CHS sees net loss narrow to $110M, pursues $2B hospital divestiture plan

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Franklin, Tenn.-based Community Health Systems, which operates 119 hospitals, saw its net loss shrink in the second quarter of 2018 as the company continues to refine its hospital portfolio.

CHS said revenues dipped to $3.56 billion in the second quarter of 2018, down 14 percent from $4.14 billion in the same period of the year prior. The decline was largely attributable to CHS operating 24 fewer hospitals in the second quarter of 2018 than in the same period of 2017. On a same-hospital basis, revenues climbed 3.3 percent year over year.

After factoring in operating expenses and one-time charges, CHS ended the second quarter of 2018 with a net loss attributable to stockholders of $110 million. That’s compared to the second quarter of 2017, when the company recorded a net loss of $137 million.

“Our second quarter results reflect progress in our key areas of strategic focus, most notably improvements in same-store operating results, progress on divestitures and successful refinancings,” said CHS Chairman and CEO Wayne T. Smith in an earnings release.

As part of a turnaround plan put into place in 2016, CHS announced plans in 2017 to sell off 30 hospitals. The company completed the divestiture plan Nov. 1. To further reduce its debt, CHS intends to sell another group of hospitals with combined revenues of $2 billion. The company has already made progress toward that goal.

During 2018, CHS has completed seven hospital divestitures and entered into definitive agreements to sell five others. CHS said it continues to receive interest from potential buyers for certain hospitals.

“As we complete additional divestitures this year, we believe our portfolio will become stronger, and more of our resources can be directed to markets where we have the greatest opportunities to drive incremental growth,” Mr. Smith said.

CHS’ long-term debt totaled $13.67 billion as of June 30, a decrease from $13.88 billion as of the end of last year.


CHI’s operating loss widens in Q3, but finances improve over longer term

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Englewood, Colo.-based Catholic Health Initiatives saw its operating loss widen in the third quarter of fiscal year 2018, but the health system’s financial picture improved over the first nine months of the fiscal year.

CHI’s operating revenues declined from $3.8 billion in the third quarter of fiscal year 2017 to $3.7 billion in the third quarter of fiscal 2018. However, the health system’s expenses before restructuring also declined about 1.7 percent year over year to $3.7 billion in the third quarter of the current fiscal year.

After factoring in restructuring, impairment and other one-time costs, the system ended the third quarter of fiscal year 2018 with an operating loss of $35.3 million, compared to an operating loss of $17.2 million in the same period a year earlier. CHI said its operating EBIDA improved by nearly $80 million during the third quarter of fiscal year 2018 after adjusting for transactional gains and other items.

CHI launched a turnaround plan about three years ago, and the improvements the system has achieved under that plan are clear when looking at financial results for the first nine months of the current fiscal year. For the nine months ended March 31, CHI reported an operating loss of $114.7 million, which was a significant improvement from the nearly $344 million loss the system recorded in the same period of the year prior.

“We continue to see strong momentum that has played out in the current fiscal year,” said Dean Swindle, president of enterprise business lines and CFO of CHI, in an earnings release. “We have established a strong foundation through a performance-improvement plan stretching back nearly three years, and we expect that these positive results will continue throughout the rest of this fiscal year and well beyond as we become a truly high-performing health system.”

The three major rating agencies — Moody’s Investors Service, Fitch Ratings and S&P Global Ratings — have all recognized CHI’s progress in recent months with positive adjustment in their outlooks for the health system.



Catholic Health Initiatives CFO Dean Swindle’s advice to other systems: ‘Don’t get too comfortable with your past success’

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Englewood, Colo.-based Catholic Health Initiatives embarked on a turnaround plan several years ago with the goal of improving its financial picture while providing high-quality care at its hospitals and other facilities across the nation. The system has made great strides toward its goal, yet there is still a lot of work to be done.

CHI has been laser-focused on performance improvement over the past three years, but rolling out a comprehensive turnaround plan across an organization with 100 hospitals is challenging, and progress is slow. The health system’s efforts just began to take hold in the second half of fiscal year 2017. Although CHI has encountered obstacles on its path to financial stability, the system is pleased with the headway it has made and expects more improvement in the coming months.

CHI’s cost-cutting initiative

To improve its finances, CHI set out to cut costs across the system. It put a great deal of energy into lowering labor and supply costs, which combined can make up two-thirds or more of the system’s operating expenses. CHI developed plans and playbooks focused on reducing these costs several years ago, knowing it would not immediately see results.

In the labor area, CHI President of Enterprise Business Lines and CFO Dean Swindle says the system had to incur costs to cut costs. “In the second half of the year [fiscal 2017] we began to see the benefits of our labor activities in the markets, but we also had cost,” he says. For example, CHI incurred the one-time expense of hiring advisers to help the system develop new labor management techniques. The system also cut jobs, which resulted in severance costs.

“When we got to the second half of 2017, we were very confident and felt very pleased that we were seeing benefit … but it was difficult for others to see it because it was for half of the year, and we had the one-time costs that were burdening that,” Mr. Swindle says.

After factoring in expenses and one-time charges, CHI ended fiscal year 2017 with an operating loss of $585.2 million, compared to an operating loss of $371.4 million in fiscal year 2016.

However, CHI saw its financial situation improve in the first quarter of fiscal year 2018. The system’s operating loss narrowed to $77.9 million from $180.7 million in the same period of the year prior. “What you were able to see in the first quarter [of fiscal 2018] … was the one-time costs had gone away for the most part; those weren’t burdening our results,” says Mr. Swindle.

He says although the system employed more physicians, its absolute labor costs were lower year over year. CHI’s supply costs, including drug costs, were also lower in the first quarter of fiscal year 2018 than in the first quarter of last year.

Mr. Swindle says CHI saw its finances improve in a difficult operating environment. Patient volume was lower in the first quarter of fiscal year 2018 than a year prior, and the system also experienced a nearly $26 million loss from business operations as a result of Hurricane Harvey.

“[This has] given us a level of confidence that we can move forward and address the difficulty that our industry is going to be facing over the next several years,” he says.

In early January, Fitch Ratings affirmed CHI’s “BBB+” rating and upgraded its credit outlook to stable from negative. The credit rating agency cited the health system’s strong start to the 2018 fiscal year and financial improvements in several markets as key reasons for the upgrade.

Preparing for new challenges

Although healthcare organizations are currently facing many challenges, including regulatory uncertainty and dwindling reimbursement rates, Mr. Swindle anticipates hospitals and health systems will face new obstacles over the next few years.

For example, hospitals will be challenged by changes to the 340B Drug Pricing Program. CMS’ 2018 Medicare Outpatient Prospective Payment System rule finalized a proposal to pay hospitals 22.5 percent less than the average sales price for drugs purchased through the 340B program. Medicare previously paid the average sales price plus 6 percent.

“I don’t think 340B was by chance and in isolation,” says Mr. Swindle. “I think we’re entering one of those cycles that the whole economic environment of our industry is going to be working against us.”

The pressures in the industry are driving hospitals and health systems to join forces. After more than a year of talks, CHI and San Francisco-based Dignity Health signed a definitive merger agreement in December 2017. The proposed transaction will create a massive nonprofit Catholic health system, comprising 139 hospitals across 28 states.

In the short term, the combination of the two systems is expected to drive synergies in the $500 million range, according to Mr. Swindle. In the coming months, the two systems will dive deeper into the synergies they expect to achieve over a multiyear period. “We do believe beyond the synergies there are some strategic initiatives we can put into place as a combined organization that we couldn’t do individually,” Mr. Swindle says. “You won’t see the benefit of those as much in the short term.”

“Take a deep breath”

Mr. Swindle knows firsthand that developing and executing an operational turnaround plan is no easy task. However, today’s healthcare landscape requires health systems to re-engineer their business models.

“Regardless of how good your results … have been over the last five to 10 years, we’re all going to have to transform ourselves in our own way to meet the characteristics of our organizations,” says Mr. Swindle.

When embarking on a performance improvement plan, the first thing health system CFOs should do is “take a deep breath,” he says. Then, they should focus on the things they have more control over. Mr. Swindle says it is critical for health systems to continue to drive improvement in patient experience and quality. They also need to be strategic cost managers.

“It’s not going to be as easy as just saying we’re going to take these [full-time employees] out or reduce this service. You’re really going to have to be very smart and very thoughtful about how you become a good cost manager that adds value to your communities,” says Mr. Swindle. “Don’t get too comfortable with your past success and your past models.”


CHS in negotiations to extend nearly $2B in debt

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Franklin, Tenn.-based Community Health Systems is in talks with a group of bondholders led by Franklin Resources, an asset management company, to extend approximately $2 billion in bonds due in 2019, people familiar with the matter told the Wall Street Journal.

The company is in talks to swap the 2019 unsecured notes for debt secured by its assets, one person familiar with the matter told WSJ. This type of transaction would be difficult for CHS to complete, as the company can only issue about $1 billion in new secured debt without permission from its lenders to waive a covenant in its revolver loans.

Extending the debt due in 2019 is only a short-term solution because CHS faces billions of dollars in debt maturities from 2020 to 2023, according to the report.

CHS put a financial turnaround plan into place last year, which included selling 30 hospitals to reduce its heavy debt load. The company completed the divestiture plan earlier this month. With the help of proceeds from the hospital sales, CHS brought down its long-term debt load to $13.9 billion in the third quarter of this year, from $14.8 billion in the same period of 2016.

CHS ended the most recent quarter with a net loss of $110 million on revenues of $3.67 billion. That’s compared to the third quarter of 2016, when the company posted a net loss of $79 million on revenues of $4.38 billion.


CHS reports $110M net loss, completes 30-hospital divestiture spree

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Community Health Systems, a 127-hospital chain based in Franklin, Tenn., posted a net loss of $110 million in the third quarter of 2017, compared to a net loss of $79 million in the same period of the year prior.

CHS said revenues dipped to $3.67 billion in the third quarter of this year, down from $4.38 billion in the same period of 2016. The decrease in revenue was attributable, in part, to lower patient volume. On a same-facility basis, admissions were down 14.8 percent in the third quarter of this year. When adjusted for outpatient activity, admissions decreased 15.5 percent year over year.

The company’s financials also took a $40 million hit from hurricanes Harvey and Irma in the three months ended Sept. 30. CHS said the hurricanes caused it to incur additional expenses and miss out on revenues.

Although CHS’ operating expenses declined in the third quarter, one-time charges took a toll on the company’s bottom line. CHS said its third quarter financial results included $33 million in impairment charges and losses related to the sale of some of its hospitals.

To improve its finances and reduce its heavy debt load, CHS put a turnaround plan into place in 2016. As part of the initiative, the company announced plans this year to sell off 30 hospitals. With the sale this week of Highlands Regional Medical Center in Sebring, Fla., and Merit Health Northwest Mississippi in Clarksdale, CHS Chairman and CEO Wayne T. Smith said Wednesday the 30 hospital divestitures are complete.

“Looking forward, we remain focused on strategic initiatives that we believe will yield positive results in the future,” said Mr. Smith. “Our goal is to emerge from this process with a sustainable group of hospitals that are positioned for long-term success and growth.”

CHS brought down its long-term debt load to $13.9 billion in the third quarter of this year, from $14.8 billion in the same period of 2016.