Community Health Systems, Inc.
Q4 2015 Earnings Call Transcript

Published: 16 Feb 2016

[Operator:]

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems 2015 Fourth Quarter and Year-End Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Mr. Michael Culotta, Vice President, Investor Relations. You may begin your conference.

[Michael J. Culotta:]

Thank you, Mike. Good morning and welcome to Community Health Systems' fourth quarter conference call. Before we begin the call, I would like to read the following disclosure statement. This conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described in headings such as Risk Factors in our Annual Report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will be referring to those slides during this earnings call. As you know, our results consolidate the results of Community Health Systems and the former HMA facilities from and after January 27, 2014, the date of acquisition. The same-store volume and financial results reflect the HMA's performance from January 1 for both 2014 and 2015, as well as for CHS. Further, our same-store for this fourth quarter also includes the following acquisitions

[Wayne T. Smith:]

Thank you, Mike. Good morning and welcome to the fourth quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer, is on the call today, as well as David Miller, our President and Chief Operating Officer. First, I want to state the obvious

[W. Larry Cash:]

Thank you, Wayne. We believe our same-store information we are providing is very meaningful as some information on consolidated sequential quarter basis. Calculation is based on the cost through the items noted earlier, including the $169 million increase in provision for bad debts reflects the change in the estimate of our allowance calculation. Speaking to that, during the fourth quarter of 2015 all the way until January of 2016, we updated our hindsight analysis which took a look at write-offs on the September 30, 2014, accounts receivable, to measure collections and estimate our allowance for doubtful accounts. We do this hindsight analysis twice each year. This most recent hindsight analysis showed higher write-offs than anticipated which led us to record a change in estimate to increase our allowance for doubtful accounts by $169 million and a corresponding increase in the provision for bad debts. This increase in write-off activity is primarily the result of larger declines than we anticipated in average collections of patient responsibility in co-pays and deductibles in approximately 20% of our self-pay receivables; increases in personal bankruptcies; a decline in the growth for patient payments over time; and decreased collections from continuous self-pay growth in non-expansion states. Looking at specific categories, other than pure self-pay contributing to the change in estimate, the decrease in collections to deductibles and co-payments represented about approximately 40%; increase in personal bankruptcies represented about 20%; and a significant decline in the growth of scheduled time payments represented about 10%. Determining the allowance for doubtful accounts is an estimation process with many variables. Just as you may recall, HMA recorded under our guidance a $246 million increase to their allowance for doubtful accounts as part of their final 2013 audit. And in 2014, we reversed $60 million of third change estimate with an offset to goodwill. In 2007, there was adjustments made to the estimation process made in connection with the acquisition of Triad totaling $166 million. The run rate of the Triad acquisition adjustment was estimated approximately $20 million. Our total gross self-pay accounts receivable balance at December 31, 2015, is approximately $8 billion, and our allowance for doubtful accounts along with other contractual discounts now represents 88% of the self-pay accounts receivable, represented 160 basis points, an increase in our allowance coverage compared to the prior year. Including accounts written off to secondary agencies for which we still receive recoveries as if they were fully reserved, our allowance coverage would be 92%. We believe that going forward, annual run rate of this change in estimate will be approximately $20 million. Now let's discuss the fourth quarter. And as a reminder, the calculations discussed on the call excluded the items noted earlier including the $169 million (14

[Wayne T. Smith:]

Thanks, Larry. Let me go back and correct something I said earlier. I was talking about filing the amendment to our Form 10 Registration. I think I said we'd be completed sometime in the first quarter of 2016. I meant to say it would be finished in the first half of 2016. 2015 was a difficult year for us, not the year we expected. But we remain convinced that many of the right long-term strategies are in place and that we will see the results from these initiatives in 2016 and beyond. We'll be diligent in our work to improve operations, continue to recruit physicians to our medical staffs, and we continue to prioritize our investments to create the right portfolio for long-term success. We come out of the past year determined to be a stronger and more profitable company. Before we open up for questions, I'd like to highlight some promising trends coming off of 2015 including an increase in inpatient orthopedic volumes with 5.2% with further program expansion planned in 2016. For our emergency department, we saw 65% larger increases in our ER volumes with marketing campaigns and EMS Affinity programs and an increase of over 8,000 successful transfers and 66 hospitals affiliated with our 12 transfer centers. In addition, we're always working to make ED throughput more efficient to ensure patients can be seen quickly with good patient satisfaction, so we'll continue to emphasize these programs. Other service line programs such as neurology, especially stroke, behavioral health and rehab, should begin to drive volumes in 2016. Our professional outreach program now includes 100 directors of professional outreach across the enterprise, which thus far has shown improvement in outpatient and surgery trends. Expansion of our urgent care centers and ambulatory surgery centers and a focus on improving our physician practice productivity remain key drivers of growth. In addition, we're investing in some mid- to long-term strategies that will position us well for the future, including the development of several clinically integrated networks, enabling our new opportunities to partner with physicians, our bundled payment initiatives, and our virtual health programs for telemedicine. And as Larry has stated earlier, we're seeing improvements in the HMA assets and had encouraging trends from the third quarter sequentially. I'd like to thank all the physicians, nurses and support staff for all their tremendous support this quarter. With that, we'd like to open the call for comments. In an effort to get more calls in, we'll limit to one question and one follow-up question so others can have time. If you have further question – follow-up question, as always, we're here to take your call as you can reach us at area code 615-465-7000.

[Operator:]

And your first question is from A.J. Rice from UBS.

[A.J. Rice:]

Thanks. Hi, everybody. Maybe just first to drill down a little bit on the cash flow comments, this year you had thought that you would see this big pickup in the fourth quarter. And I think a lot of the shortfall, the $454 million you talked about, was largely a fourth quarter shortfall. And it's hard to delineate the things you're highlighting there in the AR, the timing on payables, as to whether that's also part of the HMA ongoing issues or whether that's more broadly at the company. Can you give us some flavor for that and some flavor for how you think you'll lay out the cash flow as you look at 2016? Would it be back-end loaded to the fourth quarter again or is it more evenly spread? Maybe I'll stop with that.

[Wayne T. Smith:]

Yeah. First, we do have a little bit of extra interest in the first quarter and third quarter, so that affects the cash flow. I think you'll still have a little bit of back loaded ending the way we do some our measurement and performance of our AR days. We should see some progress in the second quarter, we won't have the interest payment. Clearly, we had a growth in receivables notwithstanding the change in estimates. We had a growth in some of our supplemental programs. I think we're going to get $45 million this quarter from one of our states and another good size from other state in this quarter which will help a little bit the first quarter. But I think where we fell short was primarily in the receivables and the supplemental programs. We did have a little bit more higher payables than we got. At the end of the year, which we anticipated, had about $100 million change in our payroll accrual which you shouldn't have next year. We collected a lot a year ago in our HITECH and then (36

[A.J. Rice:]

Okay. And then maybe just for the follow-up, to think about the guidance for 2016 and this is more of a big picture question than in any specific line item, clearly as we got to the back half of 2015, there was quite a bit of variance from the original guidance. Is there anything different about the way you have approached guidance this year? I know your range is much narrower. It's only about $100 million versus $300 million last year. Anything otherwise we can point to that says, hey, we're taking a little bit more conservative approach for 2016 versus 2015? And specifically, I might ask about the first quarter outlook since trying to get back on track with expectations aligning with what you guys feel comfortable you can do. Is there anything you can say about the first quarter outlook specifically?

[Wayne T. Smith:]

Yeah. Clearly, we were in 2014, I think that 7-7-7 (39

[A.J. Rice:]

Okay. Thanks a lot.

[Operator:]

Your next question is from Brian Tanquilut from Jefferies.

[Brian Gil Tanquilut:]

Hey, good morning, guys. Wayne, you mentioned something in your prepared remarks about Florida being 50% of the weakness in volumes. Do you mind giving us some more color on that issue and also how you think that will correct itself over the course of the year as it relates to Larry's comments about volume improvement?

[Wayne T. Smith:]

Yeah. I think we said this on the last call when we talk about Florida before in terms of physician recruiting. I think we recruited about three times more physicians in Florida than we have for our legacy facilities. We had a lot of cleanup work to do in Florida to start with. It took us a while to work through the issues there. As we said, incrementally and from the third quarter to fourth quarter, we're beginning to see progress in Florida. Florida is a good state. Population-wise, it's great. It's growing. Other companies are doing well. We will do well in Florida. It's just taken us a little while to get there, but we're beginning to see progress and we have gotten everything in place now in terms of number of doctors. So we feel pretty comfortable that we'll make even more progress going forward.

[Brian Gil Tanquilut:]

Okay. And then as a follow-up, capital deployment. In your prepared remarks you talked about paying down debt. So how should we think about balancing debt pay-down versus share buybacks? And also given the outlook you have for divestitures of hospitals, is that an area of opportunity where we could also see more hospitals get sold to fund either debt pay-down --

[Wayne T. Smith:]

Let me talk about divestitures in terms of – and then Larry can talk about our debt – our opportunities in terms of debt pay-down and going out a little bit. We continue – as we said, we have – over the last two years, we've divested about 10 facilities, terminated leases in about 10 facilities. We continue to look for rationalizations and what we're doing now is focusing on our strategies in our big larger markets to make sure that the hospitals fit. Our priority obviously is to get the spin done. That takes out 38 hospitals. And then for us to continue to look at performance of the hospitals that are not performing the way that we'd like them to perform or do not fit in terms of our portfolio going forward. So it's an ongoing process, and I think there is good opportunity for us and a good opportunity for us to monetize a number of facilities that will help us pay down some debt.

[W. Larry Cash:]

Yeah. I think, Brian, what we're looking to at the end of the year, when you think about a little extra generating cash flow, first of all, let me mention that we are in good shape on our covenants. Our interest rate calculation and our secured debt calculation, we got plenty of cushion there and we don't have any future maturities. So while the leverage is still higher than we expected to finish out at the end of the year as the EBITDA dropped, we're also doing very few acquisitions. We've got one that will close here this quarter, maybe one either this quarter, next quarter, real small one in the $20 million range. So we're selling (44

[Brian Gil Tanquilut:]

Got it. All right. Thanks, guys.

[Operator:]

Your next question is from Matthew Borsch from Goldman Sachs.

[Unknown Speaker:]

Hi. This is (45

[W. Larry Cash:]

We've done the consolidated audit there, and we don't think it's going to have a significant effect on the Quorum facilities. We think it'll be close to EBITDA, what we thought, but we are after – and the audit actually got done on February 12, late in the afternoon, that's why we went out when we did since we wanted the market to know about this change. They will begin to do more detailed work on the separation of that which – have that audit done, it'll come out in the Form-10. We don't think it's going to have a significant effect on the Quorum assets, but we'll review that with our auditors who all they opined on on Friday of last week was the total allowance adjustment.

[Unknown Speaker:]

Okay. Great. And just quick follow-up. Can you share a little more detail on that change in estimate for the medical malpractice as well?

[W. Larry Cash:]

Yeah. We, as you can see that our factory (46

[Wayne T. Smith:]

And our trends are definitely improving.

[W. Larry Cash:]

And if you looked at the first three quarters, we're in good shape on that, but we were up over a year ago and a little bit higher than we had estimated.

[Unknown Speaker:]

Okay. Thanks very much.

[Operator:]

Your next question is from Frank Morgan from RBC Capital Markets.

[Frank Morgan:]

Good morning. With regard to the decline in the collections on co-pays and deductibles and the increase in bankruptcies, were there any particular geographic areas, or was it within either one of the particular portfolios either legacy community or HMA?

[W. Larry Cash:]

There wasn't. We didn't separate the adjustment between the two, but this would be a little bit more of a legacy adjustment probably than HMA. The HMA did go through a pretty good size adjustment when we bought them at the beginning of 2014. I would say that probably on the self-pay component, clearly Texas is growing a little bit more there and probably Texas would be a little bit higher than other states. There's not many HMA hospitals in Texas. So Texas was a little bit more of a challenge.

[Frank Morgan:]

Got you. And any additional color on the incremental $20 million run rate of the higher levels of bad debts going forward? Is that just based on current experience or did you literally make any kind of change in your underlying assumptions? Thanks.

[W. Larry Cash:]

The way we've done that – and again, we bought a lot of hospitals over the years, both large hospitals, Triad and HMA, and also individual hospitals, and you often have to go make an estimate of what you think the collectability of receivables are. And in this case, I think we're up 160 basis points more reserve we're going to have to take going forward. And we took that percent times what the expected growth in self-pay is, which is probably $800 million to $1 billion of gross dollars, and that could drive something like a $16 million to $20 million change in estimate. Similar to what we've done on all the acquisitions we've done. Understand it seems like a small number, but the way you do this, you sort of take about -- what were we reserving at, what are reserving now, that change is what you got to apply to your growth in self-pay dollars, and I think that's where the $20 million. Historically, we had the same situation with Triad. We had $166 million, and if you go back and look at bad debts and charity and everything between us and Triad in December of 2007 and it came right back down the very next quarter. And so, I would expect the same thing to happen here as it relates to this change.

[Frank Morgan:]

Okay. And I guess just one final as it relates to the $169 million. Is that all related to – are there any prior year periods in there or is that purely just 2015? Thanks.

[W. Larry Cash:]

Yeah. Clearly, I think we've said here you're starting looking at the receivables on the books at September 30, 2014. You're looking what happens the next 12 months, so your base is the receivables on the books at 2014, and the way our change in estimate looks, if you go through it and you look at that, it's a hindsight analysis, and then you determine that in this case the write-offs were greater and the cash collections are less than anticipated, so you make a change in estimate. That change in estimate is all run through the current period even though the analysis is based off of historical information, in this case receivables from 2014 and prior. And then you try to factor that in, how much that would apply to – but your booking it all in 2015 and we said here going forward it's about a $20 million estimate and that may be a decent way to think about what effect it has on 2015 also.

[Frank Morgan:]

Thank you.

[Operator:]

Your next question is from Chris Rigg from Susquehanna Financial.

[Chris Rigg:]

Good morning. I just wanted to come back to the cash flow items that you spiked out at about $340 million. I guess it sounds like some of the supplemental monies are going to come in, but on sort of the pure AR side where you fell short, are you expecting some catch-up payments in the first quarter or are most of those just written off and viewed as uncollectible?

[W. Larry Cash:]

We do expect to continue to improve. I think our adjusted AR days are somewhere in the 60s, and we should be somewhere in the 50s. I don't think we'll get there in the very first quarter, but I think by the end of the year, I would expect our AR days to be lower than they are today. We did make a change to sort of segregate our supplemental dollars similar to the way other people have done from state agencies. But I do expect our AR days to improve going forward.

[Chris Rigg:]

Okay. And then just with regard to, again, cash flow but more forward-looking, obviously you cited the investments and other assets on a legacy basis. Can you give us what's that number should be approximately in 2016? And then is there anything, not unusual but that's worth highlighting with regard to other uses of cash that might not be apparent just looking at the CapEx number? Thanks.

[W. Larry Cash:]

I don't think there's anything unusual there as it relates to the CapEx activity. From an overall perspective, I think that we've got $1.5 billion to $1.7 billion. That's in the range of 55% or so of our EBITDA which if we go back we generally run that perspective.

[Chris Rigg:]

I'll follow up offline. Thanks anyway.

[W. Larry Cash:]

Okay.

[Operator:]

Your next question is from Andrew Schenker from Morgan Stanley.

[Unknown Speaker:]

Hi. This is Vikram (52

[Wayne T. Smith:]

Yeah. I think we had to replace so many physicians, so a lot of it is new startup. And as we've said earlier, takes 18 months to 24 months to do that, to get them in place. What we have done over the last year is we've consolidated all our practice management. And so we have one group here corporately that now is a pretty large group that does all the practice management. So we standardized a lot of processes and procedures within those practices, trying to standardize scheduling and follow-ups, all the other kinds of things that we did not have standardized before. So we feel pretty good about where we are and how those will work kind of going forward. It's working in some of our other markets, but this is a – Florida turns out it's a startup for a fairly large number of physicians. So it's taking a little while to get them on line.

[Unknown Speaker:]

Thanks. And then can you give us some more detail on how HMA margins have moved throughout the year and what kind of improvement you're targeting by the end of 2016?

[W. Larry Cash:]

Yeah. The margins were better in the first half of the year and the company performance a little bit better. They come down a little bit. We expect next year between synergies and margins to achieve an extra $50 million of EBITDA probably evenly split between margins and activity. We clearly had targeted to get HMA back up to about a 15% margin, which we're going to have to work hard to get that done, probably either latter part of this year or next year. As Wayne said earlier, we think they're pretty good assets and I think we got a pretty chance of continuing to improve those, especially with the improvement, the capital we spend and some of the other projects that we talked about around orthopedics and ER activity. And I do think we'll have some success as it relates to the cash flow of HMA.

[Unknown Speaker:]

Thanks.

[Operator:]

And we have time for one more caller. The last question is from Whit Mayo from Robert Baird.

[Whit Mayo:]

Hey, thanks for sliding me in. Wayne, just besides recruiting which HMA did do but what operational changes have you made in Florida? Are you still running Florida out of Nashville? Have you moved the divisional support to the local? I guess I'm just trying to figure out like what you need to do to fix some of the medical staff issues and then if you could just comment on hospital CEO/CNO turnover.

[Wayne T. Smith:]

Yeah. We have changed division presidents. In Florida, we've added two new people in addition to the division president. We run everything. I mean, we don't run. I mean, this division presidents work. We have CEOs in all the markets. We have in a number of markets in Florida where they've got larger markets, we'll have a market manager there. So, it's very similar to the stuff that we've been doing for a long, long time except for the fact that we probably didn't respond quick enough and fast enough. HMA went for a period that they did not recruit any physicians and we've not only had to fill the slots that they didn't recruit; we also had a number of physicians that we had worked through issues with and some of those worked out and some of those didn't work out. So, I think we're on the right track now, and I think our success record has been very strong through the years in terms of doing this, and I think we're doing all the right things. And the biggest thing that we have changed in terms of practice management is consolidating it here now and putting all these standards in and making sure that we're doing all the right things in the practice to grow the practices now, and to reduce the expenses as you might expect.

[Whit Mayo:]

Okay.

[W. Larry Cash:]

Whit, this is Larry. HMA, in general, the volume was down 1.5% this year, which is much lower, like I said, it was a positive 1.1%. We go back to when we bought it, it was down 5%, revenue per adjusted admission was declining, revenue was declining, the revenue this year is actually a positive 1.1%. We've moved the managed care rates up some. One of the things that will help Florida is we've done a little bit more -- better contracting; we've had pretty good synergies out of contracting for managed care, and in surgeries we're probably a negative 3% or 4%; now they're down 1%. It's heading in the right direction when you look at 2013, 2014, 2015. It's not as fast we wanted to, but the HMA assets are at least heading in the right direction -- you look at the year versus the last two years.

[Wayne T. Smith:]

And there was a year before we acquired HMA, there was a lot of uncertainty in terms of HMA's future and what was happening, and that was very disruptive to the physicians as well.

[Whit Mayo:]

Okay. Thanks a lot.

[Operator:]

And I will now turn the call back over to Mr. Smith for closing comments.

[Wayne T. Smith:]

Thank you again for spending time with us this morning. We are very focused on our strategies that we've outlined today. You will see us improve as we have always done historically. We want to specifically thank our management team and staff, hospital chief executive officers, hospital chief financial officers and chief nursing officers and division operators for their continued focus on our operating performance. Once again, if you have a question, you can always reach us at area code 615-465-7000. Thank you very much.

[Operator:]

This concludes today's conference call. You may now disconnect.