Community Health Systems Inc (CYH) 2002 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Community Health Systems Incorporated year end conference call. At this time all participants are in a listen-only mode. My name is Kevin and I will be your coordinator today.

If, at any time during the call, you need assistance, please press star followed by zero on a touch tone telephone and the coordinator will be standing by to assist you. I would like to remind all parties online today's conference is being recorded. The host for today's program is Mr. Wayne Smith, President, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Kevin. Good morning. Welcome to the Community Health Systems fourth quarter call and year end conference call.. With me on the call today is Larry Cash, Chief Financial Officer, Vice President, and Director.

The purpose of the call is to review our financial and operating results for the fourth quarter and the year ended December 31, 2002. As you know we issued a press release after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast of this conference call on our website a slide presentation accompanies our prepared remarks. I would like to begin the call with some comments about the quarter and turn the call over to Larry who will follow with a more detailed account of the financial results.

Before I begin, I would like to read the following statement. Statements contained in this conference call regarding expected operating results acquisition transactions or other forward-looking events stated in this call involve risks and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements were made pursuant to the Safe Harbor Provisions pursuant to 1995, and made based on management's current expectations or beliefs, as well as assumptions made by and information currently available to management.

These are summarized under the caption risk files filed with the Securities Exchange Commission including the company's registration statement on form S-1 registration statement number 333-69064, form 10K for the year ended December 31, 2001, form 10Q for the quarters ended March 31, 2002 and June 30, 2002 and September 30, 2002 and form 8 K filed February 26, 2002. These filings identified important risk factors and other uncertainties that cause actual results to differ from those contained in the forward-looking statements.

We are pleased to announce that we delivered another quarter of outstanding performance in the fourth quarter of 2002 capping off a record year of growth. These strong consistent results reflect the strength of our proven operating model and represent the 11th consecutive quarter of improvements in same store metrics since going public. We believe we are very well positioned to execute our strategy for our future growth through combination of market share opportunities and acquisitions. Net revenues for the quarter end December 31, 2002 totalled 583 million a 22% increase over the prior year. EBITDA was 95 million a 13% increase over the same period a year ago.

Income was 28 million or 28 cents per share diluted compared to 18 million before extraordinary items or 18 cents per share diluted for the fourth quarter last year. Same store net revenues increased by 10.3% with admissions up 3.7% versus. Same store admissions were up 4%. The fourth quarter improved same store EBITDA margin. Net revenues for the year ended total 2.2 billion a 30% increase over the same period a year ago. EBITDA was 362 million a 17% increase. Net income before extraordinary items in both years was 105 million or $1.05 per share diluted compared to 49 million or 54 cents per share diluted last year.

For the year, same store admissions increased 4.4%, adjusted admissions 5.5 and again we improved our margin, our EBITDA margin by 20 basis points from 18.2% to 18.4%. On a same store hospital our same store hospitals continued to perform well as our year-to-date financial results will demonstrate.

With that, I would like to review some of the key operating accomplishments for the quarter. First our same store facilities had an excellent quarter with admissions and same store admissions increasing 3.7% and 4% respectively. Same store net revenues also increased 10.3%. Increased volume through the quarter reflects the successful execution of our very focused operating strategy. The standardized and centralized approach increases utilization and reduces the need for patients to travel outside their communities to get healthcare services by adding and enhancing services in our facilities and recruiting qualified physicians.

The company recruited 447 new physicians for 2002 with over 65% specialists. This compares to 378 for the prior year. We expect to recruit about 450 physicians for 2003 and we've had good physician retention with the turnover of roughly 7 to 8% in 2002.

Our acquisition strategy has been successful as we lead the non urban industry with the completion of six acquisitions in 2002. The last one acquired was Lake Wells Medical Center in Lake Wells, Florida on December 1, 2002. In addition on January 1, 2003, we further enhance idea our portfolio with the acquisition of seven West Tennessee hospitals from the Methodist Healthcare System of Memphis, Tennessee. This brings our total to 70 hospitals in 22 states.

We've added an additional group for our West Tennessee acquisition pulling from our experienced executives in our other groups. We have a definitive agreement on South Side Regional Medical Center in West Virginia, this is a large facility, this is a 408 bed facility approximately 25 miles south of Richmond. This will be our fourth hospital in the Commonwealth of Virginia. We also have a letter of intent with a hospital in Pennsylvania.

We continue to have a robust acquisition pipeline at attractive multiples. This is a direct result of our strong operating platform and our very strong local market reputation. Remember, in these acquisitions price is not the only consideration, as more communities recognize our commitment to delivering high quality healthcare in rural areas.

One of our hospitals, Marion Memorial Hospital was ranked in the top 100 hospitals this year. We acquired this hospital in 1996, in December 2002, we opened a replacement facility with 92 beds, it is's now named Heartland Regional Medical Center. Additionally, 23 hospitals were surveyed this year by the Joint Commission on Accreditation with an average score of 96 up from 93 in the prior year.

We also provided updated guidance for 2003 in our AK filing last night with the SEC. Revenue guidance is from 2.6 to 2.65 billion with EPS from $1.20 to $1.25. The revenue guidance includes the recent West Tennessee acquisitions as well as two to three acquisitions for the year. At this point, I'd like to turn it over to Larry Cash to provide you a summary of our financial results. Larry?

Thank you, Wayne. We are very pleased with the financial and operating results for the quarter. With very strong on consolidated volume as evidenced by the 16% growth in admissions compared to the same period last year.

Adjusted admissions which factors in outpatient business had a 16.3% growth rate over the fourth quarter of last year. Same store basis admissions, again, increased 3.7% and adjusted admissions were up 4%.

Net revenues during the fourth quarter increased 22% for 478 million last year to 583 million on a same store basis net revenue increased 10.3% for the quarter compared to 8.7% in the 4th quarter of 2001. This is the 13th straight quarter that same store net revenue growth has exceeded 8%.

We'll continue to deliver strong EBITDA growth with a 13% increase from 84 million to 95 million. On a same store basis EBITDA increased 10.7% for the quarter. For the fourth quarter, EBITDA margin on consolidated basis was 16.2%, down 130 basis points from a year ago due to the low single digit margins of the acquired hospitals. The same store EBITDA margin was 17.6% compared to 17.5% for the quarter ended December 31, 2001 an increase of 10 basis points.

In the fourth quarter consolidated operating expenses as percentage of net revenues were up 130 basis points for the prior year. Payroll benefits decreased 30 basis points, supplies decreased 30 basis points, bad debt decreased 40 basis points and other operating expenses increased 20 basis points. The increases in other operating expenses related to malpractice up about 90 basis points, contract labor by 30 basis points and the cost of acquired hospitals. Same store operating expenses decreased 10 basis points with improvements in pay roll supplies and bad debt.

On a year-to-date basis, admissions and adjusted admissions were up 24%. Same store admissions are increased 4.4% compared to 3.9% last year and adjusted admissions increase almost 5.1% compared to 4.5% last year. Net revenues year-to-date increased 30% from 1.7 billion last year to 2.2 billion on a same store basis net revenue increased 9.7% for the year just ended. We have continued to deliver strong EBITDA growth of 17% increase from 309 million to 362 million on a same store basis EBITDA increased 11% for the same period.

For the year, consolidated operating expenses as percentage of net revenues were up 180 basis points from the prior year. Payroll and benefits increased 100 basis points. Bad debts decreased 10 basis points, supplies were flat and other operating expenses increased 90 basis points. The payroll expense relates to the cost of acquired hospitals that we will reduce over time.

Increases in operating expenses were due to increases in malpractice and contract labor as well as higher expenses associated with recent acquisitions. On a same hospital basis, operating expenses improved 20 basis points. Total AR days were 63 at December 31, 2002, down 7 days from December 31, 2001. Same store AR days were 62 at the end of the quarter down five days from December 31, 2001. [ INAUDIBLE ] $73 million or 15.4% at December 31, 2002 compared to 64 million or 15% at December 31, 2001.

Community health systems continues to have a favorable mix. For the quarter ended December 31, 2002, net revenue by pay roll source on a consolidated basis was as follows: Medicare was 31.7%, Medicaid 12.2%, managed care 18.8%, private including non HMO, Blue Cross and other was 37.3% of net revenue. Cash flow from operations was a strong 80 million versus 40 million last year. For the year just ended cash flow from operations total a strong 277 million versus 154 million for 2001 a significant increase of 79 percent. We spent approximately 28 million on acquisitions during the quarter and 156 million for the year.

Cash in the balance sheet at the end of the year was 133 million. We closed on West Tennessee on January 3, so the cash balance was used to fund this acquisition. Capital expenditures for the quarter just ended were 24. 6 million, which 5 million were for replacement hospitals. For the year ended we spent 114.6 million of which 36.8 million were for replacement hospitals.

Looking at the balance sheet as of December 31, 2002, we had 329 million in working capital and approximately 2.8 million in total assets. We had debt availability of approximately 650 million from the untapped revolver and future determined loan and cash in the balance sheet.

The amount of availability was reduced due to the acquisition of the west Tennessee facilities on January 1, 2003. Total debt less cash increased only $30 million in 2002. Our debt to capitalization was 50% our fixed rate debt is approximately 62% with floating rate debt at 38%. Total stock orders equity was 1.2 million at the end of the fourth quarter.

As Wayne mentioned we've updated our 2003 guidance. This guidance reflects the addition of 7 west Tennessee hospitals transaction and also reflects another two to three hospital acquisitions for the year. Our revenue guidance will be from 2.60 billion to 2.65 billion. EBITDA will be from 438 to 446 million and EPS will be from $1.20 to $1.25. Capital expenditure excluding replacement facilities will be 100 to 102 million and replacement hospital spendings will range from 35 million to 38 million.

We believe we are well positioned for continued successful growth. Wayne will now provide a brief recap.

As you can see, we had an excellent quarter with continued same store growth in volume and revenue, as well as improved hospital margins. This marks the 11th consecutive quarter that we've improved same store in net statistics and store revenue.

We expect our growth to continue as we improve hospital operations and add enhanced services and recruit physicians to reduce out migration. With that I will open the call for the question and answer period. If you would like to talk to us after the call, you can reach us at 615-373-9600. Kevin?

Thank you. Ladies and gentlemen, if you would like to ask a question please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by 2 all questions will be taken in the order which they are received. Your first question is from Lori Price of J.P. Morgan.

Hi.

Hi, Lori.

I had a couple of questions. First one it looks like your same store EBITDA margin came down a bit sequentially to 17.6 from 17.9, even though fourth quarter typically is a stronger seasonal one. Is that because Easton would have been included for the same time in the same store calculation for this quarter?

Easton was included for the first time, General was also acquired in October 2001 then Texas was also there, but Easton being larger would have more effect than the other two. That is the reason it was.

If you exclude those three facilities from the same store calculation, do you have any sense as to what your same store margin would have been?

Um -- it probably would have been up about 20 to 30 basis points over the preceding year.

All right. Can you tell us are you seeing pressure from any of your doctors to subsidize their malpractice premiums where they can't find affordable insurance and if you are are you resisting their demands or offering any kinds of incentives or help in subsidizing their premiums?

Well -- go ahead.

We are having some challenges. We have found some insurance companies which have gotten certain underwriting practices that they have understood our risk management program and our hospital. And that this company based in California has been helping us get malpractice coverage for our physicians where they pay for the coverage. There's only been one situation where we've had an unique arrangement in one of the under served areas where we've had some help for the doctors.

In general, you're not actually butting your own money into subsidizing their insurance premiums ?

Generally, that's correct.

Last question. What is your debt and cash balance posted at Tennessee acquisition that was completed early in the fourth quarter?

The debt and cash balance would probably be about 15 to $30 million for cash and the debt went up about $20 million off what it was at the end of 2002.

So most of that line is still available?

Yes.

Okay. Great. Thank you very much.

Thank you.

Thank you. Your next question is from Michael Weisberg of ING.

I thought you guys in the south are supposed to talk slower. Boy, hard to keep up.

We'll try better next time, Michael.

A couple of things. When you were talking about pay roll benefits being up 100 basis points, was that same store or not? I didn't catch that.

That was consolidated.

Okay.

It was consolidated.

If you can look at it, what were -- could you maybe talk on the same store basis and maybe look at pay roll and supplies and tell us what the trends are there as a percentage of sales?

Pay roll improved about 100 basis points from the fourth quarter of a year ago and supplies about 10 basis points. Both improved quite well. The increase -- bad debts improved, also the expenses were up. Other operating expenses were up because of the malpractice and contract labor.

Great. How much -- I was looking at my notes. How much incrementally did you lose from malpractice in terms of -- was it like 50 basis points?

On a consolidated basis, it was 90 basis points.

Is there a way of looking at it on the same store?

It was about 50 basis points on the same store.

Right. And as I recall, do you think -- I thought you thought that might flatten out relative to sales this year. Is that right? That is malpractice insurance will not go up relative to revenues?

No. I think that we finish up the year about 1.3%. I think we would still expect to be up 30 to 40 basis points next year. I think that's what we have been saying. Clearly you should not see big increases in the first half of the year. Second half of the year we will have to renew some of our reinsurance programs and you could see some increases in the second half of the year.

Okay. Actually one of the things I wanted to sort of understand is why we weren't getting more leverage on same hospital EBITDA margins, but that's a big reason because you have to eat 30 to 40 basis points from malpractice.

That is correct.

Good. And then one other thing if I could. In your guidance, what is the assumption in same hospital revs and EBITDA margins that sort of embedded in the numbers?

Embedded in the numbers is about 75 percent same store. We've generally had about 7 to 8%. It's about 7% right now and EBITDA margin is improved in 50 to 100 basis points.

50 to 100 basis points in same hospital EBITDA margins.

Yes.

Thanks.

Next question is from Darren Larric of SunTrust Robinson Humphrey.

Good morning, Darren Larrick, here. Just wondering if you could comment a little bit more on our unit trend and perhaps Dee compose that a little bit into pricing and mix that 6% number and also give us a pricing outlook by payor, if you could. I guess the other thing there is just to quantify what the six-month benefit might be for you folks with regard to the Medicare give back bill.

If you break down the revenue growth about 47% would be volume and then rates mix intensity would be about 54, 55% of it.

If you start your question about pricing trends for 2002, we say Medicare which is about 33% of our business the whole year is up about 2.5%. Medicaid's about flat. Managed care 6 to 7% and private business is up 7 to 8%. As it relace to the benefit we'll get from the government, I believe is one of your questions it should be about $2 million that goes into effect on April 1st through September 30th.

Okay. Great. And then just to clarify your contract labor costs, I guess as a percent of revenue for the quarter and for the year and what that might look like for '03? Thanks.

Contract labor consolidated was about 180 basis points up 30 basis points over a year ago and it is at the same level both for the year also, 180 basis points, up about 30 basis points. Up 50 basis points on the year -- excuse me it's up 30 basis points on the quarter. I would think next year that would level out a little bit.

It's predominantly out west which we are working hard to try to reduce that. But there's a little bit of a shortage in the western parts of the states and some of our acquired hospitals. We are working to try to bring that cost down.

Thanks very much.

Thank you. Your next question is from A.J. Rice of Merrill Lynch.

Hey, AJ.

Hey, everyone. A couple of quick things. Just a follow-up on the last question, maybe first. In the fourth quarter looks like you got an acceleration in your revenues per adjusted admission from 6% you've been running 4% for the year or so. Was that principally due to renegotiated contracts or was there another dynamic working there?

Last year we were up 3.8% which we finished after your 5.6%. We were up on absolute dollars last year about 202 dollars. It was up $338 this year on a dollars basis. It primarily came more from an intensity mix than a rates and we got a little bit better intensity in the managed care area and there was a little bit better mix in our Medicaid business we had looking at revenue.

We think we are still getting similar rate increases we apparently have gotten, but there's no specific drive in the rates for the quarter and the timing of when the this this this year versus last year.

Okay. On the increase in malpractice year-to-year, are there any things going into '03 or even looking out to '04 that you're doing or thinking about doing differently to try to stem that rate of growth, I guess, would be the way to say it?

Well, we have pretty good experience. We are clearly contemplating looking at a captive for ourself and maybe a -- we would be the principles players in that and we are installing that now as an offshore captive. If we did that it would be some time in 2003.

The other thing we work very hard on the risk and risk management trying to avoid it. This year, of course we have been hurt a little bit because of interest rate drops we discount our claims. Those are two things we are doing right now.

Just to follow-up on the captive question is that based on the view that people have exited the markets it's not so much a claims experience issue that you're facing as much as just availability of people to underwrite the business?

Yes. Right now there's just not as many people interested in underwriting malpractice business. We also think looking at our business our experience and our program itself, we might be able to get better attractive rates as an honor company versus working with someone else.

And then final question. Obviously during the quarter you guys announced share repurchase. What's your thoughts on that? Obviously you have a lot of things on the acquisition front percolating. How does share purchase fit into it? What's your thinking on that?

We purchased around 500,000 shares so far at $18 a share. We have the opportunity to buy 5 million shares the board authorized it for the next three years. So we'll just continually cautiously decide what to do about that. If we were going to make sure we still have the right amount of availability with our free cash flow and availability we think there's enough to do a reasonable share repurchase and continue to grow the company for good acquisitions.

Okay. Thanks a lot.

Thanks, AJ.

Next question is from Gary Lieberman of Morgan Stanley.

Hi, Gary

Thanks. Looks like you brought your EBITDA guidance up by about $18 million. In EPS guidance up by about a penny. I would have expected EPS guidance come up a little bit more based on the EBITDA increase. Can you help me out with what's going on there?

Yeah. The west Tennessee was not in the October 2002 guidance in revenue there. Acquired revenues. $150 million range and we expect to grow that and clearly we added that to it. With a transaction of that size, we don't expect to have a large EPS accretion. The first year we don't expect to be diluted, but that's what it basically is. We just think we should be cautious about how much EPS we expect to reflect on acquisition that size. And then we did bring down -- well, there's two to three acquisitions and I believe the opposite was three to four acquisitions before as we brought that down by one.

As far as the quarter, we didn't have a negative effect I guess it was $400,000 which doesn't quite round to the penny but year-to-date for 2002 we did lose a penny off our acquisitions due to timing. It's hard to be accretive in the first quarter.

I'm not sure you said it but did you have a dollar estimate for the benefit from the standardization of rates in '02 or '03 rather?

It should be about $2 million from April first to September 30.

Great. Thanks a lot.

Thank you. Your next question is from John Hindelong of CSFB.

Hi, John.

Good morning. Wondering if you would expand a little bit respond the acquisitions of the market in general. Couple of positions in particular. We've seen Life Point and Providence pay a couple of acquisitions, you haven't done that so far. Going forward what do you think the lay of the land is? Related to that, one of the strength of your acquisition program has been adding new states. I wonder if you are doing anything in that regard?

Lastly on acquisitions, it would be up to 63 hospitals, we're getting to the point where the law of large numbers starts to work against you with respect to growth rate? So, anyway, comment on all those subjects would be very helpful. Thanks.

Okay. Acquisitions, you know, we're off to a good start this year. We had a very strong year last year with acquisitions last year all of which we think are good properties. We have been very careful and cautious about not over paying, you know, we had the first in terms of a sort of unique acquisition this year with a large faith based group the Methodist system out in Memphis which we think there might be other opportunities in the future.

Our pipeline continues to be strong. We continue to see opportunities. As you kind of work would your way along in this we always go back to a BBA97 which started this in terms of all the financial trouble. We are seeing larger facilities today than we did then. So the properties look like there will be continued opportunities going forward. We've had good success in terms of, as you know, in terms of our ability to take a property and convert it to our standardized centralized approach and make really good progress on it.

So I think, you know, from our perspective, we will not, you know, we'll be very selective in terms of facilities we look at. We are not going to pay too much for facilities because there still continues to be other opportunities.

How about new states or markets?

Well, we'll continue to look at new states. We look for opportunities in new states. I think there will continue to be opportunities for us. We always have at least one or two new states in our pipeline.

Sometimes we're successful in terms of doing that, sometimes we're not. We are off to a good start in New Jersey with our Salem project there which which is one of our new states. So those states generally produce a lot of opportunities. We are very interested. Obviously we are very interested in continuing to have a diversified portfolio as it relates to geographics. We think that's a strength of ours, particularly if there are any issues in the future as it relates to Medicaid, a lot of states are under pressure in terms of Medicaid.

I think your question in terms of size, we believe that we can continue to grow without much difficulty, even though we are now larger in terms of both revenue and numbers of facilities. We can accommodate more facilities. As you probably know, when we did West Tennessee we were able to take individuals that were in our back up in our groups so that we put them together a group that was working on West Tennessee, probably 60 days before we closed it. A very experienced group who not only have a lot of hospital experience through the years, but also have a lot of community health experience in terms of how we do business.

We feel pretty comfortable about that. Our acquisition group continues to have strength in the market place. They are identifying good properties for us. So, so far we haven't seen anything there that would discourage us, John.

Thank you very much.

Thank you.

Next question is from Andrew Bhak of Goldman Sachs.

Good morning. I think I might follow on some of the themes touched upon earlier. Since your IPO you've posted pretty consistent same store performance with revenues up about 8 to 12%.

In given your recent acquisition activity it would appear to us the acquisitions size per transaction are increasing in revenues, and the EBITDA margin might be slightly lower than it has been in the past. Given that you're bringing those on, and all the moving parts of new facilities going to the same store base, I'm wondering what that suggests about your ability to maintain the trends, and more importantly, perhaps, what that suggests about EBITDA margin growth on a same store basis not just in 2003, but also looking into 2004 and just trying to get a sense of how much EBITDA growth you can harness internally based on what you've done over the past couple years? Thanks.

Well, I guess the first thing would be just to look at what we just finished up 30% in revenue and EBITDA about 17%. The guidance next year is about 19% revenue and 22 EBITDA growth. So that's strong activity.

Like I said, we expect revenue to be around 7%% EBITDA growth and next year and would expect that to carry on to 2004. Same store EBITDA growth will probably be in the 13 to 14% range and EBITDA margin same store 50 to 100 basis points. We should see probably not the first haft of the year but the last half of the year improvements in the consolidated margins versus what we finished the year at 16.4%.

Your question about going into 2004, we would just make a comment about our acquisitions and how they sort of look at. If you take the class of '96, '97 and '98 they run between 19 and 20% margin right now. The class of '99 is in the 18% range and so is the class of 2000. You take the class of 2001 and 2002, they are in the single digits or a little bit -- say 5 to 7%. There's no reason the 2001 and 2002 class will not move up in the next couple years into the 18% range. The class of 2001 was about 260 million of revenue with a margin of a couple percent. Paid out 70% of revenue to the class of 2002 was 215 million revenue it's got about a 1% trending margin, again, paid between 70 and 75% for it. They are all good facilities. They ought to generate a lot of good growth over the next few years.

Great. Thanks very much.

Thank you.

Thank you. Your next question is from Robert Mains of Advest

Two questions. First one's easy. Tax rate sort of jumped around a little bit over the year. What rate should we use in '03?

I think the year finished out around 41.1%. That's probably a pretty good rate. We do look at it throughout the year and have to adjust it following the fourth quarter based on all known facts which I think is 40.5%. Next year's rate somewhere around 41% would be a good rate to use.

The second question sort of getting back to what was just discussed about the margins, this year, '02 the non same store margins were pretty low. If I do my math right I think there's sort of an implication that those margins will be a little bit better in '03. Does that suggest that the West Tennessee facilities are running a little bit better than what are in the new store numbers in the fourth quarter?

The West Tennessee had about a 6%, you know, trailing margin there and I would expect them to be in the nine to 10% the first year. And that's better than what we bought in 2001 or 2002, which is around 1 to 2% trailing margin collectively.

Okay. That answers it. Thank you.

Thanks.

Thank you. Your next question is from Joel Ray of Wachovia.

Hi Joel.

Good morning guys. Afternoon here. At any rate I always think about the exact same type of issue. Was wondering if you would elaborate a little bit about what you are doing with these more recently acquired hospitals that will go enhance those margins. What are some of the specific things we are focusing on? Because that was a little bit shy of where I thought they would be in the quarter. It's not the end of the world, certainly a great quarter. That's where I'm focusing.

Joel, historically when we've done this we have been fairly disciplined about our approach. As we work through our model which is like a four-year model, we know the first year the vast majority of the improvements come on the expense side. We talk about all the things we do on an employee stand point in terms of reducing the wages and salaries through our supply expense and we always, you know, comment about the fact that most of the time we're buying these they have 14 or 15 or 16% supply expenses percentage of net revenue. And we're somewhere south of 12%.

So the first group of that comes from our disciplined approach which we've done over and over again. Again you know we model these out so that -- we use our operating guise or our first year -- our acquisition model turns into our first year budget. So we think we've got a pretty good plan to start with in terms of the expense side of it. And it's while we're working on that we work very hard in terms of determining which doctors we need, which we always have a pretty good idea about but we confirm that and start the recruiting process so over the next couple of years it moves to the top line in terms of opportunities for us.

Our pattern has not changed dramatically in terms of the way we've approached this. And it has worked well for us for both small facilities, as well as large facilities. We had great success in Arizona with the same model and we are having great success in Easton, Pennsylvania with the same model. We are pretty confident about the fact that the model works really well and it's the same things we've done in the past.

Just a couple comments. The hospital we bought September 30th, Salem, New Jersey probably had a trailing margin of 60 basis points when we picked it up. Lake Wells probably had about 70 to 80 basis points. So they're both pretty small. That's hard for anyone to know that when they are looking at projecting a quarter out. They brought it down, the non same store margin was 3.9% on 57 million revenue and Salem is in a whole quarter, Lake Wells, only a month.

We did roll out some pretty good performance out of Lake Easton and West Grove on a consolidated margin -- same store margin in the quarter. I think it's just where we started and not having a chance to really improve a great deal in the first quarter, we had those two transactions.

That's very helpful. One other question for you. And that is you had mentioned your comments you are looking now for two to three acquisitions versus an earlier three to four. Is there something that has changed in the dynamic that causes you to look for one less hospital?

Well, obviously we are off to a very strong start.

I couldn't agree, more. I agree.

We have a very large facility in Virginia that, you know, will be coming on. We have another large facility in Pennsylvania. From a revenue standpoint we are doing really well to start off this year. We are not going to turn down anything we sort of think meets our criteria and fits with the company but we are and continue to be -- I think we've been the most selective all along but it really has to do with the fact that we've already made a big step in the right direction this year in terms of acquisitions.

It also sounds like that given two larger facilities, they'll give you adequate revenue without having to add that extra one?

Yes.

Thanks very much.

Just to add one point. Last year our guidance was three to four and we bought six.

Right.

Thank you. Your next question is from Ken Weakley of UBS.

Hi, actually this is Marra Herson on Ken's behalf. I'm wondering if you could provide some statistics as far as case mix index both on same store and a consolidated basis? And also if you could give us some indication as far as how much additional acuity increases we should he expect from the number of physicians you have recruited this past year?

Sure, the case mix is just about flat on a consolidated basis and same store basis this year versus last year 1.15 versus 1.16. There's clearly a lot of opportunity for us. Most of the physicians we recruit are specialists. There's so much market share opportunity in various areas due to advertisement, and our ER program we would expect the case mix to move up, but there's a lot of non high intense business when cap for 50% of overall admissions. So we have a lot of opportunity to move that up.

For example one of the things we've done this past year in terms of our emergency rooms is worked hard on new Mona and chest pain. The way that you depth business, we have been recruiting a lot of specialists. The way we develop the business is to get those less intense patients in and build on that in terms of intensity. We feel comfortable we are moving in the right direction. We are continuing to recruit, as we said earlier over 65 percent of our new recruits are specialists. We should continue to improve in terms of our case mix index going forward.

I just also add our surgeries are pretty strong up 6% for the quarter which is a good surgical growth.

Great. Thank you.

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please key star followed by one on your touch tone telephones. Your next question is from Adam Feinstein of Lehman Brothers.

Hi this is Kevin Fishbeck filling in for Adam.

Hi.

I wanted to follow-up on a couple comments you made earlier about the guidance and actually about the facilities in Tennessee. If I'm doing the math right it looks like you guys brought up revenue by 150 and EBITDA by about 18 which gives me about 12% margin you said you are looking for maybe a nine to 10% margin on those facilities. I'm wondering if there was something else that was make be up the difference?

We did get the information we are going to get a couple million dollars more out of the government effective April 1st that we didn't know about in October and we had more information when we did the guidance in February than we did in guidance in October.

We had three to four and we brought it down to two to three so we took an acquisition out and replaced it with West Tennessee. We did bring it up a little bit more than what we think West Tennessee will do because of the benefit we expect to get from the government starting April 1st.

Great. I was wondering if you guys had any sediment from prior cost reports in the period which might have helped the revenue per number?

Nothing significant.

Okay. Great. Thanks.

Thank you. Your next question is from John Ransom of Raymond James.

Good morning.

Hi, John.

Good morning. In visiting that facility in Jackson, it struck me this is one of your few markets where you've got a big not for profit competitor with I guess over 80% market share. And this being kind of a new sort of experience for you, I just wondered how your strategy there to grow market share might be tempered or changed or maybe different than what you would normally do where you have little little to no competition. Thanks.

That's a good question. We are not inexperienced. Unfortunately we have a few other markets where we have two hospitals in town. Two of which are in Tennessee. Both of which, by the way, have very large competitors that are county-owned facilities. We have done extremely well in both those markets Marchtown, we have been in for a long, long time. Cleveland we have been there a good while, but we've only had significant improvement over the last three to four years. We have done a great job in Cleveland. We probably have more market share there than the county hospital.

I think the strategy is essentially the same for Jackson, Tennessee as it has been in those markets in that we perfect our operations and improve our operations so that we can compete on service and quality, recruit physicians, keep in mind that this hospital only has about 15% market share. We don't have to have a 50% market share to do extremely well there, we just need to go up incrementally over the next few years and we'll have about strong improvement. But we are encouraged by the opportunities.

There are a lot of doctors in Jackson, as you reported it's an upscale community, so we think there's plenty of opportunity to do the basic things we have done in the past which requires us to work hard in terms of physician recruitment. Getting a -- you know, some excellence in a particular area of one kind in Jackson it may be orthopedics, but those are the things that we'll do in that market that I think have worked for us in the past and will work for us in the future.

Thanks a lot.

We are very encouraged by that market, by the way.

Thanks a lot.

Thank you. I'm showing no further questions at this time. I would like to turn the program back to you for any closing remarks.

Thank you, Kevin. Thank you for spending time with us this morning. We believe that Community Health Systems has a proven operating model, is well positioned for continued success in acquiring hospitals and enhancing healthcare in the local communities we serve.

We want to specifically thank our management team and staff, hospital chief executives officer, chief financial officers and chief nursing operators and group operators for their excellent operating performance during the year that has contributed to our success and excellent results. We remain focused on our business strategy and improving our results. Once again, if you have any questions feel free to call us at 615-373-9600. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the conference, you may now disconnect. Have a nice day.