Community Health Systems discloses DOJ investigation

Editor's Note: This story has been updated with information from Community Health Systems' annual filings and commentary from its Q4 earnings call.

Community Health Systems (CHS) disclosed in a Securities and Exchange Commission filing that it is being investigated by the Department of Justice. 

The company received a Civil Investigative Demand on Jan. 11 "for documents and information relating to a variety of subjects, including practices and procedures related to utilization review, inpatient admissions and inpatient dialysis at our hospitals," according to its Form 10-K, released Wednesday. 

In a statement given to press, CHS said it "is familiar with the facts and circumstances surrounding this request for information and had previously investigated them to satisfaction. We believe the [Civil Investigative Demand] stems from allegations by a former employee at one of our hospitals."

The 71-hospital for-profit system wrote that it is "cooperating fully with this investigation." 

Five years ago, the hospital chain agreed to a $262 million settlement with the federal government over separate allegations of fraudulent billing.

The DOJ accused Health Management Associates (HMA), a hospital chain formerly headquartered in Naples, Florida, of knowingly billing government healthcare programs for inpatient services that should have been billed as outpatient or observation services. It was also accused of paying doctors to make patient referrals and submitting inflated claims for emergency department facility fees.

The alleged incidents took place before Community Health Systems acquired HMA in January 2014.

Community Health Systems has plenty of courters eyeing its hospitals, CEO says

Feb. 21

Even as one of its hospital divestiture deals is gummed up by regulators, CHS leadership said the system is fielding a swell of inbound interest that could lead to one or more selloffs before the end of 2024. 

Speaking to investors and analysts during Wednesday's earnings call, CEO Tim Hingtgen said the for-profit hasn't made any decisions or "fully negotiated" any sales. However, based on interest in "a handful" of its markets, "it's very reasonable to think that if we decide to move forward, we could get a deal done," he said. 

The dealmaking could yield over a billion in additional proceeds that could be redeployed toward debt management flexibility, future acquisitions or targeted investments in CHS' poorer markets, the executive said. In regard to the latter, Hingtgen cited outpatient access points such as ambulatory surgery centers as a continued investment priority and noted that 54% of the company's net revenues stem from outpatient care.

"We have modeled several attractive scenarios and will remain extremely disciplined in our decision-making as it relates to divestitures acquisitions, and ensuring that our core portfolio is strong and positioned for long-term success," Hingtgen said Wednesday. 

At the earliest, a deal could come around the midpoint of this year with "the potential for others to be completed late this year, early next year," the CEO said. 

CHS has already been proactive with its selloffs. It successfully divested eight hospitals and the majority interest in another across 2023, with the December close of a $294 million sale of three Florida hospitals to Tampa General Hospital marking the most recent deal.

In January, however, another agreement to divest two North Carolina hospitals came under fire from the Federal Trade Commission over concerns that the buyer, Novant Health, would control too much of the local market.

Here Hingtgen told investors that "we are limited in what we can say at this point, but we believe that this divestiture is appropriate and in the best interest of the community. The case will now move to federal court for final determination.”

Q4 expenses, poor payer mix plummet CHS' shares

The M&A comments came as CHS executives defended the latest in a string of disappointing quarters for investors. 

After market close on Tuesday, the Franklin, Tennessee-based system reported $3.18 billion in total net operating revenues, a 1.2% year-over-year gain.

It also disclosed $46 million, or $0.35 per share, of net income, though the latter drops to a $0.41 per share net loss after excluding certain adjusting items such as net business sale gains.

In Q4 2022, CHS reported a $414 million net gain—or $3.18 per share—and following the exclusion of adjusting items a net gain of $1.50 per share.

The earnings per share numbers (excluding adjustments) fell short of analysts’ expectations by $0.45 but beat revenues by $30 million, according to consensus estimates reported by Seeking Alpha. Shares closed 28% below Wednesday morning's opening.

Same-store net operating revenues rose 4.1% year over year, CHS said, and reflect a 1.9% increase in admissions and 3.6% increase in adjusted admissions on a same-store basis. The growth came faster among the Medicare-aged population, which executives said outpaced commercial growth 2:1 during the quarter.

Further, higher supplemental reimbursement program costs, increased rates for outsourced medical specialists and higher professional liability insurance costs drove an earnings decline compared to the prior year's Q4. 

Hingtgen encouraged those on the call to look past the expense roadbumps when gauging the company's overall position. 

"When you consider a more than $200 million unanticipated increase in medical specialists fees and medical expense with a 150 basis point impacted margin, we view this performance as a clear sign of positive momentum,” he said during the call.

Analysts on the call also expressed concern about CHS' lower-than-expected cash flow during the quarter, to which executives pointed to stubbornly high accounts receivable, "primarily from the temporary billing delays that we discussed last quarter related to clinical system upgrades and our physician insourcing initiatives." 

Looking at the full year, CHS increased its net operating revenues by 2.3% to $12.49 billion, with same-store operating revenues rising 4.8% as same-store admissions and adjusted admissions increased 3.5% and 5.3%.

It still weathered a $133 million net loss, or a per-share $1.02 loss, across 2023 as opposed to 2022’s $46 million net income and $0.35 per share income.

Excluding adjusting items, the system logged a per-share net loss of $1.39. This was about on par with 2022’s $1.38 per-share net loss, though that year included the positive impact of pandemic relief funds.

Operating pressures across the calendar year cited in the company’s earnings report hit many similar notes to the fourth quarter’s difficulties, with additional callouts of an unfavorable change in payer mix and higher salaries and benefits expenses.

In the coming year, executives said they expect to improve margins by growing patient volumes, further reducing contract labor and otherwise enjoying the tailwinds of efficiency and growth capital projects.

As of Feb. 20, CHS owns or leases 71 affiliated hospitals with about 12,000 beds as well as over 1,000 total sites of care.