Has Community Health Systems Finally Bottomed Out?

After selling more than 80 hospitals in three years, leaders of the large for-profit hospital operator are suggesting the worst may be behind them.

Times have been tough for Community Health Systems Chairman and CEO Wayne T. Smith, who is voicing an optimistic message this year as the hospital operator continues to navigate choppy waters.

Smith and fellow CHS senior executives told investors this month that the company expects to complete its massive and long-running divestiture plan by the end of 2019, having already shed 81 hospitals from its portfolio in the three preceding years. The company, based in Franklin, Tennessee, operated 106 hospitals across 18 states as of the end of the first quarter.

While the divestitures give CHS cash to pay down its debt, they are also part of a strategic effort to align CHS operations with the geographic areas where the company sees the greatest growth potential, Smith said.

"This has allowed the company to shift more of our resources to more sustainable markets, ones with better population growth, better economic growth, and lower unemployment, which provides us an opportunity for sustainable growth," Smith said during the first-quarter earnings call this month.

"As we complete additional divestitures, we expect our same-store metrics to further improve," he added. "This will lead to not only additional debt reduction but also better cash flow performance and lower leverage ratios."

Executive Vice President and Chief Financial Officer Thomas J. Aaron echoed that message at the Goldman Sachs Leveraged Finance Conference this month. While CHS was truly a rural hospital company 15 years ago, Aaron said the post-selloff organization is investing strategically in markets where it anticipates growth.

"We'd rather compete in a growing pie than have more market share in a pie that's shrinking," Aaron said.

"We feel like we're well-positioned," he said.

But the positive forecast is a bit of a tough sell, especially when you consider how bad the past five years have been:

• Questionable HMA Acquisition: In 2014, CHS completed its $7.6 billion acquisition of Florida-based hospital operator Health Management Associates, Inc. (HMA), in what is widely viewed in hindsight as a bad move. In addition to a $260 million settlement with the U.S. Department of Justice, a subsidiary of HMA pleaded guilty to criminal fraud last year for alleged misconduct that predated the acquisition by CHS—allegations that Smith knew about before the deal was final. "We were aware of the issues they had," Aaron said this month. "We went ahead and closed on the transaction, confident that we could get the cost synergy, and we felt like they had some great assets."
   
• Major Stock Market Woes: In 2015, the price of CHS shares peaked at nearly $53 apiece, according to New York Stock Exchange data. But by the end of that year, shares had lost more than half of that value. Share prices continued to slide the following year and haven't made a meaningful recovery since. They have been trading below $5 so far this year.
   
• Lackluster Quorum Spin-off: In 2016, CHS spun off 38 hospitals to form Quorum Health Corporation. The spin-off severely underperformed expectations, and investors began asking questions. Quorum formally responded to those investors with a letter that acknowledged several reasons to question the "operational competence" of CHS leaders who backed the spin-off. A related dispute between Quorum and CHS ended in arbitration earlier this year.
   
• Ongoing Hospital Divestitures: In 2017, CHS sold 30 hospitals, followed by another 13 hospitals in 2018, Aaron said. So far this year, CHS has announced the sale of at least seven more: one in Tennessee, two in Florida, and four in South Carolina. A spokesperson for CHS did not respond to HealthLeaders' request for additional information and comment.
   
• Recurring Bankruptcy Questions: Industry analysts have wondered for years whether bankruptcy may be on the horizon for CHS. Those questions were renewed again this month when Ryan Heslop, a portfolio manager for Firefly Value Partners LP, took a short position against the company and said a CHS bankruptcy is likely in the next few years, as Reuters reported. About that same time, Smith invested more than $3 million in CHS stock, according to two Securities and Exchange Commission filings. (Smith, 73, who has been CEO for 22 years, now directly and indirectly controls about 2.8% of the company, as the Nashville Post reported.)
   
• Call for CEO's Ouster: With the release of a report this month titled "Other People's Money," the National Nurses United (NNU) group accused Smith of squandering CHS' assets and called for him to be removed. "The fact that Smith remains at CHS' helm, given a series of fatal calculations that set the company on a downward spiral, is a real wonder," the NNU report states. Shareholders, however, voted overwhelmingly in favor of keeping Smith as a director and significantly increasing his incentive plan compensation, according to SEC filings.
   

Despite the light-at-the-end-of-the-tunnel rhetoric coming from CHS executives, there's still real concern the company could come undone. That's because CHS' problems run deeper than its balance sheets, says Mark Cherry, MFA, a principal analyst at Market Access Insights for Decision Resources Group.

"Given the national trend toward provider consolidation, CHS might not remain intact even if it were financially healthy," Cherry tells HealthLeaders in an email, adding that CHS seems to be unsuited for the industry's ongoing shifts toward value-based payments and outpatient care delivery.

"There are only a few markets, like Scranton, Knoxville, and Northwest Arkansas, where CHS has enough presence to act as a stand-alone health system that can influence physician and patient behaviors," Cherry says.

Related: CHS Reports $118M Loss as Revenues Dip 8.5% in Q1 2019

Related: Quorum Reports $200M Loss for 2018

Related: CHS Stock Sinks to New Low

Related: CHS Subsidiary Pleads Guilty to Criminal Fraud Atop $260M Settlement

The structural problem is rooted in a bad strategic bet a decade ago, Cherry says.

"As markets and regions were coalescing around large integrated delivery networks focused on value-based care, CHS continued to invest in suburban facilities and demand high fee-for-service reimbursement," Cherry says.

"Whereas operating a couple of suburban hospitals within a larger market once gave CHS access to better insured patients and leverage against payers who wanted to offer broad provider networks, the post-ACA landscape does not have as wide a uninsured discrepancy between urban and suburban areas," he adds, "and payers are shifting to high-performance narrow networks, allowing them to cut CHS facilities out entirely if they are unwilling to compromise."

A spokesperson for CHS did not respond to HealthLeaders' requests for an interview.