Community Health Systems, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you, Rocco.

Good morning, and welcome to Community Health Systems third 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 must remind everyone that this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. 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 have also posted a supplemental slides 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, expense from government and other legal matters and related costs, expense from employee termination benefits and other restructuring charges, and 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 third quarter 2026 conference call and for your continued interest in CHS. I want to begin by expressing my sincere appreciation to our dedicated clinical and operational teams across all of our facilities. Their steadfast commitment enables us to advance our core vision, making the healthcare experience exceptional for our patients, our communities, and each other. Even with the dynamic operating landscape, shaped by shifting coverage dynamics and broader macroeconomic pressures, we are taking direct, proactive steps to fortify our competitive position. Our execution remains anchored in our core operational priorities, elevating clinical quality, enhancing the patient and physician experience, and strengthening our employee engagement. Building on the quality momentum we shared last quarter, including strong Leapfrog safety grades across our network, our facilities continue to deliver outstanding clinical outcomes.

In the third quarter, we further reduced our severe sepsis and septic shock mortality rates and hospital-acquired infection metrics, continuing to outperform national benchmarks. This commitment to clinical excellence is not just an operational milestone. It directly positions CHS as the provider of choice in our communities, creating a distinct competitive advantage that positions us to expand market share as patient demand normalizes and to achieve sustainable growth into the future. To capture that demand and establish clear building blocks for future revenue growth, we are actively expanding our clinical capacity and stabilizing our core workforce. On the talent front, we reduced physician turnover by over 40% and bedside RN turnover by 10% compared to the prior year.

This improved physician retention, along with targeted specialist recruiting, has driven a 2.5% year-over-year increase in our employee provider base, expanding our procedural capacity and referral networks to set the stage for higher acuity volume and revenue growth in future quarters. Simultaneously, our investments in technology are driving operational efficiency and clinician engagement. In September, we surpassed 1 million ambient listening encounters across our outpatient clinics and emergency departments. This technology significantly alleviates administrative burden, reduces provider burnout, and enhances charge capture and coding accuracy, driving productivity improvements while elevating the overall patient experience. Turning to our operating performance, third quarter adjusted EBITDA was $280 million. While overall financial results fell below our internal forecast due to the same factors that many peers are experiencing, namely elevated uninsured volumes and temporary softness in commercial elective procedures, we delivered sequential volume gains and solid cash flow performance.

Importantly, our leading indicators clearly demonstrate that care is being deferred rather than lost to competitors. During the quarter, same-store commercial adjusted admissions, excluding exchanges, increased 2.7%. Clinic visits surged 7.9%, and MRIs and other imaging tests showed solid growth. These metrics confirm that our local networks are capturing available market demand and maintaining strong market share. To protect profitability in the current environment while elective care defers, we are proactively managing our cost structure. Specifically, already this year, we have taken actions to generate over $100 million in projected annual savings, and we expect to implement further structural cost reductions in the future. These decisive measures demonstrate our commitment to disciplined margin management today without compromising our clinical capacity or operational readiness for tomorrow. Looking forward, we are positioning CHS to capitalize on several multiyear growth tailwinds.

We remain focused on disciplined capital allocation, strategically expanding high return outpatient entry points like and including ASCs, urgent care centers, freestanding EDs, and targeted physician practices, weighed against rigorous financial return targets. Outside initiatives, like the Rural Health Transformation Program, present opportunities to expand healthcare access, overcome patient mobility barriers, and drive incremental patient volume into our facilities in future years. In closing, our industry-leading quality performance, expanding physician employment, targeted capital investments, and proactive cost management give us high confidence in our path forward. We are actively executing on the leverage within our control to navigate short-term industry dynamics and build long-term sustainable shareholder value. Let me now turn the line over to Jason Johnson to walk through the third quarter financial details in greater depth.

Jason? Thank you, and good morning, everyone.

As Kevin noted during his prepared remarks, financial results for the third quarter came in below our internal expectations, despite strong discipline from our operating teams, reflecting continued outside pressures on service and payer mix that are affecting the industry as a whole. Adjusted EBITDA was $280 million, with a margin of 10.2% versus 12.2% in the prior year period. When excluding the impact of divestitures and out-of-period items from prior year results, reflected an approximate 7% core decline year-over-year. During the quarter, we did not recognize any out-of-period benefits from new or existing state-directed payment programs, and consistent with last quarter, did not recognize any amounts for the 2026 Florida program. Same-store net revenue growth of 3.8% year-over-year included a 2.2% increase in admissions and 3.6% growth in adjusted admissions.

As Kevin previously noted, almost half the growth in adjusted admissions came from uninsured patients. While overall same-store surgeries increased 2%, similar to many of our peers, demand in commercial elective procedures remained below expectations. This unfavorable payer mix and service mix shift led to a 0.2% growth in same-store net revenue per adjusted admission. Our operating teams maintained strong cost discipline in this environment, particularly in the areas of labor management and supply chain efficiency. Along with our structural expense management program that is run corporately, we are taking steps to proactively manage profitability in the current environment. Same-store operating expense per adjusted admission increased 2.1%, and when excluding the impact of provider taxes, was up just 1.3%, significantly better than inflation.

Same-store supply expense increased 1.6% and was down on a per adjusted admission basis, reflecting ongoing improvement in procurement through our ERP, as well as lower mix of surgical revenues. Contract labor spend declined 1.6% on a same-store basis, and average hourly rate was up 2.1%, both below our expectations coming into the year. Medical specialties, meanwhile, remained a pain point on the expense side, increasing 13% year-over-year on a same-store basis. The increase again primarily reflected pressure in anesthesia and radiology. While it was improved from the 19% increase in the second quarter, it was well above our initial expectations for 5%-8% growth for the year. We are pleased to see improvement in cash flows on both a year-over-year and sequential basis.

Cash generated from operations for the third quarter of 2026 was $168 million when adjusted to exclude taxes on divestiture gains, up from $121 million in the prior year period, reflecting better management of accounts payable and ongoing collection of accounts receivable, including timing of state-directed payments we discussed last quarter. Total net leverage stood at 7.2 times at quarter end, up from 6.6 times at year-end 2025, despite the $810 million reduction in debt year to date, due to the reduction in trailing 12-month adjusted EBITDA. We ended the quarter with no amounts drawn on our ABL, and our next significant maturity is in 2029. Based on year-to-date performance and our expectations for the remainder of the year, we are updating our full year 2026 financial outlook.