Good morning. My name is Mike, 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 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to Mr. Ross Comeaux, Senior Director of Investor Relations. You may begin your conference.

Thank you, Mike. Good morning, and welcome to Community Health Systems' fourth quarter and year-end conference call. Before we begin the call, I'd like to read the following disclosure statement. 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 risks, which are described in headings such as Risk Factors in our Annual Report on Form 10-K and other reports filed with or furnished to 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. Yesterday afternoon, we issued 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. We will be referring to those slides during this earnings call. As a reminder, our discussion of our results excludes Quorum Health Corporation and the joint venture in Las Vegas that was sold to Universal Health Services. All calculations we will be discussing also exclude discontinued operations, loss from early extinguishment of debt, expenses incurred related to the company's spin-off of Quorum Health Corporation, impairment of goodwill and gain or loss on the sale of businesses, expenses related to government and other legal settlements and related costs, expenses incurred related to the divestiture of the home care division, the gain on the sale of investments and unconsolidated affiliates, the expense from fair value adjustments on the CVR agreement liability related to the HMA legal proceedings and related legal expenses. With that said, I'd like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Ross. Good morning, and welcome to our fourth quarter conference call. Larry Cash, our President, Financial Services and Chief Financial Officer, is with me on the call today, along with Tim Hingtgen, our President and Chief Operating Officer. Overall, we're pleased with our performance during the fourth quarter, but obviously, we still have a lot of work to do. As you are aware, during 2016, we began to reshape our portfolio through the spin of Quorum and other divestitures, realigned our divisions, consolidated many of our back office functions, promoted and added a number of new leaders, all of which with the focus on improving our execution and performance. As we think about 2016, we believe we have made progress across multiple fronts, which positions us well for future growth and improved performance as we move through 2017. During the fourth quarter compared to our third quarter, we did see improvement across a number of areas of our business, and we ended the year with a good quarter. First, net revenue came in slightly above our expectations for the quarter with revenue up 2% sequentially. Second, we drove better expense management sequentially across our operating expense lines, and a number of expense initiatives that we are working on should help us throughout 2017. Third, our adjusted EBITDA margin of 12.6% marked an improvement compared to our performance in the second and third quarters. And with additional efforts around growth and expense management ongoing, coupled with our divestiture plan, we expect our adjusted EBITDA margin continue to improve moving forward. Fourth, adjusted EBITDA of $564 million for the fourth quarter was within our guidance, and our cash flow from operations was $327 million in the fourth quarter, which was up 84% sequentially. Fifth, a number of hospitals and markets…

Thank you, Wayne. Overall, we had a solid fourth quarter with a number of items in line with our expectations. First, our same-store revenue increased approximately 2% sequentially, which was slightly ahead of our internal forecast. The sequential increase relates to increased in-patient admission surgeries, patient days and also, all payer patient mix increased. And we did have the planned Medicaid increase in reimbursement. HITECH incentives of $16 million were in line with our forecast. Sequential improvements from reimbursement helped Information Management and Community, Community (12:06) reductions were all in line with our projection. For our physician practices, we did achieve about $10 million improvement during the fourth quarter, about half of anticipated improvement, and in terms of seasonality and service line improvement. In Florida, we made about a $20 million improvement, which was about $10 million less than we expected. On the expense front, we made sequential progress across all payroll benefits and other expenses. Sequentially, total expenses decreased about $10 million, and in the fourth quarter, our same-store expense increase was 2% versus 5% for the first nine months. Overall, adjusted EBITDA of $564 million was within our guidance. Fourth quarter revenue did include $8 million which was from a combination of an insurance settlement from a third quarter 2016 flood in Pennsylvania and a small British Petroleum settlement, offset by negative impact from Hurricane Matthews in early October. Now, we discuss results from fourth quarter on a quarter-over-quarter basis. Remember, calculations exclude the items that we called out earlier on a same-store basis for the quarter. We note the following are fourth quarter 2015 versus 2016. Net revenues increased 0.5% comprised of a 1.9% increase in net revenues per adjusted admission and a 1.4% decrease in volume per adjusted admissions. Our in-patient admissions declined 1.4%, flu and…

Thank you, Larry. First, I would like to echo Wayne and Larry's earlier comments on our fourth quarter which is I thought we had a good quarter. I moved to the Chief Operating Officer role in September, and over the past couple of months, I have been organizing myself and our management teams to drive greater execution and accountability across the organization. Sequentially from the third quarter to the fourth quarter, we drove better same-store net revenue growth, and we delivered better operating expense leverage. First, I would like to comment in our volumes. In aggregate, we were not satisfied with our fourth quarter volume performance across our entire portfolio. We did, however, see growth in some of our most competitive markets, demonstrating the results of well-developed and executed strategic plans, medical staff development, and productive capital investments. As I mentioned last quarter, we have a number of growth and revenue initiatives that we are focused on: service line development targeting higher-acuity opportunities, improving our physician start-up process and the overall efficiency of our physician practices, consistently delivering a higher level of ED performance, and investments in additional strategic access points. Through these efforts, we have identified a number of opportunities to drive better volume performance. And while we realized some expense improvement in the fourth quarter, we continue to view more efficient expense management as a significant opportunity for the company. We continue to work with local market leaders on matching the cost structure of each respective hospital with our hospital networks' revenue outlook. And there are a number of other areas where we are targeting to drive additional efficiency. Last quarter, I highlighted a new framework. Our key performance team that increase collaboration, prioritization, and accountability by better leveraging our organization's clinical and operational subject matter expertise. This team focuses on key performance indicators that can help move the needle on quality, volumes, and earnings, benefiting our entire hospital portfolio. While we are still early in this rollout, we are continuing to see progress in areas such as length of stay, ED throughput, and supply expense management. Another initiative that we have introduced in September is our high-opportunity hospitals. We started this framework in October from which we have identified 15 hospitals or 3 per division that have historically operated at a higher EBITDA margin that have experienced some EBITDA decline in 2016. For each hospital, we conducted an in-depth operational assessment and completed focused strategic planning. We've coupled this strategic analysis with increased corporate resources and oversight to drive improved EBITDA performance. Through this model, we are seeing some early progress which we expect will drive better execution, accountability, and financial results that these targeted hospitals improve. I'm looking forward to sustained improved results in the months and years ahead, and I look forward to updating you on our progress on future earnings calls. Wayne?

Thank you, Tim. At this point, operator, we're ready to open it up for questions. We ask that you limit your questions to one each so that everybody will have opportunity to speak. And if you don't, (32:28) you know where we are. We're available to talk to you, and you can reach us at area code 615-465-7000.

Your first question is from A.J. Rice from UBS.

Thanks. Hi, everybody. Maybe just one question and then one clarification. On the comments around the divestiture program, every quarter, I think you've stepped up a little bit over the last year what you're looking at doing and had made good progress on that. I know you don't want to put out a list of hospitals or whatever that you're thinking about divesting, but is there any way to frame sort of what the end game is? Are you trying to get leverage to a certain point? Are you trying to get debt, absolute amount of debt down? Is it more about management breadth and being able to expand and control tighter? Give us a flavor for where you're trying to ultimately take the restructuring of the portfolio.

So, A.J., I think what we've said and we'll continue to work on is that we want a sustainable group of hospitals in sustainable markets where we can deploy our capital. And if you look through our slides, you'll see there is a projection in terms of what it does to our margins, and it even improves our volume a bit. So, I think when we get to that point, we'll know it. Our intentions are not to sell every hospital we have but to get to this group of hospitals. I don't know what that number is, but I would think that what we've just done and what we'll do in 2017 would be very close to that. And then Larry might want to quantify that a little bit. By the way, I would again say that we are getting a very good value for the facilities that we're selling, and we're getting about 10 times in a market for single-digit hospitals. If opportunities come along for other hospitals that we'll get 12 times, then we'd be happy to consider that.

Okay.

A.J., I just might add one thing. We are paying attention to the tax basis and making sure we decide to sell something or just maybe a couple better so you can make sure you get a good price and we get most of the proceeds. I think we estimated maybe 5% or less of the proceeds. The other thing we attempted to do this quarter, we've stepped it up every quarter. We've done it and it's now 25 hospitals, 15 definitive agreements and 10 letter of intents. And we went ahead and we've had some contacts from people for 4% to 5% of revenues, $700 million or $800 million of revenue profitably. And we think that contact will lead to a transaction. We'll be talking about it probably on our next call. But since we're putting out guidance, we don't want to keep putting out guidance with changing things. We decided to estimate that and put that out even though we have not gotten ourselves comfortable enough yet to call out one of the working LOIs. Historically, what we used to do was put out we'd buy two to three or two to four hospitals even thought they might not be named, and we tried to also give people a lot of information about when these would close and how much in the first half of the year and the second half of the year so there can be a better understanding how they would come out. So...

Okay.

And the other question here is the fact that we're all working on our metrics in terms of our debt metrics, but also, we're working hard on the size of our debt to work our debt down as well, so it's both components.

Makes sense. Just one clarification. Larry, I think in your prepared remarks, you had mentioned the progress in the Florida portfolio that you had – and I know that's been a topic of discussion for a number of quarters. You've seen a $20 million benefit, but there was sort of $10 million that you were hoping to get you didn't get. Can you tell us what you've seen, where you've had progress, and does that carry over to get some of those savings and efficiencies you've got in the walk forward. And then the $10 million that you didn't get, what was that primarily around?

Going from the third quarter and fourth quarter, we would expect some sequential improvements. Some would be seasonality. We achieved some volume improvement and some surgery improvement, but probably, we didn't quite have as much surgery improvement as we anticipated. We're doing a pretty good job on expenses there, and we'll continue to do a better job on expenses. But I think our surgery growth was a little less than we anticipated. I know our surgery for the company is a little less than we anticipated and of course the HMA hospitals continue to be negative which a lot of those are in Florida, and I think the industry looked like it had a little bit more of a challenge in the fourth quarter from a surgery perspective that we felt a little short from a surgical contribution to our EBITDA improvement in Florida in the fourth quarter.

Good job at limiting the questions to one, A.J. Next (37:21)?

That was a clarification. Thanks.

Good. Good work, A.J. Thank you.

The next question is from Brian Tanquilut from Jefferies.

Hey. Good morning, guys. I'll stick to one question. Larry, as we think about the guidance, when we think about the volume and the acuity and the pricing assumptions that you have baked in, where are you getting the confidence and then how much visibility do you have right now to the pricing dynamics that you baked into the guidance?

Yeah. First of all, I think we got pretty good visibility around Medicare, and we've got a pretty good idea where Medicaid is going to go. I think Medicaid reimbursement will be a little bit better from our perspective in 2017 over 2016 than we had 2016 over 2015. Majority of our Managed Care rates are locked up or a high percentage are for 2017. I think we'll stay close to the range that we expected to get from a volume perspective. We've got good employment growth. The population continues to grow. We got the orthopedic improvements. We've done more markets there. Dr. Simon is working on installing the physician recruitment that will be there that went there at a full year, and we continue to get better volumes from that. Some of the stuff Tim talked about around ER transfers, behavioral health has done good for us. That's about 6% of our business and then the access point should continue to do a good job for us and probably effective ED management. So, all of those collectively, it's a rollup of what the hospitals have predicted in the plans they've done, and we think – and this we pointed out earlier, selling the hospitals we're selling throughout the year will help the overall same-store results because we'll compare ourselves with five of those hospitals on a same-store basis throughout the year, and all key indicators of volume improved in 2016 had those hospitals not been there.

All right. Got it. Thanks.

The next question is from Josh Raskin from Barclays

Hi. Thanks. Good morning. Just a question on payor mix. I think we saw commercial improve. I think it was 60 bps in the quarter but 100 basis points for the full year. And I just want to make sure I understand the components there. I guess, how much of that is what we think of as pure commercial versus Medicare Advantage? And then help us understand maybe the economics on some of those shifts. Was commercial still what we think of as commercial margins and is Medicare Advantage growth I guess better or worse than the overall commercial side?

Yeah, from an overall perspective, we do include the Medicare Advantage in there since it comes from Managed Care companies. So it's roughly 8% or a little bit more, maybe 8.5% of our payor mix. And actually, it was down a little bit in the fourth quarter, down about 70 or 80 basis points on the Medicare Advantage side. At least that's what we got. So, that what seems to have contributed to most of the slowdown in the fourth quarter. Usually, the fourth quarter goes up a little bit better because of the end of the year use of deductibles and coinsurance, but our Medicare Advantage was slightly down a little bit on an overall revenue basis. And on a year-to-date basis, again, it's 8% to 9% of our Medicare Managed Care activity. I'd expect our Managed Care to keep getting a little bit better. I mean, we've done a pretty good job of trying to focus our recruitment and our acuity activities around what could drive Managed Care. We've done a pretty good job of standing contracts. We're in pretty good coverage as it relates to our contracts as far as the exchange business, and I think we'll continue to see Managed Care move up for us year-over-year.

Larry, if Medicare Advantage comes down, is that good or bad? I just don't know if you're getting slightly better rates even if the utilization is lower. Would you rather have more Medicare or more Medicare Advantage?

Well, probably, we'll make a little bit more profitability off of pure Medicare especially on the outpatient side because they do a better job of redirecting some outpatient business. Our inpatient payment rates probably are comparable there. Now, I'm sure the Managed Care companies do a little bit better job on managing utilization and just straight fee-for-service, but we get a similar rate under both for inpatient business, but we generally see a little bit less outpatient revenue come through Medicare Advantage than we do Medicare fee-for-service.

The next question is from Gary Lieberman from Wells Fargo.

Good morning. Thanks. Maybe one clarification and one question. You made a comment about the flu being weak. Was that in the fourth quarter or were you commenting on the trends continuing into the first quarter?

We were commenting about the fourth quarter actual results, and yes, we are seeing some better flu results right now as most everybody is.

Got it. And then the metrics on HMA indicate that those hospitals continue to lag. Can you talk about that? Is the expectation that they should continue to lag or do you still think there are things you can put in place that will improve the operations at HMA?

The expectation is that they should improve, and we think we're doing the right things to improve those facilities going forward. As I think Larry mentioned, about 20% of them account for 90% of the problem, so it's not as widespread as it now appears. It's just some bigger hospitals that are problematic.

And I think we did for the most part close the gaps in the fourth quarter versus the year, so hopefully, we'll continue to see that gap. Sometime in 2017, we'll provide a net churn (43:14).

The next question is from Gary Taylor from JPMorgan.

Hi. Good morning. I just want to clarify just proceeds. I'm a little bit confused because I think the release talks about $1.5 billion of proceeds, but in other places, you talked about $1.8 billion, and so maybe I'm getting confused. I think maybe the $1.8 billion includes home care and MOBs. Is that the difference?

Correct, Gary. What we've tried to do since we started this process and I think we've got a slide there that shows the last – all the quarters in time and Wayne talked about it. It shows how it's progressing. And then when we did the guidance and talk about what's to be done in 2017, we did close the MOB sale and leaseback in the fourth quarter. Now, that debt doesn't go down. It comes out of senior debt and capital lease. So, total debt then changed (44:10). We also closed the home care, and we paid off some debt from those two transactions in the fourth quarter. And so, the end result is $1.8 billion, which included those, would go down from that when you start thinking about what's available that have happened in 2017. And then of course, we have not put numbers around the transaction or transactions. We expect to get down above the 25 hospitals in the third quarter of 2017, the 4% to 5%. But the $1.5 billion that's in the 8-K is reconcilable to the $1.8 billion, but that's what we expect to accomplish during 2017.

The next question is from Justin Lake from Wolfe Research.

Hi. This is Steve Baxter on for Justin. I wanted to ask about physician recruitment. It seems like the 2016 numbers increased a lot with the slides today versus the previous update, and I guess, for the full year, it was only down about 6% and it seemed like earlier in the year, you were talking about a potentially more meaningful decline in activity here. I guess, can you give us an update on was anything changed there and what you're expecting as you go into 2017?

Yeah, you can see that we dropped it a little bit this past year. We're much more focused on our physician recruitment now. We're driving it towards (45:34) enhancing our acuity and where we think we can improve our market share by deploying physicians in the market. So, we're a lot more consistent about the way we're thinking about it. One that – you recall one of the issues that we had at HMA earlier on is that they didn't recruit enough physicians. We recruited too many, so it costs us a lot of money. So, we've gotten very strategic about our thought process about physician recruiting then. And you'll see that continue.

And maybe one clarification just to add to that, when we talk about physicians, we generally talk about employed physicians. This chart includes physicians that we recruit to become independent, may become ER doctors or hospitalists providing services, are employed and are focused about having more productivity around employed doctors and maybe recruiting less employed doctors, only the numbers stayed relatively the same. And I think we actually did reduce the number of nurse practitioners, et cetera, from 2015 to 2016. So, a lot of our comments about physicians deals more with the number of employed physicians or however active that we're hiring new doctors.

The other component to physician recruiting is productivity and ability to enhance and improve our practices, and I think we have a great team working on that. We know a lot more about our physician practice today than even we did last year. We've been recruiting physicians forever. So, I feel good about the direction of our physician recruitment and practice management.

The next question is from Ana Gupte from Leerink Partners.

Thanks. Good morning. So, the question I have is about the guidance. What are you baking in, if you can give me some color on the benefits from the ACA and the payor mix and provisions of doubtful accounts in 2017 and then just...

Yeah. We're probably not going to give specifics about the ACA going forward. I think other companies said that we expect our exchange business to continue to go down a little bit based on how the open enrollment took place, and also, there is a little bit tighter activity in the special enrollment, so that's probably going to go down. I think our Medicaid will continue to do okay. We're not expecting any large amount of Medicaid expansion to take place over our few locations. Thinking about it and I do think our exchange business will probably go down a little bit. And it seemed to have slowed down in the latter part of the fourth quarter and latter part of this year. But we probably will not give out any more ACA benefits since we've done it now for 2014, 2015 and 2016, and it did improve nicely. What we are seeing is still somewhat more benefit in both the expansion and non-expansion states for people who are eligible for Medicaid.

The last question is from Kevin Fischbeck from Bank of America.

Great. Thanks. I was just wondering if you could kind of – with this bridge of the EBITDA, if you've got some assets that you're selling during the year. I was wondering if you could kind of strip those out and say, what would the kind of the core 2017 revenue and EBITDA be as if you had sold everything as of January 1? And then also within this guidance for 2017, because you're selling some more stuff, do you have like a same-store EBITDA growth rate that you're thinking of as far as the core business growing in 2017?

Yeah, I think we do have here. Like we said, volume would probably be zero to 1.5%. Revenue per adjusted admissions will probably be 2% to 3%. And same-store revenue would probably be 2% to 4% roughly. So, that was what we were thinking. We will probably as we announced a divestiture, they stay in continuing operations which is different a few years ago that we may as we did with QHC in Las Vegas and home care, we'll move those to non same-store so that the same-store results are only the hospitals that we'll continue to operate, and we think that by showing what we did about how 2016 got better without the 25 hospitals, it gives you a little bit more confidence as the operating results going into 2017 are better than the total 150 plus hospitals for calendar 2016.

And I will now turn the call back over to Mr. Smith for closing comments.

Thank you again for spending time with us this morning. We're very focused on our strategies we have outlined over the past several quarters. 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 continued focus on operating performance. This concludes our call today. We look forward to updating you on all of our projects throughout the year. Once again, if you have questions, you can always reach us at area code 615-465-7000. Thank you.

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