Community Health Systems, Inc. (CYH) Q3 2008 Earnings Report, Transcript and Summary

Good morning. My name is Julienne and I will be your conference operator today. At this time I would like to welcome everyone to the Community Health Systems Third Quarter Conference Call. [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.

Thank you, Julienne. Good morning and thanks for joining us for the Community Health Systems quarterly conference call. Larry Cash, our Executive Vice President and Chief Financial Officer is also on the call with me. The purpose of this call is to review our financial and operating results for the quarter and the nine months ended September 30th, 2008. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. For those of who you are 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 our strong quarterly results and then turn the call over to Larry who will follow with additional details of our financial results. But before I begin I'd like to read the following statement. Statements contained in this conference call regarding operating results, acquisitions, 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 provision of the Private Securities Litigation Reform Act of 1995 and are based on management's current expectations or beliefs as well as assumptions made by and information currently available to management. You will refer to the documents filed by Community Health Systems Inc. with the Securities and Exchange Commission including the company's annual reports on form 10-K quarterly reports 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 are pleased with our solid financial operating results for the third quarter of 2008. We continue to benefit from an improving performance at the hospital level as evidenced by solid same-store volume gains and favorable revenue trends. As a reminder in our reported results the prior year third quarter 2007 and year-to-date 2007 represent last year's performance of CHS and include Triad as of July 25th. Our same-store results reflect Triad's performance for the three months ended September 30th, 2008 and 2007. We continue to have excellent same-store volume for the quarter. Our same-store admissions increased a strong 2.3% adjusted for hurricanes Gustav and Ike as well as some flooding in Illinois and Illinois hospital same-store admissions would have increased 2.6%. On a year-to-date basis same-store admissions were up 2.8%. Revenue for the third quarter was $2.8 billion, same-store revenue increased by 8.2% of $2.7 billion versus $2.6 billion in the third quarter of 2007. EBITDA for the third quarter of 2008 was $392 million, income from continuing operations was $0.54 or an increase of 38% compared to the third quarter of 2007. EPS of $0.39 adjusted for the early extinguishment of debt. Excluding the impact of hurricane earnings per share would have been $0.57. Net operating revenues for the nine months ended September 30th, 2008 totaled $8.2 billion. EBITDA for the nine months ended September 30th, 2008 was $1.1 billion and income from continuing operations for the nine months into September 30th, 2008 was $152 million or $1.61 per share. With that I'd like to review some key operating accomplishments for the quarter. The company recruited 1,092 new physicians for the first nine months compared to 558 compared for the same period a year ago. Our standardized and centralized approach to physician recruiting and practice development increased utilization by reducing the need for patients to travel outside our communities to obtain health care services. Our new target for 2008 will be 1,200 physicians and our goal for 2009 is 1,300 physicians. We have closed on the two hospital system in Spokane, Washington. Term revenues approximately $300 million with trailing margin in the mid-single digit range. The effective date of this transaction was October 1st. As disclosed by the local press we have one letter of size in Phoenixville [ph] in Pennsylvania. This facility has trailing revenue of $295 million and a single digit margin. We believe that this franchise is a perfect fit for our model in the state where we have enjoyed great success. We are also providing initial guidance for 2009 as being our practice we have provided fairly detailed guidance in the 8-K filed last night. Annual same-store volumes expected to range from 1% to 2%. Projected revenue range for 2009 is expected to be from $11.8 billion to $12.1 billion. EBITDA is expected to be from $1.650 billion to $1.7 billion and projected EPS for 2009 is expected to range from $2.50 to $2.75. Included in our guidance are two to three acquisitions two of these have been disclosed in the local press in Pennsylvania and Arkansas. We have one additional letter of intent for a small hospital strategically located near one of our larger facilities. We are and will continue to be very selective about acquisitions and our primary focus will continue to be on improvement of the Triad facilities. For the nine months ended September 30th, 2008 we have accomplished approximately 79% of our forecasted synergies of $115 million. With that at this point I'd like to turn the call over to Larry to provide you a more detailed summary of the financial results.

Thank you, Wayne. Our consolidated admissions were 164,437 in the third quarter 2008, adjusted admissions were 301,683 for the same period. Our same-store admissions increased 2.3% when adjusted for the factor of the two hurricanes affected operations Texas and Louisiana and the flooding in the Illinois hospitals admissions would have increased 2.6%. Same-store admissions increased 2.5%. Same-store self-pay admissions increased only 1.4% year-over-year decreased 10 basis points as a percentage of total admissions to 6.6%. Net revenues in the third quarter were $2.773 billion, an increase of over 23%. On a same-store basis net revenue increased 8.2%. In-patient revenue increased 9.6% and out-patient revenue increased 7.4%. Same-store net revenue per adjusted admission increased 5.5% year-over-year and also increased to 2.4% on a sequential basis. Same-store surgery volume increased 1.8% for the third quarter turning positive with a larger increase in out-patient. Our Medicare case mix was down slightly for the quarter. Our Medicare case mix improved approximately two-tenths when comparing year to date. The Medicare case mix for the quarter was somewhat down because we had faster growth in medical admissions versus surgical admissions. As with both the first and second quarters, same-store revenue growth continues to be affected by the implementation of the discount policy in our non-Tennessee Legacy hospitals in the first quarter this year. The impact of this implementation was approximately 100 basis points on both revenue and revenue per adjusted admission for the quarter. Same-store revenue would have increased 9.2% and same-store revenue for adjusted admission would have increased 6.5%, excluding the discount policy implementation. Consolidated EBITDA was $392.3 million for the quarter versus $300 million for the same period a year ago, an increase of 30.8%. On a same-store basis the value increased $107 million or 37.5% from $285 million to $392 million for the quarter. EBITDA margin for the third quarter on a consolidated basis is 14.1%, an 80 basis improvement from a year ago. Same-store EBITDA margin was 14.2 compared to 11.2 for the quarter ended September 30th, 2007. On a sequential basis the third quarter same-store margin improvements strong 40 basis points. For the third quarter our non-same-store margin from one de novo hospital was 0.06% negative margin. Consolidated operating expenses decreased 80 basis points with an 80-basis-point decline in payroll benefits. On a sequential basis we saw improvements in payroll and benefits supplies under operating expenses and increase in bad debt. Same-store operating expenses decreased 300 basis points for improvements in all expense categories. On a same-store operating costs increased 4.5% with an 8.2% increase in same-store revenue for quarter, again demonstrating our strong expense control, with operating costs per adjusted admission increasing only 1.9%. On a year-to-date basis consolidated admissions were 506,872 and adjusted admissions were 911,143. Same-store admissions increased 2.8% and adjusted admissions increased 2.9%. Adjusted for the flu, the extra leap day in February, service closures, statistical reclassifications, and other related hurricane items, as previously discussed same-store admissions would have been up 2.2%. Our volume guidance for 2009 is 1% to 2% and to point the original 2008 volume guidance was 0.5% and 1.5%. Net revenues year to date were $8.2 billion, an increase of 78%. On a same-store basis net revenue increased 6.3% for the first nine months. Same-store in-patient revenue was up 7.4% and out-patient revenue was up 5.8%. On a same-store basis net revenue per adjusted admission increased 3.2% and on a same-store surgery volume was up 0.2% year to date. Our Medicare case mix for the nine months ended was down 1.2% and again we are having faster medical procedure growth than surgical procedure growth. Same-store revenue growth continues to be affected by the implementation of discount policy in our Tennessee hospitals in the third quarter of 2007 and the non-Tennessee Legacy hospitals in the first quarter of 2008. The year-to-date impacted implementation was 120 basis points in both revenue and revenue per adjusted admission. Same-store revenue would have increased 6.2% and same-store revenue per adjusted admission would have increased 4.4% excluding the discount policy implementation. Consolidated EBITDA for the first nine months was $1.144 billion an increase of 79%. Same-store EBITDA was $1.137 billion for an increase of 18.9%. Consolidated EBITDA margins for nine months ended September 30th, 2008 was 14% and same-store margin was 14.1% an increase of 150 basis points. Non-same-store margin was 5.2%. For the first nine months consolidated operating expenses percentage of net revenue improved 10 basis points. Prior year payroll and benefits decreased 20 basis points. Bad debt decreased 50 basis points. And other operating expenses decreased 80 basis points offset by an increase of supplies of 140 basis points. Same-store operating expenses improved 150 basis points from 2007. Our payroll productivity or per man-hours adjusted admission 200 basis points. Our operating cost per adjusted admission increased 1.5% for the nine months ended September 30th, 2008 demonstrating our strong expense management ability. For the quarter consolidated bad debts decreased 10 basis points 11.8% versus 11.9%. For the quarter our bad debt increased 9 basis points versus the first six months. Self-pay admissions of like total admissions growth increased in bad debts has been driven by the growth of primarily out-patient revenue related to our increase in prices during 2008 and a decrease in the patients recognized as charity in the third quarter. When charges increase, revenue increases but so does, bad debt for self-pay. Or consolidated bad debt charity administrative self-pay discounts divided by adjusted net revenue is 18% for the quarter and 17.6% year to date. Our combined consolidated bad debt charity administrative discounts as a percentage of adjusted revenue are down 10 basis points for the quarter and 40 basis points year to date. Revenue minus bad debts was up 8.9% for the quarter for operating expenses minus bad debts were up 4.7% for the quarter. Year-to-date revenue minus bad debt was up 6.5% and operating expenses minus bad debt was up 4.4%. As we have consistently said the real cost accreting to self-insured is represented by incremental cost of care. Our same-store operating costs per adjusted admission increased only 1.9% for the third quarter and 1.5% on a year-to-date basis. Consolidated cash receipts were approximately 103% of collectible net revenue which is net revenue less bad debts for the last 12 months ended September 30, 2008. Our 2009 guidance for bad debt ranges from 11.8% to 12.4% of net revenue compared to the current 2008 guidance of 11.2% to 11.5%. Total AR days were 54, September 30, 2008 unchanged from December 31, 2007. Same-store AR days were also 54 the quarter. The allowance for dapple [ph] counts is 1.109 billion at the end of the quarter or 40.3% of receivables. The allowance for dapple counts and related contractual allowances for self-pay was approximately 80% of the hospital segment of self-paid receivables at September 30th, 2008. Community Health System continues to have a favorable payer mix recorded in September 30th, 2008 net revenue by payer source on a consolidated basis was as follows. Medicare 26.2%, Medicaid 9.3%, managed care and other 53.3%, and self-pay 11.2% of revenue. On a year-to-date basis the breakdown was as follows. Medicare 27.4%; Medicaid 8.8%; managed care and other 52.8%, and self pay 11%. Cash flow from operations for the third quarter was a strong $268 million versus $189 million in the same quarter a year ago. Cash flow from operations for the first nine months was $685 million compared to $405 million for the same period in 2007 an increase of $276 million. An increase in cash flow from operation compared to the prior year reflects improved profitability noted by increase of net income, increase of non-cash depreciation expense, increase in cash flow and change of accounts payable accrued liabilities and other income taxes and an increase from tax refunds from prior periods. These cash flows were offset by decreasing cash flows by a net increase in accounts receivable primarily from the same-store growth. We have increased our 2008 guidance from $750 million to $800 million for net cash provided by our operating activities to a range of $800 million to $850 million, our 2009 guidance is $850 million to $900 million. Capital expenditures for quarter just ended were $176 million, year to date we spent $51 billion or 5% of that revenue. This amount includes $122 million or about 1.5% for replacement hospitals. We lowered our 2008 guidance which was 725 to 775 by approximately $50 million at the low end of the range and $25 million in the high end of the range. Our 2009 guidance CapEx would be $750 million or 5.9 to 6.2% of that revenue. Balance sheet cash as of September 30th was $342 million and we purchased a Spokane on October 1st which reduced the cash about $160 million. As of September 30th, 2008 the company had available credit from the revolver of $700 million and $300 million available due to the late draw that will be drawn before the end of January 2009. Looking at the balance sheet as of September 30th, 2008. We had $1.223 billion working capital and $13.6 billion in total assets total outstanding debt at September 30th was $8.9 billion of which approximately 88% was fixed. Our debt to capitalization at the quarter end was 82.6%. We have repurchased $69 million or 3,017,000 shares through late October. During October we also bought $42.8 million of our 8.78 coupons bonds back in the open market. Our credit rate does limit the amount of stock and bonds that we can repurchase. Our senior subordinated notes mature on July 15th, 2015 our bank facility matures one year earlier 2014. One of our slides, number 18, just gives some history. Our debt to net revenue was approximately 1.6 times in 1996 after a leveraged buyout of [inaudible] and 0.5 times in 2006. After the Triad acquisition our debt to net revenue is 0.8 times. On a debt to EBITDA basis the company was 9.3 times levered in 1996, 3.4 times in 2006 and approximately 5.9 times estimated for 2008 after the Triad acquisitions. These statistics demonstrate our ability for deleveraging. At the end of September we were party to a $4.85 billion in interest rates swap agreements an increase of $400 million from the end of June. These agreements limit the factor change interest rates on a portion of our long-term borrowings. Since September 30 we have added additional $300 million in swaps and are now a party to $150 billion in swaps. As of October 28th approximately 91% of our debt is now fixed. As Wayne stated here early we provided our 2009 guidance and please note the following items. Our 2009 guidance includes a 5% to 6% increase in same-store revenue. The guidance includes two outstanding letter of intents of hospitals in Pennsylvania and Arkansas and an additional facility, 2009 interest expense range from 5.6% to 5.9% of revenue, our 2009 cash and operating guidance is $850 million to $900 million, the CapEx guidance for 2009 is $700 million to $750 million. This represents approximately 6% of net revenue for the coming year, a decrease from 2008 due somewhat to the no replacement hospitals plan for 2009. Depreciation and amortization are projected to be 4.5% to 4.8% of net revenue for 2009. The 2009 projection assumes an estimate of $0.02 to $0.03 per share of acquisition costs that will now need to be expensed due to the new accounting rules for business combinations. The EPS guidance of 2.20 to 2.26 for 2008 does include the impact of Indiana Medicaid adjustments, hurricanes in the third quarter collectively of about $0.06 for our periods. It should be noted that if you annualized the EPS from July of 2007 through December 2007, annual 2007 EPS would be about $1.50 per share indicating substantial improvements achieved in earnings per share for 2008 to 2009 EPS guidance is $2.50 to $2.75. And Wayne will have brief recap.

Thanks Larry. As you can see this quarter was successful at all levels. Strong volume coupled with good revenue and strong expense management enabled us to solidly improve our same-store margin. These results confirm that the fundamentals of our business are strong and our centralized operating strategies working across all of our markets. Despite a challenging macro environment we look forward to continuing progress for the remainder of 2008 and beyond, as a result of our consistent execution. Additionally we have provided 2009 guidance again demonstrating the strong metrics going forward as well as solid potential growth. With that I will now open up the call for questions. Question and Answer

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

Thanks. Good morning everyone. I just wanted to ask about your free cash flow guidance or implicit free cash flow guidance for 2009 and just clarify something. Larry you said you're including three acquisitions next year and I'm just wondering if you can give us a feel for how that would impact your operating cash flow less CapEx guidance that you've provided.

We have included any capital we will spend on those acquisitions if they occur. We haven't disclosed the purchase price for any facilities but it would be somewhere in the probably $150 million to $175 million as we are anticipating which would be not included in the CapEx guidance. It would be acquisitions of property but any CapEx that we have spent on anything we buy in 2009 is included in the CapEx.

Since you asked this question we have been asked this question a number of times about acquisitions going forward and how we view that. And I think we have made it fairly clear we are only going to do things that we think synergistically help us in a particular market. That we are seeing and we are inundated with opportunities but we are very careful about what we are going to do. And I think we are in really good shape in terms of the way we are approaching these and you can see both of these information is out on now are at a very good price and a huge opportunity for us in both of those markets. So the other thing that I think along these same lines is that we have brought down CapEx spending in 2008 and 2009 is in about the 6% range is what we have said we would do all along. We will continue to work on that and we will continue to work on improving that.

Okay. And then just you obviously are making a statement about buying your own securities in the open market. Can you just give us a sense for what you can do and what your appetite is? You have including the delay draw facility $1 billion of available capital and if my math is right you paid less than 70 for the senior notes. So can you just help us think about how you'll use your capital relative to any repurchase of securities?

I think we... as often as we have been opportunistic and when we think the stock price is very low we will step in. We are about through all of that now because we have availability in terms of authorization from the Board but not availability in terms of our debt structure in terms of what we can buy. So I think you won't see much more of that happening anytime in the near future. Larry.

Okay.

Yeah its basically our credit agreement allows us until we have basically $200 million and we have done quite a bit of that already about $175 million or so. So we are getting pretty close to being finished on that.

Okay. My last question is bad debt we saw it go up a little bit more than expected here in third quarter. What were your price increases your charge master increases and could you just help us think about how much seasonality versus actual price increases had to do with that and on a go forward basis if you could help us think about the 2009 bad debt guidance in that light as well. Thank you.

Yeah. The price increases were in single digits. They were timed to be sort of late in the second quarter and early third so they affected pretty much all of the third quarter. Also we had a decrease in charity and we started to look at some of the facilities that had a bad debt increase it looks like were either qualifying less people for charity or at least they haven't gone through the process yet. Because I think the charity is down 100 basis points over a year ago and down about 40 or 50 basis points sequentially which still ended up as reserving it as bad debt. What I would say as far as 2009 we have raised our guidance... well first of all we put guidance out but we did understand that the economy is challenged so we've got unemployment now about 6.1% in our markets and if you waited for the revenue and beds are sort of less in that. But we would expect that's higher than what it ran up to the second quarter and so we put some effort into raising bad debt securely. We would think in a situation where uninsured and unemployment stayed constant the party would go up 20 basis points to 30 basis points because you raise revenue on uninsured the extent of the states and the revenue on a charity discount and you end up raising the revenue and end up raising bad debts both. That's the reason we often look at revenue less bad debts compared to operating expenses that's less bad debts and those indicators look pretty good for the quarter and year to date but we raised it up to 11.8% to 12.4% year to date we are running right now 11.2% in the guidance for 2008 is 11.2% to 11.5%. Even with the increase in bad debts in the third quarter we had outstanding expense management and margin growth.

Do you have any expectation in the guidance of improving collections process I'm just trying to understand I hear you you're expecting the unemployment picture to get worse as we all are. So this guidance is 50 basis points worse than what it would be normally but is there any offset?

Yeah. We have done a good job over the years qualifying people for Medicaid and I think there were some opportunities to work on that from some of the Triad hospitals and also getting undocumented aid which is a government program to center stage in place there. But those two possibly but in our collection rates are staying about the same which is important. We are about 50% deductibles with coinsurance before it gets written off and about 7% or 8% for pure self-payments and stayed close to the same throughout 2008 so far. We did not put a recovery percentage in it. We are going to benefit as we put the Triad Hospitals to our collection company probably from an expense side. A collection cost side more may be a little better than collections but we didn't think it was appropriate to try to use better assumptions of our collections in our guidance.

Fair enough. Thank you.

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

Great. Thanks. Just a couple questions here Larry, just real quick, going back to bad debt. In terms of your opinion on it how I guess conservative fair maybe aggressive do you think you were in coming up with the guidance? I mean do you feel you sort of... that's the adequate number or were you trying to be sort of forward-looking and be a little more conservative in the number or how should we think about that?

I'm not an economist but what we basically did was look to see what happens through the quarter. You know 100 basis points increase and unemployment party drives 20 to 30 basis point percentage increase of self-pay admissions. It's really not a big number. It's probably a couple thousand in admissions if you sort of worked through the math out of 675,000 admissions. But we did try to factor in some likely increase and will adjust it as the quarter goes on but we thought it was appropriate to anticipate some increase there. I wouldn't say we are trying to be overly conservative or overly aggressive in not recognizing in not recognizing. We know it's like.

Okay. And then can you just maybe talk about the increase in the revenue per adjusted admission stats so a nice sort of bounce back from the last couple of quarters so case mix was still down so was that just pure pricing or how should we look at that number?

Well I think when you think about it we had pretty good mix in that our admissions actually improved pretty nicely and managed care and other. They were the highest in... they were up much more than overall there. Medicaid as a percent change actually dropped in the quarter versus a year ago and Medicare was a little bit under the average so most of our increases in the managed care and others. Some of that could have been the Medicare fee for service. We don't have a perfect accounting of that so some of the Medicare may have became that. But we had good growth in the managed care and other. We did some small rate increases would help a little bit over admissions growth. The Medicare case mix in our analysis have got a lot to do with the fact that we have had maybe the only company that had really good volume growth this year consistently. And that we are having good growth management which has been medical procedures which growth in medical procedures faster than serviceable growth will cause your patient mix to either stay flat or solid come down. I know everyone looks at Medicare case mix but if you have really good growth in medical procedures you'll have a slow in case mix.

And then my last one. Can you maybe just talk about the operating environment right now? Have you begun to see some of your competitors struggle at all just given the overall market?

Yeah. I think if you step back and what we have been saying over the last year or so and what we said about this transaction was that we thought there was a huge amount of upside and potential here in terms of improving those facilities. I think you're beginning to see that work for us and in terms of market share opportunity we have greater market share than even if the economy gets a little worse and unemployment goes to 7% I think we still have enough opportunity that we can trump that in most of our markets across the country. We said there were a couple of things that we thought would be very helpful to us obviously the synergies to start with but then as we looked at the operating side we knew there was a lot of room for physician recruitment and you can see that we recruited over 1,000 physicians so far this year and we are going to recruit up about 1,200 which is a huge number. That's very helpful to us. The other thing that we identified early on is how we manage our emergency services compared to a way that Triad manages theirs. We have a system we have talked about over and over again Pro-Med. We now have pro med installed in all of our facilities other than maybe three or so where we have a McKes in-system which will do essentially the same thing. So we are getting the benefit for that. If you recall there's a couple point spread in terms of our admission rate versus Triad's admission rate through their emergency services. So both of those initiatives are working and working well and I think this is the thing that probably we don't like to say anything derogatory about our competitors. But this is probably one of the things that differentiates us, in terms of opportunities going forward.

Okay. Thank you.

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

In the past couple of quarters you have talked about the synergies and maybe seeing a little bit more there than you had initially expected. It looks like your guidance is the same for synergies. But are there any anecdotes that you can share with us in terms of where there might be more or less than you were expecting?

I'd state 145 million of course we are starting our anniversary last year. I think we had 10 million in the third quarter and 15 million in the fourth quarter. There are still synergies opportunities to improve the business probably in some of the revenue management areas. I think there are some opportunities maybe in the malpractice expense area looking at the future a little bit better part of it in IT. And I think managed care will be a good opportunity looking forward allowing the rate increases and negotiations we got there in the third quarter 2007 been done. So I think we will have a good opportunity looking forward for that and I think we are probably... as we said we stayed around 145 million since the beginning of the year and we will be working on disclosing some synergy numbers for 2009. There's a lot of other good areas such as those that still have good benefits ahead of us.

Yeah we have as some of you would like to say the low hanging fruit now. We sort of identified that. We are working our way through it. We are about 80% through the number that we said we would get for this year. There are a lot of synergy opportunities here as we kind of look to the future and a lot of different areas that we have not even thought about in terms of our Larry mentioned one earlier in your credit and collection piece of the business there's a big opportunity there. So as we kind of go forward we will be able to take advantage of size in terms of synergies as well some of the... these are sort of unintended things that will happen as we move forward.

And just if you think of synergies it sort of goes back to the comment I made about the earnings per share were running about $1.50 for 2007 the last half of the year. And this year is going to be... the guidance is 2.20 to 2.26 after the hurricane after Indiana adjustments which ask really a good growth. And next year when you only got 2.50 to 2.75 which is a very good improvement it would be the best improvement in the industry. I'm sure that just shows what we have accomplished so far and it's a lot of advantages to continue to work on things in 2009.

Yeah. We are fortunate we have market growth opportunities we have physician recruiting opportunities we have admission opportunities as well as expense reduction opportunities a lot of which is in the synergy so I don't think there is another company that has all those opportunities.

And 145 million it's generally expense driven and a little bit of managed care benefit but not a lot of it is volume driven or recruit driven.

And then if I can ask one quick follow-up. Where are you with regards to your managed care pricing going into next year? What percent of your business have you renegotiated for and kind of what's the expense in terms of rates?

For all practical purposes done for 2008 we are about 70% to 75% done for 2009.

And any guidance, in terms of range of managed care pricing for next year?

I think we'll still use the 5% to 7% and if we get comfortable talking to people and they've got some large incentives themselves the managed care people to do a really good job had a really good year in '08 we're expecting a better year in 2009.

One of the things that we have been able to take advantage of is the fact that we operate on a state by state basis and have our operators our divisions are split up by states. We have been able to take advantage of size in the states in terms of numbers of hospitals. We thought that was an opportunity and it's turned out that it's worked pretty well for us.

Great. Thanks a lot.

Thanks Gary.

Your next question is from the line of Adam Feinstein with Barclays Capital.

Thank you. Very strong quarter here. Just I guess a few questions with the volumes clearly your volumes stand out relative to the industry. Just curious how much a difference you saw based on different regions just trying to figure out whether geography is playing into some of this so any feedback there?

Not really. This is pretty much across the board. We have always thought if you recall our operating model in terms of layering facilities on that we had a lot of growth opportunity left in the Legacy in the CHS hospitals. But we also were pretty clear about this when we did the Triad acquisition that we thought there was a big opportunity in those facilities. And it's around those issues that I have just mentioned in terms of physician recruitment and better management of emergency services. So we are getting pretty consistent growth around the country and we haven't... we don't really have any particular big pockets where the economy is affecting us that adversely, so spread for us that it may be a small one. But for example in South Carolina the textile industry left several years ago and we have already suffered the result of that in a couple of markets there over the past three or four years but there's nothing like that going on. It's just it spreads so wide in terms of the unemployment that it hadn't really adversely affected us. And the second thing is the opportunity is so great here that we can step over small incremental issues like that.

Sure. Absolutely. Okay. And just one of the other things looking at overall volumes are strong but surgical cases are strong also and we have seen the trend of weaker surgical cases for the industry. So just curious there in terms of what drove that any thoughts in terms of the reasons behind the acceleration in surgical cases and any particular areas where...

I think a lot of this is around our recruitment and our concentration on better performance at our facilities and our operators are focused on making sure we are doing a good job and I think that this will be more evident as we get through the year in terms of our mix in terms of recruiting but I think that's been a big help to us as well. Larry you want to add something?

Yeah the primary thing we see is that especially in the third quarter we had a really good growth in physicians coming in there and I think that's... that that growth of physicians what correlates that to it and I think you'll probably continue to see that as time goes on. We clearly lose a few of the low end procedures which is not caused a due effect on our revenue.

One other thing Adam, I would say in thinking about this we have seen improvement in our physician satisfaction across the board. We have been working very hard on patient satisfaction and physician satisfaction. I think by doing that we are retaining some physicians along the way that we might have lost in some of these competitive markets.

Okay. And just as you talk about recruiting doctors I'm just curious the current environment with the economy being very weak here just curious in terms of as you recruit doctors as you think about their needs and just in terms of what they are looking for are more doctors looking to be employed in the current environment. Just curious, whether, you have seen any changes in recruiting doctors.

Yeah I think the employment issue around doctors is twofold. One is clearly, economy. The other is a little bit around work ethic now in terms of a lot of physicians want to work want to have a consistent work schedule they want to have a life outside of practicing medicine. So I think that's driving that a little bit. We are seeing a little more in terms of employment than we have in the past. But if you look at this historically it has been up and down through the years and it's been one of those cyclical things. I don't know that this cycle is going to decrease or not but it is more today than it has been.

Okay. Good stuff. And then just as you think about the guidance Larry, I'm just curious as you think about the variability there I know that you've talked about interest rates and some of the below the line items. But just curious as you think about the high end relative to the low end of the range what are really the key swing factors as you think about that?

Well bad debt has to be one, interest rates as you said has to be one. Probably we... I think we are getting fairly conservative on our Medicaid assumptions which there is going to be assumptions in Medicaid states. We have probably got the lowest revenue growth in Medicaid we have had in a couple of years in the assumptions so that would be one. The volume at 1% to 2% clearly I think we are 2.2% now when you back out the flu and leap year so that's pretty conservative and last year we start off conservative about 2.8% running right now. So I'd say the bad debts would be one along with the interest rates and the volume.

And my final question here and I promise to get back in the queue but does Alabama Medicaid there were supposed to be cuts there and they got rolled back. I know you know Alabama very well so any thoughts in terms of what's going on with the Medicaid program?

Yeah. Alabama is a very small percentage of the company and even the Medicaid revenue in Alabama is under 5% a lot of companies are about 9% or so. Alabama's about half of what it normally is. I wouldn't think that the draconian cuts would happen we are aware of that and we are watching they put it off to January 1st. We just have to watch it but it shouldn't be a big number being less than 5% in overall revenue and probably less than 1% of overall revenue of the company.

All right. Thank you very much. Strong quarter, here.

Thanks.

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

Thanks. Just a couple of follow-ups. I was wondering could you flush out a little bit the productivity and maybe give a little bit more detail on exactly where you're driving that? I suspect that a lot of that is in the Triad facilities and the synergies you've talked about.

The volume growth I think all divisions were positive volume growth and so as you manage your expenses in that time. We are very focused on watching our payroll staffing every two weeks and we got detected PMR in all our hospitals. But probably little bit more benefit added in some of the Triad operations but it actually... I think most all divisions had pretty good productivity from that perspective and that 200% was fairly well spread out.

And then maybe, just following up on Adam's question there, about Medicaid. He mentioned Alabama. Can you remind us sort of the top few states in terms of your relative exposure to the extent there's a few that are much bigger than any others or by the same token any particular states that you're watching that may have some potential change on the table as we speak.

The couple of noted ones would be California which has got the 10% cut out there and Florida which is not that big for us and we are also watching South Carolina which looks like it may have a cut. Tennessee has gone through some renegotiating we probably might be a little short on that but I think we will be okay. It's moved away from the arrangement for the government was at risk for all of it and now its managed care and I think we will be in decent shape there. But we are watching South Carolina and of course watching Alabama and California.

Hopefully Tom as we've said all along we'll get a balance in this in the 29 states we might have a little improvement maybe highly unlikely now based on the economy but hopefully we get a little balance and if we do get a little cut here we get a little help somewhere else and generally speaking these Medicaid cuts are not necessarily on inpatients they are on outpatient procedures so it may not be as dramatic as you might expect.

Okay. Great. And then one last one. CapEx for the year implies a nice ramp in the fourth quarter. Can you just remind us of a couple of big projects that you've got going on there where that money is going? Thanks.

We've got some renovations and a couple of projects that are going to get done and some OR activities and ER activity going on. We also got a fair amount of money we are spending on equipment because we get 50% bonus depreciation on that equipment and it's clear that we ramp up and be a little conservative on that but it's in those categories. And then one other I guess point I would make about the Medicaid activity when there is a cut say of 5% keep in mind that medicate payment rate is probably 30% or 40% of the normal payment rate. It's not like a part. So it's a payer but it's the smallest payer so it's not as if it has equally effect on us.

Thank you.

Your next question is from the line of Rob Hawkins with Stifel Nicolaus.

Good morning. Most of my questions have been asked but I did want to try to explore one thing. Can you remind me again about kind of the economics and returns on replacement facilities? You guys have done, a few this summer, and I think is the Arkansas a new build or is that a replacement facility if you guys were to do that? I just kind of want to understand what kind of pickups these things might be able to be for you.

Historically volumes grow 200 to 300 basis points better in replacement hospitals than they do in the facilities overall because you can recruit more doctors which we have done a very good job of recruiting doctors than the ones that open up here. And you get much better volume growth and much better to recruit doctors and you get better productivity because you have taken an older facility which may not have been constructed in such a way to always help productivity so there's, those opportunities. As it relates to the one in Arkansas it will be replacement hospital it's an older facility. The county the seller there will be providing the financing and it will be capitalized lease if that transaction goes forward we are in letter of intent stage right now and they will provide the financing for it which will mean it will be lower cost of capital.

It's also a function of how much you spend on a facility and our operating philosophy has been we don't replace a hospital instantaneously. We like to operate for three four five years and then if you look at our construction costs compared to what we acquired in terms of their construction costs it's much different and the opportunity is much better.

And then in the Spokane and Pennsylvania hospitals I understand there's kind of... isn't there a commitment for a fair amount of capital? And so what would be... I mean I kind of understand where the revenues would be for those? But what are kind of like the margin and the pickup opportunities with the capital spend there?

Historically we do have some capital commitments there. We take that into consideration and normally we are spending 5% to 6% of revenues you got to look at it over a long period of time. And we have lock-up, four or five-year period out in Spokane and we spent a period of time and [inaudible] generally it's a long period of time to spend. CapEx is projects that we have come from projects good return if we agreed to do those ER is usually one of the ones that has to get done. What we generally get on those cap returns of those projects is their target rate of return better than 20% and we do it ourselves. And when it looks as far as Spokane margin it's a single digit it's modeled to be in the mid single... mid double digits after three or four years. And historically we have done that on almost all of our acquisitions taking from 5% to 6% margin up to a 14% margin. Collectively we have done it and a couple of them have been a little less than that and a couple better than that and Spokane is just working fine [ph].

There's no reason that these facilities should not perform as well as our other acquisitions. Remember we did 53 acquisitions over like a 10-year period and 99.9% of those worked pretty well before we did the 54 at one time but there's no reason they should not do just as well.

All right. Thanks. I'll jump back in the queue.

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

Hi, good morning. Just had a couple of questions. Larry what percent of your commercial revenue is still sensitive to charge master? I know that's been coming down over time but...

It's a small percentage. There is some... well I don't think we have actually disclosed that percentage but it's a small percentage and it's generally on the out-patient side.

And can you give us the gross self-pay AR in the quarter?

Yeah just a second. I can provide that. Gross self pay AR payout about a million 842, I believe. And allowance is 80% of that.

That's a 1.842 billion?

Yeah 1.842 billion.

That's the number before that's a figure before contractuals.

1.842 billion.

That's the figure before contractuals?

That's a self-pay grossed up and an allowance is a 1.109 billion and the contractual allowances would be somewhere in the 367, 370 range.

Okay. Thank you. And then just final question it sounds like when I looked at the quarter and agreed pretty solid on almost all respects. But the one surprise was how much the pricing/mix picked up from where it had been running the last three quarters and I think you seemed to imply it was mostly a mix issue where commercial business was just growing faster than your Medicaid and Medicare and maybe even self-pay business. So do you have commercial admissions then were up more than 2.3% they were up 3%, 4% can you tell us that number?

They were up substantially more than 2.3%, all other categories were below 2.3%.

And then...

And just as a point this is the first quarter I think we have had positive in-patient surgery growth so I think Wayne referred to that. We had good out-patient growth but also had very good surgery growth as 1.8% in the first two quarters it had been slightly negative so that helped it also.

Then just my last thought is what do you attribute that pickup to? A lot of our data would suggest commercial admissions across the country have actually been much weaker than some of the other categories and you'll be one of the few hospitals with positive commercial admissions I think this quarter.

Yeah I think...

Physician recruiting is there anything you can really point to?

No, Gary, I'm glad to hear you asked a strategic question but I think it has a lot more to do with the opportunity that we have within our markets. And if you look at historically what we have done and what the opportunity that we thought we had going forward and then you layer on the Triad hospitals there is a lot of market opportunity here.

Share gains I guess you would just point.

Yes.

And a little bit of the managed care and other is probably the Medicare business coming out of Medicare but overall we were very pleased with the mix of business that we had this quarter.

Thank you.

Your next question is from the line of Harlan Cherniak with Venner Capital [ph].

Good afternoon guys congratulations on a good quarter. Can you provide some additional color around some of the operating assumptions for 2009 regarding ED visits, elective procedures, mix what have you and how has that performed I guess in prior economic contractions and I just want to get a better sense of how you are thinking about them?

I think for the first one we provided 2009 guidance and we gave pretty detailed guidance there and we probably won't go into any further detail. 1% to 2% admissions guidance and of course clearly we are saying the self-pay could grow a little bit more as a result of the economy and I would think Medicare may continue to go there, Medicaid could go down a little bit. More importantly I would say that the same-store margin embedded in that is probably 30 basis points to 40 basis point improvement though it looks it on the guidance some people picked up. It didn't improve because of the assumption both Spokane coming in at a single digit margin and a couple of other hospitals have been acquired is holding the margin down same-store would probably be 30 to 40 basis points. I would suspect we continue to see progress in payroll supplies and other operating expenses with bad debts going up. EBITDA probably be in the high single digits, the same-store EBITDA improvement, but...

The thing that differentiates us I think from a lot of our competitors is that we again think we have a lot of up side potential here. In that we bought a number of hospitals that had relatively low margins both prior to the time we did the Triad. And a number of the Triad hospitals had relative low margins. And one thing that has happened to us over the last 12 months is that we have an outstanding group of executives that have not only stepped up and worked their way through this combination of these two and got... taken advantage of all the synergies. But from an operating standpoint across the board in our 118 facilities our executives are performing extremely well and that's made a big difference.

One thing I will just comment about how there's a lot of concern about the economy but if you sort of take the Medicare and Medicaid admissions and then you take the managed care admissions and others that come through the emergency room, which is probably going to continue. And then the self pay debts are well over 80% of our admissions. So while the economy exists it's probably not going to affect Medicare admissions or Medicaid or emergency admissions, are probably going to continue so collectively that's over 80% of our total admissions. So the percentage that you're doing from an admission perspective is not as hard as people would think.

So these operating assumptions assume sort of constant mix and thus you're not anticipating any deterioration in the “quality” of your admission?

No. I think I said we would be expecting some increase in self-pay and through some raised or bad debt.

If you look at us historically you will find we have been fairly consistent in terms of our performance.

And does your bad debt assumption incorporate any potential rise in co-pays and deductibles on a managed care front?

It's a good question. We have averaged consistently on the hospitals we are tracking somewhere between 10%, 11% and 12% and it has not gone up the last couple of years so it would not expect it to go up substantially. It will go up with managed care payments but not substantial.

Because when you... and then it sort of raises the other question when you look at bad debt expense over prior economic contractions it's tough to really compare on an apples-to-apples basis given the change in the mechanisms for how folks like yourself recognize that. Can you comment in periods of 1990, 1991, 1998, or 2003, if you were to look at it where would you see the peak in that expense?

I think as you have said the accounting has gotten a lot better in 2003 It did go up and some of that was accounting and some of it was real and I think everyone is doing a better job now on recognizing bad debts currently.

So a better job synonymous or more conservative?

Probably a combination of both.

Okay. Great. Thank you very much.

Thanks.

Our time is running out. We'll take one more question.

And your final question is from the line of A.J. Rice with Soleil Securities.

Thanks. Hello everybody. I'm going to take a couple quick questions here, hopefully. First of all labor expense Larry you were talking about productivity improvement and obviously there is probably some synergies you're still realizing on that line. But you did get 80 basis points year-to-year improvement. Anything relative to the economy and how... I mean obviously that's your biggest expense item, how might what's happening with the economy affect you going forward and had you factored that into your forecast?

Some people think that as unemployment goes up then people have to go back to work and it actually will have more availability of nurses. I don't think we have seen any of that yet. I think ours is just opportunistic in terms of good hard work and our executives doing a great job in terms of managing our expenses, and being very focused on that. At the same time we are getting some growth in volume and revenue which leverages that a bit.

In a different line item other than salaries is our contract labor it actually improved 12 basis points during the quarter and its improved 10 basis points year to date. So we have made some progress in this like you said probably there will be some opportunity there for that. If there was probably opportunity back in the last recession we saw a little less wage increases and a little less outside contract labor.

Right. But you're saying you haven't factored any of that in at this point?

Not specifically, no. That would be something that we should... we should see but it's not factored in. We have got some productivity in it but we didn't put in anything big for reduction of contract labor or lower wages.

Right. And then on the question of the acceleration and your commercial revenue relative to what others are seeing obviously you've had a big step-up in your physician recruitment. If I sort of recall that you guys talked about when new physicians come on they tend to get a lot of Medicaid and even some self-insured and I guess over time Medicare and the commercial tends to be the last to follow. Is that still the dynamic and might that account for what you're seeing?

Well that... you have seen... when first comes in there that's people who don't have a doctor. But just keep in mind you go back to a year ago how many doctors who were recruited how many you've got now and over time these doctors get settled in it. May be the doctors are recruited in 2007 and early 2008 that have the third quarter volumes but we were really pleased to see such a good commercial managed care mix.

As I recall I don't remember the number but we had a pretty strong recruiting effort for the Triad hospitals in the fourth quarter of last year which we are beginning to see hope from that as well.

Right.

But you're right it is early on. It didn't happen this quarter because the Medicaid mix admission wise went the other way.

Right. Okay. And then just on the bad debt question I guess you didn't comment on the early '90s because really bad debt never changed during those downturns it was only in the 2003 and 2004 if I remember right when...

Your memory is correct 2003 and 2004 you go back actually volumes don't change substantially because especially nowadays a smaller percentage of people have insurance. Some still buy [inaudible] with their spouses and so it shouldn't be that big of an increase. We did factor some of it in because of the likelihood it could happen. If you go back to prior 2003 I think the other recessions didn't have as much volume impact or bad debt impact.

Right. If you think about the 2003 time frame because it had never really happened before and all of a sudden then you had the spike with people pushing more out onto the individuals, the industry was sort of caught off guard. This time it seems like to me at least the industry won't be caught off guard because everybody seems to be talking about watching for increases in bad debt. And I know there's things that have been put in place since that original spike in 2003, like up front collections, triage in-patients when they show up in the ER and all that. Is there any way to think about whether that's going to make a difference this time versus the last time?

If you go back probably to 2003 I would imagine our point of service collections were 4% to 5%. This last quarter they are running about 12% year to date and that does help. We also do a much better job still a lot more improvement can take place in trying to manage the ER for appropriate admissions. The other thing is qualified people for Medicaid. A large percentage of the people who are uninsured are eligible for Medicaid. We work really hard on that trying to do that and I think that helps the bad debts. All those are different than you have had in preceding years because I know people in service and Medicaid effort have all gotten much, much better by us since 2003.

Okay. All right. Thanks a lot.

Okay.

Great. Thank you. We believe that our ability to deliver quality health care services continues to differentiate Community Health Systems in the non-urban and mid-sized hospital market. We want to specifically thank our management teams and staff hospital chief executive officers, chief financial officers and chief nursing operations and our division operators for their continued support in operating efficiencies during this challenging operating environment. In closing I continue to be excited about our business prospects. We are convinced that solid performance will propel the company to another level of success extending our leadership position in the health care facility sector. Once again if you have any questions you can reach us at area code 615-465-7000. Thank you.

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