“Challenging operating dynamics” led Community Health Systems to fall well short of the market’s consensus estimates with a second consecutive quarter of losses.
The 83-hospital for-profit reported a net loss of $326 million attributable to shareholders, or $2.52 per share, for the quarter ended June 30.
This is down from the $6 million net income in the second quarter of 2021 and far below the consensus earnings per share estimate of 5 cents per share.
"Simply stated, we did not achieve the results we expected," CEO Tim Hingtgen told investors at the top of CHS' earnings call.
The results, announced after market close Wednesday, had an immediate negative impact on the system’s shares, which plummeted by more than 40% within the hour. The price is now hovering around a mid-30% decline during the following day's trading.
Hingtgen and Chief Financial Officer Kevin Hammons characterized the decline as a blend of less-than-expected non-COVID volumes, persistently high labor pressures and lower per-admission revenues.
The latter of these came from a less favorable payer mix, generally lower acuity patients and the ongoing shift from inpatient to outpatient care for patients who formerly required high-intensity, but brief, hospital care, they said.
Additionally, the executives cast much of the earnings blame on two "outlier" markets that had particularly rough quarters. These two markets are not among the company's larger presences and saw especially high contract labor expenses.
“In a more normal operating environment, the impact of underperforming markets in any given quarter is typically absorbed by stronger growth and performance in other markets," Hingtgen said. "This year, even in higher-performing growth markets, elevated labor cost have resulted in lower net revenue conversion rates."
CHS is potentially looking at cutting low-performing service lines in these two markets, the executives said. They also stressed that the trajectory of these two markets do not apply to the long-term health of CHS' dozens of other markets, which they said have continually received investments through the pandemic in order to recapture deferred care the company believes is still on the horizon.
Net operating revenue for the most recent quarter landed just over $2.9 billion, according to the system, representing a 2.4% year-over-year decline that again fell below the market’s expectation of $3.1 billion. Same-store net operating revenues decreased by 2.6% year over year.
CHS saw a 3.4% total decline in admissions and a 0.4% dip in adjusted admissions compared to the prior year’s second quarter, according to the results. On a same-store basis, those numbers worsened to a 3.5% total decline and a 0.5% adjusted decline.
COVID volumes during the quarter declined to 2% of total admissions, under the 3% of the prior year's second quarter and well below the first quarter of 2022's 12%.
These cases tended to be lower acuity and less resource intensive than in prior quarters, Hingtgen said. However, non-COVID patients did not return to fill the gap with the back half of the quarter in particular seeing lower-than-expected returning volumes, he said.
Second-quarter operating costs and expenses increased year over year from $2.69 billion to $2.82 billion, CHS reported, with much of the gain coming from labor expenses.
Hammons said average hourly labor rates at the system rose 8.5% year over year. Since the previous quarter, CHS saw its average rates decline by 40 basis points, he said, and the company expects labor inflation to be "relatively flat" through the remainder of the year.
Contract labor ran CHS $150 million during the most recent quarter, roughly triple what it had spent during the same time last year. The company also saw a lighter decline than expected from the $190 million of Q1 2022, and now expects moderation at a slower pace than it had hoped earlier in the year.
The chain noted adjusted earnings before interest, taxes, depreciation and amortization of $253 million for the quarter, which included $8 million of pandemic relief funds.
To counteract the volume, revenue, labor and inflation challenges, Hingtgen said in a statement that the organization is “accelerating strategic growth opportunities in key markets, aggressively working to recruit and retain permanent staff to replace contract labor, achieving incremental expense reductions, and leveraging our centralized resources to achieve improved results.
“Over the past several quarters, we have made strategic investments in our markets, and we continue to believe we are well-positioned to meet healthcare demand and take market share as patient volumes return. We are committed to intense operational execution, and we remain confident that our strategies will deliver long-term growth and value,” he said.
CHS also wrapped up the divestiture of one of its hospitals July 1 but received the proceeds at a preliminary closing during the most recent quarter.
CHS reported fiscal 2021 net operating revenues of $12.37 billion and net income attributable to stockholders of $230 million, the latter of which was less than half of the prior year’s gain.
Like other systems, a COVID surge hit CHS hard during the opening quarter of 2022 and led to a narrow $1 million loss despite $3.1 billion in net operating revenues.