Community Health Systems, Inc. (CYH) Q4 2007 Earnings Report, Transcript and Summary

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems' Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer of Community Health Systems. Please go ahead.

Good morning, and thank you for joining us for our quarterly conference call. With me on the call today is Larry Cash, our Executive Vice President and Chief Financial Officer. The purpose of this call is to review our financial and operating results for the quarter and the year ended December 31, 2007. We issued a press release and an 8-K, after the market closed yesterday, that included our financial statements. For those of you listening to the live broadcast of this conference on our website, a slide presentation accompanies our prepared remarks. I'd like to begin the call with some comments about the quarter and integration status of the Triad facilities, and then turn the call over to Larry, who will follow with a more detailed account of financial results. But before I begin, I'd like to read the following statement. Statements contained in this conference call regarding expected operating results, acquisition, transactions and other events are forward-looking statements that involve risk and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of Private Securities Litigation Reform Act of 1995 and made based on management's current expectations or beliefs as well as assumptions made by, and information currently available to, management. These are summarized under the caption Risk Factors in the documents filed by Community Health Systems, Inc., with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Our reported results represent the first quarter of combined operations with Triad. The year-to-date consolidated results include Triad's performance from the acquisition date July 25, 2007. The prior year 2006 consolidated results reflect legacy, CHS only. Our same-store results included the Triad operation for the fourth quarter and for both years and year-to-date for the same-store results include Triad operations from August 1, 2007. Adjustments represent an integral part and a necessary part of any acquisition. We did complete our review of Triad's accounting processes including their reserve policies as well as their discount policy, as we discussed last quarter. Accounting differences were in the areas of charity programs, Medicaid pending, self-paid discounts, collection rate assumptions, and the handling of indigent programs. This review resulted in a charge... a change in the estimate of the Company's net receivable value of accounts receivable of $166 million increasing the allowance for doubtful accounts by $70 million and an increase in contractual allowances, primarily related to pending charity and Medicaid accounts. Larry will provide a detailed explanation of this in a minute, but for the balance of call our discussion will exclude the 2007 adjustments. Net operating revenues for the fourth quarter ended December 31, 2007 totaled $2.6 billion or 138% compared to $1.1 billion in the same period last year. Adjusted EBITDA for the fourth quarter of 2007 was $354.4 million compared to $162.8 million for the same period last year. Income from continuing operations, excluding the adjustment was $0.37 compared to $0.58 for the fourth quarter last year. Again, excluding the adjustment, net operating revenues for the year ended December 31, 2007 totaled $7.2 billion compared to $4.2 billion for 2006. EBITDA for the year ended December 31, 2007 was $993 million. Income from continuing operations for the year ended December 31, 2007 was $165 million, or $1.75 per share, adding back the effect of the early extinguishment of debt EPS would have been $1.93 compared to a $1.85 for 2006. With that I would like to review some key operating accomplishments for the year. First, the Company recruited 769 new physicians for the year compared to 594 recruited for the same period a year ago. Of the 769 new recruits, approximately 20% were recruited through the Triad facilities, since July 25, 2007. Our 2008, physician recruitment target will be 900 new physicians. We have performed the same detailed analysis on the Triad facilities as we routinely do on the legacy CHS facilities to determine additional physician requirements, both, primary care and specialty. Our recruitment target has moved up because of this analysis. We continue to believe that our standardized centralized approach to physician recruiting identifies in more timely manner physician's needs in the community and in turn increases utilization and agent generating volume. Our historical turnover has been about 6%. This year we have averaged a net increase of almost four physicians for legacy CHS hospitals. In addition, to the hospitals added to the Triad acquisition, we acquired two hospitals this year with combined trailing revenues of about $290 million and trailing margin in the low single-digits. Ruston, Louisiana and Valparaiso, Indiana, as previously reported, we've signed a definitive agreement to purchase two hospital system in Spokane, Washington with revenues of approximately $290 million and a single-digit margin. We would expect this transaction to close some time in the third quarter. We've been working diligently to selectively optimize our portfolio. In 2007 we sold three hospitals, announced two definitive agreements, one for the sale of a hospital in Lebanon, Virginia and another for the sale of nine hospitals to Capella. We did finalize the sale of the Russell County Medical Center in Lebanon, Virginia on February 1st. We also sold our operating interest in assets associated with Beacon Hospital in Dublin, Ireland effective February 21st. We anticipate the Capella transaction to close in the current quarter. These hospitals and one additional unnamed hospital as well, as a facility in Ireland, are all classified in discontinued operations. Again, we intend to fully focus on the Triad integration in the operation of all of our hospitals for the next 18 months. The Company has closed three hospital syndications with physicians since the acquisition of Triad, bringing our total to 19. We've also added additional physician investors to two of our existing syndications. The Company is updating it's previously issued guidance for 2008 as follows: revenue $11 billion to $11.3 billion; EBITDA $1.57 billion to $1.6 billion with EPS for income from continuing operations, the same from 2.25 to 2.45. We've eliminated 12 hospitals from our 2008 guidance. So those hospitals included in continuing operations for the end of the third quarter are now classified as discontinued operation. The following information is pertinent. Trailing revenue for these discontinued hospitals was approximately $550 million with a 6% margin. Revenues projected to grow by 8% with 200- to 300 basis point margin expansion, and annual admission adjusted admission will range from 0.5% to 1.5%. Please note that the Company's guidance does not include or does not take into account any resolution of the previously disclosed allegation, while the Civil Division of the U.S. Department of Justice and three of our New Mexico hospitals have caused the State of New Mexico to submit improper claims for Federal Funds in violation of the Civil False Claims Act. In a letter dated, January 22, 2008, the Civil Division notified us that based on its investigation, it has calculated that these three hospitals received ineligible federal participation payments of approximately 27.5 million from August 2000 to June 2006. The Civil Division advised us that were to the proceed to trial it would seek trouble damages plus an appropriate penalty for each of these violations of the False Claims Act. We continue our discussions with the Civil Division in an effort to resolve this matter, but the Company continues to believe that we have not violated the Federal False Claim Act in any manner described in Government's letter of January 2008. I want to give you an update on our synergies related to Triad acquisition. Through the end of December we have captured approximately 30% of our anticipating annual synergies are over $25 million. Our 2008 guidance includes synergies in the amount of a 145 million adjusted for the expected divestitures from all the facility. These synergies include supplier's productivity overhead, managed care home health, case management, marketing and IT. Other than sale of hospitals currently held for sale, no additional divestitures have been assumed in the guidance. So, at this point I'd like to turn the call over to Larry to provide you a summary of our quarterly and yearend financial results.

Thank you, Wayne. Before I get into our specific financial results, I'd like to comment on the change in estimate and confirmatory adjustment recorded in the fourth quarter of 2007. Our analysis included a review of all historical cash collections. I'm please note that cash receipt [indiscernible] cannot be done on Triad facilities until after the transaction is finalized. These analysis result in our updating assumptions and approach used by Triad as well as updating our own estimates. We used revised approach for subsequent receipt testing compared to methods used by Triad and CHS. This review resulted in changing the estimates of the Company's net realizable value of accounts receivable by $166 million, increase in the allowance for doubtful account to 70 million, primarily from the lower collection rates and actual timing of collections as it relates to asset and receivables. Historically, Triad's estimated collection rate was higher than CHS. We also increased contractual analysis, primarily related the pending Charity Medicaid accounts and undocumented [ph] [indiscernible] for non-residents. Historically, these accounts were initially classified as self pay with an estimated allowance for doubtful accounts until verified as appropriate charity and Medicaid. This adjustment was $96 million in reduced revenues. In the past we've had to adjust reserve balances on all of our non-profit acquisitions, generally through the balance sheet based on collection rates. Also we've had to estimate the run rate effect of a change in methodology. The estimated 2008 run rate of this adjustment is based on reviewing the change in receivable balances in 2007 and is estimated to be $20 million reduction in 2008 EBITDA with an increase in bad debt and a decrease in revenue. And as a reminder, our methodology reserves a percentage of all self-pay accounts receivable, without regard to aging category. [Technical Difficulty] we will monitor historical collection patterns, accounts receivable, write-offs, cash collection for synergy of current net revenue less bad debt, current period net revenue and admissions, payer classification, ARDAs, and the impact to recent acquisitions and divestitures. We currently reserve 75% of all self-pay accounts for our other payer that kind of reserves 100% of all accounts aged over 365 days. The adjusted reduced EBITDA by $166 million and income from operations by $105.4 million, or $1.12 per share for the quarter and the year just ended. Since the financial statements in December 31, 2007 released last time reflect the $166 million made in the fourth quarter. Our discussion from this point for the quarter and yearend December 31, 2007 would be for... given affect of this 2007 adjustment, unless otherwise indicated. Our consolidated admissions were 163,000 in the fourth quarter and just admissions were 293,000 for same period. Our same-store admissions decreased 0.9%, versus a tough comparison, 3%, for the same period in 2006. And I note that our CHS Legacy hospital [Technical Difficulty] by company average. When they're adjusted for lack of respiratory related illness, service closures, a statistical reclassification and some new hospital competition at two locations, admissions would have increased 1%. Monday is generally one of the busiest days for admissions, and this year Christmas fell on Tuesday. So, admissions were constrained for both Monday before Christmas as well as the Christmas day and the last day of the year. But hospitals on operate [ph], in both periods which again the CHS hospitals, we had about a 5.6% decline in admissions for the week between Christmas and New Years. Same-store admissions would have increased 1.2% without this Christmas effect and the other adjustments. Same-store self-pay admissions decreased approximately 8% year-over-year and declined 50 basis points as a percent of total admissions to about 6.1%. Consolidated revenue, as reported, increased 129%. Excluding the adjustment, consolidated net revenues for the quarter increased a 138%, compared to the same period last year or $2.624 billion versus 1.105 billion. On a same-store basis net revenue increased 5.6% with outpatient revenue up strong 10.8% and inpatient revenue up 2.3%. We did see a 1.4% increase in total surgeries this quarter. Same-store net revenue per drug submission for the fourth quarter of 2007 versus the fourth quarter 2006 increased 4.9%. Same-store CHS legacy Medicare case mix increased slightly for the quarter and the Triad case mix declined slightly about 0.9%. And a couple of comments on revenue, as I mentioned before admissions declined by almost 6% during the last seven days of the year between Christmas and New Years, this weakness contributed to an approximate decrease in the fourth quarter of 2007, revenue were about $10 million or 40 basis points. Excluding the adjustment, consolidated EBITDA was $354 million versus $163 million for last year or an increase of 118%. On a same-store basis EBITDA was $350 million versus $259 million, an increase of 9%. EBITDA margin for the fourth quarter, on a consolidated basis, was 13.5% which compares favorably to the 12.9% reported for the third quarter. Same-store EBITDA margin was 13.9% compared to 13.5% for the quarter ended December 31, 2006, an increase of 40 basis points. For the fourth quarter our non same-store margin was 3.5%. We opened the Cedar Park Regional Medical Center in Austin, Texas the middle of December, earlier than anticipated. Its operations and pre-opening costs reduced our non same-store margin about 370 basis points or about $3.6 million on EBITDA line. On a same-store basis operating expenses for the fourth quarter as a percentage of net revenue decreased 40 basis points from the prior year, primarily due to an improvement of supply line offset by an increase in the payroll benefits. This increase in payroll benefits are due primarily to the growth in physician salaries, as well as some favorable benefit adjustments in the fourth quarter of 2006. We did see, however, 170 basis points improvement in man hours per adjusted admission, so we had good productivity. Malpractice expense also increased about 50 basis points due to a positive malpractice adjustment Triad recorded in the fourth quarter 2006. We incurred approximately $5 million in non-recurring transaction related operating expenses in the fourth quarter or roughly $0.03 per share for areas such as legal, audit, tax consulting, and a little bit of staffing and printing area, and travel. For the year just ended, admissions were up 50.4% and adjusted admissions were up 48.6%. Same-store admissions were down 1.1%, again, when you adjust for the lack of respiratory related illness and service closures, the statistical reclassification and the new hospital competition, admissions went up about one-tenth of a percent, about two-tenth, if adjusted for the Christmas effect. Our same-store admission rate for 2007 would have been slightly up, expect for declines in self-pay admissions. Same-store adjusted admissions increased point four tenth of a percent. Our guidance for same-store admissions/adjusted admissions growth for 2008 will range from 0.5% to 1.5%. Net revenues for calendar 2007 increased 72.8% to $7.2 billion, compared with the same period last year. On a same-store basis net revenue increased 5.7% for the year. Same-store inpatient revenues up 2.7% and outpatient revenue was up a strong 9.6%. On a same-store basis, net revenue per adjusted admission increased 5.3% and same-store surgery volume was down point two tenth of a percent. Excluding the adjustment, consolidated EBITDA increased 76%, $993 million versus $564 million. Same-store EBITDA increased 11% for the year compared to 2006, $944 million versus $850 million. Consolidated EBITDA margin for the year ended December 31, 2007 was 13.8% versus 13.5% in the same period a year ago. Same-store EBITDA margin was 14.2 versus 13.5, the non same-store margin was 8.9%, or about $550 million revenue. Trailing margins for the acquired hospitals was approximately 5%. Again excluding the 2007 adjustment consolidated operating expenses as a percentage of net revenues, for the year improved 30 basis points from the prior year. Same-store offering expenses improved 70 basis points of increase in payroll and benefits offset by decreases in bad debt and supplies. For the fourth quarter, consolidated bad debt prior to the 2007 adjusted decreased 10 basis points, 11.1 versus 11.2%, charity increased 10 basis points, administrative discounts decreased 10 basis points. Our combined consolidated bad debt charity administrated discounts, as a percentage of adjusted revenue are down 130 basis points for the quarter versus last year. Triad has historically had lower combined bad debt charity and discounts of CHS, and as a point we did update slide 17 this morning with some additional information concerning this item. For the year, consolidated bad debt, excluding adjustment, was 11.5%, an increase of 90 basis points. Our combined consolidated bet debt charity administrated discounts as a percentage revenue are down 120 basis points, 17.5% versus 18.7%. Our 2008 bad debt guidance would be 11.2% to 11.7%. The guidance has been adjusted for implementation of upfront self-pay discount for legacy CHS to be implemented in early 2008. The discounts should approximately about 50 basis points of revenue. For the year ended, we have seen our same-store self-pay admissions are up approximately 7%, this represents a 40 basis points as a percent of total to about 6.7%. After the adjustment, consolidated cash receipts were 104% on net revenue less bad debts last 12 months ended December 31, 2007. But would have been about 102%, have we not made the 2007 adjustment. Including the 2007 adjustment, consolidated AR days were 54 at December 31, 2007 compared to 62 for legacy CHS at December 31, 2006. Excluding the adjustment, total AR days would have been 58 at December 31, 2007. The allowance for doubtful accounts is $1.33 billion or 40% of total net patient accounts receivable at 12-31-2007. Our consolidated basis, as a percentage of self-pay receivables, the combined total of allowance for doubtful accounts, as reported in the financial statements and related self-pay allowances for contractual adjustments was approximately 76% at December 31, 2007 compared to 65% at December 31, 2006. We continue to believe that Community Health System has a favorable payer mix for the quarter ended December 31, 2007. Net revenue by payer source consolidated basis was as follows: Medicare, 27.9%; Medicaid, 9.1%; Managed Care and other, 53.6%; and self-pay, 9.4% of net revenue. For the year, the breakdown was as follows: Medicare, 28.6%; Medicaid, 10.1%; Managed Care and other, 50.5%; and self-pay, 10.8%. Our cash flow from operations for the quarter was a strong $283 million versus $82 million in the same quarter a year ago. Cash flow from operations, for the year, was $688 million compared to $350 million for same period in 2006, an increase of 338 million. This increase is due to the increase in the cash flow from changes in accounts receivable, about 221 million, increases in cash flow from accrued liabilities and income taxes of 74 million and increase in non-cash expenses of $232 million, of which a $144 million relates to depreciation. These increases were offset by decreases in cash flow from supplies, prepaid expenses, and other current assets of $46 million and decreases in cash flows from other assets and liabilities of $5 million, and a decrease in net income of $138 million. Our 2008 guidance for net cash provided by operating activities is $750 million to $800 million. Capital expenditures for the quarter just ended were $244 million, or about 9.3% of revenue. For 2007, we spent $523 million, or 7.2% of net revenue. We spent approximately $179 million during 2007 on replacement facilities, representing about 2.5% of revenue or about one-third of our total capital expenditures. Our 2008 guidance for capital expenditures ranges from $775 million to $800 million, a $25 million reduction at the high-end from our previous guidance. This range includes approximately $140 million for replacement facilities or about 1.3% of net revenue. Please note that some large projects that were open earlier, will be completed earlier than anticipated, Cedar Park opened in the late fourth quarter 2007, when we'd anticipated in mid-first quarter of 2008 and Clarksville, Tennessee will open in second quarter 2008, again earlier than anticipated, as well as Petersburg, Virginia early in the third quarter 2008. This earlier open causes, both, depreciation as well as interest to increase compared to previous guidance. Balance sheet cash at 12-31-2007 is $132.9 million, and during the quarter we had a variable credit of approximately $1 billion. Looking at the balance sheet as of 12-31-2007, we had a $1.105 billion in working capital and $13.5 billion total assets, total outstanding debt at December 31, 2007 was $9.1 billion, the fixed rated of debt at 12-31 was about 75% of total outstanding debt, our debt to capitalization at yearend was 84%, and projected debt EBITDA is in the six range. We did payout for approximately $85 million in bank debt during the fourth quarter, additionally we reduced the delayed draw by approximately $100 million due to our investor activity, as well as our comfort level of cash flow. At the end of the year, we are quite about [ph] $3.875 billion in interest rates, very much an increase of $725 million. In the September as of February this week, approximately 83% of our debt was fixed. These agreements limit the fact of changes interest rates and a portion of the long-term borrowings. And rates range from 2.4% to 5.24%, for an average of 4.7%, and for average maturity of 4.4 years. We have provided the information in one of our slides, 22, I believe, to enable sequential quarterly comparison of continuing operations. The fourth quarter versus the third quarter pro forma, which includes Triad for the first 24 days of July and excludes the divestitures that were announced after the third quarter, revenue was up 2%, EBITDA was up 3.2%, margin is up 20 basis points and EPS was up 19.4%, $0.37 versus $0.31. And again the $0.37 excludes the $5 million of non-recurring operating expenses. For the hospitals included in continuing operations at the end [ph] of the quarter and are now classified as discontinued, I'll just repeat what Wayne said, trailing revenue was approximately $550 million for margin of about 6%. Revenue was projected to grow about 8% and EBITDA margin about 200- to 300 basis points. And also [indiscernible] produced [indiscernible] other changes. We reduced the revenue, same-store revenue and bad debts by estimating self-pay discounts as a result of a self-pay discount implementation that will take place in early 2008 at CHS Legacy Hospitals. Same-store revenue growth was 4.5% to 5.5% and bad debt expense was 11.2% to 11.7%, both being reduced by 50 basis points. The fourth quarter 2008 includes a full market basket increase on October 1, 2008 which will help the fourth quarter of 2008. The Spokane acquisition has been delayed from the first quarter to the third quarter, representing approximately $125 million revenue and about $12 million EBITDA and some reduction in fixed expenses, but it was an accretive... expected to be an accretive transaction. We've increased depreciation and amortization for the time of the capital expenditures related to earlier than expected opening of Cedar Park, and the order of completion of Clarksville, Tennessee which is a $200 million project and Petersburg, Virginia, about $145 million project. Interest expense has decreased as a result of the LIBOR decline, effected the variable rate portion of our debt. The net proceeds for divestitures has also reduced our interest at the current LIBOR rate which should be lower than what it was anticipated back in the fourth quarter, when they were announced. There has also been a increase for the timing of capital expenditures, as discussed above. Other than the sale of hospitals, currently we have for sale no additional divestitures than assumed in the guidance. We are still waiting to find a purchase price allocation from prior acquisition. We got a preliminary in the fourth quarter. We expect this final allocation in the second quarter of 2008. And Wayne will now provide a brief recap.

Thanks Larry. Our fourth quarter performance kept out of a year of significant growth and progress for Community Health Systems. The completion of the Triad acquisition represented an important milestone and we continue to focus on the integration of those facilities in our portfolio. We know we've provided you a substantial amount of information. So, if you'd like to talk to us after the call you can reach us at area code 615-465-7000. With that we are now ready for questions. Question And Answer

Thank you. [Operator Instructions] Your first question is from the line of Justin Lake with UBS.

Thanks, good morning. Larry, Wayne maybe we can just start off by talking about the bad debt charge, because there is there a lot of interest but specifically would like to understand... and that, I think the charge that you took back in 2006. I think it was around $65 million, and the run rate hit was about 15, I am little curious as to how was the charge that's more than twice that size only has a run rate hit of $20 million, maybe you can explain that to us?

Yes, if you look at what's happening to our receivables back in 2006, we were seeing pretty substantial growth in self-pay admissions. I think we actually had high single-digits, and also pretty rapid growth in self-pay revenues. As a percentage revenue, this quarter I think we are down about 9.4% for the quarter and then year-to-date it is probably down to about 10.8%, both, over 100 basis points drop from the preceding year. So, we have a different assumption of growth and self-pay receivables going forward than we had then. And then the... I think we'd estimated about $15 million and actually probably came out a little less than that based on the first couple of quarters before the prior transaction. We also went from reserving somewhere in the mid 50% of receivables to 60%, in mid-50, so it's about a 10% change. Here if you look where we were at the end of the third quarter, and of course, we didn't own Triad at the beginning of the year, we had about 70% or high 60% to 70% of the self-pay receivables reserved for... here we are going to 76%. So, the change, although larger, it's on a much bigger company and a percent change of the reserve is only about 5% or 6% versus the year ago was more like 10%. And we also had assumption that the self-pay receivables product could grow in 2000. So, it's adjusted more like 20% and of course today we are thinking in more in the 8% to 10% range.

Got it. That makes sense. And then, if we were to try to think about... and now that you've had Triad on your books for five months and have your hands around those assets, maybe a little better, can you give us an idea of if we were to trying to think about the run rate of EBITDA for 2007, coming out of the year on an annualized basis, where do you think... where would you put 2007 EBITDA for the combined companies, coming out of the year, knowing what you know now?

Well from the... I think in the fourth quarter the margin, before it is adjusted will be somewhere in the 13.5% margin. You have noticed that, we've up the guidance for 2000, I mean some of which is the result of getting rid of the divestitures in which I think that's got, a low end assumption about 14.2%. Clearly the Triad acquisitions, that we acquire, has got a lesser margin, they got down below 12% in the first six months, we've been making some progress on that with still a lot of progress that we can make as it relates to the margin. And just as a point when we talk about margins, we sort of think of Triad, some really good margin facilities, in Indiana, I think which is a very, very high 20s, and relative stable and everybody else outside Indiana is probably about in the low double-digits, so there is a lot of opportunity left in the facilities, for six Indiana facilities I believe so the rest of the facilities, 44, 45 facilities probably have a much better opportunity. So, I think there is a lot of opportunity, there is a 145 million synergies. For the most part it's scaled up [ph] productivity and continue overhead improvement to be there all year. The supplies and the other stuffs that we outlined there of something [ph], feel pretty good about the future as it relates to continued improved margins.

Yes, Larry, just continue this just have a second, I think we have... our assumptions really don't go into this transaction in terms of viability to identify issues and problems, and solve those problems. I think we are right on track. And I think we have founded even other things that we think will be very helpful to us. So, I think the 145 is a good solid number and, we are still very encouraged about the opportunities here.

That's, great. Maybe I could just ask it a different way then, because that was helpful... I am just trying... really what I am trying to understand is, when you look at the '07 EBITDA run rate and you add on the 145 million of synergies. I am just trying to really back into what do you think you have to grow the existing assets ex the synergies, what kind of EBITDA growth rate?

Generally in the mid single-digits of which we've done better than that in some years and I think that's what we have got build into it, is in the mid single-digits growth, excluding the synergies that we've accomplished, and I think that's... the math can be done if you take the current fourth quarter and drive a little bit forward and

Got it. So, that would imply basically that your revenue... you grow with revenue and your margins stay relatively flat ex the synergies?

Well, mid single-digits...

That's kind of the way to think about it.

... half will be little higher than that, there could be some margin improvement off the back's [ph] business.

Justin, I think we are comfortable with our guidance for 2008 in terms we kept the EPS growth about exactly the same. So, obviously we are pretty comfortable in terms of what we are and how we projected it out for the year.

Perfect. Thank you very much guys.

Your next question is from the line of Darren Lehrich with Deutsche Bank.

Thanks. Good morning everyone. I just want to make sure I am clear with regard to reconciling this EBITDA guidance with your prior. It looks like the divestitures are, would have contributed I guess about 40 million and then Spokane would be about 10 million or 15 million. So, it's really the 20 million difference, is the change in your discount policy is that how we should think about this, Larry?

Well. I think, if you got 550 million and we prove that up from 6% to 8% or 9%, you'd be more like $45 million... closer to $50 million EBITDA for those... I think you said, 40. And then you also that you have got a $5 million reduction, divestures and probably somewhere in the neighborhood of 10% for the 150... for the 125 million on Spokane, so other than, I think that we would have expected those lower margin hospitals go little faster, but once we'd own them in 2008.

Okay, and then just back to the charge. I did want to clarify a few things. I am just wondering if you could give us a sense for how much came from the Triad side in terms of that $166 million. And Larry, if you can just briefly review what policies have changed on a go forward basis, what you have adopted from Triad, what you have changed on your side given this charge?

Yes, the $70 million is exclusively Triad and...

It was bad debt.

Bad debt side of it, the $96 million from the combination of both, there was the charity Medicaid pending undocumented aliens, slight amount of managed care adjustments. What Triad had assumed was about 14% self-pay collection rate, our belief now it's that 10%, we will use that going forward, CHS has been at a 9% to 10% range. Self-pay after insurance, of Triad assumption was about 70%. We think today it's... we are in the around 60 and CHS this assumption is about 50%. Triad had also had some accounting for indigent funding and Medicare bad debts that look like it was possibly assumed twice, both, from the bad debts and contractual side. Going to the change in contractual allowances, both companies are going to reserve 100% of charity once they apply for charity, what historically CHS has done had estimated a bad debt on charity accounts so they become qualify for it. Medicaid pending accounts were growing and we had estimated Medicaid pending accounts as bad debts and that was going to carve out to once of those who think they're qualified for Medicaid for the charity, excuse me, a contractual adjustment on that. At day one, similar to the undocumented aliens, which is a program the Government pays, usually help them identify aliens, we are going to put a contractual on that day one based on history of getting that done. Those are the primary changes there and then we will continue to look at the collection patterns and receivable write-offs and all that. A good indicators of cash collections percentage of credit net revenue probably were 102% [Technical Difficulty] per year, without this adjustment; I think, CHS was like 102.6 and Triad was 101, so... but brought down the average to 102.

And are you running consistent reserving policies now across all your hospitals? Is that the case?

The reserving policies in the hospitals vary little bit, because of there is more self-pay business and we use a little more straight forward method there. The method I am describing, it's what we do on a consolidated basis. These are fairly complex calculations and we think it's a little better to do it on a consolidated basis and use a less complicated calculation on each individual hospital.

Okay, and then just a last thing for me here. The timing on the remaining asset sales, I think you said Capella first quarter, so that's coming up quickly. What are the net proceeds we should expect, in aggregate, during the first quarter? And then do you have a target net debt level for the end of 2008, so at year-end?

The answer to the last question is, no. But answer to the first one; Larry?

Yes of that percent. We were $315 million expected gross proceeds which is probably around 270 or 75 net proceeds out of Capella. Russell County was about $47 million or $48 million including working capital and probably the net there is about $30 million. So, it's somewhere around $300 million net proceeds for those two transactions, the others we sold. I think I mentioned earlier we paid $85 million in debt off at the end of the year and that took some of the proceeds from the sale in Arkansas and the sale in Ohio. The unnamed one, there is not assumptions yet, and then I think we just announced this morning that we... it's double than our [ph] which can generate a lot of cash for that transaction this time. But and what we would do is pay that, we are going to look at what the best use of that debt is and probably reduce that in some fashion. We do have the Spokane coming forward which outlay of cash is only about $165 million for the third quarter. So we are in pretty good shape, that's how you got... reduced to the late draw, because the cost is somewhat inherent.

Okay, and if I can just ask, Wayne, just one quick question about joint ventures. You are doing a lot still on that front, what's your view, I mean, the federation has been really pushing hard on physician ownership of hospitals as a key lobby and you are part of the federation, so given the amount of activity you have just curious to know how you as a company feel about that issue?

Yes, I think globally all of those things that if you could eliminate all physician ownership, both hospital and outpatient facilities, it would be a good thing for the industry, but having said that there are number of markets Triad had already started a number of syndications. We have... historically had a number of syndications. So, we are continuing to work on syndications, our views are a little different than Triad's. Their's are a much larger than ours, we use a smaller percentage of our facilities in terms of what we will syndicate. It is not a major strategy of ours, it is a continuing strategy of ours until something changes in the law. And it does give us in some instances it's competitively. It's helpful to us, but we can certainly live without it in terms of our strategic view of the markets, if in fact the law changes. We are clearly in favor of legislation that will change that.

Okay, thanks very much.

Thank you.

Your next question is from the line of Tom Gallucci with Merrill Lynch.

Good morning. Thank you. Just a few questions here. First, you mentioned the Washington sale, or I am sorry purchase delayed a bit, can you just give us little more color on what the issue is there and how the operations are trending if you are going to down-size protection in that deal?

Yes... the problem in Spokane really has to do is regulatory problem around the CON, and the fact that not us but the seller has taken longer to go through the CON process, it's really just gotten started. It will be another couple of months or so before all that happens. And as you might expect when you announce a transaction, there will be deterioration in the operations. We are keeping in mind, I don't know if purchase price is out yet or not.

It is.

It is, so we are buying almost $300 million of revenue for about $160 million, so we have a very favorable purchase price, but it's never ever till it's over. So you don't know what might be the final number, when it's all said and done, and we will just try to judge that along the way.

Okay, and then Larry I am not sure, if you said it, I may have missed it, Q4 bad debt trends look pretty good, what were some of the key drivers there?

Yes, if you look at the bad debts for the quarter, what happens was... I think I mentioned the consolidated net revenue decrease some say the third quarter from 10.9% to 9.4%, about 150 basis points decrease in absolute dollars, $9 million or $10 million. There was a change inside the company, both CHS and Triad as well as hospitals in Tennessee, they implemented in self-pay discount program in the third quarter and that grew into the fourth quarter, which sort of has a way of lowering bad debts, because you're discounting up-front. The other thing was the hospitals being sold with the 6% margin are/and discontinued have a much higher bad debt percent, closer to 13% on the Company average that we got in those in discontinued have a little bit after third... fourth quarter continuing operations number.

Okay, and then maybe one last one. I think on volumes in one of the numbers that you had mentioned, your weak flu season, weak respiratory, I think, cases you have talked about in the past. Can you give us any inside on how first quarter looks at this point, it seems like particularly flu has really spiked.

I think you go to the CDC and look at the widespread flu you'll see that flu this year is around the country, it's wide spread in just about every state now.

So presumably a lot better trends in the first quarter at this point for you all as well?

As you know flu is not a big driver, when it's all said and done, it's repertory business. So I always tell people don't get too excited about flu one way or the other, because it comes and goes and it's never during the same period at each year. So, you really can't build flu into anything that makes any sense long term.

Right, can I... just to clarify that I guess are you speaking more towards earnings or volumes or both?

All the above.

Okay, thank you.

Your next question is from the line of Christine Arnold with Morgan Stanley.

Good morning, could you give us a sense for how pricing looks, kind of entering 2008 and your progress with Triad in terms of consolidating the negotiations with Managed Care costs?

Yes, I think Managed Care is still 5% to 7%. We've met with our managed care staff which is larger today and they are pretty optimistic, they're incentivized to get good growth in that revenue and they had a good year in '07, and they expect to hit their objectives in 2008, as centralized standardized function we'll use here. So, I think we feel pretty good about that. I think on the area of Medicare. I think overall that was about 2% and we are still pretty close, we are still analyzing SDRGs. It's a fairly substantial systems change, the best we can tell it's closer to 2%, we thought early on and Medicaid is probably 0% to 1%. But the most important would be Managed Care and I think we feel like we are doing pretty good, we still got 65% of hospitals are sole providers and a pretty good talented team to work on that.

The one thing Christine, one thing that's happened as you recall, in terms of how we are organized geographically and how Triad is organized geographically. We've consolidated all those hospitals in one state and are negotiating collectively wherever we can. Like Texas and Alabama and other states, so all that's going well. So we haven't seen any dramatic change on the downside. We have had some favorable opportunities here, but the range is still the same.

And there is a little bit of movement, Medicare being sold, the Medicare fee for service. And the rights that we're getting on any PPO deals, we're doing it pretty consistent with what we got from Medicare.

Okay, and then, what... do you have a discount policy that is standard, do you apply X discount starting in January, or does it vary by hospital and by ?

It's going to vary by hospital, probably for the most part, be implemented in the first quarter for CHS, like the hospitals. We already had the Tennessee hospitals and we had a requirement in California to do it, so the rest of the hospitals are putting a discount and it's not a large discount in the 15% to 10% range, the self-pay activity. Triad had a similar type of approach where there are some carve-outs for deductibles for outpatient and stuff, but it's pretty much an approach across the Company, with someone taking a discount they want to use.

And my final question is could you update on Presbyterian in Denton?

It's a situation that's in litigation.

It's a dispute.

Oh, okay. So you are disputing it going away, presumably?

There's a methodology of calculating the purchase price and we think one thing about the calculation is someone else brings something else.

But it's probably not going to be your hospital at some point in time?

But you don't know any of that yet. It's a dispute.

Okay, thank you.

Your next question is from the line of Gary Lieberman with Stanford Group.

Thanks, good morning.

I wanted to ask a question on the equity interest line, looks like you saw fairly substantial decrease sequentially from about 14 million in the third quarter to about 10.8 million in the fourth quarter. And was hoping you could discuss maybe what, what was the driver there. Did something get pulled out of the, of the fourth quarter that wasn't in there in the third quarter and what the outlook should be going forward?

The same facilities were in there and the results of the public company joint ventures for public company is done about as well but there is one that's a not for profit joint venture, one of the hospitals that did not have a very good quarter, extremely bad quarter. And we own 50% of that, that's what cost, the... I won't talk too much about our other companies. But it... the people... the one in Las Vegas, the one in Georgia had fairly consistent activity the one in... the other one in Arkansas did not.

Okay, and then I wanted to just ask you about the synergies, and in terms of timing for getting the synergies in '08 that you guys have quantified, it should have be equally weighted throughout the quarters, back half weighted how should we think about it is where [Multiple Speakers]

Back weighted a little bit. We've made some progress on it, but to supply to build and we are building that up and then probably sort of Managed Care will be a little back weighted and some of the efforts in case management. Marketing is pretty well done, but it's a smaller number, excellent productivity will occur but it'll be a little back weighted. So it would be more in the second half of the year than the first half of the year.

And I guess if you could just update us on any departures, more at the hospital level, on some of the Triad hospitals is that leveled out or, from where it had been or any changes there?

We haven't had other than what we had at the first and this will be the thousands time that I repeated this. Other than what we had in the first six weeks in terms of departures we haven't lost anybody we haven't had any medical staff meltdowns. We just had our Chief of Staff meeting, 130 physicians here, a very positive not any negative comments whatsoever. Everything seems to be going extremely well culturally, operationally, organizationally, all that seems to be working, knock on wood extremely well and is clearly attributable to the great experienced people we have in this organization to bring this off. So, we have not... and you know our theory from the very beginning, if people disagreed with our operating philosophy. Let's don't get mad at each other. Let's just go different way and that's exactly what has happened here and so I think everybody is on board.

Wellbased on that it sounds like the integration with the physician is going well and you haven't had any I guess volume issues or with the physicians potentially admitting into competing hospitals?

I don't know of any places that we have lost physicians. I don't know of any places where we've had a conflict with a group of physicians. I don't think there are any of those kinds of things that are going on as far as I know. I think most of this has been very positive and probably one of the things that has helped us the most and people have realized throughout the organization, both, at the administrative level and the medical staff is the value of all the resources that we have and our standardized centralized approach to our business practice and policies. They have welcomed that. It's really helped them a lot. It's helped them to not have to reinvent the wheel. So this has been a very positive thing during the transition, and culturally it's been fully accepted, there has been no issues there at all.

And just on a trend perspective Gary. I think that third quarter inpatient volume is down about 3% got down to point nine tenth percent. So, we made some progress year-over-year and again we've had pretty tough comps compared to 2006 for both companies.

Great, thanks a lot.

Your next question is from the line of Mathew Borsch with Goldman Sachs.

Hi, thanks, this is Shelley Gnall in for Mathew Borsch today. Question on the asset sales, It appears that you are having the recent asset sales are having pretty modest impact on de-leveraging. Can you talk about maybe some other benefits from these assets sales, it sounds like it's an opportunity maybe to divest some of those at higher self-pay exposure, as far as offsetting that reduced EBITDA contribution?

One of the things that we did when we start looking for asset sales, we look at markets and whether or not we think the markets are going to fit for us going forward in terms of growth. And some of these markets will do extremely well. We have some overhead that we use our standardized centralized approach to business practices cost to do that; they'll do better in those markets without us. So, these work for us and I think they also work for the communities. And they work well for Capella because demand for sure. And then the other ones are individuals that have gone through systems where they get more synergies out of that particular system in a local area. And you can talk about the...

Yes, I think, for instance, the margins are generally in the mid single-digits and while we think we can improve it, it does allow us to have more time to work on the others and improve it on that and we will take the proceeds here. But it took good use. The bad debts will be an issue to probably to payroll lines part of little bit on the higher line and it just gives you a better chance to work throughout the Company. Some of the ones who've been here were about several years ago the OCHS went back in a big merger that they did back in 1994 and we saw that came as a package, and we try to improve it some we have, and some we haven't...

As Larry said, a couple of times that, now the interest rate is down. The sales are not as accretive as they have... they would have been early on. So in terms of our future we continue to look and we will continue to do this in terms of rationalizing our portfolio and look for things at our facilities that don't quite fit. But having said that I don't think you'll find us doing any major transactions, we'll continue to look at the number of them by the ones, particularly for the facilities that are in areas where system, might wont pay us, really well for that facility, we would think about that, but other than that we're really not in the process of selling a lot more facilities.

Okay, thanks, and then just one quick follow-up. Are you seeing any impact? I know you had strong physician recruiting during the quarter. I think about 200 physicians were brought on, but were these assets sale, did these asset sales have any impact on your ability to recruit physicians?

No, no.

Almost never.

Okay, great. Thanks so much.

We have time for one more question from the line of Rob Hawkins with Stifel Nicolaus.

Thank you for taking my questions. I've got just a couple of little ones. First one, I know you said the new discount policies changing the, I guess the revenue rate by about 50 basis points. What does... from a percentage of charges basis, what does the discount policy represent, are you given the half off or...

It's in around the 20% range.

So, there is 20% discount?

Yes, that's the general idea.

Do you see, I mean, in your average, I guess, revenues that you get from your average commercial or institutional payers is about one-third of the charge?

It varies at somewhere, given somewhere between a 30% discount to maybe some of the other ones may get up half 3% [ph] discount.

Okay.

Yes, that's all in Medicare, Medicaid commercial; it's about 70% revenue. It's got Medicaid real high and Medicare.

Okay. And then the next one, kind of deals, I guess was supplies in surgery, there was a little bit of a pick up in the supplies expense line and then we are hearing from Zimmer that in the fourth quarter there was just kind of a strong pick up across the country in knees and hips surgeries and your OP revenues were jumping. Can you kind of talk, tie all that together and see what's kind of going there?

Well, our supplies were up on... but not on a same-store basis. I think we improved supplies on a same-store basis. Keep in mind that Triad had about 17% supplies percentage revenue and we had about 12, so we got three months in this quarter and two months in last quarter. But we've done a pretty good job in improving the supplies year-over-year, as far as improvement. I think our opportunity still exist to do a real good job on supplies going forward and there is various categories, in area of drugs, it's built in the synergies and also probably a little lower costs, it's down some, rebates are up. The implant costs were up, maybe five basis points, not substantially but they are up just a little bit.

And then were you seeing, in terms of revenues, I mean, it looks like your outpatient revenues jumped substantially during the quarter and I mean is that in relation to, are you getting kind of, a better quality mix at surgeries? I mean how it ties up...

A little bit better quality mix in surgery, you are also, it's good growth in diagnostic, which has been a good contributor for us. And I think the surgery growth was real strong, both, for outpatient as well as inpatient which helped the growth activity. And it's fair, it's up more in the fourth quarter then it is the first three quarters. But I think even for the year were up about over 9%. So, I think we had good year in outpatient growth. And that's probably one thing that maybe is not quite as understood, it's 50% of our revenue now and it's growing at a pretty good pace, offsetting some of the weaker volumes in inpatient.

Sure, but are you seeing anything in hip and knees or stents? Those are kind of two big areas that have been lower recently, and are they getting back...

I don't think that in one quarter the trend has changed substantially in any of those.

Okay, all right. Thank you. That's all my questions.

Okay.

Ladies and gentlemen, we have reached the end of the allotted time for questions-and-answers. Mr. Smith do you have any closing remarks.

Yes, thank you. Thanks again for joining us on the call this morning. We believe that our ability to deliver quality healthcare services continues to differentiate Community Health Systems, in both non-urban and mid-sized markets. As we look ahead to 2008, we continue to pursue our ongoing strategy of recruiting qualified physicians adding these healthcare services and investing in our existing facilities. We are excited about our prospects for growth and remain focused on delivering value both our shareholders and communities we serve. We also want to specifically thank our management team and staff. Our hospital Chief Executives, our Chief Financial Officers, our Chief Nursing Officers, and our Group Operators for their continuing support and operating efficiencies. Once again, if you have any questions you can reach us at area code 615-465-7000.