Ladies and gentlemen, thank you for standing by, and welcome to Community Health Systems' Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Ross Comeaux, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Mike. Good morning, and welcome to Community Health Systems' third quarter conference call. Before we begin the call, I'd like to read the following disclosure statement. 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 Securities and Exchange Commission. As a consequence, 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. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call. All calculations we will discuss also exclude: gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expenses from government and other legal settlements and related costs; expenses from settlement to legal expenses and related to cases covered by the CVR; expenses related to employee termination benefits and other restructuring charges; change in valuation allowances recorded for promissory notes; change in estimate for professional liability claims accrual; tax effect related to HMA legal settlement; change in tax valuation allowance. With that said, I'd like to turn the call over to Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Ross, and good morning, and welcome to our third quarter conference call. I'm joined today on the call with Tim Hingtgen, our President and Chief Operating Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, Executive Vice President and Chief Financial Officer. We are pleased with the strong results reported in the third quarter, especially as we managed through COVID-19 pandemic, while also advancing strategies designed to build on the Company's recent progress and ensure long-term success. I want to credit our hospital leaders, corporate management, other support teams and especially the frontline caregivers who continue to meet the challenge of a global pandemic with commitment, professionalism and a level of human compassion that truly impresses me every single day. Before we get into the quarter's results, I hope you will indulge me just a minute to comment on the other press release that we issued yesterday announcing my decision to transition from CEO of the Company into the new role of Executive Chairman of the Board of Directors at the beginning of 2021. Tim will become our new Chief Executive Officer, and I'm completely confident that Tim will be strategic, energetic and an outstanding CEO. You've got to know him over the past few years in his role as President and COO. I trust that you have seen his strong leadership capabilities, his deep knowledge and experience in our industry and his intense personal commitment to this company. We've certainly seen the results of his labor and good work he has done to advance strategic and operational initiatives that are driving growth in our markets. I could not be more pleased that Tim will be our next CEO. Let me say again that I and our Board are completely confident in…

Thank you, Wayne. I'd also like to thank all of our hospital leadership teams, bedside caregivers, support staff and physicians for their commitments to their patients and communities and for their resilience throughout this extraordinary year. Through teamwork and collaboration and their dedication, we have cared for thousands of COVID-19 patients ensuring safety for both COVID and non-COVID patients as well as our employees and clinicians. Year-to-date, through the end of the third quarter, we have provided care for approximately 25,000 confirmed COVID-19 patients across our hospitals, emergency departments and outpatient care settings. As I mentioned on last quarter's earnings call, we experienced an increase in COVID-19 patients in the summer, particularly across the Sunbelt space. During the quarter, in our hospital TVs and outpatient care settings, we care for approximately 8,000 confirmed COVID-19 patients in July, approximately 6,000 in August and approximately 4,000 in September. In total, we saw more COVID-19 patients in the third quarter than we did in the first half of the year. The increased COVID patient counts have created challenges for the hospital industry all across the country. Due to our early-stage planning, including our dual-track framework, combining clinical and operational expertise, along with the strong support of our supply chain, facilities and logistics, infection prevention, HR and employee health, communications and other corporate support functions, we've been able to effectively manage surges in COVID-19 prevalence across all markets. Looking forward, we can see that cases continue to increase in many parts of the country and the ultimate duration of the pandemic remains an unknown. We continue to monitor cases through our internally developed COVID-19 tracking dashboard for real-time visibility of COVID-19 cases in all our hospitals. We are focused on continuous capacity and contingency planning in case of the so-called Twindemic of influenza and COVID or just additional ways of COVID-19 by leveraging the expertise and resourcefulness of our hospital teams and the support of our corporate assets. We will continue to support our hospitals in a number of ways. On the supply front, our centralized distribution system is engaged in-sourcing and logistics as it relates to ventilators, PPE, pharmaceuticals and other critical supplies that are needed to treat COVID-19 patients. From a capacity management standpoint, we are monitoring ICU and overall hospital utilization and proactively planning to expand capacity and ensure necessary staffing where and when needed. We are leveraging our transfer center for patient logistics support and utilizing telehealth to allow for continuous outreach to patients, both those needing preventative care and those vulnerable patients with preexisting comorbidities who might be considering delaying care due to fears of contact in COVID-19. As always, we lead with safety and following CDC Infective Prevention Guidelines and with proactive COVID-19 testing, especially for high-risk patient populations and pre-procedural testing and ensuring facilities spaces provide safe workflows and meet social distancing requirements. Going forward, we remain confident in our ability to manage through this pandemic safely, efficiently and effectively. Tim?

Thanks, Lynn. First, I want to say how incredibly honored I am about the opportunity to become the next Chief Executive Officer of CHS at the beginning of next year. I'm excited about where our organization is headed and the progress we are making and like Wayne, I'm optimistic about our future. Our portfolio is strong. Our team is strong, and I'm extremely proud of how we've demonstrated that, working closely together over the past few months by navigating the COVID-19 pandemic while also resuming other services and advancing strategic priorities. As a company, we have a strong culture of caring and accountability. Wayne, of course, has been an extraordinary Chief Executive and leader for CHS for all of us, and I look forward to working closely with him in his new role as Executive Chairman of the Board of Directors. I'm very grateful for the confidence and trust that has been placed in me by Wayne and our Board. Shifting to third quarter results. On top of the ongoing management of the pandemic, our hospital teams also successfully managed through two significant hurricanes during the quarter. In August, Hurricane Laura caused minor disruption to facilities in Texas and Arkansas. While in September, Hurricane Sally caused more significant disruption in Evolving County, Alabama market and less significant impacts in other Florida and Mississippi markets. Ahead of these hurricanes, we instituted our hurricane preparation plan and our hospital leaders and medical staff to fantastic work maintaining operations throughout and after these weather events. In terms of COVID-19, Dr. Simon, along with the clinical teams and the full breadth of corporate support has done an excellent job managing our COVID-19 response. And our hospital and regional leadership teams have successfully managed our return to caring for more non-COVID demand, including elective procedures.…

Thank you, Tim, and good morning, everyone. Similar to last quarter, I will not cover all of our typical financial metrics today, but instead I would refer you to the 8-K and our slide deck for additional details. As a reminder, we previously withdrew our 2020 financial guidance, and we are not providing 2020 guidance today due to a number of factors, which we have recently discussed. During the third quarter, on a consolidated basis, net operating revenues came in at $3.126 million, down 3.7% from the prior year while adjusted EBITDA was $431 million, up 11%. Keep in mind, we did not recognize any CARES Act funding into income during the quarter. On a same-store basis, net revenues increased 2.9%. This was comprised of an 11.5% decrease in adjusted admissions and a 16.2% increase in net revenue per adjusted admission. During the quarter, our hospital leadership teams executed well, managing variable cost as net revenue improved sequentially. And as Tim mentioned, our strategic margin improvement program continues to deliver expense reductions and improve our margin profile. On a same-store basis, our salaries, wages and benefits expense decreased 0.8% and down 160 basis points as a percent of net revenue. Supplies expense increased 5.1%, up 40 basis points as a percent of net revenue and other operating expense increased 1.9%, down 30 basis points as a percent of net revenue. Switching to cash flow, cash flows provided by operations were $393 million for the third quarter of 2020. This compares to cash flow from operations of a negative $74 million during the third quarter of 2019. Looking at the quarter-over-quarter increase, cash interest payments were approximately $213 million lower due in part to timing of payments. The Company received approximately $155 million and provide a relief grant under the CARES…

Thank you, Kevin. At this point, operator, we're ready to open it up for questions. We will limit everyone to one question so several of you have time on this call. But as always, we're able to talk to you at any time. You can reach us at area code (615) 465-7000.

[Operator Instructions] Your first question comes from Brian Tanquilut from Jefferies. Please go ahead.

Hey, good morning, and Wayne, thanks for all your work and your support over the years, and Tim, congratulations. So I guess my question would just be on the margins and the pace of recovery that you're seeing. Obviously, a lot of moving parts with acuity going up and volumes still pressured. So I just want to hear how you're thinking about that. You have the pace of recovery through Q4 and into next year. And what of the margin lift that you've delivered do you think is sustainable once we see more normalized acuity and revenue per addition trends? Thank you.

Sure, Brian. This is Kevin. I will take that. So as we have managed through with lower volume, we have certainly done, I think, an exceptional job of managing our labor costs. So we've been able to flex labor consistent and according to the lower volume. The margin improvement program work that we really started late in 2019, a lot of those initiatives are focused on non-patient-facing expenses. They deal with how we contract purchase services, how we're contracting for supply, and we believe those to be very sticky, so to speak. So, we believe those expense reductions will continue going forward as volumes come back. And so that margin lift will be more permanent.

Don't forget that our portfolio rationalization program is also designed to improve our margin kind of going forward and we're beginning to see that come through.

Your next question comes from Josh Raskin from Nephron Research. Please go ahead. Josh Raskin your line is open. Your next question comes from Frank Morgan from RBC Capital Markets. Please go ahead.

Good morning and congratulations Lynn and Tim on these new roles as you'll make this transition. I was hoping to get a little more color around the -- you made some commentary, I think Lynn did about, the number of COVID patients over the months of the quarter. Any additional color you can provide around kind of how underlying utilization was in terms of surgeries and admits. And I'm curious, how did that transition into the fourth quarter? Is the trends that you saw maybe in the, say, in the last month of the quarter, is that carried over into the current quarter? And then have you had any needs or requirements to do voluntary suspension of services so far in the fourth quarter? Thank you.

Great. Frank, this is Tim. I'll start it off. And obviously, Lynn, if you have anything to add to free, we obviously started the third quarter with higher surges of COVID cases in our Sunbelt space. We commented on that during our second quarter earnings call. We also, I think, shared some of the impact that was having on our volumes from the June recovery. June recovery, by the way, certainly benefited from a great deal of pent-up demand. We were very focused on getting that business in the door. We did see some shifting or deferrals in July into August. But as the COVID surge has subsided, as we expected, we saw more elective cases come back into the hospital. And from our vantage point, most of the deferred care or the delayed care was consumer driven, not so much related to resources in our end. We felt we were very well staffed and equipped to work through that. We only had two states that had, I think, what I would call, I guess, requires orders for curtailing elective cases, those being some counties in Texas and Mississippi. But for the rest of our markets, again, just the normal throttling up and down and being responsive to consumer concerns or reflected in for care with at the forefront. I think we've shared a great deal of our backlog. In the third quarter, we're still very focused on building a new pipeline of business, as we talked about in the call so far today with all of our investments and our strategies. In terms of heading into October, September was a good month, that heading into October, we were pleased with the further progression of our volume recovery. We are, as we pointed out today, seeing some resurgence of COVID haven't necessarily seen any requirements for shutdowns or curtailing elective services that we're monitoring on a day-by-day basis. And where we think it's prudent to do so, we will. Lynn has instituted a very rigorous pre procedure testing program. So we believe we have a good pulse every day on the pre-surgical pre-procedure patients on monitoring for upticks in COVID so if we would see that happening, we'd obviously make operational adjustments as warranted.

Your next question comes from Ralph Giacobbe from Citi. Please go ahead.

I guess as you think about the longer term effects of the pandemic, any thoughts on just population factors within your market and maybe stemming out migration to larger cities, any just thoughts there? And then the ER obviously remains challenged still. I know it is lower acuity that you cited. But maybe remind us again of your strategy and sort of your transfer centers and access point plan, and if you're accelerating any of those initiatives to kind of capture the volume that's not presenting at the hospital?

Ralph, I'll start it off. And again, anyone free to jump in here. But in terms of longer impact population shift, I think we've mentioned it for the last couple of quarters, and we continue to read certain articles that say, there does seem to be some desires for urban dwellers to look at some suburban or non-urban locations. Have we seen any uptick in any of our markets? I think it's too soon to tell that it's a trend that we'll certainly watch. In terms of the movement of the acuity from one sector to the other, I would say, we've been planning for the structural shift, if you will, for lower acute care to go to the outpatient setting. For the last several years with access point strategies, freestanding EDS, ASCs, we've given, I think, pretty regular updates on our progress and our investments into those access points I think they serve us very well. And then with COVID, I think you see some acceleration into urgent care settings, for instance, versus the lower CD acuity business. So we're pleased that we have been really thoughtful and strategic in how we build out those. But at one point, we're consumer focused strategy, get to where the customer is. Now they're really serving some of those structural shifts. The transfer center really is a conduit for us to connect our affiliated hospitals in our networks were maybe lower acuity to our higher acuity assets as well as non-CHS hospitals in the surrounding areas as we've invested our capital in service line advancement, cardiac, neurosurgery, trauma. That transfer center enables us to move those patients from the lower acuity setting into our sites of care that we've invested. And we're really pleased with the results. In the third quarter, despite a decline in admissions, we did see an increase in transfer center activity, which just shows how Intacta has been to help us build out the complexity and the performance of our market.

So Ralph, we haven't seen any dramatic change or any increases in terms of population ship or any of those kinds of things. This quarter, and this year is built on the same-store hospitals that we've had for a number of years, and the markets have been relatively stable for a number of years. And the opportunity we have going forward is to increase our market share in these markets. One of the reasons we did this huge divestiture program was to get down to a sustainable group of hospitals that we could grow. And that's where we find ourselves today, and we're excited about the opportunities for our continued growth in those markets with or without a digital population ship.

And I think we are well positioned on both the outpatient and the inpatient side. And just to point out, I made it the comment earlier, we've added over 200 beds in markets where we have opportunities to grow our presence and our market share. Key markets like Birmingham, Knoxville, Naples and to Sonic go down the list, but to point a stronger portfolio, we've been investing in it. We maybe didn't acquire any new hospitals, but we certainly, I think, it built out to what would be akin to a normal acquisition or a couple of acquisitions over the last couple of years.

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

I appreciate the fact that you guys were able to pay down some debt in the quarter. I guess, you had $1.8 billion of cash in the balance sheet plus another couple of hundred million dollars from asset proceeds. How much cash do you think of as kind of actually being available for deployment? And how should we think about the ability to actually reduce leverage through free cash flow going forward?

Sure. This is Kevin. There's still a lot of uncertainties around COVID and when the next surge will be. And certainly, the accelerated Medicare money that was provided by the government was meant to give us assistance kind throughout the pandemic period, which no one knows yet how long that's going to last, and it's likely to be around until we have a vaccine. That being said, with the new rules around when that repayment starts, which is not until April of next year and then extends out over a period of time. There'll be approximately roughly $450 million of the accelerated payment will be paid back in 2021. And so that still leaves us a fair amount of cash on hand to kind of navigate through the pandemic and just through some of the unknown. But going forward, we expect with our improved EBITDA results and management of our working capital that we will be kind of positive free cash flow, which we are currently and expect to be going forward. So that gives us some additional flexibility.

Your next question comes from Andrew Mok from Barclays. Please go ahead.

Congratulations again to both Wayne and Tim. Wanted to follow up on COVID patients, I think you quoted 18,000 cases in the quarter across the hospital system. Can you share how many of those cases were inpatient admissions? And relatedly, can you provide some of the characteristics of the typical COVID inpatient that's treated in your hospital for items like length of stay, insurance coverage and ventilator usage?

Great. Andrew, this is Tim. I'll kick it off and then hand it over to Dr. Simon on some of the clinical aspects. In terms of the numbers we provided, about 45% of that was on the inpatient side of the business. In terms of payer mix, similar to what you've heard or read recently, most of those patients are older age, 55 and above, higher penetration of Medicare Advantage patients. But obviously, it's something we keep track of. In terms of advancing the clinical care, I'll turn it to Dr. Simon.

And just from a demographic standpoint, certainly, we're seeing a little lower age that we did early on in the pandemic, and then we're seeing a little more surge bubble patients than we are IC, but still strong on the IC side as well. So a little bit of shift in that the patients that we're saying from a clinical standpoint, we're seeing these patients require a little longer hospital stay. So the length of stay is extended a little bit, both on the ICU side and the inpatient side. But overall, like we're seeing elsewhere, improved mortality, better therapeutics between remdesivir and steroids and less use of ventilation early on, Cronan, et cetera, all the things that you hear about. I think the clinicians are getting much more comfortable in their treatment and I think we're saying out as well related to that, encouraged with more therapeutics and others coming down the line.

Your next question comes from A.J. Rice from Crédit Suisse. Please go ahead.

Hi, everybody. Best wishes to Wayne. It's been quite the ride and congratulations to Tim on the new role. I just go back to asking about labor generally. And what are you seeing as we sort of been through the six to seven months of this pandemic in terms of your nurse turnover, use of temporary staff, wages? And then I guess also on the labor front, if I could ask you, with ER volumes being down as much as they are across the industry. I know you use ER staffing firms and typically have to subsidize them when there's weakness in the volumes, are you renegotiating those deals? Is there a way to do that? And has that been a headwind this year that maybe turns around as the ER volumes come back next year?

I'll kick that one off. In terms of contract labor trends, I think we did a good job of limiting contract labor, obviously, in the latter part of the first quarter and in the second quarter when our inpatient volumes were suppressed. So we actually had a pretty significant decrease in contract labor utilization. We have seen the need for contract labor to go back up over the last several weeks, in particular, as we've had COVID cases surge. That turnover rate, but I think they're up a little bit for nursing for various reasons that we've all read about, sometimes staff concerns and wanted to take other types of nursing physicians, some of them have last for safe staffing agency pools or contract labor pools, other, again, nothing that we -- I get an anticipated or we can manage. And in terms of the rate, we have seen some increase in rates in the contract labor space, working very hard with all the other margin improvement initiatives to offset those, of course, but it is somewhat of an emerging headwind that we'll be mindful of. In terms of the ER volumes and the subsidy, that's also something we tackled early on in the pandemic by partnering with our vendors out there to adjust staffing once we saw ED volumes drop. So we were able to work with them, reduce their expense and their staffing costs, which I think, I guess, avoided a lot of what could have been some headwinds in terms of requests for subsidy increases. Obviously, there is an uptick in our subsidy spend because you have to have some sort of fixed or core staffing in those contracts. The other thing which we asked to all the vendors to vendors to be mindful of is their ability to attract our go for CARES Act funding as well. And I believe in the last package that came through, there's a new application process for those groups who didn't qualify for some of the criteria based upon year ending 2018 practices to make special appeal. So we're working with those groups, if there is any shortfall to see if we can help them access those CARES Act funds. But I'll turn over to Kevin for any other commentary.

Yes. The only thing I would add is some of the pressure on contract labor and overall staffing kind of rate, some of that is regional as well subject to the locations. But I don't think we're experiencing anything even regionally just outside of the norm or what other people would be saying.

Some of this outpatient ED business, of course, has moved to telemedicine and other delivery formats, which we're well positioned to take advantage of.

Yes, we had another good quarter of telemedicine volumes. As more care goes into the traditional practice side, we had to come down from our second quarter highs, but we're still pleased with the ability to drive patients in that direction and for our practice visits with new patients as well.

And our last question will be from Josh Raskin from Nephron Research. Please go ahead.

Can you guys hear me better now?

We can. Yes, it's better.

All right. Perfect. Sorry about that. And I'll echo the congratulations to Wayne for the last couple of decades and certainly to Tim as well. My question, just on the prioritization of procedures that are coming back and sort of help me with the process, do you help the physicians with that decision-making and rescheduling and how is sort of community as the hospital operator part of that? And do you think there'll be an ebbing of the acuity as we get back to sort of a more normalized level of procedures and sort of the procedures that weren't prioritized are coming back as well?

Josh, this is Tim. I'll start it off. In terms of the prioritization of procedures, we work closely with our medical staffs through all phases of the pandemic. We stay close with our employee practices and their patients through our own means of connected care, and that's through some virtual mechanism through some, I guess, outbound calling from our practices, particularly for vulnerable patients, who perhaps haven't had a visit. We happened to the analytics in our ambulatory medical record systems to make sure we did proactive outreach for their safety. And then for wellness and gaps in care, doing the same thing and making sure we're more proactive in our approach with these patients as volumes have been suppressed due to the pandemic. We are pleased, again, that the higher acuity procedures came back relatively quickly. We had a good quarter in orthopedic volumes. Public joints, even though there's a large migration of hips to the ambulatory setting or outpatient surgery setting with Medicare new ruling on the two midnight rule for that. We still managed to have pretty flattish volumes on hips. So again, we look at that as all good indicators that we can partner effectively with employed and independent providers in our markets to bring that care back in the door. Where we saw the shortfall was in the lower acuity and I'll say somewhat elective, very elective care. GI was a high proportion of our decline in the total surgery cases for the quarter. ENT was number two. And with that, if you look at the age bracket, a lot of the GI care, obviously, for adults, particularly seniors. And then for the ENT, we saw a pretty large decline in our pediatric age volumes for surgery. So we have a pretty good grasp as to where those cases are. Now in terms of when we think we can get them back in the door, we'll keep on connecting with those surgeons. Those surgeons want to get those patients the care they need. But at some point, I think for GI, for screening colonoscopy that just turns into a new cycle where if it's an annual or a five-year colonoscopy screening, I don't know how much pent-up demand it is. It just moves into the next care cycle for that patient. That's why we've been really focused on generating our own future, being proactive and doing our outreach and our service line development strategies.

And early on, there were some guidelines like CMS and other states about what surgeries should prioritize. So certainly, following those guardrails, but letting the medical task, the individual communities decide how they wanted to bring their patients back because they really are closer to knowing who needs the care. And there's a lot of discussion around, certainly, if it's a higher acuity, you need to get them back in. But at the same time, those patients that may have more of code elective or preventative procedure, they need to come in as well to provide future decline in health outcomes. So really very focused on making sure we get those patients in to get the care that they need.

In terms of your question related to the acuity and how sustainable is the higher levels of acuity, I think with our intentional site of care shift to ambulatory, our focus on building out surgery centers. We have about 50 surgery centers. We have another 10 or so that are minority partnership, so most of our markets have a good ambulatory strategy as care. Appropriately, still, in some cases, moves to the lower acuity setting. So I think from a hospital standpoint, balancing that with our investments in capital, recruiting the right doctors, expanding the service lines, the transfer center, I do think there's a lot of sustainability and our ability to continue to drive acuity and case mix improvements across the portfolio.

I will now turn the call back over to Mr. Smith for closing comments.

Thanks again for spending time with us today. I want to once again express how deeply grateful we are to all of our employees, physicians, medical staffs, regional presidents, hospital leadership teams, hospital support teams, corporate support teams how have been the front, forefront of combating this global pandemic and to provide exceptional care for those affected. We continue to move ahead now with our strategies to provide outstanding care for our patients to maintain a trust in partnership, our physicians and employees, to demonstrate our value to the communities we serve and to reward the Company's shareholders and debt holders for their confidence and investment in our organization. And once again, thank you, I am extremely grateful and appreciative for all your support over the last 20 years. This concludes our call today, and we look forward to updating you on our progress. Once again, if you have any questions, you can always readjust at area code 615-465-7000. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.