Community Health Systems, Inc. Aktie

Good day, and welcome to Community Health Systems' Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

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

Thank you, Bailey. Good morning, and welcome to Community Health Systems' Second 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 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 discuss today will exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses and expense for employee termination benefits and other restructuring charges.

With that said, I'll turn the call over to Kevin Hammons, Chief Executive Officer.

Thank you, Anton. Good morning, everyone, and thank you for joining our second quarter 2026 conference call and for your continued interest in CHS. Before we get into the call, I want to acknowledge the ongoing commitment and effort of all of our teammates and thank them for the work they are doing toward advancing our vision to make the health care experience exceptional for our patients, our communities and each other.

I am proud to say that in the face of a dynamic operating environment, we have continued to make progress on our top priorities of improving quality, physician experience, patient experience and employee satisfaction. In addition to improving leapfrog safety grades and CMS star ratings that we discussed on last quarter's call, which included 12 of our hospitals achieving a Leapfrog A grade and approximately 70% achieving Leapfrog A or B grades. We are proud of the recognition coming in from other noteworthy sources. For example, earlier this month, our Lutheran Hospital in Fort Wayne, Indiana was awarded the American College of Cardiology's Heart Care Center National Distinction of Excellence, the only hospital in the state and one of only 100 hospitals across the country to receive this designation.

Also, several of our hospitals were recognized by CMS for achieving 0 hospital-acquired infections, some of the nation's best performance in this area. And many others received recognition and designations reflecting the quality care we provide to our patients. These recognitions underscore the significant progress our clinical teams have driven across multiple measures of safety and quality over the past few years, including record achievement in risk-adjusted mortality index, sepsis mortality and hospital-acquired infection rates. We are seeing positive movement in patient experience surveys and in the areas of employee satisfaction and physician experience.

The record response rates to our recently completed employee survey shows that we have a very engaged employee base even as we recognize that we have significant work still to be done. Our ability to continue advancing in each of these areas will drive enhanced financial performance over time and long-term value creation for our organization and our shareholders.

Turning to our operating performance for the second quarter of 2026. Adjusted EBITDA was $330 million compared with $380 million in the prior year period on a 9.8% decline in net revenue, primarily reflecting a smaller prior period benefit from newly approved state-directed payment programs as well as divestitures completed over the past 12 months. Results for the quarter include the benefits from recently approved Medicaid state-directed payment programs in Indiana and Florida, which were offset by a prior period adjustment to the Arizona state directed payment program and an unexpected increase in uninsured volumes and continued softness in demand for elective surgical procedures among commercially insured patients, which we attribute to continued consumer insecurity related to geopolitical instability and inflationary pressures.

Same-store net revenue increased 2.4% over the prior year period. Same-store adjusted admissions increased 2.9%. However, approximately half of that volume growth was driven by uninsured visits with minimal related net revenue. This factor, together with a lower surgical versus medical mix was more than enough to offset the rate gains from the new state-directed payment programs, resulting in a 0.5% decline in net revenue per adjusted admission for the quarter. We continue to believe that the non-ACA-related payer mix and service mix challenges that we experienced in the first half reflect a temporary disruption in demand for health care services in our markets.

And in fact, we were encouraged by the improving volume and surgical trends we witnessed exiting the quarter. However, as we consider deteriorating consumer confidence in the markets we serve, economic impacts from escalating hostilities in the Middle East, along with the softer surgeries and unfavorable payer mix we experienced this year-to-date, we believe it is prudent to be more cautious about the second half of the year and therefore, adjusted our full year outlook accordingly.

Before handing it over, I want to reiterate how proud I am of the progress we are making as an organization and the focus on our top priorities, which we believe will help us navigate a dynamic operating environment and emerge position for long-term success and improved financial results.

At this point, I'll 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 second quarter of 2026, financial results came in below our internal expectations. The company continued to execute well on the controllable aspects of our business, including strong cost controls, demonstrated further progress on our top priorities and saw sequential improvement in overall volume trends. However, service and payer mix did not improve as expected, reflecting continued softness in elective procedures, along with higher uncompensated care, both of which drove lower margins.

Adjusted EBITDA for the second quarter was $330 million with a margin of 11.7% versus 12.1% in the prior year period. Results include approximately $40 million to $45 million in combined EBITDA contribution from the recently approved Florida and Indiana state directed payment programs that were not in our previous guidance. Of this amount, approximately $20 million to $25 million related to prior periods. However, a portion of this was offset by an approximate $15 million reduction in the Arizona state-directed program because of the prior period true-up.

Same-store net revenue for the second quarter increased 2.4% year-over-year. Same-store inpatient admissions increased 1.9% and adjusted admissions increased 2.9%. Meanwhile, same-store net revenue per adjusted admission declined to 0.5% as the rate benefit from new state directed payment programs was more than offset by unfavorable shifts in payer mix and service mix. As Kevin previously noted, approximately half of the growth in adjusted admissions during the second quarter was from uninsured patients. And similar to other operators, we experienced continued soft demand in commercial elective procedures. Same-store surgeries declined 0.1% with a notable decline of 3.8% in inpatient surgeries.

On the cost side, we performed well with a 0.3% increase in same-store operating expense per adjusted admission. Labor cost was well managed once again with same-store average hourly rate up approximately 1.1% year-over-year on a same-store basis and same-store contract labor spend down 5.6%. However, salaries and benefits expense as a percentage of net revenue increased 100 basis points year-over-year on a same-store basis due primarily to increased physician employment. Supplies expense was well controlled, declining 70 basis points year-over-year to 14.2% of net revenue on a same-store basis, reflecting both the decline in elective surgical volumes and continued improved procurement under our ERP.

Medical specialist fees meanwhile increased approximately 19% year-over-year on a same-store basis and represented 5.6% of net revenue, which was up from 4.8% in the prior year period and outpaced our forecast for 5% to 8% growth. Anesthesiology and radiology continue to be the largest pain points in this regard. The increase in anesthesia specialist fees is primarily due to higher salary subsidies from lower net revenues resulting from fewer surgeries. The increase in radiology fees is primarily due to an increase in imaging volumes.

Cash flows from operations were $87 million for the second quarter or $143 million when adjusted to exclude cash taxes paid out of divestiture proceeds, improving significantly from the use of $297 million in the first quarter. Several of the items that affected the first quarter cash performance improved or reversed as expected, including improved Medicaid state directed payment cash flows, less interest paid and no annual performance bonus payments in the second quarter. In May, we completed a tender offer using proceeds from recent divestitures to repurchase approximately $368 million of the 4.75% Senior Secured Notes due 2031 and $231 million of the 10.875% Senior Secured Notes due 2032.

The company's leverage at quarter end was 6.7x versus 6.6x at year-end 2025. At quarter end, we had no amounts drawn on our ABL and our next significant maturity is in 2029. During the quarter, we completed the previously announced divestiture of 4 hospitals in Arkansas for $110 million in cash and also completed the previously announced acquisitions of majority ownership percentages in Surgical Institute of Alabama in Birmingham and South Anchorage Surgery Center in Anchorage, Alaska. These acquisitions are strengthening our positions in core markets and are meeting our expectations for operating and financial performance thus far. We will continue to evaluate opportunities for growth investments across each of our core markets.

As noted in last night's press release, we are updating our financial guidance for 2026. Specifically, we now expect net revenue to be $11.4 billion to $11.6 billion and adjusted EBITDA in a range of $1.3 billion to $1.375 billion. The revised ranges reflect several puts and takes, most notably the full year's benefits from new Medicaid state directed payment programs in Georgia, Indiana and Florida, which are more than offset by increased headwinds from macroeconomic factors and disenrollment from Affordable Care Act plans.

On the second point, when we set initial guidance for 2026 in February, we had to make certain assumptions regarding member disenrollment rates, plan switching and overall patient behavior due to the loss of enhanced premium tax credits. Through the first half of the year, the impact to net revenue has tracked in line with our previous expectations. However, based on experience to date, we've updated our estimate of how many of these disenrolled patients are continuing to come to our hospitals, which is driving higher cost to provide care with minimal related net revenue. With our revised guidance, we are assuming a similar impact in the second half, along with continued softness in elective surgery volumes, resulting in lower midpoint for adjusted EBITDA.

This concludes our prepared remarks. So at this time, we will turn the call back over to the operator for Q&A.

[Operator Instructions] Our first question comes from Ben Hendrix with RBC Capital Markets.

This is Michael Murray on for Ben. I believe you mentioned a $20 million headwind related to the EPTC expiry in the quarter and guidance contemplates a similar run rate for the remainder of the year. What gives you confidence that the EPTC headwind doesn't worsen through the balance of the year, given that 4Q is typically your highest margin quarter, and we're seeing a higher mix of bronze plan selections with very high deductibles?

Yes. This is Jason. I'll start and then Kevin can jump in. So for the full year, just to clarify for everyone, we had initially estimated that the net revenue impact from HIX disenrollment would be between $90 million and $110 million and the adjusted EBITDA impact would be between $20 million and $30 million. Coming out of the first quarter, both of those assumptions -- the experience is right in line with those assumptions. And then in the second quarter, we saw a more significant decline in our HIX volumes and obviously a correlation with our increase in self-pay.

So we estimate the quarter impact on the EBITDA front to be $20 million negative in the quarter and about $25 million for the first quarter, so $25 million for the first half of the year. We do think the back half of the year looks like the second quarter. So at the midpoint, around $20 million-ish. The volume declines are consistent with what we expected in HIX and the revenue is still in our range. We're assuming that a majority of the volume decline in HIX is offset by -- or is also resulting in an increase in self-pay.

So I feel comfortable with our increased range, which now sits between $50 million and $75 million of impact on an annual basis. And I think the -- that's pure self-pay. So I think the people who have maybe middled down or tiered down are behaving more like any other person that has commercial plans that have a higher deductible. And I think their behavior will mirror more of that group.

Our next question comes from Brian Tanquilut from Jefferies.

Maybe, Jason, as I think about the guidance that you gave, given what we've seen in the first half of the year, could you help me bridge to that guide as we think through the back half of the year? And anything you'd call out in terms of moving pieces that we need to figure or factor into our models for Q3 and Q4 separately?

Yes. Thanks for the question, Brian. I'll start. So if you talk about from the midpoint of our initial annual guidance in February was $1.415 billion. The miss in the first half of the year versus the expectations when we developed that guidance is between $60 million and $65 million. So we reduced the annual guidance by that amount. And we assume a similar impact in the second half of the year. So we took the second half down by $60 million to $70 million. And both those reductions are inclusive of the higher estimated HIX impact that I just mentioned, the $50 million to $75 million.

And then on the benefit side, we layered in the back half of the year DPP benefit that we expect from the plans in states that were not accrued when we set our initial guidance that weren't factored in, that's Georgia, Indiana and Florida. And for Florida, just to unpack that a bit, the amount that we recognized for Florida in the second quarter was $20 million to $25 million, and that related to the period from October '24 through September '25. We did not continue to accrue at that higher rate for the plan year 2026, which runs from -- I'm sorry, October '25 through September '26 because the plan hasn't been submitted to CMS yet, and there's some changes in the waivers that from what was previously approved.

So we think it's prudent to kind of wait to see what's ultimately submitted to CMS and if there's -- how quickly CMS takes to review and ultimately approve the plan. However, we did factor in the possibilities for the Florida '26 into our guidance. At the low end of our guidance, we assume that the '26 year is not able to be recognized by year-end. At the high end, we assume that we are able to recognize the Florida 2026 and the benefit is consistent with the amount that we just recognized in the second quarter.

Understand. And then maybe, Kevin, as I think about the guidance cut, I mean, I understand the payer mix headwind here. But when I think about the free cash flow or the operating cash flow adjustment that you made, it looks to be a little bigger. So just curious how you're thinking about the drivers of that and what you're able to do? I know some of that is AR related. So just curious if you can share with us some of the challenges you're facing on the cash flow side that's making it look worse than the payer mix headwind that you called out in the EBITDA line.

Sure. Thank you, Brian. One of the challenges that we're experiencing on the cash flow side is really the slowdown of payments by the payers, not only just slowing down in the normal course, but they're now auditing more claims before they pay them and having additional record requests. Oftentimes in the past, those things occurred after payment. And then if there was a problem, there would be some true-up later.

But now the behavior of the payers is such that they're doing those exercises prior to payment, which just further slows down the payment process. So our AR is growing accordingly. That would, assuming that continues forward, it's we ultimately get the cash, but it's kind of a onetime slowdown in payment. So our AR days are growing. And we've seen some of the payers even talk publicly about increasing their days in AP. So we're on the other side of that equation with increasing days in AR.

So that said, we don't believe it's necessarily a collection issue. It's just a timing issue. And once we anniversary that, then we're back on a normal run rate.

Our next question comes from A.J. Rice with UBS.

Just maybe to drill down on what you're seeing in the surgical volumes a little bit more. I know you called out a couple of service lines. Would you say that the surgeries that you're seeing the softness in or surgeries that traditionally are viewed as more elective and postponable procedures? Is that what you're seeing? And then can you break it down between -- is this a phenomenon of what you're seeing around the public exchanges? Or is it broader than that? And then also another element of it is you have -- I know you have stand-alone ASCs versus your hospital surgery inpatient, outpatient. Is there any distinction between what you're seeing in the freestanding surgery centers with what you're seeing in the hospital-based surgeries?

So thanks, A.J. This is Kevin. I'll start on this one. So definitely, the procedural softness and service line softness is trending towards more elective procedures. Orthopedics being the largest decline. So your hip and knee and shoulder replacements, those are typically procedures that people can delay or at least defer for periods of time, get a cortisone shot, maybe continue to try to manage the pain and manage through some rehab, at least for a period of time. We are also seeing some softness in cardiac surgeries.

And intuitively, those seem less elective, but they really are more elective. And as people defer visits to their cardiologists and defer some of their screenings, oftentimes, those procedures also get deferred. We saw that during COVID when there was a significant decline, again, not intuitive, but there's a significant decline in cardiac procedures during COVID that were hard to explain, but we're seeing some of that as well.

On the inpatient/outpatient, we're seeing bigger declines in the inpatient side, but we are -- and overall, we saw some increase in outpatient surgeries. So our surgery centers are picking up, but it is kind of lower acuity surgeries and not the orthopedic and some of the cardiac procedures that you would normally have expected. We are seeing really good increases in clinic visits and in things like orthopedic MRIs. So those continue to outpace prior year at a pretty significant rate, which would suggest we're capturing the patients. They probably still need the procedures, but those visits and screenings are not translating into surgeries, which lend us to continue to believe or support our belief that it's more of an economic decision that people are delaying the follow-on procedures.

Okay. And then a follow-up, maybe just ask about your uncompensated care. I know you gave the percentage of uncompensated care as a percent of revenue up significantly year-to-year. I wondered if -- do you have any color on the percent of your admissions that are uninsured this year versus last year? And also, I was wondering, did it step up significantly from Q1 to Q2?

Sure. So we were approximately 5% of our visits, just shy of 5% of our visits prior year were uncompensated or self-pay patients. And this year, we're about 110 basis points higher to just over 6% of visits. So roughly a 20% increase or so in self-pay visits.

And was that different than first quarter materially? Or was first quarter sort of similar to second quarter?

Second quarter was greater than first quarter. We did not see that big of an increase in the first quarter.

Our next question comes from Jason Cassorla with Guggenheim.

Maybe can you just walk through some of the mechanisms on the medical specialist fees, right? You've done a lot of work there to in-source to help offset industry-wide pressures. But it does seem like these costs will pressure you regardless of volume trends are favorable or unfavorable to your enterprise. So I guess just like any updated thoughts on the medical specialist fee backdrop, like if you can revisit some of those subsidies, if volumes remain pressured or anything else to help offset the growth there would be helpful.

Yes. So the most significant component of that anesthesia that does have the income guarantee. So when our -- when volumes are down, surgical volumes, in particular, and anesthesiologists are not collecting or generating as much revenue since they're guaranteed the minimums in the contract, and we have to pay the subsidy. So that one is definitely volume-based to some extent. And then that's where we are seeing the significant amount of increase. And I would say that we are doing several things. And in fact, we have in-sourced certain anesthesiologists and a few other specialties in certain locations.

And in some of those cases, when we in-source, that may mean that we're not just employing some of the docs, but we're also contracting with some on a 1099 basis. And when that happens, we end up with -- we get the professional fee and revenue, but the payment to the docs for providing the services still goes through medical specialist fees. And so that impact is -- was about $3 million of net revenue in the quarter versus the prior year and about $6 million year-to-date. So there's a little bit of offset grossed up in revenue, but it's still outpacing what we had expected. And Kevin, I don't know if you have any more flavor.

No, I think you covered that.

Okay. Got it. And maybe could you guys comment on the -- your thoughts around the proposed Medicare OPPS rule, the outpatient rule, and focus more so on like the 340B proposal, the provision in there, if that were to be finalized, like how you're balancing better like OPPS rates against -- from that provision against maybe any impacts to potential divestitures or otherwise? Just any thoughts on the proposed rates would be helpful.

Sure, so the for-profit hospitals did receive a pretty significant, I think it's close to 10.5% bump in the outpatient rates effective January 1st, 2027. And yes, we still, the for-profit hospitals who had received a benefit during the Trump administration's first term, had received some additional money that was taken out of 340B, we are faced with having to pay that back. So that payback begins next year. So that payback of the former 340B money will offset a pretty significant portion of that bump, at least for a few years.

All that said, we think the net increase in outpatient rate for 2027 should be around 5%. So it's still a much better improvement in Medicare outpatient rates than we have been getting over the past several years, if not the best ever, even on a net basis. And then once the full 340B amount is paid back, then that base rate on the outpatient side has been elevated. So we view this as a very positive.

Our next question comes from Steve Baxter with Wells Fargo.

Just to kind of ask for a little bit more detail on the payer mix and service mix challenges. I guess, would you say that those are largely or almost entirely driven by what you're talking about in terms of the exchange dynamics and the commercial elective procedures? Or would you say that, that kind of extends maybe into the medical side of the business as well? Like wondering if you could talk more about what you're seeing for employer-based coverage and demand there and maybe how that compares to the demand growth you're seeing in Medicare and Medicaid in the quarter?

Yes. I think the demand in Medicare continues to be about the same or continue to actually increase. So we're seeing increase in Medicare-related population. Commercial, although we've seen some reduction in commercial business, it's been a smaller percentage. I think the increase in uninsured is primarily coming from the exchange business. You don't have complete visibility into that, but it seems to be the most direct correlation.

There is also a decline in Medicaid. And we're hearing somewhat anecdotally, but more difficulty in some demographics not wanting to sign up for Medicaid or having more difficult time signing up for Medicaid. And so there's been some decrease in Medicaid volumes, which could also be contributing to some of the increase in uninsured or self-pay. In terms of kind of the softness in surgeries, we think that is primarily commercially insured patients and as a result of kind of economic headwinds with co-pays and deductibles.

So we're not seeing the decline in the emergency room business, which is where the primarily the amount of uninsured care that we're seeing our self-pay business is coming through the emergency room. It's not the pressure that we're seeing on surgeries.

Okay. And then if we were to set aside the exchange headwinds in the back half and the moving parts on some of the Medicaid dollars, like how should we think about what guidance assumes in terms of like underlying performance? Do you assume these dynamics improve at all throughout the balance of the year? Or would you say you've reflected something closer to what you saw in the first half now?

Yes. Baxter, this is Jason. It really does look similar to the first half. We -- in the range, we do expect on the higher end, there could be some more growth in the second half as that commercial volume comes back in. They meet their deductibles into the third quarter, early fourth quarter and then try to get the procedures done before the year-end. The risk, which is more reflected on the lower end is that they don't get to the point where they meet those deductibles this year, and they continue to defer those elective procedures into next year.

I think it's fair to say that our back half range assumes a similar decline as we experienced in the first half, offset by then some of the approved state directed payment programs.

Our next question comes from Andrew Mok with Barclays.

I think I heard at one point that the exit rate on surgeries was encouraging. Can you elaborate on that comment and how that's informing your back half outlook?

Sure. As we just track kind of through the second quarter, June was our best month of the quarter. We did see a positive year-over-year improvement for the month of June. So despite kind of negative or slightly negative on surgeries for the quarter, we were positive year-over-year in the month of June.

Great. And then, I appreciate the comments that consumer insecurity is driving lower elective surgeries overall. I think that's heard both sort of like macro concerns around gas prices as well as deductibles. Like is there a view internally on like what's the bigger driver of this affordability issue?

Yes. I think -- so a couple of things I'd point to. And we look at kind of the consumer confidence index, which has trended down. It was low in March, leading -- as being a leading indicator, which played out in the second quarter, continued softness. And that consumer confidence index continued to deteriorate through the second quarter, and I believe it's at a 12-month low right now. It's down around the lows of when we were during COVID. So as we look at that and look at kind of the very near-term impact, I would say that we view that as a little bit of headwind.

What's contributing to that, a couple of things. Gas, the price at the pump, as we saw for what we thought may have been some improvements in Q1 in consumer confidence as some of the hostilities in the Middle East broke out, and gas prices started to go up in that March and April time frame, I think that is having a big impact when you think about our communities and the median household income, which is about $64,000 compared to $81,000 national average, our communities sit below -- well below the national average. And as gas prices go up, that has a pretty significant impact on disposable income for those households and health care seems to be one of the first things that people will delay or at least attempt to delay if they can.

So I would say that, that's probably one of the biggest drivers. I'd also point to as we have a new Fed chair coming in, at least early in the year, we were expecting rate decreases throughout the year. And now we're looking at the potential of a Fed rate increase. I think overall in the market, that's probably having a little bit of a muted impact. And we're seeing higher inflation. The price of groceries is not coming down like we had anticipated earlier in the year, again putting pressure on household incomes.

Our next question comes from John Ransom with Raymond James.

One thing we've been focused on is the silver to bronze migration in the ACA. Is that something that you saw in the quarter? And more broadly, has the collectibility on self-pay deteriorated? Or do you think that's possible?

We don't have complete visibility into what plan somebody may have elected -- had elected or been under in previous year versus what period they're under this year. I do think we are seeing more business in the bronze plan this year than we have in the past. But we don't have, again, complete visibility, at least on a patient-by-patient basis to really analyze that. In terms of collectibility of self-pay, we only collect a few pennies on the dollar anyway. So there's no real room to get much worse on that. We're effectively not recognizing any revenue on that self-pay business.

Okay. And then just the comment on the ACA, I think initially, you said like $100 million-ish revenue and $20 million to $30 million of EBITDA. So the attach rate was 25%, whereas some of your peers talked about much higher decremental margins. I think Tenet was close to 100%. Can you just talk about kind of your current thinking if you lose $100 of ACA revenue, how does that translate into EBITDA losses?

Yes. Our initial guidance assumed that the folks who lost coverage, lost insurance from the credits expiring stayed out of the health system in reality or to a large extent, stayed out. And in reality, we're seeing that those folks who relied on those enhanced premium tax credits to afford exchange insurance plans are continuing to utilize the health system largely in a similar fashion and rate than they did before. These population people were high ER utilizers, and we've seen that trend. We underestimated how much of an impact that, that would have -- how many people would continue to come to our health system.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Hammons 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Community Health Systems First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

Thank you, Bailey. Good morning, everyone, and thank you, 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 discuss 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 Hammons, 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 health care 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 health care experience exceptional. And as we do, more patients will choose our health systems and will 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. This 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 2 de novo ASCs in Birmingham and Foley, Alabama. These targeted investments extend CHS' 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 investment 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 health care 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 delayed 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 are 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' 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 3 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. Investment CHS has made to expand service lines, add new access points, recruit positions 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 backdrop. Similar to our hospital peers and others in the health care industry, we continue to monitor developments related to Medicaid supplemental payment programs in the Rural Health Transformation Fund as well as ACA enhanced premium tax credit expiration 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' 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 payer mix were below expectations, including noteworthy softness in elective 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 impact from winter storm firm. Results included approximately $25 million in contribution from Georgia state directed payment program that was approved in mid-March, approximately 2/3 of which related to prior periods since the program was retroactive 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 admission was up 3.7% year-over-year, including the benefit from new state-directed payment programs, partly offset by unfavorable payer mix shift.

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 physician employment consistent with the investments Kevin highlighted as well as continued in-sourcing, which we believe position the company well to capture share of patients in our markets return to the health care system.

Supplies expense remained well controlled, declining 60 basis points year-over-year to 14.9% of 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 1/4 of the year-over-year decline was due to core operating performance, but 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 in gross proceeds and in early February, used a portion of the proceeds to redeem $223 million of the 2032 notes at 103 via a special call provision.

As Kevin previously noted, the company's leverage was down slightly at quarter end to 6.5x versus 6.6x at year-end 2025 and down from 7.4x 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 direct repayment program, the pending divestiture of our Arkansas operations and the ASC investment, we believe these are captured within the initial range for adjusted EBITDA of $1.34 billion 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 direct 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.

[Operator Instructions] Our first question comes from Brian Tanquilut from Jefferies.

This is Meghan Holtz on for Brian Tanquilut. 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 comps get easier in the second half and you guys hopefully recover some volume.

Sure, I'll start off and then Jason, feel free to jump in. The volume pressures really saw were across the board. I wouldn't call out any specific markets that were worse than others. So 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. So that leads us to believe a couple of things.

One, it's macroeconomic issues because those are the individuals with high deductibles and the more aggressive behavior by the managed care companies is we understand, at least anecdotally, that there's kind of been -- they've turned the dial up on denying preauthorizations in more cases. So oftentimes, those patients are not even getting to us because of that.

Yes. Maybe I would 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. 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. This is Jason. Yes, there are several items that are timing related that we expect to flip through the rest of the year. I'll name a few here. There's about $90 million of Medicaid supplemental payments and provider tax payments timing.

In other words, we -- timing difference between when we either recognize the revenue or the expense of the provider taxes versus when we receive those payments or make the tax payments. $50 million 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 million to $60 million, which we do expect to collect at the rest of the remainder of the year.

We make our bonus payments annually in the first quarter every year, that's about $50 million. So that will continue to flip back the other way as the accrual for this year builds up. There's $25 million 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 notes that were deferred from September 2025 and made this quarter. Those notes were issued in August of last year. And rather than make the initial payment a month or so later, it was deferred until the first quarter.

Our next question comes from Ben Hendrix with RBC.

Great. I appreciate that it's early in the quarter, but just wanted to talk about kind of the HIX exchange headwind from the ETC expiry that we -- that you are assuming in your guidance. I think in the bridge that we have here, we had about $110 million of revenue, about $25 million of EBITDA assumed. I just wanted to see kind of based on some of the reports that have come out intra-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.

Yes. So we haven't made any changes to our assumptions yet. I don't -- we're still really don't have a lot more data than we had in February. I do know that our hits revenue and adjusted admissions remained between 4% and 5%, both the first quarter of this year and last year.

Our revenue actually went up, but we did see about a 3.9% drop in adjusted admissions amongst the exchange plan patients. But that's, I think, similar to what we see with a lot of plans that have the high deductibles at 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 lost dropped the coverage or moved to another plan or self-pay, we don't really have any new information yet. I think that's still going to be second or third quarter before we get a better feel for that.

And then just on the core growth that you're anticipating, obviously coming a little bit softer than expected in the first quarter, but -- but how do we think about that phasing through the rest of the year? And I know that you've kind of mentioned some consumer confidence and how do you see that developing as we get closer to the end of the year?

Sure. I think we indicated even at the fourth quarter earnings release, we expected this year to be more heavily weighted in 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 experience as that gets more traction we'll really be positioned well that 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.

Our next question comes from A.J. Rice with UBS.

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 when it's something like an ASC within your existing markets. I'm not sure whether you describe these as being 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, A.J. Great question. These acquisitions, we would still characterize as being part of our networks of care, extending the care area 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 some -- any update on what you're seeing with labor, hourly wages, contract labor and then professional fees as well?

Yes. The average hourly rate increase was 2.3% 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, wage and benefits. And we in-sourced anesthesia program in November of 2025, and that's about $2 million, $2.5 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 positions 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 positions that the previous pace we have been hiring at, which has allowed us to add net new physicians.

That positions -- it's another area that positions us well. It comes at a little bit of a cost right now without the volume, but -- and adding new physicians to the labor cost, but that will position us well in the future that as this business comes back, we'll have more capacity to take on additional patients with the additional physicians. So again, we look at that as a net positive for us, even though it's coming in a little bit of an extra cost this quarter.

Our next question comes from Stephen Baxter with Wells Fargo.

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.

Yes, Stephen, 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 will come out for about half a year. But the ASC investments, which are going to -- are largely going to offset that, they're just about a wash. So no effect on our guidance between netting those...

Our next question comes from Andrew Mok with Barclays.

This is Thomas Walsh on for Andrew. Can you help us better understand the uncompensated care and self-pay mix 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?

Yes. Over time, the collections experience does continue to drive a natural trend that we see. I don't think there was anything outsized this quarter. There was an increase in self-pay volumes this quarter. So relative to the overall net revenue, it increased as a percentage of total. I 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 of 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, and we've taken into consideration the additional risk of collectibility 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 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 acuity headwinds?

Yes. 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 9 months worth or 3 quarters. So that's worth about $10 million a quarter on revenue and $8 million or $9 million on EBITDA. And then the rest of the decline was volume and payer mix -- or I'm sorry, that netted against those benefits, probably evenly between slight drop in acuity as well, but it's more about payer mix and volume offsetting those total rate increases.

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Hammons, 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.

Great. Welcome back to the Barclays Global Healthcare Conference. I'm pleased to welcome Community Health Systems CEO, Kevin Hammons, on stage with me here today. Kevin, welcome.

Thank you. Thanks, Andrew, for hosting us today.

Kevin, now that you've been as CEO for a few months, it would be helpful to start with a high-level overview of your current strategy and assessment of what is working well within the organization and what are some of the areas that you're focused on improving?

Absolutely. And I had an advantage of having a long career at CHS. I've been there just over 28 years, having spent the last 6 years in the CFO seat. As we move forward, one of the things we've done early this year, leading into this year is we rolled out a new vision, and that is to make the health care experience exceptional for our patients, our communities and each other. And to really make that happen, we're focusing on top priorities of quality and then patient experience, physician experience and employee satisfaction.

Not novel ideas, but certainly something that we are now bringing kind of a discipline, bringing a focus and a prioritization to how we work. So we're organizing around those top priorities more formally than we have in the past.

And I think it's going to position us well to be the provider within our markets to take market share and to grow both organically and inorganically within our markets.

Great. And as you think about the portfolio, community exited 2025 with improved free cash flow, lower leverage and a portfolio that's been reshaped by recent year divestitures. Could you share an update on the handful of deals you noted that are currently in flight already? And what are you seeing for 2026 from a divestiture standpoint?

Sure. One of those deals that was in flight just got announced. Last few days in Northwest Arkansas, we have 4 hospitals had been working on that for some time and got that one across the finish line. We have another deal sizably larger than that, again, currently in flight.

But just kind of ongoing conversations at this point, some due diligence going on, and we'll see where that one takes us. Beyond that, we still have inbound interest, but probably nothing that we have a lot of interest in selling. So we are getting close to the end of probably that more formalized divestiture program should start slowing down from here, but we've gotten a lot accomplished already this year.

And as you approach that steady state on the portfolio, what leverage range are you targeting for that -- for those hospitals?

We are -- for that core group, and we have kind of a medium-term 1- to 3-year target out there of being below 5.5x levered. I think that's been a target that we've set for ourselves.

Once we get to that state, I believe we're at that point in kind of a virtuous cycle, we would be generating sufficient free cash flows that will allow us to propel us forward in continuing to reduce our leverage from there without having to transact any further.

In fact, I think we're already -- the value proposition of divestitures is changing for us when our leverage was higher and prior to being free cash flow positive, there was a greater value proposition for us to divest an asset.

Now that we've turned free cash flow positive, our leverage is coming down, and that value proposition is changing.

Great. Let's shift to the current volume environment. Throughout 2025, both community and the broader industry experienced some softness in elective outpatient volumes. Can you talk about the key drivers behind that softness and how you expect those trends to evolve in 2026?

We believe that a key driver of the volume softness in '25 really centered around the economy. We saw strong consumer confidence exiting 2024, and we had a strong fourth quarter of '24, relatively strong performance in Q1.

But then as a lot of headlines started to be printed around the impact of tariffs and concern around tariffs, cost inflation, potentially higher inflation, we saw the consumer confidence in kind of that March time frame really drop off.

And likewise, kind of the following quarter, we started to see lower, in fact, negative adjusted admissions in the second quarter of last year. As consumer confidence began to recover throughout the year, we saw some volume improvement.

As I think about where that was most concentrated and impact on patient behavior, with concerns over the economy, it really impacts your commercially insured patients who have higher co-pays and deductibles significantly more than your government insured patients.

And that's really how it played out for us. We saw the drop-off in commercially insured elective procedures, largely surgeries, which we believe is more a deferral of care versus -- because they're concerned about paying their co-pay and deductible. As they met co-pays and deductibles throughout the year, we saw some recovery in the back half of the year.

But as I've pointed out, in December of 2025, we saw consumer confidence dip again kind of leading into 2026.

Right. And we just saw a pretty weak jobs report published by BLS last Friday. To the extent we were to see a broader slowdown in employment, how are you positioning the business to absorb those headwinds and protect volumes and margins?

Really focused in with our new vision and our top priorities, focusing on differentiating our product, which is care and differentiating or really taking care of our customers, our patients and our physicians. If we continue to focus on those, when that volume does return, I think we'll be much better positioned to take that volume away from our competitors in our markets, capture that market share. So that's really where our focus is right now.

Great. And moving on to the policy side of things. You've included a $20 million to $30 million exchange headwind in 2026 guidance. What do you view as the most important variables embedded in that assumption that will influence how the year plays out? Is there anything to call out at this point on that assumption?

We do have lower exposure to the health exchange business, at least relative to many of our peers. A couple of things I'd call out. Our average household income in our markets is below the national average, somewhere in the high teens, close to 20% below national average. So even that health care exchange business, we largely see concentrated in emergency room visits.

And we collect a much smaller percentage of co-pays and deductibles on that than -- relative to a normal commercially insured patient. So our realization is probably much lower on that business.

I think we've taken that into consideration as we've thought about the impact of that on 2026. Even having said that, we're estimating around 20% of the volume declines, again, a lower percentage of exposure to us and probably a flow-through of something close to double our blended rate, but still maybe lower than others may have expected.

Right. And related to all of this, we are seeing a pretty significant buy down or shift in metal tiers from silver to bronze. What sort of impact do you expect that to have on utilization and acuity trends this year?

I think there's certainly an impact, people tiering down or getting -- I think some of that population may come out of exchange business, get commercial insurance. Some may go to Medicaid. Some will just tier down.

How all that plays out, we just don't have enough insight into at this point to probably be very exact in terms of our analysis. But I think we've kind of considered all of that within our range of potential outcomes.

Great. And state-directed payments also remain an important part of this year's guidance, potential upside. I think your guidance excludes any benefits from any new programs. So can you provide an update on the programs still pending?

Sure. So yesterday, we heard that Georgia approved their program. We have previously estimated that in the $10 million to $15 million range. We have one hospital in the state of Georgia. We'll still sharpen our pencils on that one now that it's final approved, and we'll get the final plan.

Florida, we're still waiting on. That one is similar size to Georgia, but we're still waiting on approval. And Indiana would be the other state that we're waiting on approval for. Unable to size that one, but we understand that the state of Indiana is working closely with CMS.

Indiana has made some adjustments and amendments to the plan. So from our vantage point, we believe there's ongoing dialogue, which suggests it will likely get approved. But just waiting.

Right. And then on Florida, is it a similar situation where there seems to be some sort of friction with the program itself? Or is it simply just an administrative backlog that's taking a little bit longer than expected?

I believe it's an administrative backlog. CMS has been, albeit maybe slow from our vantage point, they have been trickling out approvals, and we're not hearing of any kind of large denials in terms of these programs.

Our understanding is they received far more by multiples of submissions than they had expected. And I think there's just a backlog.

Great. And you've also talked about the rural health transformation program as being a potential benefit. Can you talk a little bit more specifically about that program and what sort of frame the potential impact it might have?

So the states that we're operating in, the 13 states are receiving a total of approximately $2.8 billion in 2026 for the Rural Health Transformation Fund. Those states have not yet communicated what those -- how they will distribute that money. Each state will likely be different.

So what we've done is we've organized the team internally. We have some third-party assistants that have some expertise that we are ready that as soon as the states publish and are ready for us to start applying, we'll be there and kind of get in on the front end of that.

What we don't know at this point is kind of what the criteria for either application or qualification for some of those dollars. Some of it may come and we expect it to be in the form of grants. So we'll have to do some grant applications, but all that's yet to come.

The good thing, although we can't estimate, it will be a positive for us. Several of our states, Texas being the state that received the largest individual state amount allocation from CMS is a state that we have a good sized footprint in. Alaska, I believe, is up there, maybe the second largest state. There are not many providers in Alaska.

We have one. New Mexico, where we have 3 of the approximately 40 to 50 hospitals in the state is another state that received a substantial amount. So I think we're pretty well positioned.

Great. Let's move on to some of the technology and AI initiatives that you're working on. Revenue cycle management has become an increasingly strategic priority for most hospitals, which RCM capabilities have driven the benefit to date? And where do you see the greatest opportunity from here?

Overall, on AI, we're really focusing a lot of our investments around our top priorities. So both quality of care, physician and patient experience, employee satisfaction. So investing in AI across all of those in terms of prioritizing. Specific to revenue cycle, there are some opportunities. We do all of our revenue cycle internally, but there are kind of applications that we're layering on some of which we started a couple of years ago with some internally built AI capabilities around like the appeals process.

But as we move forward, really looking, I believe much of the AI is being commoditized. It's coming with a lot of your software applications being built into those software applications. So as we look for use cases around coding and collections process where there's some opportunity there, that will all get layered into our revenue cycle.

Right. And given how broad the opportunity set might be with some of these initiatives, how do you decide which ones to prioritize and how do you measure success of these programs?

Measuring success can be different for different programs. In terms of prioritization, I'd go back and focus on our top priorities as an organization around our vision. For instance, we're using AI to help identify patients who are at risk for sepsis that allow our physicians, they get alerted because the AI tool is running and scanning patient records and conditions and medical history and so forth, alerting physicians that a particular patient may be more at risk for sepsis.

We can dose medications earlier, at least evaluate and make -- allow the physician to make that clinical decision. But that has helped us reduce sepsis mortality materially. So that's helping quality of care. On the patient experience side, utilizing AI for our call center so that when a patient calls in, they get an AI agent can help schedule that agent -- the AI agent can look at openings for physicians on their schedule and schedule a patient. So focus there on patient satisfaction.

I think those are some primary ones. In the more administrative areas, we implemented our ERP. Last year, we completed the implementation. And with that ERP, they're developing Oracle is now embedding significant AI capabilities.

There's over 600 AI agents now built into that ERP. That will help us on kind of the finance, accounting, supply chain, human capital management, scheduling, staff scheduling areas to be more efficient and take costs out. And those will have more of a direct kind of return on that versus on the quality side, maybe a little more hard to measure.

Right. Understood. Moving on to the cost side of the equation. Medical specialist fees remain an industry pressure point. You cited continued upward pressure in radiology and anesthesia with an expectation of 5% to 8% growth in 2026. So one, what's driving that persistence of this headwind? And secondly, like what has been the most effective in managing this down into the mid- to high single-digit range?

A couple of things causing the persistence, and that's each year, you kind of get a different group of physicians coming and wanting to go on subsidy type contracts. So it started off with hospitalists, ED groups moved to anesthesiology. Now you're seeing more radiology groups.

Now what's working it down? A couple of things. We've been very effective at in-sourcing some of those groups, which allows us to take off the pressure of continuing increasing subsidies. We're also running out of specialty groups that we contract with.

So there isn't going to be another group of physician specialists behind those that are already kind of coming and asking for subsidies coming on behind those. So I think we're nearing the end. I don't think those costs go down in the near term, but we're certainly seeing a moderation of the increase.

Great. And you talked a little bit about this on some of the ERP investments. But on the supply side, you've done a nice job of managing costs over the last few years, but it sounds like there's more runway left.

Can you walk us through the specific sort of ERP-enabled initiatives you're focused on? And how we should think about the magnitude and cadence of these benefits you expect to realize?

So specific to supply chain, if you think about prior to our ERP, we had multiple 6 or 7 different supply chain systems across the enterprise. All of -- each of our hospitals would have a different item master or vendor master in which they used and contracted oftentimes locally or did the purchasing -- made purchasing decisions locally.

With the ERP having a single integrated system across the entire enterprise, we're able to aggregate that information, provide much better decision support, and we've centralized all of those purchasing transactions in a single shared business office.

So that in and of itself helped us capture significant -- some significant savings this year. Going forward, as contracts expire because a lot of those contracts are multiyear, so you can't get to all of them immediately.

But as contracts expire, we have an opportunity to consolidate, do more broader contracting, which should allow us to get better pricing even within our group purchasing organization, being able to concentrate, get more volume discounts by aggregating information is the runway for us, and I think there's opportunity there.

Great. Shifting to capital deployment. Community has described shifting their incremental growth CapEx toward outpatient access points and higher acuity service line investments. Can you help us understand where that capital is being deployed today?

There's a number of areas. So we've kind of wrapped up at least currently some of the larger inpatient projects that were multiyear construction projects. And those are, at least for the moment, kind of behind us. So looking at things like some ASCs, freestanding EDs, urgent care centers, some additional physician practices and then also supporting some service lines where we're expanding some of our heart programs.

So we're adding Cath Labs. We may be going from 1 to 2 in a market or 2 to 3 in a market as we expand those programs, upgrading, updating some of the imaging equipment to take advantage of some expanded higher acuity services and give us access. So that's really where we're targeting right now.

Great. On the cash flow side, you've called out a material cash flow headwind from an extra pay period in 2026. That does not impact EBITDA. But how should we think about the underlying free cash flow conversion through that disruption? And what working capital and other offsets are there? And are you assuming in guidance?

Still projecting to be cash flow -- free cash flow positive for this year, even with the headwind. That was a big turning point for us last year to get to positive free cash flow, and we want to make sure that we manage our way to continue being positive going forward and then creating a tailwind for us into 2027.

Some of the offsets to that payroll headwind this year, there are a number of them, none individually large ones, but a lot of smaller ones that we have some line of sight. Some of them are already locked in.

Some of them just we'll have to go get. But it's everything from -- I think there's some SPP money from some of the increases that the cash still hasn't fully flowed through. So that's one that is already locked in. We'll be getting that cash here in 2026.

We believe we can reduce our days AR by another day. There's some AP headwinds that we had extra accounts payable payments in 2025 that won't recur in 2026. So that should be a little bit of a tailwind. We believe our malpractice settlement claims should be lower in 2026.

Inventory management because we just get more mature in using our ERP and our processes now that we've centralized our shared service center, we believe we can manage the inventory balances better. We have better insight into doing that, and there's some cash flow benefits there. So it's a number of things that will add up.

Great. Maybe last question here in the final minute. With the removal of the inpatient-only list, how are you thinking about the strategic priorities and positioning the company in response to that regulation?

There's still a number of decisions that will be subject to kind of the doctors kind of more of a clinical decision. But as we think about our portfolio, we are investing more in the ambulatory side with surgery centers, with outpatient access points.

And I think we're really well positioned. We have a good complement. And as we think about our business, really no longer being just an acute care hospital operator, but a health care provider across the continuum of care.

Everything from your initial clinic visit with the primary care through post-acute care services that we're offering in all of our markets and building out our networks, I think we'll be able to be well positioned to capture that.

Great. With that, we're out of time. So Kevin, thank you for joining us. Thank you. Enjoy the rest of the conference.

Thank you very much.

All right. We're going to go ahead and get started. With us today, we have Community Health. On the stage is Kevin Hammons, CEO; and Jason Johnson, CFO.

Kevin, I'll start with you. You are now a CEO and both of you, congratulations. As the CFO, you knew the numbers, you knew all the facilities. What have you learned as CEO? I know it's been a short time period, but what do you think is going to change as you take on this new role? And what would you do differently?

Thanks, Rishi. And first, let me say thanks for hosting us today and for everyone joining us. As I think about maybe what I've learned in the period since the transition is how important the vision is for the company and making sure that everyone across the entire organization is aligned and working kind of towards that. I think as I kind of view the company and there were so many things going on, and I had the benefit of having had a seat at the table, working very closely with Tim on strategy. But we, in many instances, had competing interests going on. And so working with the company over the past several months, coming up with kind of a single vision, top priorities being quality of care, physician experience, patient experience, employee satisfaction. And we're still focused highly on cash flows.

So at the end of the day, continuing to delever the company, continuing to improve our free cash flow generation so that we can be investing in growth are top priorities. But some of those levers in terms of how we get there is really focused on those experiences, which as we improve quality, improve our patient satisfaction and physician satisfaction. I think it will lead to us being able to take more market share as we establish ourselves as the best provider in each of our markets.

Maybe let's shift to the macro side. In the past, you've noted that the consumer softness and that's had an issue on outpatient admissions, et cetera. What are your thoughts for '26? And how do you -- how has this affected your guidance?

So coming into 2026, we saw consumer confidence index drop at the end of the year kind of in December. The last time we saw the consumer confidence index at those levels was back in March of 2025, and we saw a pretty soft second quarter following that. Consumer confidence improved throughout the year and then dropped again. So certainly, starting off the year, we have some expectation of some softness around volumes. Our hope will be that consumer confidence continues to improve then throughout the year, and we see it pick up, particularly in the back half of the year.

I think all that's contemplated in our range of guidance. But overall, I would say our volumes in our guidance are probably low single digits, a little bit lighter, but we're seeing some improved rate as well. So still kind of in that mid-single-digit 5% net revenue range for improved net revenue for the year.

And just on that improved net revenue, obviously, we have a general understanding where Medicare is, where commercial pricing is going. But with embedded in that mix, how should we think about denials?

Denials are fairly stable right now. I think that's a result of a couple of things. I think payer behavior continues to put pressure on us. We're seeing increased numbers of denials, but the work that we're doing internally to combat that is allowing us to stay kind of stable. So we've not seen kind of a net increase for some time.

Now I think your guidance was well within expectations. The one area that we've been getting questions on is your guide for operating cash flow. We talked about it in terms of -- and it's specifically around working capital. You have the extra payroll, which is a few hundred million. And then I think your net-net was about $130 million, $180 million of working capital benefits, which would imply that there's probably over $300 million of working capital benefits to offset that payroll period. Can you just walk us through your comfort level in those buckets as to what's driving that?

Yes, I'll take that one, Kevin, and thank you for having me. There's -- the extra pay period happens every 11 years, and that's $140 million that look to step over next year. So we do think that we'll have positive free cash flow. It will just be more modest next year. We have identified a handful of opportunities to improve free cash flows next year. Several of them are related to accounts payable. We had some buildup this past year. from our conversion to ERP system that we had to pay out. And then we can continue to improve how we manage our AP. Inventory turnover is another area that we're able to focus on better with our new ERP. We've got -- on the AR side, trying to take a day out of the AR turn. And we've got AR collections on divested hospitals where we retain AR, so you lose the revenue, obviously, but we continue to have the cash. So all of those are pretty fairly equally spread. I think there's opportunity to achieve slightly positive free cash flow.

On DPP. So 2026 does not include any out of periods, does not include any DPP that could come from Texas, Florida and Indiana. But can you just update us on what you're seeing out of the 3 states? Obviously, the big focus is being Indiana. There seems to be some challenges that's the question.

Yes, you want to take Indiana?

Sure. I'll take Indiana. I'll let you take the other states. I mean Indiana is going back and forth with CMS now for some time on their program, they did a preprint. They've been working closely with CMS. They've adjusted their program and resubmitted an amended program. We don't know exactly what the structure of the resubmission is. But from our vantage point, the fact that CMS is working closely with the state indicates that CMS has not said no. And they allowed Indiana to make those adjustments. I believe that, that signals an increased likelihood that a program gets approved in Indiana.

In terms of quantifying what that is, we don't have the information to be able to do that. But I think the likelihood of a program getting approved is greater.

The other 2 states are -- it's actually Florida and Georgia. They've submitted and that's more normal course. They're, I think, in the queue awaiting approval. I know there has been activity recently where CMS has approved some of these programs, including one in Georgia. It's just not the one that is impactful to our hospital there.

In a few years, we have the Oba cuts coming through, specifically on the DPP side. We've spoken about what you may do to mitigate those cuts. It's been 5 or 6 months. How are you guys -- can you maybe just walk us through how you plan to mitigate those cuts? And when do you anticipate starting that mitigation effort?

I think we've. Already started. There's a number of cost-cutting kind of margin improvement or impact initiatives that we have ongoing, things that we do every year, but particularly around the ERP, I think there's some runway. There's a couple of years ahead of us still on benefits that we can extract out of that, improve our margins, take costs out. Oracle itself is adding significant capabilities to the ERP, particularly around AI. And I'm sure we'll talk a little bit about that here in a moment. But as they add AI components into the ERP, that should allow us to add additional efficiencies, take out additional costs out of the process. And as we just continue to mature our own workflows with the new ERP, I believe there's cost savings that will help mitigate some of those.

Is the anticipation that you'll mitigate pretty much 100% of the cuts, 80% to 60% of the cuts? How should we think about that?

I think the majority of the cuts will probably be mitigated. We've estimated now is -- with our divestitures, now the new estimation is $250 million to $300 million of cuts over the period through 2038. So I think efficiencies over that period of time, we'll be able to mitigate that.

Asset sales. In the last call, you said that these sales are dwindling. Can you -- maybe just one, talk us through the last -- or the Huntsville, Alabama asset sale is one of a few that's still remaining as part of what you had communicated in Q3. Can you quantify how many that you're actively pursuing in terms of asset sales? And then when you say dwindling, is it less than what we saw last year? Is it -- how should we just think about '26 as the setup for asset sales?

There's still a couple of deals currently in flight where we have inbound interest, but not far enough along that we would be ready to talk about those deals or to know with certainty that they'll get across the finish line. It would be less in terms of quantum than it was in 2026 -- or 2025, I'm sorry, excluding what we've already got done in 2026. So at the end of the day, 2026 will probably have greater assets.

And the ones that you're working on, are they similar in size relative to what you've seen before? Or are they smaller, larger?

Both. Yes, I would say there's a smaller deal. There's one that's similar of size.

Okay. The Clarksville sale was unique because you had the buyer dealing with maybe competitors coming in. And I'm not sure if that was in any way associated with Commerce. But I believe under the rule fund to access some of the dollars starting in '28, there has to be -- states have to eliminate anything that impedes access to healthcare. And that is, I believe, some of the comm laws. Tennessee is looking to eliminate their comm laws. Has that accelerated or changed how you guys are thinking about your assets in general?

Not really. No. We still have a couple of states that have CON rules in place, although Florida has now eliminated them. Tennessee is working to eliminate them. Many of our states don't have CONs. I think where we really looked at Clarksville, we had a situation where you -- we had 2 new entrants into the market regardless of how we operated there, that market was going to get diluted. And as we looked at longer horizon on EBITDA generation and on capital requirements to compete in a much more competitive market. And the competitors coming in had the advantage of rates because of their presence in Nashville. They had much higher rates than we did. And then we get a really good offer that allows us to delever. So it was more of an opportunistic transaction for us.

Where do you stand in the Alabama process? A lot of questions on whether -- how the FTC is going to view that sale. Where does that stand today? And when do you think -- what's the updated timing of closing that deal?

I think the updated timing will be second quarter of closing that deal. And we don't believe that there are any impediments to getting that closed.

Can you update us on the rule fund? There's been a lot of delays. Where do we stand today on that process?

Yes. I'll take that one. So we do know that our states, the states in which we operate have been allocated $2.8 billion in this first year. And they are in various stages of determining how those funds will ultimately be used. There's some approval that will have to happen for the state budgets to be able to extend them. We formed a governance committee to make sure that we've got the right strategy, and we can evaluate each of those. There's a couple of states that have already asked for some indication of interest, and we're participating in those. So don't yet know what the impact could be from -- to us. It will be beneficial, but we probably won't know until later this year. And timing-wise, these will likely -- the cash probably won't come -- start coming down to providers until definitely the second half of this year.

But retroactive to the beginning of the year.

That's right. And you actually have until, I think this first year will go into the federal fiscal year, which will end in '27. So there's a little bit of a -- the 5 years will kind of be spread out a little bit...

There's been a lot of questions and concerns around Medicaid, less to do with hospitals, but would love to just get your thoughts in terms of what you're seeing in the Medicaid environment. And I know it's a midterm year, you're probably not going to see states becoming too aggressive, but how are states just also addressing or thinking about Oba and what they may have to do to offset that impact? And how does that kind of trickle down to the Medicaid aspect of it?

Yes. We've not seen the states that we're in take any real action to this point around Medicaid. So we're thinking at least as I look at 2026, it's pretty much status quo on Medicaid.

Okay. Supply expenses. Some of the GPOs have just noted that there could be some natural price increases just based upon how things roll off, new contracts, et cetera, some of the tariff costs from last year might have to kind of flow through to potentially some of these hospital systems. You're protected, generally speaking, from my understanding under the GPOs. But what are you estimating in terms of -- what are you seeing in terms of price increases in '26? And is there a headwind that we should anticipate, whether it's later this year or in '27 as it relates to some of the costs that we saw last year?

Yes. So we're a member of the HealthTrust GPO, which we have an equity ownership. And for '26, our contracts generally renew on a rolling basis every -- I think it's about every 3 years, so about 3 or so every year. '26, I don't think we're going to -- we're not expecting to see a significant increase, nothing more than inflationary increase. The GPO takes certain actions to mitigate those risks to make sure that we have the right types of contracts and products. And then we do the same on our side with our new -- with our ERP. That's one of the advantages that we can really see across the system to determine to make sure that we're purchasing on contract. We're not just on contract, but making sure that the preference that we're using the right items that have the best price. So in the near term, no, in the long term, I suppose that if there's a 10% tariff on everything that over time, that you'll see everyone will see it.

A couple of things I might add. Over 50% of our supply purchases are domestic purchases. So there's some level of protection there, although we don't have clear insight into where some of the raw materials may be coming from. But we don't have any significant exposure to some of the locations that have the risk of higher tariffs. So I think that's a mitigating factor.

And then as Jason mentioned, with the work with our ERP and some of what we believe we can mitigate a significant portion of the cost increases by being more efficient, purchasing either different items or the right items and being more compliant within the GPO.

Okay. Just on labor, can you just walk us through your full-time and just agency exposure today? Do you think it's at the optimal level? Or do you think that there might be?

I think we've stabilized. I think we're at the optimal -- the level of use of contract labor. Not expecting any significant increase next year.

Okay. On the professional expenses, you noted that it will increase this year, but not as high as 2025. Is that just because you're pushing back on the subsidies? What's driving that less of an increase?

Yes. I think it's contracting and trying to make sure that we are negotiating the best arrangement as possible. And when we're able to, to try to in-source rather than to use outsourced when that opportunity does present itself.

We're probably also running out of doctors who are just coming on to these contracts, too, because they've all kind of worked their -- most of them have worked their way through and are already getting subsidy payments. So at least in terms of -- it started with the ER physicians and hospitalist groups and then anesthesiology got to be big. Radiology is kind of the most recent one, but you don't have any other beyond that groups of physicians that we would be contracting with that would expose us to continuing increases.

So you've internalized at least mostly the ER side have not all of it. You've talked about radiology and anesthesiology. Walk us through the stumbling box that you see in internalizing some of these solutions because it's been talked about for a few years now, I get it, it's not easy. But what are you seeing in terms of, one, the challenges, but also maybe the opportunities on that front?

One of the challenges is availability and finding in terms of anesthesiology, anesthesiologists that are willing to come into the employed model. I mean there is a shortage of anesthesiologists. There's a shortage of radiologists. And as we think about radiology and what some of the technology will be changing that in the coming years, I think in some respects, they've accelerated and see they have a short window for asking for some of these subsidies. And so in some respects, they've accelerated our desire and the work that we're doing to go out and find alternatives to using whether that's remote -- doing remote reading, using technology. There's an AI component to radiology that can make some of those reads easier -- more easily done externally than having radiologists on site.

Okay. And we'll get to the AI in a second. But before we get to that, just going back through some of the pricing on the commercial side, all the big payers are getting hit left and right. Are you -- what are you seeing? Can you talk through your contracted rates for '26, '27 and just your visibility in the out years?

We're 3% to 5% rate increase for '26, and we're about 90% contracted for the year '26 and maybe 50% or so for '27. I not for '27, I think we're still expecting that same 3% to 5% currently.

Okay. Okay. Indiana bill, I think it was 4 or 5 was going to limit some of the not-for-profits in terms of how they price relative to commercial plans, if I'm not mistaken. That bill was passed last year. How has that bill affected community in Indiana or has it?

I don't think it's really affected us. Yes.

Meaning that you haven't seen the benefit of it or you just haven't seen -- because you do compete with -- I think IU Health as part of that process, if I'm not mistaken. And I'm not sure if Part B was also part of that because they're not-for-profits, I think they were being targeted?

Yes. There were, I think, what they call the top 5 not-for-profits, the most expensive -- the not-for-profits with the highest charges in the state. But the bill targeted them in their reimbursement. It really hasn't changed -- doesn't change our reimbursement. So it really hasn't impacted us, and we've not really seen any residual impact at this point.

And then IU Health has been building out that facility in Fort Wayne. Where does that facility stand today? And just your thoughts in terms of the competitive dynamics in Fort Wayne.

So it's scheduled to be open in 2027. So it's still some time off, and I'm not sure if they're on schedule or not with their construction. It is being constructed on the south side of Fort Wayne. And most of the -- in fact, the majority of the population growth in that market is all on the north side and closer to our facilities and where we're expanding our additional footprints and access points. So I mean, at this point, no impact at all from that facility.

So let's talk about the expansion of those access points. Maybe since you mentioned it, let's start with Fort Wayne, what are you doing in Fort Wayne, and then we'll kind of dive into some of the other markets.

And we're always looking for opportunities to expand, whether that's in surgery centers, freestanding emergency departments, both of which we've opened in Fort Wayne and are looking at other opportunities across a number of our markets, we'll probably open 4 to 5 freestanding EDs this year and probably 5 to 10 surgery centers. So those are key access points. We're also looking at urgent care centers, individual clinic opportunities where we'll either open up or acquire practices. So as we focus a lot of our capital, particularly this year, now that we've completed some of our large inpatient projects that we've had in flight over the last couple of years, I think 2026 will be largely focused on outpatient access points.

And as you think about the Fort Wayne market and expansion of the beds from just across the systems that are in that market, is that market getting deeper to support the number of beds that are being added?

Deeper in terms of?

Population.

Yes. I mean I think it is. And then as we focus on our service lines and making sure that we're offering the right service lines, taking advantage where there are opportunities, partnering with the right physicians. And we've got -- with our joint venture there, I think we're partnered with about 150 of the physicians in the market through our joint venture. So I think we've got a really good hold on the market. We've taken over that market in terms of numbers of births, babies, and in fact, we're now...

That's the case a few years ago.

It was not the case a few years ago. Park View was the biggest, and we're now the biggest in the market. So I think we're continuing to grow and do good work there.

Okay. And then you've been adding urgent care centers. So then talk through some of the other access points that you're adding throughout your geographic exposure and then maybe allocation of dollars towards that expansion.

In terms of allocation of dollars, it's a little over 50% of our capital would be related to growth capital. And even as we have divested facilities, our capital spending is remaining at least flat or slightly increasing. So we're spending more per facility in terms of capital and that additional growth or those additional dollars would be primarily related to growth capital.

And where do you see those opportunities? Is it in Tennessee, Texas? I mean Texas is obviously a very crowded market. I assume that maybe there could be some opportunities there, but where are you seeing that expansion?

We're seeing it a number. Birmingham continues -- we see great opportunities there, Naples, Florida, across Texas. These are growing markets. Those markets demographically are growing at a rate higher than kind of the national averages. So we're seeing tremendous opportunities across all those. Last year, we made some investments. And over the past couple of years in Tucson, we see some continued growth opportunity there as well.

With the inpatient-only list, I know you're adding ASCs in some of your markets, but has that accelerated maybe the focus on adding more of these ASCs? And how quickly can you ramp up in adding these ASCs because obviously, that comes with the doctors that you need to hire and find.

It does. That's a gating issue, particularly in markets the size that we operate in, is making sure that you're aligned with the right physician or group of physicians. In some cases, those ASCs, we could look to either partner with existing ASCs, acquire them, in some cases, are de novo builds. So it all depends on the market. But generally, that's a much quicker to market capital spend than an inpatient build, adding a tower, which we've done over the past couple of years in a number of markets where we've been coming up on capacity constraints like Foley, Alabama, in Naples, Florida and into Knoxville, Tennessee.

Have you seen in some of your hospitals where you're reassessing the inpatient, outpatient real estate just because there's more of an outpatient. We've heard that from some of the hospitals. Is that something that you guys are actively doing as well?

It is. I mean, certainly, we consider that as we think about the future, do our 3-year planning for markets and what capacity we'll need where we are today and what capacity we think what it will look like down the road. So certainly part of the equation.

Okay. So let's talk about your cap structure. You have a sizable amount of pro forma cash post these asset sales, not including Alabama for the time being. But you still have a sizable amount of cash. You maxed the 10% on the 32. I think you have one more remaining this year up to December, if I'm not mistaken. You have one more on the 9.75%. You're increasing your first lien capacity. So I just maybe starting first, where do you see that first lien capacity today? And then are you limited in accessing that first lien capacity while the 29s and the 30s, the first lien 29s and 30s are outstanding?

So our -- as we sit here today, we would evaluate our first lien capacity approximately $750 million. I think $745 million.

Excluding the ABL or including the ABL?

Excluding. Excluding the ABL. Given the quantum of proceeds that have come in over this past year and what we expect to come in, we will need to focus any debt repayments on first lien debt. But I don't believe that there's any restrictions on the use of that capacity even with the 29 and 30 first liens out there. So I don't believe that.

Okay. That's our view as well. just to make sure. So then as you think about what you have to use the proceeds towards with some of the 10% options not available, are you then focused on near-term maturities? Or are you just going to be opportunistic throughout the structure?

I think we will be opportunistic. But if we focus on the 3 tranches of 20 31, 32s and 33s, those do have the advantage of increasing our first lien capacity. So that is another consideration that we would certainly throw in the mix in terms of what we might target.

Okay. AI is a common theme in this event. How is community harnessing AI? And where are you using it? Where do you think it's actually been? Or where do you think it could be more beneficial to the organization? I know it's early stages, but...

I think there's a couple of areas that we're already using it. A couple of areas certainly we'll be targeting. So we are rolling out ambient listening. It's partially rolled out, starting with our emergency departments in our hospital groups and then moving towards our outpatient or physician clinic practices, which we've launched recently. So I think there's a lot of benefit there. We're already using some AI in our revenue cycle areas to assist with appeals and so forth. With our ERP, there is AI being built into the ERP itself kind of from Oracle that as we mature that process, we'll have a lot of opportunities to use AI to generate efficiencies in our transaction processing.

Then there's a few other clinical areas like sepsis, like our virtual sitter program that has some embedded AI in it. So really across the spectrum, there's a number of areas.

What is the sepsis area with AI and there's obviously a big issue as it relates to hospitals, how do you...

Sure. So there's an AI component that can help us identify patients who are at risk for sepsis and then notify the doctors that gives them kind of an advanced notice on when to provide medication.

Okay. On the ambient AI side, being used in the ER, one of the issues that we've heard is just the noise. How is your use of ambient AI? Are you finding that to be a challenge in terms of all the noise that's within the ER catching everything that is needed? Or is it still kind of early stages?

We've not heard or at least I've not heard any issues around that at this point.

And has that helped from a collection standpoint, meaning that you could transcribe that data and immediately send it in? Or does it go through a few more steps and processes before you actually go through the collection process?

It still goes through a few more processes, and we're probably too early in our use of it to really have noticed a significance on the collection side, but certainly something we'll be monitoring going forward.

Okay. I wanted to save a little bit more time for the audience, but we have about a minute. If anyone has any questions, please raise your hand.

No questions.

If you think about where AI is going now, what do you think are the next steps? And where do you think you will need to actually invest in as it just relates to you looking across the spectrum?

I think it's an interesting question and our -- how we're thinking about it is probably changing over time. Early on, as we were thinking through AI, I think a number of people as they're thinking how they would use AI, we were focused on developing internally. Because the use cases were just being developed. As we sit here today and things are changing so quickly, a lot of those use cases are now -- have been proven. There's products out there. A lot of your software vendors are baking AI into their products already.

So as we just refresh some of the software we're already using, you get your new license or renew your licenses, now that product is being updated and has AI components built in, in other cases, instead of going through a process to develop it, you can go out and buy a proven product that's being used somewhere else. So I think how we're thinking about it is evolving because the whole AI space has evolved so quickly.

Well, we've hit the end of our presentation or fireside chat. Thank you so much.

Thanks, Rishi.

Appreciate it.

Thank you, everyone.

Thank you.

Good morning, and welcome to the Community Health Systems Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

I would now like to turn the conference over to Anton High, Vice President, Investor Relations. Please go ahead.

Thanks, Rocco. Good morning, and welcome to Community Health Systems Fourth Quarter 2021 Conference Call. Joining me on today's call are Kevin Hammons, Chief Executive Officer; and Jason Johnson, Executive VP and Chief Financial Officer.

Before we begin, I'll remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described 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 will discuss today exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses, expense from business transformation costs and changes in estimate for professional claims liability in the prior year period.

With that said, I will turn the call over to Kevin Hammons, Chief Executive Officer.

Thank you, Anton. Good morning, everyone, and thank you for joining our fourth quarter 2025 conference call and for your continued interest in CHS.

First, I'd like to say I'm honored to speak to you today as CEO of Community Health Systems. I want to express my sincere gratitude to our Board of Directors for their support and their confidence in appointing Jason and myself to our permanent roles as CFO and CEO, respectively. I would also like to thank many of the people on this call for offering your support and congratulations, which has meant so much to me personally. And of course, I want to acknowledge our employees and physicians and everyone else who contributes to the quality care provided for our patients every day. It is my honor and privilege to lead CHS forward at this point in time and to serve all of you in this role.

Reflecting on these past few months, I use my time as interim CEO to speak with many of our employees and physicians. And most importantly, to listen to their thoughts about our current state and future potential of our company. The feedback was candid and enlightening and encouraging. And I entered this year excited and very optimistic about what lies ahead for CHS. Today, I want to share some highlights of our 2025 operating results, but I also want to spend a minute talking about our vision and our top priorities for this year before turning the call over to Jason.

Starting with our operating performance. The fourth quarter was in line with our updated expectations, reflecting sequential margin expansion with higher acuity and a slight improvement in payer mix and continued cost controls. Same-store net revenue for the fourth quarter increased 2.1% year-over-year, reflecting a 2.4% increase in net revenue per adjusted admission. Some of our milestone achievements in 2025 were very much the result of focusing on the unique opportunities available in each of our markets. For example, ER visits were up more than 13% in our Knoxville hospitals over the past 2 years following a major investment and ER expansion at Sonova North Knoxville in 2024. The current investment at Tenova Turkey Creek in Knoxville, which will be completed this summer, we'll add more ER beds to the community and drive even more growth to our Tennessee hospitals.

A 20% increase in births, more than 4,000 babies born at Grandview Medical Center in Birmingham, Alabama in 2025 was made possible by a recent $10 million investment in women's services. That is the third expansion of women's services and maternity care services since we opened Grand View 10 years ago. In Carls Badly, Mexico, more than 450 inbound transfers a nearly 35% increase over the prior year, brought patients into our hospitals for higher acuity care coming from outline communities as far as 30, 50 and even 100 miles away. And in Longview, Texas, heart surgeries were up 16% in 2025 as we develop a top-notch heart program that keeps patients close to home for high-quality, high acuity cardiac care. These are just a few examples of how we seek to understand and address the health care needs in our communities and invest in our core portfolio for long-term growth. We also made several divestitures in 2025, enabling us to invest proceeds back into our core portfolio or use them to reduce debt.

We continue to make improvements to our capital structure. -- with leverage down from 7.4x at year-end 2024 to 6.6x at year-end 2025, thus making materially more value available to our stockholders. And with proceeds from transactions completed or to be completed in 2026, we are creating a path for additional debt reduction and deleveraging, which will further strengthen our balance sheet and continue to improve our capital structure.

As we discussed in prior quarters and has been discussed more broadly across our industry, we saw some disruptions in 2025, both from an economic standpoint impacting patient behavior as well as a regulatory standpoint, creating uncertainty in both reimbursement and insurance coverage. We believe these disruptions are temporary and there are plenty of things we can be doing and that we are doing to mitigate risk and ensure we are well positioned for the future.

Finally, our vision at CHS is to make the health care experience exceptional for our patients, our communities Andy Tube. We know this is aspirational, but also believe it's possible and attainable. To achieve this goal, the health care experience that is exceptional, we have adopted 5 priorities. We intend to improve quality, physician experience, patient experience and employee satisfaction and to grow our cash flows, enabling us to continue to invest in additional growth opportunities. We are working to differentiate ourselves in our markets. And we believe doing so will lead to even greater consumer confidence and choice of our health systems, retention of our workforce, growth and ultimately, enhance financial performance and long-term success.

At this point, I will turn the call over to our Chief Financial Officer, Jason Johnson to review financial results in greater detail and discuss our initial guidance for 2026. Jason?

Thank you, Kevin, and good morning, everyone. For the fourth quarter, CHS delivered results generally consistent with the expectations. The company continued to execute well on the controllable aspects of the business and was able to deliver expansion in adjusted EBITDA margin on a sequential basis. thus achieving the midpoint of our updated guidance for the full year 2020. Adjusted EBITDA for the fourth quarter was $395 million with a margin of 12.7%. When adjusting for divestitures and out-of-period items, adjusted EBITDA was up slightly versus the fourth quarter of 2024. Same-store net revenue for the fourth quarter increased 2.1% year-over-year driven primarily by rate growth and a slight improvement in acuity as net revenue for adjusted admission was up 2.4% year-over-year.

Same-store inpatient admissions and adjusted admissions were each down 0.3%. Same-store surgeries declined 1.9% and ED visits were down 3.6%. When excluding the Pennsylvania operations that were divested on February 1, 2026, same-store admissions and adjusted admissions were flat year-over-year and surgeries were down 0.4%. Meanwhile, CHS again performed well on cost controls. Labor was well managed with growth in average hourly wage rate coming in within our expected range for the quarter and the full year, and contract labor spend was essentially flat on both a sequential and year-over-year basis. With live expense continued to be well managed, declining 110 basis points year-over-year to 14.4% of net revenue in the fourth quarter and down 50 basis points for the full year 2025.

Medical specialist fees $169 million in the fourth quarter, which was up 4.6% year-over-year on a same-store basis and held City with recent quarters at 5.4% net revenue. We continue to expect upward pressure on medical specialist fees in excess of typical inflation, likely in the range of 5% to 8% growth for 2026 driven by radiology and anesthesia. As we previously noted, we have seen operational improvements in areas such as throughput and safety metrics and physician practices that the company has in-sourced. And we'll continue to evaluate in-sourcing opportunities to combat this upward cost pressure when appropriate.

Cash flows from operations were $266 million for the fourth quarter, bringing the full year total to $543 million versus $480 million in 2024. Cash flows from operations for the full year of 2025, as reported includes $169 million in outflows for taxes on gains until the hospitals which are paid out the divestiture proceeds that are reported as investing cash flows. When excluding these cash taxes on divestiture gains, our adjusted cash flows from operations were $712 million for 2025, and adjusted free cash flows were $150 million. As expected, during the fourth quarter, CHS received $91 million in contingent cash consideration related to the 2024 divestiture of sales of Cleveland and net cash proceeds of approximately $152 million from the divestiture of our outreach lab assets. We used a portion of these proceeds to redeem $223 million of the 10 7/8% senior secured notes due 2032 and 103 via a special call provision and also redeemed the remaining $14 million outstanding principal amount of the 2027 notes in mid-December.

Subsequent to year-end and early February, we completed the divestiture of our 80% ownership in Senova Healthcare, Clarksville in Tennessee for $623 million in gross proceeds and the 3 Pennsylvania hospitals for $33 million in cash plus a $15 million promissory note and additional contingent consideration. We used a portion of these proceeds to redeem another $223 million of the 2032 notes of 103 via the special call provision on February 2. As Kevin previously noted, our leverage at year-end 2025 was 6.6x down from 7.4x at year-end 2024 and has since been further reduced by the second partial redemption of the 2032 notes earlier this month.

We have simplified our capital structure by effectively eliminating unsecured notes in the second quarter 2025 and -- our next significant maturity is in 2029. And as of December 31, 2020, we had no amounts drawn on our ABL. The previously announced divesture of our Huntsville, Alabama assets is on track to close in the second quarter and is expected to bring in an additional $450 million in gross proceeds, further enhancing liquidity to fund growth investments and/or further reduce net debt and leverage. It is worth noting that once the Huntsville divestiture is complete, our net debt will be approximately $9.2 billion, down from the $10.1 billion at year-end 2025 and the $11.4 billion 2024.

Now moving on to our initial 2026 financial guidance. We anticipate net revenue of $11.6 billion to $12.0 billion, adjusted EBITDA of $1.34 billion to $1.49 billion, cash flows from operations of $600 million to $700 million and capital expenditures of $350 million to $400 million. The guidance range with net revenue and adjusted EBITDA both coming in below full year 2025 levels reflects the impact of divestitures completed in 2025 and those that have been announced and have been or are expected to be completed in early 2026 as well as the exclusion of onetime or out-of-period items that benefited 2025 results and are not expected to recur in 2026.

In bridging from 2025 actuals to 2026 EBITDA guidance, the biggest factors are, of course, the divestitures. For those we completed during 2025, which includes Cedar Park, Lake Norman and Shore Point, the partial year impact that you have to take out of our as-reported EBITDA in 2025 is about $30 million to $40 million -- I'm sorry, yes, $30 million or $40 million. For the class of 2026 divestitures, which includes Clarksville, Pennsylvania and Huntsville, it's in about $80 million to $90 million reduction to the baseline. And then as you recall, we had the retroactive teas related to Tennessee, STT and the opioid settlement, which together added about $45 million of EBITDA in 2025. So after adjusting for all these factors, we view the starting point for '25 as EBITDA of about $1.36 billion.

Of that base, our initial guidance range for 2026 reflects core operations of about 4%, which is net of an estimated $20 million to $30 million EBITDA impact resulting from the reduction of FIC enrollment. Our guidance does not include impact from any new or enacted state-directed payment programs that may still be waiting approval and likewise, does not include any benefits from the rural health transformation program. as the states in which we operate are still in various stages of finalizing their program designs. Additionally, the guidance considers only the impact of divestitures that have already been completed or announced to date. Any such additional transactions is completed during 2026, which reduced net revenue and EBITDA for the year and the associated proceeds would enable the company to further reduce net debt and leverage.

A final note for many employers on a biweekly pay schedule, 2026 will include an extra pay period, meaning there will be 27 payment days compared to the normal 26 payment dates. CHS is in this category. So while this has no impact to adjusted EBITDA, it will be an approximate $140 million headwind to cash flows from operations in 2026 and is reflected in the guidance range.

This concludes our prepared remarks. So at this time, we'll return the call back over to the operator for Q&A. Marco?

[Operator Instructions] Today's first question comes from Brian Tanquilut with Jefferies.

The bridge. So maybe in already gave us that, I'll shift my question to just as I think about the divestitures, right? I mean you've announced a few that are pending here, obviously baked in the guidance. But how do we think about your perspective in terms of further divestitures? And as you've pruned the portfolio, you now have an asset base that is comprised of fairly good hospitals. So how do you rate -- what's a philosophical view in terms of what is left to sell and how that impacts go-forward performance and then just how much more are you willing to prune the hospital base from here?

Brian, this is Kevin. I'll kick this off, and thank you for your question and for joining us today. We are getting, I would say, closer to the end of our programmatic divestitures. We still have some inbound interest as we continue and probably we'll always have some inbound interest because we have some very good markets. There are a couple transactions right now that we are in some early stages of discussions, but we are not sure yet whether those will proceed or whether we will be able to get those across the finish line. But I would say in terms of what we have interest in selling is certainly dwindling.

We're very comfortable with our portfolio as it stands, and we really want to be just opportunistic about transacting hospitals that if there were ever to be a change in the economic environment or environment in which we're operating that would cause us to want to make a decision to divest or if it's just an opportunistic transaction at a price point that would allow us to materially deleverage then I think we would want to take advantage of that.

I appreciate that. And then, Jason, as I think about your bridge that you provided, when I think of the HIX adjustment there, just curious if you could share with us the assumption that you've embedded in that number, whether it's shifting to bronze and employer plans? Or just curious if there's anything you can share with us on.

Yes. Sure. Thank you for the question. As a reminder, health care exchanges represent less than 5% of our total adjusted admissions and net revenue. And our guidance does attend to account for the potential impact from the reductions in enrollment in health care -- health insurance exchanges related to the administrative reforms, expirations of enhanced premium tax credits, et cetera. Obviously, it's difficult to predict currently what the ultimate outcome will be, which will be highly decent up on the ACA plan effectuation rates. Potential uptake into the employer-based plans, shifting into lower metal tier plans or becoming self-pay. And the success of our company is the eligibility, screening services and assisting uninsured patients with the pending coverage.

We acknowledge that the other peers have, there could be some negative impact to volume trends and payer mix. A 20% reduction in fixed volumes would have resulted in a $100 million to $120 million reduction in net revenue based off of that, where we're kicking off 2025 after excluding the divestitures, we think that could translate into a $20 million to $30 million reduction in EBITDA.

And our next question today comes from A.J. Rice at UBS.

Maybe first, just to ask -- I don't think I've asked about this in a while. The portfolio is obviously quite diverse. You have midsized city markets that make up a lot of the portfolio, but also have a number of small community properties still. Has there been a meaningful difference and the way 1 side or the other of the portfolio, I probably get asked it geographically as well. Do you see meaningful difference as to how within the portfolio assets are performing over the course of the last quarter to last year. Any thoughts on that?

Thanks, A.J. We do have a fairly wide range of performance across our portfolio. But as we have trended and focused on networks of care, most of those hospitals and even the smaller, more rural hospitals fit within a network that includes a hospital in a larger suburban or midsized metropolitan area in those smaller hospitals, although individually or on their own may operate at a different level, also serve as an access point or transfer point for higher acuity services that we're still able to capture within the network. So really, as we're looking at and evaluating our portfolio, we been divesting many more of the hospitals that kind of stand on their own where we don't have a network of care build up around it and focusing our efforts on those networks.

Okay. And then maybe for the follow-up, I know you swung free cash flow positive. Congratulations -- it's been a while for that. So that's a good thing. I wonder when you look at that, does that change your view on capital spending, and we certainly are hearing a lot about AI and how hospitals could benefit from AI. What are you doing there? And will that be a focus of spending?

Sure. Happy to address those. So -- and thank you for recognizing that. It has been something we've been working towards and knowing we needed to get there and we're glad to say that we kind of turned free cash flow positive this year as a result of a number of initiatives, including the divestiture program, which has helped us reduce some of our cash interest and has gotten rid of some of our cash flow headwinds.

As we move forward and as you saw in the guidance, our capital spending levels really are not changing from an absolute dollar amount from what we have spent these past couple of years, even though we have a smaller footprint of hospitals, so we're spending more per hospital going forward. And I think we're able to do that now that we're improving our cash flow. Those improvements allow us to invest in some additional growth opportunities. And then as you mentioned, as we look at AI, there's a number of use cases that we're already investing in for AI that we're already using and some additional ones on the horizon. Many of those focus in some administrative areas that are -- should drive some cost savings, even in our revenue cycle, whether it's in the -- we're using some AI in an appeals process some autonomous coating in our prior authorization process.

We've also implemented some AI or an AI augmented tool for virtual patient sitters that has helped prevent falls and serious safety events. That's a little more on the clinical side. We're in the process of rolling out the ambient listening and some AI virtual systems to improve documentation accuracy -- and then we have some even more on the clinical side with some AI-enabled maternal fetal early warning systems that improve obstetric outcomes, so we're looking at it across the portfolio. And then as we've talked a lot over the last couple of years about our ERP, the Oracle tools from an administrative standpoint and process transactions are having more and more AI built into the software that will be available to us as we continue to mature our processes with our ERP.

And our next question today comes from Ben Hendrix at RBC.

I wanted to step back to the guidance bridge a little bit and kind of back it up those elements to revenue. Just so we can get an idea of the pass-through provider tax on that onetime Tennessee DPP item and then also profitability of the divestitures. If we could just get the bridge for revenue.

Sure, Ben. Thank you for the question. So I'll kind of walk through starting with the divestitures. For 2025, the partial year impact that again, that's short point that was divested on March 1. Late Norman on April 1 and Cedar Park on June 30. It's about $210 million to $230 million of net revenue. to take out of 2025. And then for those divestitures that have been announced and have been completed or expected to be completed in early 2026, that's about a $1 billion reduction to net revenue. Keep in mind the 3 Pennsylvania hospitals that we divested on February 1, generated a lot of net revenue, about $0.5 billion annually. But they were basically breakeven to EBITDA.

And then the 2 onetime items, the Tennessee SEP, the retroactive piece there and the opioid settlement, that was about $60 million net revenue. So if you kind of factoring all those items in the jump off point for 2025 net revenue was about $11.2 billion.

Great. That's very helpful. And then just in terms of the core growth that you're projecting, if we think about the kind of consumer confidence issue that Kevin raised on his prepared remarks. How are we thinking about the impact there of that kind of early year mix shift and how it could impact the pacing through the year?

Ben, this is Kevin. Yes. So coming out of 2025, we saw a dip in consumer confidence in December, down to the level that the last time we saw that, I think, was in March of 2025. And following that, we had kind of a pretty soft quarter in terms of volume. So starting off the year, I think you're going to see a little bit of headwind, not only with the reset of co-pays and deductibles, but consumer confidence being light. We do think that's temporary. We think that will improve throughout the year. As I think about kind of cadence throughout the year, although we don't give quarterly guidance, I would expect the back half of the year to be a little stronger in the first half of the year in terms of EBITDA production.

And our next question comes from Jason Cassorla with Guggenheim.

Great. Maybe just going back, you noted the exchange headwind on EBITDA to be $20 million to $30 million. I guess if you were just to back that out, you're suggesting close to, call it, PAUSE same-facility EBITDA growth for the remaining business. Can you walk us through that growth rate? Is that more in power flow through? Is that favorable Medicare rates? Just any thoughts there when you kind of back out the exchange in the remaining business would be helpful.

Sure. Thanks, Jason. The kind of the pure rate increase assumption there is about 2.5% to 3.5% of the growth. And the remainder is the mix of payer mix, acuity and volume to get to that, but sort of about 5.5% -- 35.3% increase.

Yes, I might just add, if I can jump in with some color too, if you think about Medicare rates this year, we're looking on the inpatient side, about 4% Medicare rate increase for 2026. That's the highest rate we've seen or the highest increase we've seen in Medicare as long as I can remember. So that's going to be helpful that will help drive. We did see some pretty good rate increase in fourth quarter that Medicare inpatient rates went into effect October 1. So we do think that will pull through and as well as some of the capital growth investments that we've made throughout this past year will also be helpful in driving some higher acuity services and some payer mix improvements.

Great. Very helpful. And maybe just a follow-up on the divestiture front. I mean, your hospital footprint is down about 1/3, right, since 2019. And I guess as you evaluate the future deals or opportunities, like how are you factoring any potential headwinds that may come from fixed cost leverage leakage as your facility base gets smaller? Just curious how you're thinking about that and how you're factoring that as you look to perhaps sell more assets?

Yes. We keep a close eye on our overhead costs here. And I think our overhead costs, we've been very efficient with those costs. Many of our centralized services are volume related, like revenue cycle like our new shared business center where we've moved accounting, finance, HR, now that we've put in a new ERP. All of those things can be flexed because they're very transactional related. So as we divest facilities and reduce the number of transactions we're processing. We can scale those accordingly. Also keep in mind, we've been adding significant numbers of beds to our existing hospitals, even though we've been divesting some hospitals with our capital projects over the last several years.

I think over the last maybe 3 to 4 years, we've added 500 to 600 beds to our core portfolio -- we're adding freestanding EDs, surgery centers, clinics, and we would continue to be looking at opportunities to do that. If you go back in 2019, our net revenues, I think, were approximately $13 billion. And to your point, we've sold about 35% of our portfolio but our net revenues this past year were $12.5 billion. So -- and the EBITDA is also relatively close, even though we have 35% fewer facilities. So that's kind of how we're looking at it.

And our next question today comes from Josh Raskin at Nephron Research.

I just wanted to go back to that technology agenda that you're talking about. And maybe if you could give a little more details around some of the system changes, the ERP and how that's gone? And where you're targeting more additional efficiencies and savings in light of some of the divestitures. And then I'm curious, any new efforts around revenue optimization or anything else on the revenue side.

Thanks, Josh. The ERP implementation and transformation, I would say, went extremely well. It was a multi-year process and 1 that was a big heavy lift for us as an organization, but we did complete that on time. And we went -- fully went live across the entire portfolio effectively January 1, 2025. So we've been up now for a full year on the new systems, they are working as designed. We did not have any issues in terms of closing our books or any expense issues that were of a surprise or they came through that got identified as often as times the case when you go through a big system conversion like that, you find things and we did not find any big surprises.

We are still in the process of what I would call maturing the new system. We've had some big successes. We by our tracking, it has saved us approximately $50 million this past year. And I think there's runway over the next couple of years for us to continue to increase the savings as if we're getting out of that. Now those savings have come from a couple of different areas. One, it's been reducing the number of other systems. So we've replaced multiple systems, multiple financial platforms with a single platform. And as we get rid of some of those duplicative systems, we're saving money. We are giving better decision support. We have better insights now that we have a single integrated system and standardized data across the entire enterprise. So we're able to see more for instance in the supply chain area. We have a single item master across the entire enterprise and pick an item that you purchased we have almost instantaneous visibility into how many of those items are purchased across the entire system as opposed to trying to cobble together multiple systems to see what we purchased of a single item.

So that all provides better decision support allows us to leverage our scale better. And as that whole process matures, we believe we'll be able to extract more savings going forward. Then with the AI components that are baked into the new platform and that are being rolled out. A lot of this AI was not in Oracle when we initially acquired and began implementing it -- but as Oracle is building out their product and now that we're in a kind of a cloud environment, we get updates every quarter with new functionality. They're rolling out new functionality that we can then take advantage of going forward. That will allow us to be able to gain significant efficiency that I would expect in 2026 and forward that we'll be able to take advantage.

Perfect. And anything new on the revenue side from a tech perspective?

Yes. On the revenue side, we're continuing to -- and as I mentioned, we're already using some AI in our appeals process in some autonomous coating we're looking at some additional use cases to further expand some of those products. And some of the software that we're using in our revenue cycle is also those vendors are building out some AI PAUSE technology or components within their products that we'll be able to take advantage. That should help us with charge capture and as well as some prior authorization.

And our next question today comes from Andrew Mok with Barclays.

Wanted to follow up on the ACA headwind, the $20 million to $30 million EBITDA call out strikes me as a bit low on a potential $100 million to $120 million impact to revenue. So can you help us understand the offsetting factors there and whether that headwind figure is net of any planned cost reductions?

Yes. Sure. So I mean, first, the deductibles and co-pays that those patients have or generally, we don't collect many of those. And so the $20 million to $30 million was -- we started by applying whether their normal 12% EBITDA margin, but then recognizing that there's some fixed costs that remain -- we took that up to more than $20 million to $30 million range because, obviously, you don't incur the cost if those patients don't present and supplies, dollaries et cetera.

Yes. I would just add on to that, and I think Jason brought up a very good point that our experience has been that a number of the utilization of health care exchange of patients is in the ED and oftentimes those individuals do not pay their co-pays and deductibles, our collection of co-pays and deductibles, it is very low on that group of patients. So factoring that in, we don't believe that there is this big a headwind for that business being low.

Got it. Okay. And if I could follow up on the cash flow. The operating cash flow guidance seems to embed a meaningfully positive contribution from working capital. Despite the negative callout on the extra payroll cycle. Can you help us understand what's driving that favorable contribution.

Sure. There's probably 5 to 7 different items that we've identified categories to step over that additional pay period. One is improving our AR collections and the goal to reduce by a day. AP remains a focus. We did have in 2025 some payments of AP from our conversions from old systems that built up and were paid earlier in the year that we shouldn't have to step over in 2026. And then also just focusing generally on AP management.

Inventory turnover is a focus of ours, again, this is kind of that next step of being on a single ERP and maturing our processes. We've got -- we expect a lower amount of payments in medical malpractice and there's continued collections on the divested AR that we don't sell to the buyers. So while we don't have that income coming in, we'll continue to collect on the AR, the cash will still come in. And then there's always a state direct to payment program timing as to when the payments come in versus the recognition of the revenue.

And our next question today comes from Steve Baxter at Wells Fargo.

Not to believe the exchange points too much. I guess I'm just trying to understand a little bit better. On 1 hand, I think everyone kind of understands that this exchange population does feel like there is a great deal of ER utilization happening. I guess I'm just wondering when you think about sort of the decremental margins here the still topically, it seems like in a lot of these situations, you might actually keep the cost, people continue to use the ER but just don't actually have the revenue anymore associated with that. So just trying to understand, I guess, why you wouldn't see a much potentially higher decremental revenue drop through on that?

And then maybe just to help kind of square it, like what percentage of the exchange enrollment loss do you assume it goes to other coverage sources?

So Kim sorry, I didn't catch the last part of that...

Yes, the last part was what percentage do you expect to.

Yes, you do expect the exchange market to shrink 20%, like of that shrink, how much of that do you think ends up in another source of coverage, therefore, like what percentage of this starting 100 to 120, just kind of does not an issue to deal with at all. And then of what's left, that's kind of what the question on the avoided cost and the decremental margin comes in.

Frankly, a little too early to really accurately predict what's ultimately going to happen with these folks that still just be able to pay their own premiums or downgrade, all the things that we talked about earlier, don't just go self-pay and not be able to get coverage. So we didn't intend to determine exactly how much it's going to come back in because it kind of came back to ultimately is less than 5% of our net revenues. So we were kind of sizing it, we took an approach of starting there and then using the to start at 20% and trying to fly what kind of margin that could end up slowing down to.

Yes. We think we're generally relatively low margin on that business to begin with. And to your point, some of those folks that lose or drop out of the exchange will actually come back with commercial coverage that we'll get a better margin on as they're commercially covered. Some of them may move into Medicaid. Some of them may move into uninsured status we took a blended rate of 20%. But as we think about -- given the fact that a lot of the co-pays are not collected, our current margin on that business is pretty low. So that's where we came up with a 20% to 30% EBITDA hit on that revenue.

And then just to follow up, I think you might have said this, but just to clarify, the same-store volume growth assumption that's embedded in this guidance. And then as we think about the step from the same-store volume growth this year to what you're looking for in 2026? Like what payer category should we think about as driving that step-up.

We -- the same-store volume growth would be low single-digit expectation for 2026.

Was the second part of that question, Stephen, sorry.

Yes. Just to the extent you were looking for improvement, what payer classes you might call out is expecting a better volume performance than what you actually realized in 2025.

Certainly, commercial. I think we saw some improvement in commercial mix this year. And as we think about where we are making some of our capital investments and service line investments, we would anticipate capturing both some additional Medicare but also commercial business continuing to ramp up.

That concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Hammons for any closing remarks.

Rocker, thank you, and thank you, everyone, for joining the call today. I want to close by reiterating my thanks for our team members for their commitment to our shared vision for CHS and their combined efforts in putting our values into action. If you have additional questions, you can always reach us at 615-465-7000. Have a good day, everyone.

Thank you, sir. And that 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.

Hi, everyone. I'm A.J. Rice, the health care service analyst at UBS. And we will have next up, Community Health Systems. Happy to have Kevin Hammons, our Chief Executive Officer at Community; and Jason Johnson, Chief Financial Officer.

So we're about 10 months into the year at this point, a little over 10. What has sort of been some of the takeaways for you so far, Kevin? Surprises? Challenges?

Sure. It's been a little bit of an unusual year. Started off the year I think with a lot of optimism, consumer confidence is high. First quarter was strong in terms of volumes. And then we ran into the second quarter where I think we saw a lot of disruption. Consumer confidence dropped off pretty significantly, more disruption out of Washington that started concerns about inflation, impact of tariffs and so forth. So then when we get to the third quarter, a lot of that consumer confidence, it kind of hit the trough, it started to stabilize a little bit. We've seen some recovery in the third quarter. And hopefully, that continues on for the remainder of the year.

Yes. So you mentioned a little bit about the macro backdrop. I know volumes moderated for you and for the industry, it looked like in the second quarter, but seemed to rebound a bit in the third quarter. What's your latest thinking overall as to what's happening with respect to volumes? And do you think the bit of moderation we've seen has been sort of behind us, and we'll see a pickup as we exit the year?

I do think we're certainly stabilized now. I would expect the volumes probably, particularly in the surgery area, remain a little bit soft. We're seeing that across the industry. And at this point, it's still too early to tell for the fourth quarter, and we've not put out anything specific about the fourth quarter. But I would expect surgeries to remain soft through the rest of the year.

A lot of the softness really cause -- or we're seeing in the elective outpatient area amongst commercially insured patients, which suggest to us that it's more of an economic decision. And it's probably just deferred care. And it's yet to be seen whether that deferred care comes back in Q4 or in early 2026.

One of the managed care companies yesterday was sort of hypothesizing that there is some shift to scheduling people that would normally get an outpatient procedure, say, 8:00, 10:00 in the morning, be discharged at the end of the day via AI and things like that. Some hospitals are now scheduling those procedures from the afternoon. So they're not off of anesthesia yet, so they end up being an overnight stay. Is that -- have you -- is that anything that resonates with you?

No. I've never heard that one yet.

Okay. It seemed like an odd one, but it definitely created a little buzz yesterday. The ACA subsidies is a big focus. Obviously, we've had the announcement over the weekend of the deal, and it seems like there's not a provision to extend the subsidies on there. Can you just remind us a little bit about your exposure to the exchanges? Have you given any sense of what you think it might mean if these subsidies don't get extended?

Yes. So our exchange business represents less than 5% of our net revenue. So really limited amount of exposure and not all of those patients are receiving subsidies, only a subset of those patients are actually receiving subsidies. And if you think about the patients that really are getting subsidized for their health insurance premiums, we're also not likely to be collecting co-pays and deductibles either from those patients. So we're already kind of absorbing that piece, and there are also higher utilizers of emergency room visits. So I think our exposure is pretty limited. I think we have less exposure than some of the other providers, and that's probably more of a geographic issue than anything.

Okay. Now I do want to point out and we're thinking information is coming out, probably hourly or every 30 minutes out of Washington. But it does sound like part of the deal to reopen the government, there will be a vote on the extended tax credits here in mid-December. It looks like they'll take that up, and we'll have another vote at that.

Right. So a couple of things to follow on that. There had been some discussion of perhaps people would realize when they see there'll be open enrollment, their coverage is going to be prohibitive next year, and they might rush to get procedures done to the end of the year, given your earlier comments on surgery volumes, are you seeing anything that would suggest that type of activities happening or not really?

We've not seen that yet. I think it's a real possibility if those individuals are really paying attention to what their premium, their situation is for next year. That said, we haven't really seen that yet, at least kind of through the third quarter and maybe into the early parts of October.

And the other flip side of it is while it looks a little less likely or a lot less likely that we'll have these subsidies extended given the weekend dynamics. But if we did have some 11th hour reprieve and there was something, do you have a mechanism? What happens for people that have -- maybe there's an extended open enrollment or something? Can you access those people and tell the ones that maybe have dropped off, "hey, you can sign up again or whatever"?

We do. So we have a group, we call it Eligibility Screening Services. It's actually a subsidiary that we own that work with our patients as they present to the hospital as they schedule appointments, if they don't have insurance, our ESS group will work with them to make sure that they get signed up or qualify under whether it's charity program, Medicaid, health exchange, any type of service out there in some instances, in some communities if there's a foundation that will help cover uninsured, we'll get them connected with them. And they'll work with patients not only in our emergency rooms, but also patients scheduling inpatient services. And separately, we work with patients even in our clinics to make sure that they get it connected with any available insurance coverage.

Okay. And so that happens maybe when you're engaging with them before they come in not so much when they show up in the emergency room or when they show up in the emergency room, you can still help them?

We can still help them when they show up in the emergency room. So it's both. We can connect with them in the emergency room, if that's where they show up when they're scheduling, if it's a prescheduled procedure. We don't have a roster of just kind of blanketing the community to help with that. But we do -- when the patient comes to us, then that's when we can get involved and help them out.

We'll also contact them post discharge, if for some reason, we were not able to get with them at their time -- services with emergent or new...

Right. Sure. And you can get them signed up then. Maybe just a minute on the expense side. There's been a lot of chatter about professional fees the last two years. I think you were up in the third quarter, about 4%. Any -- what's the updated thinking on that? I know you've taken some steps to bring some in-house over the last year or so. What is the trend for professional fees look like?

SP59283275 I think our professional fees are up, I think, it's 7% same-store for the full year. And we're guiding to 8% to 10%. And I think we'll end up in that another area. And if you think about the professional fee trend, it started with ED and hospitalists. We were able to in-source quite a few of those kind of the big bang because one of the companies we're using to provide those services went under, we assumed the contract last year. So now a lot of the pressures come from anesthesia, I think half of the increase is anesthesia and radiology is increasing quickly. It's been more challenging to find opportunities to in-source a significant number of those. So it's a bit by the ones or if not able to in-source negotiating better contracts with those groups. So we do think that it will be a continued headwind.

Similar to next year, what you're seeing this year, 8% to 10%?

Yes. Probably so.

Just remind us what percent of cost revenues, labor, is that roughly? What's the best way to do...

At the mid-spec fees?

Professional fees.

Yes, it's about 5.4%, I think, of revenues.

Yes. Okay. And maybe more broadly, obviously, labor is the biggest cost item generally, what's happening with nursing and wage increases and so forth?

We are, I think, at 4% of the wage increase for nurses, which is what we're guiding towards. And I think that's probably what will continue around that amount for the foreseeable future over the next 12 months or so probably around that. Contract labors well managed. I think we've managed the utilization rates are down well down from the peak during COVID.

Are you at about the same place you were pre-COVID?

Yes, probably more like the 2019.

Okay. All right. So that probably is going to stabilize at the current level in your mind?

Yes, I don't think there's any reason to expect any significant increase on that.

From time to time, there's an area of focus under supply expense as an opportunity. Is there anything that's front burner these days?

Yes. So we are -- have an equity ownership and GPO -- so the more that we can make sure that we're spending on contract, obviously, the better for us. We implemented an ERP that we finished and January 1 of this year. So there's still opportunity there with the ERP. We have access to more data to ensure contract compliance, inventory management, also an area that we're trying to make sure that we focused on built shared services around that. So the supplies is -- I think there's still opportunities there to...

Is the inventory management more focused on commodity supplies? Or is it in implants?

It's mostly in the commodity supplies, talking about that. Yes.

Yes, if I could just maybe add a little more color. So we went from having created the company over a lot of acquisitions for a lot of years. We had multiple systems in place, not unusual for health care systems built this way. When we put our ERP in, we now have a single integrated system across finance, supply chain, HR payroll, all integrated. All of our hospitals now have a single instance of item masters and vendor masters and so forth. So we have information that we can aggregate much easier, much quicker that will give us kind of a business decision support tool.

We can see how many of an individual item we're purchasing across the entire organization within a moment's notice versus having to manually kind of gather information that you might get after 6 weeks, and suddenly, it's information stale. So I think it gives us, a great deal, more insight.

We're also in the process of putting that in, moved all of those functions into a shared service environment versus all the purchasing decisions being made locally at each hospital. So that will also give us the opportunity to leverage our scale, be able to take advantage of more bulk buy on commodities also as we think about moving physicians on some of the implant higher-cost items, having the insight and the ability to control that better with our workflows should be meaningful to us.

When did you put that in place?

We kicked it off almost four years ago, but beginning January 1 of this year is fully operational across our entire enterprise.

Do you have a target for a reduction in working capital and what that might mean from a cash flow perspective?

We do. We think, from a savings perspective, it was, I believe, $20 million to $40 million this year. We think we'll be able to increase that $30 million to $50 million next year.

Okay. And then I think the other thing is as your financial position continues to strengthen. There's an expectation you might step up capital spending as well. Can you give us a little bit of thoughts on where that spending might be directed? What might it mean for the company's growth?

We don't have any -- we recently -- last year, we completed two bed tower expansions, one in a hospital in Foley, Alabama and one in Knoxville area. So we don't have any replacement hospitals or major inpatient additions of projects into next year. So more focus on outpatient growth, more -- you should get a quicker return capital efficient. So I think next year probably looks more similar this year. We're still working on our -- we haven't released guidance, but in terms of what we'll spend, still trying to make sure that we are free cash flow positive that in the future, as we continue to decrease our leverage and generate more free cash flow, we'll certainly be looking for the increase in our capital spend.

A lot of discussion at the conference about AI, and that's the buzzword. Are you -- is that investment priority in any way? What are some areas where you might think that would be applicable for a hospital business?

It certainly is. There are a lot of opportunities. We're already using AI in our revenue cycle area. We're using it to do some coding for appeal letters. Those are some areas where we've built some AI. There's also, with a number of the products that we already purchased, AI being built in. So our ERP is Oracle. And there's a lot of AI built into Oracle, and we're in the process of now that we're up and using Oracle, looking at all the different AI components and how we can integrate those into our workflows.

Okay. I know it's sometimes hard to envision how this applies revenue cycle management generally. So what -- is there a couple of specific things that you can say this is how it's changed, and this is what it's doing for us?

Yes. I think there are one area, and this is in the clinical space, but using AI, we're -- as we gather clinical information about patients who are at risk for sepsis using AI, it can actually inform the physicians earlier in the care process that the patient has indicators of potential sepsis and allows us to actually dose medication and our sepsis rate and sepsis mortality has decreased significantly as a result of that. And the AI component of that is looking at all that information in the background and then notifying physicians that, "hey, this patient is at risk" and it does that much quicker than what may otherwise be done by humans.

In the appeals letter process in the revenue cycle, the AI tools are actually reviewing the records. We get denial and it can generate an appeals letter. And AI generated appeals letter that we can -- we still have a human review it but at least the construction of the letter itself or production of the letter itself is much quicker. So it's tools, then somebody can review it and decide -- we then decide whether...

So it's more of a focus on the appeal as opposed to just getting a clean claim to begin with. Is that where you're seeing the opportunity?

Correct. Currently.

Interesting. And I guess, maybe from a finance perspective, a general leisure perspective, there's account reconciliation opportunities to use AI rather than individuals actually complete...

So what would be an example of that, maybe?

I mean this is pretty detailed here, but even like reconciling bank reconciliations, where you've got two sources, you get the bank and the ledger and doing all the matching, just continue to auto reconcile using AI.

Which can help reduce costs and speed up time and reduce costs.

Experience. Analysis.

Right. Interesting. Okay. The government shutdown seems like its coming to an end. Was there anything that impacted your business in any way?

No, we did not see any material impacts to our business during the shutdown. I mean, claims continue to get paid and even some of the things we're more worried about that are much longer down the road, there did not seem to be any kind of slowdown or impact to those.

So you've got a couple of potentially important supplemental payment programs that are out there, I think Indiana, Florida, Georgia. Any thoughts on those? They sound like they were probably held up because of the...

They may have been held up. I mean we never know when the approval process is coming through. Certainly, they did not get approved over the last 40 days during the shutdown. I still think there's opportunity. We hope that they'll get approved before the end of the year. And as long as we're recognizing it, if they get approved by the end of the year, we can still recognize it in the quarter.

Right. And any way to size what those might be?

Sure. Florida is relatively small because it's just an adjustment to the existing program. Similarly, Georgia, we only have one hospital. I think each of those states is probably in the $10 million to $15 million range each. Indiana, there's been -- our understanding is a lot of back and forth between CMS and the state around the structure of that program. They're working through that. We don't know what the final structure of the program will be. So there's no way that we really have to size what that opportunity is.

Every once in a while, we find there's one not on their radar screen. Are there any other states that you're watching that are particularly relevant?

Not for us. We have some opportunities. We still believe in Alabama and Arkansas probably not with the provider tax programs because they were not applied for prior to the one Big Beautiful Bill. But we do believe there's other opportunities for those states to leverage federal funding, maybe in some other structures. There's work going on. We're talking with the state Medicaid directors and the governor's offices, but those are further down the road, nothing currently.

Okay. Some chatter about the Medicaid work requirements that are part of the One Big Beautiful Bill. I think that goes after more the expansion population. So maybe that's a limited impact on you guys, but just any -- what's your thought about that?

It is limited to the states that expanded Medicaid. However, we've had a little bit of experience Arkansas had previously put in work requirements as has Georgia. And we -- when those states did that, we did not see any real impact to Medicaid. And my suspicion is we won't see a material impact to Medicaid reimbursement as a result.

It's because those tend to be healthier people that aren't utilizing hospital services that much.

Yes. Okay. Divestitures have been an ongoing part of the story as well. You've recently announced three hospitals in Pennsylvania, [indiscernible] and one hospital in Tennessee to Vanderbilt. Do you want to provide -- if you don't mind some context around that and what's happening?

Sure. Happy to do that. So the Pennsylvania hospitals, total purchase price around $35 million, plus we'll give up some lease liabilities. So I think the actual valuation is closer to $50 million. And those are essentially breakeven from an EBITDA perspective. So high multiple, not really losing any EBITDA as a result. So that one was a deal that we had tried to get done last year, financing fell through by the buyer. This deal that we've recently signed still subject to financing.

But this group does have another hospital in Sharon, Pennsylvania. They have operations. They own another hospital in Pennsylvania, and we're relatively confident that they'll be able to get this one across the finish line. Clarksville, a much bigger deal, $600 million for our 80% ownership being purchased by Vanderbilt. Vanderbilt is our joint venture partner so they already own the other 20%.

What is the EBITDA headwind from that one roughly?

Roughly, that one was, I believe, in the $60 million to $70 million range. But with it being a joint venture, we also had minority interest. So net-net, it's roughly -- or net of noncontrolling interest, it's in the range of 12x multiple.

And you did a transaction with LabCorp, maybe describe that as well?

Yes. We -- so we sold our outreach lab services, not a core component of our business to LabCorp. We'll be closing on that here in the fourth quarter, roughly $190 million purchase price for that lab business which will -- they'll take over, we'll be outsourcing then all the lab work to them.

Does that create an EBITDA headwind at all or?

Because it wasn't a stand-alone business and not core to our business, we really don't have an EBITDA kind of estimate. It was really more based on a volume play in revenue play, but it should not be a material EBITDA impact.

So your total proceeds from divestitures are going to end up being what, just under $1 billion or something?

Yes. So we also, in the fourth quarter, we collected roughly $90 million, which was a contingent purchase price from the sale of our Cleveland, Tennessee Hospital last year. That deal included this contingent purchase price adjustment after Tennessee's state-directed payment program got approved. So we collected that cash. So that's $90 million, about $190 million for LabCorp, $600 million for Clarksville and then, call it, $35 million for Pennsylvania. The Clarksville deal not likely to close until Q1. But here in the next short period of time, approaching $1 billion of incoming...

Yes. Pretax, there will be 15%, 20%, maybe in taxes.

Yes. That's right.

And you've done the refinancing, they got rid of your maturities, it went out to 2029. So what's the priority for the cash flow here?

I think the priority is still to delever the company. We have a couple of opportunities to take out some debt, potentially capture some discount. We also have some high coupon first lien debt out there that we have the ability to call and/or repurchase that would probably materially benefit our cash flow by taking down our interest. We have some [ 10 and 7/8 and 2 3/4 ] debt out there. So those are good opportunities potentially looking at some smaller pieces where we could reinvest but at this point, most likely, we'll focus on just debt paydown.

So when you look at where you're at leverage-wise, where are you at today? How does that step down, you think, over the next few years?

So we're currently exiting the second quarter, I believe we're a 6.7x levered. That's down. We started the year at 7.4x so made progress this year. These deals will take that down a little bit further, probably get us sub-6.5x. And our goal is still to get kind of mid 5x in the next few years. So continue to work our debt down ultimately much more balanced capital structure.

Right. What about other divestitures? So you had a formal program and now it's been more one-off. Are you still seeing inquiries come in? What's the thought on that?

We are still seeing some inquiries come in, a lot of inbound interest, interest on some assets that we have no interest in selling. But there's still interest at some pretty good multiples. And we'll continue to evaluate by the ones. We don't -- we aren't out there kind of marketing a group of assets currently. No other deals probably in the near-term horizon but we are continuing to kind of have some discussions around some of the inbound interest, and we'll see where that takes us.

From time to time, the competitive environment, business environment, reimbursement environment, the market can change, and we want to be flexible and agile and be able to take advantage where we may see a less of an opportunity in a market today. And if selling it gives us an opportunity to reinvest in a market where we see greater opportunities, we want to be able to move our resources there.

That's great. Okay just one or two more. I just -- to make sure, does as anyone in the room want to ask a question? When you think about a long-term growth algorithm and how you build that up, what would be some of the -- not so much give guidance for '26, but thinking about more longer term. What are the building blocks in your mind on that?

As I think about kind of our long-term building blocks and really a growth algorithm and some of the things that -- as I moved into the CEO seat, focusing on really kind of quality physician and patient experience kind of building that reputation in our markets being the provider that is capturing more market share in our markets. And I think that market share is really one of the key building blocks of that growth algorithm as we go into the future.

When you think about volume growth, pricing, I mean a lot of people talk about a 2% to 3% volume, 2% to 3% pricing next year, you might have a little bit of a headwind from exchange volumes. But for you, like you said, you're less than average. I mean are those still sort of the dynamics for the industry long term, do you think?

I think long term, they are. We've seen a little bit of disruption over the past couple of years, kind of coming out of COVID, we had this real high inflation that I think muted some of the volume. And then we saw some pretty good recovery last year, a little bit of disruption. But I think when you look at long term, a 2% to 3% volume growth, 2% to 3% rate growth is a pretty good estimate of what we would expect.

And then when you think about where you're at margin wise, is the goal sort of maintain margin? Do you see an opportunity for improved margin from here? Where are we at on that?

I see a real opportunity for us to improve margin. But as we -- even with our existing margin, as we delever the company, we're in a position where we can begin to generate positive free cash flow with our existing margins in that interest expense goes down, and that really gives us an opportunity to start to grow with additional investments. But with the work that Jason was just talking about with our ERP, we think that, that is a big lever for us to begin to grow, grow margins, take out some more costs out of our systems. And then as we look to make investments in some higher acuity service lines, which also have a higher margin profile, we think that the overall consolidated margins can grow.

And in terms of -- some companies talk about outpatient surgery, other outpatient sort of broadening the catchment area, how much of a priority is that? Is there opportunity for that still?

There is opportunity for that, and it is a priority. We have roughly 50 surgery centers today. We're opening three surgery centers, just in the fourth quarter of this year. So we've kind of been quietly going about expanding that. I do think there's continued opportunity. It's a little different value proposition in our markets versus in urban market but there are still opportunities for us.

And then generally, you're in markets where you have a hospital presence where you're adding these?

Yes. Currently, we are keeping all those investments in markets where we have an acute care presence.

You said currently, is there any thought about moving outside of that?

Not right now.

Okay. All right. Just to -- maybe to wrap up here, any summary comment you'd like us to take away and think about Community?

Sure. I would just say that I think we've been continuing to make good progress, optimistic about our future and progress we can make a big turn this year getting to free cash flow positive, which we are this past quarter on a trailing 12 months basis. I believe we'll be there for the full year. And I looked at -- I believe that, that's something we can continue on into the future. And I think that's a big turning point for the company and look forward to continuing to deliver on results.

All right. Well, with that, we'll wrap up. Thanks so much to the management for Community Health, Kevin and Jason for participating. And thanks, everyone, for attending.

Great. Thank you, A.J.

Good day, and welcome to the Community Health Systems Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

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

Thank you, Betsy. Good morning, everyone, and welcome to Community Health Systems' Third Quarter 2025 Conference Call. Joining me today on the call are Kevin Hammons, President and Interim Chief Executive Officer; and Jason Johnson, Senior Vice President, Chief Accounting Officer and Interim Chief Financial Officer.

Before we begin, I'll remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks as 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 will discuss today exclude gains or losses from early extinguishment of debt, and impairment gains or losses on the sale of businesses.

With that said, I'll turn the call over to Kevin Hammons, President and Interim Chief Executive Officer. Kevin?

Thank you, Anton. Good morning, everyone, and thank you for joining our third quarter 2025 conference call. Before we jump into discussing the quarter, I want to take a moment to thank the team here at CHS for the support they've shown me and others through the recent transition of senior leadership. It is gratifying to see our team's confidence in the work we are doing here at CHS and their commitment to our future success.

Over the past 90 days or so, since stepping into my new role as interim CEO, I've had the opportunity to visit several of our markets and speak with many of our hospital leadership teams, including operational, financial, clinical and service line leaders. It is always inspiring to see the folks who are providing high-quality care for our patients, and helps put into perspective how important our hospitals are to the people and communities they serve.

At CHS, we will remain focused on supporting our caregivers, physician partners and support teams to help ensure an exceptional health care experience for our patients. Next month, approximately 150 CEOs and CFOs from across the CHS network will gather for a leadership conference where we will discuss our vision for the future of the company and our ongoing commitment to investments in quality, improving both physician and patient experience, improving employee satisfaction, and achieving sustainable positive free cash flow.

As I've shared with many on our team already, I'm very optimistic about the future of CHS and our opportunities to continuously improve the health care experience. To continue to improve our operational and financial performance and to create value for our investors through disciplined and proactive management of our business.

Now turning to the third quarter operating results. Our operating performance was in line with our updated expectations. And our reported results were further enhanced by the recognition of a $28 million gain from the settlement with some prior litigation, which reimbursed us for previously incurred expenses. Same-store net revenue for the third quarter improved 6% year-over-year. We were encouraged to see some improvement in payer mix on both a sequential and year-over-year basis as well, as realizing the incremental state directed payments from New Mexico and Tennessee when compared to the prior year.

As we have done all year, we continue to grow our inpatient volume. However, similar to last quarter, the overall business mix remains more heavily skewed towards medical versus surgical cases. And inpatient admissions were flat ahead of outpatient elective procedures. However, solid expense management across most categories helped drive slight margin expansion year-over-year, even when excluding the benefit from the [indiscernible].

We continue to make targeted investments in advance our competitive position in many key markets during the quarter, including capacity and service line expansions, such as the acquisition of a vascular surgery practice and the relocation of a large [ CobGYM ] practice onto our campus, both in Birmingham, Alabama. The addition of a new urology service line in [indiscernible], New Mexico, the addition of a new neurosurgery and spine program in Laredo, Texas and new robotic surgery programs in two of our New Mexico markets.

We are successfully recruiting physicians and advanced practice providers to our markets. At September 30, 2025, we had approximately 160 more employee physicians and APPs in our clinics than in the prior year. With the recent recruits and plan commencements in the fourth quarter and early next year, we should be favorably positioned as we enter 2026.

In addition, we continue to improve our capital structure, further reducing our leverage to 6.7x, down from 7.4x at year-end '24. Also as a reminder, during the quarter, we refinanced $1.74 billion of our senior secured notes due 2027, through the offering of $1.79 billion of [ 2034 ] notes, thereby pushing out our nearest significant maturity to 2029.

At this point, I want to introduce Jason Johnson, our Interim Chief Financial Officer. And I'll turn the call over to Jason to review the financial results in greater detail and discuss our updated guidance. Jason?

Thank you, Kevin, and good morning, everyone. For the third quarter, CHS delivered results generally consistent with expectations. The overall volume growth was in line with our updated guidance and with continued solid execution on controllable aspects of our business, the company achieved expansion in adjusted EBITDA margins, and remains on track for the full year.

Adjusted EBITDA for the third quarter was $376 million, compared with $347 million in the prior year period, with a margin of 12.2%, increasing 100 basis points year-over-year. Results included $28 million from the receipt of a settlement of a legal matter recognized as nonpatient revenue. When excluding this amount, adjusted EBITDA was $348 million, and margin was approximately 11.4%, up 20 basis points from the prior year period. Please note that the nonpatient revenue related to legal settlement is excluded from the same-store metrics provided in our earnings release and supplemental materials.

Same-store net revenue for the third quarter increased 6.0% year-over-year, again, driven primarily by rate growth as net revenue per adjusted admission was up 5.6% year-over-year. Same-store inpatient admissions increased 1.3% year-over-year, and adjusted admissions were up 0.3%. Same-store surgeries declined 2.2% and ED visits were down 1.3%. We were encouraged by the sequential volume performance coming out of the second quarter, which was better than our typical seasonal experience in the third quarter. However, as Kevin previously noted, we again experienced a divergence in inpatient surgeries, which were flat year-over-year. And allocation of surgeries, which were down, reflecting continued pressure on consumer demand for elective procedure in our markets.

Despite this environment, the company continued to perform well on cost controls, including labor costs. The year-over-year increase in average [indiscernible] rate was in line with our expectations and contract labor expense was down slightly on a year-over-year basis. We also performed well again on supplies expense, which were down year-over-year, and as a percentage of net revenue fell 20 basis points to 15.0% when excluding the $28 million legal settlement.

While we acknowledge ongoing inflationary pressures and potential incremental upward pressure from tariffs on imported products and raw materials in future periods, we believe that opportunities remain as we stabilize and mature workflows under our ERP. Medical specialist fees were $165 million in the third quarter up approximately 4% year-over-year on a same-store basis, and representing 5.4% of net revenue when excluding the legal settlement, which is generally consistent with recent quarters. We expect continued upward pressure on medical specialist fees in the fourth quarter and into next year, especially in radiology, while increased use of emerging or developing technology, including AI tools should eventually help on this front.

Cash flows from operations were $70 million for the third quarter, and $277 million for the year-to-date. Cash flows from operations for the year-to-date as reported includes $126 million in outflows for taxes on gains on sales of hospitals, which are paid out of divestiture proceeds that are reported as investing cash flows. When excluding these cash taxes on divestiture gains, our adjusted cash flows from operations were $403 million for the year-to-date, and adjusted free cash flows were slightly negative for the year-to-date. Based on our historical performance, in which the fourth quarter operating cash flows are typically the strongest of the year, we remain confident in our ability to achieve positive free cash flow for the full year of 2025 after adjusting for cash taxes paid on divestiture gain.

In August, we refinanced substantially all of our 2027 maturities, using proceeds from an offering of $1.79 billion and 9.75% senior secured notes due 2034, to redeem via a tender offer $1.743 billion, or 99%, of our outstanding 2027 senior secured notes. As Kevin previously noted, leverage at quarter end was 6.7x, down from 7.4x at year-end 2024, and our next significant maturity is in 2029, providing ample runway to continue executing our strategic initiatives.

As expected, in October, we received $91 million in contingent cash consideration related to last year's divestiture [indiscernible]. We also continue to expect the divestiture of our [ Outreach Lab ] asset to close later this quarter with proceeds of approximately $195 million, which will provide additional liquidity to fund growth investments or further reduce our leverage.

Now moving on to our updated 2025 financial guidance. Based on our operating results through the first 9 months, along with the benefit from the legal settlement that was not contemplated in the previous guidance, we are tightening our adjusted EBITDA range for the full year 2025 to $1.50 billion to $1.55 billion. Consistent with our prior approach, this guidance does not contemplate any further divestitures beyond those announced, nor does it assume contribution from any new or pending supplemental payment programs.

This concludes our prepared remarks. So at this time, we will turn the call back over to the operator for Q&A.

[Operator Instructions] The first question today comes from Brian Tanquilut with Jefferies.

Congrats on the quarter. Maybe, Kevin, as I think about volume performance, obviously, nice to see the positive trend in inpatient. But on the outpatient side, you still saw some weakness in surgeries and ER. Just any thoughts you can share with us in terms of what you're seeing in terms of the recovery of volumes there? Or how are you guys thinking internally in terms of what that trajectory looks like? And maybe also the components of what outpatient is, and what you're seeing in those buckets?

Thanks, Brian. Absolutely. So as we called out in the second quarter, and as I believe we still saw in the third quarter, some of the economic headwinds, more the macroeconomics, the climate and consumer confidence seems to be the big headwind. And I think that continued on into the third quarter, particularly in some of our markets are experiencing some heavier or more softness economically than other markets. And so we still believe that has been the primary driver of some of the softness now.

As consumer confidence seems to be stabilizing, it's bounced off its lows in the second quarter a little bit and seems to be improving. We are seeing some recovery, and I think that we experienced that where we saw some improvement in payer mix into the third quarter, and we're certainly experiencing that in some of our markets. So that gives us a little more confidence as the payer mix [ and crews ] and people are feeling better. They're starting to come back in for more procedures. Our -- although we were still down on an outpatient [ elective ] surgery volume year-over-year, it was improved over second quarter. So we did see some improvement there.

I'd also point out maybe the integration climate probably is affecting some of our markets still if you think about markets in Arizona, across Texas, primarily, there's still probably a little bit of an overhang there where patient behavior, people are staying away from hospitals, at least on an elective basis more than we've seen in the past. Now we're also experiencing, or noticing that, in our ER business. And many of those are uncompensated. So where you're seeing some lower volume and maybe why that hasn't completely been noticed in our EBITDA generation is because some of that volume that we're seeing [ lots ] of volume, particularly in the [ ERs ] and uncompensated care. And so that has not had an EBITDA -- negative EBITDA impact on it.

That's very helpful, Kevin. And then maybe just a follow-up question for me. How should we be thinking about your divestiture kind of plans or outlook for 2026?

Yes, we're still pursuing. Some divestitures were in some early conversations that -- it's too early at this point. We don't know how far those will go. But certainly, we're continuing to get some inbound interest. We are in some more advanced discussions on a couple of deals, which we think could be announced even later this year. But no agreements have been signed at this point. So nothing to report today that we are advancing some discussions.

The next question comes from A.J. Rice with UBS.

First of all, I guess, you're moving towards this year. It sounds like you think you'll be free cash flow positive on a full year 2025 basis, assuming the fourth quarter comes in with a couple of hundred million positive for you. Is that -- as you begin to move to a position where that's ongoing going to be the case. Does that change your thinking on capital deployment, amount of CapEx you're going to spend, other initiatives, maybe tuck-in deals with outpatient or other things? Any thoughts on that?

Thanks, A.J. Absolutely, I think that it frees us up a little bit and does allow us to think, and be a little more strategic in terms of how we think about either deploying capital. It gives us some optionality of whether we use incremental free cash flows to further delever the company to -- which in effect would have a [ virtuous table ] benefit because [indiscernible] future cash flows. We could use it where there are opportunities for some tuck-in deals to spend capital more strategically in areas of things that we think could generate further EBITDA. So it does free [ stuff ] and should then again, create a little more of a virtuous cycle for us.

Okay. And then, I mean it's early, I know, but when you look at '26 and you're starting your budgeting process, et cetera. Are there headwinds or tailwinds that you would call out that we should keep in mind as we try to model '26?

Yes. I think I could point out a few things. Certainly taking into consideration the divestitures that we've completed this year, [indiscernible] early in the year, [ Cedar Park ] divestiture kind of midyear. We did recognize some prior year SVP for Tennessee that's about $15 million to $20 million that we'll have this year towards the settlement gain that we recognized this quarter.

As I think about 2026, directionally, some of the things -- Medicare rate increase will be strong for 2026. We potentially -- there's a couple of other SDP programs out there in Georgia, Florida, Indiana, the rural health fund, which we don't know, can't quantify at this point, but that should be incrementally positive for us. And then we're making -- continue to make some growth [indiscernible] you just mentioned with positive free cash flow this year continue on into next year may allow us to further invest in incremental growth capital.

I might add, Kevin, this is Jason, that you might want to include that $28 million legal settlement this quarter. We [indiscernible] that from the jump off for 2025.

The next question comes from Ben Hendrix with RBC Capital Markets.

Just a quick question for Kevin and Jason in turn. Just a little bit more color on your early observations in your roles. Kevin, you mentioned you've visited some facilities, any surprises or anything out of expectation in your review of the platform?

And then any initiatives you guys are looking at? [indiscernible] a little bit already about capital deployment. But anything in operations or balance sheet management that could kind of deviate from your prior practice?

Thanks, Ben. I appreciate the question. I think the short answer is, say, I'm really excited about the direction of the company, and I'm confident that we have the right strategies and people in place to execute on our opportunities. We've had a, I believe, a very smooth transition of leadership. And I believe we're already picking up momentum in a number of key areas.

As I mentioned in my prepared remarks, we have taken the time to visit several local health systems. We've met with health system leaders and I think substantially all of our major markets already. They're very enthusiastic about the progress we're making. And I just -- and becoming increasingly confident that our investments, our strategic priorities, and the resources that we're appropriately laser-focused on those most important aspects of our business.

I think we'll see some of that come to fruition here in the near term with a few areas. I'm highly focused on quality of care. So our quality, ratings, our patient and physician experience, employee satisfaction, and I won't take my CFO hat on, and I'll continue to be laser-focused on free cash flow and making sure we've made such great progress over the last, probably, 9 quarters in a row on free cash flow trending positively, now that we're getting to kind of cross over from being negative to positive free cash flow. I think that's going to give us a lot more opportunity.

So as I think though about those kind of 5 priority areas for myself and the progress that we're already making on quality and getting focused on the others. I think that will help really accelerate what we can do in the future.

Brian, this is Jason. Kevin alluded to as CFO [indiscernible]. I'm in the position of following the [indiscernible] that's still here. And Kevin put into place to focus on adjusted free cash flow in that virtuous cycle, and that's -- we're continuing to make sure that we're laser focused on that. So no change there.

I do think about that, we got the ERP fully implemented earlier this year. So continuing to optimize that as a big focus. Evaluation of the most efficient use of proceeds from any divestitures, whether that's investment in capital or deleveraging through debt repurchases. So from my standpoint, it's just -- I've been here with Kevin for a number of years. So I understand what his vision is financially and [indiscernible] we're continuing on.

Great. Appreciate that. Just a quick follow-up to a prior comment. With the sequential surgical trend you saw from 2Q into 3Q, anything changing in the way we should think about typical 4Q elective seasonality?

I do feel that with the improvement in payer mix in Q3, it gives me a little more confidence that Q4 could look more like the normal seasonal recovery. There was some concern that if commercial patients did not come back in Q3, and you get late in the year and people have not met their [indiscernible] deductible yes, they may put it off until early 2026. It's looking less likely that, that will occur.

But with the continued kind of headlines around health care and some uncertainty, we did not want to get ahead of ourselves in terms of guidance, or suggesting that it could be better. But I think we're in a pretty good position coming into Q4. There's also potentially an opportunity that people are concerned who have exchange insurance, about losing it. There may be some more of that comes back in Q4. It's a relatively small component of our net revenue, is less than 5% of our net revenues. So I don't think it's a real material needle mover for us, but it potentially could be a slight positive.

The next question comes from Andrew Mok with Barclays.

I think I want to just follow up on some of those encouraging volume trends. Were those trends you saw exiting 3Q, or at the start of 4Q? And from a category standpoint, what are you seeing? And is the payer mix improvement generally driven more by the employer-based coverage, or the ACA?

So we saw the payer mix improvements really beginning early Q3 in July. So the -- we saw that improvement throughout Q3. So I think our expectation would be that, that will likely continue into Q4.

Now from a comp perspective, Q4 of 2024 was strong and particularly kind of the post-election period, we saw consumer confidence kind of spike in Q4 of last year. So we will have that to climb over. But all in all, directionally and sequentially, I would say that we should continue -- or we expect that we could continue to see some improvement Q3 to Q4.

In terms of where we're seeing improvement in terms of the breakdown? It was primarily in commercially insured business, although we did see improvement in exchange as well. But again, the exchange business is a relatively small component of our overall net [indiscernible]

Great. And on the government side of things, Indiana is one of your largest states, which I think has one of the largest declines in state Medicaid enrollment to date. Are you seeing the impact of tighter Medicaid eligibility in states like Indiana impact your Medicaid volume results?

We've not. We've not experienced any significant impact, specifically to Indiana from that.

The next question comes from Jason Cassorla with Guggenheim.

Can you guys hear me?

Yes Jason.

Okay. Got it. I just wanted to touch quickly. I think you noted kind of thinking about 2026 and the favorable Medicare [ IPPS ] coming in. Obviously, the -- we're waiting on the final outpatient rule. But like as you think about -- if the outpatient were to come in as proposed, like how do you think about the net of those two pieces as it relates to 2026? Were they largely offset each other? Or are there nuances from a Medicare rate perspective if the [ OPPS ] comes in as proposed?

I would say with the proposed outpatient, but we know an inpatient [ proposed ] outpatient, I still think it's a little net positive to 2026 over 2024. Sorry, 2025.

Okay. Great. And maybe just more of a high-level question. On the ambulatory front, I know you have new access points opening up, including a few ASCs. But as you step back, can you just discuss your ambulatory strategy or remind us, help frame maybe what inning you're in, in terms of building out those access points and how that's helped your market share position? And anything else along those front would be very helpful.

Sure. So we are -- continue to look at access points. We've been investing in those for some time. I think each market -- in our markets, each market is a little bit different. We've taken a little different strategy in those markets where we've had capacity constraints on the inpatient side. We have invested in more inpatient dollars, such as this past year, we opened up new towers in Knoxville, Tennessee, where we added, I believe, 58 beds, and we added a new patient tower in [ Foley ], Alabama. Both of those markets, we had capacity constraints.

Currently, we do not have any of those kind of larger construction projects on the inpatient side in flight. And so as we kind of move through '25 into 2026, more of our dollars will be focused on the access points, whether that's urgent care, [indiscernible] EDs, ASCs, and so forth. And so I think those are lower dollar. We can do more of them kind of for the same amount of capital.

Now we have been opening 3 to 4 [indiscernible] per year. We have, I believe, 3 ASCs scheduled for opening this quarter here in 2025 -- in the fourth quarter of 2025. We'll probably target kind of 6 to 8 ASCs for next year in 2026 along with some additional [ freestanding EDs ] and possibly [ emergent ] care centers. And then we're always also acquiring clinics and hiring new doctors into our existing clinics as well.

The next question comes from Stephen Baxter with Wells Fargo.

This is [ Mitchell ] on for Steve. Can you please highlight what drove the 5.6% growth in same-store revenue per admission, and kind of what you see as a sustainable rate there?

Steven, this is Jason. About 1/3 of that 5.6% improvement in same-store net revenue per AA is a result of the Tennessee and New Mexico [ state direct copayment ] programs that were approved in the second quarter. And then the rest of the improvement is payer mix related. And there is some offset. We did have a little bit lower acuity.

I might -- just to add in terms of kind of what's sustainable. We think a mid-single-digit net revenue growth and net revenue per growth is a sustainable number. And between your Medicare rate increases our commercial rate increases, we expect acuity to recover going forward. Right now, there is some dilutive impact on the net revenue per AA with the softer outpatient surgeries, particularly orthopedic and cardiac surgeries, which have been areas of softness. But as those come back, we should see a lift in the net revenue per AA, just that they're higher acuity services.

The next question comes from Josh Raskin with Nephron. Josh, your line is open. You may now ask your questions. We appear to have lost connection with Josh...

I'm sorry, do you guys hear me?

We can.

Sorry. Can you speak to trends from payers around denials and underpayments, maybe just an update there and more importantly, around maybe the mitigation of those pressures? And I'm curious if you're using any external vendors? Or is it all internal services on the RCM side and maybe any changes that have been there through the year?

Sure. So we called out really third quarter last year and in 2024, a big spike in denials. And since that time, it's stabilized. It is not really gotten any worse. But we continue to invest in our physician adviser program. We're investing in some AI tools in terms of how we do denials with our internal recycle team.

We are using a combination of third-party vendors as well as internally developed products on that for purposes of our revenue cycle team. Our revenue cycle is managed internally with our own team that they do use a combination of products. So as we get better at it, I would say we've been able to kind of hold things stable, which would indicate that the payers are probably also denying more claims, but we've been more efficient or better at overturning some of those denials in order to kind of keep things status quo.

Perfect. Perfect. That's helpful. And maybe just a quick one. Flu season. It seems like off to a little bit of a slow start. I assume that's contemplated in guidance, and I'd be curious if you guys are seeing any updates into October as we kind of move into flu season?

Yes. It is contemplated in guidance, and we haven't seen any big pickup yet in our facilities and the heavy flu. So at this point, I'm not sure we'll -- what we'll see yet for the remainder of the quarter, but we have kind of taken that into consideration.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Hammons for any closing remarks.

Thank you, everyone, for joining us on the call today. I want to close by reiterating my thanks for our team members at CHS for their commitments and confidence through the leadership transition as we approach the future together. If you have any additional questions, you can always reach us at (615) 465-7000. Have a good day, everyone.

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

So good morning, still the morning here, I think. I'm Steve Baxter, the health care services analyst here at Wells Fargo. We're very pleased to have Community Health with us here today. As I'm sure many of you know, Community is one of the largest operators of acute care hospitals in the country. From the company, we have President and Interim CEO, Kevin Hammons. And we have Jeff here as well, who's the Interim CFO. So thanks again for being here. Any opening remarks that you want to make or just we get right into the questions?

Yes, let's jump into questions.

Okay. Great. So I think the biggest, I think, surprise maybe across the industry group during the second quarter's results was maybe the slower growth of volumes that we saw. I think you noted earlier in the year, the commercial demand for surgical procedures was a little bit weaker in the first quarter and didn't improve maybe in the second quarter the way you thought it might have. Just give us an update on kind of the right way you think to characterize the volume growth coming out of the quarter and how it informs how you're thinking about the balance of the year.

Sure. We have seen kind of softer-than-expected volume growth this year. We certainly brought a lot of momentum from kind of the back half of '24 into this year, expected that momentum to continue. But I think whether it was directly related to maybe the change in administration, not so much change because I think a lot of the momentum that picked up in the fourth quarter related to that, but it's more talk of tariffs, some uncertainties in the economy were ahead of us. People got more concerned from a financial perspective. We didn't see some of the early rate cuts that we had expected in the year, and that caused some concern.

So where we have seen the most kind of softness or pullback from a volume perspective has been in some of the elective procedures, outpatient elective. And I think it's a little more -- it's related to people with high co-pays and deductibles wanting to hold on to cash and they're deferring the procedures that they can. I do think that's somewhat transitory and we'll pick back up.

Okay. So yes. So it sounds like that is primarily a commercial-driven phenomenon. I guess as you look at the trends that you saw maybe in commercial payers versus what you saw in Medicare, maybe Medicaid as a volume trend, like what are the differences kind of stand out to you in the first half?

Yes. We've seen some strength in Medicare Advantage. So more business still transitioning to Medicare Advantage and the offset to that being Medicare fee-for-service, a little bit of softness in Medicaid, but primarily in the commercial space is where the softness has been.

Okay. And as you've continued to track some of the measures around consumer confidence, I think people maybe have gotten more used to the idea that some of the headlines that we've seen kind of might be transitory or maybe kind of continue to get deferred out. Do you feel like you've seen people more willing to act and to kind of get the procedures done? Or do you think that still kind of remains like a wait-and-see issue?

We did see some improvement in June. I think from a consumer confidence standpoint, we probably hit a low mark in the middle of the second quarter. We did start to see some improvement in volumes in June. As we put out our guidance for the remainder of the year, we wanted to remain a little on the conservative side because things really hadn't turned yet, at least not where we were comfortable. So we've guided to the back half of the year for that continued softness.

But I think we'll -- as things continue to improve from a consumer confidence standpoint, I think you're starting to hear more discussion of rate cuts. As you mentioned, people are getting a little more used to the tariffs and some of these -- some of the disruption from tariffs and the inflation aren't pulling through like people had thought they might. I do believe that people will get more comfortable and begin to come back in for those procedures.

Got it. And then I totally hear your point that the surgical trends were soft in the first quarter and the second quarter, and they look pretty similar to the performance. There was like a considerable step down still in the adjusted admissions line despite the fact that the surgical trends didn't change a whole lot. I guess what you would characterize the medical volumes inside the hospital is doing? How did those act in the second quarter?

Yes. The inpatient volumes were stronger. So where people really need care and don't have a choice, we're capturing that business in our markets. So we are seeing some strength on the medical side.

Okay. And just to kind of factor in the conversation of what you've now assumed in guidance for the rest of the year on the volume side. Just remind us again, it sounds like you feel like you've reflected the continued softness into the new guidance? Or I guess, how do you think about if trends stay where the second quarter is where that might influence your kind of ability to deliver on the range?

I do think we've factored in the softness. So year-to-date through 2 quarters, our adjusted admissions were about 1%. We're guiding to the full year of kind of 0% to 1%. So kind of flat to only slightly negative in the back half of the year from a volume perspective, although that is -- we were at 2% to 3% is where we were initially expecting the year to be. So we've kind of factored in the softness in the back half of the year.

Got it. And then there were a lot of moving parts when you revised your guidance for the second quarter. There was the kind of the what you call maybe the core underperformance. There was the inclusion of more Medicaid supplemental funds, the inclusion of maybe more divestiture EBITDA impacts. Like just kind of walk us through if we strip that down to the core business, what you saw in the second quarter and then kind of what you factored into the back half, how much of that deviation continues in your thinking?

Maybe the way I'd do it, if I think about our full year guide at the midpoint, originally, it was $1.525 billion. We had about a $70 million miss in the second quarter. So factoring that in, we factored another $70 million headwind in the back half of the year and then about $25 million from the back half of the year from the divestiture of Cedar Park because we had that in our full year guidance for the full year. That was offset. So that's, call it, roughly $165 million of headwinds, offset by about $140 million tailwind from the DPPs, which lowered our midpoint by $25 million for the full year.

Got it. And then in terms of what needs to happen for the $70 million of underperformance to be $70 million for the whole back half, so run rate $35 million. What are the key levers to get from the $70 million to the implied back half?

It's a combination of a little bit of volume improvement, but payer mix improvement as well. We'll also see a little bit of benefit as the new Medicare rates go into effect on 10/1. So all things being equal, you get a little bit of rate lift in the fourth quarter from your Medicare rate increase.

Okay. And then if we were just to step back and a lot of moving parts impacting the margins, but if we just focus on cost performance throughout this year, could you spend a minute or 2 just updating us on, I guess, where you stand on labor, both full time and sort of use of contractors? And then maybe we can talk about professional fees after that.

Sure. Jason, do you want to take the labor one?

Yes. So we've been really pleased with our labor, I think, 3.5%, 4%, which is what we've guided toward and I think we're managing toward that and still expect that to continue. Contract labor is well managed now. It's down from the highs that we were kind of at COVID or post-COVID, both the rate and the usage of contract labor. So that's more normalized now. Med spec fees are a continued challenge. I think they've peaked, but they're going to continue to be something that we'll have to manage through.

Okay. And just in terms of the outsourced fees, I think it's kind of migrated from early pressure in ER and anesthesiology and more recent pressure in kind of radiology. Like any notable trends across the different sort of categories that you guys would call out?

Yes. I would say that anesthesiology still remains our biggest pain point. We're seeing more in radiology as well. That's starting to pick up as an additional pain point. From a mitigation perspective, I think there are more mitigating steps we can take on radiology because you can pull in technology. You can do remote reads. There's some AI capabilities out there. With anesthesiology, you have rest of those opportunities. But we are mitigating some of those increases by in-sourcing, bringing more of those specialists in-house to do that work. It does increase our salaries and wages. But from an EBITDA benefit, it's a net benefit if we can bring those in.

You had a big in-sourcing effort over the past few quarters in your response to kind of market conditions and what happened to some other firms that were in the market. Just kind of update us on how the performance of those groups have worked out and just again, how that informs your appetite to do more of that?

They've worked out very well for us. We're seeing, particularly on the ED and hospital side, patient experience improves. The doctors have been very pleased that we've brought in-house. So the physician experience or physician satisfaction has been better. We've gotten them more integrated with our own quality programs. So we've seen some quality improvements by having them in-sourced. So we think that it's probably not something we would do in every market. But certainly, where there are cost pressures, it seems to make a lot of sense.

Okay. And then to pivot a little bit to the policy side of things. I think you've done a very good job of giving us some color on the Medicaid supplemental payment side. So we'll come back to that in a minute. But the most near-term thing that seems like it could happen to impact 2026 would be the expiration of the enhanced exchange subsidies were that to occur. Just kind of update us on your most recent sort of sizing of that business to today? And any kind of initial thought process around how you might adopt some kind of provision for that in your eventual guidance for next year if that were to materialize?

So from a sizing standpoint, our exchange business is less than 5% of our net revenue. So we run a little bit below probably the broader industry in terms of exchange business in our markets. So the subset of that, that could potentially be subject to reduced enhanced subsidies is only a subset. So it's a relatively small portion of our net revenue. Where that goes from here, we don't know. I don't -- certainly don't know. There seems to be some momentum on further extension that we continue to hear about as recently as last week, I was speaking with some folks from Washington Senator from one of our states where we have a pretty big presence in a Republican Senator who has been advocating for extending the tax credits, and he's working on a number of his peers in the Senate to get some momentum for that.

Okay. And as you think about trying to translate what it could mean, maybe either into volume metrics or what it means to the P&L, I guess like do you feel like you have enough information to be getting closer to being able to estimate that? Is it as simple as a point or 2 of the 5 largely just kind of goes away and it drops through your P&L? Or I guess, how do you think about the way these people use the system today to kind of inform any of those calculations?

Yes. I really don't think we have the information to really inform us on -- to be able to quantify that because some states may deal with it differently, provide some other programs. Some of those people with the exchange programs made just down tier from a gold to a silver to a bronze and still have hospitalization coverage. And so we really don't have the information. I think it's pretty difficult to assess exactly dollar amount impact. But knowing that, again, less than 5% of our overall net revenue is subject to exchanges, it's a pretty immaterial amount.

Okay. And then just in terms of like as you've started to probably pay more attention to it, like in terms of how these people use the system, maybe in contrast to like an employer-based coverage population. I guess like what stands out to you is different in like the utilization of services, service categories, those type of things?

I think it weights a little more heavily to the emergency type care versus any of the elective or other type care.

Okay. And then this year, on the Medicaid side of things, you've obviously gotten some good news on the Medicaid supplemental payments. So those are in the run rate now and grandfathered in and all that good stuff. Do you look at your states now and think like basically, your states have gotten done, what can be done here? There's obviously been a lot of conversations about whether states could maybe look at some incremental funding streams that could still kind of get across the finish line and be considered grandfathered under the current policies? Like where do you think your states are in that discussion?

I think a few of our states still have plans submitted that have yet to be approved. So there's still some more upside opportunity for us. Indiana has submitted a preprint for a program to replace their existing provider tax program with the state-directed payment program. Georgia has submitted for an adjustment to their plan. Texas just had theirs approved just this past week. I think Florida has submitted for an adjustment to theirs. So I still think there's some opportunity for some additional funding mechanisms to be approved.

Okay. Any early sense of materiality or just way too early?

I think it's too early. Yes, we try not to get too far out in front of those, particularly because CMS can come back and make changes to what's been submitted in the preprint. So a little early to tell.

Okay. Fair enough. And then this maybe would have been a question related to the potential headwind from the exchanges. But I guess just as you look at planning for this operationally and trying to develop contingency plans that maybe would allow you to offset some of the potential impact of what that could mean? Like are there work streams like that, that are in progress for the company? Or are those just in addition to normal things you might be doing to improve margins? Like do you think there is some additional like cost opportunity or efficiency opportunity that you'd be able to go at specifically in response to what the exchanges might do over the next couple of years?

Right now, our priorities, and we have a number of kind of cost savings priorities ongoing right now. Those are more in the normal course. I would say, and not specific to some of the current regulatory environment because I think, one, there's a lot of work we can still be doing in the normal course to gain efficiencies, to take some costs out, our recent ERP that we've implemented, getting that stabilized, and there's still a lot of tailwinds that we should gain from the information that we're now gathering as a result of having invested in that program or that technology.

As I think about specific to the legislation and what we might do there, I think it's further down the road. Those cuts really, particularly the Medicaid cuts don't go into effect until starting in 2028 and they're phased in over a 10-year period. And there's a lot that could happen between now and then before we wouldn't want to get too far ahead of ourselves in terms of taking a look at various service lines and so forth, although probably some early planning would suggest that there's service lines that if Medicaid was not funding that we could scale back on.

Okay. And you've also talked about trends on denials as kind of being a stubborn pressure point for the company. Just update us, I guess, what you've seen as you've moved throughout the year on denials and what's your expectation for denials through the balance of the year?

If you recall, in the third quarter of last year, we saw a sizable step-up in denials. It's been pretty stable since that time. Denials haven't -- payers haven't pulled back any. It's still -- we're still seeing increased denials but it hasn't proportionately gotten worse. So it's been relatively stable over the last couple of quarters. And I would think that over the remainder of the year, it would stay at the levels that they're at. But we're not seeing any relief at all from the payers.

And this is -- is it broad-based from insurers that have different business lines? Is it primarily concentrated in commercial or Medicare or somewhere else?

It's primarily concentrated in Medicare -- in the Medicare Advantage space.

Okay. And then just to think a little bit about the commercial rate environment. I think we went through this cycle where the industry as a whole saw a pretty intense bout of wage inflation and helped kind of put upward pressure on commercial rates over the next couple of years. It feels like we could be getting to maybe the end of those above trend type rates. I guess as you negotiate contracting for 2026, what do you feel like you're seeing from the payers in terms of their willingness to provide rate updates at the same level they have over the past couple of years?

We're still seeing some pretty good rate come through similar to the levels over the past couple of years. So that tail with some of the inflation coming in seems to still be benefiting us on the rate negotiation. So I'd call it on average, 4% to 6% rate increase on the commercial side, which is where we've been kind of the last 2 years. So I think it's beneficial. Historically, we were in more of a 3% to 5% range. And right now, as I think about 2026, we're about 75% of the way through our contracting for next year and still seeing a little higher level of rate increase pull-through.

Got it. And then it's an interesting contrast because on one end, you have the denials. But I think on the other hand, there's been a lot of focus, especially recently across the industry about opportunities to use technology to leave maybe like less financing and like less yield on the table when you're dealing with payers. I guess where do you think about where you're at in the process of maybe these initiatives that could, over time, improve your yield? And how much visibility do you kind of have to driving that yourself versus your RCM vendors?

So we are investing a fair amount. We've been doing a lot of work on the side to kind of reduce denials to improve our coding. We are using some technology in both those. We're using some AI to generate appeal letters and to help in those collection processes to mitigate had we not -- and even with those efforts, we're kind of stable where we've been from a denial perspective. So I would say had we not been investing and putting forth some of the additional efforts on our side, the denials would continue to get worse because I think similar to what we're doing, I'm sure the insurers are investing in technology and use of AI on their side to mitigate their cost as well.

Yes. I think that's fair to say. And then obviously, as we think about not so much we haven't seen it, we've touched on tariffs kind of earlier in the discussion. Latest thoughts on, I guess, exposure to potential tariffs. It still seems like it's a moving target. But like what do you see as those discussions continue to evolve?

We've been fairly well protected through our group purchasing organization, HealthTrust Purchasing Group and having longer-term contracts a pretty significant portion, I think, around 50%, if memory serves me right, of our purchases are domestic purchases. We have a relatively small amount of purchasing coming from China. So we haven't seen much of an impact from the tariffs yet. Now what we don't have complete visibility into is like raw materials, even where we're doing domestic purchasing, if some of the raw materials for the manufacturing are coming through and will flow through. But right now, the majority of our contracts are 3-year contracts. So only about 1/3 of those turn over each year where we're having to renegotiate. We've not seen any noticeable increase in kind of pricing outside of normal inflationary increases.

Okay. Can you maybe spend a minute updating us on divestiture pipeline? You've gotten this most recent deal done and now reflected in your guidance, but where the discussions around potential divestitures stand? You've completed a lot of these over the years. Just how fruitful do you think the remaining opportunity set is?

So we don't have any particular or specific deals right now that we've talked about. I would say that there are several opportunities that are in flight that we have some inbound interest. We've been having conversations in a couple of different markets with several different buyers on some potential transactions. A little early to say yet where those will come out. I would say that it's highly likely that we'll continue to pursue some divestitures. I think given where we're at September already, time flies, doesn't it -- this year that I don't think we'll get anything else done. It's unlikely that we would have another deal completed this year. But if things continue to progress in our conversations, first half of 2026 is likely we could get something done, and we'll continue to work on those where they make sense.

We do have not a hospital divestiture, but we've got the outsourced lab business that we've announced that we expect to close at year-end. It's about $200 million.

That's a good point, yes.

And we expect another $100 million of proceeds related to a divestiture of a hospital in Tennessee last year that was contingent upon the DTC in the state and that we should be coming in, in the fourth quarter.

Okay. Good to know. Do you feel like the conversations have gotten any more complicated because of the macro uncertainty or because of the policy moving parts around potential deals?

I can't say that it's changed a whole lot. I think it impacts certain buyers differently. Certainly, with the Big Beautiful Bill has impacted at least in the near term, the academic, probably more so than the for-profits or even some of the other not-for-profits just because of the loss in grant funding and some of the taxes on endowments, which go into effect immediately versus others of us who -- the issue is more on the Medicaid funding, which is deferred and may not actually occur. So I think that's changed a little bit of the dynamics in terms of who some of the buyers could be or how they're looking at it. But overall, I would say there's still a fair amount of activity and interest. And I haven't seen any change in real valuation discussions.

Yes. And a similar theme, I mean, as you think about your competitors and their willingness to kind of either deploy capital either on like deals or kind of their own just internal CapEx plans, do you think there is like a real kind of like pause out there at the moment? Or do you think that you and the rest of the industry feel like in your markets that things are going to be pretty similar to how they've been in the past couple of years?

I think for many of us, our view is things will be pretty similar to how they've been the past couple of years. Again, I think the pause in some spending is probably focused more on those that have more near-term impact from the regulation. And those of us that don't have a near-term impact are seeing things a little differently.

Got it. Okay. And then in terms of the company, you have these medium-term targets out there. You have like a mid-teens EBITDA margin that you're going to be looking to strive to over the next few years. Like what do you think are the key areas of execution that will be required to kind of march towards those margin targets over the next few years?

Some of these programs are certainly beneficial to us kind of the return of the volume, and I know we're experiencing a little softness right now. But as I mentioned, I think that's transitory. And as that volume comes back, particularly the volume on the commercial side should be accretive to EBITDA. And so that will help us pretty materially, I think, even on the margin profile now that as we've gotten some of these other divestitures done, we are close to getting to free cash flow positive. And I think on a trailing 12 months basis, as of June 30, we were just slightly negative, which is a material improvement over where we had been historically. And I think we've seen a steady improvement in that area over the past 8 quarters. So that kind of flipping to positive also allowing for some additional reinvestment or some deleveraging will really help jump start us getting to those medium-term targets.

Okay. And then, yes, just Project Empower, obviously, has come up a bunch now. In terms of the sort of the key milestones there, I guess, like where do you stand in terms of things that have largely been kind of completed and put into place and things that are still kind of in front of you over the next couple of years?

So all the technology implementation is complete, really effective 1/1, we got all the technology in. The company is running on the full integrated platform now. So what we're working on this year, and we're already starting to extract value from it as we're turning off some of the duplicative software systems that we've replaced. Some of those are turned off already. Some of them, their expiration of their contract will come up throughout the year, and they'll effectively all be turned off by the end of the year. But that is just incremental value to us as we turn off those excess costs.

The insight we're getting into the supply chain now that we have our entire enterprise on a single integrated system, a single item master from a supply chain perspective is giving us more insight in terms of how we contract. So it kind of ramps up over time as we renegotiate some of these contracts, we have better visibility into our spending. We're able to do more bulk buying and leverage our scale in a different way than we have to in the past. So we'll extract benefit this year, but I think it will continue to grow probably over the next 2 years, getting value -- increasing value out of that.

Got it. And then obviously, you have targets to delever the company and a combination of that is happening through actions you're currently taking on the balance sheet and a lot of that will come through delivery of these EBITDA margin targets that you set for yourself. Just kind of walk us through the key pieces of like how you think you get from where leverage is today to where the targets are a couple of years out?

It's a balance. Some additional divestitures will take place where we'll be able to use proceeds to pay down some further debt. And as long as we're selling or completing those transactions at favorable valuation multiples, that should be delevering. And then growing the core business, and we see some good growth in our core business and the balance between those 2, we've brought over the last 8 quarters, our leverage from around 8 to -- now it's around 6.8. And that should be -- we should be able to take another turn plus out of that and get us to our midterm targets of 5.5 or below.

Okay. Great. And then just in terms of maybe just the last couple of questions would just be sort of CapEx priorities and how those have evolved over the past couple of years. I know that as you're evaluating assets for potential sale, maybe there's like changes in how you approach CapEx. Do you maybe have more of a set of assets that you seem like reasonably sure will be with the company for the next couple of years? Like where do you need to spend CapEx to deliver on that core growth over the next few years?

Over the last few years, we've made a couple of large CapEx expenditures or projects more on the construction side. We've added patient towers in Knoxville, a large patient tower in Foley, Alabama. So those were assets that were at capacity from an inpatient perspective that we wanted to build out additional capacity for growth. Those are both completed. So currently, we don't have any large construction replacement hospitals being constructed. So we'll be able to focus a lot more of our capital on outpatient access points. Those are less expensive, quicker to market type projects, probably pivoting some of those dollars to maybe even acquiring some clinics.

We acquired some urgent care centers in the fourth quarter in the Tucson market is an additional access point. There's some ASC development going on. We've got 3 ASCs that we'll be bringing on board between now and the end of the year. We've got a couple of freestanding emergency departments that are in flight. Those are kind of de novo builds, but they're relatively quick to stand up and lower cost point to build a freestanding ED. So we'll continue to pursue those type of investments around our networks of care.

I guess how different is like the return profile, like dollar of CapEx on outpatient versus dollar of CapEx on like inpatient?

It depends on the market. It's really largely dependent on the market around the payer profile. And a lot of these access points really, you have a return on the outpatient side, but you're also, as an access point, it becomes a referral source as well in terms of bringing in additional inpatient business. So if you're picking up additional patients in an urgent care or freestanding ED, oftentimes, they're coming in with higher acuity needs, but then that patient gets transferred to the hospital. And so you're picking up the higher acuity services there as well.

Okay. I think that's about all that we have time for today. Thank you very much for coming. It's great to see you. Thank you.

Great. Stephen, thank you. Thanks, everyone, for joining us.