Franklin, Tenn.-based Community Health Systems continues to sell hospitals as part of its divestiture plan and aims to take in $1 billion from hospital sales in 2024.
In 2023, the for-profit hospital system reported a $957 million in operating gain but $16 million in net income as interest expenses ate into its bottom line. This compares to an $821 million operating gain and $179 million net income in 2022.
This trend continued in the first quarter, according to results published April 24, as CHS reported $231 million in operating income and a net loss of $6 million.
CHS' long-term debt stands at about $11.5 billion, meaning its debt exposure is likely driving its M&A strategy. The challenge ahead is how CHS will react once its debt is readjusted to new rates. The bottom line is it needs to deleverage.
"Some health systems respond to increasing cost of debt and debt service in the rising rates environment," a Cain Brothers executive told Becker's. "Divestitures of hospitals by highly levered health systems has been one of the catalysts for hospital M&A in recent years and given we are in the higher for longer environment such activity is expected to continue in 2024 and beyond."
CHS currently operates 71 hospitals across 15 states, but has offloaded more than 30 hospitals since 2020. Last year, the system sold eight hospitals as well as the sale of a majority interest in another.
In 2016, CHS began refining its portfolio with the spinoff of Brentwood, Tenn.-based Quorum Health, which included 38 hospitals and its hospital management and consulting business. Over the next three years, CHS sold or closed dozens of hospitals.
Selling off hospitals and their associated assets helped reduce CHS' debt load. The health system had $13.88 billion in long-term debt when it announced its divestiture plan at the end of 2017. Since then, its net debt has shrunk, but there is still work to do.
The system has not purchased a hospital in the last eight years, but has added beds to existing facilities.
CHS CFO Kevin Hammons recently told Becker's that CHS is making progress reducing its debt and expects the company to be "back acquiring hospitals" in the near future should opportunities that make sense present themselves.
"We're focused on long-term sustainability and reducing our debt leverage and getting our balance sheet on more solid footing," Mr. Hammons said. "We've made significant progress in recent years, taking our debt down … and extending our maturity to give ourselves more flexibility."
Fitch downgraded credit ratings on CHS' bonds in December and expects the health system to continue divesting hospitals to help reduce debt while focusing on optimizing its operating costs.
That projection has held true. Earlier this month, CHS announced plans to sell Tennova Healthcare-Cleveland (Tenn.) to Hamilton Health Care System in Dalton, Ga., for $160 million.
The system also hopes to sell two North Carolina hospitals to Winston-Salem, N.C.-based Novant Health for $320 million, but the Federal Trade Commission in January sued to halt the move.
Should the sale of the three hospital sales in North Carolina and Tennessee pass the appropriate legal and regulatory hurdles, CHS will be down to 68 hospitals and have collected a combined $480 million from the transactions — almost half of the $1 billion in proceeds it has targeted from hospital sales in 2024.
CEO Tim Hingtgen said in the company's fourth-quarter earnings call that CHS "will remain extremely disciplined in our decision-making as it relates to divestitures, acquisitions and ensuring that our core portfolio is strong and positioned for long-term success."