Q2 2024 Community Health Systems Inc Earnings Call

Good day, and welcome to the Community Health Systems second quarter 2024 earnings conference call.

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Operator: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. We do ask that you limit yourself to one question and a single follow-up. Please also note that today's event is being recorded. I'd now like to turn the conference over to Mr. Anton Hie, Vice President of Investor Relations. Please go ahead.

Please also note, today's event is being recorded.

I'd now like to turn the conference over to Mr. Anton Hie, Vice President of Investor Relations. Please go ahead.

Anton Hie: Thank you, Rocco. Good morning, and welcome to Community Health Systems' second quarter 2024 conference call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer, and Kevin Hammons, President and Chief Financial Officer. Before we begin, I must 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.

Thank you, Rocco. Good morning and welcome to Community Health Systems' second quarter 2024 conference call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer, and Kevin Hammons, President and Chief Financial Officer.

Anton Hie: Actual results may differ significantly from those expressed in any forward-looking statements included 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 EMSI 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 the sale of businesses, expenses from government and other legal matters and related costs, and expenses from business transformation costs. For more information, please visit www.fema.gov. With that said, I'll turn the call over to Tim Hingtgen, Chief Executive Officer.

Before we begin, I must 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 four leading 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 EMTA 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 the sale of businesses, expense from government and other legal matters and related costs, expense from business transformation costs,

expenses related to employee termination benefits and other restructuring charges.

Tim L. Hingtgen: Anton, good morning, and thank you for joining our second quarter conference call. At the midpoint of 2024, we are pleased with our progress, including a solid second quarter that produced both volume and earnings growth. In the second quarter, same store net revenues increased 4.7% compared to the same period last year. Adjusted EBITDA for this quarter was $387 million compared to $373 million in the second quarter of 2023.

With that said, I'll turn the call over to Tim Hingtgen, Chief Executive Officer. Thanks, Anton. Good morning, and thank you for joining our second quarter conference call. At the midpoint of 2024, we are pleased with our progress, including a solid second quarter that produced both volume and earnings growth.

In the second quarter, same store net revenues increased 4.7% compared to the same period last year. Adjusted EBITDA for this quarter was $387 million compared to $373 million in the second quarter of 2023.

Tim L. Hingtgen: Safe store admissions improved 3%, adjusted admissions improved 3.2%, and surgeries were up 0.6%. About surgeries, I want to note that the second quarter increase is on top of a record surgery volume quarter for the company last year. So, we were pleased to see SaneStore's surgical volumes reaching yet another new high in the second quarter this year.

Same store admissions improved 3%, adjusted admissions improved 3.2%, and surgeries were up 0.6%.

About surgeries, I want to note that the second quarter increase is on top of a record surgery volume quarter for the company last year. So we were pleased to see SaneStore's surgical volume reaching yet a new high in the second quarter this year.

Tim L. Hingtgen: This progress is driven in part by particularly strong outpatient case volumes, including in our ambulatory surgery centers, whose performance and results are complementary to their local affiliated CHS health system. We also experience generally strong outpatient volumes, including growth in emergency department visits, urgent care, and physician practices. In addition to year-over-year same-store growth, we also achieved sequential improvements in the first quarter of 2024, and we expect to carry this momentum into the second half of the year.

This progress is driven in part by particularly strong outpatient case volumes, including in our ambulatory surgery centers, whose performance and results are complementary to their local affiliated CHS health systems.

We also experience generally strong outpatient volumes, including growth in emergency department visits, urgent care, and in physician practices.

In addition to year-over-year same-store growth, we also achieved sequential improvements over the first quarter of 2024, and we expect to carry this momentum into the second half of the year.

Tim L. Hingtgen: Much of our growth is attributable to the strategic investments made in our markets, which include ongoing physician recruitment and capital investments to expand access and capacity. We've invested more than $3 billion in our health systems since 2018, which includes new and replacement hospital facilities, bed and procedural space expansion, new technologies, and a wide spectrum of access points and outpatient services. Earlier this year, we opened our new tower at Tenova North Knoxville, where performance is already exceeding initial expectations. And a major expansion is underway in South Baldwin County, Alabama, which remains on track to open this year and will create incremental capacity and produce more growth in this rapidly growing market.

Much of our growth is attributable to the strategic investments made in our markets, which include ongoing physician recruitment and capital investments to expand access and capacity.

We've invested more than $3 billion into our health systems since 2018, which includes new and replacement hospital facilities, bed and procedural space expansions, new technologies, and a wide spectrum of access points and outpatient services.

Earlier this year, we opened our new tower at Tenova North Knoxville, where performance is already exceeding initial expectations.

And, a major expansion is underway in South Baldwin County, Alabama, which remains on track to open this year, and will create incremental capacity and produce more growth in this rapidly growing market.

Tim L. Hingtgen: Other recent openings include a freestanding emergency department in Huntsville, Alabama, which brings our company count to 18 freestanding EDs in total. Additionally, several new physician practice locations and investments to expand procedural space and services in multiple CHS hospitals. Regarding our portfolio, it has been widely reported that Novant Health ended its plans to acquire our North Carolina hospitals. That was an abrupt decision, but given the FTC's lawsuit, we were prepared for the possibility that the transaction would not be completed.

Other recent openings include a freestanding emergency department in Huntsville, Alabama, which brings our company count to 18 freestanding EDs in total, several new physician practice locations, and investments to expand procedural space and services in multiple CHS hospitals.

Regarding our portfolio, it has been widely reported that Novant Health ended its plans to acquire our North Carolina hospitals. That was an abrupt decision, but given the FTC's lawsuit, we were prepared for the possibility that the transaction would not be completed.

Tim L. Hingtgen: We rapidly deployed CHS resources to support our North Carolina team and to further evaluate our position and potential future opportunities in the market. That work is ongoing. The divestiture of our Cleveland-Tennessee hospital is on track and expected to be completed in the third quarter.

We rapidly deployed CHS resources to support our North Carolina team and to further evaluate our position and potential future opportunities in the market. That work is ongoing.

The divestiture of our Cleveland, Tennessee hospital is on track and expected to be completed in the third quarter. Additional transactions are underway and we continue to carefully review inbound interests related to other markets.

Tim L. Hingtgen: Additional transactions are underway, and we continue to carefully review inbound interests related to other markets. We are very pleased with progress related to recruitment and retention of our workforce and the programs in place to support our team. We hired nearly 3,000 registered nurses during the first half of 2024, and our nurse retention rate is very strong, at its highest level in a decade. Additionally, our centralized recruitment program has expanded to include allied health positions in areas such as imaging, pharmacy, lab, respiratory, and surgical services. Across these positions, hiring is up by more than 14% year-over-year. Other facets of cost management have been an area of strength this year, with contract labor, supplies, and other expenses falling in the second quarter.

We are very pleased with progress related to recruitment and retention of our workforce and the programs in place to support our teams.

We hired nearly 3,000 registered nurses during the first half of 2024, and our nurse retention rate is very strong, at its highest level in a decade.

Our centralized recruitment program has expanded to include allied health positions in areas such as imaging, pharmacy, lab, respiratory, and surgical services. Across these positions, hiring is up by more than 14% year over year.

Other facets of cost management have been an area of strength this year, with contract labor, supplies, and other expenses trending down in the second quarter.

Tim L. Hingtgen: Innovative solutions to improve care delivery in our business operations are another area of specific focus. During the second quarter, we announced an expanded partnership with Mark Cuban's Cost Plus Drugs. All of our hospitals will now be able to purchase select drugs from the Cost Plus Drugs Marketplace, initially resulting in hundreds of thousands of dollars in savings and enabling the potential for even greater savings over time.

Innovative solutions to improve care delivery in our business operations are another area of specific focus.

During the second quarter, we announced an expanded partnership with Mark Cuban Cost Plus Drugs.

All of our hospitals will now be able to purchase select drugs from the Cost Plus Drugs Marketplace, initially resulting in hundreds of thousands of dollars in savings, and enabling the potential for even greater savings over time.

Tim L. Hingtgen: On July 1st, we deployed the third wave of our affiliated health systems onto our enterprise resource planning platform. The initiative, which we internally refer to as Project Empower, now supports more than half of our hospitals and will be fully deployed by the end of the year. This investment is yielding deeper insights into our business functions, and we expect to identify opportunities for additional standardization, expense management, and value creation as our experience with this enhanced operational tool matures.

On July 1st, we deployed the third wave of our affiliated health systems onto our enterprise resource planning platform.

The initiative, which we internally refer to as Project Empower, now supports more than half of our hospitals and will be fully deployed by the end of the year.

This investment is yielding deeper insights into our business functions, and we expect to identify opportunities for additional standardization, expense management, and value creation as our experience with this enhanced operational tool matures.

Tim L. Hingtgen: Our clinicians, caregivers, and local leadership teams are making a real and positive difference in every community we serve. On Tuesday, we released our 2024 Community Impact Report, and I hope you have the opportunity to take a look at it. We are so proud of the quality of care and the breadth of services we provide and also what that means to our communities as we generate meaningful economic impact. We are committed to causes that improve health and well-being, and we are powered by an amazing group of people who care deeply about others and who ensure that our purpose to help people get well and live healthier is always fulfilled. With that, Kevin, I'll turn the call over to you.

Our clinicians, caregivers, and local leadership teams are making a real and positive difference in every community we serve.

On Tuesday, we released our 2024 Community Impact Report, and I hope you have the opportunity to take a look at it.

We are so proud of the quality of care and the breadth of services we provide, and also what that means to our communities as we generate meaningful economic impact.

We are committed to causes that improve health and well-being, and we are powered by an amazing group of people who care deeply about others and who ensure that our purpose to help people get well and live healthier is always fulfilled.

Kevin J. Hammons: Thank you, Tim, and good morning, everyone. As Tim indicated, we were pleased with the financial results as we delivered another quarter of steady improvement, which again was consistent with our expectations and reflected strong execution by our operating teams in a solid demand environment in our market. The momentum and volume growth that began last year continues, leading to same-store growth across all key metrics, including a 3% increase in admissions, a 3.2% increase in adjusted admissions, a 1.1% increase in emergency department visits, and a 0.6% increase in surgeries against a strong 6.2% surgical volume count in the second quarter of 2023.

With that, Kevin, I'll turn the call over to you. Thank you, Tim, and good morning, everyone.

As Tim indicated, we were pleased with financial results as we delivered another quarter of steady improvement.

Which again, was consistent with our expectations.

and reflect strong execution by our operating teams.

and the Solid Demand Environment in our markets.

The momentum and volume growth that began last year continues.

Leading to same-star growth across all key metrics, including a 3% increase in admissions, a 3.2% increase in adjusted admissions,

A 1.1% increase in emergency department visits and a 0.6% increase in surgeries against a strong 6.2% surgical volume comp in the second quarter of 2023.

Kevin J. Hammons: Net operating revenues for the quarter were $3,140,000,000, representing Consolidated Year-over-Year Growth of 0.8%. On a same-store basis, net revenue increased 4.7%, in line with our target for mid-single-digit growth for the year. Same-store top-line growth was driven by a 3.2% increase in adjusted admissions, along with a 1.4% growth in net revenue per adjusted income, which primarily reflected improved rates in incremental state Medicaid reimbursements, although partly offset by geographic niche.

Net operating revenues for the quarter were $3,140,000,000, representing consolidated year-over-year growth.

of 0.8%.

On a same-store basis, net revenue increased 4.7 percent, in line with our target for mid-single-digit growth for the year.

The same-store top-line growth was driven by the 3.2% increase in adjusted admissions along with a 1.4% growth in net revenue per adjusted admission.

which primarily reflected improved rates in incremental state Medicaid reimbursement.

Kevin J. Hammons: While we continue to see some shift from our Medicare fee-for-service business into Medicare Advantage in the second quarter, we were pleased to see solid commercial volume, with Safe, Sore, Adjusted Admissions growing in line with the Medicare Advantage book. Adjusted EBITDA for the second quarter was $387 million, compared with $373 million in the prior year period, and up slightly on a sequential basis, generally in line with our expectations. Margin for the quarter was 12.3%, up from 12% in both the prior year period and sequentially and consistent with our previous guidance for a full-year margin in the mid-12% range.

Partly Offset by Geographic Mix Shift

While we continue to see some shifts from our Medicare fee-for-service business into Medicare Advantage in the second quarter, we were pleased to see solid commercial volumes with safe-store-adjusted admissions growing in line with the Medicare Advantage book.

Adjusted EBITDA for the second quarter was $387 million, compared with $373 million in the prior year period, and up slightly on a sequential basis.

Generally, in line with our expectations.

Kevin J. Hammons: This performance reflects strong cost controls as a result of our ongoing efforts to drive productivity and efficiency gains in the face of lingering inflationary pressures on labor, supplies, and other expense categories. We were again pleased with our performance on labor costs in the quarter. Average hourly weighted rate was up 4% year over year, in line with our expectations for the full year 2024 and helped by improved productivity and reductions across premium pay categories.

Kevin J. Hammons: We also continue to deliver improvement on contract labor spend, which was down approximately $3 million sequentially to $45 million and down $29 million, or 39%, from $74 million in the second quarter of 2023. Note this decrease in contract labor was slightly better than our expectation of contract labor remaining at approximately $50 million per quarter for the year. So we are pleased with the continued progress that reflects our recruitment and retention efforts, along with lower hourly rates for contracted nurses.

Kevin J. Hammons: On supplies expense, we delivered an 80 basis point reduction as a percent of consolidated net revenue, and St. Store Supplies Expansion, per adjusted admission, declined approximately 2% year over year. We were particularly pleased to see outperformance in the hospitals where we have implemented new technology and workflows as part of Project EMPOWER, which is providing better insight into procurement savings opportunities that we believe will continue to grow. Medical specialist fees were up slightly sequentially and increased by approximately 5% from the prior year period, consistent with our expectation for a 5 to 10% increase for the full year.

Medical specialist fees were up slightly sequentially and increased approximately 5% from the prior year period, consistent with our expectation for a 5% to 10% increase for the full year.

We have been pleased with the progress of our hospital based provider in sourcing initiatives since taking over operations from the former <unk> nearly a year ago and continue to evaluate further in sourcing opportunities.

Kevin J. Hammons: We've been pleased with the progress of our hospital-based provider insourcing initiative since taking over operations from the former APP nearly a year ago and continue to evaluate further insourcing opportunities. Provider and other business taxes increased $25 million compared to the prior year quarter, primarily as a result of increases in Medicaid supplemental programs.

Provider and other business taxes increased $25 million compared to the prior year quarter, primarily as a result of increases in Medicaid supplemental programs.

Cash flows from operations were $101 million for the second quarter of 2024, compared with $86 million in the year ago period.

Kevin J. Hammons: Cash flows from operations were $101 million for the second quarter of 2024 compared with $86 million in the year-ago period. The year-over-year improvement in cash flow primarily reflects improved earnings performance, as well as lower cash payments for interest, and Improved Cash from Working Capital, including accounts receivable, offset by higher cash taxes. Capital expenditures for the second quarter of 2024 were $88 million, and for the first half were $181 million, on track for a 2024 guidance range of $350 to $400 million. The divestiture of Tenova Cleveland remains on track to close in the third quarter with estimated proceeds of approximately $160 million, plus additional contingent consideration.

Year over year improvement in cash flow, primarily reflects improved earnings performance as well as lower cash payments for interest and improved working capital and improved cash from working capital, including accounts receivable offset by higher cash tax payments.

Expenditures for the second quarter of 2024 were $88 million and for the first half were $181 million on track for our 2024 guidance range of $350 million to $400 million.

The divestiture of to know the Cleveland remains on track to close in the third quarter with estimated proceeds of approximately $160 million plus additional contingent consideration and we believe that one or more additional transactions could close within the calendar year, providing substantial capital for the.

Kevin J. Hammons: And we believe that one or more additional transactions could close within the calendar year, providing substantial capital for the company to redeploy. As we have previously discussed, we estimate combined potential proceeds of more than $1 billion through a handful of transactions that are in various stages of evaluation or negotiation. In May, we priced an upsized PACON offering of an additional $1,225,000,000 of our 10.78% senior secured notes due 2032. Using proceeds and cash on hand to redeem all of our $1,116,000,000 of remaining 8% senior secured notes due 2026 and to extinguish $130,000,000 principal amount of 2028 notes for $98,000,000 in cash.

A company to redeploy.

As we have previously discussed we estimate combined potential proceeds of more than $1 billion through a handful of transactions that are in various stages of evaluation or negotiation.

In May we priced an upsized tack on offering of an additional $1 $225 million of our 10 and seven 8% senior secured notes due 2032.

Using proceeds and cash on hand to redeem all of our $1 billion $116 million of remaining 8% senior secured notes due 2026, and two extinguished $130 million principal amount of 2028 notes for $98 million in cash.

Kevin J. Hammons: By capturing this discount, these transactions resulted in a combined pre-tax gain from early extinguishment of debt of approximately $26 million. The net interest impact of this transaction is an increase of approximately $35 million on an annual basis. But given the timing of completion, the net effect on cash interest in calendar 2024 is minimal. Additionally, in June, we amended and extended our revolving asset-based loan, extending the maturity of our $1 billion ABL from November of 2026 to June of 2029.

Hi, Catherine this discount these transactions resulted in a combined pre tax.

Okay from early extinguishment of debt of approximately $26 million during the quarter.

The net interest impact of this transaction is an increase of approximately $35 million on an annual basis.

Given the timing of completion, the net effect on cash interest in calendar 2024 is minimal.

Additionally, in June we amended and extended our revolving asset based loan facility.

Extending the maturity of our $1 billion ABL from November of 2026 to June of 2020 now.

Yeah.

At quarter end net debt to trailing adjusted EBITDA was seven six times slightly improved from the seven seven times last quarter and seven nine times at the end of 2023.

Kevin J. Hammons: At quarter end, net debt to trailing adjusted EBITDA was 7.6 times, slightly improved from 7.7 times last quarter and 7.9 times at the end of 2023. We believe we have more than adequate liquidity to meet our needs going forward, with approximately $600 million of borrowing capacity under the ABL, along with the pending asset sale process. Let me pivot and provide a brief update on Project Empower. We recently completed our third wave of deployments, implementing our new financial and supply chain systems and workflows at 25 additional hospitals and related businesses.

We believe we have more than adequate liquidity to meet our needs going forward with approximately $600 million of borrowing capacity under the ABL, along with a pending asset sale proceeds.

Let me pivot and provide a brief update on project empower we recently completed our third wave of deployments implementing our new financial and supply chain systems and workflows at 25 additional hospitals and related businesses.

Kevin J. Hammons: We now have Oracle Business Systems running in 47 hospitals, and we are on track to complete our rollout by January 1st, 2025. With the first six months of 2024 in the books, we are tightening our guidance range for the full year and slightly increasing the midpoint to reflect our increased confidence. Specifically, we now anticipate 2024 Justin Iveda revenue of $1,520,000,000 to $1,600,000,000, which, consistent with prior guidance, does not include any contribution from potential new supplemental payment programs, nor does it assume any unannounced divestiture activity.

Now have Oracle business systems running in 47 hospitals and we are on track to complete our rollout by January one of 2025.

With the first six months of 2024 in the books, we are tightening our guidance range for the full year and slightly increasing the midpoint to reflect our increased confidence specifically.

Specifically, we now anticipate 2020 for adjusted EBITDA.

Of $1.520 billion to $1 billion $600 million.

Which consistent with prior guidance does not include any contribution from potential new supplemental payment programs, nor does it assume any unannounced divestiture activity.

While we are not providing formal quarterly guidance I would remind everyone on the call with the third quarter is traditionally the softest quarter of the year from an earnings perspective, due to seasonal factors, including heightened vacation activity among both patients and physicians.

Kevin J. Hammons: While we are not providing formal quarterly guidance, I would remind everyone on the call that the third quarter is traditionally the softest quarter of the year from an earnings perspective due to seasonal factors including hikes and vacation activity among both patients and physicians. Consistent with typical patterns, we expect the fourth quarter to be our strongest quarter of the year from the Nevada and Calf Float. At this time, we'll turn the call back over to the operator.

Consistent with typical patterns, we expect the fourth quarter to be our strongest quarter of the year from an EBITDA and cash flow perspective.

At this time, we will turn the call back over to the operator for Q&A.

Thank you we will now begin the question and answer session.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the key.

Operator: If at any time your question has been addressed and you'd like to withdraw your question, please press star then 2. We do ask that you limit yourself to one question and a single follow-up. Today's first question comes from Brian Tanquilut with Jeffries. Please go ahead.

I ask a question you May press Star then one on your telephone keypad.

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'd like to withdraw. Your question. Please press Star then two.

We do ask you limit yourself to one question and a single follow up.

Today's first question comes from Brian. Thanks, a lot with Jefferies. Please go ahead.

Tim L. Hingtgen: Hey, good morning, guys, and congrats on the quarter. Maybe, Tim, my first question, as I think about your comments about Novant and Kevin's comments about, you know, still kind of like that billion-dollar goal of divestitures this year, how are you thinking about, you know, the visibility into asset sales or your ability, in your mind given the FTC's objection to the Navant deal, to be able to announce further acquisition divestiture opportunities over the course of this year?

Hey, good morning, guys and congrats on the quarter.

Maybe my first question is I think about your comments on Nevada.

And Kevin's comments about still kind of like $1 billion goal divestitures. This year, how are you thinking about kind of good visibility into.

Asset sales or your ability in your mind, given the FTC's objection.

Objection to the new bond deal to be able to announce further acquisition divestiture opportunities over the course of this year.

Sure, Brian let me take that.

Tim L. Hingtgen: For Ryan, let me take that. So, you know, with the Novant deal, obviously Novant was kind of an in-state provider. And what we're seeing, particularly in many of the other opportunities for divestitures, is the group of buyers is changing. And many for-profit and non-for-profit health care systems are looking outside of their traditional areas of service to expand. The FTC, I think, has been somewhat of an issue for transactions for quite some years now.

So you know.

With the Novartis deal, obviously, Nevada was kind of.

In state.

<unk> and what we're seeing particularly in many of the other opportunities for divestitures as the group of buyers is changing and many of.

Both for profit.

For profit healthcare systems are looking outside of their traditional.

Area of service.

To expand the FTC I think has been.

Somewhat of an issue or transactions now for a few years.

Tim L. Hingtgen: So as I look at the remaining opportunities and current deals that we're negotiating right now, the buyers are all, you know, out of market, typically out of state. Similar to the Cleveland, Tennessee deal that we've already announced, the buyer is a non-profit based in Georgia.

So as I look at the remaining opportunities.

And current deals that we're negotiating right now.

<unk> are all out of market typically out of state.

Similar with the Cleveland, Tennessee deal that we've already announced the buyer is a nonprofit based in Georgia.

Tim L. Hingtgen: And so we really don't see any headwinds to being able to complete the other tasks.

So we really don't see any.

Headwind to being able to complete the other deals that we're currently working on.

Kevin: Got it Okay, and then maybe Kevin we're getting a lot of questions on trying to size the potential opportunity or a tailwind from the DPP payments, New Mexico, and Tennessee, I know you haven't really given.

Kevin J. Hammons: Got it. Okay. And then maybe, Kevin, we're getting a lot of questions on trying to size the potential opportunity or tailwind from the DPP payments to New Mexico and Tennessee. I know you haven't really given the quantification of that, but anything, any comment you can make to help us try to frame the benefit from those things?

Kevin: On occasion, but that but any any.

Speaker Change: Any comment you can make to help us try to frame the benefit from those things.

Kevin J. Hammons: Sure, we've been a little hesitant to be out there given that these programs are not yet approved by CMS, and, in fact, New Mexico has not yet been submitted by the state. So what I would say is we do believe these programs are material to us, but until we get, you know, a little more clarity in terms of what's going to be approved and in what ways. But that said, we do believe that they'll be materially beneficial.

Sure.

Kevin: Been a little hesitant to be out there given that these programs are not yet approved by CMS and in fact, new Mexico has not yet been submitted by the state to CMS.

Speaker Change: So what.

What I would say is we do believe these programs are material to us.

Speaker Change: But until we get a little more clarity in terms of what's going to be approved.

Speaker Change: And in what form.

Speaker Change: Hesitant to go out there with any quantification.

Speaker Change: But that said, we do believe that there'll be materially beneficial to us.

Operator: Got it. I understand. Thank you.

Speaker Change: Got it understand thank you.

Speaker Change: Thank you and our next question today comes from AJ Rice of UBS. Please go ahead.

Operator: Thank you. And our next question today comes from A.J. Rice at UBS. Please go ahead.

Tim L. Hingtgen: Thanks. Hi, everybody. A lot of discussion this quarter about public exchange volumes, how that's helping year-to-year, what percentage of total it is, as well as the two-midnight rule. Do you have any thoughts you can give us on how that's impacted your results this quarter?

Albert J. William Rice: Thanks, Hi, everybody a lot of discussion this quarter about.

Albert J. William Rice: Public exchange volumes.

Albert J. William Rice: Helping year to year, what percentage of total it is as well as also the two midnight rule.

Speaker Change: Any thought.

Speaker Change: Paul if you can give us on how thats impacted your results.

Speaker Change: This quarter.

Tim L. Hingtgen: Sure, AJ. We have certainly seen a decrease in observations and an increase in the kind of short-stay admissions. Now, I'll... You know, we attribute a significant portion of that to the work that we've done internally with our physician advisor group that's helping us qualify those short stays for admissions. And I would say, in terms of behavior from the payers, we're still seeing a pretty significant amount of denials and downgrades coming from the payers. But all that said, we have made progress in reducing the number of observations and increasing short stays, which we believe is beneficial.

Paul: Sure a J, we have certainly seen a decrease in observations.

Paul: And an increase in kind of short stay admissions.

Speaker Change: Now ill.

Speaker Change: We attribute a significant portion of that to the work that we've done internally with our physician Advisory group.

Speaker Change: Helping us qualify those short stays for admissions.

Speaker Change: And I would say in terms of behavior from the Payors, we're still seeing a pretty significant amount of that.

Speaker Change: Denials and downgrades coming.

Speaker Change: From the payers.

Speaker Change: But all that said, we have made progress in reducing the number of observations increasing short stays.

Speaker Change: We believe is beneficial in terms of the exchange business.

Tim L. Hingtgen: In terms of exchange business and maybe related to redetermination, we have seen a decrease in the volume of Medicaid patients, but likewise, you know, we've seen an increase in commercial business. Now, we don't have complete line of sight when a patient comes in with, you know, an exchange insurance maybe versus a regular Blue Cross commercial insurance. But as we look across our, you know, portfolio and we see the decrease in Medicaid with an offsetting increase in commercial, we believe that substantially most of that business is getting picked up by commercial.

Speaker Change: And maybe related to Redetermination, we have seen a decrease in the volume of Medicaid.

Speaker Change: Patients.

Speaker Change: But likewise, we've seen an increase in commercial business now we don't have complete line of sight.

Speaker Change: When a patient comes in with <unk>.

Speaker Change: Exchange.

Speaker Change: Insurance may be versus a regular blue crops commercial insurance.

Speaker Change: But as we look over across our portfolio and we see the decrease in Medicaid with an offsetting increase in commercial.

Speaker Change: We believe that substantially most of that business is getting picked up.

Speaker Change: By commercial we're not seeing a similar increase in self pay.

Tim L. Hingtgen: We're not seeing a similar increase in self-pay, so we're not losing it to the uninsured, but probably picking it up in the commercial or exchange business. I would think that, you know, we look a lot like the national averages. In terms of where we are in the exchange business, we have benefited by being in states like Florida and Texas that have had some of the highest exchange business enrollment, so that's been beneficial for us.

Speaker Change: So so we're not losing it to the uninsured.

Speaker Change: <unk> picking it up as commercial exchange business I would think that we look a lot like the national averages.

Speaker Change: In terms of where we are and exchange business, we have benefited by being in states like Florida, and Texas that have had some of the highest exchange business enrollment.

Speaker Change: So that's been beneficial for us.

Operator: Okay, maybe the follow-up.

Speaker Change: Okay follow up.

Tim L. Hingtgen: And maybe the last point I'd make on that is that there is a pretty wide variation from market to market with exchange penetration.

Speaker Change: Maybe.

Speaker Change: Last point I'd make on that there is a pretty wide variation from market to market with exchange penetration.

Tim L. Hingtgen: Oh, interesting. Just a follow-up question. You mentioned increased or continuing pay or scrutiny on the observation status cases. I wondered if you could broaden that out.

Speaker Change: So interesting.

Speaker Change: Just a follow up question you mentioned increased.

Speaker Change: Or continuing payer scrutiny on the observation status cases, I wonder broaden that out.

Speaker Change: There's been this discussion about the labor impact and maybe getting some of that in the rates are you still seeing that in your managed care rates youre getting a little help catch up on labor and broader than just two midnight rule how about just.

Kevin J. Hammons: You know, there's been this discussion about the labor impact and maybe getting some of that in the rates. Are you still seeing that in your managed care rates? You're getting a little help catch up on labor and broader than just two midnight rolls. How about just utilization review activity? I know some of that got eased up with the change healthcare cyber attack. But is that all back to normal at this?

Speaker Change: Utilization review activity I know some of that got used up with the change healthcare cyber attack is that all back to normal at this point.

Kevin J. Hammons: Yeah, so in terms of rates, our reimbursement or new contracted rates are coming in for next year pretty similar to where they came in this past year, probably the last two years. So I still believe that some of the incremental labor cost is flowing through. The rate increases we're getting are still about 100 basis points above what we have seen traditionally and, you know, look a lot like what they will look like coming into 2024.

Speaker Change: Yes, so in terms of rates or reimbursement.

Speaker Change: Our new contracted rates are coming in for next year pretty similar to where they are.

Speaker Change: Came in this past year, probably the last two years, so I still believe that some of the.

Speaker Change: Incremental labor cost is flowing through.

Speaker Change: The rate increases, we're getting are still about 100 basis points.

Speaker Change: Above what we had seen traditionally and look a lot like what they look like coming into 2024.

In terms of.

Kevin J. Hammons: In terms of healthcare change, you know, we did not experience a significant disruption related to change, so that, you know, I would say has kind of worked its way through, and we don't have any real lingering impacts from that.

Speaker Change: The change healthcare, we did not experience a significant disruption related to change so that I.

Speaker Change: I would say, it's kind of worked its way through.

Speaker Change: And we don't have any real lingering impacts from that.

Operator: Okay, thanks a lot.

Speaker Change: Okay. Thanks, a lot.

Speaker Change: Thank you and our next question today comes from Ben Hendrix at RBC Capital. Please go ahead.

Operator: Thank you. And our next question today comes from Ben Hendrix at RBC Capital. Please go ahead.

Benjamin Hendrix: Thank you very much.

Tim L. Hingtgen: Thank you very much. Just a quick question to follow up on the growth you've seen on the exchange side. There have been a lot of questions about the fate of the enhanced subsidy in 2026. I wanted to get your thoughts on the impact you've seen from that contribution to growth and exchange volume and then what you think the levers are for maybe retaining some of that coverage, assuming that we do see a kind of a roll-off of those enhanced subsidies beyond 2025. Thanks. Sir Ben, this is Tim. I'll take that one, and Kevin, feel free.

Benjamin Hendrix: Just a quick question to follow up on the growth you've seen on the exchange side been a lot of questions about the fate of the enhanced subsidies.

Speaker Change: In 2020, Thanks wanted to get your.

Speaker Change: Your thoughts on the impact you've seen from that contribution to growth in exchange volume and then what you think the levers are for meaning maybe retaining some of that.

Speaker Change: Some of that coverage.

Speaker Change: Assuming we do see a.

Benjamin Hendrix: Kind of a roll off of those enhanced subsidies beyond 2025.

Speaker Change: Yes.

Tim: Sure. Ken This is Tim ill take that one and Kevin feel free to weigh in in terms of the look forward for the exploration of some of those enhanced subsidies in 2006 as you framed out on a lot of it obviously depends upon the political staying at that particular point in time, so lots of lots of debate and a wildcard.

Tim L. Hingtgen: This is Tim. I'll take that one, and Kevin. Feel free to weigh in. In terms of the look forward for the expiration of some of those enhanced subsidies in 26 June, as you framed out, a lot of it obviously depends upon the political scene at that particular point in time, so lots of debate and a wild card there. From an advocacy standpoint, we remain very active in making sure that, you know, we're telling our story through the Federation of American Hospitals and our own lobbying activities across our state to make sure that everyone understands the importance of, you know, the affordability of the exchange business to make sure we continue with some of the gains we've experienced over the last several years. Again, we can't quite size up what the risk is, but we're very, very involved in making sure that we're advocating for the continuation of that type of funding.

Speaker Change: There.

Speaker Change: I can tell you from an advocacy standpoint, we remain very active in and making sure that we're telling our story to the federation of American hospitals, and our our own lobbying activities across our states to make sure that everyone understands the importance of the affordability of the exchange business to make sure. We continue with some of the gains we have.

Speaker Change: We experienced over the last several years.

Speaker Change: Again, we can't quite size up what the risk is but we're very very involved in and making sure that we're advocating for continuation of that type of funding.

Speaker Change: Thank you.

Speaker Change: Thank you and our next question today comes from Steve Baxter with Wells Fargo. Please go ahead.

Operator: Thank you.

Operator: Yeah, hi, thanks. I have two questions here. I guess, you know, first, it would be great to hear you talk a little bit about the same sort of growth and the volume size we expect in the back end and whether you expect, you know, surgical growth could be better, you know, as you kind of maybe go against some easier comps. And the second question, the other op-ex looks like it took a pretty big step up sequentially on a dollar basis. I would have thought that maybe it could have been Medicaid supplemental payment.

Stephen C. Baxter: Yes, hi, Thanks, two questions here I guess first would be great to hear you talk a little about the same store growth on the volume side, we expect in the back half and what do you expect surgical growth can be better.

Speaker Change: Maybe to go against some easier comps in the set.

Speaker Change: Good question.

Speaker Change: The other opex looks like it took a pretty big step up sequentially on a dollar basis I would've thought that maybe you could have bid Medicaid.

Speaker Change: Supplemental payments within about really seeing that in the revenue per <unk>.

Speaker Change: Is that what's driving up the other opex dollars sequentially. Thank you.

Speaker Change: Yes, let me start with the other opex dollars. So it was up approximately 130 basis points of <unk>.

Kevin J. Hammons: Yeah, let me start with the other OPEX dollars. So it was up approximately 130 basis points in net revenue. A hundred basis points of that increase is related to the supplemental provider tax payments that were recorded this year. Of course, with those, we do get supplemental revenue, and we'll take an increase in provider tax payments, you know, with the additional revenue at any point. But that is what drove up that other operating expense line item.

Speaker Change: Net revenue of 100 basis points of that increase is related to the supplemental provider tax payments.

That's it.

Speaker Change: Were recorded this year of course with those we do get supplemental revenue and we will take an increase in provider tax payments.

The additional revenue.

Speaker Change: At any point so.

Speaker Change: But that is what drove up that other.

Speaker Change: Other operating expense line item there is some timing differences.

Kevin J. Hammons: There are some timing differences, you know, as the provider tax payments do get separated from the revenue recognition. So that can be a little bit lumpy from quarter to quarter. So it's not an exact one for one or two for one or what have you. But overall, the net revenue from these provider taxes did flow through the net revenue line and is in there as well.

Speaker Change: As the provider tax payments do get separated from.

Speaker Change: From the revenue recognition.

Speaker Change: So that can be a little bit lumpy from quarter to quarter.

Speaker Change: So it's not an exact one for one or two for one or what have you, but but overall the net revenue from those provider tax.

Speaker Change: Did flow through the net revenue line and is in there as well.

Operator: And Steve, I'll touch on the volume, the same store volume growth. You know, the key drivers for us are obviously the return on the investment for some of those big projects we've been talking about, including our incremental beds in the Knoxville market and other, you know, bed expansions over the past several quarters in our key markets. We've called out really successful physician recruitment over the last couple of years. We're still ramping up those providers very successfully, which I think led to the strong clinic visits in the first and second quarters of this year, which we believe bodes well for procedural volumes in the latter half of the year.

Tim L. Hingtgen: And Steve, I'll touch on the volume the same.

Speaker Change: And Steve I'll touch on the volume the same store volume growth.

Stephen C. Baxter: With the key drivers for US obviously the return on the investment for some of those growth projects, we've been talking about including our incremental beds in the Knoxville market another bed expansions over the past several quarters in our key markets.

Speaker Change: Called out really successful physician recruitment over the last couple of years and we're still ramping up those providers very successfully which I think led to the strong clinic visits.

The first and second quarters of this year, which we believe bode well bodes well for procedural volumes in the latter half of the year and we also had some really good improvements and capacity optimization length of stay management about a 5% improvement over prior year quarter, which opened up more capacity.

Operator: We also had some really good improvements in capacity optimization and length of stay management, about a 5% improvement over the prior year quarter, which opened up more capacity. Putting all three of those things together, we have our transfer center that can then place more patients in our facilities, so we've got more specialty coverage, more capacity, and the ability to move our inpatient and outpatient business from outlying markets. We had a really good ED admission quarter, good EMS volumes, strong growth in our rehab programs, and our post-acute settings, and as we've already called out, we've had some benefit from the two-bednight rule clarification, as well as the work of our physician advisors, so we believe the fundamentals are solid and something we can build upon in upcoming quarters. Thank you. And our next question today comes from...

Stephen C. Baxter: Putting all three of those things together, we have our transfer center that can then place more patients in our facilities. So we've got more specialty coverage more capacity and the ability to grow our inpatient and outpatient business from outlined markets. We had a really good admission quarter could dms volumes strong growth in our rehab programs are posted.

Stephen C. Baxter: <unk> settings.

Stephen C. Baxter: As we've already called out we've had some benefit from the two midnight rule clarification as well as the work of our physician advisors. So we believe the fundamentals are solid and something we can build upon in upcoming quarters.

Stephen C. Baxter: Okay.

Operator: Thank you. And our next question today comes from Andrew Mok with Barclays. Please go ahead. Hi, this is Eben on.

Speaker Change: Thank you and our next.

Speaker Change: Question today comes from Andrew Mok with Barclays. Please go ahead.

Hi, This is evan on for Andrew.

Evan: All of your peers pickup acute admissions expense expectations for the back half of the year alluded to structurally highest demand just curious to get your views on that and how it relates to your outlook.

Speaker Change: In terms of higher demand in the back half of the year.

Operator: In terms of higher demand in the back half of the year, you know, I think we're seeing demand continue to come back into the healthcare system. Historically, you know, the back half of the year has been slightly better than the first half of the year, and I think our guidance kind of reflects that in terms of revenue and EBITDA being slightly better in the back half of the year.

Evan: Thanks.

Speaker Change: We're seeing demand continue to come back into the health care system.

Historically.

Speaker Change: The back half of the year has been slightly better.

Speaker Change: And then the first half of the year and I think our guidance kind of reflects that in terms of <unk>.

Speaker Change: Revenue and EBITDA being slightly better in the back half of the year heavily weighted to Q4.

Speaker Change: And.

Operator: And, you know, as we've said kind of multiple times over the past quarter, I believe what returned first back into the system kind of post some of the pandemic was government insured patients; commercially insured patients were a little slower to come back in, primarily as a result of some of the inflationary trends and high deductibles and co-pays. And I think the longer we get out, or the longer those patients have been outside the system, the more likely they are that they actually do come back, maybe with their conditions having gotten even a little bit worse, but we're starting to see a pickup in visits and screenings and, you know, checkups and all of that leads ultimately to higher acuity services down the line.

Speaker Change: As we've said kind of.

Speaker Change: Multiple times over the past quarter.

Speaker Change: I believe what return <unk> back into the system kind of post <unk>.

Speaker Change: Some of the pandemic was government insured patients commercially insured patients work, a little slower to come back and primarily as a result of some of the inflationary trends and high deductibles and co pays and I think the longer we get out the longer those patients have been up 5%.

Speaker Change: System.

Speaker Change: The more likely they are that they actually do come back maybe with their conditioning is having.

Speaker Change: Got even a little bit worse, but we're starting to see.

Speaker Change: Picked up and visit and screenings and checkups and all of that leads ultimately to higher acuity services down the line and we are seeing.

Operator: And we're seeing, you know, better balanced growth between commercial and government insured patients than we saw in the early part of last year, and we do expect that to continue through the remainder of the year.

Speaker Change: A better balanced growth between commercial and government insured patients than we saw in the early part of last year and we do expect that to continue through the remainder of the year.

Speaker Change: Thanks.

Speaker Change: Thank you and as a reminder, if you'd like to ask a question. Please press Star then one.

Operator: Thank you. And as a reminder, if you'd like to ask a question, please press star then 1. Today's next question comes from Josh Raskin with Nefron Research. Please go ahead.

Speaker Change: Today's next question comes from Josh Raskin with Nephron Research. Please go ahead.

Operator: Hi, thanks. Just quickly on the cash flow, I'm just curious if there were any timing issues in the quarter and maybe what specifically drove that increase in accounts payable.

Joshua Richard Raskin: Hi, Thanks, just quickly on the cash flow I'm, just curious if there were any timing issues in the quarter and maybe what specifically drove that increase in accounts payable.

Speaker Change: Thanks, Josh.

Kevin J. Hammons: Hey, Josh. You know, the big timing issue in the second quarter really relates to our annual payment of our 401k match. We make that just once a year. It's about a $65 to $70 million payment.

Speaker Change: The big timing issue in the us.

Speaker Change: Second quarter really relates to our annual payment.

Speaker Change: Of our 401K match, we make that just once a year, it's about a $65 million to $70 million.

Speaker Change: Payment.

Kevin J. Hammons: And then in the back half of the year, we start to recoup that as we continue to accrue for that match. It's a non-cash expense for the remainder of the year. So that's always a headwind in the second quarter for us, and so we do expect not only not to have that in the first quarter, but also annual bonus payments. The accruals for both of those items will be helpful in the back half of the year, and then collections always are stronger in Q4, which leads to the fourth quarter being typically our strongest cash flow quarter of the year. Gotcha.

Speaker Change: And then in the back half of the year, we start to recoup that as we continue to accrue.

Speaker Change: For that match it is a noncash expense for the remainder of the year. So that's always a headwind in the second quarter.

Speaker Change: For us and so we do expect not only not to have that in the first quarter. It was annual bonus payments.

Speaker Change: Accruals for both of those items will be <unk>.

Speaker Change: Helpful in the back half of the year and then collections always.

Speaker Change: Our stronger in Q4.

Speaker Change: <unk> leads to a fourth quarter.

Speaker Change: <unk> typically our strongest cash flow quarter.

Speaker Change: The year.

Speaker Change: Got you that makes sense and then just on the volume last quarter I think in patients screened it's a little bit stronger than outpatient and that seemed to slip a little bit. This quarter. So was there something specific that drove that.

Kevin J. Hammons: Gotcha, that makes sense. And then just on the volumes, you know, last quarter, I think inpatient screening was sort of a little bit stronger than outpatient, and that seemed to flip a little bit this quarter. So was there something specific that drove that?

Kevin J. Hammons: You know, I point to a couple things. We continue to make some inpatient capital investments; we opened up a new bed tower, which I believe Tim had mentioned in his comments in Knoxville, that was opened in March, so that is helping drive more inpatient business. Some of our other higher acuity service lines that we've invested in, driving some of the inpatients and then converting some of the observations to short stay admissions is also helping on the inpatient side, but then we are also seeing good growth in outpatient.

Speaker Change: I'd point to a couple of things we continue to make some <unk>.

Speaker Change: Patient.

Capital investments.

Speaker Change: We opened up a new bed towers I believe Tim had mentioned in his comments in Knoxville that was opened in March.

Speaker Change: So that is helping drive.

Tim: More inpatient business some of our other higher acuity service lines that we've invested in driving some of the inpatient.

Tim: And then converting some of the observations too.

Tim: The short stay admissions is also helping on the inpatient side.

Tim: We are also seeing good growth in outpatient our investments kind of vary market by market, depending on where we have capacity needs. We are investing on the inpatient side, where we have available capacity, we're making investments on the outpatient side.

Tim: So we're pretty balanced there as I see it right now we also have.

Kevin J. Hammons: Our investments vary market by market, depending on where we have capacity needs, we're investing on the inpatient side, and where we have available capacity, we're making investments on the outpatient side. So we're pretty balanced there as I see it right now. We also have... another inpatient tower opening up in the fourth quarter in Foley, Alabama, which should also help drive some incremental inpatient visits. Yeah, Josh, this is Tim. I would describe

Tim: Another inpatient tower opening up in the fourth quarter.

Tim: And Foley, Alabama, which should also help drive some incremental inpatient business for US yes, Josh. This is Tim I would describe our growth relatively balanced on the inpatient and outpatient side, there may be some slight fluctuations quarter to quarter, but we target our investments to grow both of those areas of business.

Tim L. Hingtgen: Yeah, Josh, this is Tim. I would describe our growth, you know, relatively balanced on the inpatient and outpatient side. There may be some slight fluctuations quarter-to-quarter, but we target our investments to grow both of those areas of business, I guess I would say, in relative relation to each other. There is some variation by market, but the good, strong outpatient surgery growth that we've referenced earlier obviously was, you know, a specific area that we targeted over the last several years, including with our ambulatory surgery center investments with joint venture partnerships. So we've been really deliberate about making sure we're putting outpatient access where our consumers want it and need it so that we can continue to capture more of the total share of spend in our markets.

Speaker Change: I guess I would say in relative relation to each other there is some variation by market.

Good strong outpatient surgery growth that we've referenced earlier, obviously was specific to a specific area that we targeted targeted over the last several years, including with our ambulatory surgery center investments with joint venture partnerships.

Speaker Change: So we've been really deliberate about making sure we're putting outpatient access where our consumers wanted and needed. So that we can continue to capture more of a total share of spend in our markets.

Unknown Attendee: Alright, thanks so much.

Speaker Change: Alright, thanks, so much.

Speaker Change: Thank you and this concludes today's question and answer session I would like to turn the conference back over to Tim Hansen for any closing remarks.

Tim L. Hingtgen: Thank you. And this concludes today's question and answer session. I'd like to turn the conference back over to Tim Hingtgen for any closing remarks.

Unknown Attendee: And this includes today's question and answer session.

Tim Hingtgen: I'd like to turn the conference back over to Tim Hingtgen for any closing remarks.

Tim L. Hingtgen: Great. Thank you, Rocco, 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.

Tim Hingtgen: Thank you, Rocco. 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.

Tim L. Hingtgen: Great. Thank you Rocco 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.

Tim Hingtgen: Have a great day. Thank you.

Speaker Change: Thank you. This concludes today's conference call. We thank you all for attending today's presentation.

Operator: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Unknown Attendee: This includes today's conference call. We thank you all for attending today's conference call.

Unknown Attendee: Thank you all for your presentation.

Unknown Attendee: You may notice my concerns and have a wonderful day.

Speaker Change: May now disconnect your lines and have a wonderful day.

Unknown Attendee: Thank you all for joining us. Thank you.

Yeah.