Community Health Systems, Inc. (NYSE:CYH)
Baird 2016 Global Healthcare Conference Call
September 08, 2016 09:05 ET
Larry Cash - President, Financial Services & CFO
Whit Mayo - Robert W. Baird
Good morning. Thanks for joining us. I’m Whit Mayo, the healthcare facilities analysts at Robert Baird. It's my pleasure to have Community Health Systems. Representing the company is Larry Cash, the President of Financial Services and Chief Financial Officer. Larry I think you had a couple of slides you wanted to review and then we will get into questions and [indiscernible] if you have any questions I will be happy to ask Larry.
Thank you, Whit. First slide [10-Q] [ph] and 10-K filed with the SEC. About 159 hospitals today and when I get around to it I’ll talk a little bit about it so, [indiscernible]; okay year in 2015, not as good a year in 2016, [indiscernible] needs to improve, primarily the HMA hospitals.
I just point out we have got five good states that make about 50% of the revenue. Two of them expanded Medicaid and one of them is Indiana which is your Vice President nominee who is pretty supportive of the program up there, [indiscernible] 22 states. We had 29 states and a couple of hundred hospitals; we got rid of QHC in the tax-free spin-off at the end of April 2016. We also sold an investment we had since 2007, Las Vegas to Universal and both parties are pretty happy about it so this is a fair transaction. We had some divestitures we're working on announced in May, 3 transactions, 10 hospitals. Got $1 billion in revenue and we’ve now got 12 hospitals, a non-hospital transaction and [private] [ph] transactions, $1.450 billion and to 850 million [indiscernible] of sales proceeds were low margin hospitals and there are some other activities and transactions we're working on. So I am sure we are going to have a couple of questions about that. Let me just get that slide up.
We've done a really good job on quality and I know we've underperformed in some of the HMA assets, we’ve started a high reliability which physicians like and reduced the serious safety events by 74% and our legacy hospitals went down about 25% that started a year or so ago, back on a similar pace, I think that will help us on our relationships with physicians in the HMA hospitals, and we continue to do a good job on the quality of joint commission and getting a higher percent of the hospitals qualified.
What we do have is 11 regional networks, about 75 hospitals, approximately about half the revenue spread out all the way from Washington to Florida; we'll keep working on trying to improve those hospitals and getting - recent example the one that’s been around the longest in Fort Wayne, but the point I wanted to put up is the access points that we've been working on.
We've got 57 surgery centers now, about 140 some odd diagnostics centers, 75 home care, 8 free-standing, we are at 40 some odd 48 urgent care centers that also act as surgery center in the markets we operate, [indiscernible]; we got well over 1,500 physician practices. The other point we may not get to the is the bottom of this chart. We've been working on trying to centralize - so we’ve centralized payroll for the legacy hospitals over a few years. We're doing it for HMA hospitals, little bit cheaper to process, little bit more timely information, little bit better control over it, we’re also a doing a strategic sourcing for things such as [indiscernible], housekeeping, food, things of that nature on a companywide basis versus individual hospitals doing contracts.
We are in the process of centralizing AP in the company, started that down the road and a few years back we started centralizing business office activities, in some traditional service centers we are about 80% down on that transaction, 80% or 85% down. We think this will make us a more cost effective company over the years and also it looks better on [indiscernible] performance. And finally we're working on centralizing all our coding [indiscernible] information management, that's not IT, that's medical record coding, and we think it also makes it more cost effective from that perspective.
We have done a good job on recruiting physicians, it's something we are going to slow down, employing physicians in the second half of the year, I think we may have gone a little too rapidly in 2016, had the best year ever employing physicians; [indiscernible] productivity we wanted so we slowed that down in the second half of this year.
I don't talk it about as much, I think we're still seeing Medicaid adjusted admissions grow and self-pay come down in expansions states but overall the company is not seeing as much benefit as it did and we did see a new stake in Louisiana started July 1, we're getting some improved activity there, we've got four or five states that we see some potential after the election that could expand. Tennessee seems a little bit more open minded to it now. Mississippi has had some conversations about it; started to look at the Indiana program. Oklahoma, which is a state that we've got several hospitals in, Georgia a few hospitals than Alabama, [indiscernible] in excess of $100 million annually if they do expand. And we still think there is opportunity for that next year and that still leaves out Texas and Florida but all in it’s slightly over $200 million benefit, but maybe it’s something [indiscernible] in 2017.
Our payor mix has got a little bit better in managed care which we focused on, still not up to what it’s been before. Our challenge has been their volumes not growing as much as we want; it was positive in the first quarter or negative in the second. We think we'll be 0.5% to 1.5% for the year; we're 1.4% right now. We've been for last year now separating the HMA performance which has been much less than the legacy hospitals, right now [indiscernible] the legacy hospitals are growing pretty well, 4% revenue growth for positive admissions, with surgery growth not quite as good as especially last quarter at HMA hospitals, the [indiscernible] were flat,. Similar programs we're doing in both but we got a lot of opportunities we are still optimistic will make a success out of the majority of the HMA hospitals. And of course if we are struggling somewhere it becomes a candidate for divestiture.
A little ahead of ourselves on cash flow this year versus a year ago. I think we're right on the line to hitting close as it’s ever got so we did a good job [indiscernible].
Even though we had a tough quarter, if you put into perspective the second quarter versus the first quarter it was down about 4%, that's $22 million, not quite as much as we had from the [indiscernible] first, so we slowed down the rate of decline. There will be other issues, little bit less earnings in the second. The bridge that we did, I’m trying to [indiscernible]; there are some good things going on with acquisitions, high tech; we got about half of $50 million for revenue volume, we think can be priced so we’ve got to get the volume component and the mix component. Our revenue per unit is about 1.4%, generally 2 to 2.5. We're working hard, not just this year but next year, year after to do a better job on physician practices, we've got way too much cost out at our physician practices and we –have reorganized the company; we have separate management out there, we think we’ll get better results this year and the next couple of years and then the final item on there is – we’re going to talk about will be the cost, [indiscernible] on cost and we're going to refocus ourselves for the second half of the year, we’re going to try [indiscernible] which is achievable.
Our strategy, similar to what it’s been do a good job on quality, with assets [indiscernible], this is the first time we've ever said at conferences that we're not working on acquisitions, we're working on deleveraging, improving the leverage according to cash flow [indiscernible] current acquisitions [indiscernible].
Great. Maybe just to start on that, that last point. The company historically has been very inquisitive over the years, changed strategies a little bit acquiring Triad and then HMA and then -- now is in a period of -- kind of delever a little bit and selling assets. So maybe just walk us through the process of how you identified these hospitals that make the most sense to us, the markets that are core to us. I'm just trying to understand -- I think maybe the process on how you identify the appropriate assets that you felt like you could get the right proceeds to bring some of the debt down.
Yes, first of all we did sell two hospitals last year. We didn't really talk too much about it. It was a [indiscernible], and what you're doing with that franchising there, we've got a couple of not for profits that are [indiscernible] markets and then getting about $60 million [indiscernible] transaction for us. What we've done since then this year is gone through the financial results, the margins, the cash flows, the capital needs, population growth, employment growth, look at how we are doing, looking to see if there is other people who might want the hospitals from a potential divestiture perspective, gets identified from the financial side, also our development guy who follow all the hospitals gets involved and says I think these could be potential ones we find sellers for, so you're actually picking ones, you think you’ll find one [indiscernible] opportunity to sell that’s got one [indiscernible] someone will be wanting to get a double digit margin but someone else would have some value in it, [indiscernible] myself, the COO and the CEO look at it and we decide which [indiscernible] then give that to the development guy to sort of reverse, trying to buy us, trying to find buyers.
We've been fortunate that we’ve found some pretty good buyers, [indiscernible] right now, but several [indiscernible] not for profit buyers. . And we also got some startup companies in the Mid-West, those are interested, there is one in [indiscernible], you don't want to get in a rush in this kind of a situation, it’s not a rush to the finish line, it’s a rush to a good franchise at a good price. We generally announce something when we've got [indiscernible] level. So when we talk about $1.450 billion of revenue that's in the EBITDA margin, so we're in the 5% to 6% range, it's a pretty good multiple.
From a monetary perspective, I would hope that we'll have a couple of definitive agreement that we can talk about for our next conference call based on where we are, which will give some / more assurance it's going to happen which we think these -- which should all pretty much happen for us as we are talking about, and we’ve got the transactions we are still looking at and we're careful not to [indiscernible] certain number of hospitals or certain locations because we are still operating the hospitals, we own the hospitals, we're are going to get as much earnings out of the financials as possible, so generally they don't know for the most part who is for sale and who is for not.
We're also trying to get an update every quarter on a quarter conference call. Whit is correct that we are trying to de-lever here, we're trying to sell something at a higher – the current debt leverage is over 6. If we sell something at 8 to 10 times, especially we’ve had some [indiscernible] going into the year, had about $500 million of tax NOLs, which will help avoid taxes. We also go in a tax basis at assets to make sure that these are assets that we sell at a price we’ve got, potentially not as much taxes what we paid on it.
Maybe one question just on the divestitures, the package did change a little bit, and I don’t know if there is anything really to read into this other than buyers change and expectations change, any color around what happened from package one to package two?
There is actually some confidentiality about it, but there was one of the buyers who've had some external challenges, not anything to do with the assets he was looking at. We found other buyers for most of these assets, although the package to change some, but he had some other issues he needed to work on, and I think he pulled out of the market of buying hospitals. He may or may not be back. We are pretty comfortable with the package here and we expect to be announcing more transactions hopefully before the next conference call.
On top of the 12 that you have identified?
On top of the 12.
Maybe shifting gears a little bit to HMA, obviously it has been a portfolio of assets that has been challenged as sort of you’ve described, the revenue has been declining year-over-year, Florida has been called out as a market where you have had some challenges, maybe another market in Tennessee that has some challenges, just maybe reflected back on some of the issues what you anticipate and what you didn’t anticipate and maybe some of the plan of corrections that your operators have in place and you've made some leadership changes in the field associated with Florida, so maybe just an update around the strategy to improve the operations.
Just -- you mentioned a little bit earlier the history, we generally bought not-for-profit hospitals in either mid-sized markets or non-urban, we bought prior to 2007, pretty successful transaction though, and we actually closed that within about four months, due diligence in about a month or so, and we closed it within four months.
HMA drug on a long time, we actually started the conversations in November of '12, did the due diligence in '13. There is more due diligence, so the slow down, got a definitive agreement in July, didn't close until December -- January of '14, and unfortunately a month before we acquired, it’s when the government announced to join the PTAM Government investigations. Clearly, a lot of that was around Florida, there was trials, there was FBI visits, there was challnges and a lot of bad publicity that we had to do with the first year or so, and the drug a little bit into 2015, HMA’s CEO left, the CFO, Senior VP of Operations, recruitment guy, managed care person, IT people, all during that time, and there was a Board fight and a new Board came into place. So it was a pretty troubled company, I believe. From March if you go back three years to quarter end right now, they had about 8% or 9% margin that quarter and probably – ended up probably on a real apples basis to 11% for the year. And when we took it over, there were some issues with the physicians, one of the things we were focused on is the safety in which the physicians realign there. They stopped physician recruitment which really brought down the numbers in 2014. A lot of it [indiscernible] so we've gone about and tried to recruit a lot more doctors in '15, maybe a little too fast; a little too fast but we'll slow that down some this year.
From an operating perspective, the legacy hospitals are outperforming and we've got similar programs on orthopedics and ER transfer, rehab and behavioral service line initiatives, bariatric surgery, etc. that are in both the segments of the business. We just haven’t got the operating results out of HMA yet, and we still think they are some assets with population growth, good employment growth. We also had to renew a lot of managed care relationships which we look back and have got that done now. We do expect to see some progress with HMA. They will not operate as well as the legacy hospitals this year, but next year we think we will see some better results back from the leadership activity.
We did put in a – in the company, we've got three new divisional presidents since January 1, and one of them has actually been in the Company for 15 years. Also, we have got one in Indiana and Tennessee [indiscernible] been in the company for a while good executives. Tim Hingtgen just took over as President and CEO on September 1, last week, and he was in the executive team role from May 1, our most experienced, successful divisional president. So, there has been some new leadership stepping in, and Florida has got a lot of help, it’s got more divisional presidents, more help from the corporate office, the company is pretty focused on doing a better job in Flroida, in all areas of managed care, in the ER activity, and of course in the physician practices, so there has been a lot of attention for Florida and we expect it to be better. We made some progress in some of the hospitals that we called out in the first quarter in Florida and we’ve still got more progress to be made.
Maybe shifting gears a little bit to – I just want to maybe reflect on just slightly some of the divestitures just the core strategy of CHS as you guys have talked a lot this morning and in the past year or so about network strategy, maybe just elaborate a little bit more on what you're doing in existing core markets to grow your market share, to build out the medical staff and invest in new services lines?
Yes, we've put up a slide on access points, one of the things we think is critical. We, as a company, have about 57% of our revenues outpatient today. Some of that several physician practices is just well over 1500 [ph] physician practices. I think we've got a large number of access points and surgery centers, we've got a new management approach to surgery centers, hired an executive who is experienced in the business, but he is working throughout the company to improve those – the urgent care centers are being centralized, centrally managed them from a group of physician practice group. The radiology diagnostic, we’ve got a several of those, we’ve done some joint ventures in places there. We're also working on the psych. We’ve got a leader there for behavioral health, and we’ve had pretty good results in volume there and some rehab is also starting to grow.
From our orthopedics services line, perspective, with a lot of focus on orthopedics, I think we're up 8% in admissions in the first six month same-store, and we're up also pretty good on the surgery from orthopedic business, and we had 35 hospitals through June. We will have another dozen or so by the end of the year. Several of those will be HMA facilities, we're also working on very active surgery/ER transfer. We get about 60% of our admissions through the ER, so some of our ER transfer programs have got a new executive in the last few months. Leading that program is an experienced ER transfer executive. Around physician practices, we’ve centralized that business under Dr. Lynn Simon and her staff there, and all the physicians are managed differently, different financial measurements and goals and incentives for this group of people to try to improve the physician practices both from volume and productivity, and expecting a lot of work on scheduling, a lot of your physician practices have too much open time and not utilizing the scheduling too much low productivity, and we’ll work on how to do that along with the some new software approaches around client care management, Medicare wellness, and also work with managed care companies on [indiscernible]. Overall, I think we had on the bridge about $55 million improvement to the second half of the year and about 60% of that would be expenses, and probably the 40% will be volume productivity.
Maybe just speaking on that point for a second, the $55 million of -- is that just from new practices or -?
Now that's all the practices and trying to have a better result in the second half of the year, while we end the first half of the year, and we started off with a bigger objective for the year, and in the end, that would only be a $5 million or $10 million for the whole year, which is less than what we had originally established as a goal that we are working on right now.
Yes, and they've have [indiscernible] slowed down, we were up a lot in the first half of the year, a lot have employed doctors more, especially in Florida and other areas of 80 million [ph] in 2016, over 2014, and we're probably down 35% to 40% employed doctors in 2016 versus the comparable period in 2015. We're also trying to get them more productive quicker, get them on board and get then credentiated, get them the managed care arrangements, so there is a very conservative effort, it's not just in 2016, it is something we think if we manage this correctly, there is a lot of opportunities on lower cost in [indiscernible] practices for the next couple of years. So that's well around the 40% of the $55 million, or I think as I recall, lot of the physicians when they enter into a new market, the other physicians on the medical staff maybe unfamiliar with them, and there is an opportunity to -- on the front end, handle the process better to relieve when the physicians come on -- when they are on board and into their community, they are much more –.
So that's well into the 40% of the $55 million or I think what I recall, lot of the physicians when they enter into new market the other physicians on the medical staff maybe unfamiliar with them and is there an opportunity to -- on the front end, handle the process better to relieve when the physicians come on -- when they are on-boarded into the community and much more.
We had -- most of the onboarding coming in. For the local market that we're trying to manage that from a central perspective, it's a credential broker given managed care, or arrangement quicker, get them introduced to the medical staff quicker and develop some communications technique to track that, whatever barriers there are, to try to get them business faster. We've done a much better job of getting them into marketplace, so they will see patients faster. Now more importantly is the ones we've already got employed and the nurse, well we've got 1,200 nurse practitioners, physicians trying to just control, [indiscernible], so there is a world and spaces.
So for patients who want to see some of that you can do it in a couple of days and not 7 or 10 days later, we’re just seeing a lot of our situations. Patients were having to wait a week for an appointment which is way too long.
Maybe just to shift gears a second, just as the cash flow and CapEx, this year I think you've kind of bowed down your expectations around CapEx, may just any color around -- any of those commitments and perhaps there has just been a lot of focus on IT in the past and some of the physician costs if you talked about where you're prioritizing your efforts going forward.
Yes, at least here we announced replacement hospital. Last year we spent money finishing up the Grandview in Birmingham, which has done really well for us and is a good addition to the company. Next year, when we spend money, some money in New York, Pennsylvania, something we bought about four years ago building a small replacement hospital there, about $100 million or $20 million, some this year and some next year. A lot of the ERs has been on freestanding EDs or ER improve the ER improving the OR activity in some of our successful markets like in Pennsylvania and we've spent some money in Florida on some of the ER activity and in OR sort of major capital spending going on there. There is no big capital commitment. We've got a hospital in La Porte, Indiana which we've got five years to do some work there on some acquisitions. So we try to -- first of all, there is only acquisitions coming in, so there will be less requirements of capital, and we are in good shape in our current capital commitments. From an IT perspective, there is some software, we will expand on as it relates to emergence. We are a McKesson customer and some of their systems are being phased out. We will be putting a server in place there which we’re doing now in one of our big markets in Fort Wayne. We also had a Siemens and Cerner bought that. We put Cerner up in one of our big markets in Commonwealth of Pennsylvania and over time we will spend little bit money in software for some of the HMA conversions, but in no rapid pace. I think we generally spend 4% to 5% of revenue and we stayed in that range pretty well, and will probably be in mid-size of that range going forward.
If anyone has any questions you can email firstname.lastname@example.org [indiscernible] Larry, I think one of [indiscernible] that we are hearing from some of the other operators are wage pressure, contract labor, premium pay, just the whole topic. And how do you see those trends playing out within community markets?
Yes. Our contract labor stayed around the 1% of revenue. It is not grown much. It’s up a slightly amount. Wages last year were up 2% to 2.5%; this year maybe 2.5% to 3%, I think we are hopeful that it will stay in that range category. From a nursing perspective, some of our competitors – need for more nurses and raise wages. We will probably do something similar to that, but there is been a lot of markets we are seeing. So, hopefully it will stay at 2.5% to 3% overall wage increases in 2016 and hopefully in 2017. So it's been a long time. A couple of years back it was 1.5% to 2% -- 2% to 2.5% last year and now it is 2.5% to 3% and we hope it will stay for next year. We are fortunate having the type of markets we are in. I think – lot of – good information about employment growth – at about 1.5%, roughly employment growth originally, which has been helping us a little bit. But there are a few markets where we had to react to some of the nursing issues and increase in the nurse’s pay.
Same is the topic right now on security. Your view on exchange of that note from a company perspective, you benefited mostly from Medicaid expense for the earnings that you might have at risk or probably much less than what the market here but just curious about the size of how you've -- the dollar amount that you've been sort of appointed to around exchanges and also just how you look at the stability of the marketplace in general?
Yes, I think that probably about 10% drop, which I don’t think is realistic. It might be 40 or 50 basis points effects. But last year we anticipated 15% to 20% increase in enrollment in our markets, especially -- before we got 10% to 15%, I think we'll probably continue to see little bit of enrollment growth in our markets. The Aetna and Humana, United, that people talk about, we target 90% -- being in 90% of the health plans at the cheapest prices for silver and bronze, and that’s where most of the enrollment is. That’s where a lot of subsidies are. We’ve had good enrollment growth, I think in the last quarter we were up 9% over a year ago, that's changed about 4% sequentially, I’d expect us to still see some enrollment growth. United has got fee cheaper price plans, but we are in [indiscernible] market and those were some of the other players in the market we've just got into one Blue plan we were not in the first couple of years – of our important markets this year for this coming open enrollment. And best of our knowledge, there will be at least one, in a lot of patients to a free plan in a lot of our locations and we are contracting with one that you need contract with, which usually has the most attractive price and the broadest network.
When you say a 10% decline in enrollment is 40 basis points, is that a 40 basis point hits your run rate EBITDA?
Run rate EBITDA. It’s pretty small. And I don’t expect a 10% decline, but I -- if you had a 10% increase you go the other way.
Okay. Any other initiatives you have underway that -- you’ve got a new partner inside of HPG and that is probably helping to some extent such as compliance in the other areas of focus?
Yes, HPG does a very good job in the contract and there is a re-contracting activity which helps us in the second half of the year and wasn’t there in first half of the year. We also do some work around the orthopedic devices, especially [indiscernible] spine has had a lot of growth and orthopedic business, so we are working hard on that, that's not part of HPG -- also some work on [indiscernible] continue to do some of the -- work we've done with the not-for-profits, good [indiscernible] drugs in orthopedics. We are taking advantage of some of the comprehensive joint, CJR, to try to work with orthopedic doctors and gain sharing, which will help us in some of the cause for orthopedics.
Okay. So we've got 40 seconds left, Larry I think we’ll just cut it off there. And thanks for joining us today and please join me in thanking Larry.
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