Community Health Systems, Inc.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the Community Health Systems Second Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Mr. Ross Comeaux, Vice President of Investor Relations.

[Ross Comeaux:]

Thank you, Jay. Good morning, and welcome to Community Health Systems Second Quarter 2021 Conference Call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, President and Chief Financial Officer.

[Tim Hingtgen:]

Thank you, Ross. Good morning, everyone, and welcome to our second quarter 2021 conference call. We are pleased with our second quarter results, especially as we continue to see volume recovering, net revenue growth and margin improvement. During the first half of 2021, we further advanced growth-oriented strategic initiatives that continue to strengthen the company. Before we walk through the details, we would like to thank all of our providers, nurses and caregivers and our employee and leadership teams, who continue to provide safe, high-quality care in the communities we are so fortunate to serve. And this has been great to see firsthand. With more people vaccinated and because COVID case counts have declined in the second quarter, many of our executive leaders were able to spend time visiting our markets over the past several weeks. We have had the opportunity to tour capital projects that have come online, witness operational improvements and, of course, to hear heartwarming stories of patient care and positive outcomes. There is a tremendous sense of pride across our organization, especially as we reflect on the essential services and value provided to our communities while we've worked together to fight the COVID pandemic. We are currently seeing an uptick of COVID cases in some markets, but we remain confident in our dual-track operating model and the ability of our teams to safely and effectively manage COVID surges, while also meeting the increasing demand for our services and to meet the health care needs of non-COVID patients.

[Kevin Hammons:]

Thank you, Tim, and good morning, everyone. As Tim highlighted, it was another strong quarter for the company, during which we delivered solid financial performance and made progress across multiple fronts. During the second quarter, we delivered a strong volume recovery, good expense management, positive free cash flow, further capital structure improvement and additional progress across our strategic initiatives. We also adjusted our full year guidance to reflect the company's strong start to the year and our outlook for the back half of the year. Looking at the second quarter performance, net operating revenues came in at $3.007 billion on a consolidated basis. On a same-store basis, net revenue was up 30.2% from the prior year due largely to the prior year impact of COVID-19. This was the net result of a 28.5% increase in adjusted admissions and a 1.3% increase in net revenue per adjusted admission, which faced a difficult comp from the prior year. Excluding nonpatient revenue, which was lower year-over-year, net patient revenue per adjusted admission was up 3.3% compared to the prior year. During the second quarter, we drove a strong sequential recovery in non-COVID-related patient demand. And we delivered improved volume performance on a sequential and year-over-year basis. Adjusted EBITDA was $453 million. Comparing to the prepandemic baseline period of the second quarter of 2019, this represents a 12.7% growth in adjusted EBITDA despite having 23 fewer hospitals. Excluding Provider Relief Funds, this also represents a sequential 9.4% improvement over the first quarter of this year. During the second quarter, we recorded approximately $1 million of pandemic relief funds. If you recall, in the second quarter of 2020, we recognized $448 million of pandemic relief funds, which represented substantially all of our prior year adjusted EBITDA. The pandemic relief funds have helped to offset a portion of lost net revenue and incremental expense related to the COVID-19 pandemic. During the past 6 quarters, we've experienced a number of waves of COVID, which have impacted our volumes and operating expenses. Our hospital leadership teams continue to adjust extremely well to this evolving operating environment. And we expect to continue to utilize our dual-track strategy in the back half of the year as we care for both non-COVID-related health care demand as well as additional COVID-19 patients. It's also worth noting that our strategic margin improvement program has remained on plan. The program has helped to drive savings the past few quarters. And we expect the plan will reduce operating costs in the back half of this year and over the next several years.

[Ross Comeaux:]

Thank you, Kevin, and thank you, Tim. At this point, Jay, we're ready to open up the call for questions. But as always, you can reach us anytime at [phone].

[Operator:]

Our first question comes from the line of Brian Tanquilut of Jefferies.

[Brian Tanquilut:]

Congrats on the quarter. I guess my question for you, for both, I guess, for Kevin primarily. As I think about the guidance, I appreciate your comment on seasonality, but you put up a 15% margin number in the quarter, and it sounds like you're seeing the recovery, you feel confident in your ability to drive growth and you beat the number in Q2 pretty well. How are you thinking about that? I mean is that just conservatism? I guess as I look at both the back half guidance and your medium-term guidance as well, maybe if you can touch on just some of the cost factors as well that we should be thinking about.

[Kevin Hammons:]

Sure, Brian, and thank you very much. So let me touch on a couple of things there. So first, as we, I guess, think about in the beginning of the year, we kind of expected and did our guidance, expecting a recovery from COVID that kind of extended throughout the year. And as we sit here today, we have a little more insight. Of course, that recovery occurred a little bit quicker in the second quarter than we anticipated. And we have a little more insight into the third quarter. And we see some things, again, returning to a little more normal seasonality as people are getting back active again, school be starting up and so forth. In terms of kind of net revenue, we think kind of our net revenue per adjusted admission will look somewhat similar in the back half of the year to where we exited the second quarter. And then in terms of kind of cost improvements and our margin improvement program, that, as I mentioned, is on plan. And we believe that there's still some opportunities with margin improvement and cost savings opportunities and initiatives that we're working on to deliver further cost improvements in the back half of the year as well as into next year and beyond. So as we're looking at that, all things equal, we're pretty comfortable with where we're at in that guidance range. And then the big unknown and certainly included in that guidance are a number of scenarios around what may happen with COVID case counts.

[Tim Hingtgen:]

Yes, Brian, this is Tim. I'll add on just real quick. I think Kevin summed it up very nicely. I'll add on some of our investments back into the business kind of going back to that seasonality we've talked about historically, but we have about 30% more employee doctors coming into the portfolio in the third quarter. So there'll certainly be some investment into that as we ramp those practices up, but that's all for the long-term growth and development of the entire portfolio along our service line strategies and our primary care development strategy. So again, that's factored into our guidance as well, but we believe it's a good thing for the long-term prospects of the business.

[Operator:]

Our next question comes from the line of Frank Morgan of RBC Capital Markets.

[Frank Morgan:]

I guess I'll stay on that same subject. So I guess before I go back to the cost side, when you -- appreciate the color around the utilization across your service segments versus the prepandemic levels across the -- or for the quarter in its entirety. But could you give us any color on really how you exited the quarter relative to some of those 2019 prepandemic levels of utilization, whether it's admissions or ER, surgeries, those kind of things? And I guess just for a clarification, I guess, what I'm hearing you say is that the reason the seasonality here is probably going to be more driven by the cost side than the volume side. Is that correct?

[Kevin Hammons:]

Sure. Let me kick that off, and then Tim may weigh in here as well. And thanks, Frank, for the question. I guess starting off here, I would say that the second quarter, we started off with a little higher COVID case counts. And those came down throughout the quarter, and the non-COVID cases increased throughout the second quarter. So as we exited the quarter, we were probably fairly even or a little bit above that 2019 base period exiting the quarter.

[Tim Hingtgen:]

I agree, Kevin. Thanks for that. In terms of the volume progression, we certainly did see throughout the course of the previous waves of the pandemic when inpatient COVID cases subsided, we were able to bring back the elective or non-COVID care back. And we saw that trend continue into the second quarter, frankly, with a really strong bounce in the months of May and throughout June and heading into July. So we're pretty optimistic in terms of our ability to manage surges at COVID, maintain our access for our non-COVID patients through that dual-track strategy we referenced, working to demonstrate that our priority is obviously to be there when our communities need us. But we've become more proficient at managing elective care to the point that we would hope that governments wouldn't feel the need to restrict our ability to do so. We'll kind of be the arbitrator if we can of where we put our resources to make sure we take care of both COVID and non-COVID care.

[Kevin Hammons:]

And then maybe to finally circle back on the last part of your question in terms of the third quarter, I think seasonality, what we typically see is a little bit lower volume in the third quarter and then picking up in the fourth quarter and through the end of the year. And that's kind of what we're expecting to see in terms of the return to maybe a more normal seasonality or seasonal softening in the third quarter. But we believe we'll still have a good, strong expense management throughout the remainder of the year.

[Operator:]

Our next question comes from the line of Josh Raskin of Nephron Research.

[Josh Raskin:]

Just quick clarification on those Medicare repayments. I heard the $947 million remaining. Is that $125 million or so a quarter going forward until it's repaid? Or I guess what's the number quarterly?

[Kevin Hammons:]

Yes, that's about right. I think we were estimating $400 million to $450 million this year with the remainder paid back in 2022.

[Operator:]

Our next question comes from the line of A.J. Rice of Crédit Suisse.

[A.J. Rice:]

Might just take a minute to ask you about the labor dynamics. We're hearing a lot about that across the provider world. What are you seeing in terms of turnover rates, use of contract labor? And how about just thinking about wage increases over the next year or so for your permanent employees, do you have an early read? Is that going to step up? Or is that sort of consistent with where it's been?

[Kevin Hammons:]

Sure. Thanks, A.J. This is Kevin. Let me start this one off. We are seeing a little bit of higher inflation costs with respect to our labor. This does kind of vary market by market, and it's been a little bit above maybe what we've experienced in previous years. But at the same time, we are seeing some easing on both the rate and utilization of contract labor. That came down pretty significantly from the first quarter to the second quarter sequentially. We're also seeing some improvement in our employed labor retention. So we saw improvement in retention sequentially as well. So net-net, I think we believe we'll be able to kind of manage through this through the current environment without any material impact on margin through the back half of the year.

[Tim Hingtgen:]

A.J., this is Tim. I'll just add on to what Kevin mentioned. In terms of our management of labor, throughout the quarter, as Kevin said, sequentially improved from the first quarter tied to some of that decrease in COVID case counts, reduction of contract labor expenses and improved retention and hiring of our core staff. We plan to continue, obviously, with that going forward into the future with some very specific initiatives here at CHS. First of all, we've had some centralized RN recruitment success in a few of our markets that we piloted in 2019 and 2020. We're now scaling that across the organization. By the end of this month, we'll have about half of our hospitals up on a centralized nursing recruiting support function and by the end of the year, about 90% of our hospitals. And what that entails is really leveraging the digital marketing and sourcing of nurses from a corporate standpoint, similar to what we do for physician recruitment, handing over qualified candidates to the local HR teams and having them complete the hiring process and then on the back end, working with some very specific preceptorship and orientation programs. The other thing that we're doing to support the supply side of nursing, in particular and I believe we mentioned this in our first quarter earnings call, but we've initiated a relationship with Jersey College. We now have 2 fully functioning nursing programs in our market that are fully staffed and have a full enrollment of new nursing students. We have 2 more programs launching by the end of the first quarter of 2022. And by the end of 2023, about half of our hospitals will be supported by our own affiliated nursing program. The other benefit of this is not just on the supply side, but as these candidates, these students are going through the nursing program, they are getting experience in our hospitals in supportive care functions as certified nursing assistants, patient care technicians or what have you, which we believe, again, gives them an early entry into our health care system so that when they're completed with their program, pass their test, they're already ingrained into our health care delivery systems and will come on full time as nurses.

[Operator:]

Next question comes from the line of Ralph Giacobbe of Citi.

[Ralph Giacobbe:]

Just I guess wondering with COVID cases up recently with Delta variant, I was hoping you can give us a sense of what you're seeing in your markets in terms of magnitude of that lift of COVID specifically and whether you're seeing any corresponding slowdown in non-COVID volume in surgery. And then just to clarify, is the volume seasonality in the third quarter your expectation? Or are you already sort of seeing some of that of late, whether it's sort of in core or related to COVID?

[Tim Hingtgen:]

Ralph, I'll start this off and then hand it over to Dr. Simon for some more color around our current COVID experience. In terms of the current surges impact on elective business, we've obviously been monitoring that very closely. And we have not seen a material impact. And it goes back to our, I guess, experience with managing the previous waves of COVID, that dual-track strategy. Our staff is really well equipped in terms of how to manage COVID care safely and distinctly from the elective care. And our physicians and caregivers, again, very grateful for their commitment to this, but believe they've really made our communities and our patients still safe. So we have not seen wide drops in elective care. So in terms of the actual pandemic, I'll turn it over to Dr. Simon.

[Lynn Simon:]

Thanks, Tim. So the current surge that we're seeing is we're seeing an increase in cases, but still running at a lower rate than we were seeing last July. So not quite up to those levels. I think people have much more confidence now in managing the protocols and how these patients are treated. We continue to have our corporate command center running. And then we continually reach out to our teams and make sure that they have the support that they need as we see these COVID cases increase.

[Operator:]

Next question comes from the line of Steven Valiquette from Barclays.

[Steven Valiquette:]

Great. So a lot of key topics have been touched on already in relation to the acuity mix margin trends for the remainder of '21. And it's a little early to talk about '22, but I guess I'm just curious that given all the puts and takes in your upcoming pivot from this year to next year, if we do ignore the $83 million of government stimulus relief that you received this year, is there any preliminary view on whether you would expect EBITDA to grow next year from the '21 base, just given your growth initiatives. Just curious, any directional thoughts around that at this early stage?

[Kevin Hammons:]

Sure. It's probably a little early, and we haven't given out any guidance on 2022 yet. But I would say a couple of things relative to that point. One, that we're -- now that we're done with our divestiture program, and I think we've said we've turned 100% of our attention towards growth. We're making a number of investments in both inpatient and outpatient areas and a number of service line enhancements to really grow our net revenues. And if you look at our medium-term goals that we've put out, and I think it's on Page 15 of our slide deck, our goal is to grow net revenue to increase our margin above 15% and to reduce our leverage below 6x medium term being over the next 2 to 4 years. But if you think about kind of the trajectory to get there, hopefully, you can use that to kind of give some idea about the direction of 2022.

[Operator:]

Next question comes from the line of Kevin Fischbeck of Bank of America.

[Kevin Fischbeck:]

Great. I wanted to asked about the volume expectation in the back half of the year. I think if I heard you right, you said that you expected the rate to largely be similar to the first half of the year. I guess we might expect that as volume continues to normalize, it would be lower acuity volume and that it seems like government volume has been more depressed. So that would be the volume that comes back. So I guess, I just want to, I guess, first, touch on that dynamic. And then secondly, how are you thinking about, if you agree with that comment, the ability to kind of maintain the grow margins if you're bringing in low acuity government volume, which historically is a lower volume -- lower margin volume source?

[Kevin Hammons:]

Sure. And I'll be happy to start that off. So there's a lot to unpack there. And there's certainly been a lot of noise in the prior periods as we have -- are coming out and seeing declines in COVID cases. But if you look at our net revenue per adjusted admission compared to 2019, we're up about 10% over the 2-year period. And I think that if you think about maybe normal rate lift and a little bit of acuity lift off that, we're pretty comfortable that we can kind of maintain that level of net revenue per adjusted admission going into the back half. Certainly, you're right, there's probably some lower acuity service that isn't back yet. However, there's still some higher acuity services. And we've been, over the past couple of years, making investments in higher acuity service lines and making other improvements and adding services that we think will offset some of that, what might be some downward pressure as we continue to grow.

[Tim Hingtgen:]

Yes, Kevin, this is Tim. I'll just add on to what Kevin said. In terms of our prospects for growing net revenue, we really have had a very balanced approach to how we want to build out the business, expand our markets. And that balanced approach being investments in the ambulatory care settings, our access point strategies. Our freestanding EDs, as we mentioned, continue to expand. We have another one that will be opening up yet this year. We have our pipeline that has additional ones in place. And while some of those visits may be lower acuity, it is an expansion of some of our higher acuity service lines on the orthopedic and cardiac service line. So it's all meant to really help us further bolster that inpatient side of the business. In some of the core markets where we're adding beds, we still see tremendous opportunity to expand and augment service lines, growing more of that inpatient business, taking more of the inpatient market share. So again, we see that balanced approach is serving us quite well, making sure we're positioned well to where care is migrating on the ambulatory side but still being able to drive the higher acuity inpatient services.

[Operator:]

And last question comes from the line of Josh Raskin of Nephron Research.

[Josh Raskin:]

Yes. I appreciate the follow-up. The real question I had was just the changes that you're seeing, I know we just talked about sort of COVID and Delta, but I'm curious on the treatment and cost per patient and sort of impact on operations. So are you seeing differences in the treatment of the Delta variant patients relative to others? Are there differences in length of stay, difference in cost to treat? I'm assuming you don't have PPE issues and other impacts on the rest of the facility, but I'd be curious on the inpatient cost per patient.

[Tim Hingtgen:]

Sure, Josh. This is Tim. I'll kick it off with more of the operational side and have Kevin weigh in on the cost side. But in terms of the operations side, your theory is correct. We're not having the same pressures on PPE. As we pointed out, in the second quarter, we saw a drop in contract labor. We are bringing in more contract labor. So you may see some increase in that spend as we support our caregivers, our full-time and part-time caregivers, with more nursing resources to manage the surge and maintain that dual-track of elective non-COVID business coming into the hospitals. In terms of any other expenses in terms of drugs or lab, those are relatively stable to what we saw in the previous waves.

[Kevin Hammons:]

Yes. So I would say it's a little early, but right now, what we're experiencing is not any significant difference in the cost of treatment for the current wave of COVID patients compared to previous waves.

[Lynn Simon:]

Yes, and this is Lynn. I'll just add. With this wave, like everyone is talking about, seeing a little younger patient and probably less ventilated patients. So that's a trend at least now that obviously is subject to change, but that's what we've been seeing recently.

[Operator:]

We will now turn the call over to Mr. Hingtgen for closing comments.

[Tim Hingtgen:]

Thank you, Jay, and thanks to all of you for spending time with us today. In closing, I want to once again thank our physicians, caregivers, employees and hospital leadership teams, who consistently demonstrate their true purpose and commitment and service to their communities each and every day. I also want to thank our regional presidents and the company's entire leadership team for their continued strong support of our markets. We are pleased with our strong first half of the year. And we look forward to updating you on our progress throughout the rest of 2021. Once again, if you have any questions, you can always reach us at [phone]. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.