Community Health Systems brings more physicians in-house to combat high labor costs, staffing fees

Updated at 5:00 p.m., Oct. 26 with executives' earnings commentary

Community Health Systems is taking steps to bring more physicians in-house as the for-profit health system, like many of its peers, faces wage inflation and high staffing fees.

"Our nursing and clinical recruitment and retention strategies continue to perform well, enabling further improvements in contract labor in the third quarter." Tim Hingtgen, CEO of CHS, told investors and analysts during the health system's third-quarter earnings call Thursday.

CHS has focused in insourcing hospitalists and emergency medicine programs in select hospitals, he said, and now has more than 500 ED and hospitalist medicine providers working under this model.

"We are pleased with the strategic and financial benefits from this effort in the third quarter. We are confident in our ability to scale this solution as needed, and planning is currently underway to in-source anesthesia services in select markets as well," Hingtgen said.

CHS has previously contracted with American Physician Partners, a Brentwood, Tennessee-based hospital staffing firm, but the company filed for Chapter 11 bankruptcy protection in September.

Bringing physician services in-house brought in an additional $4 million to CHS' adjusted earnings compared to subsidy payments previously paid to APP, Chief Financial Officer Kevin Hammons said during the call.

"As Tim noted, the progress with our in-sourcing initiative has been very encouraging. And we expect further improvement in the coming quarters as we scale this effort," he said.

The health system's labor cost management initiatives has helped to drive down contract labor expense, which was $54 million in Q3, improving sequentially from $72 million and outperforming previous expectation for contract labor expenses to come in at $60 million to $70 million exiting the year, Hammons noted.

"We're really pleased with how this transaction has taken shape and our ability to rapidly in-source these providers in the last two months of the quarter. We see a lot of opportunities looking forward," Hingtgen said.

But he added, "We don't expect to have every single one of our hospital-based contracts serviced by an in-source model. We have not set our sights on a 100% transition to that type of work. We like the in-source model for the financial purposes that Kevin [Hammons] called out. We think there was a slight EBITDA improvement as a result of our first two months under the in-sourced model. but we also like it from an ability to align those hospital-based providers more closely to our patient safety and clinical initiatives and our throughput initiatives. It's really still early to see how much benefit we can glean from that type of affiliation with in-source providers but it's something we're keeping a close eye on and we think there's tremendous upside dow the road."

For-profit peer Universal Health Services (UHS) leadership also noted during an investor call this week that physician expense increases across 2023 continue to be an issue, running at a rate of roughly 7.6% of revenues versus pre-pandemic's 6%. UHS' chief financial officer attributed the jump to changes brought about by the No Surprises Act.

CHS leadership pointed to strong volume growth in patient admissions and clinic appointments in the third quarter as key improvements, but the for-profit health system ultimately stayed in the red for another quarter.

CHS logged a net loss of $91 million in its third quarter, or a loss of 69 cents per share, compared to a loss of $42 million, or 32 cents per share, during the same quarter a year ago, the health system announced in its third-quarter earnings report Wednesday.

Losses, adjusted for non-recurring costs and asset impairment costs, were 33 cents per share.

The results missed Wall Street expectations. The average estimate of six analysts surveyed by Zacks Investment Research was for a loss of 16 cents per share.

CHS leadership credited the increase in its quarterly losses and the decrease in adjusted EBITDA primarily to unfavorable changes in payer mix, a reduction in pandemic relief funds recognized and higher costs for supplemental reimbursement programs. The health system also said its bottom line performance was partially due to increased rates for outsourced medical specialists, partially offset by stronger inpatient volumes and reduced expense for contract labor.

The Franklin, Tennessee-based company spans 77 owned or leased affiliate hospitals and more than 1,000 sites of care. 

"Year-over-year for the quarter, same-store admissions were up 3.7% and at the highest level since the fourth quarter of 2019 or pre-pandemic. Same-store adjusted admissions increased 4.2% and reached record levels, demonstrating the strong demand for care in our markets and the favorable impact of our outpatient access point growth investments," Hingtgen said.

"We had our strongest ER volume so far this year in the third quarter, and we had a record quarter for physician practice visits, which is typically a leading indicator for future volumes," he told analysts.

In August, CHS launched an enterprise-wide, multiyear modernization and optimization initiative that will include an integrated Oracle-powered platform. The so-called Project Empower initiative will combine the Cerner (now owned by Oracle) electronic health records system that more than half of CHS' hospitals are already using with other financial, supply chain and human capital management systems offered by the tech company, executives told investors during an investor call in August.

Hammons said that initiative was showing "early evidence of success."

The operator of acute care hospitals posted revenue of $3.09 billion in the period, topping Street forecasts. Five analysts surveyed by Zacks expected $3.04 billion. Revenue was up 2% compared to $3.025 billion for the same period in 2022. 

On a same-store basis, net operating revenues increased 5.1% for the three months ended Sept. 30, 2023, compared to the same period in 2022. Net operating revenues for the third quarter reflect a 0.5% increase in admissions and a 0.4% rise in adjusted admissions, compared to a year ago. On a same-store basis, admissions increased 3.7% and adjusted admissions increased 4.2% in the third quarter.

CHS reported adjusted EBITDA was $360 million compared to $400 million for the same period in 2022. 

Net cash provided by operating activities was $29 million for the quarter, compared to $137 million for the same period in 2022.

"Strong volume growth in admissions, adjusted admissions, ER visits and clinic appointments during the quarter reflect successful execution of many of our key strategies, including investments in service lines, physician recruitment, capacity optimization programs, and the maturity of our transfer center services," said Tim Hingtgen, CEO of CHS, in a statement. "Our local management teams are focused on ensuring access to health services for their communities and our healthcare workers continue to deliver high-quality care for their patients.”

Year to date, CHS has now logged $180 million in net losses (-$1.38 per diluted share) compared to a $369 million loss (-$2.86 per diluted share) during the first nine months of 2022.

For the first nine months of 2023, CHS logged $9.3 billion in net operating revenues, up 2.6% from $9.1 billion a year ago. Same-store admissions and adjusted admissions rose 4.4% and 6.1%, respectively.

CHS credited the decrease in net loss for the first nine months of 2023 to "stronger inpatient and outpatient volumes, increased reimbursement rates, higher acuity, an increase in non-patient revenue and reduced expense for contract labor, partially offset by unfavorable changes in payor mix, a reduction in pandemic relief funds recognized, increased salaries and benefits expense, higher costs for professional liability insurance, and increased rates for outsourced medical specialists," according to the press release.

Of note, during 2023, CHS completed the divestiture of three hospitals, each in separate deals. In July came word that CHS would be selling another three of its Florida hospitals to Tampa General Hospital for about $290 million.

The health system is projecting net operating revenues of $12.4 billion to $12.5 billion for 2023 and adjusted EBITDA of $1.45 billion to $1.5 billion.

The organization reported $12.2 billion in net operating revenues and $46 million in net income attributable to stockholders across all of 2022.