Community Health Systems, Inc. (CYH) Q2 2026 Earnings Report, Transcript and Summary

Please note this event is being recorded. I would now like to turn the conference over to Anton Hie, Vice President of Investor Relations. Please go ahead.

Thank you, Bailey. Good morning and welcome to Community Health Systems' second quarter 2026 conference call. Joining me on today's call are Kevin Hammons, Chief Executive Officer, and Jason Johnson, Executive Vice President and Chief Financial Officer. Before we begin, I'll 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 on our website. All calculations we discuss today will exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses, and expense from employee termination benefits and other restructuring charges. With that said, I'll turn the call over to Kevin Hammons, Chief Executive Officer.

Thank you, Anton. Good morning, everyone, and thank you for joining our second quarter 2026 conference call and for your continued interest in CHS. Before we get into the call, I want to acknowledge the ongoing commitment and effort of all of our teammates and thank them for the work they are doing toward advancing our vision to make the healthcare experience exceptional for our patients, our communities, and each other. I am proud to say that in the face of a dynamic operating environment, we have continued to make progress on our top priorities of improving quality, physician experience, patient experience, and employee satisfaction. In addition to improving Leapfrog safety grades and CMS star ratings that we discussed on last quarter's call, which included 12 of our hospitals achieving a Leapfrog A grade and approximately 70% achieving Leapfrog A or B grades, we are proud of the recognition coming in from other noteworthy sources. For example, earlier this month, our Lutheran Hospital in Fort Wayne, Indiana, was awarded the American College of Cardiology's HeartCARE Center National Distinction of Excellence, the only hospital in the state and one of only 100 hospitals across the country to receive this designation. Also, several of our hospitals were recognized by CMS for achieving zero hospital-acquired infections, some of the nation's best performance in this area, and many others received recognition and designations reflecting the quality care we provide to our patients. These recognitions underscore the significant progress our clinical teams have driven across multiple measures of safety and quality over the past few years, including record achievement in risk-adjusted mortality index, sepsis mortality, and hospital-acquired infection rates. We are seeing positive movement in patient experience surveys and in the areas of employee satisfaction and physician experience. The record response rates to our recently completed employee survey shows that we have a very engaged employee base, even as we recognize that we have significant work still to be done. Our ability to continue advancing in each of these areas will drive enhanced financial performance over time and long-term value creation for our organization and our shareholders. Turning to our operating performance for the second quarter of 2026, Adjusted EBITDA was $330 million, compared with $380 million in the prior year period, on a 9.8% decline in net revenue, primarily reflecting a smaller prior period benefit from newly approved state-directed payment programs, as well as divestitures completed over the past 12 months. Results for the quarter include the benefits from recently approved Medicaid state-directed payment programs in Indiana and Florida, which were offset by a prior period adjustment to the Arizona State-Directed Payment program and an unexpected increase in uninsured volumes and continued softness in demand for elective surgical procedures among commercially insured patients, which we attribute to continued consumer insecurity related to geopolitical instability and inflationary pressures. Same-store net revenue increased 2.4% over the prior year period. Same-store adjusted admissions increased 2.9%. Approximately half of that volume growth was driven by uninsured visits with minimal related net revenue. This factor, together with a lower surgical versus medical mix, was more than enough to offset the rate gains from the new state-directed payment programs, resulting in a 0.5% decline in net revenue per adjusted admission for the quarter. We continue to believe that the non-ACA related payer mix and service mix challenges that we experienced in the first half reflect a temporary disruption in demand for healthcare services in our markets. In fact, we were encouraged by the improving volume and surgical trends we witnessed exiting the quarter. As we consider deteriorating consumer confidence in the markets we serve, economic impacts from escalating hostilities in the Middle East, along with the softer surgeries and unfavorable payer mix we experienced this year-to-date. We believe it is prudent to be more cautious about the second half of the year, and therefore adjusted our full year outlook accordingly. Before handing it over, I want to reiterate how proud I am of the progress we are making as an organization and the focus on our top priorities, which we believe will help us navigate a dynamic operating environment and emerge positioned for long-term success and improved financial results. At this point, I will turn the call over to our Chief Financial Officer, Jason Johnson, to review financial results and other information in greater detail. Jason?

Thank you, Kevin, and good morning, everyone. For the second quarter of 2026, financial results came in below our internal expectations. The company continued to execute well on the controllable aspects of our business, including strong cost controls, demonstrated further progress on our top priorities, and saw sequential improvement in overall volume trends. Service and payer mix did not improve as expected, reflecting continued softness in elective procedures along with higher uncompensated care, both of which drove lower margins. Adjusted EBITDA for the second quarter was $330 million, with a margin of 11.7% versus 12.1% in the prior year period. Results include approximately $40 million-$45 million in combined EBITDA contribution from the recently approved Florida and Indiana state-directed payment programs that were not in our previous guidance. Of this amount, approximately $20 million-$25 million related to prior periods. A portion of this was offset by an approximate $15 million reduction in the Arizona state-directed program because of a prior period true-up. Same-store net revenue for the second quarter increased 2.4% year-over-year. Same-store inpatient admissions increased 1.9%, and adjusted admissions increased 2.9%. Meanwhile, same-store net revenue per adjusted admission declined to 0.5% as the rate benefit from new state-directed payment programs was more than offset by unfavorable shifts in payer mix and service mix. As Kevin previously noted, approximately half of the growth in adjusted admissions during the second quarter was from uninsured patients. Similar to other operators, we experienced continued soft demand in commercial elective procedures. Same-store surgeries declined 0.1%, with a notable decline of 3.8% in inpatient surgeries. On the cost side, we performed well with a 0.3% increase in same-store operating expense per adjusted admission. Labor cost was well managed once again, with same-store average hourly rates up approximately 1.1% year-over-year on a same-store basis and same-store contract labor spend down 5.6%. Salaries and benefits expense as a percentage of net revenue increased 100 basis points year-over-year on a same-store basis, due primarily to increased physician employment. Supplies expense was well controlled, declining 70 basis points year-over-year to 14.2% of net revenue on a same-store basis, reflecting both the decline in elective surgical volumes and continued improved procurement under our ERP. Medical specialist fees, meanwhile, increased approximately 19% year-over-year on a same-store basis and represented 5.6% of net revenue, which was up from 4.8% in the prior year period and outpaced our forecast for 5%-8% growth. Anesthesiology and radiology continue to be the largest pain points in this regard. The increase in anesthesia specialist fees is primarily due to higher salary subsidies from lower net revenues resulting from fewer surgeries. The increase in radiology fees is primarily due to an increase in imaging volumes. Cash flows from operations were $87 million for the second quarter, or $143 million when adjusted to exclude cash taxes paid out of divestiture proceeds, improving significantly from the use of $297 million in the first quarter. Several of the items that affected the first quarter cash performance improved or reversed as expected, including improved Medicaid state-directed payment cash flows, less interest paid, and no annual performance bonus payment to the second quarter. In May, we completed a tender offer using proceeds from recent divestitures to repurchase approximately $368 million of the 4.75% senior secured notes due 2031 and $231 million of the 10.875% senior secured notes due 2032. The company's leverage at quarter end was 6.7x versus 6.6x at year-end 2025. At quarter end, we had no amounts drawn on our ABL, and our next significant maturity is in 2029. During the quarter, we completed the previously announced divestiture of four hospitals in Arkansas for $110 million in cash and also completed the previously announced acquisitions of majority ownership percentages in Surgical Institute of Alabama in Birmingham and South Anchorage Surgery Center in Anchorage, Alaska. These acquisitions are strengthening our positions in core markets and are meeting our expectations for operating and financial performance thus far. We will continue to evaluate opportunities for growth investments across each of our core markets. As noted in last night's press release, we are updating our financial guidance for 2026. Specifically, we now expect net revenue to be $11.4 billion-$11.6 billion and Adjusted EBITDA in a range of $1.3 billion-$1.375 billion. The revised ranges reflect several puts and takes, most notably the full year's benefits from new Medicaid state-directed payment programs in Georgia, Indiana, and Florida, which are more than offset by increased headwinds from macroeconomic factors and disenrollment from Affordable Care Act plans. On this second point, when we set initial guidance for 2026 in February, we had to make certain assumptions regarding member disenrollment rates, plan switching, and overall patient behavior due to the loss of enhanced premium tax credits. Through the first half of the year, the impact to net revenue has tracked in line with our previous expectations. However, based on experience to date, we've updated our estimate of how many of these disenrolled patients are continuing to come to our hospitals, which is driving higher costs to provide care with minimal related net revenue. With our revised guidance, we are assuming a similar impact in the second half, along with continued softness in elective surgery volumes, resulting in lower midpoint for Adjusted EBITDA. This concludes our prepared remarks. At this time, we will turn the call back over to the operator for Q&A.

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star, then two. Please limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hi, this is Michael Marion for Ben. Thanks for taking my question. I believe you mentioned a $20 million headwind related to the EPTC expiry in the quarter, and guidance contemplates a similar run rate for the remainder of the year. What gives you confidence that the EPTC headwind doesn't worsen through the balance of the year, given that 4 Qs typically your highest-margin quarter, and we're seeing a higher mix of bronze plan selections with very high deductibles?

This is Jason. I'll start, and then Kevin can jump in. For the full year, just to clarify for everyone, we had initially estimated that the net revenue impact from HIX disenrollment would be between $90 million and $110 million, and the Adjusted EBITDA impact would be between $20 million and $30 million. Coming out of the first quarter, both of those assumptions, the experience was right in line with those assumptions. In the second quarter, we saw a more significant decline in our HIX volumes, and it was obviously a correlation with our increase in self-pay. We estimate the quarter impact on the EBITDA front to be $20 million negative in the quarter and about $25 million for the first quarter, so $25 million for the first half of the year. We do think the back half of the year looks like the second quarter, so at the midpoint, around $20 million-ish. The volume declines are consistent with what we expected in HIX, and the revenue's still in our range. We're assuming that a majority of the volume decline in HIX is also resulting in an increase in self-pay. I feel comfortable with our increased range, which now sits between $50 million and $75 million of impact on an annual basis. And I think that's pure self-pay. I think the people who have maybe middle down or tier down are behaving more like any other person that has commercial plans that have a higher deductible, and I think their behavior will mirror more of that group.

Our next question comes from Brian Tanquilut from Jefferies. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Maybe Jason, as I think about the guidance that you gave, given what we've seen in the first half of the year, can you help me bridge to that guide as we think through the back half of the year and anything you'd call out in terms of moving pieces that we need to factor into our models for Q3 and Q4 separately? Thank you.

Yes. Thanks for the question, Brian. I'll start. If you talk about from the midpoint of our initial annual guidance in February was $1.415 billion. The miss in the first half of the year versus the expectations when we developed that guidance is between $60 million-$65 million. We reduced the annual guidance by that amount. We assume a similar impact in the second half of the year. We took the second half down by $60 million-$70 million, and both those reductions are inclusive of the higher estimated HIX impact that I just mentioned of $50 million-$75 million. On the benefit side, we layered in the back half of the year DPP benefits that we expect from the plans in states that were not approved when we set our initial guidance that weren't factored in. That's Georgia, Indiana, and Florida. For Florida, just to unpack that a bit, the amount that we recognized for Florida in the second quarter was $20 million-$25 million. That related to the period from October 2024 through September 2025. We did not continue to accrue at that higher rate for the plan year 2026, which runs from October 2025 through September 2026, because the plan hasn't been submitted to the CMS yet, and there's some changes in the waivers from what was previously approved. We think it's prudent to wait to see what's ultimately submitted to CMS and how quickly CMS takes to review and ultimately approve the plan. However, we did factor in the possibilities for the Florida 2026 into our guidance. At the low end of our guidance, we assume that the 2026 year is not able to be recognized by year-end. At the high end, we assume that we are able to recognize the Florida 2026, and the benefit is consistent with the amount that we just recognized in the second quarter.

Understand. Maybe, Kevin, as I think about the guidance cut, I understand the payer mix headwind here, when I think about the free cash flow or the operating cash flow adjustment that you made, it looks to be a little bigger. Just curious how you're thinking about the drivers of that and what you're able to do. I know some of that is AR related, just curious if you can share with us some of the challenges you're facing on the cash flow side that's making it look worse than the payer mix headwind that you called out on the EBITDA line. Thanks.

Sure. Thank you, Brian. One of the challenges that we're experiencing on the cash flow side is really the slowdown of payments by the payers. Not only just slowing down in the normal course, they're now auditing more claims before they pay them, and having additional record requests. Oftentimes, in the past, those things occurred after payment. If there was a problem, there would be some true-up later. Now, the behavior of the payers is such that they're doing those exercises prior to payment, which just further slows down the payment process. Our AR is growing accordingly. Assuming that continues forward, we ultimately get the cash, it's a one-time slowdown in payment, our AR days are growing, and we've seen some of the payers even talk publicly about increasing their days in AP. We're on the other side of that equation with increase in days in AR. That said, we don't believe it's necessarily a collection issue. It's just a timing issue. Once we anniversary that, then we're back on a normal run rate.

Thank you.

Our next question comes from A.J. Rice with UBS. Please go ahead.

Hi, everybody. Just maybe to drill down on what you're seeing in the surgical volumes a little bit more. I know you called out a couple of service lines. Would you say that the surgeries that you're seeing the softness in are surgeries that traditionally are viewed as more elective and postponable procedures? Is that what you're seeing? Can you break it down between, is this a phenomenon of what you're seeing around the public exchanges, or is it broader than that? Another element of it is, I know you have standalone ASCs versus your hospital surgery, inpatient, outpatient. Is there any distinction between what you're seeing in the freestanding surgery centers with what you're seeing in the hospital-based surgeries?

Thanks, A.J. This is Kevin. I'll start on this one. Definitely the procedural softness and service line softness is trending towards more elective procedures. Orthopedics being the largest decline, so your hip and knee and shoulder replacements. Those are typically procedures that people can delay or at least defer for periods of time. Get a cortisone shot, maybe continue to try to manage the pain, and manage through some rehab, at least for a period of time. We are also seeing some softness in cardiac surgeries. Intuitively, those seem less elective, but they really are more elective. As people defer visits to their cardiologists and defer some of their screenings, oftentimes those procedures also get deferred. We saw that during COVID when there was a significant decline. Again, not intuitive, but there's a significant decline in cardiac procedures during COVID that were hard to explain, but we're seeing some of that as well. On the inpatient/outpatient, we're seeing bigger declines in the inpatient side. Overall, we saw some increase in outpatient surgery. Our surgery centers are picking up, but it is lower acuity surgeries and not the orthopedic and some of the cardiac procedures that you would normally have expected. We are seeing really good increases in clinic visits, and in things like orthopedic MRIs. Those continue to outpace prior year at a pretty significant rate, which would suggest we're capturing the patients. They probably still need the procedures, those visits and screenings are not translating into surgeries which lend us to continue to believe or support our belief that it's more of an economic decision, that people are delaying the follow-on procedures.

Okay.

The follow-on procedures.

Okay. A follow-up, maybe just ask about your uncompensated care. I know you gave the percentage of uncompensated care as a percentage of revenue up significantly year-over-year. I wondered if you have any color on the percent of your admissions that are uninsured this year versus last year. Also, I was wondering, did it step up significantly from Q1 to Q2?

We were approximately 5% of our visits, just shy of 5% of our visits prior year, were uncompensated or self-pay patients. This year, we are about 110 basis points higher, just over 6% of visits. Roughly a 20% increase or so in self-pay visits.

Was that different than first quarter materially, or was first quarter sort of similar to second quarter?

Second quarter was greater than first quarter. We did not see that big of an increase in the first quarter.

Okay. Interesting. All right. Thanks a lot.

Our next question comes from Jason Cassorla with Guggenheim. Please go ahead.

Great. Thanks for taking my question. Maybe, can you just walk through some of the mechanisms on the medical specialist fees? You've done a lot of work there to insource to help offset industry-wide pressures. It does seem like these costs will pressure you regardless if volume trends are favorable or unfavorable to your enterprise. I guess just any updated thoughts on the medical specialist fee backdrop, like if you can revisit some of those subsidies, if volumes remain pressured or anything else to help offset the growth there would be helpful. Thanks.

Yeah. The most significant component of that is the anesthesia that does have the income guarantee. When volumes are down, surgical volumes in particular, anesthesiologists are not collecting or generating as much revenue, they're guaranteed the minimums in the contract, we have to pay the subsidy. That one is definitely volume-based to some extent, that's where we are seeing the significant amount of increase. I would say that we are doing several things, in fact, we have insourced certain anesthesiologists and a few other specialties in certain locations. In some of those cases when we insource, that may mean that we're not just employing some of the docs, but we're also contracting with some on a 1099 basis. When that happens, we get the professional fee in revenue, the payment to the docs for providing the services still goes through medical specialties. That impact was about $3 million of net revenue in the quarter versus the prior year, about $6 million year-to-date. There's a little bit of offset grossed up in revenue, it's still outpacing what we had expected. Kevin, I don't know if you want to add any more flavor.

No, I think you covered that.

Okay, got it. Thanks. Maybe, could you guys comment on your thoughts around the proposed Medicare OPPS rule, the outpatient rule, and focus more so on the 340B proposal, the provision in there, if that were to be finalized, how you're balancing better OPPS rates from that position against maybe any impacts to potential divestitures or otherwise. Just any thoughts on the proposed rates would be helpful.

Sure. The for-profit hospitals did receive a pretty significant, I think it's close to 10.5%, bump in the outpatient rates effective January 1st, 2027. Yes, the for-profit hospitals who had received a benefit during the Trump administration's first term Had received some additional money that was taken out of 340B. We are faced with having to pay that back. That payback begins next year. That payback of the former 340B money will offset a pretty significant portion of that bump, at least for a few years. All that said, we think the net increase in outpatient rate for 2027 should be around 5%. It's still a much better improvement in Medicare outpatient rates than we have been getting over the past several years, if not the best ever, even on a net basis. Once the full 340B amount is paid back, then that base rate on the outpatient side has been elevated. We view this as very positive.

Our next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Yeah. Hi, thanks. Just to ask for a little bit more detail on the payer mix and service mix challenges. I guess, would you say that those are largely or almost entirely driven by what you're talking about in terms of the exchange dynamics and the commercial elective procedures? Or would you say that that kind of extends maybe into the medical side of the business as well? Wondering if you could talk more about what you're seeing for employer-based coverage and demand there, and maybe how that compares to the demand growth that you're seeing in Medicare and Medicaid in the quarter. Thank you.

Yeah. I think the demand in Medicare continues to be about the same or continue to actually increase. We're seeing increase in Medicare-related population. Commercial, although we've seen some reduction in commercial business, it's been a smaller percentage. I think the increase in uninsured is primarily coming from the exchange business. You don't have complete visibility into that, but it seems to be the most direct correlation. There is also a decline in Medicaid, and we're hearing somewhat anecdotally, but more difficulty in some demographics not wanting to sign up for Medicaid or having a more difficult time signing up for Medicaid. There's been some decrease in Medicaid volumes, which could also be contributing to some of the increase in uninsured or self-pay. In terms of the softness in surgeries, we think that is primarily commercially insured patients, and as a result of kind of economic headwinds with co-pays and deductibles. We're not seeing the decline in the emergency room business, which is where primarily the amount of uninsured care that we're seeing or self-pay business is coming through the emergency room. It's not the pressure that we're seeing on surgeries.

Okay. If we were to set aside the exchange headwinds in the back half and the moving parts on some of the Medicaid dollars, how should we think about what guidance assumes in terms of underlying performance? Do you assume these dynamics improve at all throughout the balance of the year? Or would you say you've reflected something closer to what you saw in the first half now? Thank you.

This is Jason. It really does look similar to the first half. We, in the range, do expect on the higher end, there could be some more growth in the second half as that commercial volume comes back in. They meet their deductibles into the third quarter, early fourth quarter, try to get the procedures done before the year-end. The risk, which is more reflected on the lower end, is that they don't get to the point where they meet those deductibles this year, they continue to defer those elective procedures into next year.

I think it's fair to say that our back half range assumes a similar decline as we experienced in the first half, offset by some of the approved state-directed payment programs. Right.

Our next question comes from Andrew Mok with Barclays. Please go ahead.

Hi, good morning. I think I heard at one point that the exit rate on surgeries was encouraging. Can you elaborate on that comment and how that's informing your back half outlook? Thanks.

Sure. As we just tracked kind of through the second quarter, June was our best month of the quarter. We did see a positive year-over-year improvement for the month of June. Despite kind of negative or slightly negative on surgeries for the quarter, we were positive year-over-year in the month of June.

Great. I appreciate the comments that consumer insecurity is driving lower elective surgeries overall. I think I've heard both sort of macro concerns around gas prices as well as deductibles. Is there a view internally on what's the bigger driver of this affordability issue? Thanks.

Yeah, I think. A couple things I'd point to, and we look at kind of the Consumer Confidence Index, which has trended down. It was low in March, as being a leading indicator, which played out in the second quarter with continued softness. That Consumer Confidence Index continued to deteriorate through the second quarter, and I believe it's at a 12-month low right now. It's down around the lows of when we were during COVID. As we look at that and look at kind of the very near-term impact, I would say that we view that as a little bit of a headwind. What's contributing to that? A couple of things. Gas, the price at the pump, as we saw for what we thought may have been some improvements in Q1 in consumer confidence, as some of the hostilities in the Middle East broke out, and gas prices started to go up in that March and April timeframe. I think that is having a big impact. When you think about our communities and the median household income, which is about $64,000 compared to $81,000 national average, our communities sit well below national average. As gas prices go up, that has a pretty significant impact on disposable income for those households. Healthcare seems to be one of the first things that people will delay or will at least attempt to delay if they can. I would say that that's probably one of the biggest drivers. I'd also point to, as we have a new Fed Chair coming in, at least early in the year, we were expecting rate decreases throughout the year, now we're looking at the potential of a Fed rate increase. I think overall in the markets, that's probably having a little bit of a muted impact. We're seeing higher inflation. The price of groceries is not coming down like we had anticipated earlier in the year, again, putting pressure on household incomes.

Great. Thank you.

Our next question comes from John Ransom with Raymond James. Please go ahead.

Hey. Good morning, everybody. One thing we've been focused on is the silver to bronze migration in the ACA. Is that something that you saw in the quarter? More broadly, has the collectibility on self-pay deteriorated, or do you think that's possible? Thanks.

Yeah. We don't have complete visibility into what plan somebody may have elected, had elected, or been under in the previous year versus what tier they're under this year. I do think we are seeing more business in the bronze plan this year than we have in the past. We don't have, again, complete visibility, at least on a patient-by-patient basis, to really analyze that. In terms of collectibility of self-pay, we only collect a few pennies on the dollar anyway, so there's no real room to get much worse on that. We're effectively not recognizing any revenue on that self-pay business.

Okay. Just the comment on the ACA. I think initially you said like $100 million in revenue and $20-$30 of EBITDA. The attach rate was 25%, whereas some of your peers talked about much higher incremental margins. I think Tenet was close to 100%. Can you just talk about kind of your current thinking if you lose $100 of ACA revenue, how does that translate into EBITDA losses?

Yeah, our initial guidance assumed that the folks who lost coverage, lost insurance from the credits expiring, stayed out of the health system. In reality, or to a large extent, stayed out. In reality, we're seeing that those folks who relied on those enhanced premium tax credits to afford exchange insurance plans are continuing to utilize the health system largely in a similar fashion and rate than they did before. These population people were high ER utilizers.

Right.

We've seen that trend. We underestimated how much of an impact that that would have, how many people would continue to come to our health system.

Okay. Thank you. That's very helpful.

This concludes our question and answer session. I would like to turn the conference back over to Kevin Hammons for any closing remarks.

Thank you everyone for joining the call today.