Community Health Systems Inc (CYH) 2004 Q3 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conference facilitator. At this time I would like to welcome everyone to the Community Health Systems third-quarter earnings release conference call. Speaking on today's call will be Larry Cash, the Company's Chief Financial Officer, and Wayne Smith, Chairman, President and Chief Executive Officer. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Wayne Smith. Please go ahead, sir.

Thank you, Amanda. Good morning and thanks for joining us for the Community Health Systems quarterly conference call. With me on the call this morning is Larry Cash, our Executive Vice President and Chief Financial Officer.

We're pleased to report that Community Health Systems delivered another strong performance for the third quarter of 2004. The purpose of the call is to review our financial and operating results for the quarter and year-to-date ended September 30, 2004. We issued a press release and an 8-K 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'd like to begin the call with some comments about the quarter, and then turn the call over to Larry who will follow with a more detailed account of our financial results. But before I begin, I'd like to read the following statement.

Statements contained in this conference call regarding expected operating results, acquisition transaction, other events are forward-looking statements that involve risk and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1985 or 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 Factors" in the documents filed by Community Health Systems with the Securities and Exchange Commission, including the Company's Registration Statement on Form S-3, Form 10-K for the year ended December 31, 2003, and Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004. These filings identify important risk factors and other uncertainties that could cause certain actual results to differ from those contained in the forward-looking statements.

We're very pleased to report another good quarter with continued growth in revenues and EBITDA. We have also met or exceeded earnings expectations for 18 consecutive quarters now. We believe that we're very well positioned to execute our strategy for future growth through a combination of market share opportunities and acquisitions.

Net operating revenues for the third quarter ended September 30, 2004 totaled 844 million, an 18.4 percent increase compared to 713 million for the same period last year.

EBITDA for the third quarter of 2004 was 121 million compared to 107 million for the same period last year, a 13 percent increase.

Income from continuing operations increased 19.1 percent to 37.6 million or 37 cents per share compared with 31 cents per share for the third quarter of last year.

Net operating revenues for the 9 months ended September 30, 2004 totaled 2.5 billion compared to 2 billion for the same period last year, a 22 percent increase.

EBITDA for the 9 months ended September 30, 2004 was 367 compared to 315 for the same period last year, a 16 percent increase.

Income from continuing operations for the 9 months ended September 30, 2004 was 118 million or $1.14 per share compared to 96 million for the same period last year or 95 cents per share last year.

Same-store admission trends reversed through the first 2 quarters of the year to a -1.7 for the third quarter. This is due to a variety of reasons, including the effect of recent hurricanes. Our same-store adjusted admissions, however, were positive 1 percent for the quarter and same-store revenue was up 6.1 percent.

Our strong top-line growth reflects our capacity to improve the level and the scope of services and enhance the financial and operating performance of our hospitals. Our standardized and centralized approach increases utilization and reduces the need for patients to travel outside of their communities to get healthcare services by adding and enhancing services to our facilities and recruiting qualified physicians. Year-to-date the Company has recruited 403 new physicians. This compares to 396 for 2003. Our target for 2004 is 525 new physicians.

We continue to demonstrate strong leadership as an active acquirer of hospitals. We completed the purchase of Phoenixville Hospital in Phoenixville, Pennsylvania on August 1st, our seventh hospital in the state. This hospital, 30 miles west of Philadelphia, 30 miles east of Reading, has 143 beds with trailing revenue of approximately 100 million and an EBITDA margin in the low teens. Our company continues to lead the industry in selectively acquiring non-urban hospitals in attractive markets. And we continue to have a very active acquisition pipeline and multiple opportunities.

Forstmann Little sold us the remaining 23 million shares during the quarter. And the Company purchased 12 million of those shares from the underwriter at a price of $24.21.

We're slightly revising our guidance for 2004 to reflect the third quarter, as well as the discontinued operations, as follows -- revenue of 3.3 billion to 3.33 billion; EBITDA, 500 to 506 million; EPS from continuing operations will be $1.53 to $1.56. Discontinued operations include 2 hospitals that were sold during the quarter, as well a hospital that's been classified as an operation held for sale.

We're also today providing guidance for 2005. Projected revenue will be 3.7 billion to 3.75 billion; EBITDA from 506 million to 580 million; EPS for 2005 will be in the range of $1.78 to $1.88; admissions 1.5 to 3 percent. And we also expected to acquire 2 to 4 hospitals during 2005.

With that let me turn the call over to Larry who will provide you a summary of our financial results.

Thank you, Wayne.

We're very pleased with the financial and operating results we achieved for the quarter. Our consolidated admissions growth for the third quarter was 9.3 percent compared with the same period last year. Adjusted admissions, which factors in outpatient business, had 11.4 percent growth rate over the third quarter of last year. Our same-store admissions declined 1.7 percent and adjusted admissions increased 1 percent.

The third quarter is the most volatile and has fluctuated from a high of 11 percent in 2000 and 1 percent last year. In reviewing our admission volume the following specifics contributed to our volume decline -- 4 facilities were impacted by the hurricanes in August and September, reduced admissions approximately 400. OBGYN admissions were off approximately 200 admissions due to a combination of unit closures, as well as physician migration due to malpractice issues. Our respiratory admissions for the quarter also declined 300 admissions year-over-year. This (indiscernible) directly related to the unusually cool summer in 2004 versus 2003. We experienced a decline in cardiology admissions of approximately 250 due to the closure of an open heart program that was part of a known CON (ph) dispute at the time of acquisition. Also contributing to the decline but a positive, self-pay admissions were down from third quarter by approximately 100 admissions. These items represent 1250 admissions. With these adjustments admissions would be flat for the quarter.

Net revenues in the third quarter increased 18.4 percent compared with the same period last year or 844 million versus 713. On a same-store basis net revenue increased 6.1 percent with inpatient revenue up 3.6 percent and outpatient revenue up a strong 8.8 percent. Same-store surgeries increased 3.2 percent with a strong increase in outpatient surgery volume of 5.4 percent. Same-store net revenues per adjusted admission for third quarter of 2004 versus the third quarter of 2003 increased 5 percent, $6371 versus $6067. Same-store net revenue on a sequential basis increased 30 basis points.

We also had some reduction from Medicare outliers that affected revenue per adjusted admission in this quarter by approximately 40 basis points. We had a decrease in same-store Medicare case mix of 4/10 of a percent for the quarter and all payors 3/10. Increased charity care deductions continues to holdback same-store revenue per admission growth.

We have continued to deliver EBITDA growth of 13 percent this quarter compared to last year, 121 million versus 107.3 million. On a same-store basis EBITDA increased 6 million or 6 percent per quarter. Consolidated income from operations was 82 million versus 71 million, an increase of 14.9 percent. And same-store income from operations increased 9 percent.

For the third quarter EBITDA margins on a consolidated basis is 14.3 percent, down 80 basis points from a year ago, due to the low-single digit margins of acquired hospitals and the effect of the hurricanes previously discussed. The same-store EBITDA margin was flat at 15.1 percent compared to the quarter ended September 30, 2000. For the third quarter our non same-store margin was 8 percent. For the quarter just ended our consolidated income from operations percentage of net revenue was 9.7 percent versus 10 percent for the same period a year ago and on a same-store basis 10.3 percent versus 10 percent.

In the third quarter consolidated operating expenses as a percentage of net revenues were up 80 basis points from the prior year due to higher expenses and lower margins of recent acquisitions. Additionally, the hurricanes negatively affected operations. Payroll benefits increased 20 basis points, supplies increased 60 basis points, and bad debts increased 70 basis points as a percentage of revenue from 9.8 percent to 10.5 percent. Other operating expenses decreased by 70 basis points.

Both contract labor and malpractice improved year-over-year. Contract labor was down 130 basis points for the quarter. The third quarter of 2003 includes the contract labor costs for a 7 week strike in 1 of our hospitals. Payroll benefits and contract labor would have been down combined 110 basis points consolidated. Malpractice is down 20 per basis points on a consolidated basis.

On a same-store basis operating expenses were flat with increases in payroll, supplies and bad debts and a decrease in other operating expenses. Again, the payroll increase and part of the decrease in other operating is due directly to a strike that occurred in the third quarter of 2003. Payroll benefits and contract labor combined would be down 70 basis points for the same-store. Previously we've had some better same-store performance in payroll, but incurred more payroll costs as we reduced contract labor and also incurred additional expense for employee physicians of approximately 40 basis points.

On a year-to-date basis admissions were up 15.5 percent. Adjusted admissions were up 16.5 percent. Same-store admissions were up 1.1 percent and adjusted admissions were also up 2.2 percent. Same-store self-pay admissions are up slightly on a year-to-year basis from 6.4 percent to 6.6 percent or 20 basis points. Our guidance for 2005 will range from 1.5 or 3 percent for same-store admissions.

Net revenues year-to-date increased 22 percent to 2.46 billion compared to the same period last year. On a same-store basis, net revenue increased 7.1 percent for the first 9 months. Same-store inpatient revenue was up 5.2 percent and outpatient revenue was up 9.3 percent. On a same-store basis net revenue per adjusted admission increased 4.7 percent. Our same-store surgery volume was up 5.5 percent year-to-date. Our Medicare case mix for the 9 months ended September 30, 2004 increased 3/10 of a percent and all payor case mix is up 1/10 of a percent.

We have continued to have strong EBITDA growth with a 16.4 percent increase for the first 9 months compared to 2003, 367 million versus 315 million. On a same-store basis EBITDA increased over 7 percent. Consolidated EBITDA margin for the 9 months ended September 30, 2004 was 14.9 percent versus 15.7 percent for the same period a year ago due to low margins of acquired hospitals.

Non-same-store margin was 9.3 percent. The non same-store margin was impacted by the expenses in the April offering of 900,000, as well as the Registration Statement in August of 400,000 by about 40 basis points. The trailing margin for acquired hospitals is 6 to 7 percent.

Same-store margin grew 10 basis points from 15.7 to 15.8 percent. Consolidated income from operations was 10.2 percent of net revenue compared to 10.5 for 2003. Same-store income from operations was 10.9 percent versus 10.6 percent for the prior period.

For the first 9 months consolidated operating expenses as a percentage of net revenues were up 80 basis points from the prior year, again due to low margins for acquired hospitals. Payroll and benefits decreased 10 basis points and supplies increased 50 basis points. Bad debt has increased 70 basis points to 10.3 percent. Net revenue other operating expenses decreased 30 basis points. We had a 30 basis points improvement in contract labor and a 10 basis point improvement in malpractice. Other operating expenses on a same-store basis improved 10 basis points, improving payroll and benefits, as well as other operating expenses offset by the increase in bad debt.

All of our hospitals have a charity care policy that generally ranges from 100 to 200 percent of the federal property level. We also provide administrative self-pay discounts on a selected basis. For the 9 months ended September 30, 2004 same-store self-pay admissions were up 20 basis points. Our consolidated self-pay revenue is also flat at 13.3 percent. But same-store self-pay revenue is down 70 basis points from 12.6 percent versus 13.3 percent.

Consolidated bad debt is 10.3 percent for the first 9 months of 2004 versus 9.6 for 2003. Non same-store bad debt is running -- however, same-store our combined consolidated bad debt, charity and administrative self-pay discounts are up 260 basis points on a year-to-date basis, 16.5 percent versus 13.9 percent, representing a 70 basis points increase in bad debt, 160 basis point increase in charity and a 20 basis point increase in self-pay discounts. Our 2004 bad debt guidance will be 10.3 percent to 10.5 percent.

Consolidated cash receded (ph) to 103 percent of collectible net revenue for the 9 months ended September 30, 2004 and in the last 12 months was also 103 percent.

Total AR days were 63 at September 30, 2004, down 2 days and up 1 day from June 30, 2004. The allowance for doubtful accounts was 282 million or 32.8 percent at September 30, 2004.

Community Health Systems continues to have a very favorable payor mix. For the quarter ended September 30, 2004 net revenue by payor source on a consolidated basis was as follows -- Medicare, 31.1 percent; Medicaid, 10.8; managed care, 22.8; self-pay, 12.8; and private and other, 22.5. On a year-to-date basis breakdown was as follows -- Medicare, 31.8; Medicaid, 10.4; managed care, 21.3; self pay, 13.3; private and other, 23.2.

We had good cash flow from operations for the quarter of 57 million versus 47 million in the same quarter a year ago. Cash flow from operations for the first 9 months was 263 million compared to 198 million in the same period of 2003. Our percentage of cash from operating activities to EBITDA for the first 9 months was approximately 72 percent versus 63 percent the prior year.

We do anticipate an increase in disbursement for taxes in the fourth quarter as we will pay 35 million in the fourth quarter versus 44 million for the first 9 months.

Capital expenditures for the quarter ended with 42 million, of which 2 million were for replacement facilities. And year-to-date we spent about 125 million with 14.6 million for replacement hospitals. We're increasing our capitals expenditure guidance for 2004 to 157 to 165 million as we will be using the proceeds from the recently sold hospitals to purchase additional equipment where we get an attractive return. We're also providing capital expenditure guidance for 2005 with a range of 170 to 180 million.

We refinanced the Company's restated trade agreement in July of this year. With interest rates at historic lows this was a good opportunity to extend maturities, as well as to negotiate more favorable terms including rates. The reduction of the margin will help offset the anticipated rise in LIBOR rates. We then increased our revolving credit facility from 350 million to 425 million and extended the maturity to August 2009. The term loan facility was increased to 1.2 billion from 1 billion on 34 billion (ph) with a maturity of August 2001. (indiscernible) also including an accordion feature allowing an additional 400 million of new debt.

In August 2004 the Company entered into $100 million interest rate swap agreement to limit the cash flow effect of changes in interest rate on a portion of our long-term borrowings.

As Wayne mentioned earlier, Forstmann divested themselves of the remaining stock position during September. We purchased roughly half of these shares at a (indiscernible) price of 24.21 and a total cost of 290 billion. That was an accretive transaction. As you noted, with this stock buy back the rating agencies have affirmed the ratings.

At the end of September the Company had available credit 165 million, excluding the $400 million accordion feature. The Company is considering other long-term financing to repay the revolver that was used to purchase the 12 million shares. This long-term financing is included in our 2005 guidance at an estimated 7 percent interest rate. We have adequate availability to fulfill our acquisition plans.

Looking at the balance sheet, as of September 30, 2004 we had 319 million in working capital and 3.5 billion in total assets. Total debt was 1 billion 781 million versus 1 billion 475 million at 12/31/03, up mainly because of the stock buy back. Debt to capitalization was approximately 60 percent and debt to EBITDA was 3.7 times on a trailing basis. Total stockholders' equity was 1.2 billion at the end of the quarter. The fixed portion of our debt end of the quarter was 1 billion 37 million or 61 percent.

The Company has moved 2 hospitals sold in the quarter, as well as an additional hospital currently held for sale, to discontinued operations. On a year-to-date basis income from continuing operations increased 22.3 percent, 117.6 million, or $1.14 per share versus 96.1 million or 95 cents per share for the same period last year. Our income from continuing operations increased 19.1 percent to 37.6 million or 37 cents per diluted share to 31.6 million or 31 cents per share for the third quarter of 2003. Income from continuing operations was reduced approximately $400,000 in expenses related to the Registration Statement of common stock in September and a $788,000 loss from the early extinguishment of debt related to the refinancing of the credit agreement. Third quarter results were also impacted by approximately 1 penny per share due to the hurricane-related items that included repairs, staffing costs and lost volume.

As Wayne stated earlier, we are updating our guidance for the current year, as well as 2005. For the fourth quarter income from continuing operation guidance ranges from 40 to 43 cents, an increase of 14 to 23 percent over the fourth quarter of 2003 of 35 cents. 2005 net income per share will range from $1.78 to $1.88. And same-store revenue growth was projected at approximately 7 percent, same-store EBITDA at 9 to 10 percent, and same-store margin improvement of approximately 50 basis points.

Wayne will now provide a brief recap.

Thanks Larry. We're pleased with Community Health Systems' continued strong performance for the third quarter. I want to acknowledge the hard work and dedication of those employees directly affected by the hurricanes. Where our volumes were affected by these disruptions from the severe hurricane activity in Florida and the Gulf Coast of Alabama in September, we still delivered another quarter of top-line growth. Our ability to consistently meet our financial and operating objectives reflects the strength of our business model and solid execution by our management team.

I will now open the call for questions and answer period. And if you would like to talk to us after the call, you can reach us at 615-373-9600.

(OPERATOR INSTRUCTIONS) AJ Rice, Merrill Lynch.

First, Triad actually just had a call this morning, and on there 1 of the things that they said which they hadn't focused on before is that looking ahead to '05 they saw maybe a pick up in the rate on Medicare as you get the benefit in this fourth quarter from the labor adjustment related to Medicare Modernization Act, the full market basket increase in the outliers (indiscernible) coming down. I was just curious, do you guys see that? And what do you think that price increase might be net-in all-in for Medicare next year versus this year?

Yes we do. We've got a 3.3 percent market basket increase which is probably worth about 1.5 million extra dollars this year over what was there. Previously wage index -- we got a little bit of pick up in the wage index, a few hundred under thousand dollars. The labor is probably -- on an annual basis is probably worth about $4 million -- or $6 million, so it would be about $1.5 million for the fourth quarter. Of course the dish (ph) money went into effect on April 1st and we've been getting that, so that's not an increase for October 1st. So overall we do expect a good increase from Medicare going this year. We should get another good increase from the outpatient part of about 3.3 percent and 2.3 percent for home health coming in the next couple of months. And that's built into our 2005 guidance.

With the guidance on the admissions next year versus where we're at in the current quarter, obviously the hurricane stuff doesn't linger on I assume in your expectations for next year. But how about just maybe walked us through -- or where is the rebound going to come from or how did you build that up?

Maybe I will start this, Larry. As you know, AJ, this is a pretty unusual quarter. There's a lot of things strange that happened in terms of the hurricane. And for us we had some closings of OB units. We've lost a couple of OB doctors in the units that slowed those down. And we had 1 issue with a certificate of need on an open heart program over in Jackson, Tennessee.

Having said all of that, we think we're on track. Our physician recruitment is very solid. We are going to recruit over 525 physicians for the year. As we the economy improves, as we hope it improves, we think we will continue to see volumes. And we continue to have a lot of opportunity in our markets, as we always talk about, in terms of market share. We still have a lot of growth opportunity in terms of market share, as well as we have intensity opportunities as we continue to increase our specialists.

If you looked at it on a year-to-date basis, with the challenges we had in the last quarter we are still up 1.1 percent. The 1.5 and the 3 percent, generally when we grow volume it's about half of that comes from new physicians; about a 1 percent population growth. We earn (ph) older population. Probably 14, 15 percent of our population is over 65. We actually have an older group (indiscernible) 65 in the national average. And we've got (indiscernible) 55. There is 6 million people out there that generate 650 to 700,000 in admissions in our market areas so we have got a lot of opportunities to improve it. And we feel we will be able to get back on a better growth pattern in 2005. The quarter coming up it will be a challenging quarter because of the strong flu season from 2003, but we think we can achieve the 1.5 to 3 percent. We've done that from 1999 through 2002. We think it's achievable in 2005.

Thanks a lot.

Ken Weakley, UBS.

Good afternoon everyone. I wanted to ask you about labor, I guess doctor productivity. I know you recruited I think 400 doctors you said through the 9 months. And 1 way I look at things is your beds and service are up about 12 percent; your total admissions are up about 15. So I don't know if I should ascribe the delta there to the 400 doctors. If I do that, that doesn't suggest you are doing a lot of work. So how do you track the productivity of doctors? And what is the best way for us to assess where you are in that story?

Those are consolidated statistics, and clearly we just bought the hospital in Phoenixville and Galesburg, and also some of the hospitals we bought in the last year -- Laredo, which it takes us a while. Generally requited physicians don't come into our markets until after we own the hospital for about a year, so it is probably not taking (indiscernible) and looking at it.

We generally grow admissions about 3 percent a year. About 50 percent of that comes from recently new recruited physicians. We should probably get about 120 admissions a year off of primary care doctor; probably 60 admissions a year off of specialists. We've done a study of that over the last 2 years, and it's held pretty constant with that.

Larry, what are those numbers again?

About 120 off of primary care doctors and about 60 off of specialists. So we've done a good job of getting growth off those physicians, and that's held pretty consistent for the past couple of years. And clearly you have got some turnover off the numbers of 400 physicians because that's a gross number and there will be some turn over. Turn over has generally been around 6 percent, actually a little bit better this year. We do track it and we generally have always got about half our volume growth off the new physicians we've been bringing in.

You have to keep in mind there's all lag time. It takes a while for them to get started up depending on the type specialist. So it might be 6 months before some of them get started in making any impact at all. So we're really working off 2003 now. We will be working off of 2004 next year.

Is the cost of physician recruitment changing? There's been some suggestions about shortages and things. I'm wondering if have to give away (ph) more economics.

I don't think ours has changed dramatically. There are particular specialties that are a little different than they have been in the past. Radiologists are a little more difficult to come by. But radiology, as you know, is a specialty that's really taking off. They're doing a lot more now in terms of invasive procedures. But generally speaking, the cost for physician recruiting has been relatively flat for us in terms of individual physicians.

Thank you.

Joseph Chiarelli, Oppenheimer & Co.

Just to follow up on your comment on the radiologists, do you run a centralized radiology review program? Is it decentralized at each hospital? Can you give us a little bit of color on that and how you see the benefit in the recruitment in that particular area prospectively?

We do this by individual hospitals by and large. We like everyone else are in the process of expanding our radiology services, putting in these pack systems which -- record storage and being able to provide physicians copies of x-rays in our offices in our bigger facilities. We've not -- we do some tele-radiology as well across the country, but we have not sort of taken on a standardized approach to radiology yet. But my comments related to the fact that there are a lot more invasive procedures in terms of -- I always like to talk about virtual colonoscopies and things like that that historically have been done by other doctors that are now being done by radiologists. And we are beginning to see a little bit of that tension in some of our larger facilities where the radiologists want to perform 1 procedure where it might be a cardiologist that has been historically performing that procedure. So I think that's just developmental. We will see more of that in the future. And that's 1 of the reasons that you're finding a greater demand for radiologists today.

Just 2 follow-ups on that. Is there a benefit to you if a radiologists does a procedure versus a cardiologist, number 1? And number 2, I assumed that all of these packs are all digitized. Is that correct? What is your approach to trying to digitize all of these procedures to capture the information for either future use or simplicity?

Yes. The packs are digitized. And we're not trying to put pack systems in all of our facilities. Some of them are relatively small. We might have 1 radiologists that does 2 or 3 facilities in a particular area.

The advantage that we have in some instances in terms of recruiting radiologists who can do invasive procedures is in fact we don't happen to have a cardiologist that id there, it might enhance our ability to do procedures that we currently don't have. But there's no distinct advantage to us having radiologists versus cardiologist do any particular procedure or gastroenterology; neither one makes much difference 1 way or the other.

Thanks.

Robert Mains, Advest.

A question about acquisitions. This has been the lightest year for you I think since you reemerged as a public company. And there's been -- the trade press has talked about various indicators suggesting that margins are moving up for the industry as a whole. How much of that are you actually seeing in your markets? Are the hospitals where acquisition candidates or are competitors potentially -- are you seeing noticeable improvement? Or is environment out there more or less the same as before?

I think it is pretty much the same. I think if you look at the 2 facilities we acquire this year, 1 had a margin and 1 did not have a margin to amount anything. Phoenixville just happens to be a hospital with a very high mid-teen margin which we're really happy about to acquire 1 of those. Normally, as you know, we acquire them and they were have virtually no margin.

I think they're still all over the board. I think there are a few hospitals that we see that are a little better. But there is still plenty of hospitals out there that have low to no margins. And the year is not over with yet, number 1, in terms of the number of facilities that we could acquire.

But we've been very disciplined. We continue to be disciplined in terms of our acquisition approach. We look for properties the sort of fit our model. And we've been very careful not to overpay through the years. And I think whenever it gets out of the range of what we think will work for us, we will step back. And we've done that a couple of times this year.

So we're comfortable with our acquisition strategy. We have a very active pipeline; still 15 plus properties in that. A lot of good ones continuing to work. So I think the opportunities are there for us as we go forward.

1 of the things that we have done and been able to do it is to buy at both ends of the spectrum; buy a 20 or $30 million trailing revenue facility and make that work, as well as buy a $100 million or a $100 million plus facility and make that work. That gives us more possibilities in terms of opportunities. But we feel pretty good about where things are and really don't see a huge change coming in the future.

To sort of put a perspective on it, I think we told people we would buy $150 million acquired revenue this year. We did that with the 2 hospitals we did, and we've actually the last 3 years and 9 months bought 1 billion 1 of revenue. So we have clearly had a good year this year; not as good as the year before when we bought 545 million, but we did buy Laredo late in the year at 160 million.

We think it is still the right idea to buy EBITDA multiples of 5 or 6 times trailing as opposed to doing something different in there. There continues to be those opportunities.

When you see something different getting some, which folks overpay, who is out there that is doing the overpaying?

I don't really know who would do something like that. I think periodically you will see companies, and I speak -- in this instance I think a can speak for a lot of different companies -- I think you will see companies periodically, because they have a strategic reason to do that, where they might pay more than 1 times revenue or more than what we consider to be an appropriate EBITDA though multiple. We try not to do that, but strategically if we find the right facility the works great for us, we would do that as well. So I'm not critical of that process. I think the thing for us is to stay disciplined and not do that on every acquisition.

I guess my question is sort of generically is it hospital companies, is it not-for-profits, is it players that have not seen in the market before?

It's basically hospital companies. We really don't see much in terms of not-for-profits. Just every now and then we see those in the marketplace. It's the same group that we are all competing together.

Fair enough. Thank you.

Adam Feinstein, Lehman Brothers.

2 questions for you. 1 is just I noticed your bad debt plus charity care if we look at it combined was down relative to the second quarter. So that was a positive item. Just curious just in terms of how you guys are interpreting that and whether that's a trend that you think will continue to see.

And then secondly, just want to see what your outlook was for same facility margins for 2005. The guidance you gave is very helpful, but just wanted to see if you has some more detail about how we should think about same facility margins for next year.

One thing that has happened, the hospitals that we have sold are under-performing hospitals that have a little higher bad debt and charity care. And I think the year-to-date bad debt charity care was 16.5 percent when you leave those hospitals out. The quarter was 16.2 percent. If you go back and look at the actual reported first part of the year it was like 16.8 percent. But when you back out those 3 hospitals, you do have to pull them out of your earnings. So the quarter was 16.2 versus 16.5. Charity was 4.1 for the quarter versus 4.4 year-to-date. So it's not as big a change as it looked when you get all the hospitals in the right quarters.

As far as non-same-store versus same-store margin, I think we said we expect about a 50 basis point improvement, which would move it up to the mid-15 percent range for 2005, which was embedded in our guidance. And what we expect to see is improvement in payroll, probably see continued improvements in contract labor. And we would hope to see possibly malpractice to be flat, maybe down a little bit.

Just 1 follow-up here as well. You had mentioned a strike earlier at 1 of your hospitals. Just wanted to get some more details and see whether that issue was finalized. Or is that something that's still ongoing?

That was a 2003 event. That event is --

It's over with. It's totally over with and complete. We have settled and we have a contract in place with -- it was at Easton, and it had to do with contract labor. That's how (multiple speakers)

You were talking about Easton. Okay, thank you.

Yes.

Oksanna Butler, Citigroup.

I was going to ask you about the CMI. I understand that -- if I got this right -- the CMI actually went down in the quarter even though you saw strong same-store surgical growth. Can you just comment on what you're seeing in terms of acuity and if you're seeing growth in specific types of surgeries?

What happened was the total surgeries are of 3.2 percent; outpatient surgeries were up 5.4 percent. So there is a slight decrease in inpatient surgeries, which contributed to the Medicare case mix being down 4/10 of a percent. It's up on a year-to-date basis, but the quarter was not up. The same-store surgeries generally happen in the adjusted areas of pain management and endoscopies for outpatient business. But we had very good outpatient growth of 5.4 percent which contributed to our 8.8 percent outpatient revenue growth.

Are you seeing any type of shift in acuity on the managed care position?

We're not seeing any more of a shift today than we've seen in proceeding years. Clearly the stronger managed care companies usually get stronger every year than companies who don't have quite as good a price network. But we're not seeing any distinct differences between 2004 and 2003.

We don't have the same issues that you find in the urban areas as regards to managed care and concentration of managed care companies where they can really affect the acuity level like some other companies do.

Our managed care pricing will still be between 5 and 7 percent this year and we think it will be that next year also.

With respect to supply costs, what are your expectations going forward? Is there anything that you can implement at this point that you can really reducing your supply costs (inaudible)

We've always had pretty low supply costs. It is a little higher this quarter, somewhat to do to acquisitions. There's an oncology program at the hospital there at Phoenixville that we acquired with a higher supply costs. Surgeries drive it up a little bit, but I think in 2000 -- we're about flat for the first 9 months of this year. I think we can still continue to stay flat this year, maybe get a bit better improvement, in 2005 on supplies. But we've got a pretty low supply costs on a same-store basis. Year-to-date I believe it's 11.7 percent, which I think is 1 in the lowest in the industry, so it is probably not going to move down that much other than the advantage improving hospitals we acquired and getting them on our full purchasing program.

Thank you.

(OPERATOR INSTRUCTIONS) Kevin Berg, Credit Suisse First Boston.

You guys talked a little bit about physician recruitment. Could you talk about physician turn over as well? You said (indiscernible) been more challenging market. We have heard that from your competitors as well. Can you talk about what is going on there and what moves you guys are taking to increase retention?

Let me just start in terms of physician recruitment. It still continues to be -- is working very us very well for us. We continue to have lots of opportunities across the country in terms of opportunities for our medical -- if you look at the numbers of physicians per thousand in our markets, there's still a lot of opportunities for doctors. We are going recruit over 525 this year. I think we are probably recruiting more than anybody else just about in the industry. So it's a start -- it's a strong part of our strategy, and it continues to work. And the turn over actually is down a little bit this year.

Generally turn over for us is between 6 and 8 percent. This year we think it is going to average 6 percent, so we've actually done a better job of reducing turn over in 2004 than we did in 2003.

Thank you very much.

Mica McGidd (ph), Basslet Partners (ph).

Can you guys just provide an update on the margin by acquisition class?

Yes, just a second. Year-to-date through September 30th the class of 2001 is 15 percent. That was 2 percent we acquired in 2001. The class of 2002, which is 1 percent is now about 11 percent. The class of 2003 is about 11.6 percent, 11.7 percent and was about 6 percent when we acquired it. Collectively that's about 14 percent for that class, those 3 years. And the last 2 years is about 13 percent.

Thank you.

At this time there are no further questions. Are there any further remarks?

Yes. Thanks for spending time with us this morning. Our track record of consistent quarterly growth and our ability to deliver the highest quality health care services continues to differentiate Community Health Systems in the non-urban hospital market. We believe we're well positioned for continued success in 2004.

We want to thank our management team and staff, hospital chief executive officers, chief financial officers and chief nursing officers and group operators for their excellent operating performance during the year that has contributed to our success and excellent results.

Again, there is a slide presentation that accompanies this conference call available on our website at www.chs.net.

We believe our success in the marketplace and our favorable reputation as an acquirer of choice continue to extend our leadership position.

Once again, if you have any questions, you can reach us at 615-373-9600.

Thank you for participating in today's conference call. You may now disconnect.