COMMUNITY HEALTH SYSTEMS INC Q3 FY2024 earnings call

• Impact of hurricanes: Hurricanes Helene and Milton impacted communities served, with three facilities evacuated and closed, especially ShorePoint Health System, Physicians Regional Healthcare System, and Tennova Newport. • Strategic investments: Knoxville North Tower expansion opened and ramping up well, new patient tower and surgical capacity in Baldwin County, Alabama opening soon, 18 freestanding ED locations now operating, and acquisition of Carbon Health's 10 urgent care locations in Tucson, Arizona expected to close this quarter. • Expense management: Labor costs had average hourly wage rate increase 3.9% year-over-year, contract labor spend down 24% year-over-year; supplies expense improved on same store basis; medical specialist fees increased but in source platform expanding. • Clinical quality and safety: Achieved nearly 20% improvement in risk adjusted mortality index, nearly 24% improvement in patient safety and adverse event composite from CMS, and 27% year-over-year improvement in precursor safety event rate. • ERP implementation: All subsidiaries up and running on new financial and supply chain platforms, on track to complete ERP implementation by first quarter of 2025.

Net operating revenues for the quarter were $3.09 billion, up slightly year-over-year on a consolidated basis. On a same-store basis, net revenue increased 5.1%. Adjusted EBITDA for the third quarter was $347 million compared with $360 million in the prior year period. Same-store volumes improved with a 2.4% increase in admissions and a 2.6% increase in adjusted admissions over the prior year quarter. Surgeries improved 3.1% led by growth in lower acuity outpatient cases. However, the service line mix was less favorable than expected with overall case mix index down 60 basis points from prior year, reflecting declines in both the surgical mix and the surgical CMI. Hurricane Helene and Milton impacted several facilities, with ShorePoint Health Punta Gorda remaining closed due to extensive damage, impacting fourth quarter results.

• 2024 adjusted EBITDA is now anticipated to be $1.5 billion to $1.54 billion, not including contribution from potential new supplemental payment programs or future divestiture activity. • Initial estimate of potential benefit from new or expanded state directed payment programs in New Mexico and Tennessee is an aggregate EBITDA benefit of approximately $100 million to $120 million annually, pending CMS approval. • While not providing formal 2025 guidance, initial estimate of benefit from state programs is shared.

• Hurricane impact: Continued disruption to operations and financial results due to hurricanes, with ShorePoint Health Punta Gorda closed for remainder of year impacting fourth quarter. • Payer denials: Aggressive tactics by payers leading to doubling of denials in the quarter compared to prior year, particularly in Medicare Advantage book, creating approximately $10 million headwind. • Insurance claims: Uncertainty in timing of business interruption insurance reimbursement for hurricane-related property damage and disruptions.

Q: Brian Tanquilut with Jefferies asked about the DPP and EBITDA guidance, including net of provider taxes and bridge from EBITDA cut to free cash flow cut.

A: Kevin Hammons responded that the $100 million to $120 million is net of provider taxes, and the EBITDA cut is due to Q3 miss, hurricane impact in fourth quarter, and denials. Cash flow is impacted by slow adjudication process and timing of asset sale proceeds.

Q: A.J. Rice with UBS inquired about the EBITDA guidance change, hurricane impact in fourth quarter, and operational changes related to MedMal expense.

A: Kevin Hammons said about $18 million of the $40 million change is Q3 miss, remainder is hurricane impact and denial impact, and MedMal expense adjustment doesn't materially impact go-forward run rate.

Q: Andrew Mok with Barclays asked about the timing of denials materializing, combatting denials, and broad-based activity across payers.

A: Kevin Hammons and Tim Hingtgen responded that denials materialized throughout the quarter, continued to ramp up, are relatively broad-based, and the company has physician advisor coverage and robust appeals capabilities.

Q: Ben Hendrix with RBC asked about parsing $22 million EBITDA guidance in fourth quarter, impact of acuity softness, and drivers of it.

A: Kevin Hammons said more than half is hurricane impact, denial impact similar to Q3; Tim Hingtgen explained acuity softness was due to site of care migration of total joints to outpatient, softness in certain spine and CVT/Vascular services, but clinic visits were strong indicating timing issue.

Q: Stephen Baxter with Wells Fargo inquired about 2024 revised guidance as a jump-off point, lingering hurricane disruption, and impact on Q1/Q2.

A: Kevin Hammons and Tim Hingtgen mentioned divestitures, potential DPP program approval in 2025, hurricane disruption insurance settlement timing, and continued progress in strategic investments.

Q: Brian Tanquilut with Jefferies asked about revenue per adjusted admission outlook and valuation of divestitures.

A: Kevin Hammons said opportunity to grow revenue per admission with acuity recovery, favorable Medicare rates, commercial contracting increases, and Medicaid DPP programs; divestitures are on track with 10x multiple consistent with past valuations.

Q: Joshua Raskin with Nephron Research asked about IV shortages impact, exchange admits percentage, and impact of Medicaid reverification end.

A: Miguel Benet said IV shortages not a major issue as they partner with BD; Kevin Hammons stated exchange admits are roughly 7% of total, and no material change recently but picking up some additional exchange business as states move people off Medicaid roles.