Community Health Systems, Inc.

Good day and welcome to the Community Health System's third quarter 2024 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 a touch-tone phone. To withdraw your question, please press star and then two. Also, please limit yourself to one question and one follow-up. Requeue to ask additional questions. Please note this event is being recorded. I would now like to turn the conference over to Anton Hive, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Community Health Systems Third Core 2024 Conference Call. Participating on today's call are Tim Henschen, Chief Executive Officer, Kevin Hammonds, President and Chief Financial Officer, and Dr. Miguel Benet, Executive Vice President, 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 on our website. All calculations we will discuss exclude impairment expense as well as gains or losses on a sale of businesses, expense from government and other legal matters and related costs, expense from business transformation costs, expense related to employee termination benefits and other restructuring charges, and change in estimate for professional claims liability. With that said, I will turn the call over to Tim Henschen, Chief Executive Officer.

Thank you, Anton, and thanks, everyone, for joining our third quarter earnings conference call. I'd like to begin by addressing the impact of back-to-back hurricanes Helene and Milton. The hurricanes impacted several of the communities we serve, primarily in Florida, Georgia, and East Tennessee. As a result, in late third quarter and early fourth quarter, CHS hospitals most likely to experience severe impact ramped down services and canceled elective procedures. In total, three of our facilities were evacuated and closed, consistent with local orders. The biggest impacts occurred in our ShorePoint Health System, located south of Tampa, Physicians Regional Healthcare System in Naples, and Tenova Newport in East Tennessee. Most significantly, ShorePoint Punta Gorda experienced major damage due to flooding. The hospital remains closed today, and remediation efforts are currently underway. Hurricane readiness and response has proven to be a core competency at CHS, and I want to note that the effort to safely evacuate patients was enabled by terrific coordination between our hospitals, our CHS Transfer Center operations, and numerous other corporate resources that worked around the clock to be ready for Helene and then Milton. Our hearts go out to all affected by these terrible weather events, and I just want to mention that our CHS CARES Fund which was established to help employees in need of financial assistance following an unforeseen disaster or situation, has already been supporting hundreds of impacted team members. Kevin will talk more about the financial impact of the hurricanes on the third quarter results in just a moment. Despite the late quarter hurricane impact, same store volumes improved with a 2.4% increase in admissions and a 2.6% increase in adjusted admissions over the prior year quarter. Surgeries improved 3.1%, led by growth in lower-acuity outpatient cases, driven by our consistent investment into ambulatory surgery sites of care. While patient demand for services was good overall, inpatient acuity skewed lower than expected, affecting net revenue, which totaled $3.09 billion in the quarter. Adjusted EBITDA was $347 million. Our third quarter results were impacted by a continued increase in denials and downgrades by insurers. We are seeing some payers aggressively deny payment for medically necessary services that have been provided for our patients. For several quarters now, the challenges we and our industry are facing regarding increasing denial activity by payers has been well documented. And over the last few years, in response to this challenge, we have stood up an enhanced utilization review program and centralized physician advisor services to ensure our patients are placed in the correct care status and that we receive the appropriate payment for their care. As a result, our physician advisor service has been able to obtain a high rate of reversal on initial payer denials. Nevertheless, the rate of denial activity by payers continues to grow, and it's continued to pressure our top line. We are making incremental investments in our centralized patient financial services processes and team, as well as our physician advisor program to continue to advocate for the appropriate classification of care for our patients and payment for the services our health systems provide. While the quarter did not fully meet all of our expectations, I remain very proud of our team's ability to face unexpected challenges head on, and I'm optimistic about our opportunities. We expect normal seasonality improvements in the fourth quarter, and we remain optimistic that our focus on adding incremental inpatient capacity, outpatient access points, and recruitment of specialists necessary to grow higher acuity service lines will position our health systems for growth into 2025 and beyond. We have been delivering upon our strategic growth plans across our health systems fueled by key capital investments. A few recent and notable investments include our Knoxville North Tower expansion, which opened earlier this year and is ramping up well. The new capacity was a catalyst for strong incremental patient volumes, posting a double-digit increase versus the same quarter last year. And this Saturday, we are opening a new patient tower and incremental surgical capacity in Baldwin County, Alabama. These developments are core components of the nearly $200 million campus expansion taking shape there, all which will create capacity for incremental market share gains in this rapidly growing region. On the outpatient side, we now operate a total of 18 freestanding ED locations following the opening of new centers in Huntsville, Alabama and Lake Granbury, Texas. We also completed the expansion of the hospital emergency department at Grandview Medical Center in Birmingham, Alabama. All of these projects have resulted in immediate volume growth. And we recently announced a definitive agreement to acquire Carbon Health's 10 urgent care locations in the Tucson, Arizona market. This will expand our urgent care footprint to 17 locations across that market. We expect that transaction to close this quarter. My confidence in our strategic direction, health system leadership teams, and especially the women and men who provide care for our patients is at an all-time high. The services we provide are critically important to our patients and communities, and our commitment to provide that care while also achieving strong operating and financial results is unwavering. With that, Kevin, let me turn the call over to you. Thank you, Tim, and good morning, everyone.

Underlying demand for care in our markets remains strong. leading to the same-store volume growth, including a 2.4% increase in admissions and a 2.6% increase in adjusted admissions. Same-store ED visits were up 0.8%, and surgeries were up 3.1%. As a result of Hurricane Helene, during the third quarter, one of our facilities was forced to evacuate patients, and several facilities saw delays in scheduled electives. We estimate an approximate $7 million impact during the third quarter for missed revenue and incremental costs. However, Shore Point Health Punta Gorda remains closed due to the extensive damage suffered from both hurricanes and will continue to be a headwind throughout the fourth quarter as it will be closed for the remainder of the year. Net operating revenues for the quarter were $3.09 billion up slightly year over year on a consolidated basis. On a same-store basis, net revenue increased 5.1%, which remained consistent with our target for mid-single-digit growth for the year. The same-store top-line growth was driven by the 2.6% increase in adjusted admissions, along with 2.5% growth in net revenue per adjusted admission, which largely reflects improved rates and incremental reimbursement under state Medicaid programs partly offset by lower acuity. We were pleased to see solid volume growth, including growth in our commercial book. However, the service line mix of the business was less favorable than expected, with overall case mix index down 60 basis points from prior year, reflecting declines in both the surgical mix and the surgical CMI. Adjusted EBITDA for the third quarter was $347 million, compared with $360 million in the prior year period. Margin for the quarter was 11.2%, down from 11.7% in the prior year period. Contributing to the lower-than-expected EBITDA, we've continued to experience significant increases in initial denials and downgrades by managed care plans, with more than half of the incidents coming in the Medicare Advantage book. While denial activity is not new, the tactics used by the payers have become more aggressive, and we have experienced an approximate doubling of denials in the quarter compared with the prior year, which is an increase above our expectations. This resulted in an approximate $10 million headwind for the quarter. As Tim noted, we are taking action to help ensure that the care we are providing is properly classified and reimbursed. including further expansion of our centralized physician advisor program, along with additional steps to mitigate increased denials in the future. Moving to expense management, we were once again pleased with our performance on labor costs. Average hourly wage rate increased 3.9% year over year, consistent with our expectations for the full year. Contract labor spend was down 24% year over year, and declined $4 million sequentially to $41 million in the third quarter, which was better than our expectations and reflected the continued progress made possible by our recruitment and retention efforts. We continue to see a meaningful improvement in controlling supplies expense, which on a same-store basis was down 1.3% per adjusted admission in the third quarter. As we move more hospitals onto our new ERP, we are gaining additional insights we can leverage to improve efficiencies and reduce supply expense. Medical specialist fees increased $15 million, or approximately 10% from the prior year period, with notable pressure in anesthesia. This was slightly higher than expected in the third quarter, but overall, we remain pleased with the progress of our hospital-based provider insourcing initiative. Since launching in August of 2023, the insource platform has expanded significantly in coverage of ED and hospice programs, and is only just beginning in anesthesia with the first large market coming online in the fourth quarter. We have an active pipeline of additional programs coming in-house in the coming months and many others under consideration. During the quarter, we booked a $149 million increase to our professional claims liability accrual based on a review by our new actuaries. This change in estimate considers the national trend of outsized verdicts and propensity for larger claim settlements that have been experienced more recently, which is broadly being referred to in the industry as social inflation, and the exposure of adverse development in our outstanding claims if this environment persists. Although we've not been the subject of any recent nuclear verdicts, we have experienced increased settlement amounts over historical averages. including those in jurisdictions that have historically resisted this behavior. Furthermore, the majority of this change in estimate relates to claim activity and development from previously divested hospitals and is therefore not reflective of our current run rate of new claim activity, which has been much lower as we have made material improvements in our safety and quality outcomes. In fact, our improvements in some cases are industry leading. And I've asked Dr. Miguel Benet to comment for just a minute on some of these most recent accomplishments.

Dr. Benet. Thank you, Kevin. CHS has a longstanding commitment to advance clinical quality and patient safety. And that commitment is ingrained into our culture at every level of the organization. We're very proud of the many positive results that we are achieving, especially this year. And we are confident that we can continuously improve quality and safety producing better outcomes and higher value for our patients. DHS began monitoring our organization-wide serious safety event rate more than a decade ago. Significant improvements in this area have saved lives and spared thousands of patients from preventable harm. That work continues, and I would like to highlight achievements in three specific areas, including, first, we've achieved a nearly 20% improvement in our risk-adjusted mortality index from the prior year period, which puts CHS in the top quartile of all U.S. hospitals. There are many initiatives that have led to this accomplishment, including a company-wide focus on immediate treatment of patients with sepsis. We've also achieved a nearly 24% improvement versus the same period last year in our patient safety and adverse event composite from CMS, which measures effectiveness in protecting patients from complications. The improvement places CHS in the top 5% of hospitals nationwide. And we're pleased to report a 27% year-over-year improvement in our precursor safety event rate, continuing our trend of reducing serious safety events almost every quarter since the baseline was established in 2012. Our data science program is maturing and providing insights to help identify areas like these where we can optimize our clinical outcomes and deliver further improvements across the organization. Of course, it is the physicians, nurses, and other caregivers who commit daily to providing high-quality care for their patients and make these accomplishments possible. We certainly appreciate your dedication to quality and safety. With that, Kevin, I'll turn it back over to you. Thank you, Miguel.

Back to our financial review. Cash flows from operations were $67 million for the third quarter of 2024, compared with $29 million in the year-ago period. The year-over-year improvement in cash flow primarily reflects improved cash flow from changes in working capital, including conversion of accounts receivable, as expected. Capital expenditures for the third quarter of 2024 were $70 million, and for the year to date were $251 million, on track for our 2024 guidance range of $350 to $400 million. In August, we completed the divestiture of Tenova Cleveland and used part of the proceeds to extinguish approximately $143 million of principal value of our 5% and 5.8% senior secured notes due 2027 through open market repurchases utilizing cash on hand. We continue to make progress towards our $1 billion divestiture plan. We anticipate the majority of the remaining transactions to complete this plan will likely be signed in the fourth quarter with final closings carrying over into the first quarter of 2025. At the end of the order, net debt to trailing adjusted EBITDA was 7.6 times consistent with the prior quarter and improved from 7.9 times at year end 2023. We continue to believe we have more than adequate liquidity to meet our needs going forward with approximately $440 million of borrowing capacity under the ABL along with pending asset sale proceeds. Our implementation of a new ERP and workflows along with standardization of data under our project Empower enters the final innings. As of October 1st, we have all of our subsidiaries up and running on the new financial and supply chain platforms and transitioned into our shared service environment. We are on track to complete the implementation of the ERP by transitioning onto the new workforce management tools for HR, payroll, and timekeeping, thus completing the bulk of the transition work in the first quarter of 2025. As we enter 2025, we will benefit by having the investment and disruption behind us. and we can focus on optimizing our use of the new tools and benefit realization. With one quarter remaining in 2024, we are adjusting our guidance range as we continue to assess the impact of Hurricane Tulane and Milton on our operations. Specifically, we now anticipate 2024 adjusted EBITDA of $1.5 to $1.54 billion, which, consistent with prior guidance, does not include any contribution from potential new supplemental payment programs, nor does it assume any future divestiture activity. While not yet providing formal guidance for 2025, in response to repeated investor inquiries and in the interest of transparency, we are providing an initial estimate of the potential benefit from the new or expanded state-directed payment programs in New Mexico and Tennessee. and governors and submitted to CMS where they are currently awaiting approval. At this time, based on our interpretation of the programs as designed and the various puts and takes, we estimate an aggregate EBITDA benefit of approximately $100 to $120 million annually. This concludes our prepared remarks, so at this time we'll turn the call back over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Also, please limit yourself to one question and one follow-up. Requeue to ask additional questions. Our first question comes from Brian Tanquillet with Jefferies. Please go ahead.

Hey, good morning, guys. Maybe, Kevin, I'll touch on that last comment you made just on the DPP. So 100 to 120 million, this is just for New Mexico and Tennessee, and then is this net of provider taxes, just to clarify that?

Yes. That is the aggregate amount from both Tennessee and New Mexico on an annual basis and is the net EBITDA benefit. So that would be net of the provider taxes. So there would be a gross up impact on that revenue and then additional expense. It is also net of what we may see in terms of sunsetting some existing reimbursement benefit and maybe some additional costs. that we could encourage a result of these plans being approved as we've seen in the past in some other states. So that is what our current estimate is of our EBITDA benefit on an annual basis. I would remind everyone that if those are approved in the fourth quarter as we expect, those plans are retroactive back to July 1st of 2024. So we could potentially get six months worth of that again, if CMS approves them during the fourth quarter.

I understand. And maybe, Kevin, as I think about your EBITDA guidance change and the free cash flow guidance change, maybe if you can bridge me, you know, from that $40 million cut to EBITDA to the $100 million or so cut to free cash flows. Just curious.

Sure. There's a couple other things that I'd point out. So, you know, obviously a big one there is the reduction in EBITDA The denials and truly the slowdown in the adjudication process is also having an impact on our cash collections. A number of the claims that have been denied are still not through the final adjudication process, and that seems to be continually slowing down, so we've taken that into consideration. There is a small amount of some state program monies that we had thought might get approved in the third quarter that will be approved in the fourth quarter, but the cash for those will likely slip into the first quarter of 2025. So that's just a matter of timing. And then with one of the divestitures in Pennsylvania that we have announced that we expect to close in the fourth quarter, we are selling working capital with that. So that working capital will get pulled out and the anticipated collections related to those receivables won't be in the fourth quarter.

I got it. Thank you.

The next question comes from AJ Rice with UBS. Please go ahead.

Thanks. Hi, everybody. Just to go back to that guidance change on the EBITDA, so reduction of about 40 million at the midpoint. I think 18 million of that is in third quarter variants, hurricane and otherwise. So that leaves about 22 for the fourth quarter if I've got the numbers right. You've got, I'm sure, additional hurricane impact given the timing of the second hurricane. I don't know whether there's a change in your accruals or liability based on the update charge in the third quarter, but is that part of the dynamic? And then are you making any operational changes in your assumption for the fourth quarter?

Thanks, AJ. So I think your math is right. About $18 million of the $40 million change at the midpoint is the quick to the miss in Q3. Then I would say the remainder is really split between the fourth quarter hurricane impact with Punta Gorda being shut down for the entire quarter, as well as the disruption we had when Milton hit early in the quarter. There's certainly some ED business. that we won't get back from those days. Hopefully we'll recover some of the elective surgeries. There really is no operational changes being made. In terms of the MedMau expense, our increased liability really does not impact our go-forward run rate materially. We have already been increasing the run rate of expense, so that's kind of been baked in. This adjustment really was going back and looking at the base claim amounts, but in terms of run rate, we don't see that having a big impact. I do also want to point out relative to our guidance change on net revenue, we did bring down net revenue $100 million at the midpoint. That's largely due to reflecting the announced divestitures. in Commonwealth and North Carolina, the one small hospital in North Carolina, and taking the fourth quarter revenue down because we expect those to be complete deals to close here during the quarter. And then a smaller portion of that net revenue adjustment was, again, the hurricanes and denials.

Okay, that makes sense. Maybe just my follow-up question. on those denials you're seeing. You said it's mainly concentrated Medicare Advantage plans. When you drill down, is this mostly related to the change associated with the two midnight rule that MA plans are having to absorb and that's creating confusion or is there other areas of focus on these denials that are being implemented?

How I would describe that is I think maybe the two midnight rule is the impetus, but we're just seeing the payers be more aggressive across many areas of denial, so they're expanding the population of claims which they're denying. We're seeing it, again, the majority of it is in the MA book, but we're seeing more denials in the commercial book as well. So that's where we're seeing the impact above the prior trends and above what we had previously anticipated.

Okay. Thanks a lot.

And the next question comes from Andrew Moak with Barclays. Please go ahead.

Hi, good morning. Just wanted to follow up on this denied claims headwind. One, when did that start to materialize as a headwind in the quarter? And two, you know, what can you do to combat this going forward? Do you have a stronger appeals case for these newer denials than what you would typically have?

Thanks. You know, I think, you know, it was really kind of throughout the quarter.

They've continued to ramp up. And really it's the slowdown of the adjudication process that continues to kind of expand. And we're, you know, as noted by our adjustment in our guidance in the fourth quarter, at this point we're expecting that to continue to be a problem, you know, somewhat going forward as well. So I can't say that there wasn't one event during the quarter that would have pointed to, hey, this is changing, but we just continue to see a slow ramp up in denials as well as the timeframe for the adjudication process. We have been successful in about 25% of the cases that have been denied. We're looking at cases greater than two midnights that have been denied. We've been successful in about 25% of those. Getting those paid is inpatient, but there still remains a material amount, almost 70% of those initial denials from claims this year that are still in the process of not being final adjudicated.

Yes, Andrew, and this is Tim. I'll add on to that. We have been experiencing increased denials throughout the year, but most of that claims activity is coming out of the prior year, because there's quite a tail on the actual denial appeal process. What we saw in this quarter was an acceleration off of the run rate that we had in the first and second quarter, and that's the $10 million delta Kevin called out. expect it bounced in the third quarter.

Got it. And if I could just follow up, is this broad-based activity across most of your payers or is this more concentrated among a few? Thanks.

It's relatively broad-based.

Yeah, I would agree. And maybe to your other question about things that we're changing or can do going forward, we do now are in a position to have physician advisor coverage across our entire portfolio, as well as having a more robust kind of appeals capabilities to go after some of these initial denials.

Great. Thanks for the call.

The next question comes from Ben Hendrix with RBC. Please go ahead.

Thank you very much. Just to follow up on the $22 million of the EBITDA guidance that's expected in the fourth quarter, is it possible to parse that out between the impact from Punta Gorda and the other hospitals versus claim denials, just trying to get an idea of if those claim denials are expected to continue to accelerate into fourth quarter? Sure. And then if there's any impact on acuity in that number from the outpatient acuity, if you can just parse out kind of the impact within that 22 million.

Yeah, I would say, you know, more than half of that 22 million is hurricane impact. I would say the denial impact would look similar to Q3. And then the remainder... being hurricane impact.

Thanks for that. Just a quick follow-up on the softer acuity. Can you talk to the drivers of that outpatient acuity softness? Is that just calendar related? We heard one of your peers talk about kind of forecast expectations for maybe some higher volume of lower acuity in the second half. I'm just wondering if you see that persisting through the rest of the year and then how that might look like for 2025. Thanks. Hey, Ben.

This is Tim. I'll start us off and invite Kevin or Miguel to chime in. Just to clarify, the softness and the acuity that we called out was on the inpatient surgery side of the business. We had good, strong surgical growth in the quarter, as we pointed out earlier in our remarks. but that was primarily on the outpatient side of the business. We did see growth on inpatient surgery, but they were in the lower acuity inpatient surgery category. I think impacting that inpatient surgical acuity was just some continued side of care migration of our total joints to the outpatient side. So last year and in previous quarters, we had more inpatient total joints. We see more of that migrating into the ambulatory surgery environments. Just to clarify, we believe we're capturing that within our ambulatory surgery environments. We did a large expansion in one of our orthopedic-focused ASCs in Indiana that is really ramping up very nicely. So that does have an impact on the surgical acuity. We did see softer inpatient surgery volumes on elective spine cases. We saw some softness on the CBT and vascular services. Those are the areas where we believe we'll pick those back up in the fourth quarter with focused efforts of getting those patients back in for their care. Just to point out, our clinic visits in the third quarter, we always say that's a decent bellwether of what we can expect for volumes down the road. We did have really strong clinic visits, even factoring in the hurricane impact markets. So we have no reason to believe that demand is just softening overall.

We believe it's more of a timing issue.

Thank you.

And the next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Hi, thanks. You know, I know it's early for 2025 commentary, but just wanted to get your sense of how we should think about, you know, perhaps the 2024 revised guidance as a jump-off point. Because, you know, I guess first, you know, wondering, like, is it reasonable to expect essentially getting back all of the hurricane headwinds As we move into 2025, where you expect that there'd be any lingering disruption there. And I guess as we think about this incremental $10 million of denials, you know, I assume obviously you're factoring in something similar for the fourth quarter. I guess what we also then have to consider is the headwind to maybe Q1 and Q2 before you laugh at it. Maybe all these things are offsetting and this is a good jump off point or should we think about it perhaps differently? I'd love to get some insight there. Thanks.

There are some moving parts, but I think 2024 is a good jumping off point. We will have some divestitures here either in late fourth quarter or early first quarter that would need adjusted. Certainly the DPP programs, which are not in 2024 and not in our guidance, that we're hopeful to get approved here in the fourth quarter, but would certainly expect those to be in place in 2025, assuming CMS approves those. So that's kind of a meaningful change for us. In terms of disruption around the hurricane, it will take some time before we get insurance, business interruption insurance settled, but some of this disruption that we're seeing here in the third and fourth quarter, we will be getting reimbursed through business interruption insurance. But again, that'll take some time and it's not going to be this year. And I would hope that with a full year ahead of us in 25, that we can come to some agreement with the insurance companies and get that settled in 2025, as well as having some reimbursement for property damage. Again, some moving parts, but I think from base operations, we're continuing to make progress with some of our strategic investments, opening the new tower here in the fourth quarter that Tim mentioned, and earlier in the year, another one in Knoxville. As we continue to recruit specialists and make other investments in outpatient locations, I think we can continue to grow volume and grow earnings from there.

I think that's well said. Steven, I'll add on in terms of hurricane disruption. For the Punta Gorda facility that remains closed, that's part of our ShorePoint Health Network, which has a larger hospital in Port Charlotte. We have been successful at migrating some of that care over to the Port Charlotte campus to mitigate some of that disruption of having a campus shut down. But we do not have the access for ED services. We also had a larger behavioral health program that is running at a more reduced capacity at the Port Charlotte campus. So there's some things that we can't necessarily overcome within one quarter. Just want to put some color around that. In terms of the timing of Milton, unlike Helene, happening in the last week of a quarter, With Milton being in the first week of the quarter, we do see opportunities to work those patients back into the surgical side, the procedural side of the business for sure through the remainder of the quarter. We stay close to those patients and providers. Right now, as is commonly the case after a major natural disaster, Those patients maybe don't come back the first week or second week after an incident like this. They're trying to get their homes and their lives back in order, but we believe we can get them back in by the end of the quarter.

And the next question comes from Brian Kankilu with Jefferies.

Please go ahead.

Hey, thanks for letting me ask a follow-up. Maybe, Kevin, as I think about the revenue per adjusted admission, KPI for the quarter. Just curious, I mean, as I look at the payer mix improving, obviously you called out acuity, but how should we be thinking about putting all that together and the outlook for revenue per admission?

You know, there's opportunity to continue to grow that. Certainly getting acuity back will be beneficial. You know, a couple of the other moving parts there, Brian, I would point out is you know, with redetermination, and we've lost some Medicaid business, but we are picking up more in healthcare exchanges, which is, you know, beneficial to us. We have seen some movement from commercial insurance into healthcare exchanges, which isn't beneficial, but still in the managed care numbers. We've had some geographic movement during this quarter, and, you know, not all commercial you know, contracts in all locations are equal. So if you lose, you know, have lower commercial business in one location that may have higher rates and you're picking up commercial business in another location that has lower rates, it's still flowing through as commercial business and commercial volume, but, you know, we may have been reimbursed less for it. So there was some geographic movement during the quarter. All that I think kind of washes out in the end over the course of a year, and we don't see that being a headwind for us going forward and think we'll continue to grow off of that. Reimbursement rates, as you know, for Medicare are going to be favorable for next year. On our commercial contracting, we're seeing increases similar to what we've experienced this year. And then with some of the Medicaid DPP programs, could materially increase our realization on Medicaid business going forward.

And maybe, Kevin, one last for me. As I think about the divestitures, I mean, you sound fairly confident that, you know, we're still on track to hitting some of your goals there. How are you thinking about valuation and just the ability to close deals or at least announce deals by year-end, given some of the moving pieces in the industry right now?

Yeah. You know, I would say for this billion-dollar... you know, book that we're trying to get completed here, it's going to average out to about a 10 times multiple. And these facilities will average out, you know, there'll be probably high single digit margin hospitals in a 10 multiple. So, you know, one, it should help our leverage. Two, it should help our margin profile going forward. So, you know, and that's pretty consistent with where our valuations have been in the past, you know, over the past several years, at least on average, where we've been in the 10 to 12 times multiple. So still feel very good about the multiple that we're getting and being able to get these across the finish line.

Awesome. Thank you.

And the next question comes from Josh Raskin with Nefron Research. Please go ahead.

Hi, thanks for fitting me in here. So just want to confirm, Tennessee and New Mexico, I know you talked about a potential retro of a half year, maybe 50, 60 million. I assume that's not in guidance for 4Q, right? You're waiting for that to be completed at CMS level, right?

That is correct. It is not in our guidance for 2024. We've kept it out of guidance because it's not approved by CMS yet and had not previously quantified it. But at this point, we did want to quantify at least what an annual amount looks like to give you some insight if I were thinking about this going forward.

Gotcha. And then I'm just curious, you know, we're hearing a lot about these IV shortages, and I'm curious if you're seeing any impact that you're, you know, at the hospitals, you know, in terms of procedures and at that level. Are you seeing any impact from these IV shortages at this point?

Hey, Josh, this is Miguel Benet. So far, we have not experienced any operational disruptions, in large part because Baxter is not our primary source for IV fluids. We largely partner with BD for sourcing those stocks. Also, we are aware, of course, of the broader risk in the industry because of the shortages due to the Baxter plant destruction and about potential buying across the industry to basically ramp up stock. So in preparation for that, teams have implemented the logistics efforts and the shifting of inventory between our affiliated hospitals. and basically stocking up so that we can stay ahead and keep our operations flowing without interruption.

Okay, perfect. And then just last one for me, just on the exchanges, do you get a sense of what percentage of your admits are coming from the exchanges at this point? And then has that slowed down at all as the re-verification process in Medicaid has come to an end?

You know, our kind of percentage exchange business is about 7%. roughly, which is consistent with national averages of the population enrolled in exchange business. I think we're pretty close to national average as it relates to that. We've not seen any real material change recently, I guess. Other than to say that we are picking up some additional exchange business as states have taken some of the Medicaid people off the Medicaid rolls. We have seen a decline in Medicaid volume and a pickup in exchange volume without seeing much of a change in our uninsured business.

Thanks.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tim Hinchin for any closing remarks.

Thank you, Dave. And thanks to all of you for joining our call today. As always, if you have additional questions, you can reach us at 615-465-7000. Have a great day.

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