Earnings call: Community Health Systems reports a 4.8% increase in revenue

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Earnings call: Community Health Systems reports a 4.8% increase in revenue
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Community Health Systems (NYSE: NYSE: CYH ) disclosed a 4.8% increase in same-store net revenue for the fourth quarter of 2023, driven by volume gains in key services during its year-end earnings call. The company announced a net operating revenue of $3.2 billion for the quarter, with adjusted EBITDA reaching $386 million, reflecting a margin of 12.1%.

Looking ahead, initial guidance for 2024 includes net revenue projections between $12.3 billion and $12.7 billion, and adjusted EBITDA estimates ranging from $1.475 billion to $1.625 billion. Community Health Systems also indicated that it is exploring divestiture opportunities with the potential to generate over $1 billion in proceeds, which could be used for debt reduction or other strategic purposes.

Key Takeaways

  • Same-store net revenue grew by 4.8% in Q4 2023.
  • Investments in core markets are being made, with new construction projects and outpatient access points underway.
  • The company is considering divestitures that could exceed $1 billion in proceeds.
  • A partnership with Google (NASDAQ: GOOGL ) Cloud aims to use AI for better patient care and operational efficiencies.
  • Net operating revenues for Q4 stood at $3.2 billion, with a 12.1% adjusted EBITDA margin.
  • Initial 2024 guidance projects net revenue of $12.3 billion to $12.7 billion and adjusted EBITDA of $1.475 billion to $1.625 billion.
  • The company launched Project Empower, a modernization initiative, in October.

Company Outlook

  • Community Health Systems provided initial 2024 guidance with net revenue expected to be between $12.3 billion and $12.7 billion.
  • Adjusted EBITDA for 2024 is projected to be between $1.475 billion and $1.625 billion, with anticipated tailwinds from various growth and cost-saving initiatives.
  • Cash flow from operations is estimated to range from $500 million to $650 million for 2024.

Bearish Highlights

  • The company is facing challenges in the medical malpractice environment, expecting continued pressure.
  • An increase in claim denials and downgrades by MA payers has been observed, prompting lobbying efforts to address the issue.

Bullish Highlights

  • Contract labor expenses decreased by approximately $30 million.
  • The company is experiencing volume growth and favorable rates, which are anticipated to contribute to margin improvement in 2024.
  • New CMS guidance is expected to provide some benefits.
  • Ambulatory projects and other investments are targeted to drive stronger EBITDA performance.


  • The company has seen higher CapEx due to projects winding down but expects a decrease in CapEx in the upcoming year.

Q&A Highlights

  • The company discussed the potential for divestiture deals to reach multiples of 10x plus trailing EBITDA, with completion expected by midyear or later.
  • There are deliberate investment strategies in place to enhance EBITDA performance and provide long-term value for shareholders.
  • Community Health Systems plans to allocate capital from divestiture proceeds for debt paydown or acquisitions.

In conclusion, Community Health Systems is actively managing its portfolio and capital to enhance growth and shareholder value. The partnership with Google Cloud and the launch of Project Empower signal the company's commitment to modernization and operational efficiency. With a strategic focus on outpatient projects and potential divestitures, the company is positioning itself for improved financial performance in the coming year.

InvestingPro Insights

Community Health Systems (NYSE: CYH) has shown resilience with a 4.8% increase in same-store net revenue for Q4 2023, yet InvestingPro data and tips reveal some underlying challenges and opportunities. The company's market capitalization stands at a modest $384.27 million, and the adjusted price-to-earnings (P/E) ratio as of the last twelve months ending Q3 2023 is 5.31, indicating the market's current valuation of its earnings.

InvestingPro Tips suggest that Community Health Systems operates with a significant debt burden and is quickly burning through cash, which may raise concerns for investors looking at the company's long-term financial health. Analysts have also revised their earnings downwards for the upcoming period, hinting at potential headwinds that could impact future profitability. However, it's worth noting that Community Health Systems is a prominent player in the Healthcare Providers & Services industry, and despite some volatility, it has managed a strong return over the last three months.

When it comes to revenue, Community Health Systems reported a growth of 1.2% in the last twelve months as of Q3 2023, with a gross profit margin of 40.6%, which is a positive indicator of the company's ability to manage its cost of sales effectively.

Investors interested in a deeper dive into Community Health Systems' financials and strategic positioning can find additional InvestingPro Tips at https://www.investing.com/pro/CYH. With these insights, investors can make more informed decisions, and for those looking to access a comprehensive suite of tools and analytics, they can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 7 more InvestingPro Tips available that could further inform investment strategies.

Full transcript - Community Health (CYH) Q4 2023:

Operator: Hello, and welcome to the Community Health Systems Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call to Anton Hie, Vice President of Investor Relations. Please go ahead.

Anton Hie: Thank you, MJ. Good morning, and welcome to the Community Health Systems Fourth Quarter and Year-End 2023 Conference Call. Joining me today on this call are Tim Hingtgen, Chief Executive Officer; Kevin Hammons, President and Chief Financial Officer; and Dr. Miguel Benet, Executive Vice President of Clinical Operations. Before we begin, I must remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation to our website. All calculations we will discuss exclude gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on sales of subsidies gained from the Core Trust transaction, expense from government and other legal matters and related costs, expenses from business transformation costs, expenses related to employee termination benefits and other restructuring charges, and changes in estimates for professional claims liability related to the [indiscernible] locations. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Tim Hingtgen: Thank you, Anton. Good morning. Thank you for joining our fourth quarter and year-end conference call. To kick things off, I first want to recognize the more than 60,000 dedicated employees, providers and leaders across our healthcare systems for the excellent care delivered to patients in 2023 and always. I'd also like to acknowledge the tremendous team effort that enabled progress in every key priority established for 2023, which we have reviewed on these calls over the past several quarters. Throughout the year, we were purposely focused on advancing safe quality health care, strengthening our workforce, accelerating growth and controlling expenses. Major accomplishments in the year included volume gains across all key services as we continue to see broad-based strength in demand. New access points, strong capacity management, defined workforce initiatives and investments to optimize our competitive position, make this growth possible. Same-store admissions increased 3.5% in 2023 and adjusted admissions were up 5.3%, driving same-store net revenue growth of 4.8%. Same-store ER volume grew 1.1%, while surgeries increased a solid 5.1%. Adjusted EBITDA for the full year increased 12.3%, and our margin expanded 100 basis points year-over-year when excluding the positive impact of pandemic relief funds in 2022. When you consider a more than $200 million unanticipated increase in medical specialist fees and medical malpractice expense with a 150 basis point impact to margin, we view this performance as a clear sign of positive momentum. We continue to invest in our core markets to accelerate growth prospects and further capture market share. In Knoxville, Tennessee, construction of our new tower is nearly complete with the grand opening scheduled to take place in the next few months. This project includes new inpatient beds and an expanded emergency department. On the Alabama Coast, the major expansion of our Baldwin County campus should open before the end of the year and will also increase the number of acute care beds and the surgical capacity available within this very busy hospital. While we pursue bed additions where we are seeing strong demand and our growing market share, we also continue to invest in outpatient access points, such as ambulatory surgery centers, freestanding emergency departments, urgent care centers and provider clinics. As a result, CHS health systems are capturing patient care that is migrating out of the inpatient environment with 54% of our net revenues now derived from outpatient care. This outpatient focus includes the deliberate broadening of our ASC footprint. During the fourth quarter, we completed the expansion of the Grand View GI ASC in Birmingham, Alabama, and completed an ASC acquisition in La Porte, Indiana. And already this year, we opened a de novo ASC in Cedar Park, Texas. In addition to capital investments in our health systems, our transfer center is driving volume and higher acuity admissions, most notably in cardiology, critical care, GI and general surgery. The transfer center also gives us visibility to see where we have opportunities to invest in further service line development and physician recruitment. Work to sharpen our portfolio in 2023 included divestitures in West Virginia, Arkansas, Oklahoma and Florida. As you may have seen, the FTC recently sued to block our planned divestiture of 2 hospitals in North Carolina to Novant Health. We are limited in what we can say at this point, but we believe this divestiture is appropriate and in the best interest of the community. The case will now move to Federal Court for final determination. Proceeds from divestiture transactions enable a variety of positive activities such as targeted investments in core markets, funding potential future acquisitions and increased flexibility in debt management. We are currently evaluating inbound interest for a handful of markets that could yield more than $1 billion in additional proceeds. We have modeled several attractive scenarios, but 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. In an effort to strengthen our workforce in 2023, our centralized clinical recruitment team continued to deliver strong results, and we finished the year with a net gain of more than 1,000 bedside nurses. We also expanded their activities to Allied Health, building 1,500 physicians in clinical support, technician and other roles. The impact was real, with the $260 million reduction in contract labor in 2023 compared to the prior year. Also, as you know, in 2023, we've rapidly and successfully in-sourced a large number of hospitalist and emergency medicine programs that were previously vendor outsourced. As a result, we now operate an internal infrastructure of resources that allows for further integration of hospital-based physician groups required by our markets. Based upon the success of in-sourcing ED and hospitalist medicine initiatives are underway to in-source anesthesia services in select markets, and we believe we can scale these new capabilities effectively and as needed. Advancing safety and quality is an ongoing daily commitment. In 2023, we achieved a record 89% reduction in our serious safety event rate from the baseline established more than a decade ago. We saw many other measures of quality care success including a 25% reduction in the overall mortality rate and a 48% improvement in postop respiratory failure rates. Looking to the future, our recently announced clinical data platform migration and partnership with Google Cloud opens the door for expanded use of AI and demonstrates how CHS is leveraging technology to drive administrative efficiencies and to improve patient care. Dr. Benet is on the call with us today to comment about the ways we are and will be using AI and machine learning across our hospitals. Dr. Benet?

Miguel Benet: Thank you, Tim. Our partnership with Google Cloud enabled us to unify our data into a single platform that facilitates greater transparency, enables more real-time decision-making and that will serve as the foundation for the future use of AI in our health care settings. We call our platform THIA, or tactical health engine for intelligent analytics. Working on this platform, we are developing tools that improve patient care and outcomes and that support our clinicians and administrative teams in their work. As we leverage AI, we expect to drive efficiencies that enable our health care professionals to focus even more of their time on high-value patient interactions. For example, we can deploy this technology for continuous monitoring of patients in the acute care setting using algorithms and near real-time data to identify the potential need for early intervention. AI can be used to generate clinical summaries that physicians and nurses can edit for documentation, decreasing administrative work. Since AI can do still and disseminate large amounts of complex data, we anticipate using it to help our clinical documentation specialists, capture the complexity of care and documentation. Another example is our ability to provide patients with concise contextualized information to improve social determinants to help by using Google Maps capabilities to provide discharge patients with a list of nearby resources available in their communities and customized to their needs. We are already seeing notable benefits, including improvements in a variety of quality metrics and operational benchmarks such as reductions in mental state. There are endless possibilities, and we are just beginning to see the power of artificial intelligence and health care. In all, we are doing at CHS, we are following standards set in 2018 for ethical, safe and proper use of AI and have joined the coalition for Health AI to help frame safe and responsible use of AI in health care into the future. Tim, I'll turn the call back to you.

Tim Hingtgen: Thank you, Dr. Benet. Our fourth overarching priority remains controlling expenses, which Kevin will address in his remarks, along with other comments about our financial performance in the fourth quarter and 2023 and our outlook for 2024. Kevin?

Kevin Hammons: Thank you, Tim, and good morning, everyone. Overall, we were pleased to see continued solid demand in our markets and CHS' ongoing progress on our strategic priorities. For the fourth quarter, net operating revenues were $3.2 billion, representing year-over-year growth of 1.2% on a consolidated basis. On a same-store basis, net revenue was up 4.1% over the fourth quarter of 2022, driven primarily by a 3.6% increase in adjusted admissions and a 0.5% growth in net revenue per adjusted admission. Inpatient and outpatient volumes in the fourth quarter increased for both the commercial and Medicare books, reflecting the strong demand in our markets and targeted capital investments. However, the mix of that business with the disproportionate growth in Medicare Advantage versus fee-for-service and from states where our negotiated commercial rates are lower, continued to affect our net revenue per adjusted admission growth, similar to previous quarters. Adjusted EBITDA for the fourth quarter was $386 million, representing a margin of 12.1%. During the quarter, we benefited from the recognition of approximately $40 million in increased EBITDA from the Mississippi Hospital access program, of which approximately half related to prior periods. While this amount was not factored into our guidance, we effectively offset this benefit by increasing our self-insurance reserves for medical malpractice, which was recognized as a change in estimate during the fourth quarter. We believe this adjustment was appropriate based on recent experience and claims activity across the hospital industry. Overall, we were pleased with our performance on labor costs. Average hourly wage rate for the quarter was up approximately 3% year-over-year, bringing the full year increase to approximately 4% versus our full year expectation for 5%. We expect similar growth in average hourly rate in 2024 of approximately 4%. As Tim noted, our recruitment retention strategies have helped stabilize our workforce, allowing us to drive significant reductions in contract labor expense, which at $52 million represented an approximate $30 million decline over prior year and a modest decline sequentially. Recall that we typically see a material increase in contract labor utilization in the fourth quarter to help cover for seasonally higher patient demand. Meanwhile, medical specialist fees at approximately 5% of net revenue remained elevated versus historical levels, but generally consistent with the third quarter. When comparing the gross up of expenses for physicians in-sourced, from the former APP contract against the net revenue related to those physicians, we estimate that our results benefited by approximately $5 million during the quarter versus the subsidy payments previously paid to APP. We expect further opportunities in the coming quarters as we look to scale our in-sourcing efforts, but believe there continues to be pressure, particularly in the area of anesthesia. Cash flows from operations were $90 million for the fourth quarter of 2023 compared with $9 million in the year ago period. We did not see the expected improvement sequentially in accounts receivable, primarily from the temporary billing delays that we discussed last quarter related to clinical system upgrades and our physician in-sourcing initiative. Additionally, performance for the quarter was affected by growth in the Mississippi supplemental Medicaid program, AR of approximately $40 million. The slowdown of receiving payments from Medicare Advantage payers versus fee-for-service of approximately $10 million and the acceleration of interest payments resulting from our refinancing efforts of approximately $30 million. Note that we've begun receiving payments in the first quarter from the state of Mississippi for the expanded Medicaid funding program and expect significant further improvement in cash flows relative to where we finished 2023. Capital expenditures for the quarter were $110 million, bringing the full year total to $467 million, consistent with our guidance of $450 million to $500 million. In December, we completed a private offering of $1 billion of 10.78% senior secured notes due 2032. Using proceeds from the offering, and from the completion of our Bravera divestiture to redeem $985 million of our 8% notes due 2026 and to extinguish $402 million of principal amount of other debt, which by capturing discount resulted in a pretax gain from early extinguishment of debt of approximately $72 million during the quarter. Net debt to trailing adjusted EBITDA at year-end was 7.88x slightly improved relative to the third quarter. We remain well positioned to meet our needs going forward with improved operations, and $637 million of borrowing capacity under our ABL. As Tim noted in his remarks, apart from the North Carolina transaction, we are currently evaluating opportunities for further divestitures across a handful of markets that could total more than $1 billion in additional proceeds. We anticipate that 1 or more of these transactions could close within the calendar year, providing substantial capital for the company to redeploy. Project Empower, our enterprise modernization initiative launched October 1. And after standing up our shared services platform and new workflows at 15 of our facilities with no disruption in patient care, we are seeing improved visibility and insight as expected. After a pause during the year-end closing process, we will begin further implementations throughout 2024. Moving on to our initial guidance for 2024. We anticipate net revenue of $12.3 billion to $12.7 billion, adjusted EBITDA of $1.475 billion to $1.625 billion and cash flow from operations of $500 million to $650 million. When normalizing for the divestitures completed in 2023, the midpoint of our net revenue outlook represents a year-over-year growth of approximately 4% and the midpoint of adjusted EBITDA represents a growth of approximately 9%. Note that our outlook does not include the impact of any future divestitures or major acquisitions [indiscernible] does not include the impact of any debt refinancing transactions and excludes the potential benefit from a rollback of the 163(j) limitation on interest deductibility for tax purposes and the income tax refund that we have previously discussed. Additionally, our cash flow guidance includes approximately $60 million to $80 million of cash outflow related to Project Empower. As the ERP and workflow modernization rolls out to the markets throughout 2024, these investments will wind down by year-end and will become a cash flow tailwind into 2025. [Health] provide context for the 2024 adjusted EBITDA guidance relative to 2023 and 2022. There are several puts and takes that we would like to highlight. Specifically, as we set initial guidance this time last year for 2023, we had anticipated adjusted EBITDA growth of approximately 7% at the midpoint. At that time, the primary expected headwinds were the $173 million reduction in pandemic relief funds and a moderate increase in medical specialist fees, which we were able to offset through the benefits of our margin improvement program, contract labor reductions and growth in patient volumes. What we had not anticipated as we started 2023 was that medical specialist fees would spike as high as they did midyear prior to our APP transaction and that we would face additional headwinds from higher medical malpractice expense and from the outsized growth in Medicare Advantage, as we have discussed in quarterly calls since then, leading to the results you see today. Looking into 2024, we have much better visibility into these factors, while at the same time, we anticipate tailwinds from growth capital projects over the past 2 years, further reductions in contract labor, additional savings from cost control efforts and a full year's benefit from the recently expanded Mississippi Medicaid funding program. Based on these factors as well as operating results through the first 6 weeks of the year, we have a high degree of confidence in our ability to deliver on the guidance we have provided and look forward to providing updates in the coming quarters. Tim?

Tim Hingtgen: Thank you, Kevin. I think now we're ready to open up for Q&A.

Operator: [Operator Instructions] Today's first question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut: Kevin, thanks for all the color that you gave us on the cash flow. But maybe just a little more detail, just looking at the cash flow shortfall in Q4 and how you're thinking about guidance in 2024, including what seems to be a reduced CapEx spend for the year. So just any color you can share with us and yes, that would be great?

Kevin Hammons: Sure. Thanks for the question, Brian. So yes, if I could just maybe kind of go back through some of the items that I believe caused the shortfall in Q4 and then maybe talk a little bit about '24. We finished Q3, I believe our accounts receivable balance was about $2.16 billion. We expected that to come down in Q4, particularly as we claw back some of the built up AR from our Cerner (NASDAQ: CERN ) conversions. As we went throughout the quarter, we -- although we clawed back maybe 1/3 of that, we did not claw back all of that. We had some additional buildup in AR, particularly around some of the in-sourced physicians as well as timing of some commercial payments. The holidays fell on a weekday, the last week of December, and we didn't really have complete insight into how some of the commercial payers may pay at the end of the year. So really, we look at that as just more of a timing issue. -- then the Mississippi program came through, which the cash of that wasn't paid in December, so added to our AR. And at the end of the day, the accounts receivable balance increase instead of decreasing as we expected, had increased at the end of the year. So that was all in, call it, roughly $130 million headwind in cash flow in the fourth quarter. Then we talked about we did a refinancing in the fourth quarter. We had to accelerate in the repayment of the bonds, accelerate some of the interest payments that otherwise would have been paid in '24. So that's clearly a timing issue because now that interest is paid and we will not have that payment in '24. We also settled a legal case, the Mason case, which was about $30 million in the fourth quarter, made that payment, which was not anticipated. We just did not know the timing of when that payment was made. We had it accrued at the end of the quarter, but did not have the timing of when that payment would be made. So those are kind of led to and are, again, primarily some timing related matters. As we go into the '24, a couple of things, I'll just reiterate around the 163J interest deductibility. That has passed the house. It is in the Senate, although we don't know when or if the Senate will pass that rollback. So we've not anticipated, we've not put that in our guidance this year as well as the tax refund, which we still feel very comfortable that we're going to get, but we were wrong. I was wrong about anticipating the timing of that last year. So I'm not going to predict the timing of our government approving that this year. So if either of those come through, they would be positive. Our current cash tax estimate is $150 million to $200 million, and that could be reduced if either of those items come through.

Brian Tanquilut: Got it. Okay. And then maybe as I think about -- just the expense line, any comment or anything you can share with us as it relates to your views on nurse wage inflation, contract labor utilization what's baked into the guidance and also physician service or physician specialists spend both in-house and outsourced?

Kevin Hammons: Yes. So we're estimating kind of a wage inflation at 4% for 2024. -- that's right about where we were at in 2023. So I think we've baked in a conservative estimate into '24 for wage inflation and we'll certainly work harder to keep it below that, and we're actually exiting '24 at a rate below that. It was about 3.4% in Q4. On contract labor, again, as we kind of look out at the midpoint of our guidance assumes the current run rate that we're exiting '23 at, if you think about $52 million fourth quarter contract labor expense, if we say that run rate throughout '24, that would represent about a $60 million reduction in contract labor year-over-year, and about half of that would flow through to EBITDA. I do believe there's some opportunity that we can further reduce contract labor, it's still running significantly higher than pre-pandemic levels, and we still may be able to take a little bit more out of that. And then I think there was 1 more -- on CapEx, I think you had mentioned CapEx. We've had some higher CapEx over the past couple of years. We've had some large projects that were winding down. These are inpatient towers where we're adding inpatient capacity in markets where we need to add capacity and because we're full and those markets are growing, those projects are winding down. So we'll have a year with a little less CapEx also reflects the hospitals that we've divested over the past year. So we're still very comfortable with the amount of capital we're spending as well as trying to manage just our free cash flow.

Tim Hingtgen: Yes. And Kevin, I'll tack on to that in terms of our philosophy and the management of our capital spending. We have a really full pipeline. We've talked about that a lot over the last several quarters. The predominant amount of that is on the outpatient side of the business, which we know does not typically have as high of a spend to get those strategic access points put into operation. So that outpatient focus continues to be an area of growth and opportunity for us across the portfolio. We're also managing that pipeline relative to the gains in staffing so that when we are ready to activate the capital, bring it online, we have a cost-effective way to drive margin and payback on that capital investment. So we're really, I think, hyper focused on phasing this in ways that are really going to be accretive to earnings in the long run. The other thing I would point out is outside of CapEx, it's just keeping some of our powder dry for opportunistic acquisitions. So we'll keep an eye on that as things emerge in the upcoming quarters. On the outpatient side of the business, you heard me reference 2 outpatient ASC acquisitions later last year. We continue to scan our markets for those types of opportunities as well.

Operator: The next question comes from Jason Cassorla with Citi..

Kevin Hammons: Jason, I think we may have lost you.

Operator: The next question comes from Ben Hendrix with RBC Capital Markets.

Ben Hendrix: I wanted to follow up on your -- the Med Mal reserving. -- specifically your decision not to adjust that out of adjusted results? And also just your general comfort level with kind of reserves where they are now. Is there anything out there specifically on the horizon that could continue to push those reserves up higher through the year? Just any comment around your thinking there?

Kevin Hammons: Sure. Thanks for the question, Ben. We debated whether or not it was appropriate to adjust that out of our adjusted EBITDA and certainly give that some consideration. At the end of the day, we decided to leave it in. We also had with Mississippi coming in, which was unexpected in the fourth quarter, we did not want to appear that we were cherry picking and only adjusting out unfavorable items. There's reasons that Mississippi would stay in because it's an ongoing program, and we did not want to create situation where we pulled it out also in the fourth quarter and then put it back in next year in just some inconsistencies. So at the end of the day, just decided to leave them both in into the adjusted EBITDA calculation. Again, the Mississippi program like other programs are ongoing and really represent reimbursement for services provided. So I think that's also appropriate. As we look ahead to '24, the malpractice environment overall, I think, is getting more difficult. We're seeing some pretty large settlements, jury awards in cases that are higher than we've ever seen historically. And I think there is a little bit of pressure in the industry at large. We're hearing that from our insurance carriers as well. We are self-insured for malpractice with excess insurance coverage above certain levels. But so we do have insurance. And here, there is some pressure there. But overall, I would expect our malpractice expense to probably come back to something a little more normal in the future as we manage through. I'd also point out that the work we've done on patient safety and quality over the years and the 89% reduction in serious safety events that Tim called out is very meaningful. And there's such a long tail on malpractice. We're still settling a lot of old claims, but the rate at which new claims are coming in is significantly lower than it had been historically. So I feel good about the future in our ability to manage that cost.

Ben Hendrix: And if I may, a quick follow-up on your comments about around puts and takes on guidance. I was wondering if we could get some more detail on the kind of the key drivers of margin improvement implied for 2024. It sounds like there will be some support from lower contract labor year-over-year, and you mentioned lower wage inflation than we saw also Missisippi Medicaid, but should we also expect some normalization of payer mix trends this year? Any comments on how we bridge to the margin?

Kevin Hammons: Yes. I do -- you called out a couple of the items I already mentioned. I do think there's some or we have some expectation of some normalization in payer mix trends. Rates continue to be relatively favorable. -- governmental rate, Medicare lift should be in the kind of 2.5% to 3% range this year versus 2023, it was 1.9%. I think Medicaid is about flat, excluding some of the supplemental programs. It was a negative in 2023. So those are all marginally helpful to as commercial rates are still in that 4% to 6% range, similar to 2023, but another year of those should be helpful. As we continue to grow volume and cover -- are able to cover our fixed cost that has the benefit of increasing our margin. And as our markets continue to grow, and we continue to see recovery and higher volumes, I think that's an important factor to point out. We also have our margin improvement program that we're highly focused on and putting a lot of discipline around a number of initiatives. Some of those are baked into our guidance. Many of them are not baked into our guidance, and give us the upside potential. But around the uncertainty of when those come through and to what degree we did not want to get too far out ahead and bake all of that, but we have a number of initiatives we're working on that should be favorable.

Operator: The next question is from Jason Cassorla with Citi.

Jason Cassorla: Great. Can you guys hear me?

Kevin Hammons: Sure can. We hear you now, Jason.

Jason Cassorla: Excellent. Apologies for that. I wanted to talk about the MA book, right. In the past, you've discussed how your MA book has a lower effective pricing yield compared to fee-for-service Medicare and how that dynamic has impacted results with your elevated M&A volume growth in '23. But I guess stepping in the 24, are you anticipating any offsets to this yield differential, whether that be from a contracting perspective with MA payers or new rules like the 2-midnight rule. I guess just if you have any color on the levers and areas that can help narrow that pricing yield differential moving forward?

Kevin Hammons: Sure. So when you go step back when we look at our contracts, kind of on a procedure by procedural basis, the rate of reimbursement is pretty similar to Medicare fee-for-service. The realization is really where we lose money comparatively and that's what causes the discount that we talked about, and that's a result of downgrades and denials of claims. Going into '24, there certainly should be some benefit from the new guidance put out by CMS around the 2 midnight rule around preauthorizations. We expect that those could be helpful to us. It's too early to tell. We've not been able to quantify that yet in too early in '24 to really see that come through. I know some of the payers have talked about already seeing an impact in Q4, making more payments. We did not see any benefit in Q4 from that coming through. But I think directionally, it could be positive for us in '24. Tim?

Tim Hingtgen: Yes, Jason, I think we're investing in a lot of clinical resources to help us monitor the environment, be more on the proactive side of this. We've talked in the past about our centralized GR investments. That was largely a registered nurse organized function under the direction of Dr. Benet. Later last year, we stood up a physician adviser, in-source physician adviser program to really be more active and proactive as much as we can be, but also to counteract any downgrades and denials that the admitting physician and the physician advisers believe is clinically appropriate for inpatient status. So we would expect to see some tail effects, positive tail effects for that in 2024 as well.

Jason Cassorla: Okay. Got it. And maybe just a follow-up, and apologies if I missed this before, but I wanted to ask on that 4% revenue growth. excluding divestitures, can you just help on the building blocks of that 4% relative to your 2% to 3% kind of target for volume and pricing and mix? And then maybe just specifically on volumes, growth for 2023 was some, call it, 300 basis points ahead of your original expectations. Do you feel that the outsized growth last year kind of creates a comp issue for you in '24 kind of especially in the first half of the year? Or how would you frame the volume environment in '24?

Kevin Hammons: Yes. So I would say that the 4% growth, we're looking at roughly 2% to 3% volume growth in '24, which is lower than we experienced in '23, but we still believe strongly that we can continue to grow those volumes in our markets and get something 2% to 3% volume growth. And then rate, overall, as I mentioned, we're kind of 4% to 6% on commercial rate, 2.5% to 3% on Medicare, which is a little higher than we had in '23 and about flat on Medicaid. There probably is, and we've factored in a little bit of a headwind on continued deterioration in payer mix. But when you throw all that in together, we get about a 4% same-store kind of growth on net revenue.

Operator: The next question comes from A.J. Rice with UBS.

A.J. Rice: Just maybe to follow up a little bit more on that payer mix question. There's been obviously a debate in the marketplace about utilization rates. Are you seeing any difference in behavior among your utilization between your MA book and your fee-for-service book and frankly the rest of the book as well. Is there anything you can tell in terms of rebound post pandemic and so forth that may show different trends across those payer classes?

Kevin Hammons: I think kind of post pandemic, we certainly saw a deterioration in the actions by the MA payers where they were not downgrading or denying claims during the pandemic, they certainly began denying and downgrading significantly more claims, particularly in the MA book, although it applies to commercial as well, but more so in the MA space. And we believe that kind of hit a peak. And I think it's gotten a lot more attention at the governmental levels. We've certainly been active in our discussions with legislators, with our lobbying efforts. I know the American Hospital Association, Federation American hospitals, they've all tried to shine a light on some of the behavior of the payers. And I think that's resulted in some movement by CMS to come out with some additional guidance around their expectations, like the 2 midnight rule like some of the preauthorization requirements. We have yet to see any real change that's meaningful or measurable. But having said that, we do expect there to be some favorable movement into 2024.

Tim Hingtgen: Yes, A.J., this is Tim. I'll go back to my comment. The reason we set up the physician adviser program was to make sure that we're supporting the admitting physician's decision with more collaboration with the MA plans or commercial plans in general. We have a strong compliance program across Medicare and every other payer source as well. But in general, to try to counteract some of those adverse trends, we believe we're better positioned going forward to make sure that, that admitting physician's decision is more strongly represented.

A.J. Rice: Okay. And maybe my follow-up, just to ask about -- you're mentioning this divestiture activity that you plan to undertake. Is that in response to people proactively coming to you? Is it strategic decision you're making. And you talked about having as much $1 billion for capital deployment. I wondered whether you're thinking mainly about paying down debt further? Or is there some other use of that potential capital that you're thinking about?

Kevin Hammons: So sure. Happy to take that one, A.J. So this is almost entirely resulting from inbound interest. But having said that, I still think we're taking an [indiscernible] look because we get inbound interest on a number of locations and facilities that we don't act on. So we're not acting on every inbound interest that comes in, but we do happen to have some inbound interest in markets that we think may make strategic sense to transact. So we're pursuing those further. We don't know at this point whether they'll come to fruition, but there is some significant interest out there that we are going through the effort to have conversations and looking to deeper and evaluate that may make sense. If -- to the extent that we get proceeds in, I think we'll evaluate the markets at the time and the other opportunities at the time on what is the best way to delever the company. My focus is clearly on delevering and balancing our capital structure, and we can do that in 2 ways. We can pay down debt, we can grow EBITDA. And if we have the right opportunity for acquisition at the time we have cash in hand, and we think that, that could be more accretive. That's something we would certainly take a look at. If the markets are such that debt paydown is the better play, I think we'd take a look at that. So I know I'm not giving you a specific answer here, but we'll evaluate based on the timing that the cash comes in, what we think is the best way to delever.

Operator: The next question comes from Stephen Baxter (NYSE: BAX ) with Wells Fargo (NYSE: WFC ).

Stephen Baxter: Just another 1 on payer mix. I might have thought that with the growth of the exchanges or maybe potentially some catch-up in the commercial demand that you were hoping to see in 2023 that there could potentially be upside risk to payer mix. It sounds like you're a bit more cautious there. I just want to make sure we really are capturing all the dynamics that you want us to keep in mind. And then just to come back to AR briefly, just to manage our expectations, would we expect to see progress as soon as the first quarter? Like are you actually seeing or improve to date this year? Or should we be thinking about maybe a more gradual progression throughout the balance of the year?

Kevin Hammons: Sure. A couple of things I'll mention on payer mix and Tim, feel free to jump in as well. So we did grow both commercial and Medicare population payer mix in the fourth quarter. So I want to be very clear, we grew both. But the MA business outpaced the commercial business by about [indiscernible] in the fourth quarter. For the full year, it outpaced the commercial 3:1. So we did make improve that proportional change was better in the fourth quarter than for the full year, but MA did outpace the growth. So as we go into '24, we look for some moderation of that, but we're still cognizant of keeping our eye on that payer mix dynamic. There's 1 other -- on AR, sorry, I forgot the second part of that question. On AR, I think we'll see some early benefits in '24 as it relates to the buildup in AR from like the Mississippi supplemental program that will largely be collected in Q1. Some of the other buildup will probably be more moderate throughout the year, but I do expect over the course of the year for us to make improvements and to recapture the remainder of the conversion AR plus the buildup on AR from some of the movement to MA more commercial payers slowing down, that should moderate throughout 2024. And over the course of the year, I expect an improvement.

Operator: Today's last question comes from Josh Raskin with Nephron Research.

Marco Criscuolo: This is actually Marco on for Josh. Just looking at the 2024 guidance, was wondering if you could parse out some of the $350 million to $400 million in CapEx for 2024. Is that mainly maintenance CapEx at this point? Or do you have any other notable projects in the pipeline that are coming through this year? And do you have any ability to flex that lower in 2024, if you need to?

Kevin Hammons: Sure. So we have been running approximately 50% maintenance capital, 50% growth capital over the last several years if you go back and look at our CapEx. And I would say proportionately, that's still very similar in 2024 will be split about 50-50. As I mentioned, a couple of the large projects that are high-cost projects, the inpatient having patient towers and adding beds are winding down in 2024. And then with fewer hospitals as we actually sold 8 hospitals in 2023, that lowers some of our maintenance capital as well related to those. So overall, I don't think we are materially decreasing the amount of maintenance or growth capital kind of comparatively. The other thing is we've had some capital related to Project Empower over the last year, the majority of what we'll be spending in 2024 will be more on the expense side is now the systems and so forth for that project are built and the costs going forward are going to be implementation and training and rollout costs. So there's some reduction there as well.

Tim Hingtgen: The only thing I would add is, to your question is, could you throttle that back? Anything is certainly possible, but similar to what we did in 2023, we were very deliberate in our investments into the core business with the intention of, as Kevin said earlier, working on projects that will help us certainly drive stronger EBITDA performance, which is a benefit to the long-term value of the company and its shareholders. So a similar equation obviously comes into play in 2024. We have a strong pipeline of projects, as I said previously, a lot of those are on the ambulatory side of the business, not as many high dollar inpatient investments that we're making in 2024. So I think it just is a normal settling of the capital spend, but we're very, very deliberate in how we're allocating our cash in that regard.

Marco Criscuolo: Great. Thanks for the color. And then if I could squeeze in 1 follow-up. You spoke to about $1 billion in potential proceeds from the divestiture opportunities that you now have identified -- can you help us understand a little bit more about the cadence of how that could ultimately be realized, especially in light of some of the FTC scrutiny that we've seen over some of these deals more recently. And then is there any financial detail you can provide around the revenue or EBITDA contribution of those assets?

Kevin Hammons: Sure. I think it's probably too early to tell or to say much we don't have any agreements signed at this point, but this is inbound interest that we're evaluating. I would say, generally speaking, all of these deals would be in the 10x plus multiple of EBITDA -- of trailing EBITDA, if they are to come to fruition. Again, we've not made a decision and we've not fully negotiated on any of these deals, but we do have an inbound interest that's very reasonable to think that if we decide to move forward, we could get deals done. That said, deals don't move very quickly. As you are well aware, I would expect the earliest something to be completed would be probably midyear and then the potential for others to be completed late in the year or early next year.

Operator: Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Hingtgen for any closing remarks.

Tim Hingtgen: Thank you, MJ, and thanks to all of you for joining our call today. We look forward to providing you with updates on our progress throughout 2024 and to demonstrating that our strategies and initiatives are producing positive momentum and results. As always, if you have additional questions, you can reach us at (615) 465-7000. Thanks again, and have a great day.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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