Lackluster Earnings Has Analysts Concerned For Community Health Systems

"Our results in the second quarter were affected by challenging operating dynamics," says CEO Tim Hingtgen.

Financial analysts are losing faith in Tennessee-based Community Health Systems, which operates 83 hospitals across 16 states with over $11 billion in total revenue, ever since it reported a decline in revenues and admissions for the second quarter of 2022.

Community Health Systems finished the three months ended June 30, 2022, with a net loss of $326 million compared to a net income of $6 million for the same period in 2021. Community Health Systems also reported a 3.4% decline in admissions, compared to the same quarter in 2021.

"Our results in the second quarter were affected by challenging operating dynamics that included lower than anticipated volume, lower net revenue per adjusted admission, and significant contract labor costs driven by the labor market and inflationary pressures," Tim Hingtgen, CEO of Community Health Systems, said in the earnings report. "We have initiatives underway intended to actively address these pressures by accelerating strategic growth opportunities in key markets, aggressively working to recruit and retain permanent staff to replace contract labor, achieving incremental expense reductions, and leveraging our centralized resources to achieve improved results."

Following the discouraging earnings report, several financial analysts downgraded their ratings on the for-profit organization's stock including Fitch Ratings, which revised its outlook to negative from stable.

"The negative outlook reflects a deterioration in operating performance in 1H 2022, with significant increases in labor costs and weakness in volumes and acuity mix driving a downturn in the company's revenue and margin levels, resulting in a sizeable reduction in its 2022 financial guidance and elevating leverage to levels posing increased downgrade risk," Fitch said in its analysis.

Financial news organization TheStreet downgraded its rating on Community Health Systems to a D from a C-. CitiGroup has decreased its target price on Community Health Systems to $6 from $14, and Bank of America has downgraded its rating to neutral from buy. Credit Suisse lowered its price target to $6.50 from $8, and Loop Capital initiated coverage on Community Health Systems with a hold rating and a $5 price target.

"The company's strengths can be seen in multiple areas, such as its reasonable valuation levels and solid stock price performance," TheStreet report said. "However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity, and poor profit margins."

Community Health Systems CFO Kevin Hammons acknowledged that the organization's second-quarter results came in "well below" expectations on the earnings call.

"Lower than anticipated volume and net revenue per adjusted admission impacted the top line," Hammons said. "As the quarter progressed, the return of non-COVID-related patient volumes was lower than we anticipated."

Community Health Systems isn't the only healthcare organization to recently report lackluster earnings. HCA Healthcare—a for-profit hospital system based in Nashville—posted a year-over-year decline in net income of $1.16 billion from $1.45 billion. Same facility admissions for HCA dipped by 1.2% year-over-year for the second quarter. Labor costs, supply chain issues, and workforce disruptions all contributed to an increase in expenses for the quarter. Sacramento-based nonprofit health system Sutter Health reported an increase in total operating expenses for the second quarter of $3.55 billion from $3.41 billion.

Hospitals and health systems across the U.S. have been struggling with rising expenses as the cost of care continues to increase. Community Health Systems wasn't immune to this—particularly when it comes to labor costs. The organization experienced an 8.5% year-over-year increase in its average hourly employee rate. Contract labor has been an expense burden for hospitals that have continued to rely on this type of workforce. Community Health Systems saw a significant year-over-year increase in contract labor of $150 million from $50 million.

"Hospitals are in a challenging position," Erik Swanson, senior vice president of data analytics at Kaufman Hall, recently told HealthLeaders. "Organizations are not expecting that these expenses will go back down anytime soon to pre-pandemic levels, they will remain elevated."

Swanson shared some solutions CFOs could consider to alleviate some of the financial pressures on hospitals and health systems, including optimizing their workforce through data-driven workforce techniques, and the development and reevaluation of float pools. Hospitals can also look at patient demand unit by unit to get a better understanding of where they need the most staffing.

CFOs can also reevaluate their non-labor contracts to get better pricing on products and services they are buying as one key way hospitals and health systems can get a hold of their spending, Swanson says. Examining their supply chain to allow a more efficient flow of these materials across the systems and eliminating redundancies and waste across the organizations can also help contain non-labor expenses.

"We remain focused on our plans to retain our workforce, recruit new clinical employees and reduce contract labor," Hingtgen said on the call. "The number of nursing hires increased by more than 30% compared to the first quarter and our turnover rate declined 20%. These are clearly favorable trends as we work to reduce contract labor and create sufficient permanent staffing for key services and market share gains as healthcare demand strengthens."

Looking ahead, and despite the commentary from analysts, the Community Health Systems leadership team is hopeful they'll see a turnaround in the organization's financial results for the rest of the year.

"We believe the stronger return of deferred care, the execution of our growth and strategic initiatives, our successful expense management, and continued focus on cash flow and capital structure management will allow the company to achieve its medium-term financial goals," Hammons said on the call. "[This] includes targets for 16%-plus EBITDA margin, positive annual free cash flow generation, and reducing our leverage below five times."