Community Health Systems, Inc. (CYH) Q2 2008 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 Second 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]. 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 welcome to the Community Health Systems quarterly conference call. With me on the call today is Larry Cash, our Executive Vice President and Chief Financial Officer. The purpose of the call is to review our financial and operating results for the second quarter and year-to-date ended June 30, 2008. We issued an 8-K including a press release after the market closed yesterday with our financial statements. For those of you listening to the live broadcast of this conference call, on our website, a slide presentation accompanies our prepared remarks. I'd like to begin the call with some comments about the quarter and update on our integration progress and then turn the call over to Larry who will follow with comments on our financial results. But before I begin, I'd like to read the following statement. Statements contained in the conference call regarding expected operating results, acquisition transactions and other events are forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to Safe Harbor provisions of Private Securities Litigation Reform Act of 1985 and are 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 document followed by Community Health Systems, Inc. with the Securities and Exchange Commission including the company's annual reports 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 cause actual results to differ from those contained in the forward-looking statements. We're pleased that Community Health System has delivered another solid quarter of financial... solid financial and operating performance for the second quarter 2008. Our results continue to reflect our consistent execution as well as our integration of our large 2007 acquisition. In our reported results, the prior year's second quarter 2007, year-to-date 2007 consolidated results reflect legacy CHS only. Our same-store results included the July 2007 acquisition as well as legacy CHS for the second quarter of 2008 and 2007 as well as year-to-date 2008 and 2007. Net operating revenues for the quarter ended June 30, 2008 totaled $2.7 billion compared to $1.2 billion for the same period last year. Adjusted EBITDA was $369 million versus $169 million for the same period a year ago. Income from continuing operations was $50 million versus $54 million for the second quarter last year. Earnings per share from continued operations was $0.52 per share versus $0.57 per share for the same period. In the second quarter, we had a $9 million reduction in pre-tax profit or $0.06 EPS, which was primarily related to the reduction in reimbursement and non-payment under the State of Indiana Medicaid program. Larry will provide additional details about that item in a minute. Net operating revenues for the six months ended June 30, 2008 was $5.4 billion, EBITDA was $752 million and income from continuing operations for the six months ended June 30, 2008 was $101 million or $1.06 compared to $1.17 for the same period a year ago. With that, I would like to review some key accomplishments for the quarter. First, our same-store admissions were a strong 2.3% for the second quarter and year-to-date same-store admissions are up 3.1%. Same-store adjusted admissions also increased 2.4% for the quarter and same-store net revenue increased 4.9%. We continue to move forward with the acquisition of Empire Health, a two-hospital system with 511 beds and almost $300 million in net revenue in Spokane in Washington. The targeted closing for this acquisition is sometime in the fourth quarter. Again, our focus for the next six months will be to improve our current hospital portfolio. Additionally, we did purchase the remaining 35% interest in Trinity Medical Center in Birmingham, Alabama from the Baptist Health System on June 30th for approximately $51 million and forgiveness of a note. As you know, physician recruiting has always been a key component of our operating strategy. Adding new physicians to our market improves not only the quality but also the scope of healthcare services provided in our communities. The company recruited 475 new physicians for the six months compared to 295 physicians recruited for the same period a year ago. Our physician turnover is approximately 5% and we have increased our target for 2008 to 1000 physicians. We have achieved approximately $42 million in synergies in the second quarter, $77 million on a year-to-date basis, over 50% of our targeted synergies for the... are about 145 [ph] for 2008. We continue to be on track with our expectations. We are updating our 2008 guidance to reflect the strong volume experienced in the first quarter and the second quarter's same-store annual admissions adjusted... admissions growth will range from 1.5% to 2.5%, revenue $10.9 billion to $11.1 billion and EBITDA $1.550 billion to $1.570 billion with EPS for income from continuing operations to $2.20 to $2.35 as a result of the Indiana Medicaid reduction. At this point, I would like to turn the call over to Larry to provide you a summary of our financial results.

Thank you, Wayne. Good volume and continued expense control has contributed to our good operating results for second quarter. The State of Indiana provided a formal notification in June 2008 that no Medicaid payments for the Hospital Care for the Indigent, a program called HCI will be made for its state fiscal year ended June 30, 2008. The program had been in existence for over ten years with all CHS Indiana hospitals expected to receive payments. CMS did not state with the [ph] program for fiscal year June 30, 2008 and beyond. Therefore, we did not receive an expected payment of $4.2 million in the second quarter ended June 30, 2008. In the second quarter, the State communicated one of its CHS Indiana hospitals will not receive all the expected disproportionate share payments under [ph] DSH edge for the state fiscal year ended June 30, 2008. The DSH underpayment was a surprise because the state DSH payment, determination was significantly different from the prior year's payment determinations and from previous communications from the state. The reduction in DSH was directly attributable to an increase in DSH funds paid to the larger municipal hospitals, thereby reducing the overall DSH funds available to those hospitals classified as non-historical DSH hospitals. Those hospitals classified as historical DSH hospitals maintained their historical DSH funding. Efforts to contest the reduction receive additional payments continued throughout the second quarter of 2008; it is communicated by the state early July that additional payments will not been received unless additional Medicaid days for 1997 were identified, which we didn't qualify to CHS hospital as a historical DSH hospital. As a result, we received $4 million less than expected in DSH payments for fiscal June 30, 2008. I would now like to move on to the quarter and efforts. Our consolidated admissions growth in the second quarter was up 101.3% compared to the same period last year. Adjusted admissions, which factors in outpatient business had a 93% growth rate over the second quarter of last year. Our same-store admissions increased a strong 2.3% compared to the second quarter of 2007 Adjusted for the Easter movement from the first quarter to the second quarter... from the second quarter to first quarter this year as well as severance closures, same-store admissions would have increased 2.2%. Same-store self-pay admissions as a percent of total admissions were flat for the quarter of 6.4%. Same-store adjusted admissions increased 2.4% for the quarter. Net revenues in the quarter increased to 125% from $1.197 billion after eliminating approximately $50 million of revenue for divested hospitals since June 30, 2007 and they increased to $2.7 billion in the second quarter of 2008. On a same-store basis, net revenue increased 4.9% for the quarter with both inpatient and outpatient net revenue increasing 5.3%. Several points can be made with regard to revenue growth in the second quarter. Same-store net revenue per adjusted admission increased 2.4% year-over-year and an increase of 2.3% on a sequential basis. Same-store surgery volume decreased to 0.2% or 20 basis points for the second quarter, a slight improvement over first quarter. Our main central [ph] admissions have increased in the same period a year ago where our average length of stay has decreased two tenths of a day, indicating less acute business. Our consolidated... our Medicare case mix decreased 1%. As with the first quarter, our same-store revenue growth continues to be affected of the implementation of the discount policy in the legacy Tennessee hospitals that was regulated beginning the third quarter of 2007. It affected revenue and revenue per adjusted admission by approximately 40 basis points. The impact of discounts implemented in our other legacy CHS hospitals in the first quarter is approximately 90 basis points on both revenue and revenue per adjusted admission for the quarter. Considering only the discount policy, same-store revenue would have increased 6.2% and our same-store revenue per adjusted admission would have increased 3.7%. The growth in self-pay discounts was higher than previously estimated by about 30 basis points and has been factored into the revised annual revenue guidance and bad debt guidance. Consolidated EBITDA was $369 million in the second quarter versus $169 million for same period a year ago. On a same-store basis, EBITDA increased a strong 10.7% or $35.5 million from $330 million to $366 million for the quarter. For the second quarter, EBITDA margin on a consolidated basis was 13.7%, down 60 basis points from a year ago. Same-store EBITDA margin increased 80 basis points to 13.8% compared to the quarter ended June 30, 2007. For the second quarter, our non-same store margin was 7.9%. In the second quarter, consolidated operating expenses as a percentage of net revenues increased 40 basis points. Consolidated payroll benefits increased 60 basis points and supplies increased 230 basis points to 14%. Bad debts decreased 100 basis points to 10.8% and other operating expenses including rent decreased 110 basis points. On a sequential basis, we saw improvements in bad debt and supplies. On a same-store basis, total operating expenses improved 80 basis points, driven by an improvement in supplies and our other operating expenses including rent, offset that increase in payroll and benefits. The payroll benefit increases driven primarily by a movement from other operating expenses to salaries and benefits of the IT personnel previously employed by PRO are now employed by CHS as well as higher payroll and benefits from our physician plennage [ph] growth. Bad debt improved in the second quarter and our operating costs per adjusted admission on a same-store basis increased only 1.6% for the quarter, demonstrating our strong expense control. On a year-to-date basis, consolidated admissions were 342,000 and consolidated adjusted admissions were 609,000. Same-store admissions as well as same-store adjusted admissions increased 3.1%. Adjusted for severance closures and flu-related admissions, an extra day in February, same-store admissions would increase to 2% for the first six months. As Wayne mentioned, we're increasing our guidance to reflect the volume trend in the first quarter. Admissions and adjusted admissions growth for same-store range from 1.5% to 2.5%. Net revenues year-to-date were $5.4 billion, an increase of 130% for the same period in 2007. On a consolidated basis, net revenue per adjusted admission increased 16.6%. On a same-store basis, net revenue increased 5.3% for the first six months. Same-store inpatient revenue increased 6.3% and outpatient revenue increased 5%. Total same-store in services [ph] are down 0.5%. On a same-store basis, net revenue per adjusted admission increased 20% and our Medicare case mix for the six months ended June 30, 2008 decreased 1.3%. And again, additional discounts reduced our same-store revenue growth and revenue per adjusted admission by 120 basis points. Consolidated EBITDA was $752 million for the six months ended June 30, 2008. On a same-store basis, EBITDA increased 11%. Consolidated EBITDA margin for the six months ended June 30, 2008 was 13.9% versus the same-store... the same-store margin ended June 30, 2008 was 14.1%, an increase of 80 basis points compared to the same period in 2007. For the six months, consolidated operating expense as a percentage of net revenues increased 50 basis points from the prior year, due in part of low margins of our acquisitions. Salaries and benefits increased 20 basis points, attributable to the higher payroll and benefits cost for physicians growth. Suppliers increased 240 basis points. Both bad debt and other operating expenses combined improved 170 basis points. Same-store operating expenses improved a strong 80 basis points from 2007. Our operating cost per adjusted admission increased only 1.3% for the six months ended June 30, 2008 and our man hours per adjusted admission improved a strong 2% year-to-date. Triad has historically had lower combined bad debt and share with CHS but higher discounts. Consolidated self-pay revenue as a percent of total revenue declined 200 basis points, due somewhat to an implementation of discount policies. Consolidated bad debt is 10.8% for the second quarter versus 11.8% for the prior year ago. Of course, bad debts was less due to an increased discounts and charity decreased 100 basis points. Administrative discounts increased 100 basis points. Our combined consolidated bad debt, charity, administrative discounts as a percentage of adjusted revenue are down 140 basis points from the quarter of 17.2% versus 18.6%. Looking at revenue minus bad debt, it was up 5.2% for the quarter while operating expenses minus bad debt was up 4.3% for the quarter. On a year-to-date basis, revenue minus bad debt was up 5.3% and operating expenses minus bad debt was up 4.3%. As we have consistently said, the real costs for treating non-insured is represented by an incremental cost of care. Our same-store operating costs for adjusted admission increased only 1.6% for the second quarter and only 1.3% on a year-to-date basis. Our 2008 guidance for bad debt now ranges from 10.9% to 11.4% of net revenue. Consolidated cash receipts were over 103% on flexible [ph] net revenues for the last 12 months ended June 30, 2008. Total AR days for continuing operations were 54 at June 30, 2008, unchanged from December 31, 2007. Same-store AR days were also 54 in the quarter. The allowance for doubtful accounts is $1.53 billion or 39.6% at June 30, 2008. For the hospital segment, the allowance for doubtful accounts and related contractual allowances for self-pay was approximately 80% of the self-pay receivables at June 30, 2008. Community Health Systems continues to have a favorable payor mix. For the quarter ended June 30, 2008, consolidated net revenue by payor source was broken down as follows: Medicare 27.5%; Medicaid 8.7%; managed care and other 52.8% and self-pay 11% of net revenue. On a year-to-date basis, the payor mix is Medicare at 28%; Medicaid 8.5%; managed care and other 52.7%; and self-pay 10.8%. Payor mix is an important driver of the hospital revenue margin. Our consolidated revenue for adjusted admission for the quarter was $8991 while the same period for 2007 was $7740, demonstrating an increase from the Triad statistics. Cash flow from operations was $408 million for the quarter versus $96 million for the second quarter of 2007. On a year-to-date basis, cash flow from operations was $417 million versus $216 million for 2007. The increase in cash flow from the prior years and as a result of net inflow from accounts payable, accrued liabilities and income taxes of about $34 million and supplies and prepaid expenses and other assets of $27 million. We had an increase in non-cash depreciation expense of $143 million, an increase in other non-cash expense of $34 million. Total capital expenditures for the quarter just ended were $138 million or 5.1% of revenue. Approximately $53 million was for replacement facilities. Year-to-date, total capital expenditures are $276 million or 5.1% and $103 million has been spent for replacement hospitals. Our capital expenditure guidance remains $775 million to $800 million with $140 million related to replacement hospitals. The balance sheet cash at June 30, 2008 was $264 million. At the end of the quarter, the company had available credit from a revolver of $700 million and $300 million in the delayed draw through January 2009. Looking at the balance sheet, as of June 30, 2008, we had $1.2 billion in working capital. We had approximately $13.4 billion in total assets. Total outstanding debt at June 30, 2008 was $8.9 billion, of which 84% is fixed. Our debt to capitalization was... at quarter end was 83%. At the end of the quarter, we were party to $4.450 billion in interest rate swap agreements, unchanged from the end of the first quarter, and again, our fixed rate debt is 84%. We recognized about $10.5 million in equity, earnings of unconsolidated subsidiaries in the second quarter, down from $12.9 million in the first quarter. Some of the decrease is due to seasonality and also an $800,000 change in estimate of bad debt allowance related to one unconsolidated affiliate, resulting in reduced earnings. As Wayne mentioned, we did provide updated 2008 guidance and our bad debt range has been reduced to 10.9% from 11.4%. Recently, we've opened three replacement hospitals totaling approximately $380 million that will cause interest and deprecation expense to increase in the third and fourth quarter. The annual and quarterly guidance includes an adjustment of between about $0.08 and $0.09 for the reduction in Indiana Medicaid to date and throughout 2008. Wayne will now provide a brief recap.

Thanks Larry. We're pleased with the solid second quarter operating results for Community Health Systems. Our margin improvement trend through the first half of 2008 validates the strength of our operating model and the success of our integration of Triad. We expect our growth to continue as we improve hospital operations, add enhanced services and recruit physicians. With that, I'll now open the call for questions. If you would like to talk to us after this call, you can reach us at area code 615-465-7000. Question And Answer

Thank you. [Operator Instructions]. Your first question is from the line of Darren Lehrich with Deutsche Bank.

Thanks, good morning everyone. A couple of things here. I wanted to start off with the pricing topic, and I guess making the adjustments for the discounts here, your revenue per adjusted admission would be closer to about 3.5%, which still lags the pricing that we've seen thus far. Can you just talk a little bit more about what you're seeing relative to surgery, whether you're having any issues with specialty, physician retention? And maybe, if you could just comment a little bit on Medicare Advantage mix and how that's impacting your pricing as well? Just want to get a little bit more visibility into your pricing going forward?

Let me just comment on surgery and surgery is relatively flat from the first quarter and there is nothing systemic there. We're not having any issues anywhere. We've had a little more competition in a couple of places, but I don't think that's the major issue. When you do the math on this, this is very few surgeries down per facility. So it's enough that it could be vacations and other kinds of things. None of that is too problematic for us. But as we talked about early on when we did this acquisition, we knew there were opportunities in surgery for surgery growth. So that's another reason that we increased our numbers of physicians for physician recruiting because we have found that there is a lot of opportunity for us kind of going forward in terms of surgery opportunities.

Yes Darren, one thing that's happened is we've had pretty good growth with ER admissions, which generally are a little bit less acuity business. So while we have got very good admissions growth, it is a little bit less acuity, our patient days are down slightly. And I think our length of stay was down about 5%, two-tenths of a day. The other is our Medicare case mix has decreased about 1%. There is no one particular area that's affecting that. It was pretty much throughout our divisions. We are doing a little bit more internal work, efforts in trying to look for opportunities with MSDRGs and hopefully, we'll find some opportunities to improve that. We are taking a little bit of a reduction for that as anticipated. I think that when you consider the discounts you are given, we are back up to 3.7% with the case mix drop in Medicare and probably a similar case mix in the other business that has resulted in growth in ER and our admissions. That put us back in the... closer to 5%, which will be our historical range. The managed care business is still strong, it's a 5% to 7% increase, probably not getting much of an increase in Medicaid and the Medicare increase was about 2%. The other thing I would add, having flat self-pay admissions is a good thing from a bad debt perspective, but from a growth and revenue perspective, that slows down your net revenue per adjusted admission because it's your highest portion of the component of your net revenue and still not down while it helps you on your operating expenses and your bad debts if that slowed down your net revenue per adjusted admission.

One other thing Darren, and just a follow up on Larry's comment about one of the things, we thought we had a good opportunity with the Triad facility as well as improving ER admissions in our measuring, admissions were up over 3% or so, when you do that you are clearly going to have less acuity, and that's adversely affecting our case mix to some extent.

Okay. And then just when you look at the major employers in some of your key markets, can you just talk about what you are seeing relative to their hiring and any mass layoffs anything like that, can you just share with us your thoughts on just the major employers in your key markets those are probably the important?

I don't know of any major layoffs in any of our markets. I think any time you think about the automobile industry, you certainly think about Michigan, Indiana and some of those places. But so far, we don't seem to have had any... we went through a period a time when we had a number of layoffs around the textile industry in South Carolina. But so far, we don't know of any really major issues along those lines. And it would have to be a pretty substantial layoff in a market to really adversely affect that market, which should not overall adversely affect the entire company anyway. So it would have to be a pretty big layoff to adversely affect us.

We do track our county specific unemployment rates. And in May '08 versus May '07, it's up about 70 basis points. Nationally, as we read it, it's up about 90 basis points. Still, we're about 5.2%. So it's a pretty low unemployment versus historically; actually it's lower than what it was in May of '04 and flat what it was in '05 and slightly up in '06 and '07. So it's not up as much as nationally. And as Wayne said, there's no big employer that's actually just a couple of quarters back or last year, we had a lot of textile business move. But that's about three or four quarters ago.

That's helpful. And then Larry, I guess just last thing here, a question about the cash balance. Are you holding cash to fund CapEx in the Empire deal? I guess, just want to get your response on what will be a normal cash balance going forward? And just speaking of CapEx, looks like you've got to spend about $500 million in the second half to hit the guidance. Can you just share with us your thoughts about any potential for slippage on how that CapEx gets spent or do you think that number just comes down and probably stays lower going into '09?

Well, two things in relation to CapEx. You are right, we've only spent $276 million. We thought some about what our guidance is at 775 to 800. We get a lot of projects and renovations started underway. We'll spend some money on... a lot of money on radiology, diagnostic equipment and some other equipment. We are tying to take advantage of the bonus depreciation, which sun sets we get to deduct half in depreciation in the first year of this year is the stimulus try to buy equipment. So we didn't want to lower because we were still trying to take advantage as much as that is possible. We will look again at the end of the third quarter to see where we'll be. But right now, I think we've done a real good job in the first year. This six months, we've only spent 5% of revenue and probably about 40% of that is on replacement hospitals, which we'll finish up a couple here. So CapEx it's a perspective, we've got to watch what we're going to spend there. What was your first question there too?

But just the normal cash balances. Curious that your cash was so high.

Yes, the cash is high. We have generated a lot of cash flow. Had really strong cash flow, did a pretty good job of managing our receivables and brining the balances down a little bit, have done a good job on our income taxes. We have got the Spokane acquisition coming up in the fourth quarter, which will eat up about half of that. We also have a semiannual interest payment on our bonds, about $130 million or so that we had to pay mid July. So that would reduce some of that cash. But we are operating in cash. We've got... we'll get back to the normal range of $20 million to $50 million in 2009. The one thing we're focused on also is the late draws [ph] are very good financial terms and think about how we can best use that and make sure we use it effectively if we need to.

Okay, thanks very much.

Thanks Darren.

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

Thanks, good morning. Could you give us a little bit of update in terms of where you are on the synergy front? It looks like you are at least a little bit nicely ahead of your full year guidance for the synergies. And thinking back, it sounded like you had initially thought that it would be a little bit more back-end weighted. It looks like it's maybe a little bit more front-end weighted. So is that just a timing thing or have you found additional opportunities on the synergy front?

Yes, the $145 million, I think we originally had said back at the... end of the first quarter that we'd probably back-end weighted. We ended up reducing the corporate overhead a lot faster, almost all areas, got eliminated pretty much in the middle of first quarter, a little faster than we thought. So we were able to get I think $35 million or so in the first quarter and then that benefited having that here this quarter which got us to $77 million year-to-date a day which was a little about 53% and $145 million. We will anniversary some of the savings in the third and fourth quarter. We will anniversary some of those savings in the corporate overhead so it won't be quite as much a opportunity in the third and fourth quarter. So we're still accounting to $145 million I think you've heard us say there's other areas that we don't have it near, like Wayne talks about the position recruitment in the emergency room management which is revenue driven. We've got some other opportunities in some other areas of management. But we're pretty comfortable we can hit the 145. On a cumulative basis, that would be $170 million and based on what we have got on line today, I think we are in pretty good terms.

Okay. And then just on the salary and benefit front, looks like you've had pretty good expense control on that line item. Can you talk a little bit about how the economy either helps you or hurts you with regards to hiring and staffing?

Yes, I know there is a lot of theories out there historically that when the economy gets bad, more nurses go back to work, and there is more availability. I don't think we have seen any of that yet if in fact that does happen. If the unemployment rate changes 0.5% or so, that's a relatively small change across the country when you spread it out across the country so, I don't think we have seen any changes in terms of availability or lack of availability for employees over the last six months or so. I just don't think there is a change much at all, we seem to be doing fine in terms of recruiting and retention, all of the above.

And Gary, a lot of times people will sort of forget, still 65% of our hospitals are sole providers. So there is not a lot of competition in our markets, which helps us manage for the salaries pretty nicely for those 65% of the hospitals. And generally, people aren't going to... in a day's time going to leave the community to go work somewhere else if they got a good job and cleaning out a little of them [ph].

Okay, thanks a lot.

Your next question is from the line of Ralph Giacobbe with Credit Suisse.

Great, thank you. Just in terms of the guidance, revenue and EBITDA look like it maybe came down a little bit more than just the Indiana Medicaid. But EPS was sort of more in line with that Medicaid impact. So was hoping maybe you could just talk about the lower numbers and the offsets to EPS.

Yes, the revenue would be... of course, the discounts probably about a third. I think we lowered the minimum of guidance to $100 million and the high in $200 million. Two things, one was the discounts was about a third of that, the actual discounts we gave. The Medicaid would be about... that adjustment would be about $10 million to $15 million. We also probably, as a result of the case mix being a lower in the second quarter, that we brought down the same-store revenue guidance from 4.5 to 5.5, 4.5 to 5 just because of the case mix. Well we are working and trying to improve that and we are doing a lot of for it. We thought it was appropriate to reflect that adjustment. The EBITDA if you look at the tail end of the minimum guidance was $1.570 billion. The carry forward was about $13 million or $14 million under the Indiana adjustment for both the [ph] 12 months ended June 30th we booked in the second quarter and the rest of the year. So that get it somewhere in $1.557 billion or $1.556 and we just round it down to $1.550 billion, which is simply rounding in our part the use of a round number for the guidance. The only thing that I would comment, we didn't have a strong first quarter and then when you look at some of the estimates out there, it's sort of carried that $12.9 million forward for rest of the year and clearly, this quarter was 10.5, looks from under writing, it's more like $11 million to $11.5 million.

Okay. And then just sort of shifting, looking at Medicaid, any other state sort of presenting any challenges or any discrepancies versus what you or where your expectations are? And then maybe, I think you mentioned your expectations are for sort of aggregate flat pricing in the Medicaid bucket.

That would be correct. I think that... it's been publicly known, there is a small reduction out in California. We have only got three hospitals and only one our size to be affected. And there is a small reduction in Florida, in which we got two hospitals. There is a dialogue in other states, but nothing the size or consequence of aware of that's been implemented as it relates to Indiana. Indiana was just a reimbursement change that took place in the quarter that affected a program that has been around for ten years since we confirmed with a state contractor. In the second quarter, we get paid and we didn't get paid. And of course, the DSH, which we are still contesting, we got less money that we thought we were entitled to and what's built in our guidance as to what we get only what we are... the rest of the year what we received in the period ended June 30, 2008.

Historically, of course, one of the things that we think we have done and have accomplished is for our risk across the country in terms of Medicaid changes like this and we've been able to get over those by having increases in one state and decrease in other state and work our way through this. This was as such, this was a large number one and secondly the timing on it was such that we didn't have any choice. But historically, we've been able to figure out a way to spread that risk across the country and deal with. So this is just a little unusual in terms of way this all happened

Okay. And just my last one. I know in the past you've said that there's been no sort of physician recruiting, retention issues. And I guess I just wanted to confirm one, that still remains the case at this point. Obviously, you have the stats in the presentation. It doesn't appear to be an issue, but I guess just more from the point of view of any push back from docs, maybe your spending habits are a little more constrained on a relative basis to where Triad was.

I don't think so. We have had national PLG meetings, we've have National Chief Staff meetings. I have not had one physician say to me, I haven't been able to get this piece of equipment or we haven't been able to do this or whatever it might be in any of the facilities. I don't think we have any issues along those lines. I don't think we've lost any major groups that I am aware of. Now we are working on and we've talked about this a couple of times. We're working on some of the position arrangements that were in place and the trial facilities that were unfavorable arrangements and we're working our way through those. But having said that, we've not lost any or had any big issues as related to our operating skills or our operations or as to our spending habits, or a lack thereof. That's just not been an issue at all. As a matter of fact, I think we think that we are getting improvement in terms of physician satisfaction across the country.

Okay, great. Thank you.

Your next question is from the line of Jason Gurda with Leerink. Jason, your line is open. There is no response from that line. Your next question is from the line of Matthew Borsch with Goldman Sachs.

Hi thanks, this is Shelley Gnall on for Matt Borsch. Just wondering if we could talk a little bit more about the Indiana issue. Just wondering on what grounds they halted the payment, or issued payments for both of the programs, the DSH as well as the Hospital Care for the Indigent. Is this a state budgetary issue? I guess I'm wondering how much on advance notice you had that there would be changes from Indiana? I'm trying to get a sense whether there is a state... to many state specific issue here? Or there could be a broader issue around state budgetary concerns related to the economy?

The first program had been in existence for 10 years, and what we expected to receive was about what had been received in preceding years for the six or seven hospitals we got in Indiana. I think we get formal notice in June of 2008 that that payment won't be made. CMS had denied a state waiver for the program and we are not made aware of that until we heard in June of 2008, which meant it was partly being discussed with CMS. So they did not make the payment. It was implied that they would transfer some of that payment over to other programs, but in our case, what we end up getting under the second program, the DSH payment, we got about $4 million less than we thought we would receive for both '08 and preceding years. And we confirmed throughout the year what we expect to get for this program. Now what they did was reallocate some funds to larger municipal hospitals which brought down a reduction available to other hospitals. We consider this a pretty important DSH hospital, because they are taking care of a lot of Medicaid business. But in contesting it, they went back to a analysis of what days were performed over ten years ago in year 1997 and said the hospital was below what it should have been and to keep this historical DSH designation and such, they communicated in early July that they would not be giving us any extra money. We still have the right to look to see if the 1997 account was incorrect, and we are doing that. We've done a lot of communications for the state and we are still continuing those. But as the accounting dictates us to both not recognize any revenue for program that was discontinued end of the quarter or receivable, actually we got the payment in the second quarter, reported payment for what we received. So that's what caused us to take the two adjustments we did.

Okay, thanks. And then I apologize if you've already spoken to this, but on the same-store growth year-to-date is up about 3.1%, the guidance was only raised 1.5% to 2.5%. Can you... again, I apologize if you spoke to this, but does this imply that you're expecting pressure in the back half of the year?

Well, we went into the year at 0.5 to 1.5. We had a really strong flu season, and of course that's what's driven. Something else, we got a leap year in the first quarter. If you look at the second half of the year, you wouldn't want to anticipate a flu coming in the fourth quarter. But historically, it doesn't come back frequently. And again, of course, the benefit of I think is 120 basis points for the quarter and the leap year will not be there in the second half of the year. So we sort of went back to looking at more of what we thought would still good growth to maybe around 1% or 1.5% growth for the rest of the year, which is less than we've been for the first two quarters. Hopefully, the programs we've got in place will have us do better than that. We clearly are working at doing better than that and hope our hospitals do better. But that was the guidance we decided, it wasn't... smart to go ahead and continue in the second half of the year what happened in the first half of the year because of the flu and leap year and other stuff.

Okay.

And then also, as we've said, there's always services we're looking we'd want to close or some other activities. So I think it still will be pretty much at the high end of the hospital admissions guidance out there when you see us at 1.5% to 2.5%.

Yes, just to reemphasize that, we continue to look at this and think about this but I think we are at the high end in terms of the industry so we're just going to be very careful about how we'll view this going forward and we will continue to have good growth in terms of our guidance.

And just on the other point, you didn't ask it, but we're working pretty hard to get the revenue up. But based on what we're seeing in the first, the second quarter, we thought it was appropriate to adjust the revenue slightly.

Okay, great. Thanks.

Your next question is from the line of Dawn Brock with J.P. Morgan.

Good morning. First, I just wanted to just kind of close the loop, at least for myself, on the Medicaid issue and just confirm that the reduction of the DSH payment issue is isolated to Indiana and you don't see this spreading to any other state.

Yes, this is only in Indiana. This is one hospital in Indiana that we don't expect in our other big states with receivables are in South Carolina and Texas. And the best of our knowledge, what we expect to receive, we are going to receive. But DSH does fluctuate. This is the first time we've had one fluctuate of this size. But to our knowledge, we are in good shape in the other states.

And as far as the non-payment for the Indigent care, you don't necessarily see any shifts from a budgetary perspective there either?

No, this was... CMS denied the state of... waiver for this program, the dollars should have been shifted in other programs. They are looking at a healthy Indiana program, which may end up generating some extra dollars there. But as of right now, we don't see any other programs. There is sparsely [ph] other programs that have this type of programs throughout the state. So I don't see this shift into other states.

Okay. And then quickly, I just wanted to ask you to remind us the size of the three replacement hospitals by bed count and the expected EBITDA contribution.

The Petersburg is about 300 beds and the Shelbyville's is about... the beds really didn't changes from what's out there now substantially. I think the Clarksville is a couple of hundred beds and Shelbyville hospital is about 50 beds. And then the size of one of them is about 200 million in Clarksville, one about 150 million in Petersburg and the Shelbyville is about 35 million cost. And EBITDA is... what we expect to have happen is you'd see some volume growth and EBITDA growth from that in the second half of the year, which is still from similar [ph] to the guidance. And more importantly, what I was trying to point out was people remembered the interest and depreciation will go up as a result of these openings in the third and fourth quarter.

Okay. And then that was my next question. So the $30 million to $40 million that you are expecting to see increase in the second half of the year, we should associate that with the replacement hospitals?

Well that plus as we buy equipment, and we are clearly trying to buy equipment a little faster. We normally would have been close to the bonus [ph] depreciation. That's a tax arrangement that will have similar depreciation in that equipment buying. But most of the fluctuation in fixed costs will be related to the opening of these facilities, which has been in June, mid-July and late-July.

All three of those facilities are now in the new facility last weekend with Petersburg in Virginia that went over 150-160 patients over the week and all three of those facilities now are open and running.

Okay, excellent. And then just to maybe get a little bit more color around labor, are you seeing less pressure on wage increases based on the economy for nurses right now?

Not substantially on that. In our markets, again, we're sole providers there in a situation. And clearly, I think we've done a good job at managing contract labor which is probably might be contributed to, somewhat sustain our contract labor is down a little bit on a same-store basis. It was a bit better in the quarter. So I think that's helpful. But I think from an overall perspective, I think contract labor is down 20 basis points in the second quarter, which is better than it had been. That, and I think we're still 4.5% or 5% overall labor cost.

You don't have to have a pretty substantial change in unemployment or change in the economy in a market I think for us to really start seeing a big difference. But so far, as I said earlier, we've not seen any difference whatsoever.

On that front, are you seeing any major shifts that are different, say, over the last six months in employing physicians? And is that something that you would expect to continue or is there any sort of trend line that you can point to that might be beneficial or detrimental going forward?

I think clearly the trend is, and I think most people would tell you that we're employing more physicians today than we have in the past. It's certainly not a strategy... our main strategy for us, but it's the nature of physicians that are finishing their training problems as well as the mix in terms of the male female mix there is 50:50 now. So we are... this year, we're employing more than we have in the past. But I don't think that's anything too different that what we have been doing, it's up a bit. I think we have about 1300 physician or so employed across the country. I think you will see a change kind of going forward to probably more employed physicians in the future than they have been in the past. By the way these things tend to be cyclical as well, and we've gone through this couple times. Historically, when we've had more employee positions and that goes back a bit. So it's a little hard to tell what the future's going to bring and the economy will drive that as well, as you might expect.

And employing physicians does cause our consolidated payroll benefits to move slightly.

Guys, would that actually be a positive as far as just being a natural deterrent in attrition levels?

In some instances, you find people who... they're large not for profits that are employing everybody in the market for that purpose. That's certainly not our theory, but you can... that does work to a certain extent.

Okay, thank you.

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

Good morning guys. Thanks for the color. I guess following up on that last question, thinking about the recruits. What's the percent of specialists at this point and is the expected incremental recruits, is there any difference there in the level... in the number of specialists?

It'd stayed around 60%.

As we think about Triad and the opportunity with Triad and we think about surgery, you know, surgery volumes, we will be clearly focused on the specialty side, particularly the surgical side because we think there is a lot of opportunity there. So it's 60% to 70 % in that range now in terms of the specialist piece.

Okay. Was there any discernible difference in acuity levels between the sort of legacy Community or Triad portfolios, or this has sort of been a phenomenon you have seen across the board?

We have five operating divisions, which sort of spread out, it was pretty much in most of the divisions or some acuity admission. Again, some of that had to do with our maybe better managing the ERs and addressing the mission side of the ER, which are usually lower acuity.

Right. Expectations for Empire in terms of timing and with that business is turning up right now and have been deteriorating I think a bit so what's your latest there?

Should be around the first... well, fourth quarter, early in the fourth quarter we'd hope and then also, it has done better. It did not have a very good 2007. It's performed better in the last six months than it did during 2007. So I think it will come on somewhere. We will be somewhere in the high single digits margin. And that would create about 50% of revenues. So it's a pretty good price and I think it will be a good opportunity for us.

And it should work pretty well and it should... and it fits our strategy going forward in not only having non-urban facilities, but these mid-markets that we think have opportunities for pretty substantial population expansion over a longer period of time, primarily around the baby boomers. So we think it will be a good facility for us and a certain price drag.

Right. Last question just on the balance sheet. I guess at this point, what are your expectations in terms of delivering? And I saw you bought a few shares there, not a big number, but it was sort of surprising. So wondering what the thought process was there. Thanks.

Well, we have... we almost had an authorization out, and we decided at the price we borrowed, that was a good price. We had I think another questionnaire ask about the excess cash we got, and that was a good use for 10 or 10 million or so of cash. I think you will see us delever by continuing to grow earnings. I don't think we've got any active divestiture program other than one facility that's still being worked. And I think when you think... if you go back here a few quarters ago, we were making around $0.35 a quarter. Even with this adjustment this quarter, we are making $0.52, you adjust... if Indiana's $0.58. We made a lot of progress since the third quarter, the second quarter pro forma, or the fourth quarter results. So in a short period of time, we've grown our earnings pretty substantial and think as we continue to work on the plans we've got there, we'll continue to grow the EBITDA and the margin. But I think the best way to deleverage is probably to continue grow EBITDA and we've done a good job on CapEx. Historically, the Triad facility has probably spent 9% or 10% of revenue. We spent 5% or 6%. I think we can bring that capital spending to the company going forward.

The only thing I would add to that is just keep in mind, I think we just had our first anniversary date from this transaction last week. So this is still early on in all this. And as we continue to improve, our stock price continues to improve, we have other opportunities kind of going forward as far as deleveraging some --

And the other thing is whatever stock option proceeds we get, which is not large, we usually redeploy that back into buying stock.

Your next question is from the line of Adam Feinstein with Lehman Brothers.

Okay, thank you. Good morning Wayne, good morning Larry. I guess maybe just on the interest cost, Larry. I'm sorry, just to follow up, there was a question earlier just talking about the guidance and just some of the components changing. I just may have missed, but just the interest expense number was lower. I was just curious in terms of what drove that and then, just... I know you guys have some swaps coming off here, where they came up in the second quarter and some in the third. So was just curious in terms of how that factors in and then I have a couple of follow up questions as well.

I think the interest actually was about 5.8% of revenue, which our range was 5.8% to 6.1% and the preceding one was 5.8% to 6.2%. Interest was a little different, because one, we reset the LIBOR throughout the quarter at a lower rate. We had really good cash flow and we redeployed it pretty well. Those the two things that partly helped interest. And also, a lot of debt that was being incurred was for these replacement hospitals as you spend more on those before they open, you capitalize the interest on that. And of course that's going to go away once these hospitals are open. I think our range is still 5.8% to 6.1% for the year. We are comfortable we'll fit in that. I just want to point out to people that we have now finished some pretty [indiscernible] as debt was being incurred, it was being capitalized. Now we'll be... have to expense that going forward. But I do believe we are pretty close to the 5.8% for the quarter.

Okay. And then just with respect to the balance sheet, if we look at the uninsured and AR, I guess in the past you've talked about just a percent reserve. So how is that trending?

It's 80%, a little different than it was in the preceding quarter, about flat for what it was in the year. And basically, as we look at that, you have to start looking at both the locations, receivables, the hospitals in which the states, drilling in and also you've got to look at the mix of self-pay and self-pay after insurance as we collect five times more for self-pay after insurance into self-pay. And again, as you discount receivables, self-pay, you have less receivables of 80%. We are very comfortable with that. Our last was 39.6% of our overall receivables. Our net self-pay dropped a little bit in relationship to overall receivables for the first quarter, second quarter. Our allowance I believe, the third... it did in the first quarter was 38.9. So it moved up to... versus 39.6, pretty close to what it was at the end of the year of 40.3%

Okay. And I guess on the supply cost area, I know that's an area you guys have been aggressively targeting in the relative five versus the first quarter. So just in terms of expectations, they are and just in terms of as you talked about lower case mix, I guess that you thought being that maybe utilize less, high cost supply. So just how are you thinking about that?

Well, I think if you look at it, we still think there is synergies embedded in it, probably another $20 million or so in synergies for the rest of the year. We did a pretty good job, and actually on a same-store basis, we got real good improvement in supplies. It looks not good if you look at the prior year because we were running at about 112% of revenue and Triad was running about 17%. We had progress in the quarter in drugs and implants and a little bit better rebate program, probably the one program the rebate programs proved pretty helpful for us. I think you'll continue to see it. I don't think you'll see us take 14% down to 13% but I think you can see us making some incremental progress in supply, of course, working, as you're aware our strategic programs that's a big change from purchasing arrangements and individual hospital companies who are working on that I think we will manage that pretty well. The issue about concern about inflation in plastics it's a pretty small percentage of the supply stands and I don't think its going to make a substantial benefit challenged us going forward.

Just a final question. Wayne, you mentioned that one year anniversary as in the deals so here we are a year later, just what are your thoughts in terms of what's really, have been the biggest surprise, I guess, as you think about it both positive or a negative?

I think what we've seen through this year, we have had a relatively smooth transition in terms of this acquisition. And it's worked pretty well. I think the things that I think are very positive about this is as we looked at this and as we thought about it more, we mentioned this a couple of times that the opportunity in terms of emergency services and doing a better job of managing our emergency services, which we have seen an increase in our ER admissions. So we think that clearly is an opportunity going forward. Physician recruiting is a very good opportunity for us. As we mentioned, that's the reason we're upping our goal this year from 900 to 1000; both of those are very positive things. I think one surprise that this was no surprise to us, but I think it might be a surprise to a lot of the people in the market was that we might have some kind of adjustment issues related to medical staff and physician relationships. We've had zero... none of those kinds of issues, we've had no physician meltdowns, we've had no physician problems. I've not gotten any adverse calls about you guys don't know what you are doing. None of those kinds of things; it's been a very smooth transition in every facility as it relates to medical staff. So I bet all those things are a positive kind of surprise to us. And I guess I would say we think there is a lot of opportunity here and that's the thing that keeps us moving forward pretty quickly as the opportunities that we see going forward. So all those are positive things, I don't think we found anything that is very discouraging to us and I suppose the only thing that will take us a little longer than we thought is working on some of these physician relationships, physician deals that were done prior to this transaction, and that will take us a while.

Okay, thank you for the details.

Adam, one point. I do believe we improved supply sequentially. I think it went from 14.2% to 14%. So there was a 20 basis point reduction and that may be a little less than what people had thought, but we were pleased to see at least a 20 basis point improvement.

Okay, fair point.

Your next question is from the line of Witt Mayo [ph] with Robert W. Baird.

Thanks for taking my call. Larry, you touched on briefly the announcement that HPG cancelled some of its contracts with various large orthopedic vendors and can you just talk a little bit more about the pressure there in the near term or if that's kind of longer term and sort of walk through how you managed that going forward and any opportunities that they come out of this?

What we are going to do is work individually for our company, our chief purchasing officer and his staff are working with the various vendors to do our own contracts. I don't think it's going to be an initiative that's going to cause us to see an uptake in our expenses and we'll work on it up on a national basis and or are appropriate region basis. We had a little bit improvement in plans of this quarter and little bit improvements on a year-to-date basis from a supplier stand and I think will manage it fine going forward.

I don't think we are having any issues in terms of contracts getting worse; it's only an opportunity for them to get better I think is generally what's happened to us so far.

Okay. That's helpful. And just, can you remind me how many doctor deals you have begun to unwind at this point? I think I know about one of them, but...

We don't talk to them about... we don't talk about these specifically. You might expect these are highly sensitive arrangements. So we're careful about how we describe them. I will just tell you that it will take us a while because we don't want these to implode or we don't want to create any major issues or problems for ourselves. So it will take us a little longer, some of which will contract. Aside from that, some run out [ph]. Some of which will do the things that we need to do quickly in terms of managing them down. But it's going to take us a while. And they are all over the country and there is... by the way, it is not a substantial issue; it is a sensitive issue is maybe the way I should put it.

And it's pretty well oscillated to a few locations, just on something, numerous and numerous hospitals.

Yes, it's in different locations across the country.

Okay. But you're very early in the stage of this process.

Yes, yes.

Okay. That's fair. Thanks a lot guys.

Thanks.

Your next question is from the line of Jeff Englander with Standard & Poor's.

Good morning guys. Just a quick question. Larry, you mentioned tracking the unemployment by county. Can you talk about whether you've seen any uptick either statistically or anecdotally in usage in front of increases in unemployment, or if there is any kind of lag effect due to COBRA?

There is a lag effect. I'm not so sure it's I think the last call, we said we're up 20 basis points; in the period, now we're up kind of February [ph]. Here, we're up 70 basis points. If you go back to the activity in 2002, when COBRA went up quite a bit, I think there was a large uptick of about 150 to 200 basis points increase in the employment. We saw a fair amount of uptick from COBRA. Utilization is about 150% lower than it is for general insurance people. We've tracked after our counties, we saw employment go up. It's a little too early as Wayne said here, only a 70 basis point uptick, all started occurring here in the last three or four months that we've started to see them uptick in our employment. But if keeps going and right now, 5%, if it gets up in the mid 6s, you'll probably see some COBRA utilization based on history will go up, and that usually occurs for the first six to nine months in COBRA for people who're paying for it use it, because they would not be buying if they didn't plan on using it.

Still hadn't said that. That's a pretty small increase when you spread it across 28 states and different locations. If you have one major event in a big city that was a huge employer then you would, that city would progress it. But, when you spread it out across, all across the countries it's pretty small in terms of the numbers.

Any comments or color you care to add in terms of where that usage might be picking up in terms of the states or in your markets at all.

I'm sorry, I didn't understand the question.

In other words, within that you mentioned, there have been some pickups in COBRA usage. Have you seen in any particular states or any particular markets?

No, I think what we said was that it's too early to see that, because if you go back our unemployment, it's only up about 20 basis points in February. And now, we've got information through maintenance up 70. That's not enough of an uptick yet to have that activity. We're fortunate on the reverse side of that, we don't have a lot of presence in Florida, or Nevada or California, Detroit. Your challenging states from an economic perspective or from a housing perspective, I think we're fortunate, which is probably helping us a little bit on our self-pay business and other stuff being in better locations. And we much prefer to be in those locations and have the unemployment going up, getting a little bit of COBRA benefit.

One other question is one of your competitors made a statement that it's more the unemployment and the even the unemployment number than, and so, the rate as opposed to even housing, that's more key to volumes and usage and I just wonder if you would concur with that?

I don't think so. I think you have to have a pretty substantial change in unemployment in a market for it to adversely affect your volumes, and first it would positively affect your volumes. So I like to use the example if you are in Detroit and General Motors goes out of business, you're going to have a pretty big increase in terms of your volumes on short-term, and then long-term your bad debt is going up, because people are not having insurance. I don't think, because we're spread so far, and somehow it concentrated in particular city, and that city has a huge promise seems to me that's probably applicable, but when you do it across the board, across so many markets, even this issue that you're asking about in terms of COBRA increases that spreads so thin [ph] so far, you would... it would be very difficult to make the terminations about any kind of substantial increases in that, any time in the near future unless you have a big unemployment issue in one particular market.

One final point, if there is a lot of COBRA activity or COBRA utilization, you'd be hearing from the managed care companies because they'd be talking about it when they are trying to explain their utilization and they are not commenting about it yet so I am not for sure if it's happening yet.

And by the way, our volumes are up.

Right, great. Thank you very much.

Thanks

Your next question is from the line of John Ransom with Raymond James.

Hey guys.

Hey John.

If you look at your Medicaid pricing, the state budgets mostly reset July 1. What do you look at for the next 12 months on your blended... taking Indiana out, but what do you look at for Medicaid pricing for your next 12 months?

It's generally around 0 to 1%. There's a few little increases I think I may have mentioned earlier the states that we think we can see reduction and might be a small reduction in California, a really small reduction in Florida, small increase in Georgia, and Virginia maybe a little bit of reduction in one of the managed care companies here in Tennessee, but not substantial overall impact for us.

Are you seeing any big eligibility changes?

No, not yet. Not something like you had here a few years ago, TennCare. There is always the talk that... I know Texas has got coming up in September and there is some discussion in Mississippi, nothing of any substantial nature where decisions have been made, but the ones we know about are here and they are all relatively small compared to the overall company.

Okay. And my other question, if you look at the Triad book, I know outside of Indiana, there were a bunch of high single-digit, low double-digit hospital margins, do you still think... what do you view as the kind of three to five year margin potential of those hospitals? And I am also curious kind of where you are. I know there was a big IT conversion job and just kind of where you are there?

We continue to think... one of the things that we thought about when we did this is if Triad had a substantial amount of earnings in a particular market like the Fort Wayne area, then the other hospitals sort of fit the kinds of hospitals that we've been buying through the years, which are lower margin hospitals. So the things we've done through the years in terms of improving those hospitals, we could do with the Triad hospitals. We see that as still the case and it's real opportunity for us. I don't think we've talked about what we think the margin improvement would be by facilitating those kinds of things but I would tell you that we still think there is a lot if opportunity here in terms of going forward in terms of improvements.

I think what we have said is that Indiana is probably a 25% to 30% margin, so it's forcing everybody else to be. As Wayne said, in the low double digits. Historically, which is what we can talk about, generally have got hospitals in 5% or 6% margins and take it up to 14% or 15%. We would think the same opportunity exists in those markets to get them up in the mid-teens. The IT conversion, we have done some pretty good size conversions, we've got one in... a couple in the Southeast and one up in the Northwest. They've generally gone pretty well. The Southeast has gone well, we have done two big facilities there and we have done several. We have gone through our standard HMS system, which is a must for hospitals; that's gone well. We are not rushing into it. It probably will take us two to three years to get it done, and we're spending a little bit of money with our vendors to do it. But it's pretty much on target other than we are probably going a little slower than we have historically done on conversions.

And of course, our strategy is totally different than the strategy Triad had.

Sure.

We are doing key conversions based on size of facility, not one size fits all, which is a lot more economical way to do it and so far, it's working pretty well.

And what we did for early on was to extend the HCA contract, to get that done, so we got a much more opportunity and time to do in the timeframe we wanted to do it all.

Okay, thank you.

Your next question is from the line of Kemp Dolliver with Cowen and Company.

Hi, thanks and good morning. What are the trends in your med now?

Pretty decent. I mean we've got $332 million reserve. We had $300 million at the end of the year. We are pretty comfortable where we are and we do actual studies throughout the year and we're probably doing some here sometimes in the middle of the summer. And I would think that we're in pretty good shape. We have got a... we need our reinsurance and actually had a reduction in costs going forward that we will see the rest of the year, which isn't good because that was some encouraging safety... about that. I think there has been no surprises picking up the Triad reserves as well as our reserves, because they are managed by it. [indiscernible] did a pretty good job and we carried that performance forward.

Okay. That's great. And then, on your self pay, the impatient mix has been stable, what have you seen on outpatient as in say ER visits?

ER visits... we're up some in the first quarter, which we'd consider in the flu business. The ER business was not up as much in the second quarter, was stabilized because the flu does bring a lot of so, it's been relative stable during the... this quarter. ER still drives about the 58, 75% or 80% of our inpatient admissions. We had OB to rest about. Not any small percent. So, that's actually pretty consistent.

That's great. Thank you.

Your next question is from the line of Robert Hawkins with Stifel Nicholas.

Good afternoon. I've just got one question regarding contract pricing. We've seen a lot of the managed care companies struggling with them. This last quarter, putting yourself in their shoes I mean how do you expect these guys to behave, and what do you think might be changing regarding the pricing environment for incentives.

Well, we have got about 90% done through '08 probably 65% to 70% for '09, so what I think they'd be talking about would be pretty much past '09. That actually... we done a pretty good job its one of the centralized standardized process you could do. And executives, who've got doing it, had lots of experience working for managed care companies, and working for us. I think we're pretty comfortable with continuous staying in the 5% or 7% range for managed care. We have reduced some large contracts which we think we did a pretty good job of. I think, we're in pretty good shape for managed care. Our those perspective I mean, their part of other work on utilization, our doubt [ph] impression, mostly we're struggling more as the cost of Medicare advantage and they are in the commercial business, but that's where most of the problem is.

One of things I think has helped us and one of the things that we thought would help us is the fact that we are organizing on a state-by-state basis where Triad was not organized on the state basis. So we're getting a little leverage in terms of being able to negotiate for a larger number of hospitals in individual states. So, that's a little... that's been a little helpful to us.

Are you doing the three year contracts like a lot of folks or are you doing nationals and are you negotiating kind of utilization incentives?

Most of our contracts are more regionally driven, and we do have some multi-year, but not a large percentage of our contracts.

We do whatever we can do to get the best price.

Okay. I know you guys are all versed. Alright, thank you.

Thanks.

Your next question is from the line of Mark Afitzerati with Temco [ph].

Hi there. Thanks a lot. Just in terms of the bond buybacks earlier this year, I was just wonder if were there any further bond buybacks in the quarter or after the quarter?

There were no buybacks in the quarter or after the quarter.

Okay. Great. And then just in terms of the bad debt guidance, coming down 30 basis points. Slightly improved there, I was wondering I'm trying to reconcile I guess that with some of the other guidance from other companies out there for example HCA, which is guided to more deterioration and bad debt, very significant. And so, what's your thinking here, in terms of reconciling that --

Well, we're talking long-term; I do know they are, based on information, on regions located in a little bit more challenging markets, so Florida being a little more challenging, and we are in Texas a bit more challenging. So it could be the market location. Our uninsured admissions are about 6.4%, of our conditions and we've been relatively flat for simply flat it could be as for the geography, we work very hard on qualifying different Medicaid form services which I'm sure they do also.

Okay. Great. Thanks a lot. That was... everything else was answered. Thank you.

Thank you.

Your next question is from the line of Gary Taylor with Citigroup.

Hey, good morning guys. Just a few quick questions. Larry, on the Indiana, the bad debt charge of the $8 million or even, I guess, the total $9 million, pickup that other piece, did that all run through the bad debt line, not a revenue adjustment?

No, it was a revenue adjustment, $8.2 million was the revenue adjustment. And then the $800,000 ran through the equity and unconsolidated subsidiaries. So 800... $8 million, $8.2 million ran though revenue. And, of course, the EBITDA on pre-tax and the other $800,000 ran through the line of equity and unconsolidated subsidiaries.

Okay, thanks. Commercial admissions, can you talk about growth there versus your 2.4 consolidated?

We've generally not broken down our admissions. They're I would say probably --

Look at our payor mix.

Yes, clearly our self-pay mix was pretty good and better versus a year ago. From an overall admission perspective, we probably had, fortunately self-pay was roughly flat certainly else. If you take the other three components, Medicare, Medicaid, managed care it average about the same. Not just a little bit.

Okay, sorry, on same store revenue what's the right prior year comparison going into the third quarter. I know we've got divestures third quarter of '07 was not a full quarter Triad.

Yes, that's a really good question because it appeared it, last year we had reported revenue of about 50 million more than actually got this year because we discontinued some operations. It probably is about a $100 million less than what was reported for the third quarter of '07 approximately. So because you got the 50 million in CHS and now in third quarter you have some prior hospitals we sold since the end of the third quarter about the 100 million less of what was reported.

And then my last question just to make sure I understand what you've said, it looks like if you exclude... excluding Indiana revenue guidance still came down a bit, EBITDA came down but earning guidance I guess would have actually gone up maybe a nickel excluding Indiana so is the differential there LIBOR basically?

Well I think we've managed our CapEx pretty good, which means your depreciation expense. We've had pretty good cash flow, which has helped the interest expense. We sort of looked at it that the Indiana adjustment for the year is $13 million, $14 million or so which we lowered the low end of the guidance, $20 million on it, but also basically for us which was grounded. The revenue, the discounts were about a third of it the case mix slowed down a little bit in the second quarter, we worked a bit to back up, but we've got another quarter lower than that and then we also just decided taking Indiana Medicaid gets us close to the $100 million that we took out in the bottom end.

Okay, thank you.

Okay

You have a follow-up question from the line of Darren Lehrich with Deutsche Bank.

Thanks for taking the follow-up. I guess just a really kind of high level question for you. When you think about the kind of volumes you've been doing in this business you tend to see better operating leverage so I guess just a question Wayne if volumes continued at about the 1.5% to 2% range which is above where the trend has been, would you expect to see some operating leverage from here. I just want to get your sense for where you think we are relative to achieving operating leverage in the business.

I would think so. I think if you look at all of our metrics though, we're really in pretty shape, we managed our expenses. The thing that is one of the things that maybe driving some of our volume is that we've been working hard on these emergency rooms, increased our emergency room admissions of over 3% and we're getting a little less purity in terms of those and that would be expected when you start really pushing and working to improve your emergency services. So you were right about as we kind of go forward I would think that would be the case.

Darren, I would add, I think we may increase the same-store EBITDA on a comparable basis 11% first six months and the margin is up 80 basis points. So we have got some leverage. There are some facilities that we've opened that are non same-store especially one of them was in the range of first quarter and a little bit the second quarter. But we've got 11% same store growth in EBITDA and an 80% improvement basis. So with the margin that we had... and it was a little intense, and not the best revenue growth, but we did a pretty good job.

But I am not concerned about the fact that, because we are making really good progress and things continue to move forward. So there is still lots of opportunity here.

And that's 11% and 80 basis points after the adjustment for the shortfall in Indiana.

Right, okay, thanks a lot.

Your next question is from the line of Brian Redwood with Hagemini Capital Management [ph].

Hey guys. To get a better handle on how operating expenses are managed or controlled on a hospital-by-hospital basis, I kind of just want to start off with the average length of stay overall in all the hospitals. Do you have that information?

Yeah it was 4.2 on a same-store basis versus last year 4.4 on a consolidated basis, 4.2 versus 4.1 if you can round [ph] it consolidated number that have tried in year ago; so its 4.2 versus 4.4 quarter on a year-to-date basis, its 4.3 versus 4.4.

And what about in the ICUs, your average length of stay within the ICU?

We don't really talk about that, we don't break it down to that kind of granularity in terms of that kind of detail.

So you wouldn't know whether it's like 9 times or ....

I'd didn't say we wouldn't know, I said we don't talk about.

You don't talk about it. Okay, just to go a little bit further, industry trends have recently shown increases in I guess hospitals and intensive with programs.

Sure.

kind of tied in expenses up within each hospital. Leapfrog, that organization that basically sets the quality parameters for hospitals, have you been having this sometime?

That's a democratic organization I think.

I am sorry?

Yes, go ahead.

I didn't hear you. But I am... in any event --

It's not exactly one of our favorite organizations by the way --

Yes, okay. Well, either way, do you have these programs in place at any of the hospitals? Hospital programs intensive --

We have a number of hospitals programs that are out, we have a number of intensive [ph] depending on the size of what our facilities throughout the country. And, there is an increasing trend in hospitals as you might expect, because there are a lot of prima care physicians now, and don't want to go through all the work to admit patients in hospitals. And so that's a... they're only paid very well for that. So, but it yet to be determined whether or not hospitals for say, are improving quality or non improving quality. And that's really the theory behind people like lift for all this to try to improve the quality. I don't think, there is any question that intensive... intensive [ph] are very helpful in terms of acute care and intensive care units, that there are very helpful. The other part... but the other part of that is, it is really a convenience issue for a lot of physicians, in term of the hospitals.

And in terms of intensive care, we're based on Florida and there is a bunch of hospitals down here that have started those programs, intensive programs that is. And they're basically in the hospitals all day, all night and they're able to lower the --

That's exactly how they work.

Right. So they are able to lower their length of stay, which is able to tighten up expenses and reduce hospitals and in just the same time.

Maybe.

Maybe, okay. I mean do you have plans in going forward and implementing these with your other hospitals?

No, I don't think, I think you have to do this on a hospital by hospital basis, and some of it depends on, go level of the intensitivist [ph] and what he is doing, and all the above. I mean this is a very complex area in terms of how you go back administering this and how that work and how they deliver the care. But, generally speaking, I would say that intensitivists [ph] are very good for quality.

Okay. And do you still... do you kind of classify this as a doctor deal or is this something separate from the doctor deals that you're trying to get away with... get away from?

I'm not sure what you mean by a doctor deal, but this is --

You talked about it earlier, but unwinding some of the arrangements that are sensitive et cetera?

Yes, no, this would not fall in that category. This is a totally different category.

Yes, agreed. Okay, okay. That's all, thank you.

Your final question is from the line of Frank Morgan with Jefferies and Company.

Good morning. Quick question here. One, on CapEx for '09, any idea there are no, you said it should normalize back down but in '07 it was around $525 million, $530 million. Is that a good number to look at for 2009? And then, could you give us any kind of anecdotal evidence [ph] that you're seeing so far on some of the CapEx projects that you inherited from Triad in terms of how those returns are developing in, and improving. And then, finally, just one out of curiosity was there any detail ever given on why CMS actually did not that have that waiver program in Indiana? Thanks.

Well, on the last one first, we weren't given any details, I would assume that the program had to do with some action of... some property tax, which CMS elected not to continue to carry forward. But there still was some money to be spent from the state, but they do not allocate at least to us. On the 2009, we haven't provided any guidance yet. I think, we have say publicly good work towards it, it's about 7% this year. And over time we'll work to try to bring our guidance to in the country [ph] 6%. We'll give out the specific guidance, I think, we give that earlier by the some time in late October or November, at least the third quarter earnings. But, our intent is to continue to move it back towards the 6% range that we'd generally leverage for you to prevent and one adjust would be presenting replacement hospitals, which you get a lot of done already. Looking at the performance, we've gone through probably about 15 projects. I think they look overall pretty good. There is a couple that we are trying to get a bit better performance on that has been spent. But I think overall, I don't think we've managed to get a decent return. We generally have targeted about a 4 to 5 and these are running 5 to 6 small dollar purchase price.

Some of these projects, we have done a lot of work on to get them to improve as well. So we want to make sure we don't miss that point. Frank?

Yes, got it. Thank you very much.

Thank you. Thank you for spending time with us this morning. Our proven business platform has enabled us to enhance the operating performance at both our existing and acquired facility. This model enables us to meet our objectives in a challenging hospital industry... operating environment. Our further ability to improve our results will continue to be a distinct competitive advantage for Community Health Systems. We want to specifically thank our management teams and staff, hospital Chief Executive Officers, Chief Financial Officers and chief nursing officers and division operators for their excellent operating performance in the second quarter. We remain focused on our business strategy and improving results. And once again, if you have any questions, you can reach us at area code 615-465-7000.

Thank you for participating in today's Community Health Systems second quarter conference call. You may now disconnect.