Community Health Systems, Inc. (CYH) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Amanda, 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. [Operator Instructions] Thank you. Lizbeth Schuler, Vice President of Investor Relations, please begin.

Thank you, Amanda. Good morning, and welcome to Community Health Systems Second Quarter Conference Call. Before we begin the call, I would like to read the following disclosure statement. This presentation may contain certain forward-looking statements provided by company management. These statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, including statements regarding future operations, financial results, cash flows, cost and cost management initiatives and can also be identified by the use of words like may, believe , will, would, expect, project, target, estimates, guidance, anticipate, intend, plan, initiative, continue, or words and phrases of similar meaning. These forward-looking statements speak only as of the date hereof and are based on our current plans and expectations, and are subject to a number of known and unknown uncertainties and risk, many of which are beyond our control. These risks and uncertainties are described in headings such as risk factors in our annual report on Form 10-K and other reports filed with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ significantly from those expressed in these forward-looking statements in today's presentation. You are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented, and we do not have any obligation to and do not intend to update any of these forward-looking statements. The presentation also contains certain and non-GAAP financial measures. This presentation and the company's earnings releases for the quarter and year ended December 31, 2010, and the quarter and year-to-date ended June 30, 2011, located on the company's Investor Relations page at www.chs.net, include a reconciliation of the difference between certain non-GAAP financial measures with the most directly comparable financial measure calculated in accordance with GAAP. These non-GAAP financial measures should not be considered an alternative to the GAAP financial measures. References to company or Community Health Systems used herein refer first to Community Health Systems, Inc. and its affiliates, unless otherwise stated or indicated by context. With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer. Mr. Smith?

Thank you, Liz. Good morning, and welcome to our quarterly conference call. Larry Cash, our Executive Vice President and Chief Financial Officer, is on the call with me today. The purpose of the call is to review our financial and operating results for the second quarter and the 6 months ended June 30, 2011. After the market closed yesterday, we issued an 8-K, including a press release of our financial statements. For those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanies our remarks. I'd like to begin the call today with some comments about the quarter, then turn the call over to Larry who will follow up with additional comments on our financial results. Community Health Systems has delivered another quarter of solid financial and operating results. These results are in spite of the continuing weakness in inpatient volumes and the challenges in the economy. Net operating revenues for the quarter, ended June 30, 2011, totaled $3.4 billion, compared to $3.1 billion over the same period last year, an increase of 11.5%. Consolidated EBITDA increased 4.7% from $442 million to $462 million. Earnings per share from continuing operation is $0.81 versus $0.76 for the same period a year ago, an increase of 6.6%. Excluding the after-tax expense related to the Tenet law suit, shareholder losses and governmental investigations, our EPS for the quarter would have been $0.85. Net operating revenue for the 6 months ended June 30, 2011, was $6.8 billion and EBITDA was $919 million. Earnings per share from continuing operations for the 6 months ended June 30, 2011 was $1.62, compared to $1.51 for the same period a year ago, an increase of 7%. With that, I'd like to recap a few significant accomplishments for the quarter. Our acquisition of the assets, Mercy Health Partners, was completed on May 1, 2011. The assets included 2 general key care hospitals: Regional Hospital at Scranton, 198 beds; Tyler Memorial Hospital, 48 beds. We also acquired a special care hospital, a 67-bed long-term acute-care facility in Nanticoke, as well as our other outpatient and ancillary facilities. Trail revenue was approximately $200 million with a single-digit margin. We now have 13 facilities in Pennsylvania. We have signed a definitive agreement to purchase the assets in Moses Taylor Health Care System in Scranton, Pennsylvania. The system has 217 beds in Scranton and a 25-bed hospital in Peckville, as well as a Primary Care and Specialty Practice positions health alliance now with 14 locations. This acquisition is still subject to regulatory approval. We continue to look for opportunities and have a very strong and active pipeline. When this acquisition is complete, we will have 15 hospitals in Pennsylvania. After the market closed yesterday, we announced that we've executed a definitive agreement to acquire substantially all of the assets of Tomball Regional Medical Center located in Tomball, Texas, a rapidly growing community approximately 30 miles northwest of Houston. The 358-bed hospital provides an array of health services and sits on a 155-acre campus that also includes a cancer center, heart center, women's health center, outpatient surgery centers, and sports medicine center. The transaction is subject to the customary regulatory approvals. When the acquisition is complete, Tomball Medical Center will become the 19th Community Health System Hospital -- Inc. affiliated hospital in Texas. We also announced that we have executed definitive agreement to sell 2 hospitals in Oklahoma to Ardent Health Services. Ardent already had 4 hospital presence in the Tulsa market, and propose this transaction to complement -- I'm sorry, and propose this transaction to complement their Oklahoma network. Projected sale prices are reasonable, EBITDA multiple, and for an amount greater than the stated net tangible assets of the facilities. Position recruiting has been an integral part of our operating strategy, and we're very proud of our success in this area. We currently recruit 658 new physicians for the first 6 months, compared to 743 recruited the same period a year ago. While the number of recruited is slightly behind last year, our turnover rate has improved. The third quarter typically represents our strongest recruiting quarter. Our recruitment target remains at 1,900 for 2011. The company is updating guidance. We have raised the low end of our guidance from $3.15 to $3.20, and our 2011 EPS guidance is now $3.20 to $3.35. Our 2011 projection exclude the estimated legal and other expenses related the Tenet lawsuit, shareholder losses and government investigations. I'd like to give you a brief update on significant litigation investigation matters that we've been working on. There will be more detail in the legal proceeding section of our Form 10-Q for the second quarter. First, discovery is continuing in the Baker qui tam case. This is a lawsuit in which the government intervened and involves Medicaid, upper payment limit for New Mexico. The trial date has not been set, the motions for summary judgment are due in November. With respect to the Tenet lawsuit, we filed our motion to dismiss their many complaints at the end of June. At this point, given that we withdrew our offer to acquire their company, we believe there is no reasonable basis for them to continue to sue. Their demand for legal fees and other expenses seem completely contrary to the right of stockholders to nominate directors. A number of lawsuits have been filed that mimic the allegations made in Tenet suit. Also, a number of shareholder derivative actions have been filed. We expect these cases to be consolidated into 2 separate cases, which will make them easier to manage. We believe this cases are without bearing, and we will vigorously defend them. There are no notable developments in the report in the government investigations that was initiated with the OIG subpoena we received in April. Of course, we are cooperating fully with the government but at this point, we have only been providing the requested documents. This is a very resource-intense activity and could take several more months to complete. It is far too early to predict the outcome of this of investigation as no medical records have been requested. We were also cooperating fully with the SEC investigation, which is following a similar track as the Department of Justice document production. The Texas Attorney General investigation was continuously focused on the functionality and reporting capabilities of Pro-MED emergency room maintenance software tool, is similar still, at the document production stage. In connection with the May Annual Meeting of Stockholders, Meeting of Stockholders, there were questions posed about the absence of proxy statement disclosure of our Board of Directors and Audit Committee Compliance. Audit and Compliance Committee is handling the oversight of some of these matters. Of course, at the time a proxy statement was filed, we have not received the OIG subpoena or the Tenet lawsuit. Supplemental proxy materials were filed to explain the chronology and the handling of the oversight of the Audit and Compliance Committee. Because we believe this is an ongoing interest to our investors, we have added a section to our 10-Q that provides a summary and update on that Committee's processes and oversight. At this point, I'd like to turn the call over to Larry Cash to provide you with a summary of our financial results.

Thank you, Wayne. Our consolidated admissions growth for the second quarter was up 0.6%, compared to the same period last year. Adjusted admissions, risk factors and outpatient business increased 5.3%. Our same-store admissions decreased 5.6% compared to the second quarter 2010, and soft inpatient volumes continued in the second quarter. Our sole community provider hospitals were down approximately 200 basis points more than our non-sole providers consistent with prior results. Now the following contributed to the company's decrease: Weather-related service closures and lack of flu, 30 basis points; lower admissions from women's services includes obstetrics and gynecology, 80 basis points; increased competition from a few hospitals for new services that occurred prior to the second quarter, changes in physician relationships, as well as some physician practice acquisitions by competitors, 60 basis points; a reduction in one-day stays for emergency room with a corresponding increase in outpatient visits, 160 basis points; and a reduction in one-day stays with no emergency room charge, that is the patient was a direct admit through inpatient registration, we're going to expect an increase in outpatient visits at 100 basis points. We believe that our volume decline attributed to one-day stays can be viewed as 2 separate categories: patients that have been admitted to the emergency room and patients that who would've been admitted as direct admits in inpatient registration. Please note that approximately 60% of the second quarter total decline in one day stays can be attributed to 2 factors. And approximately 40% decline for inpatient surgery were for corresponding increase for outpatient surgery. And approximately 20% decline in chest pain one-day stays. At the third quarter 2010 revisions to removal of inpatient criteria due to the direct chest pain admissions. We believe we may have had a natural reaction to the publicity that contributed to our one-day stay decline. Same-store admissions decreased 0.7% for the quarter. This has been our guidance and minus 1% to plus 1% for adjusted admissions. In the second quarter, we had good outpatient equivalent admissions growth of approximately 4.8%. Net revenues in the second quarter increased 11.5% from $3,081,000,000 last year to $3,433,000,000. On a same-store basis, net revenue increased a very strong 5.8% for the quarter where inpatient revenue down slightly and outpatient revenue increasing over 10%. Physician practice growth is contributing to the strong outpatient growth. Same-store volume increased 2.1% for the quarter. The strength in our outpatient surgery, which increased was driven by the increases in cardiovascular, orthopedic and scopes. In the second quarter, we recognized the California provider tax revenue of approximately 20 basis points and the related provider tax expense for approximately 10 basis points. At the end of the quarter, we've received approximately 70% of cash related to this program, and this treatment is in accordance with our revenue recognition policy. For the second quarter, same-store net revenue per adjusted admission increased 6.5% versus the same period in 2010, with a sequential increase of 1.9%. Our same-store Medicare case mix increased to 1.9% versus last year. Our overall same-store surgical case mix increased 3.7%. Consolidated reported EBITDA was $462 million for the second quarter versus $442 million for the same period a year ago, an increase of 4.7%. On a same-store basis, reported EBITDA was $464 million for the second quarter increasing 4.3%. Our consolidated EBITDA would have been $468 million, excluding expenses related to the Tenet lawsuit, shareholder lawsuits and government investigations, or an increase to 6.1%. For the second quarter, EBITDA margin on consolidated basis was 13.5% versus 14.3% for the prior year. The decrease basis points is primarily due to the low margins and recently acquired facilities and expenses related to the lawsuits investigations. Same-store EBITDA margin decreased 20 basis points to 14.2%, compared to the quarter ended June 30, 2010. And this can be contributed to the growth in physician practices and also increases in bad debts. For the second quarter, our non-same-store margin was 0.7%, non-same-store margin includes acquisitions cost, the Tenet acquisition costs. Also, with the Tenet acquisition cost, as well as systems conversions. And additionally, the $6.2 million expenses related to the Tenet lawsuit, shareholder lawsuits and government investigations is included. Our consolidated EBITDA margin would've been 13.6%, excluding the $6.2 million expenses for the various lawsuits and the government investigations. Consolidated operating expenses as a percentage of net revenue increased 80 basis points in the second quarter due to the acquisitions and inclusions of the various legal expenses. A decrease in supplies of 90 basis points set to offset increase of 30 basis points in payroll and benefits, 70 basis points in bad debt, and 60 basis points at our operating expenses and rent. Our consolidated operating expenses included a $6.2 million expenses that were related to the lawsuits and investigations discussed earlier. On a same-store basis, total operating expenses increased 20 basis points. Same-store payroll was flat, supplies decreased to 80 basis points and our operating and ramp increased 10 basis points. The improvement in the supply cost was primarily during by lower implant costs, medical supplies, drugs, cost, pacemaker costs and an improvement in rebates. Business taxes increased approximately 20% in the quarter due to various provider tax programs. Same-store revenue minus bad debt increased 4.7% for the second quarter, while same-store operating expense minus bad debt increased 4.7%. The net was flat for the quarter. On a year-to-date basis, consolidated admissions increased 1.2% and consolidated adjusted admissions increased 5.1%. Same-store admission is decreased 4.4%. And the following contributed to the decrease: Service closures, weather and lack of flu, 40 basis points; lower admissions from women's services, 80 basis points; increased competition in a few hospitals in these services that had occurred prior to second quarter and changes in physician relationships, as well as acquisition practice acquisitions, 50 basis points; reduction in one-day stays for emergency room with a corresponding increase of outpatient visits, 130 basis points; and reduction in one-day stays with no emergency room charge, that is the patient was a direct admit through inpatient registration, for the increase in outpatient visits of 90 basis points. Same-store adjusted admissions declined 0.2% and outpatient adjusted admissions increased to strong 4.5%. Consolidated net revenue year-to-date was $6.8 billion, an increase of $10.4 billion. On a same-store basis, net revenue increase 5.6% for the first 6 months and outpatient revenue increased a very strong 11.1%, including the growth from the physician practices. On a consolidated basis, net revenue per adjusted admission increased 5% on a same-store basis, net revenue per adjusted admission increased 5.9%. Same-store surgeries increased 2.1% from a very strong increase in cardiovascular, orthopedic and scopes. Our same-store Medicare patient mix for the 6 months ended June 30, 2011, increased 1.8%. Our all payer year-to-date surgical case mix increased 3%. Consolidated EBITDA was $919 million for the first 6 months ended June 30. On a same-store basis, EBITDA increased to solid 6.9%. Consolidated EBITDA margin for the 6 months ended June 30, 2010, was 13.5%, same-store margin 6 months ended June 30, 2011, was 14.4%, an increase of 20 basis points, compared to the period in June 30, 2010. Non-same-store margin for the 6 months ended June 30 was minus 5%. Again, consolidate EBITDA would have been $926 million, an increase of 6.6% without the expenses I discussed previously. For the first 6 months consolidated operating expenses as a percentage of net revenue increased 60 basis points for the prior year. Increases in payroll, 40 basis points; bad debt, at 40 basis points; and other operating at random, 30, were partially offset by 50 basis point improvement in supplies. Same-store operating expenses declined 20 basis points, payroll decreased 10 basis points, supplies decreased 60 basis points and also the increase in bad debts. Same-store net revenue minus bad debts increased to 4.9% year-to-date, compared to 4.6% increase in operating expenses minus bad debts, a net positive of 30 basis points. For the second quarter, consolidated bad debt was 12.6% versus 11.9% compared to a year ago, an increase of 70 basis points. On a sequential basis, bad debt increased 60 basis points. Same-store self-paid admissions increased 3.5%, and year-to-date, consolidated bad debt increased 40 basis points, 12.3% versus 7.9%. Our combined consolidated bad debt charity administrators self-paid discounts divided by adjusted net revenue was 20.5% year-to-date through June 30, 2011. And our combined consolidated bad debt charity administrator discounts as a percent of adjusted revenue were up 100 basis points year-to-date. The year-to-date increase consist of 20 basis points, an increase in bad debt, 30; increase in charity, and a 50 basis points increase in discounts. Our consolidated cash receipts were 102%, on collectible net revenue for the 12 months ended June 30, 2011, and our bad debt guidance range remains 12.4% to 12.7%. AR days were 47 at June 30, 2011, it increased to one day for the end of the year and same as the first quarter of 2011. The second quarter AR days were down one day from the same quarter a year ago. The allowance for doubtful accounts is $1,793 million or 50% at June 30, 2011. The allowance for adaptable accounts and related contractual allowances for self pay were approximately 84% of self-pay receivables at June 30, 2011. Community Health Systems continues to have a favorable payer mix for the quarter ended June 30, consolidated net revenue by payer source was as follows: Medicare 26.8%, Medicaid 10.1%, Managed Care and Other, 51.1% and Self Pay, 12% of net revenue. On a year-to-date basis to payer mix is as follows: Medicare 27.1%, Medicaid 9.9%, Managed Care and Other, 50.8% and Self Pay, 12.2%. Embedded in our guidance is an overall Medicaid decrease for changes in calendar year 2011 of 3% to 3.5% compared to the previous decrease of 2% to 3%. Please note that the various state Medicaid cuts will affect the second half of the year. Cash flow from operations was $397 million for the quarter. On a year-to-date basis, cash flow from operations of $585 million versus $542 million for 2010, an increase of $42 million or 7.9%. The increase is primarily due to increased depreciation and amortization of $23 million, increasing continued net income of $12 million, income tax refund of $80 million. These improvements were offset by growth of accounts receivable of $19 million and changes in prepaid accounts payable. Compensation and liability is approximately $50 million. The cash flow guidance remains $1,150,000,000 to $1,250,000,000. Total capital expenditures for the quarter just ended $198 million or 5.7% of net revenue. Year-to-date, capital expenditures of $351 million or 5.2% and replacement hospital expenditures, including a number of $48 million for the quarter, and $82 million year-to-date. Our guidance now ranges from $750 million to $825 million, a reduction in $25 million on the high end. Balance sheet cash at June 30, 2011, is $191 million. At the end of the quarter the company had available credit from the revolver of $710 million after the outstanding letters of credit. Looking at the balance sheet, as of June 30, 2011, we had $1,072,000,000 working capital and $14.8 billion in total assets, total outstanding debt at June 30, 2011, was $8,852,000,000, which is approximately 93% is fixed. Our debt to capitalization at quarter end was 79%. At the end of the quarter, we reported to $5,315,000,000 of interest rate swap agreements unchanged at the end of the first quarter, and again 93% of our debt is fixed. The company repurchased approximately $50 million or 1,763,000 shares back during the second quarter of 2011. We've revised our guidance as follows: Expenses related to the Tenet lawsuit, shareholder lawsuits and government investigations are excluded from our 2011 guidance; revenue in EBITDA guidance has been lowered, reflect the pending divestiture activity for 2011 and actual activity. Please note, we did increase to low end of our EPS range for 2011 to $3.20. We have provided an estimate for a meaningful use and electronic health record implementation. We expect incentive payments recorded this revenue to exceed and related expense by 5 basis points to 1.58% of revenue. We did not recognize any EHR revenue in the second quarter of 2011. We will update our Medicaid revenue decrease estimates, several Medicaid decreases will be implemented in the second half of 2011. And just as a reminder, in the third quarter 2010, we recorded 15 months for a new provider tax program, we do not expect such a benefit in the third quarter of 2011. Please also note, the third quarter is unusually seasonally lower than any of the 4 quarters. Now Wayne will now provide a brief recap.

Thanks, Larry. We've very pleased with our strong second quarter performance as we continue to deliver solid operating results through efficient, expense management and consistent execution. All economic trends indicate that the overall hospital industry volume will remain under pressure. We believe our proven operating strategy, combined with a solid cost results will enable us to navigate through this uncertain environment. With that, I will 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.

[Operator Instructions] Your first question comes from the line of Tom Gallucci of Lazard Capital Markets.

Two questions, if I could. First, when I just thought it was interesting how you're framing the one-day stays in to sort of a 2 categories there from ER and then the other. Do you know the percent of the total of one-day stays historically that have sort of come from one versus the other?

Somewhere to 30% to 40% range number, probably.

30% to 40% is coming from -- are they non-ER.

Yes, yes. Direct. And the answer is yes, Tom.

Right. Okay. And then you announced the acquisition in Texas. I'm wondering if you could give any more color on sort of that market, the opportunity and sort of multiples that you're seeing out there on the acquisition landscape in general?

We haven't talked about the purchase price, but I will tell you it is a great opportunity, it's in a great location, it's about 30 miles north of Houston. It's on a 155 acres, it's got a number of subsets of specialties. It doesn't need a huge amount of capital. It's a great operating opportunity for us in terms of improvements. The market area by the way, the primary area has about 218,000 people expected to grow by 11% by 2015, the second area is 437,000, it is a bedroom community of Houston. We understand that Exxon Mobil is relocating their Houston workforce, which is going to be about 8,000 new employees in the area. So we're pretty excited about it. And I would just say in terms of the process, it was a highly competitive process. It was run by [indiscernible]. They're very careful and thoughtful in terms of how they run these processes. You have to work your way through the ADA [ph] all of the above. And the process worked. We got a unanimous vote by the medical staff, a unanimous vote by the Board of Trustees in terms of this acquisition. So we're pleased about it, they're pleased about it. That employees are ecstatic about it, we just heard yesterday, how pleased the employees are about it. So we're excited about the opportunity.

Your next question comes from the line of A.J. Rice of Susquehanna.

Two things if I can ask real quick. Larry, I think you referred to it when you're talking about the one-day stay change. But maybe more broadly, if you think about the different constituencies, payer discussions, physicians, your staff, obviously you had a lot of noise that you worked through in the quarter from Tenet, from a regulatory inquiry. Are you sort of back to normal do you feel like with your people in the field? Or can you sort tell us how the flow of inquiries are coming in from those guys? Are they back to focusing on the job at this point or is it still something you're watching closely.

A.J., let me start the conversation here. What we try to do and I think we've done a pretty effective job of isolating the issues around Tenet lawsuit and the government investigations here at the corporate office and remains in those here in a consolidated way. We are not hearing a huge amount of discussion when we go out and talk to -- or when we asked our executives, there's not a lot of discussion at the hospital level. Their singularly focused on getting their job done and providing high-quality care and getting good results. So I think it's a modest barrier here in terms of -- as things continue to go along, but it's certainly not disruptive. And in terms of acquisitions, which is sort of the next part of that, I mean, it's certainly not disruptive in terms of the operations. But in terms of acquisitions, we're very straightforward there. We lay all the status we did at Tomball and Scranton and it's not really been -- again, it's kind of like a modest barrier, it's not a been a major detractor. But we know that we lost a good acquisition opportunity, HMA [ph] which has done a good job and they did a good job in terms of selling what they can do and accomplish in Knoxville. But that was right here in the middle of all the heat around this early in April, in mid- April. So as long as our detractors don't do other kinds of things that stir up the markets, I think we're on track and we believe we have a good solid acquisition pipeline and we think we'll continue to be able to acquire and obviously we can think we can operating results.

I'll have a second, if I would, A.J., on the commissions about managed care, we are doing well with managed care, we're renewing the contacts, getting new contracts, getting increases and there's been no really big issue brought up about this by the managed care companies to the extent that anyone has any questions we would address those. But we're doing a good job and the managed care people doing that area of handling it quite well. But we still expect to get the cost 5% to 7% increase and getting historically, and we're renewing our contracts as expected.

Okay. And then just one other one. Probably, this is another sort of big picture question. I guess, as I look at the results that people are putting or posting in terms of divergencies and acuity trends, inpatient volumes trends and surgical medical mix , I mean, among the public companies, there's probably as much divergence this quarter as I've seen in a long time. Do you guys have any thoughts about why people are seeing such different trends?

Well, I know we got a mixture of hospitals between urban and non-urban there. I know our non-urban volume is going down a little more than others. And we are seeing a fair amount of movement from inpatient to outpatient. I think others are seeing it too. They may not be talking about it, but others are seeing it. We're fortunate that our Medicare case mix was up and our surgical case mix is up. We did have a little bit of movement, a few more medical DRGs not much, I mean, it's 75% to 80% of our business has stayed in that range, and surgery is somewhere 20% to 25%. It's hard to describe what others may have, but I think, at least, in our situation we've been fortunate enough to have good intensity growth, good revenue, good outpatient growth and expense management.

The other thing I think, A.J., that's impacting this -- clearly, the world is moving to outpatients quickly as it can, managed care companies or Medicaid programs are. But you also are having a number of physician practices that are being acquired, the net revenue is now going into a lot of outpatient business as well. So that maybe driving a little bit of this. But it's hard to determine by company what they're doing in terms of physician acquisitions.

Your next question comes from the line of Kevin Fischbeck of Bank of America.

I wanted to just kind of triangulate on a couple of comments that you had made. You guys highlighted as headwinds of volumes, this change in physician relationship and things that some of your competitors have done. But then I think -- also, you said that physician retention was actually improved during the quarter and that -- I'm not sure how those things go together, can you just clarify that.

Yes. First of all, the competition was in [indiscernible] hospitals and we decided to carve it out and we've not really talked about that, it's not something that you often see happen but we did have a little bit of competition that started early in the year for our new service such as the surgery center or physicians came where they invested in a surgical hospital. And also in a couple of situations where a competitor made things a little bit better. Physician relationship may not mean they've left our medical staff, but they are not admitting to us at the time. And clearly, we had a couple of places where physician practice acquisition was done by our competitors. This is 5 or 6 hospitals but it did amount about a 60 basis point decrease. And since volume was down we thought we'll give a little more color on the some things you're seeing.

Okay. But you're saying outside of that retention is -- how did you?

This is in just 5 or 6 markets. The retention is down for all 130. Retention is better and improved for all 130 hospitals. This was just a 5 or 6 hospital situation.

We also seem to be recruiting more nurse practitioners or PAs as well. But we think we've got a good shot of my getting 1,900. Last year was a huge year for us, but we still think we're on track to get there.

Okay. So I guess when we think some of the ways if you obviously, want to better understand how this situation, the investigation could be impacting the company, you've done a great job outlining the impact on volumes. So you can see that you addressed doesn't really seem to be impacting your ability to deal when it comes up. It sounds like it doesn't impact your physician relationship, it's not impacting your managed care pricing, is there an where else that you talked about this potentially being an impact or where you expect it to flow-through if it was too?

Well -- go ahead.

These issues are carved out all sort of the curve prior to the second quarter, but it didn't have effect our volume in the second quarter, so it's not something to risk another investigation. I think the physician recruitment, as just we Wayne said we're about 50 below first quarter, second quarter. If you go and look at the healthcare practitioners we recruited which can help, they are up about a 100 over a year ago, so that shows the growth there. I think if you get physician relationships acquisitions are doing good. We're still keeping retention always, it's always, it's doing well, we're growing the revenue well and most importantly managing our expenses well.

But just around the employees for example, we just got back our surveys, our satisfaction surveys among employees and we had an 84% satisfied rate among our employees, which is pretty phenomenal when you think about it. So this is an area of concern, but it's not an area that's disrupting operations.

Okay. Great. And then I think, in the past, I know you may have said it to somebody, I didn't catch it, but in fact you kind of made some commentary about volume growth and differentiate between the urban and non-urban markets. Any difference in trend there?

Yes. Last quarter, and even last year, we saw the non-urban markets decline a little bit more than the urban markets, where we didn't have sole providers. And I know that the urban markets, that report, at least one that's reported had pretty good volume growth, more so than the non-urban, also the non-urban markets. And I think it's probably -- maybe a little bit more on those types of situations. Also saw a little bit of growth rate -- lower growth rates by populations. So we're just saying that some of our decline may be different than others is because we have 80 of our hospitals are sole providers.

Larry, why don't you comment about adjusted admissions because that seems to be the metric.

Yes. The one that we have put more interest on here now and company suggested admissions and were down 0.7%, 0.2% year-to-date right within our guidance. We have really good outpatient equivalent growth and that's in both urban and non-urban markets. And I think that will to continue -- to us, it's well over 50% of revenue growth and it's sort of much more correlation with EBITDA growth, adjusted admissions is than admissions are.

Your next question comes from the line of Whit Mayo from Robert W. Baird. Whit Mayo - Robert W. Baird & Co. Incorporated: Larry, I wanted to cut into the one-day stay discussions just a little bit differently. Can you talk a little bit about your Medicare or managed care denial rates, just curious if that's changed materially in recent months with what we presume has been somewhat increased payer reviews?

Yes. I don't think that Medicare denial rate has changed much. We are, like everyone has seen a little bit of activity interaction [ph] and it's a little too early to know exactly how that's going to end up, but we are seeing some. I think the managed care is probably a little bit better. We now talk about it, it's probably a little bit better than a quarter there, and we'll continue to watch that denial rates somewhere around 1% plus or minus, a little bit, it's probably a little bit better. Which sort of says if you don't get in a situation with managed care, where you are doing appropriate than you have a little bit better denial rate you also have process to a little better. One of the reasons that we made the decision to go back in the first quarter of 2011 for all the start was to have a better, smoother process for managed care. Whit Mayo - Robert W. Baird & Co. Incorporated: But it said the 1%, that's your final denial rate?

Yes. Whit Mayo - Robert W. Baird & Co. Incorporated: And that hasn't changed?

It's actually a little bit better but it's around that number. Whit Mayo - Robert W. Baird & Co. Incorporated: And that hasn't trended?

It got a little bit better in the second quarter, and I think it will probably get better as the year goes on. Whit Mayo - Robert W. Baird & Co. Incorporated: Okay. Just one other question with regards to Tulsa, and I guess I'm trying to poke a little bit at the quarter and then you didn't give exactly guidance around the third quarter but I just want to get a sense for how much revenue and earnings you sold and again kind of what you're assuming for M&A in the back half of the year. I mean, I guess, you could argue that you've hit your goal already, but just anything with the combination of the moving pieces to help us kind of think about the third quarter?

Yes. The Ardent transaction will take it out of the operations and our opinion would be revenue consensus for the quarter, when you back out, it's approximately $50 million a quarter. We backed out $20 million of EBITDA for the year, so it's somewhere in the $5 million range plus or minus something was in guidance. So the actual results for the third quarter will not include anything for the 2 hospitals in Tulsa or the previous transactions from the first quarter. As it relates to acquisitions, I think what you have in the second quarter was grant closed on May 1, it's probably approximately $15 million to something about $16 million of revenue a month. So you actually a couple of months in the third quarter, you didn't have in the -- or one month in the third quarter you didn't have in the second quarter, I doubt that the other 2 transactions will not have any activity in the third quarter. Whit Mayo - Robert W. Baird & Co. Incorporated: Okay. Any other moving pieces just to think about as we look at our models for the upcoming quarter?

Well, we did, I think, we carved out a couple of transactions there, net it's about $1 billion that will not be there, but the revenue and expense related there will disappear. Whit Mayo - Robert W. Baird & Co. Incorporated: Okay. And I guess, maybe, let me ask one other quick one, just on the same-store hospitals, you noted 70 basis points, I guess, negative margin and it looks like maybe $1 million to $2 million of an EBITDA loss, can you walk us through kind of these losses and expectations going forward?

Yes. I think the legal fees that we incurred in this quarter is a [indiscernible] put up guidance but that's probably going to continue. And we have a reason to think it's going to go down.

And that's in the non-same...

That's in the non-same store. We've got the acquisition costs, this is the conversion cost and they will probably continue. I don't think the Tenet acquisition cost there will not continue. We'll incur some money on finalizing the 2 transactions we just announced and legal fees. And you also have Scranton will be in there. The one in Marion, South Carolina, which we bought last year in July, so it will flow in the same-store. That's about $60 million or $70 million of revenue. And then you'll probably have, as I said, a full quarter of Scranton and you understand Forum will stay in non-same store, as will Bluefield for all of the third quarter.

Your next question comes from the line of Gary Taylor from Citigroup.

Pretty good results with all the noise in the quarter. Just a couple of questions. When you talk about the Medicaid cut 3% to 3.5% for calendar '11, are you saying the back half Medicaid rates will be down 6% to 7% or I assume you probably had some states where you have already taken a little bit of a hit in the first half on the Medicaid side.

Yes. We have had some. And I think it's the whole calendar year effect. But the number of reductions in the back half of the year will be greater, I don't if it's 6% to 7% but the back half is going to be greater than the first half of the year. Why we don't have much in Florida. That was there and you got Texas and there will be all sort of changes. And New Mexico will affect us in the back half of the year.

Great. And then on the net benefit from high-tech in the back half, is that still just Medicaid or is that a combination of some Medicare and Medicaid?

We've got a ask mixture of Medicaid and Medicare, most of this is Medicaid. And I think we'll continue to probably -- there might be a little bit of Medicare, but most of it will Medicaid, especially on the high-end. And that's also net of expenses that we'll. I'll just give you a little bit of color, all our meaningful use products we now have received stage 1 certification. 17 states that we operate in are involved in the state incentive programs for Medicaid, that means we got an opportunity to get some dollars there. And I do expect us to see something, maybe, a little bit in the third quarter. But it's more in the fourth quarter and at the higher end of the range, probably more Medicaid dollars than would be Medicare dollars.

And last question, just going back to the one-day stays, which contribute, I guess, 260 basis points of the admissions decline. But I think one-day stays only represent of 15%, 16% of your total admissions, at least on the Medicare side. So is that -- I mean, the math suggests I guess one-day stays are down somewhere between 15% and 20% year-over-year, is that about right?

That's probably down 15% to 20% year-over-year and I think that we're probably, the way you look at Medicare admissions running something around 12%, probably of the Medicare admissions were historically running 13% to 14%.

And can you comment or do you care to comment -- I mean how much of a drag on same-store revenue do you think of a headwind that's presented?

Well, we'll try to point out that a fair amount of that is surgery, 40% and getting outpatient surgery. And clearly, for managed care, some of those payments are as good as or will be better or some of it are bit worse. We had very fortunate good same-store revenue growth and we also pointed out that a fair percentage is chest pains which is a difference between the inpatient payment rate for most of the payers is not that big, but we have 5.8% same-store revenue growth for the quarter. And I think that there's a lack of it that's build in our guidance, we'll stay in the 4% to 5% range for the year. So we think we'll continue. And we do expect the one-day stays to continue to decline a little bit throughout the year.

Presumably that was an even stronger number x this headwind? No?

They could continue to decline a little bit. I think as long there's -- if we get the outpatient payment rate and the managed expenses to it, we should be okay. I think our overall revenue growth is 5.6% from the first 6 months and it was 5.8% for the quarter when all this happened.

One more quick one, I'm sorry. I just thought of -- we haven't heard anyone talk about any expectations around the inpatient final rules that ought to be out on Monday. Have you guys had any indication or hope from the association or the federation that we'll see any movement closer to flat on that or is your expectation it will look like as proposed?

I think we always got hope it, but I don't know if have any more color we can add to it. And even if we tried to -- and therefore, what we think is going to happen into our guidance, it’s unfortunate this year it's only a quarter of it. But if it stays around 0.5% reduction, then we'll just have to continue to manage the expenses better. But we don't have any more color over that one.

No. I don't think there's any good news around reimbursement right now.

Your next question comes from the line of Matt Borsch of Goldman Sachs.

Just wanted to get a better sense of what your outlook is on the volume side, and can you comment at all on what you seen in the month of July so far?

As a general practice, we don't comment about 3 or 4 weeks it's in the best interest of everyone. Clearly, July starts off with a holiday which is a Monday, so it will be a more challenged there and it ends on a strong Friday, Saturday, Sunday, which is, actually not stronger for our business. We don't generally do that. Our outlook is still a minus 1% to plus 1%, we're 0.2% negative for the first 6 months. We've had some drop, about a 4% drop in admissions. A little bit more in non-urban markets than in the urban providers we have competition. That's probably going to continue from the admissions drop. We does see much change in the economy. We continue to see a little bit of drop in the one day admissions. But I think from an outpatient perspective or more from a revenue perspective, and I could put out a data just to show we think the revenue will continue to be strong. And I think that the outpatient volume that we're seeing will continue. We'll have a little bit of growth from physicians, we have very good OR, radiology, pharmacy, lab and ER outpatient growth and that we think that will probably continue.

Just on top, I think you can assume as long as the economy is in pretty poor shape, unemployment rate is at 9.2%, I've been saying this all along that 2011, looks like a lot like 2010. I think the thing that's changed a little bit is there's certainly seems more movement to outpatient for everybody. And I think that's a trend that will continue. It's not only managed care companies and Medicaid and everyone else pushing for outpatient. Technologies continues to improve. That's moving things to outpatient. So that's why we are now beginning to think that adjusted admissions is probably important metric than just admissions. But I don't see any change in terms of admissions until unemployment rate comes down fairly substantially. It's based -- I mean it's all around how many people.

I'll make one comment, we did see that the managed care was up 51.1% for the quarter, better than it was year-to-date. I think it was better than it was last year, which is a positive to see the managed care up a little bit. Last year it was 50.6%, so we're moving up a little bit in that category and that's a good earnings contributor from managed care makes this better.

And would you describe your rate negotiations with managed care is about status quo relative to a year ago? Or what would you spike out that's maybe changed in the nature of those discussions?

I got to be careful to what I say to managed care analyst, sometimes. 5% and 7% is what we've always said. And we're clearly thinking it will continue to be in that range and where a good percentage done of our contracts reported 90% and 95% when the 2011 contract is done, and we're 70% to 75% done for 2012. And clearly, managed care is going to do what they need to do, but these are physician with a lot of sole provider hospitals, a lot of good presence as we continue to build networks, I think we'll be okay and hope to continue to do well.

One other think, if you look at our acquisition pattern here recently in terms of Spokane, I mentioned this several times over the last number of quarters in terms of the network that we built in Spokane. That's what the Scranton Wilkes-Barre area is all about. It's developing a network that can make us very competitive in the market, so that we're not excluded from any managed care company and that we can demonstrate quality at the same time. So you will see us work hard to continue to develop those networks and add another hospital in Texas is an important part of our network.

Your last question comes from the line of Gary Lieberman of Wells Fargo.

Larry, I think you said that your total guidance or total expectation for Medicaid count was 3% for the year and kind of down 6% to 7% in the second half. Is that any different from what your prior expectation was for it?

Yes. I think what I was trying to say was the change in calendar 2011 is 3% to 3.5%. Previously, we thought it would be 2% to 3%. So if you use the midpoint of that, it's going from 2.5% to 3.2%. And I do think we saw some reductions in a couple of situations a little bit lower that's embedded -- when we raised the guidance to -- the low end of the guidance from 3.15% to 3.20% we were aware that the Medicaid cut would be a little bit more than the last half of the year.

Any state specifically that caused the change?

Well, we'd originally guessed that taxes at 5%, maybe we're not a good guessers, but it turned out to be 8%. And we have some reductions in New Mexico more than we have thought. I think we sort of said that could be there. There may be some provider taxes coming a couple of states that might help at the end of the year, but we'll just have to wait and see if that happens. But right now, we are thinking it's going to be somewhere between 3% to 3.5% from all the changes that happened in 2011, affecting the revenue in 2011. Some of that will carry over into 2012. Hopefully, [indiscernible] that issue behind us and state tax receipts a little bit better and 2012 won't be as challenging as 2011.

And presenters, I turn the call back over to you for any closing remarks.

Thank you for spending time with us this morning. Our consistent ability to drive revenues and achieve solid margins in this environment demonstrates solid execution of our centralized offering strategy. We want to specifically thank our management team and staff and hospital Chief Executive Officers, Chief Financial Officers, Chief Nursing Officers and Regional Operators for their excellent operating performance for the second quarter. I also want to thank our very loyal and supportive medical staffs and great employees. I mentioned earlier that we have an 84% satisfaction on our surveys with our employees. We're extremely appreciative for the good work that you're doing every day for the patients that we serve. We remain focused on our business strategy and prudent results. Once again, if you have any questions, you can reach us at area code (615) 465-7000.

This concludes today's conference call. You may now disconnect.