At the end of 2014, CHS had 197 hospitals, more than any other investor-owned company at the time, including Nashville-based HCA Healthcare.
"In Nashville, there was the recognition that Wayne aspired to be bigger than and more prominent than HCA," said Paul Keckley, a consultant and managing editor of the Keckley Report. "That was the motivating factor."
Smith said competing with HCA was never the goal behind the acquisitions. Revenue—not number of hospitals—is the true measure of size, and HCA has always been larger in that respect, he said.
Unfortunately for CHS, being bigger wasn't all it was cracked up to be. Many of the former HMA hospitals ran into reimbursement issues, given states' refusals to expand Medicaid, a weak economy and poor market share in some areas. And there was another big problem: CHS was suddenly saddled with an enormous amount of debt.
By 2016, CHS reported an eye-popping $1.7 billion net loss to shareholders on $18.4 billion in revenue. That loss topped out at $2.5 billion in 2017 on $15.4 billion in revenue.
At the time CHS was buying hospitals, there were discussions about health insurers eventually negotiating across state lines, in which case, scale would have been a significant advantage, said Dan Marino, a managing partner with Lumina Health Partners.
"That never happened," Marino said. "So as long as it stayed localized, the strategy he took around that really backfired, and he knew it."
The company has since narrowed its loss to shareholders through an aggressive hospital sell-off program. In 2019, that loss was $675 million on $13.2 billion in net operating revenue, from a $788 million loss on $14.2 billion in revenue in 2018.
CHS showed further improvement with its results from the quarter ended Sept. 30, 2020. The company managed to turn a profit even without having recognized federal coronavirus relief grants as income. Income attributable to shareholders was $112 million in the recently ended quarter, compared with a net loss of $17 million in the 2019 period. Earnings were up 11% year-over-year.
"I think offloading half their portfolio was necessary and has been executed well," Keckley said. "I think you have to give them a lot of credit for that."
CHS reported $200 million in net income to shareholders in the nine months ended Sept. 30, up from a $302 million loss in the 2019 period. That's even as revenue declined 6.3% on a same-store basis.
Kevin Hammons, CHS' chief financial officer, said in an interview that CHS has now completed its divestiture program, through which it netted about $1.5 billion in proceeds, ahead of its $1.3 billion goal. Most of the roughly 90 hospitals sold were low- to mid-single digit margin hospitals, he said.
"Getting rid of those will improve our margins and leave us with a core group operating at much better margins," he said.
Friends of Smith's, like Dr. Mike Schatzlein, a former health system exec and principal of the consultancy Schatzlein Solutions Group, said he has been a good corporate citizen, too, having been involved with organizations like the Nashville Area Chamber of Commerce.
It's also true that Smith's colleagues have looked out for him along the way. His board, which he chairs, has been loyal even in the face of calls for his ouster. He's staying on as executive chairman, but when he exits, he'll cash in on a pension worth almost $50 million as of 2019 under the company's supplemental executive retirement plan, thanks in part to a 2004 deal that let him temporarily accrue two years' worth of benefits for every year of service.
By comparison, former HCA Healthcare CEO R. Milton Johnson's SERP benefits were worth $36 million when he retired in 2018. HCA drew $51.3 billion in revenue last year, compared with CHS' $13.2 billion.
CVS Health CEO Larry Merlo's SERP was worth $40.3 million in 2019. CVS' revenue was $256.8 billion that year.
It's difficult to compare SERP payouts from one executive to another, however, as there are other ways companies can provide retirement pay, said Bill Dixon, a managing director with Pearl Meyer. CEOs can have four or five different retirement vehicles. Further, some companies choose to weight compensation more toward cash or company stock instead of retirement benefits, Dixon said.
"All those components matter in terms of comparisons," he said. "There are choices there around how you mix your compensation."
The focus for new CEO Tim Hingtgen—currently CHS' chief operating officer—will be on day-to-day operations and growth, said Brian Tanquilut, a healthcare equity analyst for Jefferies.
"I think they've right-sized the business to where it needs to be," he said. "It's a matter of execution now for Tim."
To that end, Hingtgen said on the company's third-quarter earnings call last week that CHS has added more than 200 beds in an effort to grow its market share in some areas, such as Birmingham, Ala., Knoxville, Tenn., and Naples, Fla. The investment is akin to buying one or two hospitals over the past couple years, he said.
In an interview, Hingtgen said he's been involved in the company's reboot over the past couple of years. Moving forward, he said the strategy hinges on safety and quality, operational excellence and adapting to the consumerism trend.
CHS'remaining portfolio includes 89 hospitals in 16 states, the top states being Florida and Indiana. And after selling off some of its most rural hospitals, Smith said more than 80% of its remaining hospitals are now in markets with at least 50,000 residents.
"We're in more nonrural markets now than we ever have been," he said.
Now, CHS is working to build up its facilities in the markets it's staying in: Replacing a hospital in Indiana, for example, and making plans to add microhospitals. Smith said the company has spent about $2 billion on capital upgrades in its markets over the past 5 years.
Early on, CHS was defined by aggressive growth, even if it was a lot to digest in a short time period, said Brian Sanderson, national healthcare leader with the consultancy Crowe. Going forward, the company needs to decide on a strategy that will advance it into the future, whether that's rural health, technology or something else, he said.
"CHS just needs to figure out what they want to be on the other side of this," Sanderson said.
Lumina's Marino said his concern with CHS is that the company has been so focused on cutting costs, it hasn't positioned itself for the evolution toward value-based care. CHS' contracts with insurers are still largely fee-for-service, he said. Fee-for-service contracts quickly proved to be a problem for providers when volumes dried up during the COVID-19 pandemic. The crisis highlighted the benefit of being paid to manage patients' health, rather than based on the number of services provided.
The reality of the situation, Smith said, is that CHS only makes money on fee-for-service patients. It loses money on Medicaid and doesn't make money on Medicare.
"Anybody who does not have a significant amount of fee-for-service business will not be in business very long," he said.
Smith said CHS launched an accountable care organization in 2018 that now includes more than 4,000 providers and more than 280,000 Medicare beneficiaries. Still, that accounts for less than one-half of 1% of CHS' earnings, he said. He said that will probably grow in the coming years, but not by much.
After all the ups and downs, the complicated and emotional divestitures, Smith said he thinks CHS is now on the right track.
"We're making great progress," he said. "Our future looks bright."