Hello and welcome to the 2023 RBC Capital Markets Global Healthcare Conference. I'm Ben Hendrix, RBC's Healthcare Services and Managed Care Analyst. We're pleased to host acute care hospital operator Community Health Systems. With us this morning from management is Kevin Hammons, President and CFO. We also have Shelly Schussele, Senior Director of Investor Relations, and I'm pleased to introduce my former colleague, Anton Hie, as Community's new Vice President, Investor Relations. Let's start off with a question on the quarter, when Q 23 results came in well below consensus estimates, though the company affirmed full-year guidance. A lot of moving pieces there and components. Could you give us a broad overview of what you believe contributed to the miss and what gives you confidence that you can still hit your full-year guidance? Sure. Absolutely. Thanks, Ben, for having us here. Appreciate you hosting us. A couple things occurred in the first quarter. We saw tremendous kind of recovery of volume. I think it's really that return of core demand into the healthcare system that we see as being very positive. We believe that, you know, that was a sign it carried over from the fourth quarter. That's a sign that again, core demands are turning, and that will continue through the year. What we did experience in the first quarter though, is a deterioration in payer mix, particularly from the fourth quarter. Volume started to return in the fourth quarter. In the first quarter, the payer mix deteriorated, and sequentially, all of our increased volume was Medicare Advantage. As we incurred, really an increased level of cost to treat some of that volume coming in, and then the with the payer mix deteriorating, it was a, you know, a bigger headwind on EBITDA. We also had a couple, expense line, items that increased, kinda year-over-year and sequentially, in medical specialist fees. We had some one-time, malpractice, some professional liability expenses in the first quarter. That's kinda again, a one-time item. We don't think that's gonna continue. Med spec fees, I believe we hit our peak for the year in the first quarter. As we go throughout the year and kinda back to the payer mix issue, the only real structural change between the fourth quarter and the first quarter, relatively short period of time, was a reset of copays and deductibles. That's where we see that reset, it was still a barrier for some of the commercial patients coming back into the healthcare system. With overall demand returning, we believe throughout the year, those commercial patients will come back, similar to everyone else coming back into the system. That payer mix will improve throughout the year. If we dig just a little bit deeper into the Medicare Advantage mix sequentially, as MA continues to grow in popularity, we continue to see the penetration rates expand and people select MA increasingly over fee for service. Do you think that this is gonna be a longer term thing you're gonna have to manage through or headwind, or are there strategies in place to kind of get rid of that lumpiness, I guess? Yeah, I do think that it's something that the industry will deal with over time. Mm-hmm. I believe that this quarter was an outsized impact because we actually had the decrease in commercial business with a corresponding increase in the Medicare Advantage business. With the Medicare Advantage patients, there's really no barrier for them at this point to come back into the healthcare system. With the pandemic being largely over, generally no copays and deductibles. There was no economic barrier for them coming back in that exists in a bigger way for the commercial patients when you have high copays and deductibles. I think we'll manage through that. In terms of the commercial mix, I think you mentioned that you expect, you know, to see kind of a corresponding higher mix and maybe later in the year. Is that correct? Mm-hmm. You had seen, you know, some momentum in March, April. Is that continuing in May? How are we thinking about mix kind of thus far into the first half? Sure. you know, I think it's still gonna be a little bit of a headwind in the first half of the year. We did see some improvement in March, which has continued into April, but not back to, you know, where we expect it to be. I think the back half of the year, though, gets much stronger in terms of payer mix. If we could just talk about demand more generally. First quarter volumes, well ahead of expectations. Adjusted admissions in 9.4%. Surgical growth, 10.6%. In the call you attributed the volume growth to consumer returning to healthcare settings. Can we just any general thoughts about how you're thinking about volumes through the rest of the year and demand across the various healthcare categories? No, there was a tremendous amount of disruption in second, third quarter of last year, which was the big headwind last year. I think the overriding question was, you know, will that demand ever come back, or is it going to someone else in our markets? I think we've shown in the fourth quarter and the first quarter that the demand is going to come back and we're going to capture it. We are capturing that demand as it comes back into the system. I think we have some easy comps in the second, third quarter in terms of overall volume. I do expect and what we've seen so far in April is the volumes we saw in the first quarter, you know, in terms of levels of volume, has been generally the same. It's continuing. There's a lot of focus on volume expectations into second quarter, and following the very strong first quarter comps, how much visibility do you actually have into future volume, whether it be the surgeries on schedule or other indications? You know, how far out can you realistically see? That's a great question. There's not a great leading indicator of volume out there, in terms of, you know, you have surgery schedules, but it's relatively a short window that you have visibility into. I think the bigger indicator out there is we saw a return of your clinic visits, your screenings, kind of diagnostic procedures. As people during the pandemic had stayed away from the healthcare system, weren't going to see their doctor or primary care doctor. Those visits that are returning to the primary care physicians, the office visits, and then the your normal routine screenings. As those start to pick up, and we are seeing, we started to see that in the fourth quarter, seeing it in the first quarter. It's lower acuity. It's moved some of, a little more of our revenue to the outpatient side. I think that is a leading indicator that as people stayed away from healthcare system for a period of time, they come back, they finally see their doctor again, their conditions may have deteriorated, and that's going to lead to the higher acuity services being performed down the road. Gotcha. In terms of your inpatient volume that you are seeing, how is acuity playing out there? Acuity of the inpatient was up a little bit year-over-year. Mm-hmm. Particularly, you know, the non-COVID, overall acuity was down because you had COVID in the first quarter of 2022. Non-COVID business, you saw acuity improve year-over-year. Got you. If we could, maybe skip to rate a little bit. Do you update investors on commercial contract negotiations for 2024? Do you anticipate a higher than historical reimbursement rate, kind of given the ongoing inflation that we're still dealing with the labor issue? A little early for us to say much about 2024 and where we're at, other than to say our expectation is that we would see higher than, you know, continued elevated increases in commercial rates. We see that in 2023. We're about 100 basis points higher than we've been historically on the commercial rates in 2023. I believe that continues into 2024 and maybe even 2025, 'cause there's about a three-year cycle of renegotiating contracts. Not every contract's up for renegotiation every year. It'll take us a couple of years to get through the cycle. With the inflation we've seen over the last couple of years, I think there's still some runway that we'll see continued elevated increases on the commercial side. Does that 100 basis points gets us to mid-single digits, or? Yeah. We're at 4%-6%. Okay. O n average. That's averaging everything that's rolling over, plus those that aren't being, you know, renegotiated, plus the new contracts coming into place. If we could shift to labor. you know, contract labor expense increased slightly from 4Q. Is a reasonable run rate where we are at the rest of the year, or what do we have baked in for the outlook? Yeah. We saw a slight increase in Q1 over Q4 of contract labor. I think that's, you know, probably goes down from here. I think we're at the peak. Mm-hmm. F or the year. I would expect us to exit the year, in the $60 million-$65 million range for the fourth quarter. Mm. I do expect some decrease. I think we estimated contract labor down 40% to 50% for the full year over 2022. I think that's still a good estimate. We should see some declines. Is that supported by more nurses coming into the system? How's hiring going? It is. Hiring was very good in the first quarter, although more of our hiring in the first quarter, were new graduates because you had a December graduating class. Mm-hmm. C oming out, we hired a higher percentage of new graduates in the first quarter. We'll see that again probably in the third quarter with June graduates. Second quarter and fourth quarter will be hiring more experienced nurses. There's a little longer ramp-up period in the first quarter for new graduates to get on board. The onboarding process is a little bit longer. We use preceptors. They spend more time with them before they're just turned loose and become fully productive. That kind of delays some of the benefit we'll get in taking out some contract labor, but we should start to see that then in the second quarter. Then, in terms of the retention, any special programs to call out and how that's going? Are you offering a lot of retention bonuses this year that are helping people stay on? Yeah, not so much in terms of retention bonuses. Mm. That should be a benefit because we were doing more of that last year. We have put in some initiatives to improve retention. One of them, which we call our Pathways program, which is paying for student loans for any of our clinical, you know, nurses and other clinical positions. As long as they stay employed, we have the employees work through SoFi, to refinance their student loans, and then as long as they stay in employment, we'll take over student loan payments. That's been a great tool for both retention and recruiting. We're seeing great success. I believe we've reduced turnover by about 500 basis points over the past year. Where does that get us to right now, about? Yeah, we haven't given. You haven't given it right. Yeah. Yeah. Yeah. We're still elevated over where we were pre-pandemic, but we're getting close. We've talked this morning, one of your peers about, HCA with Galen School, and I know. Mm-hmm. Have had partnerships in the past with, Jersey College. Jersey College. What, how's that going, and is that expanding, and what other programs do you have? It is expanding. We're getting ready to open our eighth location. Mm-hmm. We have a couple more locations that will open up. We're not opening one in every hospital, but, you know, we're targeting markets. Some of these locations actually serve multiple hospitals within a market. We'll have a little over half of our hospitals covered with a Jersey College program, nursing schools. Those schools actually are doing the education within the four walls of the hospital. We're targeting not only members of the community who come in, but also our employees are often students in the program. They can do all their clinical work in our hospital and becomes a nice transition for them to be hired full-time. We graduated our first class. Our first cohort graduated in January in one of our markets in Florida. We'll have our next one coming up, I think, in December. We'll have a cohort, a couple cohorts graduating. It'll start to ramp up by 2024, I believe, we'll be graduating about 1,000 nurses a year. Mm-hmm. That we expect to get a very high percentage of those retained as employees. We also have programs with other local universities that we have affiliations with and, you know, connections with. The program with Jersey College is the one that's most directly tied with our facilities. Great. Just to change gears a little bit, I wanted to touch on the acuity migration to outpatient. Mm-hmm. Particularly in MSK. Can you give us a recap of kind of how you have positioned ASCs in your markets, what the plan is for the future, and if, and if you're capturing all of that volume that's kind of migrating outpatient? Yeah. We, we are capturing substantially all the volume. We talk about migration from inpatient to outpatient. We're not losing that business. We're just capturing it in our outpatient settings. In our markets, we don't have a big presence of, like, any of the national ASC groups that are competing against us. We have ASCs in about 85% of our markets that we own. Mm-hmm. Or are part owners of. Sometimes we're joint venturing with physicians, but generally, we have a majority ownership position in those. We are looking at expanding, you know, somewhere in the neighborhood of five to 10 per year. I think that as we look at the outpatient or the ambulatory surgery center space, there's a little less value proposition for the patient in our markets versus a larger urban area because our hospitals, by their nature, are in a suburban area. They're easier to get to, they're easier to access. You're not having to navigate, you know, a large 800,000-bed facility that's hard to find parking and that sort of thing to navigate for outpatient procedures. Some of our outpatient, a lot of our outpatient procedures are done from the hospital. We could have a wing, a separate entrance, just as easy to navigate as an ASC. Where it makes sense, we're then targeting and opening, you know, freestanding kind of, ASCs as well. Got you. Kind of the requisite question on redetermination. How are you thinking about that, particularly, you mentioned your markets in Florida earlier? Mm-hmm. You know, how do you think you're positioned and what are your latest expectations for the pacing of that? I think we're positioned well for a couple reasons. One, it's too early to tell. You know, the states, this will kind of come in over a phased approach that different states are going through it at different times. I think it's generally neutral is how we're thinking about it. Two of our largest states, Texas and Florida, have the highest enrollment in Exchange. Mm-hmm. Program enrollment, and which increased significantly in those states. If I recall correctly, it's about $3.2 million incremental enrollees in the exchange programs in those states, and those are two of our largest states. We would expect, although, you know, there will be patients that lose coverage during redetermination, some percentage of those will be picked up through exchange programs or other commercial programs that will offset. Mm-hmm. You know, those losses. At this point, kind of how we're looking at it is fairly neutral to us. Got you. Kind of more broadly, put this question to one of your peers earlier. Since we've seen kind of expanded subsidies under the ACA Exchanges, and we also know that you operate in the kind of Medicaid expansion holdout states, to what extent is the, from an economic perspective, are these expanded subsidies kind of filling the hole? I know that we still have a lot of uninsured folks in those states, but to what extent economically is that kind of, that expanded ACA benefit or subsidy backfilling the hole for you? Yeah. You know, I think it is. I think there's some real opportunity that we see for a couple of these states to still expand Medicaid. Mm-hmm. I think that would be beneficial for us. A couple of those holdout states are starting to talk more about it, and I think we're getting much closer in a couple states for Medicaid expansion. I think there's, you know, Alabama for one, is a state that's, you know, previously hadn't talked about or previously had resisted, that's now, you know, probably extending conversations about it, getting much closer. I think once you see, you know, one or more of these former states that had resisted, start to expand, I think the others will follow suit. If we could shift gears a little bit to the intermediate term revenue growth and EBITDA margin targets, you know, kind of where are you seeing that growth and comprised of, and then what do you believe, you know, you'll see the most leverage to hit those EBITDA targets? Yeah. Certainly payer mix improvement is gonna help significantly. As contract labor continues to come down, that'll certainly be a benefit to margin. We see, you know, a pretty clear path that contract labor continues to moderate and come down. We don't ever get back to pre-pandemic levels. Mm-hmm. Certainly, able to do that. We implemented this margin improvement program, really, we started back in 2019, late 2019, I think it was fourth quarter of 2019. It's been very effective. We've held from an absolute dollar spend, a lot of our non-labor costs, you know, relatively flat in considering inflation. We think there's still runway to continue to take out costs in the system, gain efficiencies through technology and through other means to improve efficiencies. There's still some work to be done in our supply chain area. Mm-hmm. that we can take out some costs and gain some more purchasing efficiencies in supply chain, all of which will be helpful. Then as, you know, we still get some leverage on managed care rates over the next couple of year. I think Medicare rates, although the base rate increase for 23 was like 3.8%, when you factor in all the take backs, is really about 1.9% on Medicare, which was nowhere near inflation. I think going forward, those take back programs are largely done. Mm-hmm. I think Medicare rates probably are, you know, at the higher end of the historical range of 2%-3%. probably something closer to the higher end next year. With the lag of inflation getting built into Medicare rates, I think that probably continues for a couple of years, which is helpful as well. All those combined will lead to improved margins. Speaking of margins this year, you had noted earlier that medical specialist fees kinda peaked in the first quarter. Kind of, what does your visibility look like through the rest of the year, and how, and what gives you confidence in that coming down? Yeah. you know, we saw that start to go up really back half of last year, largely as an impact from the No Surprises Act, and more of the physicians, you know, passing some of those costs on to us. We do not have a big presence with the national providers, like a TeamHealth or Envision. We're more contracted with regional players, local players. We have a little more flexibility. We started to take some action. It doesn't happen overnight, but in some cases, you know, there's really three approaches we're taking. One is insourcing, where we'll hire the physicians instead of using a third-party provider. One is just renegotiating a contract, and the other might just really be going out for bid and putting RFP out and look for other providers. As we work through those by the ones, we really kicked that off late last year. Didn't have time to really get the benefits of that yet through Q1, but we're seeing the results of some of that work already start to come through. We'll see some reductions kinda sequentially going forward. Yeah. We've asked your peers this morning about the Envision Chapter 11, who have exposure there. Do you see that being a systemic issue that's also weighing on your regional providers, or are they in pretty good shape overall financially? I think they're probably in better shape, financially. You know, it's hard to say across the board because there's a lot more, you know, regional providers. I think many of them may not have had the debt load. Mm-hmm. That Envision had. I think generally speaking, they're in a little better position. It is probably a, it's a headwind for the whole industry. If we could shift in the last couple of minutes to capital. The company just recently closed on a sale of West Virginia facility. Mm-hmm. An agreement to sell two facilities in North Carolina. And you've also noted your discussions about the other transactions. Can you discuss the thought process of divesting these and kinda use of proceeds and are these in non-core markets? Yes. You know, whether some of these others come to fruition or not, it's a little early to tell. We are still receiving some inbound interest on a number of facilities and where it makes sense, whether it's a non-core market or. You know, since the pandemic, the economic, the dynamics of certain markets, whether it's demographic or economic, have changed. I think we're continuing to go through, you know, some detailed reviews of all of our markets and looking to see what the outlook is, and actually extending our horizon out a little bit farther to see what a three and five year, you know, growth profile looks like. In many of our markets, we think that's improved significantly. Maybe we're deciding to, you know, we wanna double down in a market because now with some economic and demographic shift, there's more opportunity. We wanna refocus effort there. In another market, it may, you know, be more muted. If we get an inbound offer that's accretive to leverage, we may, you know, be more inclined to take a look at that and then reallocate resources somewhere else. I think generally speaking, any proceeds we get would be used to deliver the company, so, at this point. Great. Well, I think that brings us to time. Thank you very much for joining us today. Ben, thank you very much. Appreciate it.