Community Health Systems, Inc. (CYH) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems' Fourth Quarter and Year-End 2014 Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Michael Culotta, Vice President Investor Relations. Please go ahead, sir.

Thank you, Jeremy. Good morning and welcome to Community Health Systems' fourth quarter conference call. Before we begin the call, I would like to read the following disclosure statements. This conference call 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 risk 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 discussion. We do not intend to update any of these forward-looking statements. After the market closed yesterday, we issued an 8-K, including a press release, with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. As you know, our year-end results consolidate the results of Community Health Systems and the former HMA facilities from and after January 27, 2014. The prior year's fourth quarter and year-end historical financial information includes that of CHS only. The same-store volume and financial results reflect the HMA's performance for the full fourth quarter of 2013 and for the year-to-date performance from February 1 forward for both 2013 and 2014 as well as for CHS for all three months and year end, respectively. All calculations we will be discussing exclude the costs associated with the HMA acquisition and transition, government settlements and related reserves and the CVR legal expenses and liability. With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Mike. Good morning and welcome to our fourth quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer, is on the call today, as well as David Miller, our President and Chief Operating Officer and Dr. Lynn Simon, our President of Clinical Services and Chief Quality Officer. I'm extremely pleased with our financial and operational results that we were able to achieve, both this quarter and for the full year. I think you will agree that our results are continuing to improve each quarter. We're accomplishing our goals that we have established and continue to move this Company forward as one. I think it's very important to point out what we've accomplished in 2014. We projected that we would improve volumes throughout the year and we did. Our same-store adjusted admissions have gone from a negative 5.3%, with difficult weather in the first quarter, to 2.7% increase in the fourth quarter, or a 800 basis point improvement. The 2.7% fourth quarter increase compares to the decline of 6.1% in 2013. Our net revenues exceeded $18.6 billion and an increase of over 45%. Our adjusted EBITDA improved to approximately $2.8 billion, a 49% increase from the prior year. We projected we would see sequential improvement in adjusted EBITDA this year and we did. On a sequential quarter basis, our adjusted EBITDA has gone from $541 million to $699 million to $751 million and finally, to $785 million. We projected we would improve margins and we did. Our adjusted EBITDA margins improved 310 basis points throughout the year. On a sequential quarter basis, we went from 12.9% to 14.6% to 15.7% and the final quarter to 16%. We improved 160 basis points in the fourth quarter 2014 compared to the fourth quarter 2013. We projected we would see $1.6 billion to $1.8 billion in adjusted cash flow and we did. Our adjusted cash flow and operations for the year was approximately $1.8 billion which represents approximately 65% of adjusted EBITDA. Our adjusted earnings per share for the year was $3.29 compared to $2.62, a growth of approximately 26%. For fourth quarter, our adjusted earnings per share grew over 123% to $1.23 from $0.55. This truly has been a strong and continued improvement year for us and we're all very pleased with these results. I'm also pleased and excited about our physician recruiting efforts. As always, we're very focused on physician recruiting. There were over 3,760 physicians that recruited to our active medical staffs across all of our facilities this year. In addition, as we previously discussed, there was a slowdown in recruiting at HMA during the latter half of 2013 and prior to our completion of the acquisition. We're now seeing an increase in physician staffing at the former HCA facilities, as we have recruited approximately 900 physicians this year. Now turning our attention to the HMA integration, David Miller continues doing a great job of focusing our resources on getting this acquisition fully integrated. He is also working with Dr. Lynn Simon on our quality and clinical initiatives. We have achieved $125 million in synergies for this past year and $38 million in synergies this quarter. We estimate we'll achieve an additional $125 million to $150 million of synergies in 2015. As we had previously disclosed on October 1, we completed the acquisition of Natchez Regional Medical Center in Natchez, Mississippi, a 179 licensed bed facility. Net revenues from Natchez Regional approximate $40 million. We're excited to be able to further our mission in the community and be the primary provider. We also previously disclosed the acquisition of Upstate Carolina Medical Center in Gaffney, South Carolina, that was affected November 1. This is a 125 licensed bed facility with net revenues also in approximately the $40 million range. As you know, we're required by the FTC to sell two facilities. These facilities were Carolina Pines in Hartsville, South Carolina and Riverview Medical Center in Gadsden, Alabama. The Carolina Pines facility was sold on January 1, 2015, for approximately $70 million and we're awaiting regulatory clearance on the sale of Riverview. We recently announced the sale of Harris Hospital in Newport, Arkansas, effective February 1st. We've also announced the pending sale of Dallas Regional Medical Center in Mesquite, Texas. This transaction should close in the first quarter. I'm very pleased that we have executed a definitive agreement for the purchase of an 80% equity interest in MetroHealth near Grand Rapids, Michigan. MetroHealth provides an opportunity for our Company to expand into Michigan, in the state's fastest-growing market in our organization. The health system has served Western Michigan for many years and we're looking forward to further supporting Metro's medical staff and employees in their ongoing work to provide quality healthcare. This is a 204-bed licensed facility with net revenues of approximately $320 million. The closing of this transaction is estimated to be in the second half of the year. Let's now update you on the Affordable Care Act. But before I do that, we're hoping governors and state legislators in non-expansion states will strongly consider the positive impact of expanding Medicaid. We're very active in our states with the respective hospital associations and trade groups, including active lobbies. You know, I must mention a quote from Ohio governor. He said when you die and get to the meeting with St. Peter, he'll probably is not going to ask you how much -- much about what you did about keeping the government small, but he's going to ask you what you did for the poor. And as I've stated on numerous occasion, expansion is simply the right thing to do. We presently have 14 states that have expanded, with Pennsylvania and Indiana being the most recent. These 14 states represent approximately 30.9% of our uninsured population in our states eligible for expansion. These percentages are based on information from Enroll America data. You all are aware of current outcomes in several states, so we will not belabor that. We still believe other states may expand in 2015 and are factored into the high end of our guidance. Larry will give you more insight on the historical trends later in the call. Next, to update you on the pending legal matters, with respect to HMA matters covered by the CER, our efforts to work to bring this to conclusion are continuing. We continue making presentations to the government on various cases and otherwise cooperating with them to provide documents and make witnesses available. We're making progress with our discussions with the government to resolve these matters. The judge in a multidistrict litigation has continued the stay until May 27, 2015. We continue to revalue the estimated liability covered by the CVRs on a quarterly basis. I remind you that these expenses and accruals have different financial statement treatment than under the CVR agreement. Our estimate continues to reflect there will be no payment to the CVR holders. Now let's discuss our guidance for 2015. Our same-store adjusted admissions is expected to be in a range from 0 to 2%. Net revenue, less provision for bad debts are estimated to be in a range of $19.6 billion to $20.6 billion. Our expected adjusted EBITDA is expected to be in the range of $3 billion to $3.2 billion. Our adjusted earnings per share is estimated to be in the range of $3.40 to $4.05. Larry will now discuss further our results and the effects of the Affordable Care Act and provide you with other information on the 2015 guidance. Larry?

Thank you, Wayne. We believe our same-store information in the fourth quarter we're providing is more meaningful, thus we'll predominantly discuss same-store results for fourth quarter. Same-store numbers reflect the synergies previously discussed. Of course, information we'll be discussing includes the integration and merger costs of HMA transaction of approximately $1 million. The government settlement and related reserves previously mentioned are approximately $28 million and a reduction of estimated liability expense associated with the HMA government litigation related to contingent value rights of approximately $26 million, these three items net to about $3 million. Wayne just previously provided information on the positive value trends. The reported flu and respiratory did contribute about 70 basis points of the 2.7% increase. Adjusted [inaudible] for the flu volume also contributed our same-store ER visit growth of 6.6%. We'll continue to see a shift to outpatient setting. Our outpatient revenue represents 56.4% of total patient revenues compared to 55.9%. In the fourth quarter of 2013, we also saw a 60 basis point sequential shift to the outpatient setting from the third quarter of 2014. This compares to 100 basis points shift in the similar periods in 2013. On pricing and intensity, we saw our same-store revenue per adjusted admission after provision for bad debts increase 1.9%. In our pre-release, we reported 0.4% growth, but later determined a high-tech reimbursement of $7 million in HMA's prior-year fourth quarter of 2013 was classified as revenues and should be an offset to expense. Our same-store payer mix continues to improve, as we saw a 90 basis point improvement in managed care, a 140 point basis point in Medicaid and a reduction in self-pay of 150 basis points, all on the same-store basis. Our all-payer case mix declined 0.4%, but of note is our Medicaid case mix did increase 1% while our Medicare case mix declined 1.7%. With influence, the case has contributed to this decline. Overall, we're seeing very tremendous job done in decreasing cost and improving efficiencies. Our salaries and benefits as a percent of net revenue declined approximately 180 basis points as a percent of net revenue. The decline was the result of 3.8% productivity improvement and for the year, also on a same-store decline of 70 basis points. Supply expenses declined approximately 40 basis points as a percentage of net revenue. We're continuing to increase our overall compliance in our group purchasing organization and decrease our overall pricing. Decline for the year, also on a same-store basis, was 20 basis points. As it relates to high tech, we recognized $47 million which is a $41 million dollars less than the high tech incentive in the third quarter. This was approximately $8 million below what we expected. And our expenses came in about $2 million higher. Thus we had an approximate higher estimated headwind of $10 million in the fourth quarter. We'll focus on year-to-date amounts as it pertains to our cash flow from operations of $1.6 million -- billion reported. The following items impacted our cash flow from operations; the negative impact of the HMA integration costs and legal expenses associated with the CVRs of $82 million; HMA investment banking fees and other deal-related liabilities that were in accounts payable and accrued liabilities at closing in the amount of $94 million; government settlement and related costs of $99 million. Adding these items back after the estimated tax benefit had cash flow of $1.822 billion. In the fourth quarter, adjusted cash flow from operations was approximately $990 million, though $1.8 billion compares to $1.3 billion generated below companies combined a year ago, resulting in a 38% improvement. And we did receive about a $188 million tax refund in 2014. Our 2015 adjusted cash flow from operations is projected to be $1.650 billion to $1.850 billion. Our adjusted cash flow from operations will be negatively impacted by about $300 million related to the income tax refund in 2014 and a change in payroll payments due to timing. As we previously said, we got about $188 million in our tax refund. Our CapEx for the year was $853 million or 4.6% of revenue compared to 4.8% for 2013. We spent about $120 million on our Birmingham, Alabama, replacement facility. Our original 2014 guidance was a range of $975 million to $1.050 billion in 2014. Our 2015 CapEx guidance is a range of $1.050 billion to $1.25 billion, with $150 million for replacement hospitals. Let's turn our attention to the Affordable Care Act. As we said earlier, in a three years' time, we expect our self-pay adjusted admissions to decrease from 8% to 4% in 2016 and this percentage reduction is in line with the various estimates about a CBO. Approximately 55% of our self-pay population should be eligible for Medicaid and -- if all states expanding and according to their statistical data in our markets. Our same-store expansion state information for hospitals we would like to discuss. For the year, self-pay admissions as a percentage of total admissions declined 440 basis points to 3% and adjusted admissions declined 460 basis points to 3.4%. For the quarter, self-pay admissions as a percentage of total admissions declined 570 basis points to 2.1% and adjusted admissions declined 590 basis points to 2.5%. For the year, Medicaid admissions as a percentage of total admissions increased 540 basis points to 24.5% and adjusted admissions increased 640 basis points to 26.3%. For the year, our self-pay admissions decreased 60.8% and adjusted admissions decreased 57.3%. The quarter, self-pay admissions decreased 73% and self-pay adjusted admissions decreased 69%. For the year, Medicaid admissions increased 23% and adjusted admissions increased 30%. For the quarter, it was a 31% and adjusted admissions increased 39%. On a same-store basis, all states' self-pay admissions declined 21% and adjusted admissions declined 17.8%, while Medicaid admissions increased 1.8%. Adjusted admissions increased 6.6%. We had originally estimated an overall reduction of 15% reduction in self-pay adjusted admissions for 2014 and we actually achieved 17.8%. For the year, our self-pay emergency department visits decreased 26% in expansion states and 3% in non-expansion states. And for the quarter, self-pay emergency department visits decreased 39% in expansion states and 4.7% in non-expansion. And of course, we're obligated to take care of patients according to EMTALA. Incidentally, we did experience an increase in Medicaid inpatient case mix in expansion states of 4.5% and 8.5% in non-expansion states. For the last four quarters, the decline in self-pay admits and adjusted admits and the increase in Medicaid in expansion states have grown quarter over quarter. Take a look at the last four quarters, as the trend of charity care plus self-pay discounts plus bad debt expense has gone from 26.4% to 25.8% to 25.4% and now 23.9% of net revenue before bad debt expense and these deductions. In the fourth quarter related to same-store, we achieved 120 basis point improvement in bad debt as a percentage of operating revenue due to year-end improvements and recoveries in collections. Point-of-service collections improved 100 basis points in the fourth quarter compared to a year ago. We did have a decrease in our HMA bad debt balance sheet allowance of $60 million as a result of the purchase accounting adjustment which reduced goodwill in the fourth quarter with no EBITDA affect. As you previously recall from our first quarter, we've been monitoring patient visits with specific exchanges identifications for 13 states or about 60% of our business. We could identify select insurance companies that exchange business in our hospitals. Based on this information and extrapolating that to our entire system, we believe we had approximately 18,000 adjusted admissions and 6,700 adjusted admissions for the fourth quarter. We believe approximately 50% of these were previously uninsured. Based on various data points on Medicaid and exchange business, we believe we've recognized the net benefit after government deductions in the amount of $120 million to $125 million from the Affordable Care Act for all of 2014. For 2015, we estimate we will receive additional benefit before government deductions of $100 million to $175 million. Just briefly on a sequential quarter basis, net revenues improved 280 basis points, both for consolidated and same-store. Our net revenue per adjusted admission increased 290 basis points consolidated and 340 basis points same-store. Our ER visits grew 180 basis points consolidated and 100 basis points on same-store. Our adjusted EBITDA increased $34 million, with a $27 million hit to high tech EBITDA. Our margins improved 30 basis points. Our salaries and benefits and other operating expenses, each as a percent of net revenue, improved 70 basis points on a same-store basis, while supplies did increase 30 basis points. Our adjusted diluted earnings per share improved 23%, although we did have a $0.08 pickup due to a tax reversal in the quarter. Just a few final remarks on 2014, we had originally put out our guidance February 18, 2014. We made the guidance after the actual ownership of HMA and the two facilities that we had to sell. In addition, we gave a large range of adjusted EBITDA. The range was because of several factors. First, the rollout of the Affordable Care Act and which states would ultimately spend Medicaid. That range was after deductions $95 million to $160 million. The guidance also included three to four additional target hospitals. Of those, we did actually acquire two. We declined on one in Florida in the fourth which was MetroHealth. The most significant acquisition was delayed to the middle part of 2015. The other two hospitals we actually acquired were not part of this group and actually are significantly smaller than the other two that did not acquire. But considering all that, we achieved our volume guidance, we achieved our EPS guidance, we achieved our cash flow guidance. Our adjusted EBITDA guidance did change throughout the year, but it was reduced in the upper end. We did have different changes in the components of the guidance, especially related to the size and timing of acquisitions. Adjusted for those items we previously disclosed, meaning the BNA rule floor settlement for HMA which is included in the original guidance. While we did receive the cash in the BP oil settlement, the proceeds that was added during the year, we would've been above the $2.825 billion low-end guidance. As it relates to the $36 million BNA rural floor settlement, upon fuller analysis and consultation for auditors in the SEC, we concluded this should not be reflected as 2014 earnings, but should be counted for in purchase accounting as an acquired asset at January 2014. Our reported adjusted EPS did include a one-time tax benefit of $0.08 and we did have a component of a celebrated amortization related to impaired software that will be replaced and has been replaced of approximately $0.09. EPS of $3.12 should be used when comparing to 2015. Our 2013 combined estimated adjusted EBITDA included HMA and adjusted for discontinued operations, comparable periods and other adjustments was approximately $2.450 billion. Let's now focus our attention on 2015 guidance. Wayne has previously given our ranges, but some other items just call to your attention. Just as a reminder, we had 26 less days of interest expense, depreciation, amortization and the weighted shares outstanding as a result of the closing of HMA in late January. For example, for items below EBITDA interest, the depreciation and amortization would've been approximately $26 million higher or $50 million for both. Also, the average weighted share count would've been 1.3 million higher if the transaction had occurred on first of the year. Our adjusted EBITDA range comprised of various assumptions around the Affordable Care Act synergies and volume growth. We've included only MetroHealth in Grand Rapids, Michigan, as an acquisition plus a second unnamed acquisition. We expect these acquisitions to close in the second half of the year. Our guidance midpoint of the incremental impact on healthcare reform does include all the previous states that have enacted legislation and the states Pennsylvania and Indiana. Our 2015 estimate before any deductions will be a growth of $100 million to $175 million. Our adjusted EBITDA effect of healthcare reform does not include the netting of the additional [inaudible] of about $36 million in 2015. For 2015, we estimate high tech reimbursement to be in the range of $145 million to $155 million and EBITDA contribution in the range of $90 million to $95 million. We do believe we will now receive the BP oil settlement proceeds in the second half of 2015, but this will mostly be offset by the $25 million physician parity Medicaid adjustment. As you recall, physicians have been getting paid Medicaid patients at Medicare rates for 2013 and 2014. As it relates to the first quarter, we should see an approximate 30% increase in adjusted EBITDA in the first quarter of 2015 over the first quarter of 2014. In thinking about the first quarter, it should be noted that payroll taxes and unemployment taxes will increase in the first quarter. Deductibles and copayments increased in the first quarter, the highest for any quarter throughout the year. And high tech for the first quarter is lower than the average for the year and usually the lowest for the quarter. I'll turn it back over to Wayne now.

Thanks, Larry. We're very pleased with what we have accomplished this year and what we hope to accomplish in 2015 and beyond. We have many opportunities with the continuation of the rollout of the Affordable Care Act, our opportunities for growth in the former HMA assets, including synergies that we expect to achieve, our opportunities to delever our balance sheet and our operational and clinical initiatives. We expect to continue to increase the EBITDA margins in the former HMA facilities exclusive of the synergies. We will continue to work on volume initiatives that should help achieve organic growth and grow market share. We have laid a great foundation for our platform and as always, we will continue to focus on enhancing quality, building stronger physician relationships, including increasing physician recruiting and doing the right things for our patients. I would like to thank all the physicians, nurses, support staff for all their tremendous support during this quarter and this outstanding 2014. With that, we would like to open the call for comments. In an effort to get more calls in, we will limit to one question so others will have a chance to talk. If you have further questions or follow-up questions, as always we're here to take calls. You can reach us any time at area code 615-465-7000.

[Operator Instructions]. Your first question comes from the line of A.J. Rice with UBS. Your line is open.

I appreciate the comments on the 2015 outlook and the bridge that you have in the slide deck, on slide 18 in particular. I think on two items there, maybe to get you to comment on a little further. In the overall pick up in health reform benefit, the $100 million to $175 million, if I take Indian and Pennsylvania, say, at roughly $50 million -- and I know there are several ways to look at it -- but we look at your Q4 run rate of benefit on health reform, maybe another $50 million or $55 million of incremental versus what you showed for the full year. Is it right to think about at the low end of the guidance, there's very little health reform benefit? And at the high end of the guidance, maybe there is something like $70 million to $75 million? And can you give us your thoughts relative to exchanges and so forth about why you'd be that way? And then the other aspect of it was just your growth number that you're using. That seems to imply to me low single-digit core growth. Is that sort of where we're at or would you describe that is still somewhat depressed coming out of the issues in the last two years and with a long-term objective to do better than that?

First of all, let me deal with the healthcare reform. We've done it and now we gross it up and the gross number would probably be in the range of $165 million or so roughly in 2014. You are correct. The low end doesn't have a lot of growth in it and it's a conservative low end and I would hope we would not have any trouble achieving the low end of that number. The midpoint does include Indiana Medicaid and there's a couple of small states in the high end because we're still working on them. What we did is we took the second half of 2014, both Medicaid and exchange and we annualized it. And at that point, we thought we had captured the growth in the Medicaid and the exchange, because it was kept growing through the second quarter. We added to that Indiana Medicaid which are, you know, in the $40 million to $50 million benefit for the year. There's a little bit of a ramp up on that and there is not -- if the ramp up is real slow, then it would be at the low end and the midpoint would probably be the $40 million and $50 million in the high end. And then we took the healthcare exchange benefit and we looked at what's going on. We studied our own markets and we had about an 830,000 people in our zip codes as of January 15 which was about a 35% increase off what it was when it started and we took that and we tried to make an estimate of where we thought it would finish out. Now it looks like it's finishing out strong. We did see today that CMS is extended another period for people who got some penalties and also got their weight going and we put in an increase of the healthcare exchange, thinking our best estimate in our markets and what we also have going on ourselves. So when we put in all of it together, we got somewhere in $140 million for the midpoint end of the range which we feel really comfortable about. The low end is not that aggressive and should be easily achieved.

And how about on core growth? Just a comment.

For core growth, slide 18 would show that it's in the 2% to almost 4% growth in core growth there. And that's got various elements in it. We did break out the Medicare dish. We've got a volume growth of 0% to 2%. We were over the 2% with the flu happening in the fourth quarter, a lot of initiatives. So hopefully that's -- and we suspect revenue for adjusted admission to be in the 2% to 4% range. And I think that we feel pretty comfortable we can achieve the growth we've got outlined there, especially when we go back and look at what we did for '13 and '14 with HMA and us combined.

Your next question comes from the line of Whit Mayo from Robert W Baird. Your line is open.

I guess my one question really relates to HMA. You've owned the company for a year now. Can you just talk about physician and employee satisfaction? Any progress in Mississippi gaining back business with Blue Cross? Just any general comments to help us think about the stability or improvement, you know, on those legacy assets and any surprises along the way? Thanks.

Yes, Whit, I think if you were to ask the HMA employees and if you ask the physicians groups there how they satisfied with what we've accomplished and what they have gotten from us in terms of our standardized centralized way of doing things and providing them information, all the serious safety events, all the things that we do that we built our reputation on. And by the way, this was a group of people -- employees and physicians, who had not had a lot of attention, as you might expect over the last year or two, when it was all said and done. So they are very pleased in terms of where they are. You can see we're making progress. We recruited 900 physicians to the HMA facilities this past year which they haven't had any physician recruiting. Their margins are improving and I think you would find they're relatively satisfied and we're very satisfied. It's a great group of hospitals. We think we did absolutely the right thing.

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

I guess just to follow-up on that core growth number, if you were thinking revenue per adjusted admission of 2% to 4% and volume to 0% to 2%, I mean at the midpoint, you're talking about 4% same-store revenue growth. And yet at the midpoint, you're talking about not even 3% EBITDA growth. If you're getting 1% volume growth, if you think incremental margins on that, it should imply something more like 5% EBITDA growth at the midpoint. Is there something else going on there? Because if anything, I would think that you might even have a tailwind of HMA margins looping back to normal to do even better than that. So why aren't we showing at least EBITDA growth in line with the revenue growth that your outlook has?

Well when you look at the revenue growth that you got there, we attempted to try to understand what would likely be to happen in this year and we decided a 2% to 4% growth. We also looked at what we thought the organic growth was between 2013 and 2014 and it's in the 2% to 3% range and we thought a reasonable assumption would be that we continue to do that. We probably didn't make a lot of progress the first year on the HMA margin. We did make some progress activity. There is of course, uncertainty in some of the Medicaid programs. I think there's some uncertainty down in Florida and a little bit of uncertainty in one of our -- we're going to have a little bit of a reduction in Texas. But I think we had to factor those in, so we thought the prudent thing to do was use a 2% to 4% likely organic growth. With all the things we got going, work out better and it would be better than that if -- I know our employment growth has been better and our unemployment growth has declined. So that would possibly be better, but that's how we decided to do the guidance.

Your next question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Question for you, on the fundamental volume or utilization trends, I think we've all talked about this before how you guys are putting initiatives in place and the economic improvements trickling down to the rural markets that you operate in. So if you don't mind just talking about the drivers of same-store and how that is translating today, kind of like the trends you're seeing in terms of just broader utilization of trends. Thank you.

Let me just start and then Larry can take on it. We've got good solid momentum in terms of the programs and initiatives we put in across the board. I suppose the area that -- and I think Larry mentioned this and we'll mention this in the future -- our emergency room business is very strong, continues to be very strong, but we made good progress in orthopedics. These programs are beginning to -- it's taken us a while to kind of get going and to move forward in terms of getting everybody on board. But I think we're on track now for good core growth, sustainable core growth. Larry, do you want to--?

Yes, just a couple of statistics. Our unemployment in our markets' revenue weighted was between 8% and 9% at [inaudible]. Now it's 5.6%. Our employment growth for the last three years has probably been about 3%. So I think these type of markets are starting to see a little bit of improvement there. We're seeing a little bit in managed care activity. I know we're tracking our exchange business. Just like it's going to be -- it was a very strong through the middle of January. We expect it to be -- ultimately, we finished strong the last week that we track ourselves. So I think we'll do good from that perspective. So I think we've got a good opportunity to continue to do volume growth.

I think we had the best improvement in volume in 2014. Even though we're the worst in volume, but we have the best improvement in volume.

Yes, we were -- down to a minus 9%. It was about a 5%. In the last quarter, a comparable number, as Wayne said, was a negative 6% to a positive 2.7%. Likewise, revenue is also strong. It was 4.6% for the quarter.

Your next question comes from the line of Joshua Raskin with Barclays. Your line is open.

Larry, I think you mentioned a 30% growth rate in the first quarter which would put you at about $700 million. That implies another ramp sort of as you go through the year. So could you just help us understand some of the seasonal factors? I would've thought off an easy comp in one queue, plus an extra month of HMA, maybe would've been even a little higher than that.

Yes, the payroll taxes is starting over and unemployment taxes. Some people don't talk about it, but we did notice that last year and probably see it again this year. We have been starting a study to seasonality in the deductibles and copayments and we lose a fair amount of earnings. Our bad debts are a little bit higher than that, because they grow up and we don't collect but about 50% of that. And you know, the one that's probably people should be aware of is high tech. I think it will probably be like it would be $20 million in synergies in the first quarter and that would be the lowest. If you look at the average for the year, it would probably be closer to $35 million to $40 million for the year. And so you lose that activity and the expenses are probably relatively flat. You take those three items together, that's probably 7% or 8% of a quarter's EBITDA that accounts for it. And unfortunately, we're sitting here with a pretty bad weather again this quarter, and thinking about it, we got to recognize that we're having a pretty tough period this past week and it may continue for a while. We did have a big ramp last year. It won't be as much here -- there, but we did have a good ramp last year and we went up nicely. But to make people understand, we probably start out somewhere at 30%, maybe a little better, than the reported number last year. The HMA number we thought was probably closer to 50%. It's probably in the low end of closer to 40%. Looking back on what we know now about HMA in the period before we bought it.

Your next question comes from the line of Frank Morgan with RBC. Your line is open.

I wanted to go back to slide 18 one more time on the HMA synergies, since that is a significant number. Could you talk about what you have identified incrementally in the synergy opportunity there? How much of that is revenue related? How much of it is cost synergy? And what's the probability that you would put on accomplishing the high end of that? Thanks.

I think the probability is pretty good. We hit $275 million for Triad over a couple of years. HMA has got more hospitals, more revenue and on larger corporate overhead. I would say the big -- and it is revenue, but the only revenue item we include is managed care contracting or -- also that Richard Willis and his staff are doing a good job of getting ready for 2015 in the managed care contracting. Most of our synergies are all cost driven, but if we do a better job than anticipated on managed care and I know we've done a good job of getting them in some of the HMA facilities and exchanges this year and that's going to benefit us and we also did a bit better job on some of the contracting. Other than that, it's expenses, and again, it's productivity and supply management and contract management and the physician house-based contract fees is what's going to drive it. But the new one probably in 2015, the one in 2014, would be a much better benefit from the managed care contracting.

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

So I wanted to just focus on the surgical trends. You've obviously seen a real improvement in your adjusted admission numbers throughout the year. The surgery numbers are still a bit soft, although they have, I guess improved sequentially over the course of the year. And I guess I would like to just get an update or two on what do you think we should be expecting for surgical trends and what you're doing strategically to maybe move that along?

Yes, we were down about 2% for the quarter and 3% year-to-date and we were closer to 4% or 5% in the first quarter. We done a really good job -- I think Wayne mentioned the orthopedic program that we put in place and that's very helpful. And there are 40 hospitals underway with that. We've also got a Director of Professional Relations function that we started in about 70 of our hospitals that will look at the hospitals. We got a chance to convince people that they should use us or physicians should use us for doing some of their referral activity. We're doing a much better job of monitoring our employed physicians, making sure we're getting our referrals there. Also our CapEx spending -- you know, we've got probably almost $200 million of CapEx spending of good size that's opening up and that will be available in 2015, that will drive a very good EBITDA. A fair amount of that is on the surgical side. We're also -- with some of the recruitment that we did was on physicians and that -- the latter part of the year recruitment, especially in 2013, will help with our search for growth. So that's probably the ones I can think of. Anything you want to add, Wayne?

I would just say that you know, I think we're making steady improvement. And the 3760 physicians that we recruited this past year will certainly be helpful to that as we go forward, but I think we're on the right track.

Your next question comes from the line of Justin Lake with JPMorgan. Your line is open.

I want to follow up on a couple things. One, can you flesh out in a little more detail how you expect the HMA margin improvement opportunity that you've laid out to roll through 2015 and beyond? And then secondly, I think you've talked about some potential headwinds. I think you're talking about the Florida and Texas waiver programs. Can you put some numbers around that for us in terms of what you thought about for the potential versus for the 2015 numbers?

Yes, first of all, let me deal with the issue of the Florida, I think Florida is around a $20 million issue. It could be that way, the LIP program. We would hope that that and last year, we thought that was not to happen, until the last minute it did happen, so there. I'm thinking in the Texas program, it could be a $20 million to $30 million UPL challenge in 2015 that we've thought about. The first question -- what was his first question? I didn't write it down.

HMA margins.

HMA margins, sorry.

And Larry, he doesn't get but one question, though, Larry.

Yes, but I'll answer. You know, HMA run about 15% to 16% from 2010, 2011, 2012 and in 2013, it's down at 12% or 13%. Probably a little bit lower if you take all the adjustments that we determined. Probably a lot of it will be pushed back. We think we can still improve that a couple of hundred basis points. We made a little progress this year. I would hope we can get 50 basis points next year and I hope we can finish that out in 2016. To do that, we've got a lot of activity going on in both recruitment of doctors, CapEx spending, productivity, activity and then just good marketing in the markets. We do think we'll benefit a little bit better in 2016 from the margins of HMA as a result of this change, but most of the margin opportunity there has just come from better performing and they did perform better.

And some improvement enhancement of revenue.

And their enhancement and the revenue per unit for them is below us. We did grow the revenue per adjusted admission in HMA in 2014. Not quite as much as we did ourselves, so that opportunity still exists. They'll never be as high as us because of the Medicare mix, but I think we've done a very good job of trying to put the right focus on some of their areas to do a better job on revenue.

Your next question comes from the line of Jason Gurda with KeyBanc. Your line is open.

Most of my questions have been answered, but did you mention that the high end of guidance assumes additional states expanding Medicaid?

Yes, there are a couple of small states, a couple out in the West and one in the South and we're not going to get into chapter and verse today. They won't make a big difference in it, but we were working on it. And as Wayne said, it's a focus of the company to try to get some of these states to move. One of the small ones in Wyoming looked like it went the opposite direction of what we thought it would, but there are a couple of them out West that may happen and maybe one in the South. I don't think it's going to move that much, but there is some effort on our part to continue to do that.

Jason, I would not give up on Tennessee. I think the governor is not giving up and I think there is a lot of work going on now. So we're all cautiously optimistic that we'll get back to the state legislature sometime in the relative near future in Tennessee.

Probably in the fourth quarter, we're more optimistic about more states than we're today. But we're still able to have a pretty good range of the EBITDA here of $3 billion to $3.2 billion, with the Indiana and Medicaid being at the midpoint and a couple of smaller ones at the high end. I think what's going to really help the Affordable Care Act is the rapid growth in exchange. It's up 35% for us so far; probably finish out much higher than that. Then you got the CMS today announcing another month of open enrollment, I believe tied around the people who have to pay the penalties.

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

Just wanted to follow back on the CapEx and I apologize if I missed this, but it wasn't clear whether you just -- because the CapEx came in $125 million-ish below what you are guiding to, whether that just rolled into 2015 or there was an elimination of some spending altogether? Thanks.

Both.

Well, we've got an opportunity if we don't acquire hospitals, our executive monitors that and Marty Schweinhart does a great job of keeping it all lined up for us and there is always projects we can go do, but we're doing a better job. David Miller and Marty, Wayne, myself are all looking harder at projects, trying to get a good return, as are the [inaudible] presidents are. So it's probably caused us to be a little bit slower in getting things done and making sure there's going to be a good return. So to some extent, it's our effort to try to make sure there -- and I mentioned we got a big return coming off some of the stuff that we done this year which would drive us to even better than what we show in the guidance if they all come through. But we do generally step the percent -- the amount of the guidance up at the beginning of the year and then we manage throughout the year. So to some extent, some of it falls back. But it's really pick the right projects that are going to work and make sure we get a good return on those projects. And we also monitor it for the next couple of years to make sure that we got the return and we're also doing it in the places where we got the higher margins.

Your last question comes from the line of Andrew Schenker with Morgan Stanley. Your line is open.

Most questions have been asked, but just real quick on bad debt collections, particularly on the exchanges, just curious how those have been trending through the year and kind of what you are baking in for next year.

I know some people seem to be overly concerned about the deductibles and copayments. We -- with the exchange business, historically it's been 65% silver, in which gives you some subsidies to these people. And then the people are buying the gold and the platinum ought to do just as well if even not better than we do off their existing activity. The 20% buying the bronze will be a collection challenge because there are no subsidies there. We collect around 50% and we'll probably collect a little less than that off all the exchange business. But I don't think it's going to be a material impact for us. We started to work through it and based on what we've got now, you're talking about a $5 million -- maybe $5 million or $10 million bad debt challenge you have to work through and we're trying to accrue for that as we go along. We do a lot of analytics around our bad debts, deductibles and copayments. And so while it is true that they are big deductibles, when you start to factor it and consider the subsidies, I think we're also getting a much higher percentage of people buying the silver plan so far this year than they did historically and that's the one where the subsidies are.

This concludes our Q&A session for today. I would now like to turn the call back to Mr. Smith for closing remarks.

Thank you, again, for spending time with us this morning. Our standardized centralized operating platforms will help in moving this company forward as one. We're excited about the opportunities in 2015 and beyond. And we want to specifically thank our management team and staff, hospital Chief Executive Officers, hospital Chief Financial Officers and Chief Nursing Officers and division operators for their focus on operating performance for this challenging quarter. Once again, if you have a question, you can always reach us at area code 615-465-7000.

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