Community Health Systems tightens 2025 EBITDA outlook to $1.50B–$1.55B with positive free cash flow in focus

Earnings Call Insights: Community Health Systems (CYH) Q3 2025

MANAGEMENT VIEW

* Kevin Hammons, President and Interim CEO, opened the call by thanking the CHS team for their support during the recent senior leadership transition and emphasized continued focus on supporting caregivers, improving patient and physician experience, employee satisfaction, and maintaining positive free cash flow. Hammons highlighted, "Next month, approximately 150 CEOs and CFOs from across the CHS network will gather for a leadership conference where we will discuss our vision for the future of the company and our ongoing commitment to investments in quality, improving both physician and patient experience, improving employee satisfaction, and achieving sustainable positive free cash flow."
* Hammons reported that operating performance for the quarter aligned with updated expectations, with a $28 million gain from a legal settlement enhancing reported results. Same-store net revenue improved 6% year-over-year, driven by payer mix improvement and state-directed payments from New Mexico and Tennessee. "We continue to grow our inpatient volume. However, similar to last quarter, the overall business mix remains more heavily skewed towards medical versus surgical cases."
* The company invested in capacity and service line expansions, acquiring a vascular surgery practice, relocating an OB/GYN practice, and launching new urology, neurosurgery, spine, and robotic surgery programs across several markets. Physician recruitment resulted in 160 more employed clinicians year-over-year as of September 30, 2025.
* CHS reduced leverage to 6.7x, down from 7.4x at year-end 2024, and refinanced $1.743 billion of Senior Secured Notes due 2027 with a new $1.79 billion 2034 note, pushing the next significant maturity to 2029.
* Jason Johnson, Interim CFO, stated, "Adjusted EBITDA for the third quarter was $376 million, compared with $347 million in the prior year period, with a margin of 12.2%, increasing 100 basis points year-over-year. Results included $28 million from the receipt of a settlement of a legal matter recognized as nonpatient revenue."

OUTLOOK

* Johnson shared that full-year 2025 adjusted EBITDA guidance has been tightened to $1.50 billion to $1.55 billion, factoring in the benefit from the legal settlement and operating results through the first nine months. The guidance excludes further divestitures beyond those announced and does not assume contributions from new or pending supplemental payment programs.
* Hammons expressed optimism about the payer mix improvement and forecasted that a mid-single-digit net revenue growth rate per adjusted admission is sustainable, supported by Medicare and commercial rate increases and expected acuity recovery.

FINANCIAL RESULTS

* Same-store net revenue for the quarter increased 6.0% year-over-year, primarily due to a 5.6% increase in net revenue per adjusted admission. Same-store inpatient admissions rose 1.3%, while same-store surgeries fell 2.2%, and ED visits decreased 1.3%.
* Contract labor and supplies expenses were down year-over-year, and supplies as a percentage of net revenue improved to 15.0% (excluding the legal settlement). Medical specialist fees totaled $165 million, up approximately 4% year-over-year on a same-store basis.
* Cash flows from operations for Q3 were $70 million and $277 million year-to-date. When excluding $126 million in cash taxes on divestiture gains, adjusted year-to-date cash flows from operations were $403 million, with adjusted free cash flows slightly negative for the year-to-date. The company expects to achieve positive free cash flow for full-year 2025, especially as fourth-quarter cash flows are typically strongest.

Q&A

* Brian Tanquilut, Jefferies: Asked about the recovery trajectory for outpatient volumes and elective procedures. Hammons responded that macroeconomic headwinds and consumer confidence remain the main challenges but noted payer mix and outpatient elective surgery volumes improved from Q2 to Q3. "Although we were still down on an outpatient elective surgery volume year-over-year, it was improved over second quarter."
* Tanquilut followed up on divestiture plans for 2026. Hammons indicated ongoing discussions, stating, "We are in some more advanced discussions on a couple of deals, which we think could be announced even later this year."
* Albert Rice, UBS: Inquired about capital deployment as free cash flow turns positive. Hammons indicated more optionality: "It gives us some optionality of whether we use incremental free cash flows to further delever the company...or...for some tuck-in deals to spend capital more strategically."
* Rice also asked about headwinds or tailwinds for 2026. Hammons pointed to completed divestitures, anticipated Medicare rate increases, and possible new SVP programs as potential positives.
* Benjamin Hendrix, RBC: Asked about surprises in leadership transition and operational initiatives. Hammons replied that the transition has been smooth, with accelerating momentum in key areas and a focus on quality and free cash flow.
* Andrew Mok, Barclays: Asked about payer mix timing and Medicaid eligibility impacts. Hammons said payer mix improvements started in July and have continued; no significant Medicaid eligibility impact was noted in Indiana.
* Jason Cassorla, Guggenheim: Sought color on Medicare outpatient rules and ambulatory strategy. Hammons expects a net positive impact from Medicare rate changes for 2026 and outlined plans to expand ambulatory access points, including 6 to 8 ASCs next year.
* Stephen Baxter, Wells Fargo: Asked about drivers behind same-store revenue per admission growth. Johnson explained, "About 1/3 of that 5.6% improvement...is a result of the Tennessee and New Mexico state-directed payments...the rest...is payer mix related."
* Joshua Raskin, Nephron: Queried trends in payer denials and mitigation strategies. Hammons described investments in physician adviser programs and AI tools, noting stability in denial rates.

SENTIMENT ANALYSIS

* Analysts focused on volume recovery, outpatient trends, divestiture activity, and capital deployment, with a tone that was generally neutral but probing, particularly regarding volume softness and future headwinds.
* Management maintained a confident and optimistic tone during prepared remarks, emphasizing operational improvements and financial discipline, but adopted a more cautious, measured tone when fielding questions about volume trends and macroeconomic headwinds. Hammons noted, "We are seeing some recovery, and I think that we experienced that where we saw some improvement in payer mix into the third quarter."
* Compared to the previous quarter, there is a shift toward greater management confidence, especially on free cash flow and payer mix, though analysts remain focused on persistent volume challenges.

QUARTER-OVER-QUARTER COMPARISON

* Guidance for full-year adjusted EBITDA was tightened (from $1.45–$1.55 billion previously to $1.50–$1.55 billion now), reflecting improved visibility and the legal settlement gain.
* Strategic focus shifted more explicitly to margin expansion, free cash flow generation, and ambulatory growth access points, supported by targeted investments and physician recruitment.
* Analysts continued to press on volume recovery, elective procedure demand, and the effect of macroeconomic and policy changes, while management's tone has become more positive and forward-looking compared to last quarter's more cautious sentiment amid leadership transition.
* Key metric changes include improved leverage (now 6.7x from 7.4x) and a $28 million legal settlement gain positively affecting results.

RISKS AND CONCERNS

* Management cited persistent macroeconomic headwinds, particularly consumer confidence and economic softness in certain markets, as the main drag on outpatient volumes.
* Ongoing inflationary pressures and potential upward pressure from tariffs on imported products and raw materials were noted, though management believes stabilization efforts are underway.
* Analysts raised concerns about volume recovery, the impact of Medicaid eligibility changes, and the sustainability of payer mix improvements. Management reported stable denial rates and ongoing mitigation investments in revenue cycle management, including AI tools.

FINAL TAKEAWAY

Community Health Systems signaled a step-up in operational discipline and strategic focus, tightening its 2025 adjusted EBITDA guidance while targeting positive free cash flow for the year. Management emphasized ongoing investments in physician recruitment, ambulatory access points, and margin improvements, with leverage reduced and further capital deployment options opening as cash flow improves. Macro headwinds continue to weigh on volumes, but payer mix trends and cost controls provide management with confidence as they look ahead to 2026 and beyond.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/cyh/earnings/transcripts]

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