Community Health Systems, Inc.

Good day and thank you for standing by. Welcome to Community Health Systems second quarter 2022 earnings call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ross Como, Vice President of Investor Relations.

Thank you, Matt. Good morning and welcome to Community Health Systems second quarter 2022 conference call. Joining me on today's call are Tim Henschen, Chief Executive Officer, Kevin Hammond, President and Chief Financial Officer, and Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer. Before I turn the call over to Tim, I'd like to remind everyone that 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 followed 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 refer to those slides during this earnings call. Also, all calculations we will discuss also exclude loss or gain from early extinguishment of debt and impairment expense as well as gains or losses on the sale of businesses. With that said, I'd like to now turn the call over to Tim Henschen, Chief Executive Officer. Great.

Thank you, Ross. Good morning everyone and welcome to our second quarter conference call. The second quarter was challenging in many regards as we navigated through a particularly complex operating environment that simply stated we did not achieve the results we had expected. During this call, we will point to some of the issues affecting our results along with actions that are underway to improve performance. We will also discuss why we remain confident that our operational priorities and strategic growth initiatives remain the right areas of intense focus to deliver the desired results. Several factors came into play in Q2, resulting in our adjusted EBITDA decline, the most pronounced being lower than forecasted net revenue, continued pressure on the SWB line, and contract labor expenses, which improved sequentially but remained well over prior year. And lastly, a disproportionate negative impact from the operating results in two of our markets, which I will quantify later. In terms of net revenue, the decline was due to lower than forecasted volumes in a post-COVID surge quarter based upon past history and lower net revenue per adjusted admission than anticipated due to the continued site of care shifts, payer mix, and generally lower acuity of our medical admissions. Nonpatient revenues also decreased year-over-year. Unfortunately, the lower net revenue had a high flow-through to the EBITDA line in the quarter. And conversely, we expect net revenue to improve in the future, and we expect this incremental net revenue to drive a high flow-through back to EBITDA. Switching back to the quarter, on a year-over-year basis, same-store admissions were down 3.5%. A main contributor to this decline was a greater migration of higher-acuity, short-stay surgery cases that were historically inpatient status being performed as outpatient status, as evidenced by a much smaller decline in adjusted admissions, which were down 50 basis points, and in a same-store surgery decline of 30 basis points. We made targeted investments to increase surgical service lines, capacity, and volumes. and we are pleased to see these strategies producing generally positive results. Our surgical volumes are 1% higher than 2019, while surgical case mix index increased 5% versus the pre-COVID baseline. In terms of the pandemic, we provided care for approximately 2,300 COVID admissions, or 2% of total admissions, compared to 3% of admissions during the prior year quarter and 12% last quarter. On average, COVID cases during the second quarter were lower acuity and less resource intensive on a year-over-year basis and sequentially. Shifting to labor, we remain focused in our plans to retain our workforce, recruit new clinical employees, and reduce contract labor. The number of nursing hires increased by more than 30% compared to the first quarter, and our turnover rate declined 20%. These are clearly favorable trends as we work to reduce contract labor and create sufficient permanent staffing for key services and market share gains as healthcare demand strengthens. Contract labor expense declined each month of the second quarter, and we finished June with 30% fewer contract labor FTEs compared to the end of March. Still, contract labor remains at very elevated levels versus prior year, without the higher acuity inpatient revenues previously seen in the COVID pandemic, which partially offset its EBITDA impact. Already rates for contract labor are going down, and we continue to aggressively execute our recruitment and retention initiatives to build and strengthen a stronger core workforce. Through these efforts, we expect sequential quarterly improvement as the year goes on. Earlier, I mentioned that negative operating results in two markets had an outsized impact on the overall company performance in the second quarter. First, let me say that the vast majority of our 48 markets have adapted well, given the challenging macro environment. However, on a year-over-year basis, these two markets, which have historically had lower than company average EBITDA margins, accounted for 20% of the total company EBITDA decline during the second quarter. In a more normal operating environment, the impact of underperforming markets in any given quarter is typically absorbed by stronger growth and performance in other markets. This year, even in higher performing growth markets, elevated labor costs have resulted in lower net revenue conversion rates that we have historically delivered. It is important to reiterate that the majority of our markets are making progress and continue to appropriately adjust their operations and execute strategies designed to achieve long-term volume and earnings growth. Now, I'd like to cover four areas of immediate and ongoing focus for the company, opportunistic growth, rebuilding our workforce, incremental expense reduction initiatives, and leveraging our CHF centralized resources. First, opportunistic growth. Our management team has undertaken a strategic opportunities assessment to accelerate net revenue and EBITDA growth across several key markets, which includes strengthening position alignment, service line investments, payer strategies, incremental access point expansion, and evaluating potential strategic partnerships. We are pursuing newly identified opportunities aggressively, shifting labor, capital, and other resources where most advantageous, especially to markets with the highest growth potential. We're optimistic this work can accelerate more growth and earnings improvement. And we continue to invest in additional development opportunities. On the inpatient side, during the quarter, we opened Northwest Medical Center Houghton, our fourth hospital in Tucson, Arizona. We broke ground on a $66 million tower addition that will add 56 beds and more ER capacity at Tennova North, a well-situated campus in our Knoxville, Tennessee system. We announced a $30 million investment at our hospital in Warsaw, Indiana as part of the Lutheran Health Network. And later this year, we will begin to open even more inpatient beds as part of multiple expansion projects in our Naples, Florida market. On the ambulatory side of the business, we continue to expand access points in our markets, and we are growing our ambulatory surgery center footprint as more surgical care shifts to the outpatient setting. New ASCs opened in Knoxville and Cleveland, Tennessee during the second quarter. We now have 46 ASCs across our portfolio, with planned additions before the end of the year and a full pipeline in place for 2023. Second, rebuilding our workforce. As everyone knows, the COVID pandemic created seismic shifts across the industry affecting staff recruitment, compensation, and retention. But, as I mentioned earlier, we are now seeing sequential improvements that we expect to continue, including progress in new hire rates and retention rates. Our centralized nurse recruitment program supports all of our markets and is achieving solid results. and we have enhanced our benefits program to provide more tuition reimbursement and loan repayment options, which has received positive feedback from employees. Our work to provide nursing education opportunities and to develop the next generation of nurses continues through our partnership with Jersey College. Four campuses are fully operational. Another will open in the third quarter and six more by the end of 2023. Across these programs, we expect to graduate 1,000 new nurses per year. Third, incremental expense reduction initiatives. During the second quarter, non-labor operating expenses were flat the prior year. Our biggest opportunity and focus is further contract labor reduction. In response to the current operating environment and select markets, we are consolidating some service locations and intentionally reducing capacity and staffing. Of course, we will do this where it makes sense and in ways that balance the labor supply challenges with our focus on growth and expanding market presence in the long term. Fourth, leveraging CHS centralized resources. Our company-wide resource programs are driving improved operational performance. For example, our transfer center achieved a 5% increase in inbound transfers from non-CHS facilities versus prior year quarter and delivered solid gains sequentially as well. Centralized scheduling initiatives, physician and nurse recruitment teams, utilization review and capacity optimization resources, accountable care organizations, and other centralized programs and expertise continue to support the advancement of operational goals and help enhance competitive position in our markets. I will also note that our managed care contracting team is targeting opportunities to improve rates on agreements coming up for renewal as well as proactively analyzing existing contracts, and we see opportunity here. In closing, let me reiterate that we are not satisfied with our overall results in the second quarter. However, we remain steadfast in our commitment to pursue every option and opportunity to improve. And to that end, I want to thank our local health system and company leadership team who remain optimistic about our future and who share in our commitment to achieve the best results possible. With that, Kevin, let me turn the call over to you.