Community Health Systems, Inc.

Good morning and thank you for holding for the Community Health System's first quarter 2026 earnings conference call. The call will begin in five minutes time. . . . . ¶¶ Thank you. ¶¶ ¶¶ Thank you. ¶¶ ¶¶ Thanks for watching! Good day and welcome to the Community Health System's first quarter 2026 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 a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Anton High, Vice President of Investor Relations. Please go ahead.

Thank you, Bailey. Good morning, everyone, and welcome to Community Health Systems First Quarter 2026 conference call. Joining me on today's call are Kevin Hammons, Chief Executive Officer, and Jason Johnson, Executive Vice President and Chief Financial Officer. Before we begin, I'll remind everyone that this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as risk factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. 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 discussed today will exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses, and expense from business transformation costs. With that said, I will turn the call over to Kevin Hammonds, Chief Executive Officer.

Thank you, Anton. Good morning, everyone, and thank you for joining our first quarter 2026 conference call and for your continued interest in CHS. Before we begin, I want to acknowledge our employees, physicians, and all of our teammates who have embraced our vision to make the healthcare experience exceptional for our patients, our communities, and each other. As people across our organization share in this commitment, I am confident we will see the benefits of making that healthcare experience exceptional. And as we do, more patients will choose our health systems and we'll create an even stronger company. Earlier this week, we announced some significant investments in ambulatory surgery centers in our core markets, including the pending acquisition of a majority ownership interest in the Surgical Institute of Alabama, our largest acquisition since 2016. The surgery center performs more than 8,000 cases annually and is the largest multi-specialty surgery center in Alabama. We expect to close this transaction during the second quarter. During the first quarter, we also purchased a majority interest in South Anchorage Surgery Center in Alaska and opened two de novo ASCs in Birmingham and Foley, Alabama. These targeted investments extend CHS's ability to provide outpatient surgical care in the most advantageous way for our patients while delivering excellent outcomes, optimizing the surgical experience for our physician partners, and driving future growth for our health systems. Turning to our operating performance for the first quarter of 2026, adjusted EBITDA was on the low end of our internal expectations, declining 17.8% from the prior year period. reflecting our strategic transactions to reduce our debt, macroeconomic disruptions across the country, as well as the investments CHS is making in our future. The quarter's results include an approximate $50 million year-over-year EBITDA drag from recently completed divestitures that went from being positive contributors in the prior year period to negative in the first quarter of 2026. Closing these divestitures will remove the negative EBITDA drag from future quarters. Additionally, while we benefited from some out-of-period revenue related to the Georgia State Directed Payment Program, this tailwind was partially offset by out-of-period provider tax increases related to the Indiana program. Same-store net revenue increased 3.1% year-over-year, driven by 3.7% growth in net revenue per adjusted admission, partly offset by a 0.5% decline in same-store adjusted admissions. We believe volume and payer mix challenges in the first quarter reflect a temporary disruption in demand for healthcare services in our markets, largely driven by consumer fears related to geopolitical instability and increased cost of living, as well as ongoing aggressive practices used by the managed care companies that drive inefficiency unnecessarily delay payment and interfere with the delivery of medical care. I'd like to spend just a minute on our top priorities this year as we work to enhance quality, patient experience, physician experience, and employee satisfaction. We're realizing operational improvements at an accelerating pace and our ability to advance in each of these areas will also ultimately drive enhanced financial performance and long-term value creation for our organization and shareholders. For example, in the area of quality, when the spring 2026 leapfrog safety grades are released next month, we expect as many as 80% of CHS's hospitals to receive a leapfrog A or B grade, up significantly from just 48% this time a year ago. We also expect 56% of our hospitals to receive a CMS rating of three or more stars when those metrics are published next month, up from 45% in the 2025 ratings. These achievements demonstrate our commitment to continuous improvement and our ability to drive stronger performance in this area. We are hyper-focused on improving the experiences of the people working in our organization, especially our physicians and employees. and we have numerous initiatives underway to increase patient satisfaction as well. On the physician experience front, we are currently deploying an ambient listening technology in our clinics and hospitals, which will help reduce administrative burdens and optimize the time physicians and other providers spend face-to-face with their patients. Investments CHS has made to expand service lines, add new access points, recruit physicians to our markets, and improve our quality and experience have us better positioned and prepared to accommodate demand as soon as it returns to normal levels. Before I pass the call over to Jason, I'd also like to discuss the policy background. Similar to our hospital peers and others in the healthcare industry, we continue to monitor developments related to Medicaid supplemental payment programs and the Rural Health Transformation Fund, as well as ACA enhanced premium tax credit expirations and Medicaid work requirements and redeterminations among other changes. It is still very early to gauge the impact of these external factors, while there are a lot of moving pieces, unknown variables, and potential consequences. Given CHS's historical and current presence in many rural and underserved markets, we remain actively engaged with policymakers across each of our states to help ensure that programs under the Rural Health Fund are directed towards hospitals and other providers delivering care in these communities, which we believe was the original intent of the fund. We've set up a formal structure with dedicated internal and external resources, working to evaluate each state's various programs as details emerge, and to apply for any and all funding available to us in order to ensure continued access to quality care in our rural communities. At this point, I will turn the call over to our Chief Financial Officer, Jason Johnson, to review financial results and other information in greater detail. Jason?

Thank you, Kevin, and good morning, everyone. For the first quarter, CHS delivered financial results toward the low end of expectations. The company continued to execute well on the controllable aspects of our business, demonstrate significant progress on our top priorities, and further deleverage the balance sheet. However, volumes and impairments were below expectations, including noteworthy softness in the left of procedures such as hips and knees, which along with negative contribution from recently divested operations led to margin compression. Adjusted EBITDA for the first quarter was 309 million with margin of 10.4%. Recently divested hospitals produced approximately 25 million of negative adjusted EBITDA in the first quarter, compared to positive $25 million in the prior year period. A portion of the negative results from the hospitals divested in the first quarter was attributable to impacts from winter storm ferns. Results included approximately $25 million in contribution from Georgia state-directed payment program that was approved in mid-March, approximately two-thirds of which related to prior period since the program was retroacted to July 1, 2025. As Kevin previously noted, half of this out-of-period benefit was offset by higher operating expense related to out-of-period Indiana provider taxes. Same-store net revenue for the first quarter increased 3.1% year-over-year, again driven primarily by rate growth as net revenue per adjusted emission was up 3.7% year-over-year including the benefit from new state-directed payment programs, partly offset by unfavorable payer mix shifts. Same-store inpatient admissions declined 1.3%, and adjusted admissions were down 0.5% year-over-year. Same-store surgeries declined 2.2%, and ED visits were down 2.8%. Labor cost was well managed overall with approximately 2% year-over-year growth in average hourly rate and same-store contract labor spend down 11% from the prior year period. However, salaries and benefits expressed as a percentage of revenue increased 50 basis points year-over-year on a same-store basis due partly to increased position employment consistent with the investments Kevin highlighted as well as continued insourcing. which we believe positioned the company well to capture share of patients in our market's return to the healthcare system. Supplies expense remained well controlled, declining 60 basis points year over year to 14.9% net revenue, which largely reflected the decline in surgical volumes, along with better procurement and inventory management under our ERP. Medical specialist fees were up approximately 11% year over year, on a same store basis, slightly ahead of our forecast for 5% to 8% growth, but were generally consistent as a percentage of net revenue at 5.5%. Cash flows from operations were a use of $297 million for the first quarter versus positive $120 million in the prior year period. Approximately one quarter of the year-over-year decline was due to core operating performance, with the remainder primarily attributed to timing of certain items, such as Medicaid supplemental payments and provider tax payments, that should reverse in future quarters. We also experienced a large buildup of AR related to Medicare Advantage accounts due to delayed payments, which we expect to collect throughout the remainder of the year. As expected, during the quarter, we completed the Clarksville, Tennessee, Pennsylvania, and Huntsville, Alabama divestitures, generating more than $1.1 billion and gross proceeds, and in early February used a portion of the proceeds to redeem $223 million of the 2032 notes at 103 via the special call provision. As Kevin previously noted, the company's leverage was down slightly at quarter end to 6.5 times versus 6.6 times at year end 2025, and down from 7.4 times at year end 2024. Our next significant maturity is in 2029, and at quarter end, we had no amounts drawn on our ABL. In early March, we announced a definitive agreement to divest four hospitals in Arkansas to Freeman Health Systems for $112 million in cash and the assumption by the buyer of certain real estate leases. The transaction is expected to close in the second quarter of 2026. further enhancing liquidity to continue to reduce net debt and leverage or to fund growth investments. Following the completion of the Arkansas divestiture, our net debt will be approximately $9.3 billion, down from $10.1 billion at year end 2025 and $11.4 billion at year end 2024. As Kevin previously noted, earlier this week we announced several ASC investments in Alabama and Arkansas that are either pending or recently completed. with a combined price tag of approximately $85 million. We will continue to evaluate opportunities for growth investments across each of our core markets. Our financial guidance for 2026 remains unchanged. While new developments have emerged relative to the outlook that we provided in February, including the approval of Georgia's State Director Payment Program, the pending divestiture for Arkansas operations, and the ASD investments, We believe these are captured within the initial range for adjusted EBITDA of $1.34 to $1.49 billion. There are multiple items on the horizon that could affect guidance in the future, most notably the potential approval of new or enhanced state drug repayment programs and potential tailwinds from the Rural Health Transformation Program. We don't have sufficient data to adjust the outlook at this early stage in the year. 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 1 on your touch-tone phone. If you are 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 the question, please press star then 2. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster.

Our first question comes from . Please go ahead.

Good morning, guys. This is for . I guess it would be helpful if we could start on the payer mix and volume pressures that you saw in the quarter. Is it due to the macro environment or are you seeing particular pressures in your markets, particularly as you start to see some green shoots in Q4 around your commercial book? And then how should we be just thinking about volume for the full year as you had been originally guiding to 1.5% to 2.5% of that 5% revenue growth? Should we still be thinking about that as comms get easier in the second half and you guys hopefully recover some volume?

I'll start off and Jason feel free to jump in. The volume pressures we really saw were across the board. I wouldn't call out any specific markets that were worse than others. We really do believe that it was a broad pressure on volume. It was also concentrated more so in individuals with commercial and health exchange coverage. That leads us to believe a couple things. One, it's macroeconomic issues because those are the individuals with high deductibles and the more aggressive behavior by the managed care companies. We understand, at least anecdotally, that there's kind of been, they've turned the dial up on denying pre-authorizations in more cases. So oftentimes those patients are not even getting to us because of that.

Yeah, maybe I'll just add as it relates to our guidance. We're assuming low single-digit volume growth for the year. So we're at negative 0.5% adjusted admission for the first quarter. We do think that that should recover And I think payer mix was the other piece that came in less than our expectations for the full year. And similar, we think that comes back as the economy continues to improve.

Okay, thank you. And then as a quick follow-up, operating cash flow looked a little weak in the quarter. We assume it's working capital timing related headwinds that you'll ultimately recapture. But can you just kind of give us the moving pieces on what was going on in the operating cash flow line in the quarter?

Sure. I'll take that one to Jason. There are several items that are timing related that we expect to flip for the rest of the year. I'll name a few here. There's about $90 million of Medicaid supplemental payments, provider tax payments, timing. In other words, we're timing difference between when we either recognize the revenue or the expense of some of the provider taxes versus when we receive those payments or make the tax payments. 50 to 60 million, I mentioned I referenced this in my comments that there was a buildup of managed care Medicare Advantage accounts and that's about 50 to 60 million which we do expect to collect at the remainder of the year. We make our bonus payment annually in the first quarter every year that's about 50 million dollars so that'll continue to There's 25 to 50 million of AP timing that occurs and usually does kind of happen at year end versus the first quarter. And then there's the final thing I'll mention is about a $15 million initial interest payment on the 2034 note that were deferred from September 2025 and made this quarter. Those notes were issued in August 2020. of last year, and rather than make the initial payment a month or so later, it was deferred until the first quarter.

Thank you.

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

Great. Thank you very much. Appreciate that it's early in the quarter, but just wanted to talk about kind of the The Hicks Exchange headwind from the EPTC expiry that you are assuming your guidance, I think in the bridge that we have here, we had about $110 million of revenue, about $25 million of EBITDA assumed, and just wanted to see kind of based on some of the reports that have come out in your quarter and your experience, just if there's any kind of change to that progression and if you're seeing any kind of regional variation. Thanks.

Yeah, so we haven't made any changes to our assumptions yet. We still really don't have a lot more data than we had in February. I do know that our hits revenue and just emissions remained between 4% and 5%, both the first quarter of this year and last year. Our revenue actually and adjusted emissions and must be exchanged plan patients. I think similar to what we see with a lot of plans that have the high deductibles or the beginning of the year that we think are staying out of the system, certainly there's some portion of those people that may have dropped the coverage.

planned or self-paced we don't really have any new information yet i think that's still going to be our second or third quarter before we get better built for that thanks and then uh just on the core growth that you're anticipating obviously coming a little bit softer than expected in the first quarter but can but how are we thinking about that phasing through the rest of the year and i know that you've you've kind of mentioned uh you know, some consumer confidence and how you see that developing as we get closer to the end of the year. Thanks.

I think, you know, we indicated even at the fourth quarter earnings release, we expected this year to be more heavily weighted on the back half. We had anticipated starting off the year a little softer given the consumer confidence coming out of December. was muted and low and then kind of throughout the first quarter we saw a jobs report come out that was much worse than expected and then the conflict in the Middle East that transpired in March and the rise of price of oil and gas and price of the pump and so forth. We do believe that we'll see some economic recovery in the back half of the year. Second quarter will be a little bit of an easier comp for us as well, and we think that with the work that we're doing on improving, as I mentioned, improving quality, improving our patient experiences, that gets more traction. We'll really be positioned well with this deferred business as people ultimately will come back and have these procedures done. We believe we'll be positioned well to capture that business and maybe uniquely positioned to capture that business in our markets, and that should serve us well, but that is likely not to happen until the back half of the year.

Great. Thank you very much.

Our next question comes from A.J. Rice with UBS. Please go ahead.

Hi, everybody. Maybe first... on these acquisitions, the Surgical Institute of Alabama and the Alaska one. I know traditionally I've tended to think of you guys as doing, you know, when it's something like an ASC within your existing markets. I'm not sure whether you'd describe these as being, you know, adjacent to existing hospitals or are you pivoting to now, maybe looking more at freestanding ASCs as an investment opportunity, and should we think that there'll be some capital devoted to that, incremental capital devoted to that going forward?

Thanks, AJ. Great question. These acquisitions, we would still characterize as being part of our networks of care, extending the care areas that we're treating patients from those hospitals, but still connected. within our markets and just an extension of those networks. So not going into what I would call new markets with just an ASC strategy.

Okay. All right. And just maybe any update on what you're seeing with labor, hourly wages, contract labor, and then professional fees as well?

Yeah. The average hourly rate increases. during the first quarter versus the prior year. We did make an investment in physicians. We have 30 net physicians added in the first quarter. That's probably about $5 million of salaries, wages, and benefits. And we insourced one anesthesia program in November of 2025, and that's about two to an half million of additional expenses this quarter. Contract labor came down 11%. I think we're continuing to see a return to rate and usage that are more consistent with prior to the pandemic.

And maybe if I could just add a little more color, I think Jason absolutely got that right. But as I think about Jason's comments that we added, some additional physicians during the quarter. Part of what we experienced, and as we're being intentional about working on physician experience, our physician turnover decreased during the quarter. We were able to continue to hire new physicians at the previous pace we had been hiring at, which has allowed us to add net new physicians That position, it's another area that positions as well. It comes at a little bit of a cost right now without the volume, but in adding new positions to the labor cost, but that will position as well in the future that as this business comes back, we'll have more capacity to take on additional patients with the additional positions. So again, we look at that as a net positive for us, even though it's coming at a little bit of an extra cost this quarter.

Okay, thanks so much.

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

Hi, this is Mitchell on for Steve. Can you give us a sense of the financial profile of the four Arkansas hospitals you announced are going to be divested, as well as the large ASC investment? Just trying to better understand how that fits into the guidance. Thank you.

Yeah, Steven, thanks for the question. The $112 million proceeds, Arkansas, that's about, I think, a 10 to 12 multiple. And that was not reflected in our initial guidance in February. So that'll come out for about a half a year. But the ASC investment, which are largely going to offset that, they're just about a wash. So no effect on our guidance between getting those two.

Thank you.

Our next question comes from Andrew Mock with Barclays. Please go ahead.

Good morning. This is Thomas Walsh on for Andrew. Can you help us better understand the uncompensated care and self-pay mixed shifts in the quarter as ACA exchange disenrollment picked up? What's the most direct driver of higher uncompensated care? Higher uninsurance or worsening collections from the insured population?

Over time, the collections experience does continue to drive a natural trend that we see. I don't think there was anything outside this quarter. There was an increase in self-paid volumes this quarter. So relative to the overall net revenue, it increases the percentage of total. Don't know that there's any one thing that we can point to except for, I don't know, part of this could be the behavior if those folks don't have insurance, if they continue to come into the health systems regardless of what's happening in the broader macro environment.

I do think it's a fair point. We've taken into consideration the additional risk of collectability of co-pays and deductibles in that amount and have adjusted accordingly.

Great. And following up, there are a number of moving parts inside the pricing of 3.7% in the quarter. Could you help us understand the contribution of normal course rate increases incremental, state-directed payments, and then the payer mix or QD headwinds?

Yeah, the normal rate increases are, I think, consistent with our guide around 3% of the impact. And then the Medicaid supplemental payments, Georgia, which I mentioned was approved this quarter, that was about... 30 million of revenue, 25 million of EBITDA, that's nine months worth or three quarters, so that's worth about 10 million a quarter on revenue and eight or nine million on EBITDA. And then the rest of the decline was volume impairments that netted against those benefits. Probably evenly between slight drop in acuity as well, but it's more about impairments and volume. offsetting those total rate increases.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Kevin Hammonds, Chief Executive Officer, for any closing remarks.

Thank you, everyone, for joining the call today. If you have any additional questions, you can always reach us at 615-465-7000. Have a good day everyone.

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