Community Health Systems, Inc.

Good day and welcome to the Community Health System's second quarter 2025 earnings conference call. All participants will be in a 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 touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Anton High, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good morning, and welcome to Community Health Systems' second quarter 2025 earnings conference call. Joining me on today's call are Tim Henschen, Chief Executive Officer, and Kevin Hammons, President and Chief Financial Officer. 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 under 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 today exclude gains from early extinguishment of debt, impairment gains or losses on the sale of businesses, and expense from business transformation costs. With that said, I'll turn the call over to Tim Henschen, Chief Executive Officer.

Thank you, Anton. Good morning, everyone, and thank you for joining our second quarter 2025 conference call. Before we get to the quarter's results, I want to address the announcement made yesterday afternoon that I've decided to retire at the end of September. I'm stepping back from my role as CEO for personal reasons, the most important one being that I want to dedicate more time to my family and personal pursuits. And while I have loved the opportunity to serve as the leader of an organization that is devoted to helping people get well and live healthier, the job of CEO requires the highest degree of time, energy, and commitment. and my family has very generously supported me and my commitment to giving everything I have to leading this organization. I've been thinking about that a lot this year. I want to be more present for them at this stage in my life and at this stage in theirs. I also have some personal pursuits that I want to explore while I'm still young enough and eager enough to try new things. This is not a decision that was made easily or quickly or without regard to what's best for CHS. I wrestled with whether to retire and when to retire, in part out of a sense of loyalty to the organization. But even more than that, out of my sincere desire to continue to be a part of the progress happening in this company and the opportunities and achievements I still see ahead. Those will continue to happen under Kevin's leadership, I am sure. But after thinking about it a lot and consulting with my family, this is the appropriate decision. Let's call it a difficult, honest, and for me, a necessary choice. I'll be here through the end of September to support a seamless transition, but truthfully, Kevin could step into the role of CEO today and things would be just fine. He knows CHS as much as anyone and he cares deeply about our company, our people, and the patients who choose and rely on CHS health systems for their medical care. I want to thank the CHS board for their faith in me and the CHS team for the privilege of being their leader. And thank you to our investors for your confidence in CHS. So now, with that, let me make just a few brief remarks about the quarter, and then Kevin will add quite a bit more detail and color about our results and what we see ahead, including potential impact from the big, beautiful bill. In the second quarter, on a same-store basis, net revenue increased 6.5% year-over-year. Inpatient admissions were up three-tenths of a percent, and adjusted admissions declined seven-tenths of a percent, with a 2.5% decline in surgery and a 1.9% decline in ER visits. While patient volumes were lower than expected and hampered our overall earnings results, we are confident that our past development and capital investment strategies have positioned CHS health systems very well to capture patient demand once consumer competence returns. and it always has. Our development strategies include physical capacity and service line expansion with a balanced focus on both inpatient and outpatient care. And we are intentional about broadening the footprint of our health systems through the ongoing recruitment of primary care, specialty physicians, and other providers. Specifically, through our year-to-date recruitment activities, we have over 200 providers currently scheduled to commence in the second half of 2025. including back-building for the departure of certain independent specialists. We have a strong clinic services operations team, and we are committing significant resources towards ensuring the successful and rapid ramp-up of our newest providers. Recent service line and capacity expansions in Knoxville, Maples, Laredo, Birmingham, and other key markets continue to ramp up and gain market share, and we have several new outpatient access points set to open in the coming months. including new ambulatory surgery centers in our Birmingham, Foley, and Tucson markets. Today, CHS operates more than 40 ASCs, a critical component of our market growth strategy, and to being well positioned to grow and serve consumer demand. We also continue to make progress on other strategic initiatives. Since our last earnings call in April, we completed the debasiture of Cedar Park Regional Medical Center in Texas. and continue to improve our maturity and leverage profile through successful debt refinancing and retirement transactions. Now, I'll turn the call over to Kevin, and as I do, I just want to once again express my full confidence in his upcoming leadership of community health systems. Kevin?

Thank you, Tim, and good morning, everyone. Before I begin with the review of financial and operating results, I want to take a moment to acknowledge Tim's contributions to CHS over the past 17 years. Since joining the company in 2008, Tim has brought an invaluable amount of experience and insight into our organization and has been instrumental in leading the development of regional healthcare networks across the country. Tim's long track record of success as an operator, his leadership qualities, and his natural way with people have been an asset to CHS and all of our teammates from us here at the corporate headquarters and throughout our entire organization. For me personally, Tim, I want to say that it's been my pleasure to have been your partner here at CHS and to serve alongside you as your CFO. I believe I can speak for everyone when I wish you the best in your future endeavors. Turning to the results for the second quarter, CHF executed well on many of the controllable aspects of our business, such as supplies expense, wage rate growth, and overhead costs. However, we believe that external factors have affected the demand for healthcare services across our markets over the past few months. Last quarter, we noticed some deterioration in our acuity mix versus expectations with softer demand for elective surgical procedures within our commercial book. While we had expected the mixed profile to improve with the typical seasonal factor of commercial patients meeting their deductibles and as flu volumes dropped off, this improvement did not materialize in the second quarter as expected, which led to some loss of operating leverage and slight degradation in EBITDA margin year-over-year and versus our forecasts. Despite the adverse volume and mixed profile, CHS continued to make good progress in strategic initiatives as Tim noted in his prepared remarks. On June 30th, we completed previously announced divestiture of our 80% ownership in Cedar Park Regional Medical Center to the minority partner, Ascension Health, for $436 million. And in May, we successfully refinanced all $700 million of our outstanding 8% senior secured notes due 2027 using proceeds from our offering of a new 10.75% senior secured notes due for 2033, and also tendered and redeemed $584 million principal value of our outstanding 2028 unsecured notes, using $438 million in cash on hand. Turning back to operating results for the second quarter, same store net revenue increased 6.5% year-over-year and was primarily driven by rate growth, including the recognition of revenue under Medicaid state-directed payment programs in New Mexico and Tennessee, a portion of which was related to prior periods. Same-store inpatient admissions increased 0.3% year-over-year, while adjusted admissions declined 0.7%. Same-store surgeries declined 2.5%, and ED visits were down 1.9%. Adjusted EBITDA for the second quarter was $380 million, compared with $387 million in the prior year period, and included approximately $75 million in net contribution from the recently approved state-directed payment programs in New Mexico and Tennessee. Margin for the second quarter was 12.1% versus 12.3% in the prior year. Turning to expense management, we continued to perform well on labor costs. with an approximate 4% year-over-year increase in average hourly wage rate, which was consistent with our range of expected growth for the year and, again, includes the impact from significant growth in the number of employed positions, which was consistent with our expectations. Contract labor expense at $40 million was down approximately $5 million year-over-year on a consolidated basis and was flat sequentially. We also continued to perform well on supplies expense, which was down year over year, and when adjusting for the impact from the new SDP programs in New Mexico and Tennessee, was essentially flat as a percentage of net revenue with the prior year period. We believe there remain opportunities in this area as we stabilize and mature our new processes with our ERP. Medical specialist fees were 152 million in the second quarter. essentially flat year-over-year on a consolidated basis and representing 4.9% of net revenues consistent with the prior year period. Cash flows from operations were $87 million for the second quarter and $208 million for the year-to-date. Note that cash flows from operations, as reported, include $74 million in outflows for taxes on gain-on-sale, primarily for the Lake Norman and Shore Point transactions. paid out of divestiture proceeds and were not considered in our annual guidance. When excluding this figure, our cash flows from operations were $282 million for the year to date and free cash flows for the second quarter were marginally positive. Note that the funds from the new state directed payment programs in New Mexico and Tennessee likely beginning to flow in the third quarter and the company should also see positive free cash flow in the back half of the year. Additionally, we anticipate receiving the previously discussed contingent consideration related to the Tenova Cleveland divestiture and the proceeds from the sale of our reference lab business to LabCorp by the end of this year. We have received many inquiries from the investment community about the financial impact from the recently signed Budget Reconciliation, or One Big Beautiful Bill Act. Based on our analysis, impacts to state-directed payment programs will be phased in beginning in 2027 through 2038. We project the combined impacts from lowering the provider tax threshold and the phase-down to Medicare-linked rates across CHS states will reduce EBITDA by approximately 300 to 350 million cumulatively over the next 13 years. with no impact in 2025 or 2026, an immaterial impact in 2027, and then building from there. Our estimate reflects the estimated net reduction relative to total Medicaid reimbursement based on current Medicaid reimbursement rates. Our analysis does not take into account any impact from Medicaid work requirements or the various provisions that could affect enrollment in ACA plans, such as expiration of the extended tax credits, since these are much more difficult to predict. Additionally, this analysis does not assume any benefit from the proposed rule fund due to the uncertainties of how those monies will be distributed, nor do we assume any mitigating factors from expanded SDP programs, cost reductions, potential service line changes, strategic investments, or other actions that we make in order to offset the financial impact to CHS. In the upcoming months, CHS will support industry efforts to aggressively pursue legislative and administrative fixes to the bill. We assume the opportunities to do so will increase as voters better understand how the cuts affect their household. On the subject of the Budget Reconciliation Act, I think it is also important to note that the interest deduction under section 163J of the IRS code, which we have discussed on several occasions in the past, was restored, which will increase the amount of interest CHS can deduct for tax purposes. And along with the accelerated depreciation provisions, we'll have the benefit to us of lowering our annual cash taxes by approximately $40 to $60 million beginning next year. Now moving on, to our 2025 financial guidance. Based on our operating results through the first half of the year and the lower than expected volume growth heading into the third quarter, combined with the impacts in the second half of the year from the recently completed Cedar Park divestiture and the new state-directed payment programs, we are tightening our adjusted EBITDA range for the full year 2025 to $1.45 to $1.55 billion. While we are pleased to receive the additional funding in New Mexico and Tennessee, which will be helpful to maintain service lines in the markets we serve, we believe it is prudent to take a more conservative approach to the underlying business, given the impact from macro factors that we have observed in the second quarter. This concludes our prepared remarks, so at this time, we will turn the call back over to the operator for QA.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, 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 2. Please limit yourself to one question and one follow-up. And if you have further questions, you may re-enter the question queue.

And at this time, we'll pause momentarily to assemble our roster. And the first question will come from AJ Rice with UBS.

Please go ahead.

Hi, everybody. I want to just wish Tim best wishes going forward, and Kevin, congratulations. Maybe I'll ask about two items on the guidance. Volumes, obviously, it seems like those are coming in a little more sluggish than expected. To what extent did you make a tweak in your second half expectations if you did on volumes, and maybe talk about the dynamics you saw into a quarter. Was there any variation into a quarter on that? And then also on the guidance, the operating cash flow. I know year-to-date your free cash flow, I think it's about $200 million. Our operating cash flow rose $200 million. And I think the guidance calls for $600 to $700 million. I know there's some unusual items, the DPP program and the way you get paid for that. Can you just bridge us a little bit from what you're seeing in the first half and how you get to that second half number?

Thanks, AJ. Let me start off. In terms of volume, you know, inter-quarter, really if we go back to March of the first quarter, we began to see some decline in consumer confidence. consumer confidence consistently declined in April, May, and June to the point where we're seeing now the lowest consumer confidence probably since COVID levels. So I'm not sure we saw a significant decrease kind of month over month, but certainly as the consumer confidence is a leading indicator, it has continuously declined. we're taking that into consideration. I will say that as we exited June, we did see kind of the final week of June beginning to see some recovery in volume back to prior levels. And as we look out into kind of this first part of July coming into the third quarter, although the levels are not where we had maybe originally anticipated, we are starting to see some stabilization in our volumes relative to prior year. If we look out over the course of the year where we had maybe originally guided towards a 2% to 3% adjusted admission volume for the year, I think a new updated guidance would look more like 0% to 1% adjusted admissions for the year. Currently, we're at 1% year to date. So hopefully that gives you a little bit of color around the volume trend. Cash flow, as we think about our guide, kind of remains the same. A couple things I'd point out. Our adjusted cash flow from operations, and we reported $208 million, but that did include the $74 million cash tax payment on the gain on sale. That cash comes out of divestiture proceeds. When you add that back in, cash flow from operations in the first half of the year is 282, which is almost halfway there for our full year guide, at least the low end of our full year guide. Typically, our fourth quarter is by far the largest cash flow generating quarter of the year. The DPP programs that were approved in the second quarter in New Mexico and Tennessee, those were approved just in the final days of the quarter. We've not received any of that cash yet. So those payments will be coming in the back half. So with those payments and the historically better fourth quarter cash flow generation, we expect to be able to hit the range with effectively our EBITDA guidance staying relatively flat from where we were at the beginning of the year. And our year-to-date cash flow, I think, will be positive in the back half of the year as well.

If I could just jump in with one follow-up. There have been some pending DPP programs that were relevant to you, Indiana, Alabama, and to a lesser extent, Florida, potentially topping up their program. Is there any update on the status of those in light of the one big, beautiful bill?

There is. Florida has submitted for an update to their rate under their existing program. That submission was in on time and we would expect that to be approved and there should be a small tailwind for us at the point in time that gets approved. Indiana likewise has submitted their preprint to CMS for a new state directed payment program which will replace their provider tax program that currently exists in the state. We would expect that to be a much more material benefit to us. That preprint was submitted before the deadline and we fully expect that that one will also be approved. We don't have the ability to really estimate the amounts and we don't do that until those programs are approved, but the insight we have today and given our footprint in the state of Indiana, we would expect that to be a material benefit to us. In terms of Alabama and Arkansas, They are not that far along yet, but we understand there may still be a path for them. It's a little less clear to us at this point, but I know those states are still working on some opportunities.

Okay, great. Thanks so much.

Thank you.

The next question will come from Brian Tanquillit with Jefferies. Please go ahead.

Hey, good morning, guys. And Tim, congrats on the retirement. And Kevin, good luck. Maybe my first question, as we think about what the right run rate is for earnings to be thinking about given the DPP from the quarter, I'm thinking like 305, is that the right way to think about it? Or maybe slightly higher than that if we back out the prior period contribution from the Tennessee DPP. So if you could just walk us through how we should be thinking about the right run rate for EBITDA going forward.

Sure, Brian. Thank you. 305, I think, is too low. because that's really taking out the entire DPP money that we recognize this quarter. You would want to include the current period quarter portion of that, call that roughly $30 million, so starting at $335 million. But even at that point, volumes in the second quarter were really depressed, and we don't think that's the current run rate. particularly as I mentioned as we're exiting the quarter and seeing some visibility and some stabilization, I would say that the real run rate in our mind is probably something in the 360 to 375 as a starting point. And then as we get back to positive volume growth, and we believe, as Tim mentioned in his remarks, there are times when we go through periods where volumes are you know, seem to dry up, but they always come back. We believe that most of what happened this quarter was care that's being deferred for financial reasons, you know, patient behavior, but that will come back. So kind of as a baseline starting point in the 360 to 375 range, and then opportunity to grow from there.

That makes sense. And then maybe, Kevin, just to double-click on your comment on the OB-BVA impact. Maybe if you can share with us just how you're thinking about that number, meaning what assumptions go into that, or maybe how we should be thinking about trying to build that ourselves.

Yeah, I mean, there's some probably pretty complicated math behind those, but we really went through kind of state-by-state exercise, taking a look at which states are expansion states, which states are non-expansion states, ratcheting down states, both the rate, Medicaid rate for where we have, you know, commercial, average commercial rate down in Medicare, and then the states that are expansion states that have taxes, you know, above the 3.5%, those get ratcheted down, I think, 50 basis points each year beginning in 2028. Got it.

Thank you. The next question will come from Ben Hendrix with RBC, please go ahead.

Thank you very much. With the recognition of the DPP revenue from Tennessee and New Mexico and then also the developments on the commercial elective weakness, maybe you can kind of just recap the bridge to the revised 2025 EBITDA guidance for us.

Sure, Ben. You know, we started, call it the midpoint, at $1,525,000. If you add in, and that did not include any DPP from New Mexico or Tennessee, add in, call it $140 million of DPP monies for Tennessee and New Mexico, back out, call it $20 to $25 from the divestiture of Cedar Park, roughly $70 million, which is probably the miss in the second quarter, and then the remainder being kind of revision to the back half of the year based off of our previous expectations to get us to our new guide of $1.5 billion at the midpoint.

Gotcha. And then just a follow-up on some of the mix trends you're seeing. I know that payer mix has been a topic of discussion in recent quarters. I'm just wondering if you could – walk through the components of payer mixed trend you're seeing, and then Medicare Advantage in particular, the type of growth you're seeing there.

Sure. The biggest declines we had were in surgical, and about half of those surgical declines were orthopedics. Most of the declines were were primarily commercial Blue Cross business. So that's where we're seeing the biggest headwinds, which certainly impacted our net revenue for adjusted admission, impacted the flow through to EBITDA, and also lends us to believe that the consumer confidence and impact on household incomes and how people are, you know, spending their money making decisions in healthcare is really the true reason for some of the headwind on surgical and care delivery at this point. It's those patients who have the highest co-pays and deductibles that are being most impacted. And I think even if you look at some other industry across the country where we're seeing consumers not spending money, their discretionary income on things. Again, that's the biggest decline. In terms of the exchange business, overall volume of exchange business was up but acuity of exchange business was severely down with the biggest component of that being surgery of exchange patients. There again led us to the same conclusion because most of the exchange contracts have some higher co-pays and deductibles.

Thank you very much, and congratulations to Tim on retirement and to Kevin and Jason on the appointments. Thanks, Ben.

The next question will come from Jason Casorla with Guggenheim. Please go ahead.

Great. Thanks. Best of luck, Tim, in your retirement, and congrats, Kevin. Maybe I just want to start on leverage. You've got some cash coming in in the second half. You've done some refinancing activity early this year, but are there other areas you're hoping to refinance at this point, maybe drive some incremental interest cost savings, whether debt takeout or otherwise, and kind of just follow to that? You're still about a little less than a turn and a half away from your below five and a half times leveraged target, maybe only a turn when factoring the back half, cash generation, incoming proceeds. in payments, but perhaps can you just walk us through the remaining building blocks that get you toward that below 5.5 target at this point? Thanks.

Thank you. Yes, happy to walk through that. So right now, as we look at our debt stack, we've got some 2027s, $1,750,000,000 of 2027s that are our next current maturity. become current in March of 2026. And we've been pretty diligent over the years of trying to, or disciplined I should say maybe, over the years of trying to make sure we take care of those debts and not get too close to things becoming current. So that's top of our list of things we want to get handled and get that debt pushed out. Now that debt currently has a coupon of 5% and 5.8%, probably a little bit lower than the market's going to absorb right now, and we'll see a little bit of additional interest expense from that. But as we continue to make progress on some divestitures and chipping away at other pieces of debt, we'll have an opportunity to offset any of those interest expense increases from the rate and continue to lower our leverage. As we look out in the nearest term or the next couple quarters, I mentioned we've got the proceeds coming in from the LabCorp sale, which is almost $200 million, and we have the contingent payment from the sale of Tenova Cleveland, which that's in the area of $100 million. So we should be getting approximately $300 million coming in in the back half of this year. And then we're continuing to pursue some additional divestiture opportunities. There's a number of transactions that are in various stages. We're still getting some inbound interest and we'll continue to look at that to manage our portfolio, not only where we believe we have the best opportunities to invest and to grow, but then also with some opportunities to maybe put that money to other use, whether that's directly paying down debt or investing in some growth opportunities, both of which would help us de-lever. I think we've given that goal of below five and a half times by 2027. So we've got a little bit of time, although time is clicking away here, ticking away. But I would go back, and if you track our leveraged over the last two years, we have consistently been bringing it down over a two-year period. I'm fully confident we'll continue to make progress there and get to our goal.

Got it. Okay, thanks. Helpful. And maybe just as a follow-up, you know, on the heels of the LabCorp deal, obviously a nice cash flow or cash inflow there, but maybe are there other opportunities for the enterprise that you're either evaluating to maybe outsource or maybe other non-core assets that you can look to offload that could drive that incremental cash or even EBITDA benefits at this point? Thanks.

Great question. We continue to look at our business seeing where we can make little tweaks similar to what we did. Our outpatient reference lab business is something that was not a core competency and I actually believe that by Completing this deal with LabCorp, we're going to provide a better experience for our physicians and also potentially get some savings to the company. We'll be using LabCorp almost exclusively for our reference lab and outsource business, and we'll be getting better pricing where we had been using them sporadically in the past or other outsource services. We can move that to LabCorp at a better pricing going forward. We continuously look at our business. I don't know that we have anything currently in flight that I would call out as being something that we could monetize. There are areas of our business that we consider as we grow and invest and develop that may be sources of revenue for us in the future, and those are something that we're looking at and which could be margin accretive. if we would decide to do that or get to a point where we think it's viable that we could sell some services.

Okay, great. Thank you. The next question will come from Andrew Moak with Barclays.

Please go ahead.

Hi, good morning. I wanted to follow up on volumes because I'm having a hard time reconciling the lower volumes that you're calling out with some of the call-outs of accelerating cost trends from payers. Was there anything else you saw impacting volume trends beyond consumer confidence that might be more regional-specific or anything on the policy front that you suspect is driving a hesitation to use the healthcare system? Thanks.

Maybe the only other item I might call out, and it's admittedly difficult when patients don't come to your system to know exactly why they aren't coming and who those patients are when they're not showing up. But the other item that I would call out would be immigration, and certainly in some of our markets that may have larger concentrations of the immigrant community in states like Arizona and Texas, possibly even Florida, there has been a well-documented instances of individuals in the immigrant community not participating in some normal everyday things, not going to church, school, going to the hospital, not going to concerts, doing things like that. I know the hospitals are no longer considered a sanctuary location and there is concern even among immigrants with legal status that there's some fear in that community. that's likely caused, at least in some of our markets, some softness in the volumes.

Great. Maybe just as a quick follow-up, appreciate all the color on the estimated impact of state-directed payments. Is there any way you can share thoughts for how the expiration of enhanced subsidies might impact your business next year? Thanks.

That one's difficult to quantify in any real I can say what we're doing relative to that is investing in our lobbying efforts in Washington and continue to work on that from a legislative standpoint. But in terms of quantifying, no, we don't have an estimate at this point.

Great. Thank you.

The next question will come from Steven Baxter with Wells Fargo. Please go ahead.

Hi, thanks. I just wanted to kind of continue the Guidance Bridge conversation just to make sure that we understand kind of how you're carrying things forward. So I think the items you're flagging are the $70 million underperformance on a core basis during the quarter, the $25 million for Cedar Hills, Did you give us the all-in increase to Medicaid supplemental program expectations? I think there's more than just 100 to maybe 120 that you kind of let on before. I'm just trying to really understand, as we think about the back half of the year relative to the $70 million underperformance, I guess how much of that are you carrying through into this guidance revision that you made? Thank you.

Thanks, Stephen. Yeah, let me give you some more clarity on the state-directed payment programs and Sorry if I did not make that clear. So we had previously indicated $100 to $125 million of state-directed payment possibility. There's an annual run rate for Tennessee and New Mexico. That was just a 12-month run rate for the combined two states. In the second quarter, we actually picked up a retroactive piece back to 2024 for Tennessee, plus six months of Tennessee and six months of New Mexico. So for the full year 2025, those two states will be about $140 million. That's the amount we're putting in our guide, kind of is the midpoint for the DPP program. So that's the addition. Starting, again, I'll run through this quickly. $1.5 billion at the midpoint was a starting point. We added $140 million. That's the 100 to 125 run rate plus the retroactive piece. Then taking out $20 to $25 for Cedar Park, taking out the second quarter miss, and then adjusting our expectations in the back half of the year slightly.

Okay, got it. Thank you very much. It's really helpful to have the sizing around the you know, the impacts from the bill. Is there an absolute number you can give us for what the current annual run rate of these programs are? So not including any of the out-of-period stuff, but just so we can maybe contextualize this as a percentage decline. That would also be, I think, pretty helpful to people. Thank you.

No, I don't have that number exactly. We really look at those state-directed payment programs. Once they're in place, they become part of the normal Medicaid reimbursement strategy for that state and normal Medicaid reimbursement process. Those programs oftentimes have many different variations within a state, both at the district level, county level, state level. States then make decisions about increasing their rate or increasing the programs at various stages once they're in place. So we don't really call those out separately because they, again, once in place, they kind of move more as an aggregate number within the state versus each individual program being on its own.

Okay. Maybe just one more, if I can squeeze it in. Just can you talk a little bit, I know a lot of this, you know, you think is driven on the volume side by the consumer confidence changes, you know, kind of in the early part of this year. Are you seeing any kind of volume change in the Medicare part of your business, given that obviously it seems like there would generally be less economic sensitivity there? I'd be curious to sign up for a comment on Medicare-specific trends, if possible.

Yeah, we haven't seen much change in the Medicare book of business. And interestingly, the Medicare book of business has the lowest deductible component, so it's That is the group of patients least impacted, I think, by some of this consumer confidence issue. I think that really further supports maybe our belief that what's driving some of the patient behavior is around financial decisions. Those patients are government-insured patients who don't have high co-pays and deductibles, haven't really changed their behavior in terms of coming to receive healthcare.

The next question will come from Josh Raskin with Nefron Research. Please go ahead.

Hi. Thanks. Good morning. I'll congratulate Tim as well and Kevin and Jason as well. I want to go back to the difference in trends that you guys are seeing from the volume perspective relative to some of the hospital peers and certainly relative to the commentary from the payers. And I appreciate the commentary you've made. But do you think there's any difference from whether it's geographies or lines of business or outpatient networks that could explain that? Do you think others are embracing more technology or AI on the RCM side? Do you think any of that could be contributing to this?

There could be some differential in terms of location, types of markets, urban versus non-urban. It's hard to say exactly. Again, I would point to when patients don't show up, it's very hard to necessarily know why or to track that, but I do think the differential between urban markets and non-urban markets could be part of that. In terms of difference between what we're experiencing and the payers are experiencing, Much of their cost increases could be coming from the pharmaceutical side, maybe behavioral, business, not necessarily a change in acute payments to the acute providers. I think their headwinds really are probably somewhere else. Otherwise, I can't really reconcile it. Tim, I don't know if there's something you might want to add on this.

Yeah, Josh, thanks for the question. I'll add on to the payer answer. I think the other area where I'm not going to say it's an outsized impact, but we've been speaking for several quarters on our investment in physician advisor services and really honing in on where we believe we should be getting appropriate reimbursement for care and services delivered. We have not seen an increase in our downgrades and denials as a percentage of net because of those efforts. And I hope it means we're keeping more of the rightfully earned dollars coming into our pockets versus into the payer's pockets. So that's one element I would throw in there. I don't think it's material, but we have not allowed that slippage to continue, which we said we'd be fixated on as a strategy for the company. In terms of your other question regarding strategy and or technology and AI, that has also been a core strategy for CHS. I believe I mentioned last quarter our investment in growth in robotic surgery platforms. We continue to see really strong growth in our robotic-assisted surgeries in the company, so I don't think it's due to any underinvestment into emerging technologies or services in our communities. In terms of the AI component, one of the things I'm really proud of is our investment into the development of a strong data science group here at CHS. We have some of the leading industry experts on supporting our efforts. We have deeper insights into the business as a result of that. And I'd also layer on the investment into the ERP, the enterprise resource planning tools. Again, we're, I think, in the early innings of that investment, but the insights that's gleaning into our business and our operations and our opportunities, I think it'll be a really strong benefit and tailwind to the company. for many quarters and years to come. So I don't think there's really anything in terms of where we maybe missed it strategically. I think it really is a lull in consumer confidence, as we've called out. And as I said in my prepared remarks, I can't remember a time in this industry where the consumer hasn't come back. We still believe we provide absolutely essential services to the communities we serve.

Great. Great. That all makes sense. Just a quick follow-up on the LabCorp. Were you referenced previously? Were those assets EBITDA positive for you in the past, and then is it conceivable that having LabCorp take care of those assets is actually additive to EBITDA?

We don't have an exact measure because it wasn't a business that we ran separately, but certainly we've done a fair amount of work before making the decision to sell that part of our business. As I mentioned, it was not a corporate. competency of ours, it may have been marginally EBITDA, or there may have been some marginal EBITDA generation from that, relatively small, and I think that, again, overall, getting some cash up front and providing a much better experience for our physicians will be much more beneficial to our practices and ultimately to our EBITDA going forward. Also keep in mind that even our employee physicians did not use our in-house outreach lab business exclusively. We were still sending portions of our business out to LabCorp, to Quest, to other third-party labs. We really have now an opportunity to partner with LabCorp on this. bring just a better solution with their technology, and it is their core competency, and they'll be able to deliver those services at a cost cheaper than we could provide them ourselves.

Gotcha. Perfect. Thanks.

The next question is a follow-up from Ben Hendricks with RBC.

Please go ahead.

Great, thank you very much for squeezing me in here with one more. We've gotten a lot of questions on the Rural Health Transformation Program and the $50 billion allocated under the OBBB Act. Any way to frame kind of your contribution there, to what extent you're including those funds in your outlook, and how do we frame kind of what the benefit could be, even if just an assessment of how much of your program would be eligible for that program? Thanks.

Great question, Ben, and one we've received a couple times already and one we're thinking about quite a bit. Again, we're investing in lobbying efforts around that. There is no clear answer at this point as to how that money is going to be spent or divvied up amongst the rural health providers. So that's all yet to be determined. I believe my understanding is 50% of that. will be at the discretion of CMS and the other 50% given to the state to determine, and even they may determine differently in each state how they distribute the money. So a lot more to come. I also understand that there's been a proposed bill in the Senate to increase the amount from $50 billion to $100 billion. So that is still yet to come. As we look at our portfolio of hospitals, I would say roughly 40% of our beds, we believe, would qualify in terms of a definition of rule. But even that isn't entirely clear because throughout the medical regulations and CMS, there's multiple definitions of what is rule. And I'm not sure which is the exact one that will apply here. We're given our best estimate that is about 40% of our beds.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tim Hinchen, Chief Executive Officer, for any closing remarks. Please go ahead, sir.

Great. Thanks, Chuck. And thank you, everyone, for joining the call today. I want to close by thanking the amazing people who work across the CHS organization for the opportunity to serve as their CEO and to support their commitment to provide quality, compassionate care for all of their patients. And I want to say once again that I'm grateful to be passing the torch to Kevin Hammond because he's a capable and committed leader for CHF. I look forward to all of the good things ahead for community health systems. If you have any additional questions, you can always reach us at 615-465-7000. Have a great day, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.