Community Health Systems, Inc. (CYH) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Adrian, and I will be your conference operator today. At this time, I would like to welcome everyone to Community Health Systems' first quarter conference call. [Operator Instructions] Lizbeth Schuler, Vice President of Investor Relations, you may begin your conference.

Thank you, Adrian. Good morning, and welcome to Community Health Systems' first quarter 2013 conference call. Before we begin the call, I would like to read the following disclosure statement. This presentation may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown uncertainties and risks, which 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, actual results may differ significantly from those expressed in any forward-looking statements in today's presentation. We do not intend to update any of these forward-looking statements. 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, and good morning. Thanks for joining our review of the financial and operating results for the first quarter ended March 31, 2013. Larry Cash, our Executive Vice President and Chief Financial Officer, is on the call with me. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. A slide presentation accommodates our prepared remarks for those of you listening to the live broadcast of this conference call on our website. First, I will discuss some parts of our quarterly results and then turn the call over to Larry who will add some additional details. Our results for the first quarter reflect the current dynamic market conditions in a more challenging operating environment for health care providers. Our consolidated adjusted admissions were down 3.5% for the first -- for the quarter with the same-store adjusted admissions, same-store adjusted admissions down 5.2%, approximately half of our same-store adjusted admission decline is directly related to seasonal issues we discussed on the fourth quarter conference call. Consolidated net revenue was $3.3 billion and adjusted EBITDA was $494 million for the first quarter of 2013. Income from continuing operations, including the loss of early extinguishment of debt, was $0.86 per share diluted, adding back the loss of extinguishment of debt of $0.01. Our EPS for the first quarter was $0.87. With that, I'd like to review some key operating accomplishments. We recruited 418 new physicians during the first quarter 2013 compared to 423 for the same period in 2012. In addition, we added 30 mid-level practitioners during the quarter. Physician recruiting remains a key component of our operating strategy. Adding new physicians improves not only the quality, but also the availability of services provided in our communities. The company is updating the guidance it has provided for the fourth quarter earnings results. We've tightened revenue guidance for 2013. We're in the high end of the range by $200 million. We have also tightened our adjusted EBITDA and EPS guidance lowering the end of the range by $25 million and $0.10, respectively. These adjustments reflect the actual timing of sequester now implemented. As we announced in March, the company and the Cleveland Clinic have entered into a strategic alliance to find new and collaborative ways to enhance quality, reduce cost and create greater value for the services provided to our patients. We believe that this collaboration will allow us to identify synergies and develop solutions for the ever-changing health care delivery landscape. Some key components of the alliance include the assessment and implementation of the Cleveland Clinic quality alliance and selected CHS markets and a potential affiliation with the Cleveland Clinic heart and vascular institutes, cardiovascular quality management model and multiple CHS markets. There clearly is a potential for future joint ventures, clinical research and shared innovations. We're very excited about the future opportunities for the Cleveland Clinic and we'll continue to update you as this alliance evolves. Moving to our government investigation matters, there are no significant updates since our last call in February. We continue to cooperate with the Department of Justice regarding their inquiry into the medical necessity of short-stay in-patient admissions from our hospitals' EDs. And the real[ph] case in Indiana, another 6-month extension to the pending stay has been requested by the government with our consent and has been granted by the judge. And in the Baker-[indiscernible] case in New Mexico, we're still awaiting scheduling from the court on a pending motion for summary judgment. At this point, I'd like to turn the call over to Larry to provide you additional details of our results.

Thank you, Wayne. Consolidated admissions decreased 4.4% in the first quarter of 2013. Our adjusted admissions decreased 3.5%. Our same-store admissions decreased 5.9%. Same-store adjusted admissions decreased 5.2%. As we previously discussed during the fourth quarter call, first quarter had a number of seasonality factors. January 1 fell on a Tuesday this year versus a Sunday. We lost a leap day in 2013. And finally, Easter fell in March, the first time since 2008. All told, seasonality represented approximately 50% of adjusted admission decrease in the first quarter. While flu was rampant during the year, end of the 2012, was no long a factor in our latter part of the first quarter and actually accounted for approximately 10% decrease for the entire quarter. We'll continue to see lower GYN and OB admissions, and this reduction accounted for 10% of the decline in adjusted admissions. There's also involuntary turnover in employed physicians since midyear 2012 in an effort to improve physician productivity that generated approximately 10% of the decrease in adjusted admissions. And finally, a decrease in self-pay adjusted admissions represented 10% of the decrease. Adjusted admissions have been slightly negative taken into consideration the seasonality of flu and our women services and a decline in [indiscernible] physicians and self-pay. We've decided to review our historical performance from the fourth quarter to the first quarter for only the same hospitals for the past 3 years. For 2012 first quarter, even adjusted for seasonality, had a much stronger volume growth in 2011 and 2010 versus the fourth quarter. So it simply states we had a very tough comp. I would also like to note that our managed care adjusted admissions decline, we're better than the overall company average. That's the most significant decrease was in Medicare and Medicaid. Our net revenues in the first quarter were $3,312,000,000 compared to $3,297,000,000 for the first quarter. I'm pleased to remember that the BNA settlement and the SSI adjustment off approximately $81 million were included in the consolidated revenue for the first quarter of 2012. Excluded this, consolidated revenue increased 3%. On a same-store basis, net revenue increased 1.4%. Same-store net revenue per adjusted admission increased 6.9% year-over-year due to higher intensity and improvement in payer mix. The March, 2012 first quarter revenue for adjusted admission was up only 1.9%. Our same-store Medicare patient mix increased 2.6% for the quarter. Overall, payer mix increased 2.9%. Same-store volume decreased 6.6%, with outpatient surgery just being slightly less than inpatient. Again, the seasonality issues explained earlier contribute to about 50% of the decline. Almost all the inpatient, outpatient surgical classifications were down. While our volume was down, our intensity increased, our same-store surgical case peaks [ph] for all payers, increased 3.1% for the quarter. Our same-store ER visits were up 0.7% for the first quarter 2013. Consolidated EBITDA was $494 million for the first quarter versus $535 million for the same period a year ago. Again, excluding the fact of industry-wide budget and traveling settlement, including expenses associated with the settlement in the SSI adjustment. And reserves set up in the first quarter, our consolidated EBITDA increased 3.4%. On a same-store basis, EBITDA was $496 million for the first quarter, a 4.3% increase. EBITDA margin for the first quarter on a consolidated basis was 14.9% versus 16.2%. Again, excluding the items that I discussed earlier, the margin was at 14.9%. Same-store margin improved 40 basis points for the quarter, 15.2% versus 14.8%. Consolidated operating expenses increased 130 basis points. As a percent of revenue in the first quarter, again excluding the BNA and SSI adjustments, the percentage of net revenue was affected by the first quarter 2012. Payroll benefits also affected the increase. Same-store operating expenses improved 40 basis points for the first quarter, while payroll was up only 10 basis points. It's very strong expense management supply, so 50 basis points. The supply savings were generated from reductions in cardiovascular, including pacemaker and stent, drugs, food and chargeable supplies. Total AR days were 60 at March 31, 2013, a 2-day increase from December 31, 2012. The amounts for doubtful accounts was $2,258,000,000 at the end of the quarter or 50.5%. The allowance for doubtful accounts or related contractuals for self-pay was approximately 84% of the hospital segment's pay receivables, at March 13, 2013, unchanged from December 31, 2012. I'm pleased to note while bad debt is seemingly flat, our uncompensated care was 22.6% and adjusted revenue for the first quarter 2013 compared to 21.4% for the same period of 2012 and an increase of 120 basis points. Community Health Systems has a favorable payer mix. For the quarter ended March 31, net revenue by payer source of a solid basis was as follows: Medicare, 26.1%, Medicaid, 8.8%, managed care and other, 51.7% and self-pay, 13.4%. Cash flow from operations for the first quarter was $57 million compared to $187 million at first quarter 2012. Cash flow from operations for the last 12 months ended March 31 was $1,150,000,000 or approximately 10% lower than last 12 months ended March 31, 2012. The following items affected our results for the first quarter compared to the first quarter of 2012: the 2-day increase in accounts receivable in the first quarter would cost about $75 million. Approximately $6 million was affected by the timing differences of payroll and some related liabilities; reduction of $24 million related to the legal settlement. We paid $10 billion in the first quarter of 2013 compared to an accrual of $14 million in the first quarter of '12; and there were significant reductions in accounts payable from accelerated payments in the first quarter of 2013. Cash flow for the first quarter 2012 also started off slowly. And similar to the results of Quarter 1 2012, we started off slowly in 2013. We'll be working to improve cash flow results for the remainder of 2013 but are maintaining our 2013 guidance of $1,225,000,000 to $1,300,000,000. Total capital expenditures for the quarter just ended were $113 million or only 3.4% of net revenue, and this compares to $185 million or 5.6% of net revenue for the first quarter of 2012. Our CapEx guidance range for 2013 ranges from $800 million to $850 million, a reduction of $50 million on the high side. Balance sheet cash at March 31, 2013 was $285 million. As of March 13, 2013, the company had available credit from the revolver of approximately $700 million, after outstanding letters of credit. Now looking at the balance sheet at March 31, 2013 we had $1.4 billion of working capital, $16.6 billion total assets. Total outstanding debt at March 31, 2013 was $9.5 billion, of which approximately 82% is fixed and our debt to capitalization at quarter end was 76%. At the end of March, we were a party to a $2.9 billion in interest rate swap agreements. During the quarter, we did buy back approximately 523,000 shares of stock at an average price of $35 or roughly $18.7 million. The company also amended its receivables securitization program to increase availability from $300 million to $500 million. Looking at a couple of other highlights for the quarter. Our revised 2013 projection of 0.5% to 0.7% versus a 0.3% to 0.8% includes the implementation of a sequester on April 1. Well, this also is an estimate for our revised Medicare -- disproportionate share and coding adjustments effective October 1st. The prior low end of 0.3% assumed the sequester would be implemented in the third quarter. We tightened our wide range, guidance range in revenue, EBITDA and EPS, but lower to higher and to recognize those changes. Well, what's the first quarter results. Also, please note, we lowered our adjusted admission guidance to reflect the first quarter results. Guidance will range from minus 2% to 1% positive. The slowdown in adjusted admission seems to be nationwide in the first quarter. The first quarter HITECH incentive was $21 million or $4 million below our guidance. The second quarter HITECH should be approximately 10% to 20% higher than the first quarter. Finally, our fourth quarter HITECH should be the highest quarter for 2013. The first quarter 2013 HITECH depreciation and amortization increased by $8 million, which reduced EPS in the quarter by approximately $0.05. Our EPS for the first quarter adjusted [indiscernible] debt was $0.87. The growth in diluted shares by about $3 million cost of production or approximately $0.03 and earnings per share in the first quarter of 2013.

Thank you, Larry. As we navigate through these transformative period in our industry, we look forward to growth opportunities as health care reform begins to take shape. We continue to focus on the fundamentals of our business and believe that our proven success in admissions and other health care practitioners, improving operational efficiencies, enhancing essential health care services and careful deployment of our capital will continue to support our long-term growth strategies. With that, I will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Darren Lehrich from Deutsche Bank.

I had a question with regard to your observation, visit trends. And I'm curious to know if you could talk a little bit more about the percentage of your observation visits to expand to midnights. So I'm just curious just to see how the recent clarification in the IPPS regs might have an impact on you guys.

Yes. While we tracked that, it's not a big percentage of our admissions, the ones that will be over 2 midnights. The exact percentage right now, it's a small percentage, but it is growing. I think you've heard other people talk about it growing. I think what those CMS has done will help that issue, but it also helped all the efforts of 2-day admissions for RACs, we're looking at it. And I as -- we recognize probably the RACs generally, when they come out and look at claims, maybe 20% to 25%, maybe 2 day admissions to that it could help from that perspective. But it's not that big of a percentage of the observation that we have right now, but it is growing.

Okay. Having physician order and giving a little clarity around this is helpful to everybody. It's obviously been confusing through the years.

Yes, absolutely. And then just staying on the proposed reg for a minute here. Just wondering if you can maybe update us on your thoughts with regard to DSH [ph] and how your hospitals may fall out, given what the CMS has proposed here?

Yes. Our executive Larry Carlton worked pretty hard over the weekend, and we originally had thought the DSH[ph] from a dollar perspective would probably be in a quarter this year of $15 million to $20 million annualized that and see $60 million to $80 million. While we're still doing work on it, we can certainly think that quarter will probably under $5 million, and that's part of a conservative estimate, but actually a bit lower than that for 2013, which would mean it's going to be substantially less than what we thought on an annual basis. The various estimates including our hours after generally any work is low as $5 million to as high as $15 million for the year, and our estimates are probably in the range of that ourselves. We tried to factor that in our -- lower the reimbursement cut. We have a 4.8, which included the sequester and the Medicare disproportionate share down to 0.7, so we tried to factor that in our revised guidance.

Your next question comes from the line of Ralph Giacobbe from Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: I'm trying to go back to sort of the volume. I know you guys don't typically comment on inter quarter trends. But just given what was a steep fall-off in March, any color on April trends so far, first? And then second, anything to highlight by geography or maybe by market size?

Let me just kind of start this conversation. We don't really like to comment on the months. I think the first quarter would be a good example of why you don't want to comment on the months because January was pretty strong and then February dropped off and then March got even worse. So I think it is a slippery slope to do that. Larry can make up his mind here in just a second of how he wants to tell you about that when it's all said and done. But generally speaking, I think what we're seeing is across the board, it's across the country, it's not in any particular one hospital. There's nothing systemic within our system. And you can see that other companies are having exactly the same issue. So I think Larry will give you a bit more color on April.

Yes. I just want to say we don't like to do that, but we looked at April, and keep in mind, April got a little benefit because of the Easter movement. It's not a big component of seasonality and also it's got a little bit better stub [ph] for the last couple of days, but that's withstanding. April should be within the range of what our guidance is, the minus 2% to plus 1% for the month. That doesn't mean the entire month will be that, but it does, at mean that April will start out much better. We were down well over 5% for the first quarter adjusted admissions and if you back out half of it, it's says April is running much better than the first quarter. And so hopefully, that will continue but it has got some good seasonality factors in it.

But I'll tell you, we're not sure what that means. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. And then just I guess just onto exchange contracting, maybe help us with what percentage has been negotiated. I'm assuming, whatever has been that's sort of a carved out product, is that right? And then just the rates that you're getting or would expect to get.

Yes. We're due in for 29 states, 135 hospitals. We've got signed contracts in 19 states. The 5 largest states are done. We've got 4 states where we are in negotiations, and which we've changed proposals. We've got 3 states, we're seriously in discussions. We've got 3 states which have had little to no discussions. They are 3 states, only 1 hospital each. So we've done a lot and we've got 19 of the 29 states done and the 5 largest are there. The prices, instead of getting into specifics, we target to be close to commercial. We're in that range right now. We hope to stay in that range, and I think we'll be successful. I would add, I don't think we'll be in every narrow network. We are in some narrow networks inside of here. There probably be a couple of narrow networks who won't get in, but so far, I think our managed care people have done a good job and we hope it will continue to finalize the 3 states we're still working on and potentially get the 3 small states done. Ralph Giacobbe - Crédit Suisse AG, Research Division: Larry, just as it relates to that narrow network, to the extent that you're not involved in the narrow network, how does it work? So somebody shows up, is it just gross charge, reasonable charge? Or how does that work?

Well as I understand it, the way the programs work today, if an emergency happens and you don't have a contract, that you're obligated to pay their charges and may pay the charges to a patient to pay the charges to us and of course, in a lot of our markets, we are sole provider in 180 hospitals, so that should help us. So that should be how it should work. And we'll work hard to be in all the networks we need to be in, but then we've got a real very good job of getting a lot of the contracts done in the last few months and expect to finish it up and be a big participant with managed care.

Your next question comes from the line of Josh Raskin from Barclays.

Larry, I think you mentioned the physician, involuntary physician turnover was about 10% of the impact on volumes. Just curious, is that more or less than what we saw last quarter, and maybe any color on what happened there?

Yes, it's more. We started the effort at the end of -- the middle of 2012 and started to make a little progress in the fourth quarter, just trying to improve the productivity of our physicians, we've got a lot of them. This is not a big number of physicians, but we did see. And looking at the individual market volumes, you saw that affected us a little bit. I think we'll get these replaced and efforts to do it now or get other people to do the work that these are the volume statistics that our doctors who've left us pretty much and we started talking about productivity and what needs to be done to make sure you're successful and we're both successful.

Got it. So these are doctors who weren't sort of buying into it. And then what's the lead time of replacing these physicians?

It's probably about a 6 months effort. To some extent, if you're aware of what you may do, you should start a little sooner than that. So if you look at the volume hit this quarter and maybe a little bit next quarter, it should work itself out in the second half of the year.

Got you. And on the Cleveland Clinic, I'm just curious, are there any sort of milestones that you guys have in place in terms of implementation of procedures? And then maybe related to the first question, are you seeing any impact on physician recruiting? Are you already getting a little more interest from the docs?

We've had a lot of interest in our relationship with the Cleveland Clinic, obviously. Across the board from all kinds of different constituents. There's really no particular milestone. We have announced this week that we're starting our early assessments in 5 or 6 hospitals and we're working on accretive lines and another 4 or 5 hospitals or so. So we've already started down the road. This will take a while to develop. This is about everything for enhanced quality to improved physician integration. So it's a great opportunity for us. We're excited about it. Everyone in our organization is excited about it. But it is a work in progress and it will take a while before we see any real results out of it.

And Josh, I think you heard me say earlier also one of the objectives was to reduce cost and should help us on that side also.

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

A couple of questions. On the cash flow trends, while you mentioned that Q1 the last 2 years, this year and the prior year have been the seasonally weak for you. Is there any dynamic going on there that would drive that weakness that's worth highlighting?

There's a lot of efforts in the company in receivables and performance and a lot of people are paid based on a year-end performance and some are paid on a quarterly activity. And we worked really hard at the end of the year and that part, it has some effect on receivables maybe climbing back up and we'll get better as time goes on. The legal settlement, which is reserved for it there, and we paid it at the time we had pay it. As relates to the crew payroll and items like that, you clearly have some payments for performance plans and stuff in the first quarter. Sometimes, the health insurance that you have probably the growth in the flu business in the fourth quarter of 2012, part of it came through for about half insurance payments in the first quarter of 2013, and that's unlikely to continue. And then probably, some of our provider tax programs that we've got, we get usually payments throughout the quarter. And usually our first quarter is not one where we get many of those, so that's why our receivable increased. We have a little bit of a buildup in Medicare HMOs, which we're working on trying to help us get through some of the processes there. And that may have been, and that may have been--maybe got a little active in their cost containment efforts in the middle of 2000 in the first quarter, and that probably would correct itself over time.

Okay. And then on the HITECH, you laid out nicely the incentive payment trend for the rest of the year. But what about on the expense side? I know it was a drag for you this quarter. What -- when you take it all the way to the bottom line, what is -- what do you think the expense trend looks like for the rest of the year?

Well, it should get a little better, because we've got some trends out there in our guidance that shows us we have a little bit of earnings from it. What we think what will happen is in the fourth quarter has a lot of incentives expenses to get that part of it done in the first couple of quarters, so probably the next couple of quarters, expenses should stay the same. Depreciation will stay relatively flat and probably grow a little bit as we get more done, but the operating expenses on a percentage of revenue should drop in the fourth quarter, but the next couple of quarters, we're probably close to what they are now.

Okay. And then just my last question, maybe just comment on the deal pipeline. I know you've got it now and you got us those 3 or 4 deals. At one point, I think it was one more deal you are looking at. Do you think as we get on top of 2014, the market sort of stalls out for a little while, while people regroup and figure out what's happening or do you sort of see a steady pipeline that just persists right through the rollout of the ACA?

Yes, I think that some of these things are indeterminable currently. But the opportunities are still there. We are seeing plenty of them. What we're trying to do is be very selective that we add to the markets we're really trying to enhance our networks, and we've got opportunities. We have turned down a few along the way and we've been very careful not to overpay in this environment. So I think we're in good shape. I think we'll kind of do well, and I'm not sure what 2014 will bring. I suspect that we'll continue to see opportunities for consolidation, because I think once we start seeing more and more people insured, I think that will drive more consolidations to the list.

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

I just wanted to get a little more color on the volume numbers here. You mentioned that Medicare and Medicaid were down the most. I forget, do you just do fee-for-service in that number? So is mix shift impacting those year-over-year growth rates?

I don't think so. We put Medicare managed care in managed care, although it's about 6% or 7% of our revenue. I don't think it's changed that much as you go along. I think Medicare and managed care was about 10% of our admissions in the quarter previously it's like 9.3%, so it's not too much difference. And Medicaid is in the Medicaid area and managed Medicaid is approximately 50% of our business, and I don't think it'd be a Medicaid activity. What we did notice is we see is the biggest change in the admissions decline-wise was in the Medicare and Medicaid and we're both higher than in the company average and the lowest drop was in the managed care. The self-pay was down 4.5%. That didn't happen that way, it happened that way a lot in the quarters, so 2012. One of our efforts in recruiting doctors and trying to grow is to capture as much managed care business as we can plus we tried to recruit and add services that would help us in that category. And usually, the first quarter, Medicaid has a little bit lower than the rest of the year as we get out in the quarters and find more qualification of people from the self-pay to be Medicaid.

Okay, so just to kind of recap that, the Medicaid number is not skewed by mix shift, the Medicare number maybe skewed, just a little bit but you didn't think that's a big for the numbers?

No, I'm not looking at admissions that change quarter-to-quarter.

And then, when you think about the reduction in guidance, is there an assumption that there's a certain payer that will account for disproportionately the reduction in volume outlook? And then I guess, also in [indiscernible] adjusted admissions, is there anything in there about inpatient volume versus outpatient volume trends being dramatically different?

Well, we went to the adjustment admissions because 53% of our revenue is now outpatient. Go back to 2 years, it's mid-40s. Usually, the adjusted admissions are a little bit -- grow a little bit slower or climb a little bit faster and adjustment admissions movement to outpatient that's a similar activity and we're down 5.9% and 5.2%. I would expect that the admissions would follow. And had we given guidance, they would follow similar to what we had here. If we have a little bit bigger decline, a little bit smaller increase in the admissions. The adjusted admissions by payer, I would expect for the managed care hopefully to continue to what you have heard us talk about exchange contracting. We're doing -- you've heard us talk about trying to get contracts with managed care companies. You got a lot of help with some factor. We've got 80 sole provider hospitals. We got a lot of talent contracting people that I think will help us make sure we get good activity and recruitment this time to get doctors that we'll see managed care business.

Okay, so you think that the total number should look directionally payer-wise similar to Q1 results?

Yes, and that's similar to what we had in 2012 was the growth and the business was a little bit more for managed care and others, it's a little bit of Medicare managed care admissions, and they were not that much.

Okay. And my last question. Medicaid outlook, I don't think I heard you gave an update on that. Is there a change in trend there?

I think last year, we were up about 1%. I think we'll still be down about 2% for 2013, which is similar to what I think I said in last quarter. So pretty much where it was that we had in February.

Yes, I think that quarter was down 1% to 2%. So is it worse or are you seeing it going worse or you see...

It's around 2.

Your next question comes from the line of Whit Mayo from Robert Baird. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Larry, you don't have a ton of Medicare advantage, but you have some, I think you said maybe 6% of revenue. But are you seeing any material change in behavior with those health plans on denials, risk sharing with docs, incentive payments? Anything that's different today versus perhaps last year?

We're not seeing a lot of risk sharing. We're seeing this in our markets. We are open to do that, if that's what help us grow and something that works for us to we now both have a little bit of experience in Medicare risk and Medicare risk sharing. As it relates to the now effort, there was a little bit more in the first quarter, since this started the quarter went on, and we just have to work through that and get us some help that's needed to try to make sure that the appropriate work we're doing gets -- we get paid for, and I think it was the receivables were up a little bit in the Medicare HMO category. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay, but you don't feel...

It looks like overall denials, because it's not a big percent of our business, it's maybe a follow-on to your question or to your comment was our denials are about the same percent of revenue today as they were a year ago. And it's been relatively flat a little bit throughout the year, but we're pretty close in the same percentage of revenue for, I think, managed care's 20 basis points is not a big number. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay. But I guess, overall, you don't feel like their behavior is much different today than it was 6 months or 12 months ago?

Not overall, but in a few situations, we have a little work to do trying to make sure they get paid for the appropriate work we've doing. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Okay. Maybe just any color in any internal discussions you guys are having about outreach efforts to educate some of the uninsured in your markets about coverage options? Just curious, maybe what process you guys may be developing.

Yes, well, what we did first, let's go back and look. For 2012, we had about 500,000 individuals self-pay uninsured patients visit, and they generated about 750,000 visits. As you would expect, most of that came through the emergency room and we had about 450,000 in 2011, and again, most came through the emergency room. If you look at the age of those people, it's spread around like 12% over 55 and a few percentage are under 19. And we developed -- we're beginning to develop efforts used on [indiscernible] Screening vendors. We now qualify people for activity. Actually, no they had a good first quarter too. We've got about $15 million more from that effort which helped their debts in the first quarter. Gathering all kind of data like looking at the marketing department, do we use direct mail or fairs or community affiliations. We've got the seniors circle program out there, we've got a healthy woman program, and how we use that. We'll probably not be a navigator, but there are efforts that we make, probably on some type of sort of certified application counselor to try to help people. To the extent that we use mail and we'll probably have them dial into our call center. We have a large call center for eligibility screening service. We also have one inside our collection company, which we could use. We think about how we -- in our eligibility screen, people take care of about 60% of our hospitals and other hospitals are looking at how our financial accounts could help people and we may try to have -- when people contact us, about the use of marketplace or the Medicaid portal to try to direct people and try to make sure to get to the process. There will be some effort going on in our part. We'll probably spend the money in the latter part of the third quarter and the fourth quarter and we got help on this process. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Do you have a sense of what your success rate is in converting, I guess, Medicaid pending receivable to Medicaid? And then if you look at the newly eligible Medicaid patient population, is that percent any different? And do you think you could be more successful in converting some of those into an insured patient?

I think the advantage here is the process might be a little bit more automated and you have to help the people activity, and I think it will make it a little bit more streamlined. What your issue is that people who get outside of the hospital are not as good about filling out the paperwork. I think the paperwork will be a little bit more standardized and we'll try to be able to work through that activity. I think you'll probably -- we've been pretty successful getting people there. We only have about 15% or 20% of the people who just don't cooperate with us and we've got a pretty good success rate. I think it's in the 60% or 70% of getting people qualified that. I would think this might be a little better. I mean, the government is going to spend one-time just $30 million of allocated $300 million for marketing and outreach. I think that there will be a lot of advertisement activity. There'll be some navigators involved, which we probably don't have that role. They will actually get paid for their efforts to get someone enrolled. I believe in the markets we operate in most markets where Medicaid has been expanding in the market. In the commercial market, the commercial marketplace or exchange market place, whatever term you want to us, there will be a lot of activity going on, trying to make sure people take advantage of this.

Your next question comes from the line of Andy Schenker from Morgan Stanley.

So you guys mentioned the involuntary turnovers on the physician side related to the productivity process you guys are in. Can you give us a little more color on how the productivity strategy is playing out besides the turnover and what kind of grant you're hoping on them?

Well, as you think about productivity, you look other work units and look at what kind of specialty they are and how well they're doing and what kind of revenue they're getting and the collections off of that. And if they're working at a 25% productivity, that's probably not good. If you're working at 60% and that is probably better than the average. And so, that's kind of statistics over the years that we've been gathering. And I think Wayne has mentioned that we have some talent in the area and we're going to charge, we got a new financial person. You got a good team in charge of billing and collecting. So we got a lot more statistics around physicians and how well they work and trying to make sure that they're productive. And so with any process that we find improvement and will go back and do with. That's what this is. I don't think it's going to continue a lot throughout the year, but we did start something we haven't done as much of last year. This is creating a little bit of challenge in volume and we'll work through it in the second half of the year to get these physicians replace.

This has also resulted over the last number of years in terms of the number of practices that all of us in the industry have acquired in our physician recruiting. So our skill level in terms of trying to be helpful in terms of managing practices and enhance the quality and improve productivity are changing. And so we're working hard at it and this is kind of a result of all that.

Okay, great. And then your price increase for admission was strong in the quarter after normalizing for the rural floor [ph]. Can you maybe talk about the moving parts in there? I assume, someone's -- but can you give a little more color on there?

Yes. I think I mentioned that Medicare case there is up 2.6% and our payer 2.9% and surgery up 3%. That's probably the best thing that helps the revenue growth. Our price increases are in line of 5% to 6% for our managed care. That's what we expect. Pretty good with the volume we have, we have pretty good intensity. We have a good government increase, which of course that went away on April 1. Those are categories -- the outpatient intensity was pretty strong. Managed care payments probably fit well, fit in that range there. We had some government reimbursement programs that's probably helped about 1% that we got. We did get a little bit of help from some Medicaid provider types programs that were there in the third -- second, third and fourth quarter and were not there the first quarter a year ago. But we were -- I think there's 1.9%, so we had a fairly easy comp last year and actually, last year, if I answer your question why it wasn't 3% to 4%. So now you're 7% versus 2%, I would expect us to be somewhere in the 3% to 4% or maybe 3% to 5% going forward.

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

Maybe just to go back to the proposed inpatient rule. You talked about the DSH [ph] cuts being less than your original estimate. Were there any other impacts in the inpatient rule either from Medicare-dependent hospitals or low-volume hospital impacts that would apply to you guys?

Yes. The Medicare-dependent hospitals would apply. We've got, I think, if you go look on the cost, we've got 11 and only a few of those are really affected by the way they're paid, and that's probably a few million dollars. The low volume is probably $10 million to $15 million of effect. Again, last year, that stopped and it was put back in place as part of the taxpayer act, and we've got that embedded in here. That has likely to go away. As it relates to the coding adjustment, we had an estimate there. I think we said $10 million, probably now in somewhere around $5 million for the fourth quarter. So that's a little bit better and we tried to factor that into the reduction, reduced reimbursement cuts on the high end.

On the Medicare dependent hospitals, is that a few million annually or per quarter?

Annually.

Okay. And the same for the low volume that was $10 million to $15 million annual.

Yes. That's annual. Hopefully, that will stay in place.

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

This is Brian Zimmerman in for Matt. Your supply costs are down below our estimates this quarter. Can you comment on a little bit more on what you're seeing in that area? And what do you think the right level is for this going forward?

Well, we're down 50 basis points, for the years I think last year was 30 basis points and the year before that was 40. So the quarter's a bit better. And when the servers dropped 6%, that helped a little bit. I think we mentioned that the charge for supplies, which were probably the biggest opportunity. And then the categories were pacemakers stents, we had a little bit of a rebate benefit for the program we were in on drugs and food. I would not think that our supplies will always be 50 basis points better and help our volume increase and better performance in surgery would make it a little more difficult for us to have low supplies and that would of our overall earnings but we're fortunate that good cost management, good compliance in the quarter, because that helped us.

Okay. And then I know you're still expecting that 3 or 4 hospitals this year. But have your views changed at all around capital deployment? Are you considering more direct payment or buybacks?

We have about $80 million left on our board authorization to buy stock, and we do intend to buy, especially at stock option exercise that may take place. We have about $230 million availability under our credit agreement and we will occasionally do that. But I think most of our -- and we did reduce our CapEx but we think that we can go to something reasonable well to $800 million to $850 million. I doubt if it will be a big paydown of debt. We're pretty happy for where the credit agreement is and the debt and we've done a good job of extending it out. And we'll use our money primarily for acquisitions.

Okay. And then my last question is you mentioned that commercial pricing trends remain at around 5% to 6%. What percentage of your 2014 contracts are booked at this point?

Give me just a second, and it is about 40% to 50% or about 80% done for 2013.

Your next question comes from the line of Tom Gallucci from Lazard capital markets.

Two quick sort of follow-ups. I guess, first just on the acquisition landscape, can you talk about the competitive environment? Are you seeing any particular players become more aggressive of late, whether it's some of the maybe for-profit, but not public entities that are trying to get bigger or any of the local not-for-profits that are trying to round out their systems out of reform?

Yes, a little bit. You can see a little bit movement in terms of some people moving up and the price moving up a little bit. I would say that another area that for large systems, there seems to be more competition than there has been. And obviously, there's some not-for-profits who are more interested in large systems and are willing to adjust upward in that effort. So I would say, the competition is getting a little -- it's increasing a little better, it's another way, the price is moving a little bit. But I don't think it increased too terribly meaningful when it's all said and done. I think there's a lot of good properties out there and a lot of that opportunities. And the difference that we continue to see is there are system opportunities versus just individual hospitals.

Okay. And then on the Medicaid expansion side, I see you got a little exposure in Arkansas, just curious now that the alternative type of a plan is seems to be going in place. What your thoughts are there on that versus the traditional expansion, rate differentials, things like that? And any other sort of key states from your perspective, in your book leather that are still outstanding at this point from an expansion standpoint?

Yes, I think you know the Arkansas Project, if you want to call it that, is an opportunity. And clearly, Tennessee is working hard to determine the best way to do this within Tennessee. And looking at Arkansas, a lot of this has to do with -- I think what you're going to see is a continuing interest in Medicaid expansion in every state, practically when it's all said and done. But it's just going to take a while. Some of this is held up by what's going to happen in 2014 election in these states, and the Republican's view of it in terms of the tea party and all that. But having said that, we continue to hear discussions about there are a number of states who have an interest in moving forward. We are obviously close to Tennessee and Tennessee is working very hard to try to find a good solution that works for them, similar to Arkansas.

Tom, I'll add one comment, not about Medicaid. But if you look at the percent of Medicaid people, there's a pretty good percentage that falls in the 100% to 138% of the poverty level, with the subsidies that they'll be available to have, they'll be able to probably get the bronze or silver plan at a little to no cost. And so there would still be an effort to enroll some of those people in the plan. And clearly, the Arkansas plan looks like one that should be helpful as it rolls out if. You. Think it, will.

Your next question comes from the line of Chris Rigg from Susquehanna Financial.

Just wanted to come back to the comment you guys have in the slides about the Medicare and Medicaid adjusted admission decline being higher than the company average. Is that, what you saw in the first quarter, does that represent a change relative to what you've seen in recent periods?

I think the Medicare and Medicaid were a little bit more of a decline than they've been and I think we've said if you check our transcripts and we talk about, we don't give specific pair mix directionally, the commercial, either growth or decline has been a little less. If you look at our revenue per payer, it's 51.7% I think it's up over a year ago, which continues to move up. We lost a lot of our managed care and other back in 2009 and we've been slowly building it back up. So it's encouraging that when you lose volume, you lose personal self-pay business and Medicare Medicaid was the best revenue producer from a per-unit perspective is the managed care and it had a slower decline. And I think we have a similar situation back for 2012.

Okay, great. And then one other maintenance question here. Does the same-store EBITDA and EBITDA margin in the 2012 period include the rural floor benefits?

No, it does not. we're willing to not distort the same-store results, so we kept it in the nonsame-store consolidated results for the first quarter of 2012 and all the remaining year-to-date statistics. So our same-store will not have either for the first quarter and the other first quarters comparing to 2012 as it put in the nonsame-store.

Here is your last question from Justin Lake of JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: First, on the IPPS regs have some commentary on observation visits. Talked to anything over 2 midnights is being billed as inpatient. Can you tell us how you think that might impact your volumes in the observation visit particular going forward?

Yes. I think we answered that question early on, but we don't have a lot of our observations over 48 hours. It is growing. You've heard other people talk about it. Ours are growing also. But I think the positive component will be the RACs, which is some percentage 20% thereabouts part of the RAC look at 2 days. I think that will clarify that activity and it will be helpful to have it and talk about the doctor orders and should give us some clarity what was a lot of confusion for this. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, great. And then on Medicare Advantage, there's a commentary on our payer call this morning in regards to contracting. Plans are clearly facing pressure here. I'm just curious in terms of have you seen any engagement -- in terms of renegotiating these contracts post the final rate of release for Medicare Advantage earlier this month?

There's been activity to renegotiate contracts. It's only been a couple of months. A lot of our managed care contracts are tied more to -- to the first of the year or some other event, and I think we'll do pretty well. If we have not had any change of heart about the managed care that I'm aware of we had the session. I think back in March for managed care people came out of discussion. There may be something, as time goes on, but actually our market update for them was a little bit better than the initial rule. Justin Lake - JP Morgan Chase & Co, Research Division: Sure. And just particularly on this sort of -- do you have any color you can share in terms of how many of your Medicare Advantage contracts are paid at a premium for the fee-for-service rate?

I don't have it committed to memory, there are some but not very much. I mean, I think early on, we probably got some in some of our markets as part of the few now and -- it's not a relatively small percentage. I think I mentioned a while ago, one of those 10% of admissions for Medicare 10% admissions and it was 9% so it's not moving much. And there's a few in some locations where maybe some other, but I don't think it's a big dollar amount.

That concludes our question-and-answer session. I'd like to turn the call back over to Mr. Smith for closing remarks.

Thank you community Health Systems has a proven track record with experience in financial resources to support and keep our hospitals viable in the local community. We firmly believe that hospitals will also benefit from reform as coverage has expanded and we'll remain confident in our ability to execute our strategy in today's dynamic environment. We want to specifically thank our management team and staff, hospital, chief executive officers, chief financial officers, chief nursing officers and division operators for their continued support and operating efficiencies. Once again, if you have a question you can reach us at area code 615 465-7000.

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