Community Health Systems Q1 Earnings Call Highlights

Key Points

• CHS reported Q1 adjusted EBITDA of $309 million, down 17.8% y/y with a 10.4% margin, as volumes and payer mix missed expectations and recent divestitures created roughly a $50 million year‑over‑year EBITDA drag.
• Cash flow from operations was a use of $297 million driven by timing items, but CHS completed divestitures generating over $1.1 billion of gross proceeds, redeemed $223 million of 2032 notes and reduced leverage to about 6.5x, while keeping 2026 adjusted EBITDA guidance at $1.34B–$1.49B.
• Management cited broad demand softness—especially elective procedures like hips and knees and weaker commercial/exchange patients—but is investing in outpatient surgical capacity (multiple ASC deals) and physician additions that increase near‑term costs to position for future recovery.

Community Health Systems NYSE: CYH executives told investors the company’s first-quarter 2026 performance landed at the low end of internal expectations as volumes and payer mix came in below plan, while recently divested operations weighed on profitability.

Quarter performance pressured by volumes, payer mix, and divestiture drag

Chief Executive Officer Kevin Hammons said adjusted EBITDA declined 17.8% year over year, citing strategic transactions to reduce debt, “macroeconomic disruptions across the country,” and ongoing investments. He noted the quarter included roughly a $50 million year-over-year EBITDA drag from divestitures that shifted from positive contributors in the prior-year period to negative results in the first quarter. Hammons said closing these divestitures will remove that negative drag from future quarters.

Executive Vice President and Chief Financial Officer Jason Johnson reported adjusted EBITDA of $309 million, with an adjusted EBITDA margin of 10.4%. Johnson said recently divested hospitals generated about $25 million of negative adjusted EBITDA in the first quarter, compared with a $25 million positive contribution in the prior-year period. He added that part of the negative results from hospitals divested in the first quarter was attributable to Winter Storm Gianna.

On the revenue side, Hammons said same-store net revenue increased 3.1% year over year, driven by 3.7% growth in net revenue per adjusted admission, partly offset by a 0.5% decline in same-store adjusted admissions.

State-directed payments provided a tailwind, partly offset by provider taxes

Management highlighted the impact of state program timing. Johnson said results included approximately $25 million in contribution from the Georgia Directed Payment Program, which was approved in mid-March and retroactive to July 1, 2025. He said about two-thirds of that contribution related to prior periods. However, Hammons and Johnson both noted that roughly half of the out-of-period benefit was offset by higher operating expense tied to out-of-period Indiana provider tax increases.

In response to a question about the components of first-quarter pricing and rate performance, Johnson said normal course rate increases were “consistent with our guide around 3%.” He described Georgia’s program as about $30 million of revenue and $25 million of EBITDA for nine months (three quarters), equating to roughly $10 million per quarter in revenue and $8 million to $9 million per quarter in EBITDA, before factoring in offsets. Johnson said the remaining impact was driven by volume and payer mix, with a slight drop in acuity, but “it’s more about payer mix and volume offsetting those total rate increases.”

Demand softness concentrated in elective procedures and certain payers

Both Hammons and Johnson pointed to broad volume softness, including weaker elective activity. Johnson cited “noteworthy softness in elective procedures such as hips and knees,” which, along with the negative contribution from divested operations, contributed to margin compression.

Hammons said volume pressure was “across the board” and not isolated to specific markets. He added that weakness was concentrated among individuals with commercial and health exchange coverage, which he linked to macroeconomic pressure on consumers with high deductibles. Hammons also alleged that managed care behavior has become more restrictive, saying the company has heard “at least anecdotally” that payers “turned the dial up on denying pre-authorizations,” potentially preventing some patients from accessing care.

On same-store utilization metrics, Johnson reported:

• Same-store inpatient admissions down 1.3% year over year
• Same-store adjusted admissions down 0.5%
• Same-store surgeries down 2.2%
• Emergency department visits down 2.8%

When asked about full-year assumptions, Johnson said the company’s guidance assumes low single-digit volume growth for the year and that management expects volumes and payer mix to recover. “We do think that should recover,” he said of volumes, adding that payer mix also came in below expectations but “we think that comes back as the economy continues to improve.”

Cost management, labor trends, and physician investments

Johnson said labor costs were “well managed overall,” with average hourly rates up about 2% year over year (later quantified at 2.3% in response to a question) and same-store contract labor spend down 11% from the prior-year period. However, he said salaries and benefits as a percentage of revenue increased 50 basis points year over year on a same-store basis, due in part to increased physician employment and continued insourcing.

In Q&A, Johnson said the company added 30 net physicians in the quarter, contributing about $5 million in salaries, wages, and benefits. He also said CHS insourced an anesthesia program in November 2025, adding roughly $2 million to $2.5 million of expense in the quarter. Hammons said physician turnover decreased during the quarter, enabling CHS to continue hiring at its prior pace and add net new physicians—an investment he framed as positioning the company for future demand, even if it raises costs in the near term.

On other expenses, Johnson said supply expense declined 60 basis points year over year to 14.9% of net revenue, reflecting lower surgical volumes and improved procurement and inventory management under the company’s ERP. He also said medical specialist fees rose about 11% year over year on a same-store basis, exceeding the company’s 5% to 8% growth forecast, but remained steady at 5.5% of net revenue.

Cash flow timing items, deleveraging, and portfolio actions

Cash flow from operations was a use of $297 million in the first quarter, compared with a source of $120 million in the prior-year period. Hammons attributed the decline largely to timing items expected to reverse, including about $90 million related to Medicaid supplemental payment and provider tax timing, $50 million to $60 million of accounts receivable tied to delayed Medicare Advantage payments, about $50 million of annual bonus payments made in the first quarter, $25 million to $50 million of accounts payable timing, and a roughly $15 million interest payment on 2034 notes that had been deferred from September 2025.

On balance sheet actions, Johnson said CHS completed divestitures in Clarksville, Tennessee, Pennsylvania, and Huntsville, Alabama during the quarter, generating more than $1.1 billion in gross proceeds. He said the company used a portion of the proceeds in early February to redeem $223 million of 2032 notes at 103 using a special call provision. Johnson reported leverage of 6.5x at quarter end, compared with 6.6x at year-end 2025 and 7.4x at year-end 2024, and said the next significant maturity is in 2029. He also said CHS had no amounts drawn on its asset-based lending facility at quarter end.

Johnson also discussed a pending divestiture agreement announced in early March to sell four Arkansas hospitals to Freeman Health System for $112 million in cash, with the buyer assuming certain real estate leases. The transaction is expected to close in the second quarter of 2026. Johnson said the sale multiple is approximately 10x to 12x and was not reflected in the company’s initial February guidance; he added it would affect about half a year but that new ambulatory surgery center (ASC) investments are expected to “largely” offset it, resulting in “just about a wash” with no net effect on guidance.

Looking ahead, Johnson said the company’s 2026 guidance remained unchanged, including an adjusted EBITDA range of $1.34 billion to $1.49 billion. He cited several evolving factors—such as potential approvals of additional state-directed payment programs and possible benefits from the Rural Health Transformation Program—but said there was not enough data to adjust the outlook early in the year.

Separately, Hammons highlighted a push into outpatient surgical capacity in core markets. He said CHS announced significant investments in ASCs, including a pending acquisition of a majority interest in the Surgical Institute of Alabama, which he called the company’s largest acquisition since 2016. Hammons said the center performs more than 8,000 cases annually and is expected to close in the second quarter. He also said CHS purchased a majority interest in South Anchorage Surgery Center in Alaska and opened two de novo ASCs in Birmingham and Foley, Alabama. Responding to an analyst question, Hammons said the ASC deals are extensions of CHS’s existing networks of care rather than a strategy to enter new markets with freestanding ASCs.

On policy, Hammons said CHS continues to monitor developments around Medicaid supplemental payment programs, the Rural Health Transformation Program, the potential expiration of ACA enhanced premium tax credits, and Medicaid work requirements and redeterminations. He said it remains “very early” to assess impacts, and that CHS is engaging with state policymakers and has put a formal structure in place to evaluate programs and apply for available funding.

About Community Health Systems NYSE: CYH

Community Health Systems, Inc NYSE: CYH is one of the largest publicly traded hospital operators in the United States. Headquartered in Franklin, Tennessee, the company owns, leases and manages general acute care hospitals and outpatient facilities, primarily in non-urban and mid-market communities. CHS is focused on delivering locally accessible healthcare services through its network of affiliated hospitals, clinics and post-acute providers.

The company's core offerings include inpatient medical and surgical care, emergency services, critical care, diagnostic imaging and laboratory testing.

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