Welcome to the 2024 RBC Capital Markets Healthcare Conference. I'm Ben Hendricks, RBC's Healthcare Services Managed Care Analyst, and we're pleased to host Acute Care Hospital Operator Community Health Systems. With us this afternoon from management is Kevin Hammons, President and Chief Financial Officer, and in the audience we also have from Investor Relations Shelley Schussele and Anton Hie. Thank you very much for joining us today. Thank you, Ben. Thank you for hosting us. Absolutely. Community had a solid inpatient Adjusted Admission growth during the first quarter. You noted improving labor backdrop, length of stay management, contributing to good volumes. Can maybe you expand on kind of what you're seeing on the volume front, on the demand front, and your ability to address that demand? Sure. So, you know, we did have a, I think, a strong first quarter in terms of volumes. We're seeing that continue, that momentum continue on, and we see that, you know, there's potential for continued recovery. People, patients still coming back into the healthcare system, largely last year in 2023 that was led by government-insured patients. So we still believe that there's, you know, some more demand on the commercial side for the commercial patients to still come back into the healthcare system. We're still below, or we're above 2019 levels, but below where you might expect kind of had we had normal annual growth rate from 2019 absent the pandemic and the disruption we've had over the last couple of years. So I still believe there's some opportunity for continued growth. Any thoughts on what kind of the gating item is for that commercial piece of the growth that coming back into the system? Yeah, I do. I believe it's the economy. The two big gating factors that, in my mind, were keeping patients out of the healthcare system were the pandemic itself and then inflation. Now that we're past the pandemic, people are more comfortable, you know, with the healthcare setting, going back to the doctor, getting back into the hospital. Those patients that don't have an economic barrier are coming back in. Patients that still have high copays and deductibles, particularly which would be the individuals with commercial insurance, I still think there's a barrier for them with continued inflation. We've heard a lot of talk and obviously discussed over the last several quarters about Medicare redetermination, or Medicaid redetermination rather, and some pickup perhaps on the exchange side, which may be delaying care due to copays and deductibles. Just want to get your thoughts. Is that part and parcel with kind of what you're seeing? Yeah, I think that absolutely fits in with what we're seeing, that they get, you know, they're able to get healthcare exchange insurance, but with that comes a higher copay and deductible, and there's still that barrier for them to be able to meet that, particularly for those at the, you know, lower end of the wage spectrum. And, you know, in some of our markets, you know, you have average hour or average, you know, annual wages of that $50,000-$60,000 a year. And if you have a $6,000, $8,000, or $10,000 copay, particularly in this environment with higher cost of fuel and groceries and rent and utilities, it becomes much more of a barrier. One of your competitors hypothesized that maybe this, you know, these copays and deductibles could provide a setup for some enhanced seasonality where we may actually see more commercial weight in the fourth quarter than we typically see, given the growth in the exchange population. Is that something that I can't imagine it's in your guidance, but is it something that is probable in your mind? You're right. It's not in the guide, but fourth quarter is typically your highest seasonality quarter for commercial business. We saw, you know, better commercial recovery last year in the fourth quarter, and I would expect to see more of that in the fourth quarter, at least back half of the year this year, to the extent you have more people who are in that position that have exchange insurance or more people with a commercial type product. I do think that lends itself to having more upside of those coming into the back into the system later in the year. Just over the course of time, the longer people are out of the healthcare system in general, the more apt they are to maybe, as they have something, you know, go wrong or come up, that they can't stay out forever, and they may not have a choice but to get back in. Gotcha. You also discussed in the first quarter benefit your transfer centers and capacity lines and increased opportunity there kind of with the demand environment. I was wondering if you could kind of expand on the benefits you get from these transfer centers and how that's helping you in your markets. Yeah. So just as a quick reminder, Transfer Center is more of a logistics operation that serves as an entry point if a patient presents at an emergency room, whether it's one of our hospitals or outside of our system in one of our communities, and that patient can't be treated in that emergency care setting for any number of reasons, whether there's capacity issues, whether it's a service line issue, and they need transfer, they call the Transfer Center. The Transfer Center arranges for that patient to go to another emergency department that can, you know, serve the needs of the patient. By running those Transfer Centers, we're gathering a lot of business intelligence. If we were to outsource that, and there are what we previously did before starting the transfer centers, we outsource that to a third party, we wouldn't know if those calls weren't coming to our hospital, or we wouldn't know if we didn't take the patient themselves, we didn't have a source of business intelligence to know what all of the opportunities were out there. By running that transfer center ourselves, we're able to gather that intelligence and able to see if we're not accepting the patients, why are we not accepting them, what's maybe passing our hospital, going to somewhere else, what are all the needs in the communities. Overall, that's helping us make decisions about what service lines that we might want to add, as well as what are all the opportunities in the market that we can accept, being able to manage denials and that sort of thing. Gotcha. Getting back to the kind of the volume trends that we're seeing, I know we've kind of beaten to death the narrative of the January and February strength and then some softness in March and then, you know, maybe April, perhaps falling somewhere in between. But now that we're halfway through the quarter, are we on track in terms of how you're thinking about your guidance, or are we still maybe outperforming a little bit? You know, we saw, and personally for CHS, we didn't parse out a lot of the first quarter kind of on a monthly cadence. There was a lot of noise around the calendar. In March, you had, you know, an extra business day because of the leap year in February. You had one less day in March, and then the way the weekends fell, and then you had a holiday move in. So we really didn't parse out. And I wouldn't say that we noticed a big decline other than the calendar impacts during Q1. So all that said, you know, the momentum that we saw in Q1 in terms of volume, generally, I would say is continuing on into the second quarter. Great. Then the Two-Midnight Rule, obviously, another one that's been beaten to death, but I think we may have gotten some a little bit more guidance and clarity from CMS. Just wanted to get your thoughts there and if it's changing the way you're thinking about the opportunity. We did get some clarity from CMS, and I think that's helpful for all the acute care providers because, you know, the expectation is if CMS is paying as an admission, you know, that Medicare Advantage would pay as an admission as well. I think it's too early to tell whether we've really seen much of a change in the payer behavior. I think that maybe from the commentary we're hearing from the payers, they've changed behavior, but I'm not sure that we necessarily, you know, can point specifically and say we're seeing a big change in that. That being said, we did have a strong inpatient volume in the first quarter. But there's a couple of things going on. You know, part of it may be some of the payer behavior around two-midnight rule, but we've also put in place our physician advisor group that we've talked about on a couple of our calls, bringing in-house a group of physicians that do our peer-to-peer reviews with the payers versus outsourcing it like we were doing previously. I think we have better performance with the physician advisors internally. I think that can lead, you know, could be a, you know, benefit to us in terms of turning more of these visits into inpatient admissions. Our physician advisor group also works directly with our utilization review team, who really are working on the documentation to ensure that the appropriate documentation for a patient's done in their records to qualify, you know, if that patient's to qualify for an inpatient versus an outpatient visit, and therefore it gets billed correctly and less likely to get denied. All that said, we're still seeing higher denials by the commercial payers comparatively to last year. So the other side of that coin, although we saw maybe some improvement in inpatient admissions, we're still seeing higher denials. Gotcha. Moving on over to the labor backdrop, wage inflation, clearly you outperformed in the first quarter, kind of what was embedded in your guidance, but there could have been some comp effects in there. So maybe if you think about how we should think about progressing through the rest of the year. Yeah, we did outperform our guide. We guided to 4% wage inflation for the year. We came in at 3% in Q1. We were able to, you know, really bring down some of the overtime and premium pay. You know, part of that is the success rate we've had in bringing and hiring new nurses and making sure that our staffing levels are appropriate. We're not having to pay some of the premium pay, and that certainly helps with the average hourly rate. Still believe that as we go throughout the year, you know, we're seeing some individual markets where there's some irrational competitors doing things with pay. We had one, for instance, a single market that a competitor put 7% across the board. Pay increases in on January 1st, obviously requires us to, you know, match if we want to stay competitive in those markets. Now, that was baked into the 3% that we saw in Q1, so we stepped over that without any problems. But if you start to see more of that pile up later in the year, also with the supplemental program payments that are coming out, we don't know what some of the competitors, how they might use some of that incremental supplemental money, and if they use that to increase wages in markets that would require us to do the same, there could be a little more wage pressure in the back half of the year. Gotcha. And in addition to kind of the easing labor environment, it seems like you're getting more staff in and onboarded, and also you're changing your care delivery models. Something we talked about several quarters ago, but maybe it kind of has kind of reemerged. To what degree is that helping your throughput, reducing stay? So, I think it's helping in a number of areas, the care delivery model. So, one, it's a satisfier for the nurses. It's allowing them to practice at the top of their license. We're using more LPNs and patient care technicians to do things that previously an RN may have been doing all of that. So, it allows each of them to practice closer to the top of their license. And it's also helping us then to develop, you know, some of those RNs, and we're doing some leadership training for them. So, as they advance in their career, it gives them more management experience, management opportunities. So, all that's great for development. One of the benefits we're also seeing is that by using more patient care technicians, LPNs, we're actually getting more hands on the patient more often. That's a big satisfier for the patient because they really don't care if somebody's checking on them, whether it's an RN or a patient care technician. They're just happy that somebody's checking on them, asking them how they're doing, asking them if they need anything. We have found with this new model that we get more, you know, those hands get on the patient more often during their stay. We're seeing some of that come through in terms of kind of patient satisfaction. There's also some cost benefit to doing so because you're able to bring in some of those roles at a lower cost than an RN. Then how are we right now with agency expenses? It seems like some slight sequential declines. Does this maybe indicate that we're hitting a kind of run rate? I think we're close to a run rate, at least for the time being. We kind of guided to a pretty flat run rate as we came out of Q4 of last year at about 50, I think it was $52 million. We guided to about $200 million of contract labor for the full year. That's about a $60 million decrease over 2023. But that was assuming that the run rate coming out of Q4 kind of continued on for the full year. We came in at $48 million. So a couple million dollar decline from Q4. I think there is some opportunity for us to still squeeze a little bit more out of that. We never get back to kind of pre-pandemic levels in terms of cost. I do think we eventually get back to pre-pandemic levels, maybe as you get out to 2025 in terms of utilization of contract labor. But the rate of contract labor is going to be higher than it was pre-pandemic. So we'll still have that cost. But again, a little more room that it can come down. But right now, I think we're kind of in line with what we've guided, and we see that continuing on for the next few quarters. Another item on the P&L that stood out to us was the supplies expense for Adjusted Admission, essentially flat year-over-year. You had talked about fewer high-dollar impact procedures. Is there anything to read through about patient mix that we should think about going forward or through the year? No, I don't think so. And I would think that, you know, some of those high dollar cost, you know, supply procedures are coming back. You know, we didn't see as many of them in Q1. But I wouldn't read anything into that for the full year. So I still think, you know, you're going to see some pressure on some inflationary pressure on supplies as well. But we're also doing a number of things internally, you know, to reduce supply costs. Partially putting in the ERP is going to be helpful to us managing supply costs going forward. Project Empower? Yeah, Project Empower. That's not fully implemented yet, but we see as we standardize our supply chain system across the entire organization versus multiple supply chain systems that we have today, it gives us much more leverage, much more insight into being able to, you know, manage purchasing, do demand management. We're putting in some automation in over how supplies are ordered and inventoried and so forth. That That should be a benefit to us, at least going into 2025. Does this impact your relationship with HealthTrust at all? GPO? HPG? Health Purchasing? Yeah. No, it does not impact our relationship with them at all. Great. Maybe we can move on over to professional fees, obviously, high focus area. You guys have done a good job onboarding and maintaining a good mix of salaried versus kind of more of a kind of contract structure. Maybe you can kind of talk about how you strike that balance and what you're seeing. Sure. So, you know, with the former APP physicians, which represented about 20% of our footprint of ED doctor and hospitalists, outsourced ED doctors and hospitalists programs, bringing them in-house is about 500 doctors, physicians in total. Probably, you know, I believe it's two-thirds of those were converted to employees. About a third of them remain 1099 doctors. Some of that is, you know, their choosing of how they want structured. They have a similar structure to what they had with APP as well. But we've gotten them onboarded and getting them credentialed. And it's been very beneficial, I think, to us. We've gotten a great reception from the physicians themselves. We've gotten them trained on our safety protocols, kind of fully integrated into our system. The patient experience has been, again, significantly better. That was something we did not anticipate. But we have seen a pretty, you know, meaningful lift in terms of patient experience now that those doctors are in-house, if you will, and seeing some better metrics around our patient safety and quality. So I think all that said, it's been beneficial. We've also now extended that, added a few more programs. We've brought in-house some expertise on anesthesiology. And we're looking to bring in some of the anesthesiology programs as well in-house. So we brought 2 in-house in the first quarter and looking at a handful of others. Gotcha. I want to move over. I know this is a lot to pack into 25 minutes to talk about everything that you have going on, but I wanted to talk about your portfolio management strategy, specifically the divestiture of Tennova Cleveland during the quarter and some other projects that you have on the books. Kind of what the strategy is there and how you're approaching it. How we're approaching it. So, you know, we indicated that there was approximately, you know, $1 billion of potential proceeds for deals that we're having early discussions on. Generally, these are markets that, as we look out long term, don't have the same growth profile as what we would like to have. Or as maybe that they've had in the past. And we're looking at more of kind of maximizing value. Most of these opportunities are in markets that probably don't fit our strategy going forward or our core, you know, profile going forward. So looking at opportunities and we're getting inbound interest. And there's been a fair amount of inbound interest at pretty attractive multiples. So Cleveland happened to be one of them. It's a market that really wasn't close to our Tennova East market, doesn't really have much, you know, connection with our Tennova Clarksville market either. So somewhat set, you know, a little bit isolated, you know, closer to Chattanooga where we don't have any other kind of network around the Chattanooga area. And probably longer term subject to a bigger competitive environment. So it would cause, you know, maybe more risk around growth with an attractive inbound multiple of interest. It became one. And that kind of, in a similar fashion, there's some other markets. We're not as far along in discussions in the other markets. But we are continuing a number of discussions that we think will ultimately result in some potential divestitures. As we think about these strategic exits and also your broader margin enhancement strategy, what are between those, how do we think about the drivers of your delivering targets down to, I think you reaffirmed sub 5.5% within three to five years? Yeah. You know, we're not going to get there by doing just one thing. So it's going to have to deliver that much. It's going to have to be a combination of paying off some debt and growing EBITDA. And so we're really focusing on where we can get the most growth, the highest growth potential, and focusing our efforts there and our investments in those markets. And then on the flip side of that, where we can get a good multiple on a market that doesn't have that kind of growth profile, in delivering through paying down debt with some divestitures. So I think between the two of those, kind of combining them is where we can get the greatest improvement in our overall leverage. What are the main levers that you can pull to get to that mid-teens target and go on the margin side? So, you know, there's some investment on, you know, improving capacity, which we've recently opened up a new bed tower in Knoxville, Tennessee. We've got one under construction in Foley, Alabama, which is opening up another 88 inpatient beds. Last year, we opened up 112 beds in Naples. So making those kind of investments, some higher acuity service lines that we're investing in, like orthopedics and cardiology and neurology in certain markets where there are needs. I'd point out where we're opening the new inpatient beds are markets that are growing and we're having capacity constraints. So by opening up new beds in a market that's already kind of at capacity, we feel good about being able to expand and grow in those markets. On the cost side, I think there's still a fair amount of things that we have the opportunity to do and Project Empower in the ERP being one of them. So, you know, particularly as we get to 2025, where I think we can really start to see some cost savings out of the result. One will be done deploying it. Then we can really start utilizing it and realizing some of the cost benefits. On the deployment side of it, you mentioned ortho. Are we doing like ASC investment in certain markets or? Yeah, we are. Certainly are. What is your platform up to now? On ASCs, we're, I think, at 45 ASCs across our portfolio. We have ASCs in 85% of our markets, which we at least have an ASC presence in every market that we really desire to. The markets that we don't have an ASC are the ones that are really part of a broader network. And probably, you know, it's some of the smaller communities where it's just as easy from a patient perspective to have an outpatient procedure at the hospital as it would be to, you know, go to a separate ASC because there are smaller hospitals that are easier to navigate and so forth. So I don't think that that's a barrier in those markets. We're looking at some opportunities in some of our bigger markets to add additional ASCs. Gotcha. Well, I think that brings us to time. Thank you very much for joining us. Appreciate it, Ben. Thank you. Thanks, everyone.