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Hospitalogists,

My hospital bear market operating environment thesis continues, and today is a brief interlude to tie in real operating results from Community Health Systems’ Q2 - announced yesterday (they also refuse to modernize their website) - to the bigger picture around deteriorating hospital economics in 2026. Spoiler alert, it ain’t looking great for CHS and there’s no free money Covid era to bail them out this time around.

P.S. - Last call to join me and Dr. Jon Slotkin to talk all things healthcare AI in an interactive fireside chat with fellow Hospitalogists! Tomorrow at 12pm CT. Register here.

Jon is also joining me as a keynote speaker at the Hospitalogy AI Retreat - for senior level hospital folks, apply to attend the retreat here!

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See for Yourself

Community Health Systems: The Bumbling Operator Personifying the Hospital Bear Market

source: Cap IQ and Hospitalogy research

TL;DR: Executive Summary

• This was a terrible quarter → midpoint revenue guidance lowered by $300M, adj. EBITDA by $40M, significant drop in expected (un)profitability - note that the % change in the below table is comparing Q1 guidance to the new Q2 dropped guide:

source: Cap IQ and Hospitalogy research

• Volume is just OK, but patient / service mix weakened drastically. HALF of adjusted admissions growth (+2.9%) came from uninsured patients - a 110bps increase in uninsured / self-pay visits (now over 6% of visits versus under 5% last year). Weak spot was inpatient surgeries at -3.8% decline (specifically calling out cardiac procedures), same-store surgeries down 0.1%, and management noting softness in elective surgeries.

• The elective surgeries CHS IS picking up on the ASC side are lower acuity and not the desirable, lucrative procedures done within ortho or cardiology.

source: Cap IQ and Hospitalogy research

• CHS got destroyed on reimbursement driven by both worse service mix and worse payor mix - AKA, unexpected increases in uninsured folk walking through their doors. ACA disenrollees didn’t stop coming to the ER just because they stopped paying for insurance. They just stopped paying altogether. Consequently, net revenue per adjusted admit dropped 0.5%.

• Adjusted EBITDA margin contracted to 11.7% from 12.1% a year ago driven by the above volume/reimbursement dynamics and their continued issues with professional fee inflation (up 19% year over year, or 5.6% of revenue → anesthesiology and radiology) which makes sense. If your payor mix is bad, the physicians you contract with are probably dealing with similar issues. Bigger subsidy, sinking ship economics.

• Bright spots include volume strength in clinic visits and orthopedic MRIs, some expense mitigation in supplies and contract labor and positive results with state directed payment programs.

• Regardless, restructuring moves are likely in play ASAP given CHS’ leverage position. Bankruptcy is on the horizon if things don’t improve.

Other Notable Tidbits:

ACA exchange / EPTC / HICS dynamics: In Q&A, management said they initially estimated the net revenue impact from HICS disenrollment at $90 million to $110 million and EBITDA impact at $20 million to $30 million for the full year. They then estimated a $20 million negative EBITDA impact in the second quarter and said the back half should look similar to the second quarter, with annual EBITDA impact now expected at $50 million to $75 million. CHS is also assuming that much of the HICS volume decline is becoming self-pay volume.

• CHS leadership said the increase in uninsured is “primarily coming from the exchange business,” though they do not have complete visibility. They also cited a decline in Medicaid volumes and said they were hearing anecdotally that some demographics were less willing or less able to sign up for Medicaid, which may also be contributing to uninsured/self-pay growth.

• CHS thinks other commercially insured patients are delaying care due to affordability issues. Co-pays and deductibles.

Technology + Transformation: There is no narrative here. None. CHS did not mention AI or technological transformation once on the call. No hope for investors (except short sellers). Sorry guys.

Capital + M&A: Net leverage ticked to 6.7x from 6.6x despite a May tender offer that retired ~$368M of 4.75% notes (~35%) and ~$231M of 10.875% notes (~13%) using ~$600M of divestiture proceeds; next maturity 2029, ~98% fixed rate. Divested four Arkansas hospitals for $110M (nine YTD); acquired majority stakes in Surgical Institute of Alabama and South Anchorage Surgery Center — ambulatory tuck-ins meeting expectations. Capex $152M H1 against a $350-400M full-year guide. Patient AR grew to $2.143B, consuming $159M in H1 on payer pre-payment audit slowdowns management calls timing, not collectability.

Main Takeaway

At least for one hospital operator, who operates in smaller urban markets, we are seeing a bear case scenario play out. But as I type this, Tenet Healthcare is up 13% in after hours trading after seemingly crushing Q2 earnings and raising guidance. You literally cannot have a starker contrast between an operator who bet on the future in ASCs in selective, attractive markets with 22%+ adjusted EBITDA margins versus another who has no visibility into their operations and is dying a slow death.

And I’m probably being unfair to CHS - nobody is really comparable to these two high flying names, but it shows the stark contrast and how local markets make a significant difference in operating performance with their reliance on consumer confidence in sub-$65K income communities for increased demand at their facilities. CHS is stuck between a rock and a hard place while their ERs fill up.

More on Tenet and HCA in the next edition of Hospitalogy. Now it’s time for me to get my son to pee. Until next time, Hospitalogy fam.

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MISCELLANEOUS MADDENINGS

Potty training went surprisingly well - our toddler has now successfully transitioned into Lightning McQueen undies, and his reward is to go to Dig World in Dallas at some point to destroy some dirt piles with some excavators. Hell ya.

Stay safe, stay cool!

Thanks for the read! Let me know what you thought by replying back to this email.

— Blake