Community Health Systems Q2 2023 Earnings Call Transcript

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August 3, 2023

Key Takeaways

  • Portfolio Optimization: Announced divestiture of Brevera Health and other non-core assets for approximately $290 M to sharpen focus on high-growth markets and reduce debt.
  • Strategic Capacity Expansion: Added ~200 beds, opened a new hospital in Tucson, expanded bed towers in Foley (AL) and Knoxville (TN), and acquired/opened multiple outpatient ASCs to capture rising demand.
  • In-Sourcing Physician Services: Transitioned over 500 APP-contracted providers in-house to prevent care disruption, strengthen hospital alignment, and mitigate future financial risk.
  • Project Empower Launch: Rolling out an enterprise ERP (Oracle) and shared-services model through early 2025 to standardize finance, supply chain, and HR workflows—targeting significant cost savings and data-driven agility.
  • Robust Q2 Performance: Same-store admissions +4.8%, surgeries +6.2%, same-store net revenue +9.2%, and adjusted EBITDA of $373 M (12% margin), while sequential contract labor fell 15% to $74 M.
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Earnings Conference Call
Community Health Systems Q2 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good morning, everyone, and welcome to the Community Health Systems Second Quarter 2023 Earnings Conference Call. Please note that today's call is being recorded. At this time, I'd like to hand the floor over to Anton Hai, Vice President of Investor Relations.

Speaker 1

Thank you, MJ. Good morning, and welcome to Community Health Systems' Q2 2023 earnings conference call. Joining me on today's call are Tim Hinchen, Chief Executive Officer and Kevin Hammonds, President and Chief Financial Officer. 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 ks and other reports filed with or furnished to the Securities and Exchange Commission.

Speaker 1

As a consequence, actual results may differ significantly from those expressed in any press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We have also posted a supplemental slide presentation All calculations we will discuss on today's call exclude gains or losses from early extinguishment of debt, Impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, Expense related to employee termination, benefits and other restructuring charges, expense from business transformation costs as well. With that Today, I will turn the call over to Tim Hitchens, Chief Executive Officer.

Speaker 2

Thanks, Anton. Good morning and thank you for joining our Q2 conference call. We were pleased to deliver both year over year and sequential improvements in key operating metrics in the Q2 as we expected, With notable progress in the areas of patient volumes, net revenue and adjusted EBITDA. We are seeing increasing demand for our healthcare services. Because of investments to expand in key markets, strong physician recruitment success and other volume generating initiatives, We are well positioned to capture more growth as the year continues.

Speaker 2

Before I get into the specifics of the quarter, I'd like to touch on 3 strategic developments, which should be very positive for our company. First, I want to address recent changes that will We continue to sharpen and strengthen our portfolio as we remain focused on markets with the greatest potential to produce meaningful long term growth. To this end, last week, we announced the planned divestiture of Brevera Health. This healthcare system includes 3 acute care hospitals About an hour north of Tampa. This is a good market, but divestitures like this one and others such as El Dorado, Arkansas Seminole, Oklahoma and 2 other small health systems in West Virginia enable us to deliberately focus our resources And markets that we deem as most investable and that can produce greater growth and returns over the long term.

Speaker 2

Proceeds from the Prevera transaction are expected to be approximately $290,000,000 At the same time that we are divesting certain assets, We are making significant investments in markets where we see more attractive growth opportunities. We have added nearly 200 beds in key health systems over the past 18 months and we continue to add outpatient locations such as ambulatory surgery centers and freestanding emergency departments And communities where we have opportunities to gain further market share. Our new hospital in the Houghton area of Tucson, Arizona just celebrated its 1 year And it's delivering strong operational results and in fact exceeding its year 1 pro form a. Another de novo hospital that we opened in this market In late 2020 continues to grow and perform very well. Northwest Healthcare now has the largest overall presence in Tucson, covering all quadrants and the fastest growing areas of the region.

Speaker 2

We expect similar strong results from major bed tower expansion projects underway in 2 other high growth markets, Foley, Alabama and Knoxville, Tennessee. On the outpatient side of the business, We recently acquired an ambulatory surgery center in Key West, Florida and opened a 3rd orthopedic focused ASC as part of Lutheran Health Network. Expanding health system partnerships with highly reputable and skilled surgeons remains a very high priority. We will continue to methodically work our development pipeline and invest for the future where we have the best strategic opportunities. Next, as you likely know, American Physician Partners, or APP, has ceased operations effective July 31 Amid severe financial challenges, APP was contracted for ED and hospitalist provider services in a number of our markets.

Speaker 2

As it became likely that APP would not be able to continue operations, Our team moved swiftly to transition the employment of more than 500 APP hospital based providers Working at our hospitals to affiliates of our company. We believe this arrangement with APP accomplishes several things. Most importantly, it prevents any disruption to patient care and the facilities where they were the contracted provider. It also strengthens the alignment between our hospital based physicians and clinical care teams and delivering quality care and strong safety And finally, it mitigates potential future financial risk as we will be in a better position to bring contracts in house at other facilities where we see opportunity to improve operating performance. While in sourcing such a large number of programs in approximately 1 quarter of our market and all at once was not in our immediate We view this as an attractive opportunity to stand up a scalable in house solution with long term benefit for CHS.

Speaker 2

While our existing capabilities in physician clinic operations and with the addition of local management talent from APP, We are very confident that we can operate these programs efficiently, effectively and in strong partnership with the providers who have been a part of this transition. Finally, we are excited to publicly announce Project Empower, a strategic initiative to modernize and further centralize and standardize Certain business functions. As part of the program, we will launch our Enterprise Resource Planning or ERP platform later this year. Kevin will go into more detail about how this initiative will optimize a number of business activities and eventually yield meaningful to our organization over time. Returning to our Q2 results, I want to highlight a few of our key performance metrics.

Speaker 2

Same store admissions increased by 4.8% and adjusted admissions increased 4.9% year over year. Same store surgeries increased 6.2% with strength across a number of specialties, including cardiovascular, colorectal, urology and gynecology. In addition to these year over year gains, we also experienced solid sequential surgery volume improvement in the second quarter. I mentioned physician recruitment earlier, so I want to highlight that at the midpoint of the year, provider is up 13.1% compared to last year, which was our best recruitment year of the past 5 years. We are also making great progress recruiting nurses.

Speaker 2

Nurse hiring for the first half of the year is up 5.3% compared to last In large measure, due to the success of our centralized nurse recruitment model. Through tuition reimbursement, nursing school programs And other opportunities for existing employees to become nurses, nearly 400 of our team members have achieved RN status this year and moved into We also realized a significant reduction in contract labor during the quarter, which Kevin will describe in greater detail. As we move forward through the second half of the year, we will pursue continuous growth and every opportunity to manage costs. We remain optimistic about all of the potential still ahead. Now Kevin, I'll turn the call over to you.

Speaker 3

Thank you, Tim, and good morning, everyone. As Tim mentioned, we were very pleased with our financial and operating performance in the Q2. As expected, Results reflected notable sequential improvement as demand remained strong, driving continued solid volume trends and better payer mix, And reductions in contract labor help drive margin expansion. The continued return in core demand for healthcare services is encouraging, And CHS continues to invest in service lines, access points and talent so that our operators can provide safe and cost effective care for our communities. Moving on to quarterly financial results.

Speaker 3

Net operating revenues were $3,100,000,000 representing 6.2% year over year growth on a consolidated basis. On a same store basis, net revenue increased 9.2% from the Q2 of 2022. This reflected a 4.9% year over year increase in adjusted admissions

Speaker 2

And a

Speaker 3

4.1% increase in net revenue per adjusted admission. Additionally, surgeries were up 6.2% on a year over year basis. On a sequential basis, same store net revenue increased 1.1%, driven by 2% growth in adjusted admissions And a 1.7% increase in surgeries, partially offset by 0.8% decline in net revenue For adjusted admission. As noted, we experienced slight improvement in payer mix relative to the Q1 and continue to expect further improvement through year end. Adjusted EBITDA was $373,000,000 representing adjusted EBITDA margin of 12%.

Speaker 3

Consistent with expectations, pandemic relief funds did not contribute materially to the adjusted EBITDA in the 2nd quarter compared with the $8,000,000 recognized in the prior year period. We were very pleased to deliver strong labor cost management during the quarter with combined salaries, wages and benefits And contract labor expense declining approximately $40,000,000 sequentially. We achieved these results Despite the continued strong nurse and provider recruitment activity and increased staffing necessary to meet the strong demand in the quarter, primarily through productivity management and improved retention and lowering the need for overtime and premium pay. Notably, our average hourly wage rate increased only 2.8% compared to the prior year and was down 0.6% sequentially. Contract labor expense showed further progress, down 15% sequentially to $74,000,000 in the Q2 of 2023 and well below the peak of $190,000,000 in the Q1 of 2022.

Speaker 3

Supply costs were down $3,000,000 sequentially despite the solid growth in surgical volumes, reflecting our ongoing supply chain management efforts. Medical specialist fees were also down slightly from the Q1, But we're still up substantially on

Speaker 1

a year over year basis.

Speaker 3

We expect further reductions in the coming quarters, particularly through the actions we've taken through the agreement with APP. Moving on to the cash flow statement. Cash flows from operations were $86,000,000 compared with $53,000,000 in the Q2 of 2022. Capital expenditures for the quarter were $105,000,000 and for the first half of twenty twenty three were $227,000,000 With certain state supplemental payments expected to come in along with other working capital improvements. Recall that the Q4 has historically been our strongest cash flow period, and we expect this year to be no different.

Speaker 3

The company's net debt to trailing EBITDA was 7.7x@quarterend. With $118,000,000 of cash and equivalents on hand And $764,000,000 of borrowing capacity available under our ABL, we remain well positioned from a liquidity standpoint to meet our needs going forward. Proceeds from the sales of our facility in El Dorado, Arkansas that was completed in July In the planned divestiture, the Brevera Health Assets in Western Florida will be used primarily to pay down debt, Bring up additional capital for higher return uses in core strategic markets. From time to time, we continue to receive inbound interest in our assets and will consider a transaction when it makes financial and strategic sense. Over the past several quarters, Tim and I have discussed our 4 near term priorities to position the company for long term success: Accelerating growth, strengthening our workforce, controlling expenses and advancing safety and quality.

Speaker 3

To that end, we We are pleased to announce the launch of our enterprise wide modernization and optimization initiative, Project Empower, which we believe will advance each of these key areas of focus as well as deliver increased shareholder value. Project Empower encompasses important investments across the operations and financial aspects of CHL, including implementation of an integrated Oracle ERP platform, standing up of a shared business organization and the redesign of key workflows. The program will provide standardization of core processes within finance, supply chain and human capital management, Improved transparency across the enterprise to enable more timely decision making, reduce complexity and administrative burden And help CHS better leverage its scale as one of the largest healthcare systems in the country. The company has committed significant resources To ensure the success of Project Empower, including both internal and external FTEs focused on implementation And change management experts to help team members adjust to their new workflows. Implementation will occur in several ways, Beginning in the next several months and rolling out to the entire portfolio through early 2025.

Speaker 3

This cadence will allow leadership to learn from the process and ensure that subsequent waves go smoothly to minimize the risk of operational and financial disruption. Through better management of our supply chain and our workforce, reduced variability in processes and outcomes And enhanced data to support our decision making to capitalize on opportunities, we anticipate significant cost savings and other financial benefits from Project Empower. Additionally, we believe the significantly improved visibility and insight May reveal opportunities within CHS' markets and business lines from which our operators can capitalize upon to drive further shareholder value. We look forward to providing updates and progress reports on achievement of key milestones as we press forward with Project Empower in the coming months and quarters. With that, I'll turn the call back over to the operator to poll for questions.

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Speaker 4

Hey, good morning guys. Congrats on the strong quarter. I guess my first question for you guys on the staffing side and it's Two parter, right? Nursing, Kevin, I mean, how much runway do you think is left to reduce your Utilization of contract labor and maybe just overall SWB. And then maybe for Tim, how are you thinking about the physician Hospital based physician side, I know there's a lot of disruption.

Speaker 4

There you called out APP. Any strategies that we should be thinking about that You're contemplating as a way to position for what seems to be a very volatile physician environment in the hospital today. Thanks.

Speaker 3

Thanks, Brian. So let me start off with contract labor. We had indicated at the beginning of

Speaker 1

the year, we expected a 40% to

Speaker 3

percent decrease year over year in contract labor, and I think we're well on track to meet that With $74,000,000 of contract labor this quarter, down from $150,000,000 last year, So down just over 50%. I think we'll continue to make progress through the remainder of the year and would expect to exit the year Something in the low 60s, dollars 60,000,000 to $65,000,000 is where I would anticipate us exiting the year. Beyond that, I still believe there's some opportunity for us to continue to reduce contract labor, Probably something at this point, I'd guess, into the low to mid-50s. I think at that point, It starts to moderate. We are bringing in a higher number of international nurses To fill some of the spots, more international nurses than we used pre pandemic.

Speaker 3

Of course, they come at a little lower cost. They also have longer contracts. And we hope to make them full time employees eventually. So I think that becomes a pipeline for us. I don't believe we ever get down to the $30,000,000 a quarter pre pandemic, which represented about 2.5% Of net revenue, right now, we're approximately 5% of net revenue or I'm sorry, of salaries and wages.

Speaker 3

So it probably goes down slightly from here.

Speaker 2

Great. Thanks, Kevin. And Brian, good morning. I'll take the Specialty's question. As I said in my opening remarks, the movement with APP was rapid, But it's obviously an expense line item that we've had our eye on for quite some time.

Speaker 2

We called it out in the Q1 as a significant headwind. We expected it to moderate in the Q2, which it did. We would expect that to continue throughout the rest of this year. I'm not being of a headwind, but it's slightly elevated over prior year quarters. The strategies to mitigate that, some of them are just operationally based In terms of highly efficient operations to reduce waste, those would be length of stay initiatives, surgery throughput initiatives, ED initiatives, And I believe we do a really good job with that.

Speaker 2

We hope through our Project Empower deployment, we'll even have more insights into how we can optimize care delivery, Drive high safety and quality, but also take out some of those costs, which obviously most of them have some physician stacking component embedded into them. The other thing which We're very focused on, as we said, was in sourcing capabilities for the company. In the Q1, we actually added some in house Competencies around anesthesia, operations and management. It's not our intent to in source every single hospital based contract across the company, But where there is an opportunity for us to do so, if we can't find a good mix or a good partnership in a local market across many hospital based specialties, We certainly want to have those capabilities embedded in house. On the hospital based medicine and ED side, With the APP maneuver this quarter, we have now about 25% of our contracts in source.

Speaker 2

So we're going to learn from that, again be able to scale that where it makes sense for us. But in general, we hope there are operational efficiencies And I believe the partnership with the hospital based providers, we can really enhance the care delivery. I do want to point out again, the change out that we had, rapid change out we had with APP, it's going really well. No disruption to operations. The providers have been really just a delight to work with and we have brought on some really high caliber talent from the APP organization, Which has allowed us to scale this so quickly.

Speaker 2

Again, we plan to work through this over the next several quarters and leverage it as a core strength for the organization.

Speaker 4

I really appreciate that. I guess my follow-up, Kevin, as I think about the divestitures that you've announced, maybe just for modeling purposes as we think about 2024, How should we be thinking about the impact of that on revenue and EBITDA? Thanks.

Speaker 3

Sure. Ines, the El Dorado, Arkansas and other ones were immaterial. The Brevera Health Network, We underwrote that at about a 10 times EBITDA price. I would kind of use that similar to what we've been selling Other hospitals on average and you can probably use that to model out 24. We expect it to close In the Q4, so it really won't have a material impact on 2023 as that should be out for the full year of 2024.

Speaker 5

Awesome. Thanks guys.

Operator

The next question comes from Ben Hendricks with RBC Capital Markets. Please go ahead.

Speaker 4

Hi. This is Mike Murray on for Ben. It looks like payer mix and inpatient mix were the drivers of better revenue per adjusted admission. Could you talk a little bit about the moving pieces here? What drove the inpatient improvement?

Speaker 4

And then I have a follow-up.

Speaker 3

Sure. Let me start that. So part of that, I believe, is just some of the recovery coming back from the pandemic. Initially, as patients started to come back, we saw in the 4th quarter Patients were coming back for clinic visits, for screenings, for diagnostic testing. We believe that's leading To further care downstream, in the Q1, we experienced much more disruption From the economy, I think even with that recovery and we're seeing fewer commercial patients and all of our Increased level of business in Q1 was from Medicare Advantage patients who did not have an economic barrier to coming back in the system.

Speaker 3

But we saw the Higher mix improved as we expected. We think that will continue to improve throughout the year, the biggest improvement late in the year before co pays and deductibles reset again. But It's really kind of just some of the downstream impact of recovery that we're seeing some of that business come back into the inpatient side.

Speaker 2

Yes. And Mike, I'll add on to that. Rather deliberate in our approach here with the build out of inpatient capabilities, As we mentioned in our opening remarks, we've had a lot of beds in core markets. We've recruited a lot of doctors to help us further round out specialties and advance our Service line capabilities that tends to drive some case mix improvements. And then we overlay on top of that the transfer Center, which we did mention this morning, but we talk about almost every quarter that continues to post sequential and year over year growth opportunities for us As we add this capacity in those core markets, so we believe those are really keys to the game for further advancing inpatient acuity and volumes.

Speaker 4

Okay. And then my follow-up, obviously in the quarter, you had pretty good revenue per adjusted admission. You're coming up against some easier comps in the back half of the year. How should we think about growth in the second half?

Speaker 3

I think we're starting to see some normalization of seasonal patterns As we come back into the back half of this year, we did start to see strong recovery And volumes in the Q4 of last year, so this year, we would have to obviously be stepping over that. I think the comps were much easier really this quarter Q1 and Q2 due to some of the disruption from the pandemic in 2022.

Speaker 2

All right. Thank you.

Operator

The next question comes from A. J. Rice with Credit Suisse. Please go ahead.

Speaker 5

Hi, everybody. First, maybe just to ask about your contract With managed care, I guess, two aspects to that in particular, but any update generally would be helpful. But There's been some discussion about seeing rates bump up a little bit to help with the labor challenges. I wonder if you're still seeing that as you contract for the rest of this year in 2024. And then a subcategory of Managed Care contracting is the public exchanges and I know that they've grown rapidly, they grow again in their enrollment With Medicaid reverifications, I wondered, can you just comment on the company's positioning with respect to Contracting for public exchanges, do you feel like you're well covered in the markets you're in?

Speaker 5

Any commentary there?

Speaker 3

Sure, A. J. I'll start that one. So in terms of managed care contracting, we're complete with 23 And you have some contracts that are resetting here or did reset on July 1 For the back half of this year, we're probably approximately 50% complete with 2024 contracts As we're working through those to renegotiate, in 2023, we saw about 100 basis point improvement in average rate As we as you mentioned and as we push on the payers to help cover some of the Increased cost of inflation, increased cost that we're incurring did see a pickup in the rate we're getting. And that seems to be continuing on Into 'twenty four.

Speaker 3

So I would expect that as we mentioned for 'twenty three, in that 4% to 6% range, I would expect something Similar at this point in 2024. At least we don't have anything that would tell us otherwise. In terms of the exchanges, You're absolutely right. There's been recent reports out that Texas and Florida have some of the highest Change enrollment, 2 of our biggest states, and we are well covered with contracts in those exchanges. Okay.

Speaker 3

And maybe just as

Speaker 5

a follow-up, you've got obviously good rebound in volumes, It seems like and we're sort of at least normalizing, if not a little better even. And you're seeing some meaningful improvement on the labor front. And now you've got this project in power. I wonder if you put all that together when you think about A goal for margins, looking at EBITDA margin, looking out a couple of years or does it make you think that there's Relative to the current run rate? Or will this help you to maintain the

Speaker 3

current run rate? Any way to think about that? Yes. So we have our medium term goals out there to get to mid teen margin run rate, and we Certainly, we're working towards that and believe that these initiatives with like Project Empower, with the recovery of volume And the investments that we're making on the capital side, both in inpatient and outpatient and the tweaks to the markets We've made we'll all work towards getting us to those mid teen margin kind of goals that we have.

Speaker 5

Okay. Thanks a lot.

Operator

The next question is from Jason Casperla with Citigroup. Please go ahead.

Speaker 6

Great. Thanks. Good morning. Thanks for taking my question. Just in the Q2 of last year, you flagged that 2 of your markets had a disproportionate impact Obviously, the 2Q 'twenty three results proved to be much stronger, but just curious how much of an EBITDA lift on a year over year basis Due to the improvements in those two markets against a better operating trend backdrop for the rest of your improvement?

Speaker 6

And then I have a follow-up.

Speaker 3

Yes. We've had some EBITDA lift from those markets not outside and still have A fair amount of work to do in those markets. We have stabilized them. We've taken a number of actions, Including consolidating some of the hospitals within those markets, closing some service lines, Taking out contract labor because we were spending more in contract labor than we were making and It has negative margin as a result. So we've made kind of or taken steps to stabilize those markets.

Speaker 3

It will take us some additional time to continue to grow them, but we are working to that end. Got

Speaker 6

it. Okay. Thanks. And then, just piggybacking off a commercial contracting question in a way. I guess, are you seeing heightened scrutiny for managed care just given the strong volume backdrop this year, perhaps higher denials, greater intensity on utilization management techniques, Pushing observation status.

Speaker 6

And if so, when do you see that moderating in the future? Or how would you frame

Speaker 2

that? Thanks.

Speaker 3

So we are. I mean, I think we saw a little pause by the payers during the pandemic Some of their tactics, if you will, they've slowed down denying claims and pushing on observations As they had fewer claims to pay, but now that as volumes are coming back, we're certainly seeing a higher number of denials And more pressure from the managed care payer. All that said, we are experiencing Better than average renegotiated rates with them going forward contracts. So Continuing to work with them on things like denials, observations, making sure we're getting paid what we Believe is the appropriate amounts and working closely with them.

Speaker 2

And Jason, this is Tim. I'll add on to that. We've mentioned in the past really fortifying our utilization review function here at CHS. We've centralized certain components of Over made some data, we're now investing in more of a clinical oversight of the UR function for, I I think appropriate placement for claims adjudication, denial management, so all those things will be coming into our organization here The next couple of quarters to continue to improve our front end games so that we can have the strongest relationship possible with the payers on the back end.

Speaker 3

Got it. Great. Thank you for the call.

Operator

The next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Speaker 7

Great, thanks. I wanted to start off on this Project Empower Announcement, I guess, we're kind of used to you guys talking about consistent cost savings initiatives over the last five Plus years, I don't remember there being like a name like this to what you're doing. So just trying to understand, Is this of a different scale than what you've done in the past? And then The timing of what you're talking about starting at the end of this year kind of rolling through 2025, when we think about those medium term margin targets, does that mean not much Progress on margins next year and then more kind of 25% and 26% or are there is there a reason to believe that It should be somewhat ratable towards that ultimate margin goal.

Speaker 3

Thanks, Kevin. So a couple of things I'd Point 2, we have been talking about our strategic margin improvement program that we really formally kicked off In the Q4 of 2019, which was putting a lot of discipline around and chasing a number of initiatives Over the course of the last several years, Project Empower really takes that maybe to a new level. It is Adding a significant investment into the company in terms of adding some technology around Installing a new ERP, putting in Oracle across the entire enterprise is going to Remove a number of disparate systems and put all of our data into an integrated platform Across finance, supply chain and HR, that will significantly improve our ability To manage data at a large scale, give us more comparability across the enterprise versus the disparate The other thing I would point to Oracle recently purchased acquired Cerner and we're a big Cerner shop with more than half of our hospitals on the Both on the Cerner clinical platforms, this has the potential to open up opportunities for integration between those clinical systems And financial systems to further allow us to leverage data in a very new way.

Speaker 3

This is not just a technology lift though. We're redesigning workflows. We're putting in a shared business operations for a number of these back office functions It will add, efficiencies to the process. So really, I think what we're talking and the reason we're talking about it, 1, We're organized around this internally around Project Empower. It's something we talked about internally, and we've organized around that, sharing that with you guys as investors and analysts.

Speaker 3

It is kind of a longer term Play, but we do believe that benefits will start to come. We're kicking off actually implementation here over the next couple of months. That will take us probably through next year to fully implement, and then there's certainly some runway so you start Fully realizing the benefit, but being at our margin improvement program now for a couple of years, This effort is really going to extend that runway and allow us to continue to add margin improvement In ways that we couldn't get at the data today into the future for a number of years.

Speaker 7

And then just thinking about that progression towards that medium term margin target, does the timing of this mean it's more Back end loaded in the next couple of years? Or is there is it more kind of ratable as you think about the leverage you need to pull to get to that mid teens EBITDA margin? Thanks.

Speaker 3

Yes. So this project, I think, is one of many things that we're kind of investing in to get to our mid teen margins. Certainly, our capital improvements our capital investments that will improve Higher acuity services and bring in more business, those are not dependent on Project Empower. Those should drive Margins, the return of volume, leveraging our fixed costs are less dependent on Project Empower. Those can come earlier.

Speaker 3

Project Empower, I think, again, just lengthens the runway that we can continue to improve margins downstream. That's kind of how we're looking at it.

Speaker 8

Great. Thanks.

Operator

The next question is from Stephen Baxter with Wells Fargo. Please go ahead.

Speaker 8

Yes. Hi, thanks. I was hoping you could help us think a little bit about how the American Physician Partners transition is going to impact your P and L. I guess first is the Revenue contribution from bringing ER function in house for these hospitals meaningful. And by comparison, one of your peers talked about consolidating And then ER joint venture and suggested it was a breakeven proposition.

Speaker 8

Is that the right way to think about it for you too? And then I guess finally, I guess, could you talk a little bit about why you would expect some of the physician specialists to be pressured to reduce itself over time? It does feel like some of these challenges are pretty Structural, so I'd love to get more insight into what you think the key levers would be over the next couple of years there. Thank you.

Speaker 3

Sure. So let me talk about the kind of P and L So right now, subsidies that we are paying are all running through the other operating expense The line and we've seen those and been talking about those now for a few quarters continuing to go up, and we're not getting any Revenue relative to their professional fees in our revenue numbers. So those increase in medical specialties or subsidies We will be able to bill for their pro fees, so we do get some revenue. We'll be adding There are wages for those that are employed or other operating expense for those doctors that are on 1099s, But the revenue that's generated from their pro fees does largely offset that increased expense. So it is somewhat of a net zero impact.

Speaker 3

But then what we're not having to incur is the markup You know that we're paying a 3rd party for in those subsidy payments when they aren't able to bill, which So we're removing that drag from the EBITDA calculation.

Operator

The next question comes from Josh Raskin with Nephron Research. Please go ahead.

Speaker 9

Hi, thanks. Good morning. I wanted to just get back to the big step down in SWB both year over year and sequentially and understand the contract labor. But Just on the base wage rates, it sounds like are you anniversarying some of those increases? Should we be thinking about wage increases Getting back to more normal historical levels.

Speaker 9

And then just second question as you kind of reposition further the Portfolio of assets and get rid of West Florida, etcetera. Should we expect CapEx, is there an opportunity for CapEx to step down or We are really not investing a ton in some of these non core markets. So we should think CapEx is just being it wasn't really allocated to some of these divested So maybe not a big step down. Thanks.

Speaker 3

Sure. So with regard To the salaries and wages, yes, to your point about anniversarying some of the higher wage increases is Certainly on point, we are anniversarying those larger increases that we had last year. I think last Your second quarter is about 8.5% wage inflation. So we did anniversary that. We are also benefiting From some productivity gains and reducing overtime in premium pay as we're adding More full time nurses and getting rid of some of the contract nurses take some of the pressure off those full Time employees to have to work overtime and have premium pay, and so that's been a benefit.

Speaker 3

The other component of that, there's probably a number of moving parts here, but it's skill set and mix using Additional LPNs and some of our team nursing concepts that we've put in place has been beneficial. And A number of our nurse hiring, we talked about in the Q1, were new graduates, so bringing in A number of new graduates that obviously come in at a little lower rate than your longer Tenured nurses. So a number of those things in terms of mix have impacted that as well. And then on your question on capital, I think you're right. As we work through some of these divestitures, They do take some time to work through.

Speaker 3

We've talked about for a couple of quarters Some deals that we were in conversations on, we weren't sure if they were would come to fruition. When something when a hospital or market gets On the radar like that, when conversations start to become serious, we're certainly maintaining those hospitals, but Not investing a lot of additional growth capital in those during those negotiations. So I would not expect We have to see a big decline in capital investment. But as we think about which markets we're targeting, we Do look and consider kind of the risk of future capital investments in those markets and what the return risk profile looks like. And by divesting some of these, it certainly helps us reallocate what may otherwise have been future capital to other markets where we

Operator

The next question comes from Andrew Mok with UBS. Please go ahead.

Speaker 10

Thanks. Good morning. 1st, just wanted to clarify a few items around the outsourced physician staffing costs. Can you put some numbers around the total dollar cost for these expenses today? And are you expecting the absolute dollar cost to decrease on a same physician basis?

Speaker 10

Or do you simply expect this to be less of a year over year headwind in the second half? Thanks.

Speaker 3

We've not quantified the exact dollar amounts at this point. We're still working through Kind of all the onboarding and working through that, I would say that it's not going to be overly material for the remainder of 2023, and we'll have probably Some more clarity that we can give on 2024, if we believe it becomes, more material.

Speaker 10

Great. And then wanted to follow-up on the revenue per adjusted admit. Would love to hear how that performed against your own Expectations in the quarter, that metric was actually down sequentially even though you called it out as a soft spot in Q1 and noted that payer mix improved sequentially. So can you help us understand what's going on there with respect to pricing, acuity and mix, especially on a sequential basis? Thanks.

Speaker 3

Sure. Overall, I think net revenue and EBITDA came in, in line with our expectations for Q2. Volumes continue to be strong for us and recovery from the pandemic. And I think even Having adjusted admissions in surgeries up over Q1 was a very strong signal. We do believe that there is Further room to improve on payer mix.

Speaker 3

I think the Medicare age population of our mix was down About 100 basis points. Commercial is up 100 basis points. So slight improvement, but it is trending in the right direction. As that continues to improve further in the back half of the year, that will certainly lead towards a higher net revenue per adjusted We also had BMI, case mix index acuity was about flat sequentially. We believe that can improve a little bit.

Speaker 3

We expect some of our investments to improve as well in the back half of the year as people are coming in For services and surgeries and so forth before their co pays reset for 2024.

Speaker 2

Great. Thank you.

Operator

This concludes our question and answer session. I'll now turn the call over to Mr. Hinchen for closing comments.

Speaker 2

Thank you, MJ. I want to thank you all for joining us today. Before we conclude, I want to thank our physicians, nurses and other clinicians and support teams for all they do to ensure quality care for their patients And also to our health system leaders and those working in our CHS corporate offices for their many contributions. As always, if you have additional questions, you can reach us at 615-465-7000. Thank you, and have a great day.

Operator

The conference is now concluded. Thank you for your participation. You may now disconnect your lines.

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