CHS' growth, margin improvement efforts slowed by Q3's rising costs, execs say

Updated on Oct. 27 with executives' earnings call commentary

Community Health Systems (CHS) executives reported a $42 million net loss ($0.32 per diluted share) in the third quarter of 2022 and acknowledged that industry-wide rising costs have hamstrung growth and margin development opportunities in a "small number" of its markets.

"We are taking swift and necessary steps to mitigate these headwinds," CHS CEO Tim Hingtgen told investors late Thursday morning. "During the third quarter, we accelerated efforts to adjust operations in these markets by consolidating or reducing some services or even opting to close facilities. We expect an overall positive impact from these changes as we close the year and even more long-term impact moving into 2023."

The Franklin, Tennessee-based hospital operator’s loss was accompanied by a 2.9% year-over-year decline in net operating revenues to $3.12 billion and a 1.7% year-over-year increase in total operating costs and expenses to $2.82 billion. 

Despite missing consensus estimates, CHS' stock ticker rose roughly 30% the morning after its report and maintained its gain through the earnings call.

Hingtgen outlined for investors several of CHS' "many sequential improvements in the third quarter." These include service line expansions, added inpatient and outpatient capacity, centralized nurse recruitment and incremental expense reductions through supply chain initiatives and targeted service consolidations.

Executives also highlighted a sequential decline in contract labor costs from the second quarter's $150 million to the third quarter's $100 million, a 12% year-to-date increase in nurse hiring compared to 2021 and a 300 basis-point increase in nurse retention, "resulting in a strong net gain in nursing [full-time equivalents]," Hingtgen said.

"We will continue to intentionally and aggressively adapt our portfolio services and operations to step over inflationary impacts and other industry headwinds, which we believe will position us for better results in 2023 and beyond," Hingtgen said. "And, we're supporting our markets with enhanced resources to accelerate growth and revenue, which we know is essential to address fixed and higher variable costs and to restore stronger earnings and margin performance." 

Kevin Hammons, president and chief financial officer, told investors that the system expects the year's final quarter to follow seasonal trends of higher volumes and revenue. Continued labor gains and "a theory" that many people will try to squeeze in care before deductibles reset and the economy worsens could also drive a strong close to the year, he said.

CHS’ revenue decline in Q3 was driven in part by reduced inpatient volumes. Admissions and same-store admissions decreased by 3.7% and 2.2%, respectively, while adjusted and same-store adjusted admissions increased 3.8% and 5.2%, respectively, the system reported.

COVID-19 admissions, which had represented 13% of all admissions in Q3 2021, fell to 5% in the most recent quarter. Additionally, a push to increase capacity via shorter length-of-stay has yielded a 6% length-of-stay reduction compared to the second quarter, Hingtgen said.

Surgical volumes were a bright spot for CHS, beating the 2019 pre-pandemic baseline and increasing 5.3% over last year on a same-store basis, Hingtgen said. Growth was strongest across orthopedics, spine, neuro, GI and colorectal procedures, he said.

“We were successful at driving stronger surgical volumes and also saw other volume indicators rebound midway through the quarter," he said.

Other factors working against CHS included lower acuity of inpatient admissions and surgeries, an unfavorable change in payer mix, elevated contract labor costs and Hurricane Ian in Florida.

The storm was responsible for roughly $10 million in pretax revenue losses and expenses (prior to insurance recoveries), with Hingtgen noting "significant disruption to elective procedures" that continued into October.

CHS has eight hospitals and over 80 outpatient sites of care across Florida's west coast, he said, and work is still ongoing to restore full operations in the area. 

"I want to acknowledge and express gratitude to our healthcare leaders and teams in Florida, who did a truly remarkable job before, during and after Hurricane Ian," Hingtgen said. 

"While our facilities sustained damage, our team maintained operations and continued to care for patients throughout the storm. And in the aftermath, they worked around the clock to ensure emergency surgical and other services will be available to their community. For several days, [subsidiary system] ShorePoint Health was functioning as the sole healthcare provider within a 30-mile radius."

CHS noted that the quarter’s loss was partially offset by roughly $84 million in pandemic relief funds recognized during the quarter.

The latest numbers bring CHS’ year-to-date net operating revenues to $9.07 billion, representing total and same-store declines of 0.7% and 0.1%, respectively, compared to 2021. Year-to-date net loss attributable to CHS is $369 million ($2.86 per diluted share), compared to a $52 million gain ($0.40 per diluted share) during the first nine months of last year.

Executives declined to comment on anticipated 2023 volume trends but said they plan to continue margin improvement efforts and, potentially, take advantage of nonprofit hospitals' tough financial situation to achieve market share growth.

"I don't want to call out any market specifically today, for fear that the competition will know we've got our sights set on them, but at the end of the day, we do see some opportunities in that regard," Hingtgen said.

CHS currently owns or leases 83 affiliate hospitals and operates over 1,000 sites of care across 16 states.