Community Health Systems Inc – Competitive Landscape & Long-term Plans

Could you discuss CHS’s [Community Health Systems’] background and recent history? I know that you’ll touch upon its 2014 acquisition of HMA [Health Management Associates]. Where is the company today, where is it going and what past decisions might have led to its current positioning? What might have caused the company to play defence vs offence? HCA Healthcare has done a great job on the ambulatory side and has played a lot of offence over the years. Tenet also has a story with its ambulatory position and 2021 acquisition of SCD [SurgCenter Development].

CMS [Centers for Medicare and Medicaid Services] has been driving the migration of procedures that previously were on an inpatient-only list, meaning they weren’t allowed to be done in the outpatient setting. It removed hundreds of procedures from that list, including many profitable ones. Those procedures now can be performed in the ASC [ambulatory surgical centre] setting. ASC executives have talked about this being a USD 60bn opportunity, referring to the total potential revenue moving from the inpatient to the outpatient. How should CHS’s CEO position the company to face the challenges CMS is presenting? Could you discuss the leadership change at CHS? What do you think of the leaders now in place and how they’ve been steering the ship? Where do they need to steer it?

CHS has been unable to build a meaningful ASC franchise, which is why we started by discussing the HMA acquisition. CHS was unable to de-lever appropriately. The company did the Quorum spin-off, which was challenged. You said perhaps CHS wouldn’t have sold these hospitals if it was in another situation. I’m not so sure that wasn’t the right decision with Quorum, but the fact of the matter is CHS is a community hospital system. In a recent Interview [see US Hospitals – Purchasing Trends & Leakage Strategy – 29 March 2022], the writing seems on the wall that the smaller hospitals that serve these communities are the ones probably most at risk vs the large players that might be able to backfill the operating room revenue. Would you agree with this?

CHS’s consolidated net inpatient revenue as a percentage of total net operating revenue was 48.7% for Q4 2021, down from 49% in Q4 2020. Therefore, the majority of net operating revenue – 51.3% – was actually in the outpatient setting. Are you surprised with this revenue split given the company hasn’t really created much of an outpatient footprint? Could some confusion arise when you think about hospital outpatient vs the ASC setting, meaning that the outpatient revenue mix isn’t representative of a strong ASC strategy? How does that change your thinking of CHS, if at all?

When we discussed inpatient vs outpatient mix, you said you weren’t surprised that CHS splits 50/50 as it’s a community setting and not huge hospitals. The referral channel is important, and we can’t force physicians to refer into the network, but physicians employed by CHS aren’t helping the company by referring out of network. What are some interesting ideas CHS can employ – that won’t face legal scrutiny – to help address the severe problem of leakage outside of network? If we’re looking to save profitability as best we can in a challenging situation – and I’d say CHS is challenged by the types of hospitals it operates – what can it do with its physician base to fight the good fight?

It’s interesting you talk about having discussions with physicians to try and persuade them to refer into the network. A fairly effective use of dollar spend might be networking events to introduce in-network physicians to each other so that they can develop relationships. This leadership exercise might be a very elegant and simple solution that helps the referral pattern. What are your thoughts on this?

CHS has gone from 89 hospitals to 83 YoY so we’ll focus on same-facility metrics. The company’s admissions on a same-facility basis were down 3.9% YoY, and adjusted admissions were up 1.7%, so not great but not bad either. Do you feel, with the pandemic, there’s still a bolus of deferred surgeries? Do you believe there’s upside to all hospitals, including CHS, from people finally getting out and seeking proper medical treatment?

CHS’s same-facility occupancy rates went from 49.8% in Q4 2020 to 51.5% in Q4 2021, so a very good trend, and we all know the importance of maintaining occupancy rates. In fact, driving occupancy rate higher can drop a lot of earnings to the bottom line as you generate operational leverage. That said, it’d be interesting to compare CHS’s occupancy rates to those of other hospitals such as HCA and Tenet. Are you surprised occupancy is still that low? Is this a permanent negative, because of how CHS operates in the community vs urban setting, or is it highlighting a silver lining with the potential for occupancy rate improvement?

There’s this back and forth between managed care organisations and providers, because CMS is underpaying for services. In fact, there are a number of procedures in the hospital setting for Medicare and Medicaid beneficiaries where the hospital loses money, because the reimbursement is so low. The providers then tell the managed care organisations they need more money – in effect, having managed care subsidise CMS’s underpayment. Managed care is getting tired of passing that on and raising rates on clients. However, things like the No Surprises Act shift even more power to managed care, so how do you see this playing out? As this threatens rural and community hospitals that can’t backfill with higher-acuity, lucrative procedures, do you see a saving grace coming from congressional representatives as they look to boost payments to these community hospitals?

HCA’s occupancy rates were 70.2 % for Q4 2021 and 70.6% for FY21 vs CHS’s 51.5%. Do these rates represent real attractive upside in terms of what CHS could do, or do they represent a long-term problem because of the profile CHS operates in?

The nursing shortage through the pandemic is likely going to persist – there seems to be no end in sight to the supply-demand imbalance. We also have an ageing out of nurses as they retire. A lot of nurses have been stressed out and said enough is enough. There’s been a lot of reliance on premium or contract labour. I saw this most with Tenet, whose premium spend rate went from USD 50m to USD 120m, around 300 basis points of margin compression. In the same environment, CHS’s salaries, wage and benefits expense went from 43.5% to 41.1%. Is it the case that some of CHS’s staff are more loyal because of where it operates, and it therefore doesn’t have to rely on the same amount of premium labour? Alternatively, has CHS been so focused on cost containment that although it currently looks good in terms of mitigating these expenses, it could come back to bite the organisation?

You said, “If you’re looking for a positive lining, I have one.” Could you share that? Do you have a final message?