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spk20: Hello and welcome to the Community Health System's fourth quarter and full year 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad, and to withdraw from the question queue, please press star, then two. I would now like to hand the call to Anton High, Vice President of Investor Relations. Please go ahead.
spk16: Thank you, MJ. Good morning and welcome to the Community Health System's fourth quarter and year-end 2023 conference call. Joining me today on this call are Tim Henschen, Chief Executive Officer, Kevin Hammons, President and Chief Financial Officer, and Dr. Miguel Dine, Executive Vice President of Clinical Operations. Before we begin, I must remind everyone 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 FDC. 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. We've also posted a supplemental slide presentation to our website. All calculations we will discuss exclude gain or loss from early extinguishment of debt, impairment expense, as well as gains or losses on sales of subsidies, gain from the core trust transaction, expense from government and other legal matters and related costs, expenses from business transformation costs, expenses related to employee termination benefits and other restructuring charges, and changes in estimates for professional claims liability related to the events and locations. With that said, I will turn the call over to Tim Henschen, Chief Executive Officer.
spk14: Thank you, Anton. Good morning. Thank you for joining our fourth quarter and your conference call. To kick things off, I first want to recognize the more than 60,000 dedicated employees, providers, and leaders across our healthcare systems for the excellent care delivered to patients in 2023 and always. I'd also like to acknowledge the tremendous team effort that enabled progress in every key priority established for 2023, which we have reviewed on these calls over the past several quarters. Throughout the year, we were purposely focused on advancing safe, quality healthcare strengthening our workforce, accelerating growth, and controlling expenses. Major accomplishments in the year included volume gains across all key services as we continue to see broad-based strength in demand. New access points, strong capacity management, defined workforce initiatives, and investments to optimize our competitive position made this growth possible. Same-store admissions increased 3.5% in 2023, and adjusted admissions were up 5.3%, driving same-store net revenue growth of 4.8%. Same-store ER volume grew 1.1%, while surgeries increased a solid 5.1%. Adjusted EBITDA for the full year increased 12.3%, and our margin expanded 100 basis points year over year, when excluding the positive impact of pandemic relief funds in 2022. When you consider a more than $200 million unanticipated increase in medical specialist fees and medical malpractice expense with a 150 basis point impact margin, we view this performance as a clear sign of positive momentum. We continue to invest in our core markets to accelerate growth prospects and further capture market share. In Knoxville, Tennessee, construction of our new tower is nearly complete with the grand opening scheduled to take place in the next few months. This project includes new inpatient beds and an expanded emergency department. On the Alabama coast, the major expansion of our Baldwin County campus should open before the end of the year and will also increase the number of acute care beds and the surgical capacity available within this very busy hospital. While we pursue bed additions where we are seeing strong demand and are growing market share, we also continue to invest in outpatient access points. such as ambulatory surgery centers, freestanding emergency departments, urgent care centers, and provider clinics. As a result, CHS health systems are capturing patient care that is migrating out of the inpatient environment with 54% of our net revenues now derived from outpatient care. This outpatient focus includes the deliberate broadening of our ASC footprint. During the fourth quarter, we completed the expansion of the Grandview GI ASC in Birmingham, Alabama, and completed an ASC acquisition in La Porte, Indiana. And already this year, we opened a de novo ASC in Cedar Park, Texas. In addition to capital investments in our health systems, our transfer center is driving volume and higher acuity admissions, most notably in cardiology, critical care, GI, and general surgery. The Transfer Center also gives us visibility to see where we have opportunities to invest in further service line development and physician recruitment. Work to sharpen our portfolio in 2023 included divestitures in West Virginia, Arkansas, Oklahoma, and Florida. As you may have seen, the FTC recently sued to block our planned divestiture of two hospitals in North Carolina to Novant Health. We are limited in what we can say at this point, but we believe this divestiture is appropriate and in the best interest of the community. The case will now move to federal court for final determination. Proceeds from divestiture transactions enable a variety of positive activities, such as targeted investments in core markets, funding potential future acquisitions, and increased flexibility in debt management. We are currently evaluating inbound interest for a handful of markets that could yield more than $1 billion in additional proceeds. We have modeled several attractive scenarios but will remain extremely disciplined in our decision-making as it relates to divestitures, acquisitions, and ensuring that our core portfolio is strong and positioned for long-term success. In an effort to strengthen our workforce in 2023, our centralized clinical recruitment team continued to deliver strong results. and we finished the year with a net gain of more than 1,000 bedside nurses. We also expanded their activities to allied health, filling 1,500 physicians in clinical support, technician, and other roles. The impact was real, with a $260 million reduction in contract labor in 2023 compared to the prior year. Also, as you know, in 2023, we rapidly and successfully insourced a large number of hospitalist and emergency medicine programs that were previously vendor outsourced. As a result, we now operate an internal infrastructure of resources that allows for further integration of hospital-based physician groups required by our markets. Based upon the success of insourcing ED and hospitalist medicine, initiatives are underway to insource anesthesia services in select markets, and we believe we can scale these new capabilities effectively and as needed. Advancing safety and quality is an ongoing daily commitment. In 2023, we achieved a record 89% reduction in our serious safety event rate from the baseline established more than a decade ago. We saw many other measures of quality care success, including a 25% reduction in the overall mortality rate and a 48% improvement in post-op respiratory failure rates. Looking to the future, our recently announced clinical data platform migration and partnership with Google Cloud opens the door for expanded use of AI and demonstrates how CHS is leveraging technology to drive administrative efficiencies and to improve patient care. Dr. Binet is on the call with us today to comment about the ways we are and will be using AI and machine learning across our hospitals. Dr. Binet? Thank you, Tim.
spk13: Our partnership with Google Cloud enables us to unify our data into a single platform that enables more real-time decision-making, and that will serve as the foundation for the future use of AI in our healthcare settings. We call our platform Thea, for Tactical Health Engine for Intelligent Analytics. Working on this platform, we are developing tools that improve patient care and outcomes and that support our clinicians and administrative teams in their work. As we leverage AI, we expect to drive efficiencies that enable our healthcare professionals to focus even more of their time on high-value patient interactions. For example, we can deploy this technology for continuous monitoring of patients in an acute care setting using algorithms and near real-time data to identify the potential need for early intervention. AI can be used to generate clinical summaries that physicians and nurses can edit for documentation, decreasing administrative burden. Since AI can distill and disseminate large amounts of complex data, we anticipate using it to help our clinical documentation specialists capture the complexity of care and documentation. Another example is our ability to provide patients with concise, contextualized information to improve social determinants of health by using Google Maps capabilities to provide discharged patients with a list of nearby resources available in their communities and customized to their needs. We are already seeing notable benefits, including improvements in a variety of quality metrics and operational benchmarks, such as reductions in Memphis Day. There are endless possibilities, and we are just beginning to see the power of artificial intelligence in healthcare. In all we are doing at CHS, we are following standards set in 2018 for ethical, safe, and proper use of AI, and have joined the Coalition for Health AI to help frame safe and responsible use of AI in healthcare into the future. Tim, I'll turn the call back to you.
spk14: Thank you, Dr. Binet. Our fourth overarching priority remains controlling expenses, which Kevin will address in his remarks, along with other comments about our financial performance in the fourth quarter and 2023 and our outlook for 2024. Kevin?
spk17: Thank you, Tim, and good morning, everyone. We were pleased to see continued solid demand in our markets and CHS's ongoing progress on our strategic priorities. For the fourth quarter, net operating revenues were $3.2 billion, representing year-over-year growth of 1.2% on a consolidated basis. On the same store basis, net revenue was up 4.1% over the fourth quarter of 2022. driven primarily by a 3.6% increase in adjusted admissions and a 0.5% growth in net revenue per adjusted admission. Inpatient and outpatient volumes in the fourth quarter increased for both the commercial and Medicare books, reflecting the strong demand in our markets and targeted capital investments. However, the mix of that business with the disproportionate growth in Medicare Advantage versus fee-for-service and from states where our negotiated commercial rates are lower, continued to affect our net revenue per adjusted admission growth, similar to previous quarters. Adjusted EBITDA for the fourth quarter was $386 million, representing a margin of 12.1%. During the quarter, we benefited from the recognition of approximately $40 million in increased EBITDA from the Mississippi Hospital Access Program. of which approximately half related to prior periods. While this amount was not factored into our guidance, we effectively offset this benefit by increasing our self-insurance reserves for medical malpractice, which was recognized as a change in estimate during the fourth quarter. We believe this adjustment was appropriate based on recent experience and claims activity across the hospital industry. Overall, we were pleased with our performance on labor costs, Average hourly rate wage rate for the quarter was up approximately 3% year over year, bringing the full year increase to approximately 4% versus our full year expectation for 5%. We expect similar growth in average hourly rate in 2024 or approximately 4%. As Tim noted, our recruitment and retention strategies have helped stabilize our workforce. allowing us to drive significant reductions in contract labor expense, which at $52 million represented an approximate $30 million decline over prior year and a modest decline sequentially. Recall that we typically see a material increase in contract labor utilization in the fourth quarter to help cover for seasonally higher patient demand. Meanwhile, medical specialist fees at approximately 5% of net revenue remained elevated versus historical levels, but generally consistent with the third quarter. When comparing the gross up of expenses for physicians insourced from the former APP contract against the net revenue related to those physicians, we estimate that our results benefited by approximately $5 million during the quarter versus the subsidy payments previously paid to APP. We expect further opportunities in the coming quarters as we look to scale our insourcing efforts, but believe there continues to be pressure, particularly in the area of anesthesia. Cash flows from operations were $90 million for the fourth quarter of 2023, compared with $9 million in the year-ago period. We did not see the expected improvement sequentially in accounts receivable, primarily from the temporary billing delays that we discussed last quarter related to clinical system upgrades in our physician insourcing initiative. Additionally, performance for the quarter was affected by growth in the Mississippi Supplemental Medicaid program AR of approximately $40 million, the slowdown of receiving payments from Medicare Advantage payers versus fee-for-service of approximately $10 million, and the acceleration of interest payments resulting from our refinancing efforts of approximately $30 million. Note that we've begun receiving payments in the first quarter from the state of Mississippi for the expanded Medicaid funding program and expect significant further improvement in cash flows relative to where we finished 2023. Capital expenditures for the quarter were $110 million, bringing the full year total to $467 million. consistent with our guidance of $450 to $500 million. In December, we completed a private offering of $1 billion of 10 and 7 eighths percent senior secured notes due 2032. Using proceeds from the offering and from the completion of our Brevera divestiture to redeem $985 million of our 8% notes due 2026 and to extinguish $402 million principal amount of other debt, which by capturing discount resulted in a pre-tax gain from early extinguishment of debt of approximately $72 million during the quarter. Net debt to trailing adjusted EBITDA at year end was 7.88 times, slightly improved relative to the third quarter. We remain well positioned to meet our needs going forward with improved operations and $637 million of borrowing capacity under our ABL. As Tim noted in his remarks, apart from the North Carolina transaction, we are currently evaluating opportunities for further divestitures across a handful of markets that could total more than $1 billion in additional proceeds. We anticipate that one or more of these transactions could close within the calendar year, providing substantial capital for the company to redeploy. Project Empower, our enterprise modernization initiative, launched October 1st, and after standing up our shared services platform and new workflows at 15 of our facilities with no disruption in patient care, we are seeing improved visibility and insight as expected. After a pause during the year-end closing process, we will begin further implementations throughout 2024. Moving on to our initial guidance for 2024, we anticipate net revenue of $12.3 to $12.7 billion, adjusted EBITDA of $1,475,000,000 to $1,625,000,000, and cash flow from operations of $500 to $650 million. When normalizing for the divestitures completed in 2023, the midpoint of our net revenue output represents a year-over-year growth of approximately 4%, and the midpoint of adjusted EBITDA represents a growth of approximately 9%. Note that our outlook does not include the impact of any future divestitures or major acquisitions, does not include the impact of any debt refinancing transactions, and excludes the potential benefit from a rollback of the 163J limitation on interest deductibility for tax purposes in the income tax refund that we've previously discussed. Additionally, our cash flow guidance includes approximately $60 to $80 million of cash outflow related to Project Empower. As the ERP and workflow modernization rolls out to the markets throughout 2024, these investments will wind down by year end and will become a cash flow tailwind into 2025. To help provide context for the 2024 adjusted EBITDA guidance relative to 2023 and 2022, there are several puts and takes that we would like to highlight. Specifically, as we set initial guidance this time last year for 2023, we had anticipated adjusted EBITDA growth of approximately 7% at the midpoint. At that time, the primary expected headwinds were the $173 million reduction in pandemic relief funds and a moderate increase in medical specialist fees, which we were able to offset through the benefits of our margin improvement program, contract labor reductions, and growth in patient volumes. What we had not anticipated as we started 2023 was that medical specialist fees would spike as high as they did mid-year prior to our APP transaction, and that we would face additional headwinds from higher medical malpractice expense, and from the outsized growth in Medicare Advantage, as we have discussed in quarterly calls since then, leading to the results you see today. Looking into 2024, we have much better visibility into these factors, while at the same time we anticipate tailwinds from growth capital projects over the past two years, further reductions in contract labor, additional savings from cost control efforts, and a full year's benefit from the recently expanded Mississippi Medicaid funding program. Based on these factors, as well as operating results through the first six weeks of the year, we have a high degree of confidence in our ability to deliver on the guidance we have provided and look forward to providing updates in the coming quarters. Tim? Thank you, Kevin.
spk14: I think now we're ready to open it up for Q&A.
spk20: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Brian Tanquilat with Jefferies. Please go ahead.
spk05: Hey, good morning, guys. Kevin, thanks for all the color that you gave us on the cash flow. But maybe just in a little more detail, just looking at the cash flow shortfall in Q4 and how you're thinking about guidance in 2024, including what seems to be a reduced capex spend for the year. So just any color you can share with us. And yeah, that'd be great.
spk17: Sure. Thanks for the question, Brian. So, yeah, if I could just maybe kind of go back through some of the items that I believe caused the shortfall in Q4 and then maybe talk a little bit about 24. You know, we finished Q3, I believe our accounts receivable balance was about $2,160,000. We expected that to come down in Q4, particularly as we clawed back some of the built-up AR from our Cerner conversions. As we went throughout the quarter, although we clawed back maybe a third of that, we did not claw back all of that. We had some additional build-up in AR, particularly around some of the in-source physicians, as well as timing of some commercial payments. The holiday fell on a weekday the last week of December, and We didn't really have complete insight into how some of the commercial payers may pay at the end of the year. So really, we looked at that as just more of a timing issue. Then the Mississippi program came through, which the cash of that wasn't paid in December, so it added to our AR. And at the end of the day, the accounts receivable balance increased. Instead of decreasing as we expected, it had increased. at the end of the year, so that was all in, call it roughly $130 million headwind in cash flow in the fourth quarter. Then we talked about we did a refinancing in the fourth quarter. We had to accelerate in the repayment of the bonds, accelerate some of the interest payments that otherwise would have been paid. in 24, so that's clearly a timing issue because now that interest is paid and we will not have that payment in 24. We also settled a legal case, the Mason case, which was about $30 million in the fourth quarter, made that payment, which was not anticipated. We just did not know the timing of when that payment was made. We had it accrued at the end of the quarter, but did not have the timing of when that payment would be made. So those are kind of led to and are, again, primarily some timing-related matters. As we go into the 24, a couple things I'll just reiterate around the 163J interest deductibility. That has passed the House. It is in the Senate, although we don't know when or if the Senate will pass that rollback. So we've not anticipated, we've not put that in our guidance this year, as well as the tax refund, which we still feel very comfortable that we're going to get, but we were wrong. I was wrong about anticipating the timing of that last year, so I'm not going to predict the timing of our government approving that this year. So if either of those come through, they would be positive. Our current cash tax estimate is $150 to $200 million, and that could be reduced if either of those items come through.
spk05: Got it. Okay. And then maybe as I think about just the expense line, any comment or anything you can share with us as it relates to your views on nurse wage inflation, contract labor utilization, what's baked into the guidance, and also physician service or physician specialist spend, both in-house and outsourced?
spk17: Yeah, so we're estimating kind of a wage inflation at 4% for 2024. That's right about where we were at in 2023, so I think we've baked in a conservative estimate into 24 for wage inflation, and we'll certainly work harder to keep it below that, and we're actually exiting 24 at a rate below that. It was about 3.4% in Q4. On contract labor, again, as we kind of look out at the midpoint of our guidance assumes the current run rate that we're exiting 2023 at. If you think about $52 million fourth quarter contract labor expense, if we stay at that run rate throughout 2024, that would represent about a $60 million reduction in contract labor year over year. and about half of that would flow through to EBITDA, I do believe there's some opportunity that we can further reduce contract labor. It's still running significantly higher than pre-pandemic levels, and we still may be able to take a little bit more out of that. And then I think there was one more. Oh, and CapEx, I think you had mentioned CapEx. We've had some higher CapEx over the past couple of years. We've had some large projects that were winding down. These are inpatient towers where we're adding inpatient capacity in markets where we need to add capacity because we're full and those markets are growing. Those projects are winding down, so we'll have a year with a little less CapEx. Also reflects the hospitals that we've divested over the past year. We're still very comfortable with the amount of capital we're spending as well as trying to manage just our free cash flow.
spk14: Kevin, I'll tack onto that in terms of our philosophy and the management of our capital spending. We have a really full pipeline. We talked about that a lot over the last several quarters. The predominant amount of that is on the outpatient side of the business, which we know does not typically have as high of a spend to get those strategic access points put into operation. So that outpatient focus continues to be an area of growth and opportunity for us across the portfolio. We're also managing that pipeline relative to the gains and staffing so that when we are ready to activate the cap or bring it online, we have a cost-effective way to drive margin and pay back on that capital investment. So we're really, I think, hyper-focused on phasing this in in ways that are really going to be accretive to earnings in the long run. The other thing I would point out is outside of CapEx, it's just keeping some of our powder dry for opportunistic acquisitions. So we'll keep an eye on that as things emerge in the upcoming quarters. On the outpatient side of the business, you heard me reference two outpatient ASC acquisitions later last year. We continue to scan our markets for those types of opportunities as well.
spk20: Thank you.
spk12: The next question comes from Jason Casorla with Citi. Please go ahead.
spk25: Jason, your line is open.
spk09: Jason, I think we may have lost you.
spk20: All right. The next question comes from Ben Hendricks with RBC Capital Markets. Please go ahead.
spk04: Thank you very much. I wanted to follow up on the MedMal reserving, specifically your decision not to adjust that out of adjusted results, and also just your general comfort level with kind of reserves where they are now. Is there anything out there specifically on the horizon that could continue to push those reserves up higher through the year? Just any comment around your thinking there. Thanks.
spk17: Sure. Thanks for the question, Ben. You know, we debated – whether or not it was appropriate to adjust that out of our adjusted EBITDA. I certainly gave that some consideration. At the end of the day, we decided to leave it in. We also had, with Mississippi coming in, which was unexpected in the fourth quarter, we did not want to appear that we were cherry picking and only adjusting out unfavorable items There's reasons that Mississippi would stay in because it's an ongoing program and we did not want to create a situation where we pulled it out also in the fourth quarter and then put it back in next year and just some inconsistencies. At the end of the day, just decided to leave them both in into the adjusted EBITDA calculation Again, the Mississippi program, like other programs, are ongoing and really represent reimbursement for services provided, so I think that's also appropriate. As we look ahead to 24, the malpractice environment overall, I think, is getting more difficult. We're seeing some pretty large settlements, jury awards in cases that are higher than we've ever seen before. historically and I think there you know is a little bit of pressure in the industry at large we're hearing that from our insurance carriers as well we are self insured for malpractice with with excess insurance coverage above certain levels but so we do have insurance and here you know there is some pressure there but overall I would expect our malpractice expense to probably you know come back to something a little more normal in the future as we manage through. I'd also point out that the work we've done on patient safety and quality over the years in the 89% reduction in serious safety events that Tim called out is very meaningful. There's such a long tail on malpractice. We're still settling a lot of old claims, but the rate at which new claims are coming in is significantly lower. than it had been historically. So I feel good about the future, our ability to manage that cost.
spk04: Thank you. And if I may, a quick follow up on your comments about round puts and takes on guidance. We're wondering if we get some more detail on the kind of key drivers of margin improvement, you know, implied for 2024. It sounds like there will be some support from lower contract labor year over year. And you mentioned lower wage inflation. Then we saw Also, Mississippi Medicaid. But should we also expect some normalization of payer mix trends this year? Any comments on how we bridge to the margin? Thanks.
spk17: Yeah, I do. You called out a couple of the items I already mentioned. I do think there's some, or we have some expectation of some normalization in payer mix trends. You know, rates continue to be relatively favorable. Governmental rates Medicare list should be in the kind of 2.5% to 3% range this year versus 2023. It was 1.9%. I think Medicaid is about flat, excluding some of the supplemental programs. It was a negative in 2023. So those are all marginally helpful to us. Commercial rates are still in that 4% to 6% range. similar to 2023, but another year of those should be helpful. As we continue to grow volume and are able to cover our fixed costs, that has the benefit of increasing our margin. And as our markets continue to grow and we continue to see recovery in higher volumes, I think that's an important factor to point out. We also have our margin improvement program that we're highly focused on and putting a lot of discipline around a number of initiatives. Some of those are baked into our guidance. Many of them are not baked into our guidance and give us the upside potential. But around the uncertainty of when those come through and to what degree, we did not want to get too far out ahead and bake all of that. But we have a number of initiatives we're working on that should be favorable.
spk20: Thank you. The next question is from Jason Casorla with Citi. Please go ahead.
spk15: Great. Thanks. Can you guys hear me? Yep, sure can. We can hear you now, Jason.
spk11: Excellent. Thank you. Apologies for that. I wanted to talk about the MA book, right? In the past, you've discussed how your MA book has a lower effective pricing yield compared to fee-for-service Medicare, you know, and how that dynamic has impacted results with your elevated MA volume growth in 23. But I guess, you know, stepping into 24, are you anticipating any offsets to this yield differential, whether that be from your contracting perspective with MA payers or new rules like the two midnight rule? I guess just if you have any color on the levers and areas that can help narrow that pricing yield differential moving forward. Thanks.
spk17: Sure. So, you know, when you go step back, when we look at our contracts kind of on a procedure by procedural basis, the rates, of reimbursements pretty similar to Medicare fee for service. The realization is really where we lose money comparatively and that's what causes the discount that we talked about. That's a result of downgrades and denials of claims. Going into 24, there certainly should be some benefit from the new guidance put out by CMS around the two midnight rule. around pre-authorizations. We expect that those could be helpful to us. It's too early to tell. We've not been able to quantify that yet and too early in 24 to really see that come through. I know some of the payers have talked about already seeing an impact in Q4 of making more payments. We did not see any benefit in Q4 from that coming through, but I think Directionally, it could be positive for us in 24. Tim?
spk14: Jason, I think we're investing in a lot of clinical resources to help us monitor the environment, be more on the proactive side of this. We've talked in the past about our centralized UR investments. That was largely a registered nurse organized function under the direction of Dr. Binet. Later last year, we stood up a physician advisor, in-source physician advisor program. to really be more active and proactive as much as we can be, but also to counteract any downgrades and denials that the admitting physician and the physician advisors believe is clinically appropriate for inpatient status. So we would expect to see some positive tail effects for that in 2024 as well.
spk11: Okay. Got to thank. So maybe just a follow-up, and apologies if I missed this before, but I wanted to ask on that 4% revenue growth. Excluding divestitures, can you just help on the building blocks of that 4% relative to your 2% to 3% kind of targets for volume and pricing and mix? And then maybe just specifically on volumes, you know, growth for 2023 was some, you know, call it 300 basis points ahead of your original expectations. Do you feel that the outsized growth last year kind of creates a comp issue for you in 2024, kind of especially in the first half of the year? Or how would you frame the volume environment in 2024? Thanks.
spk17: Yeah, so I would say that, you know, the 4% growth, we're looking at, you know, roughly 2% to 3% volume growth in 24, which is lower than we experienced in 23. But we still believe, you know, strongly that we can continue to grow those volumes in our markets and get something in 2% to 3% volume growth. And then, you know, rates. Overall, as I mentioned, we're kind of 4% or 6% on commercial rate, 2.5% to 3% on Medicare, which is a little higher than we had in 23 and about flat on Medicaid. There probably is, and we factored in a little bit of a headwind on continued deterioration in payer mix, but when you throw all that in together, we get about a 4% same-store rate.
spk09: kind of growth on net revenue.
spk20: Thank you. The next question comes from AJ Rice with UBS. Please go ahead.
spk06: Hi, everybody. Just maybe to follow up a little bit more on that payer mix question. There's been obviously debate in the marketplace about utilization rates. Are you seeing any difference in behavior among your utilization between your MA book and your fee-for-service book and, frankly, the rest of the book as well. Is there anything you can tell in terms of rebound post-pandemic and so forth that may show different trends across those payer classes?
spk17: You know, I think kind of post-pandemic, we certainly saw a deterioration in the – actions by the MA payers, you know, where they were not downgrading or denying claims during the pandemic, they certainly began denying and downgrading significantly more claims, particularly in the MA book, although it applies to commercial as well, but more so in the MA space. And we believe that kind of hit a peak, you know, and I think that's gotten a lot more attention at the governmental levels. We've certainly been active in our discussions with legislators, with our lobbying efforts. I know the American Hospital Association, Federation of American Hospitals, they've all tried to shine a light on some of the behavior of the payers. I think that's resulted in some movement by CMS to come out with some additional guidance around their expectations, like the two midnight rule, like some of the preauthorization requirements. We have yet to see any real change that's meaningful or measurable, but having said that, we do expect there to be some favorable movement into 2024.
spk14: Yeah, AJ, this is Sam. I'll go back to my comment. The reason we set up the Physician Advisor Program was to make sure that we're supporting the admitting physician's decision with more collaboration with CMA plans or commercial plans in general. We have a strong compliance program across Medicare and every other payer source as well, but in general to try to counteract some of those adverse trends. We believe we're better positioned going forward to make sure that that admitting physician's decision is is more strongly represented.
spk06: Okay, thanks. And maybe my follow-up, just to ask about, you're mentioning this divestiture activity that you plan to undertake. Is that in response to people proactively coming to you? Is it a strategic decision you're making? And you talk about having as much as a billion dollars for capital deployment. I wondered whether you're thinking mainly about paying down debt further, or is there some other... use of that potential capital that you're thinking about.
spk17: So, sure, happy to take that one, A.J. So this is almost entirely resulting from inbound interest. But having said that, I still think we're taking an opportunistic look because we get inbound interest on a number of locations and facilities that we don't act on. So we're not acting on every inbound interest that comes in, but we do happen to have some inbound interest in markets that we think may make strategic sense to transact. So we're pursuing those further. We don't know at this point whether they'll come to fruition, but there is some significant interest out there that we are going through the effort to you know, have conversations and look into deeper and evaluate that may make sense. If, you know, to the extent that we get proceeds in, I think we'll evaluate the markets at the time and the other opportunities at the time on what is the best way to delever the company. My focus is clearly on delevering and balancing our capital structure, and we can do that in two ways. We can pay down debt and we can grow EBITDA. And, you know, if we have the right opportunity for acquisition at the time we have, you know, cash in hand and we think that that could be more accretive, that's something we would certainly take a look at. If the markets are such that, you know, debt pay down is the better play, I think we'd take a look at that. So I know I'm not giving you a specific answer here, but we'll evaluate based on the timing that the cash comes in what we think is the best way to deliver.
spk20: Thank you. The next question comes from Steven Baxter with Wells Fargo. Please go ahead.
spk21: Hey, thanks for the question. Just another one on payer mix. I might have thought that with the growth of the exchanges or maybe potentially some catch-up in the commercial demand you were hoping to see in 2023 that there could potentially be upside risk to payer mix. Sounds like you're a bit more cautious there. Just want to make sure we really are capturing all the dynamics that you want us to keep in mind. And then just to come back to AR briefly, just to manage our expectations. You know, would we expect to see progress, you know, as soon as the first quarter? Like, are you actually seeing AR improve to date this year? Or should we be thinking about maybe a more gradual progression throughout the balance of the year? Thank you.
spk17: Sure. A couple things I'll mention on payer mix, and Tim, feel free to jump in as well. So we did grow both commercial and Medicare age population payer mix in the fourth quarter. So I want to be very clear, we grew both. But the MA business outpaced the commercial business by about 2 to 1 in the fourth quarter. For the full year, it outpaced the commercial 3 to 1. So we did make improvements. That proportional change was better in the fourth quarter than for the full year, but MA did outpace the growth. As we go into 24, we look for some moderation of that, but we're still cognizant and keeping our eye on that payer mix dynamic. There's one other AR. Oh, on AR. Sorry, I forgot the second part of that question. On AR, I think we'll see some early benefits in 24. as it relates to the buildup in AR from like the Mississippi supplemental program, that will largely be collected in Q1. Some of the other buildup will probably be more moderate throughout the year, but I do expect over the course of the year for us to make improvements and to recapture the remainder of the conversion AR plus the buildup on AR from some of the movement to MA, more commercial players slowing down, that should moderate throughout 2024. Over the course of the year, I expect an improvement.
spk12: Thank you. Today's last question comes from Josh Raskin with Nefrin Research.
spk20: Please go ahead.
spk10: Hey, good morning. This is actually Marco on for Josh. Appreciate you taking the question. Just looking at the 2024 guidance, I was wondering if you could parse out some of the $350 to $400 million in CapEx for 2024. Is that mainly maintenance CapEx at this point, or do you have any other notable projects in the pipeline that are coming through this year? And do you have any ability to flex that lower in 2024 if you need to? Thanks.
spk17: Sure. So, you know, we have been running approximately 50% maintenance capital, 50% growth capital over the last several years, if you go back and look at our CapEx. And I would say proportionally that's still very similar in 2021. 2024 will be split about 50-50. As I mentioned, a couple of the large projects that are high-cost projects, the inpatient adding patient towers and adding beds are winding down in 2024. And then with fewer hospitals, as we actually sold eight hospitals in 2023, that lowers some of our maintenance capital. as well related to those. Overall, I don't think we are materially decreasing the amount of maintenance or growth capital comparatively. The other thing is we've had some capital related to Project Empower over the last year. The majority of what we'll be spending in 2024 will be more on the expense side is now, you know, the systems and so forth for that project are built and the costs going forward are going to be implementation and training and rollout costs. So there's some reduction there as well.
spk14: The only thing I would add is, you know, to your question of, you know, could you throttle that back? You know, anything is certainly possible, but, you know, similar to what we did in 2023, We were very deliberate in our investments into the core business with the intention of, as Kevin said earlier, working on projects that will help us certainly drive stronger EBITDA performance, which is a benefit to the long-term value of the company and its shareholders. So a similar equation obviously comes into play in 2024. We have a strong pipeline of projects. As I said previously, a lot of those are on the ambulatory side of the business. not as many high-dollar inpatient investments that we're making in 2024. So I think it just is a normal settling of the capital spend, but we're very, very deliberate in how we're allocating our cash in that regard.
spk10: Great. Thanks for the color. And then if I could squeeze in one follow-up. You spoke to about $1 billion in potential proceeds from divestiture opportunities that you now have identified. Can you help us understand a little bit more about the cadence of how that could ultimately be realized, especially in light of some of the FTC scrutiny that we've seen over some of these deals more recently? And then is there any financial detail you can provide around the revenue or EBITDA contribution of those assets? Thank you.
spk17: Sure. I think it's probably too early to tell or to say much about We don't have any agreements signed at this point, but this is inbound interest that we're evaluating. I would say, generally speaking, all of these deals would be in the 10 times plus multiple of EBITDA, of trailing EBITDA, if they are to come to fruition. Again, we've not made a decision and we've not fully negotiated anything on any of these deals, but we do have an inbound interest that's very reasonable to think that if we decide to move forward, we could get deals done. That said, deals don't move very quickly. As you are well aware, I would expect the earliest something to be completed would be probably mid-year and then the potential for others to be completed
spk09: late in the year, early next year.
spk12: Thank you. This concludes our question and answer session.
spk20: I would now like to turn the call back over to Mr. Hinchin for any closing remarks.
spk14: Thank you, MJ, and thanks to all of you for joining our call today. We look forward to providing you with updates on our progress throughout 2024 and to demonstrating that our strategies and initiatives are producing positive momentum and results. As always, if you have additional questions, you can reach us at 615-465-7000. Thanks again and have a great day.
spk20: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. you Thank you. Thank you.
spk24: Bye.
spk20: Hello and welcome to the Community Health System's fourth quarter and full year 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad, and to withdraw from the question queue, please press star, then 2. I would now like to hand the call to Anton High, Vice President of Investor Relations. Please go ahead.
spk16: Thank you, MJ. Good morning, and welcome to the Community Health System's fourth quarter and year-end 2023 conference calls. Joining me today on this call are Tim Henschen, Chief Executive Officer, Kevin Hammonds, President and Chief Financial Officer, and Dr. Miguel Dene, Executive Vice President of Clinical Operations. Before we begin, I must remind everyone 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 SEC. Actual results may differ significantly from those expressed in any four living statements in today's discussion. We do not intend to update any of these four living statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation to our website. All calculations we will discuss exclude gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on sales of subsidies, gain from core trust transaction, expense from government and other legal matters and related costs, expenses from business transformation costs, expenses related to employee termination benefits and other restructuring charges, and changes in estimates for professional claims liability related to divested locations.
spk14: With that said, I will turn the call over to Tim Henschen, Chief Executive Officer. Thank you, Anton. Good morning. Thank you for joining our fourth quarter and year-end conference call. To kick things off, I first want to recognize the more than 60,000 dedicated employees, providers, and leaders across our healthcare systems for the excellent care delivered to patients in 2023 and always. I'd also like to acknowledge the tremendous team effort that enabled progress in every key priority established for 2023, which we have reviewed on these calls over the past several quarters. Throughout the year, we were purposely focused on advancing safe, quality healthcare, strengthening our workforce, accelerating growth, and controlling expenses. Major accomplishments in the year included volume gains across all key services, as we continue to see broad-based strength in demand. New access points, strong capacity management, defined workforce initiatives, and investments to optimize our competitive position made this growth possible. Same-store admissions increased 3.5% in 2023, and adjusted admissions were up 5.3%, driving same-store net revenue growth of 4.8%. Same-store ER volume grew 1.1%, while surgeries increased a solid 5.1%. Adjusted EBITDA for the full year increased 12.3% and our margin expanded 100 basis points year over year when excluding the positive impact of pandemic relief funds in 2022. When you consider a more than $200 million unanticipated increase in medical specialist fees and medical malpractice expense with a 150 basis point impact of margin, We view this performance as a clear sign of positive momentum. We continue to invest in our core markets to accelerate growth prospects and further capture market share. In Knoxville, Tennessee, construction of our new tower is nearly complete with the grand opening scheduled to take place in the next few months. This project includes new inpatient beds and an expanded emergency department. On the Alabama coast, the major expansion of our Baldwin County campus should open before the end of the year and will also increase the number of acute care beds and the surgical capacity available within this very busy hospital. While we pursue bed additions where we are seeing strong demand and are growing market share, we also continue to invest in outpatient access points, such as ambulatory surgery centers, freestanding emergency departments, urgent care centers, and provider clinics. As a result, CHS health systems are capturing patient care that is migrating out of the inpatient environment, with 54% of our net revenues now derived from outpatient care. This outpatient focus includes the deliberate broadening of our ASC footprint. During the fourth quarter, we completed the expansion of the Grandview GI ASC in Birmingham, Alabama, and completed an ASC acquisition in La Porte, Indiana. And already this year, we opened a de novo ASC in Cedar Park, Texas. In addition to capital investments in our health systems, our transfer center is driving volume and higher acuity admissions, most notably in cardiology, critical care, GI, and general surgery. The transfer center also gives us visibility to see where we have opportunities to invest in further service line development and physician recruitment. Work to sharpen our portfolio in 2023 included divestitures in West Virginia, Arkansas, Oklahoma, and Florida. As you may have seen, the FTC recently sued to block our planned divestiture of two hospitals in North Carolina to Novant Health. We are limited in what we can say at this point, but we believe this divestiture is appropriate and in the best interest of the community. The case will now move to federal court for final determination. Proceeds from divestiture transactions enable a variety of positive activities, such as targeted investments in core markets, funding potential future acquisitions, and increased flexibility in debt management. We are currently evaluating inbound interest for a handful of markets that could yield more than $1 billion in additional proceeds. We have modeled several attractive scenarios but will remain extremely disciplined in our decision-making as it relates to divestitures, acquisitions, and ensuring that our core portfolio is strong and positioned for long-term success. In an effort to strengthen our workforce in 2023, Our centralized clinical recruitment team continued to deliver strong results, and we finished the year with a net gain of more than 1,000 bedside nurses. We also expanded their activities to allied health, filling 1,500 physicians in clinical support, technician, and other roles. The impact was real, with a $260 million reduction in contract labor in 2023 compared to the prior year. Also, as you know, in 2023, we rapidly and successfully insourced a large number of hospitalist and emergency medicine programs that were previously vendor outsourced. As a result, we now operate an internal infrastructure of resources that allows for further integration of hospital-based physician groups required by our markets. Based upon the success of insourcing ED and hospitalist medicine, initiatives are underway to insource anesthesia services in select markets and we believe we can scale these new capabilities effectively and as needed. Advancing safety and quality is an ongoing daily commitment. In 2023, we achieved a record 89% reduction in our serious safety event rate from the baseline established more than a decade ago. We saw many other measures of quality care success, including a 25% reduction in the overall mortality rate and a 48% improvement in post-op respiratory failure rates. Looking to the future, our recently announced clinical data platform migration and partnership with Google Cloud opens the door for expanded use of AI and demonstrates how CHS is leveraging technology to drive administrative efficiencies and to improve patient care. Dr. Binet is on the call with us today to comment about the ways we are and will be using AI and machine learning across our hospitals. Dr. Binet? Thank you, Tim.
spk13: Our partnership with Google Cloud enables us to unify our data into a single platform that facilitates greater transparency, enables more real-time decision-making, and that will serve as the foundation for the future use of AI in our healthcare settings. We call our platform Thea, for Tactical Health Engine for Intelligent Analytics. Working on this platform, we are developing tools that improve patient care and outcomes and support our clinicians and administrative teams in their work. As we leverage AI, we expect to drive efficiencies that enable our healthcare professionals to focus even more of their time on high-value patient interactions. For example, we can deploy this technology for continuous monitoring of patients in an acute care setting using algorithms and near real-time data to identify the potential need for early intervention. AI can be used to generate clinical summaries that physicians and nurses can edit for documentation, decreasing administrative burden. Since AI can distill and disseminate large amounts of complex data, we anticipate using it to help our clinical documentation specialists capture the complexity of care and documentation. Another example is our ability to provide patients with concise, contextualized information to improve social determinants of health by using Google Maps capabilities to provide discharge patients with a list of nearby resources available in their communities and customized to their needs. We are already seeing notable benefits, including improvements in a variety of quality metrics and operational benchmarks, such as reductions in Memphis Day. There are endless possibilities, and we are just beginning to see the power of artificial intelligence in healthcare. In all we are doing at CHS, we are following standards set in 2018 for ethical, safe, and proper use of AI and have joined the Coalition for Health AI to help frame safe and responsible use of AI and healthcare into the future. Tim, I'll turn the call back to you.
spk14: Thank you, Dr. Binet. Our fourth overarching priority remains controlling expenses, which Kevin will address in his remarks along with other comments about our financial performance in the fourth quarter and 2023 and our outlook for 2024. Kevin?
spk17: Thank you, Tim, and good morning, everyone. Overall, we were pleased to see continued solid demand in our markets and CHS's ongoing progress on our strategic priorities. For the fourth quarter, net operating revenues were $3.2 billion, representing year-over-year growth of 1.2% on a consolidated basis. On a same-store basis, net revenue was up 4.1% over the fourth quarter of 2022. driven primarily by a 3.6% increase in adjusted admissions and a 0.5% growth in net revenue per adjusted admission. Inpatient and outpatient volumes in the fourth quarter increased for both the commercial and Medicare books, reflecting the strong demand in our markets and targeted capital investments. However, the mix of that business with the disproportionate growth in Medicare Advantage versus fee-for-service and from states where our negotiated commercial rates are lower, continued to affect our net revenue per adjusted admission growth, similar to previous quarters. Adjusted EBITDA for the fourth quarter was $386 million, representing a margin of 12.1%. During the quarter, we benefited from the recognition of approximately $40 million in increased EBITDA from the Mississippi Hospital Access Program. of which approximately half related to prior periods. While this amount was not factored into our guidance, we effectively offset this benefit by increasing our self-insurance reserves for medical malpractice, which was recognized as a change in estimate during the fourth quarter. We believe this adjustment was appropriate based on recent experience and claims activity across the hospital industry. Overall, we were pleased with our performance on labor costs Average hourly rate wage rate for the quarter was up approximately 3% year over year, bringing the full year increase to approximately 4% versus our full year expectation for 5%. We expect similar growth in average hourly rate in 2024 or approximately 4%. As Tim noted, our recruitment and retention strategies have helped stabilize our workforce. allowing us to drive significant reductions in contract labor expense, which at $52 million represented an approximate $30 million decline over prior year and a modest decline sequentially. Recall that we typically see a material increase in contract labor utilization in the fourth quarter to help cover for seasonally higher patient demand. Meanwhile, medical specialist fees at approximately 5% of net revenue remained elevated versus historical levels, but generally consistent with the third quarter. When comparing the gross up of expenses for physicians insourced from the former APP contract against the net revenue related to those physicians, we estimate that our results benefited by approximately $5 million during the quarter versus the subsidy payments previously paid to APP. We expect further opportunities in the coming quarters as we look to scale our insourcing efforts, but believe there continues to be pressure, particularly in the area of anesthesia. Cash flows from operations were $90 million for the fourth quarter of 2023, compared with $9 million in the year-ago period. We did not see the expected improvement sequentially in accounts receivable, primarily from the temporary billing delays that we discussed last quarter related to clinical system upgrades in our physician insourcing initiative. Additionally, performance for the quarter was affected by growth in the Mississippi Supplemental Medicaid program AR of approximately $40 million, the slowdown of receiving payments from Medicare Advantage payers versus fee-for-service of approximately $10 million, and the acceleration of interest payments resulting from our refinancing efforts of approximately $30 million. Note that we've begun receiving payments in the first quarter from the state of Mississippi for the expanded Medicaid funding program and expect significant further improvement in cash flows relative to where we finished 2023. Capital expenditures for the quarter were $110 million, bringing the full year total to $467 million. consistent with our guidance of $450 to $500 million. In December, we completed a private offering of $1 billion of 10 and 7 eighths percent senior secured notes due 2032. Using proceeds from the offering and from the completion of our Brevera divestiture to redeem $985 million of our 8% notes due 2026 and to extinguish $402 million principal amount of other debt, which by capturing discount resulted in a pre-tax gain from early extinguishment of debt of approximately $72 million during the quarter. Net debt to trailing adjusted EBITDA at year end was 7.88 times, slightly improved relative to the third quarter. We remain well positioned to meet our needs going forward with improved operations and $637 million of borrowing capacity under our ABL. As Tim noted in his remarks, apart from the North Carolina transaction, we are currently evaluating opportunities for further divestitures across a handful of markets that could total more than $1 billion in additional proceeds. We anticipate that one or more of these transactions could close within the calendar year, providing substantial capital for the company to redeploy. Project Empower, our enterprise modernization initiative, launched October 1st, and after standing up our shared services platform and new workflows at 15 of our facilities with no disruption in patient care, we are seeing improved visibility and insight as expected. After a pause during the year-end closing process, we will begin further implementations throughout 2024. Moving on to our initial guidance for 2024, we anticipate net revenue of $12.3 to $12.7 billion, adjusted EBITDA of $1,475,000,000 to $1,625,000, and cash flow from operations of $500 to $650 million. When normalizing for the divestitures completed in 2023, the midpoint of our net revenue output represents a year-over-year growth of approximately 4%, and the midpoint of adjusted EBITDA represents a growth of approximately 9%. Note that our outlook does not include the impact of any future divestitures or major acquisitions, does not include the impact of any debt refinancing transactions, and excludes the potential benefit from a rollback of the 163J limitation on interest deductibility for tax purposes in the income tax refund that we've previously discussed. Additionally, our cash flow guidance includes approximately $60 to $80 million of cash outflow related to Project Empower. As the ERP and workflow modernization rolls out to the markets throughout 2024, these investments will wind down by year end and will become a cash flow tailwind into 2025. To help provide context for the 2024 adjusted EBITDA guidance relative to 2023 and 2022, there are several puts and takes that we would like to highlight. Specifically, as we set initial guidance this time last year for 2023, we had anticipated adjusted EBITDA growth of approximately 7% at the midpoint. At that time, the primary expected headwinds were the $173 million reduction in pandemic relief funds and a moderate increase in medical specialist fees, which we were able to offset through the benefits of our margin improvement program, contract labor reductions, and growth in patient volumes. What we had not anticipated as we started 2023 was that medical specialist fees would spike as high as they did mid-year prior to our APP transaction, and that we would face additional headwinds from higher medical malpractice expense, and from the outsized growth in Medicare Advantage, as we have discussed in quarterly calls since then, leading to the results you see today. Looking into 2024, we have much better visibility into these factors, while at the same time we anticipate tailwinds from growth capital projects over the past two years, further reductions in contract labor, additional savings from cost control efforts, and a full year's benefit from the recently expanded Mississippi Medicaid funding program. Based on these factors, as well as operating results through the first six weeks of the year, we have a high degree of confidence in our ability to deliver on the guidance we have provided and look forward to providing updates in the coming quarters. Tim? Thank you, Kevin.
spk14: I think now we're ready to open it up for Q&A.
spk20: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Brian Tanquilat with Jefferies. Please go ahead.
spk05: Hey, good morning, guys. Kevin, thanks for all the color that you gave us on the cash flow. But maybe just in a little more detail, just looking at the cash flow shortfall in Q4 and how you're thinking about guidance in 2024, including what seems to be a reduced capex spend for the year. So just any color you can share with us. And yeah, that'd be great.
spk17: Sure. Thanks for the question, Brian. So, yeah, if I could just maybe kind of go back through some of the items that I believe caused the shortfall in Q4 and then maybe talk a little bit about 24. You know, we finished Q3, I believe our accounts receivable balance was about $2,160,000. We expected that to come down in Q4, particularly as we clawed back some of the built-up AR from our Cerner conversions. As we went throughout the quarter, although we clawed back maybe a third of that, we did not claw back all of that. We had some additional build-up in AR, particularly around some of the in-source physicians, as well as timing of some commercial payments. The holiday fell on a weekday the last week of December, and We didn't really have complete insight into how some of the commercial payers may pay at the end of the year. So really, we looked at that as just more of a timing issue. Then the Mississippi program came through, which the cash of that wasn't paid in December, so it added to our AR. And at the end of the day, the accounts receivable balance increased. Instead of decreasing as we expected, it had increased. at the end of the year, so that was all in, call it roughly $130 million headwind in cash flow in the fourth quarter. Then we talked about we did a refinancing in the fourth quarter. We had to accelerate in the repayment of the bonds, accelerate some of the interest payments that otherwise would have been paid. in 24, so that's clearly a timing issue because now that interest is paid and we will not have that payment in 24. We also settled a legal case, the Mason case, which was about $30 million in the fourth quarter, made that payment, which was not anticipated. We just did not know the timing of when that payment was made. We had it accrued at the end of the quarter but did not have the timing of when that payment would be made. So those are kind of led to and are, again, primarily some timing-related matters. As we go into the 24, a couple things I'll just reiterate around the 163 interest deductibility. That has passed the House. It is in the Senate, although we don't know when or if the Senate will pass that rollback. So we've not anticipated, we've not put that in our guidance this year, as well as the tax refund, which we still feel very comfortable that we're going to get, but we were wrong. I was wrong about anticipating the timing of that last year, so I'm not going to predict the timing of our government approving that this year. So if either of those come through, they would be positive. Our current cash tax estimate is $150 to $200 million, and that could be reduced if either of those items come through.
spk05: Got it. Okay. And then maybe as I think about just the expense line, any comment or anything you can share with us as it relates to your views on nurse wage inflation, contract labor utilization, what's baked into the guidance, and also physician service or physician specialist spend, both in-house and outsourced?
spk17: Yeah, so we're estimating kind of a wage inflation at 4% for 2024. That's right about where we were at in 2023, so I think we've baked in a conservative estimate into 24 for wage inflation, and we'll certainly work harder to keep it below that, and we're actually exiting 24 at a rate below that. It was about 3.4% in Q4. On contract labor, again, as we kind of look out at the midpoint of our guidance assumes the current run rate that we're exiting 2023 at. If you think about $52 million fourth quarter contract labor expense, if we stay at that run rate throughout 24, that would represent about a $60 million reduction in contract labor year over year. and about half of that would flow through to EBITDA, I do believe there's some opportunity that we can further reduce contract labor. It's still running significantly higher than pre-pandemic levels, and we still may be able to take a little bit more out of that. And then I think there was one more. Oh, and CapEx, I think you had mentioned CapEx. We've had some higher CapEx over the past couple of years. We've had some large projects that were winding down. These are inpatient towers where we're adding inpatient capacity in markets where we need to add capacity because we're full and those markets are growing. Those projects are winding down, so we'll have a year with a little less capex. Also reflects the hospitals that we've divested over the past year. We're still very comfortable with the amount of capital we're spending as well as trying to manage just our free cash flow.
spk14: Kevin, I'll tack onto that in terms of our philosophy and the management of our capital spending. We have a really full pipeline. We talked about that a lot over the last several quarters. The predominant amount of that is on the outpatient side of the business, which we know does not typically have as high of a spend to get those strategic access points put into operation. So that outpatient focus continues to be an area of growth and opportunity for us across the portfolio. We're also managing that pipeline relative to the gains and staffing so that when we are ready to activate the cap or bring it online, we have a cost-effective way to drive margin and pay back on that capital investment. So we're really, I think, hyper-focused on phasing this in in ways that are really going to be accretive to earnings in the long run. The other thing I would point out is outside of CapEx, it's just keeping some of our powder dry for opportunistic acquisitions. So we'll keep an eye on that as things emerge in the upcoming quarters. On the outpatient side of the business, you heard me reference two outpatient ASC acquisitions later last year. We continue to scan our markets for those types of opportunities as well.
spk12: Thank you. The next question comes from Jason Casorla with Citi. Please go ahead.
spk25: Jason, your line is open.
spk09: Jason, I think we may have lost you.
spk20: All right. The next question comes from Ben Hendrix with RBC Capital Markets. Please go ahead.
spk04: Thank you very much. I wanted to follow up on the MedMal reserving, specifically your decision not to adjust that out of adjusted results. and also just your general comfort level with kind of reserves where they are now. Is there anything out there specifically on the horizon that could continue to push those reserves up higher through the year? Just any comment around your thinking there. Thanks.
spk17: Sure. Thanks for the question, Ben. You know, we debated whether or not it was appropriate to adjust that out of our adjusted EBITDA. I certainly gave that some consideration. At the end of the day, we decided to leave it in. We also had, with Mississippi coming in, which was unexpected in the fourth quarter, we did not want to appear that we were cherry-picking and only adjusting out unfavorable items. There's reasons that Mississippi would stay in because it's an ongoing program, and we did not want to create a situation where we pulled it out also in the fourth quarter and then put it back in next year and just some inconsistencies. So at the end of the day, just decided to leave them both in, you know, into the adjusted EBITDA calculation. Again, the Mississippi program, like other programs, are ongoing and really represent reimbursement for services provided. So I think that's also appropriate. As we look ahead to 24, the malpractice environment overall, I think, is getting more difficult. We're seeing some pretty large settlements, jury awards in cases that are higher than we've ever seen historically. And I think there is a little bit of pressure in the industry at large. We're hearing that from our insurance carriers as well. We are self-insured. for malpractice with excess insurance coverage above certain levels, so we do have insurance and here there is some pressure there. But overall, I would expect our malpractice expense to probably come back to something a little more normal in the future as we manage through. I'd also point out that the work we've done on patient safety and quality over the years in the 89% reduction in serious safety events that Tim called out is very meaningful. And there's such a long tail on malpractice. We're still settling a lot of old claims, but the rate at which new claims are coming in is significantly lower than it had been historically. So I feel good about the future, our ability to manage that cost.
spk04: Thank you. And if I may, a quick follow up on your comments about round puts and takes on guidance. We're wondering if we could get some more detail on the key drivers of margin improvement implied for 2024. It sounds like there will be some support from lower contract labor year over year, and you mentioned lower wage inflation. Then we saw also Mississippi Medicaid, but should we also expect some normalization of payer mix trends this year? Any comments on how we bridge to the margin? Thanks.
spk17: Yeah, I do. You called out a couple of the items already mentioned. I do think there's some, or we have some expectation of some normalization in payer mix trends. Rates continue to be relatively favorable. Governmental rate, Medicare list should be in the kind of 2.5% to 3% range this year versus 2023. It was 1.9%. I think Medicaid is about flat, excluding some of the supplemental programs. It was a negative in 2023. So those are all marginally helpful to us. Commercial rates are still in that 4% to 6% range, similar to 2023, but another year of those should be helpful. As we continue to grow volume and are able to cover our fixed costs, that has the benefit of increasing our margin. And as our markets continue to grow and we continue to see recovery in higher volumes, I think that's an important factor to point out. We also have our margin improvement program that we're highly focused on and putting a lot of discipline around a number of initiatives. Some of those are baked into our guidance. Many of them are not baked into our guidance and give us the upside potential. But around the uncertainty of when those come through and to what degree, We did not want to get too far out ahead and bake all of that, but we have a number of initiatives we're working on that should be favorable.
spk20: Thank you. The next question is from Jason Casorla with Citi. Please go ahead.
spk11: Great. Thanks. Can you guys hear me?
spk15: Yep, sure can. We can hear you now, Jason.
spk11: Excellent. Thank you. Apologies for that. I wanted to talk about the MA book. In the past, you've discussed how your MA book has a lower effective pricing yield compared to fee-for-service Medicare and how that dynamic has impacted results with your elevated MA volume growth in 23. But I guess stepping into 24, are you anticipating any offsets to this yield differential, whether that be from your contracting perspective with MA payers or new rules like the two midnight rule. I guess just if you have any color on the levers and areas that can help narrow that pricing yield differential moving forward. Thanks.
spk17: Sure. So, you know, when you go step back, when we look at our contracts kind of on a procedure by procedural basis, the rate of reimbursement is pretty similar to Medicare fee for service. The realization is really, you know, where we lose money comparatively and that's what causes the discount that we talked about. That's a result of downgrades and denials of claims. Going into 24, there certainly should be some benefit from the new guidance put out by CMS around the two midnight rule, around pre-authorizations. We expect that those could be helpful. to us. It's too early to tell. We've not been able to quantify that yet and too early in 24 to really see that come through. I know some of the payers have talked about already seeing an impact in Q4 of making more payments. We did not see any benefit in Q4 from that coming through, but I think directionally it could be positive for us in 24. Tim?
spk14: Jason, I think we're investing in a lot of clinical resources to help us monitor the environment, be more on the proactive side of this. We've talked in the past about our centralized UR investment. That was largely a registered nurse organized function under the direction of Dr. Binet. Later last year, we stood up a physician advisor, in-source physician advisor program. to really be more active and proactive as much as we can be, but also to counteract any downgrades and denials that the admitting physician and the physician advisors believe is clinically appropriate for inpatient status. So we would expect to see some positive tail effects for that in 2024 as well.
spk11: Okay, got to think. So maybe just a follow-up, and apologies if I missed this before, but I wanted to ask on that 4% revenue growth. Excluding divestitures, can you just help on the building blocks of that 4% relative to your 2% to 3% kind of targets for volume and pricing and mix? And then maybe just specifically on volumes, you know, growth for 2023 was some, you know, call it 300 basis points ahead of your original expectations. Do you feel that the outsized growth last year kind of creates a comp issue for you in 2024, kind of especially in the first half of the year? Or how would you frame the volume environment in 2024? Thanks.
spk17: Yeah, so I would say that, you know, the 4% growth, we're looking at, you know, roughly 2% to 3% volume growth in 24, which is lower than we experienced in 23. But we still believe, you know, strongly that we can continue to grow those volumes in our markets and get something in 2% to 3% volume growth. And then, you know, rates. Overall, as I mentioned, we're kind of 4% to 6% on commercial rate, 2.5% to 3% on Medicare, which is a little higher than we had in 23 and about flat on Medicaid. There probably is, and we factored in a little bit of a headwind on continued deterioration in payer mix, but when you throw all that in together, we get about a 4% same-store rate.
spk09: kind of growth on net revenue.
spk20: Thank you. The next question comes from AJ Rice with UBS. Please go ahead.
spk06: Hi, everybody. Just maybe to follow up a little bit more on that payer mix question. There's been obviously debate in the marketplace about utilization rates. Are you seeing any difference in behavior among your utilization between your MA book and your fee-for-service book and, frankly, the rest of the book as well. Is there anything you can tell in terms of rebound post-pandemic and so forth that may show different trends across those payer classes?
spk17: You know, I think kind of post-pandemic, we certainly saw a deterioration in the – actions by the MA payers, you know, where they were not downgrading or denying claims during the pandemic, they certainly began denying and downgrading significantly more claims, particularly in the MA book, although it applies to commercial as well, but more so in the MA space. And we believe that kind of hit a peak, you know, and I think that's gotten a lot more attention at the governmental levels. We've certainly been active in our discussions with legislators, with our lobbying efforts. I know the American Hospital Association, Federation of American Hospitals, they've all tried to shine a light on some of the behavior of the payers. I think that's resulted in some movement by CMS to come out with some additional guidance around their expectations, like the two midnight rule, like some of the preauthorization requirements. We have yet to see any real change that's meaningful or measurable, but having said that, we do expect there to be some favorable movement into 2024.
spk14: Yeah, AJ, this is Sam. I'll go back to my comment. The reason we set up the Physician Advisor Program was to make sure that we're supporting the admitting physician's decision with more collaboration with CMA plans or commercial plans in general. We have a strong compliance program across Medicare and every other payer source as well, but in general to try to counteract some of those adverse trends. We believe we're better positioned going forward to make sure that that admitting physician's decision is is more strongly represented.
spk06: Okay, thanks. And maybe my follow-up, just to ask about, you're mentioning this divestiture activity that you plan to undertake. Is that in response to people proactively coming to you? Is it a strategic decision you're making? And you talked about having as much as a billion dollars for capital deployment. I wondered whether you're thinking mainly about paying down debt further, or is there some other... use of that potential capital that you're thinking about?
spk17: Sure. Happy to take that one, AJ. So this is almost entirely resulting from inbound interest. But having said that, I still think we're taking an opportunistic look because we get inbound interest on a number of locations and facilities that we don't act on. So we're not acting on every inbound interest that comes in. but we do happen to have some inbound interest in markets that we think may make strategic sense to transact. So we're pursuing those further. We don't know at this point whether they'll come to fruition, but there is some significant interest out there that we are going through the effort to have conversations and look into deeper and evaluate that may make sense. To the extent that we get proceeds in, I think we'll evaluate the markets at the time and the other opportunities at the time on what is the best way to delever the company. My focus is clearly on delevering and balancing our capital structure, and we can do that in two ways. We can pay down debt and we can grow EBITDA. If we have the right opportunity for acquisition at the time we have, you know, cash in hand, and we think that that could be more accretive, that's something we would certainly take a look at. If the markets are such that, you know, debt pay down is the better play, I think we'd take a look at that. So I know I'm not giving you a specific answer here, but we'll evaluate based on the timing that the cash comes in what we think is the best way to deliver.
spk20: Thank you. The next question comes from Steven Baxter with Wells Fargo. Please go ahead.
spk21: Hey, thanks for the question. Just another one on payer mix. I might have thought that with the growth of the exchanges or maybe potentially some catch-up in the commercial demand you were hoping to see in 2023 that there could potentially be upside risk to payer mix. Sounds like you're a bit more cautious there. Just want to make sure we really are capturing all the dynamics that you want us to keep in mind. And then just to come back to AR briefly, just to manage our expectations, Would we expect to see progress as soon as the first quarter? Are you actually seeing IR improve to date this year? Or should we be thinking about maybe a more gradual progression throughout the balance of the year? Thank you.
spk17: Sure. A couple things I'll mention on payer mix, and Tim, feel free to jump in as well. So we did grow both commercial and Medicare age population payer mix in the fourth quarter. So I want to be very clear, we grew both. But the MA business outpaced the commercial business by about two to one in the fourth quarter. For the full year, it outpaced the commercial three to one. We did make improvements. That proportional change was better in the fourth quarter than for the full year, but MA did outpace the growth. As we go into 24, we look for some moderation of that, but we're still cognizant and keeping our eye on that payer mix dynamic. On AR, I think we'll see some early benefits in 24. As it relates to the buildup in AR from like the Mississippi supplemental program, that will largely be collected in Q1. Some of the other buildup will probably be more moderate throughout the year, but I do expect over the course of the year for us to make improvements and to recapture the remainder of the conversion AR plus the buildup on AR from some of the movement to MA, more commercial players slowing down, that should moderate throughout 2024. And over the course of the year, I expect an improvement.
spk12: Thank you. Today's last question comes from Josh Raskin with Nefron Research.
spk20: Please go ahead.
spk10: Hey, good morning. This is actually Marco on for Josh. Appreciate you taking the question. Just looking at the 2024 guidance, I was wondering if you could parse out some of the 350 to 400 million in CapEx for 2024. Is that mainly maintenance CapEx at this point, or do you have any other notable projects in the pipeline that are coming through this year? And do you have any ability to flex that lower in 2024 if you need to?
spk17: Sure, so we have been running approximately 50% maintenance capital, 50% growth capital over the last several years if you go back and look at our CapEx. And I would say proportionally that's still very similar in 2024. We'll be split about 50-50. As I mentioned, a couple of the large projects that are high-cost projects, the inpatient adding patient towers and adding beds are winding down in 2024. And then with fewer hospitals, as we actually sold eight hospitals in 2023, that lowers some of our maintenance capital as well related to those. So overall, I don't think we are materially decreasing the amount of maintenance or growth capital kind of comparatively. The other thing is we've had some capital related to Project Empower over the last year. The majority of what we'll be spending in 2024 will be more on the expense side as now the systems and so forth for that project are built. and the costs going forward are going to be implementation and training and rollout costs, so there's some reduction there as well.
spk14: The only thing I would add to your question is could you throttle that back? Anything is certainly possible, but similar to what we did in 2023, we were very deliberate in our investments into the core business with the intention of, as Kevin said earlier, working on projects that will help us certainly drive stronger EBITDA performance, which is a benefit to the long-term value of the company and its shareholders. So a similar equation obviously comes into play in 2024. We have a strong pipeline of projects. As I said previously, a lot of those are on the ambulatory side of the business, not as many high-dollar inpatient investments that we're making in 2024. So I think it just is a normal settling of the capital spend, but we're very, very deliberate in how we're allocating our cash in that regard.
spk10: Great, thanks for the color. And then if I could squeeze in one follow-up. You spoke to about $1 billion in potential proceeds from divestiture opportunities that you now have identified. Can you help us understand a little bit more about the cadence of how that could ultimately be realized, especially in light of some of the FTC scrutiny that we've seen over some of these deals more recently? And then is there any financial detail you can provide around the revenue or EBITDA contribution of those assets? Thank you.
spk17: Sure. I think it's probably too early to tell or to say much. We don't have any agreements signed at this point, but this is inbound interest that we're evaluating. I would say, generally speaking, all of these deals would be in the 10 times plus multiple of EBITDA, of trailing EBITDA, if they are to come to fruition. Again, we've not made a decision and we've not fully negotiated on any of these deals, but we do have an inbound interest that's very reasonable to think that if we decide to move forward, we could get deals done. That said, deals don't move very quickly. As you are well aware, I would expect the earliest you know, something to be completed would be, you know, probably mid-year and then the potential for, you know, others to be completed late in the year, early next year.
spk12: Thank you. This concludes our question and answer session.
spk20: I would now like to turn the call back over to Mr. Hinchin for any closing remarks.
spk14: Thank you, MJ. And thanks to all of you for joining our call today. We look forward to providing you with updates on our progress throughout 2024 and to demonstrating that our strategies and initiatives are producing positive momentum and results. As always, if you have additional questions, you can reach us at 615-465-7000. Thanks again and have a great day.
spk20: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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