Okay.
Right here?
Wherever you like. Sorry. Yeah.
I'll go way down here.
At this point, it doesn't matter at all. Awesome. Well, thank you everyone for being here. We're pleased to have Community Health with us to wrap up the day. Community, as I'm sure you all know, is an operator of acute care hospitals and hospital systems. With us from the company, we have CFO Jason Johnson. Thank you for being here. We also have Anton Hie here from Investor Relations. Thank you both for your time today. I guess first, any kind of intro, opening comments you'd like to make? Or would you rather we just hop right into Q&A?
Sure. Just a few, and thanks, [Steve], for having us. Appreciate it.
Yeah. Of course.
There's a lot to be excited about at CHS, and we really do believe that even though there's certainly enough uncertainty that's going along in the near term, and we get plenty of questions-
Yeah.
-we're concerned about all of those things, whether it's Medicare or Medicaid reimbursement, you name it. Since Kevin Hammons took over as the CEO, he immediately gathered the senior team and came up with a new vision for the company and top priorities, where we're focused on enhancing quality, employee engagement, physician experience, and patient experience. Those all are table stakes for hospitals. They should be obvious. It's not that we didn't understand they were important or have initiatives around those. I don't think we had enough clarity and resources and processes devoted to make sure that we're focused on those and that we're measuring our impacts-
Yeah.
-toward improving those.
Got it. Okay. Maybe just help us frame a little bit, kind of the performance that we saw in the most recent quarter. On one hand, the same-store adjusted admissions were up almost 3%, big improvement from the first quarter, but a bunch of that growth came from uninsured or self-pay type visits, and there was some pressure on revenue per AA. I guess, help us kind of unpack some of the moving parts in the second quarter and how to think about some of the demand trends in the business.
Right. So we did, as you mentioned, half of our same-store adjusted admissions growth came from self-pay. So what we saw was both softness in the payer mix, so less commercial, more uninsured, but we also saw softness in the service mix, or acuity. So within the surgeries even, the surgeries were less acute.
Okay.
Less orthopedic, et cetera.
Mm-hmm. Okay. I guess as you look more into the surgical trends, on one hand, it seems like there's been some discussion around electives and consumer uncertainty. I guess as you look at the performance of your elective surgeries, do you feel like you're seeing that, and I guess how are you thinking about potentially some ability to improve that trend throughout the year, maybe as people burn through co-pays and deductibles and the like?
Yeah. So we did see the comments that we've made about macroeconomic concerns and people making decisions based on their, to receive healthcare services, particularly elective, that's been specifically related to the commercial payer group. We saw that happen last year as well. We did see last year improvement, in the fourth quarter in particular, and our guidance does assume that that will occur again this year, particularly in the fourth quarter, although it will be off of a lower base than what we had assumed initially at the beginning of the year.
Got it. I think you did call out that maybe you saw surgical volumes improve a bit in June. I think maybe you were back to positive in June. I think June also had maybe a favorable calendar. But I guess how do you think about kind of the exit rate that you saw in the second quarter and how much confidence that gives you or maybe doesn't in terms of what you see in the back half?
Yeah. June was the strongest month of the year in terms of surgeries, and it was actually up year-over-year. Certainly much stronger than the first two months of the quarter. We do expect some continued improvement there, particularly, again, back to that's the fourth quarter where we think we'll see most of that come back as people get to the point where they either have met their deductibles or expect to meet their deductibles.
Okay. Maybe a good point to kind of jump into some of the exchange discussion. You took up the guidance that you have for the exchange EBITDA impact with the second quarter. Tell us a little bit about what you saw as you got more data in the second quarter and how that's impacting your thinking now.
Yeah. So maybe going back to the beginning of the year, we had to make estimates as to what would happen to those individuals who had been receiving enhanced premium tax credits. Would they find insurance elsewhere through a spouse or employer? Would they continue to pay their own premiums through the exchange or would they become self-insured? What we didn't anticipate is how many of those that remained self-insured, didn't get insurance coverage, continued to come in to the health system through the ED. So their behavior did not change, so we were left with incurring the cost with basically no revenue.
Okay. As you're thinking about this for the balance of the year, typically in the exchange market you see enrollments decline throughout the year just sort of as normal course of business. This year in particular seems to be more reason to think that you'll see maybe more coverage lapse given the higher cost people have borne. I guess how is the company thinking about, and maybe what have you seen in terms of how this is developing through the balance of the year, how you're thinking about it developing in the balance of the year.
Yeah. We do think that we hit that spike in the second quarter, and that even there could be some movement, until we anniversary the spike after the first quarter of next year, but not really expecting anything significant in regards to continued declining enrollment. You know, and I guess, maybe part of this is back to the fact that we are exchange business is less than 4% of our net revenue. And adjusted admissions, so not quite as exposed maybe [inaudible]
Okay. Got it. Another key focus has been for the exchange volume that you've kept, in some markets in particular, there's been a pretty material shift out of products with much lower cost-sharing, lower deductibles into products with higher cost sharing deductibles. I guess, in terms of what the company is, you know, seeing this year, I guess, how is that impacted the exchange headwind that you provided? And I guess, just maybe remind us when we think about, you know, collection timelines when you're thinking about co-pays and deductibles, like how short or long are those compared to, maybe, the business overall, and at what point do you feel like you have enough visibility to kind of put a stake in the ground and say we've identified this part of the issue correctly.
First, we don't really have insight into the tier of the exchange plans.
Yeah.
We don't really know if someone presents with a gold, silver, or bronze plan. I believe that probably in our markets, most of those folks were probably already bronze, and those that lost the tax credits, probably what we now know, most of those remained self-insured. We don't really collect a lot of the self-pay portion. Their deductibles historically, and I think that's continued too. In general, people in that group who've had a self-pay portion, a deductible portion, there's really not a lot of collection. To the point on timing, we reserve most of that up front.
Okay.
There is maybe a slightly better collection than a pure self-pay, but in this particular group of individuals who move back to self-pay, I suspect we will not get much at all.
Okay. Then just broadly on co-pays and deductibles, I guess not necessarily so specific to the exchanges. There has been some coverage recently that certain healthcare providers have made more of an effort to secure payment for things like this upfront, maybe even ahead of performing surgeries. Maybe this is some kind of contributing factor to maybe some of the elective procedure weakness that we have been discussing over the past couple of quarters. I guess first, has the company made any changes to the way it approaches things like patient verification ahead of time, and I guess just generally, do you think that is a reasonable contributing factor or not at this point in time?
Yeah. I mean, not for us. Our practice has not changed. I do not think we typically, as a matter of business, try to collect on a co-pay or deductible upfront. So I do not think that is anything new for us, or at least for our behavior. I guess the only thing it could is that in general, that-
Yeah.
-decision of the patient to hold off on a procedure just because of that cost and how much of it is that they bear, whether you bill them upfront or not.
Okay. When we look at the EBITDA guidance revision after the second quarter, there is a lot of moving pieces in there. Maybe just remind us of how to think about the moving parts around the exchange component of it is pretty explicit, but maybe what is in there for the core, maybe for Medicaid, and anything else that is meaningful as we try to bucket the moving parts there, and how to think about the low end and what that represents versus the high end, and what is assumed there.
Sure. If you start at the beginning of the year, we issue our guidance, and the midpoint of Adjusted EBITDA was $1.415 billion. By the time we got through the second quarter, we were about $60 million-$65 million behind, driven by that commercial elective softness, and the higher than expected uninsured from the HIX.
Mm-hmm.
When we looked at the back half of the year and updating guidance, we assumed we would have a similar impact, and assumed $60 million-$70 million reduction in the back half of the year. We layered on into some of the tailwinds from the new state-directed payment programs that were approved in 2026 that were not in our original guidance. That is Georgia, and Indiana, and Florida, and that was about $50 million in total at the mid, and that gets you to the $1.338 billion . Make a comment on Florida, just so I am clear on this one.
We recognized $20 million- $25 million for Florida in the second quarter. That was for the program year 2025. We didn't accrue anything for program year 2026. However, we did factor this into our guidance. The high end of our guidance assumes that we'll ultimately be able to recognize Florida, and it's consistent with the 2025 amount, so $20 million- $25 million. The low end assumes that we're not able to recognize anything for Florida. The mid assumes that we recognize basically half of that amount.
Okay. That's helpful. If we were to, I guess maybe set the exchanges and maybe Medicaid supplemental moving parts to the side, and maybe think about what some might call the core, I guess, how would you describe what the core performance was in the first quarter? I think you called out a little bit of how far you might have been behind like ex- items, and how to think about what you've embedded in the back half there. Essentially, what do you need outside of the exchanges and Medicaid supplemental moving parts for you to be able to achieve the guidance?
Yeah. The core, if you strip out all of the one-time items from last year and those out-of-period state-directed payment programs this year, and you kind of normalize last year for what we've now seen with the increase in insured, it's about a 1% improvement over the prior year, is what we're assuming there. So modest. Because even though we do think that commercial volume will come back more in the fourth quarter, it's still going to be, if you're looking sequentially, off a lower base.
Okay. You know, I think, obviously, there's been a lot of a focus on, you know, policy, you know, kind of changes to your comments. At the beginning, I mean, one thing that is a positive that I think we've still trying to been waiting to get more color on is some of the dollars and the funding that's going to flow through the Rural Health Transformation Fund. I guess just to give us the latest on what you know about funding today and essentially how that might be allocated and when you might start to think about having it in P&L to the extent there could be impacts.
Sure. This is the year one of the funds here that we're talking about still, and the states have until October 31st to determine how those funds are going to be used, to obligate those funds. Then they have until September of 2027 to actually spend those funds or-
Yeah.
-to confirm that they've been spent by the recipients. Most of these are grants. Actually, I think all of these are grants. We have internal and external resources we've been dedicated to make sure we understand all of the various grant opportunities in each state.
And we are applying for those, or have applied for those, for which our hospitals are eligible and that we expect would be beneficial to us. I think by the third quarter, we will have some information that we will be able to share in terms of how much at that point we are aware of having been granted, and probably true that up in the fourth quarter. Then maybe some comments on how the accounting for this might look for year one.
So, a lot of these year one projects that the states needed to be shovel-ready projects because they did not have a lot of time to get this spent.
Okay.
For us, a lot of ours have been capital projects that we have applied for.
And that would mean that the income for those grants would be recognized over multiple years, maybe 5- 10 even.
Okay.
Because it would need to be tied to that underlying piece of equipment. And then, on the cash flow statement, it's going to get a little messy. The inflow from receipt of those grants-
Yeah.
-if you receive it after you spent the money, it's an investing section. If you receive it before, it's a financing inflow. We'll have to make sure that we're- I suspect we'll probably have line items that are labeled so that-
Okay.
-it's very obvious for everyone. In general, these funds aren't just being distributed evenly based on how many rural hospitals.
Early on we talked about what's the definition of rural? Well, it's not standard.
Yeah
And even within a state, you could have grant by grant, how they determined who would be an eligible recipient. They are not just going to providers to offset future cuts. They are being distributed across the board to, in some states, tribes and tribal organizations. There are some social programs, there are some more tech-related programs.
Mm-hmm.
It is not what we initially thought it was going to be, but there is still an opportunity, and we are going after-
Okay.
-those funds.
Okay. Thank you for that. I am looking forward to the accounting already.
Yeah. I cannot wait to explain it.
Yeah. It should be good. All right, and then yeah, maybe just on the policy front, obviously we have seen sort of round one of the exchanges, and it can be debated whether we are just thinking about annualization or maybe there is a thought that maybe there could be more pressure there.
I guess that is more of a wait and see, and it is hard to say at this point, but I guess Medicaid work requirements are a bit, I feel like, more sort of tangible, entirely incremental issue for us to think about. I guess, what is the company's early thinking about how Medicaid work requirements might play out?
Yeah.
And sort of the impacts to watch for?
So let me maybe level set onto where this might impact us. Six of our states, so half of the states in which we operate, are expansion states and will be subject to the work requirements and redetermination rules. Florida is apparently electing to put in some sort of work requirements, even though they are not an expansion state. So roughly half of our Medicaid revenues will be subject to expansion. Obviously, there are certain exclusions from the work requirements. There is age-based, there is if you have got a child that is 14 or younger, 13 or younger, medical frailty, et cetera. There is a list of those. So we are trying to work through how to size that.
Okay.
And each state, it looks like they probably will be doing the work requirements and the redetermination a little differently.
Yeah.
And trying to figure out how much that will ultimately be. It will be an estimate that we will all be making, and I suspect-
Yep.
-true enough as we go.
What are we doing in the meantime is we have an eligibility services group, and we are making sure they are educated and up to speed on what are the work requirements and what are the redetermination rules in educating patients as they present, making sure they are enrolled, and then know what to do to stay enrolled.
Yeah. I guess is that generally what you would be watching for is that typically there is an opportunity in many of these states to get people covered as they use services and that is the opportunity for what might be at risk here? Or it seems like it is a little bit less about the steady state enrollee who may or may not present. It is just more about getting these people who are in the facility already covered.
When they present, if they are already covered, making sure they understand if there are actions they need to take to retain that coverage.
Got it. Okay. Maybe a good time for an update on the cost side of the business. I guess one set of data we have been tracking pretty close. We know every market is different, but when you look at some of the national data that is produced by BLS, it does seem like there has been a decent amount of deceleration in some of the acute care wage growth and really over the past 12 months. Curious whether you feel like any of that is starting to show up in your markets, and I guess how do you characterize what you are seeing on labor and turnover and recruiting and things like that?
Yeah. I guess total expenses were well managed in the quarter. The same-store operating expense per adjusted admission was only up 0.3%. On the salary, wages, and benefits line, our average salary rate was, I think, up 1.1%, which was lower than what we had anticipated of the 3%-4% for the full year. That is just on the average hourly rate. So there obviously can be some other expenses that come in when we insource positions, for example.
Yeah.
You are going to have higher salaries, and that may come out of medical specialist fees. Contract labor was down 5.6% in same-store basis year-over-year. It is now about 1.1% of our revenue. So the rates are down to where they were, had you gone back to pre-COVID and had a normal inflationary increases.
Yeah.
We are managing that well. I think if we look forward, benefit costs, like all companies, are going to be higher.
Sure.
Yeah. We have been. I think we have seen that lower rate come in, but there are some other costs, I think, that are-
Okay.
-going forward.
Got it. Then, yeah, obviously things like professional fees have been a kind of big watch area for a couple of years. I guess what is the latest thinking there? I guess you are probably getting some insight into how that might be shaping up as contracts maybe renew for the next fiscal year, like any real change in what is going on in that part of the market.
Yeah. The medical specialist fees were up 19% in the second quarter and 14% year-to-date versus the prior year, and we had expected 5%-8%, so clearly outpaced what we expected. The subsidies that we pay, cash collection subsidies, were the big driver in the second quarter, so as volumes were lower or softer, elective volumes were lower, then that resulted in more subsidies, specifically on the anesthesia side. We look for opportunities when there's contract renegotiations to obviously try to level set that. We also look for opportunities to insource, if that makes sense.
Yeah.
It kind of is a market-by-market decision.
Okay. Then, when you took the operating cash flow guidance down, I think by more than the EBITDA, it seems like there's been some element in slowdown in payments and I think maybe more claims being subjected to audit, prepayment. I guess just maybe describe a little bit what you're seeing here and whether you think this is maybe just a new baseline and maybe this is just going to be more normal course of business. If not, how do you get this resolved with the payers and maybe get dollars flowing faster than they are today?
Yeah. There were two big buckets that we discussed in the second quarter relative to working capital, and one was, which you're specifically asking about, which is we've seen commercial managed care payers slow down. This isn't denials. This is taking longer to pay claims than they had in the past. We're seeing more audits up front, whereas historically that may have happened, it would happen after the payment was received, the claim was paid-
Yeah.
-and then some sort of back-end audit.
Mm-hmm.
We are seeing a lot more record requests, not audits, just wanting more records-
Yeah
-before they will pay a claim. I think we have $100 millio- $150 million of buildup in AR from that this year that we think that is timing. I think that will ultimately be collected. It is not a collection issue, it is just a timing issue that we step over. I do not think they are going to probably change that, but it is maybe the new normal.
Okay.
The other big bucket we called out was the timing difference on the state-directed payment programs.
Yeah
Frequently the income is recognized before the cash, and that was another, I think, maybe $200 million.
Okay. Got it. Okay. Then maybe, I think you guys have made comments around the divestiture program, I think generally expecting that the pace of that to slow some. But I guess generally, how should we think about the portfolio today and whether there's still opportunities to maybe do more over time and how that could maybe contrast versus where it's been over the past couple of years?
Yeah. In the divestiture program, we've been successful at generating proceeds and reducing our leverage. As we said today, the value proposition on divestitures isn't what it once was. So, we evaluate every inbound interest to determine if it's going to be de-levering or not. That certainly is still a tool in the belt that we could consider in the future. We do have some runway here. Our next maturity is in 2029, and we've got in total about $2.4 billion of second lien debt outstanding. About half of that's in 2029, half in 2030. As we said today, we've got just under $1.5 billion of first lien availability.
Okay.
So got a little time to hopefully generate free cash flows that we can use to further delever and divestitures could still remain another tool that we could consider to manage that liability.
Got it. Okay. Then to change topics a little bit, we are asking really most of our companies about how they are using AI and the investments they have made in AI so far, and what the return profile of those investments have been, and whether there is any interesting use cases you would want to highlight that are either impacting the business today, or you maybe expect to impact the business more over the next couple of years. So just in general-
Yeah.
-kind of an open question on AI.
To date, our investment and use of AI has mostly been to reduce administrative burdens, improve workflows, et cetera. A couple of examples that come to mind. Remote Patient Monitoring we have been doing for some time, and I guess technically there is some AI involved there. We have not seen a significant decrease in staffing, but it has allowed us to maintain staffing and monitor more patients with fewer people. More importantly, we see that it is important for safety and quality, which in the long run does allow you to have better reimbursement and more market share. We also rolled out ambient listening, which is, I think, starting to become table stakes.
Yeah
In the EDs, and we've got it in the physician practices. I think its adoption has generally gone well, and we've got the laggards that we're working through now. Still some upside there. But again, a lot of that's on physician satisfaction, less pajama time for them. The other areas are within Oracle, who's our ERP vendor.
Mm-hmm.
They're investing a lot in AI, so we have the ability to use and roll out that AI as they release it. To date, the use cases, it's been difficult to measure exactly what those have been, but they've definitely enhanced what we've been able to do.
Yeah. Okay. Got it. That's great. Then just in terms of other things in the business that are exciting. Obviously, we spent a lot of time talking about some of the noise and policy challenges at the moment, but I know that's not consuming all of the company's focus. When we think about what some of the key milestones and priorities are for the company over the next few years, like the things we'll be talking about one to two to three years as we move beyond some of these policy headwinds, what are some of those kind of things going to be?
Yeah. I mentioned at my opening remarks focusing on our top priorities, and that I think really is exciting for us, and I think that will generate ultimately better financial results and free cash flow. But we're also trying to expand our ambulatory footprint. We've acquired four ASCs this year, or acquired or opened four ASCs this year within our markets. So we're trying to focus on that. What is our ambulatory strategy, and making more investments in ambulatory within our markets to make sure that we capture particularly that commercial elective volumes, and maybe even push out a little bit further from our existing markets.
Okay. When you think about your CapEx budget and the kind of things you are prioritizing, I guess has there been any change in priorities when you think about maintenance capital or how much of your CapEx is being consumed by maintenance? When you think about the growth components of it, what are the most important sources and uses of that? I guess how much has that changed or could it change over the next couple of years?
Yeah. It is pretty consistent in terms of maintenance versus growth. I expect it will continue to be. Next year, back to the Rural Health Transformation Program is going to get a little messy [crosstalk]
Yeah. Sure. It is like leave that part out. Yeah.
But on the growth, it's really been more on the ambulatory side, on freestanding EDs, ASCs, et cetera.
Okay. Got it. And I guess where would you kind of characterize how far along you are with ASCs versus where you might want to be a couple of years from now? Or maybe where you think you'd be if maybe capital was less constrained?
Yeah. I think we're about 40, we have around 40, I think, ASCs currently. We hadn't set an exact number on the target, but there still are a number of opportunities and markets that I know are being considered or are being presented to us for consideration.
Yeah.
So I hadn't set a number, but we'll have the hospitals, but I think that's with the outpatient footprint trying to capture that.
Okay. Just as you think about your markets and the competitive trends in your markets, I would be curious for an update there. I guess how do you think you are doing from a market share perspective? Do you think any of the influx of maybe Medicaid dollars or potentially 340B dollars to the not-for-profit hospitals have maybe changed any of the competitive balance, at least over the short term? In general, what do you think has happened with competition over the past couple of years in your business?
Yeah. I don't think within our markets there has been a significant change in the last 12 months in our market share. Looking forward, I think there could be opportunity if the 340B cuts remain. We are able to maybe outlast some of the competitors.
Mm-hmm.
Of course, we are all in the same boat as it relates to some of the other concerns as it relates to provider tax limits and SDP cuts, et cetera.
Okay. Got it. Okay. As we think about, again, we are not going to do 2027 guidance today, so understanding that quite clearly, as we just think about the 2026 numbers and guidance that you have, any general considerations about what normalizes maybe a jump-off point for you? Like how much out of period benefit do you have from things like Medicaid supplemental payments that maybe we should consider? Then any kind of broad headwinds, tailwinds on 2027, if you want to go there.
Yeah.
We will obviously be interested in that too.
So let me maybe start with the out-of-periods directed payments, provider taxes-
Yes. Okay.
-and the divestitures. They actually come pretty close to offsetting.
Okay.
On the SDP side, there was about a net $15 million of benefit in 2026 related to prior periods. Quickly, the components there would be Georgia DPP was approved in the first quarter, and there was about $17 million that related to 2025.
Okay
That was recognized. In second quarter, we had that Florida state-directed payment program that was approved for 2025, and that was $20 million- $25 million. That is about $40 million, and there was two hits out of period, bad guys, if you will.
Yeah.
In the first quarter, there was a $9 million provider tax in Indiana. There was a $15 million take back in Arizona in the second quarter-
I see.
-for a prior SDP program. So net, that is about $15 million that you need to take out of 2026.
Divestitures actually were about a, I don't know, $10 million-$12 million negative contribution to EBITDA this year. You may recall in the first quarter w e owned Clarksville and Pennsylvania hospitals for one month. They underperformed. We had about a-
Loss- making [crosstalk]
-$25 million loss there. Since then, some of the other divestitures that we've had were positive contributors, which would go against that $25 million to get you down to about $10 million-$12 million.
Okay. Got it. That's super helpful.
Then I guess beyond that-
Yeah
-you've got one more quarter of the exchange-
Yeah. The [crosstalk]
-reduction. You can debate whether or not it's going to [sustain] that level.
Yeah. Okay.
But we expect it will be one more quarter before we step over that because it happened the second quarter. Then you've got the proposed Medicare outpatient rate which is about 5%- 5.5% higher than what it normally is.
Yeah. Okay. Awesome. I think that's about all we have time for today. Thanks so much. That was super helpful.
Yeah.
Thanks for being here today.
Yeah. Thank you very much.
Okay.