Community Health Systems Inc (CYH) 2005 Q2 法說會逐字稿

Welcome to the Community Health Systems, second quarter 2005 conference all. [OPERATOR INSTRUCTIONS] I will now turn the call over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer of Community Health Systems. Please go ahead, sir.

Thank you, Michelle. Good morning and welcome to Community Health Systems quarterly conference call. With me on the call today is Larry Cash our Executive Vice President and Chief Financial Officer. The purpose of the call is to review our financial and operating result for the second quarter and year-to-date into June 30, 2005. We issued a press release after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast on 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, 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 transactions, and other events are forward-looking statements and involve risks 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 1995 and are based on management's current expectations or believes as well as the assumptions made by and information currently available to management. You refer to the documents filed by Community Health Systems Inc. with the Securities and Exchange Commission including the Company's annual report on Form10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and the recent registration statements. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

We are very pleased that Community Health Systems has delivered another very solid financial and operating performance for the second quarter 2005 and our results reflect our consistent execution and our focus on quality care. This represents 21 executive -- consecutive quarters of meeting or beating analysts' expectations. Net operating revenues for the quarter ended June 30,2005 total $919 million, a 19.1% increase over the prior year compared to $771 million for the same period last year. Adjusted EBITDA was $141 million or 17.9% increase over the same period a year ago. Adjusted EBITDA is EBITDA adjusted to exclude discontinued operations and minority interest and earnings. Further references to EBITDA contained in this call will be based on adjusted EBITDA.

Income from continuing operations was $46 million versus $39 million for the second quarter last year, an increase of 18.9%. Earnings per share from continuing operations increased 29%, $0.49 per share diluted versus $0.38 per share diluted for the same period. Net operating revenues for the six months ending June 30, 2005 increased 17.8% or $1.8 billion to 1.8 billion. EBITDA was $284 million an increase of 16.8%. Income from continuing operations for the six months ended June 30, 2005 was $95 million or $1.01 diluted compared to $0.78 for the same period a year ago.

First, our same store admissions were up 3/10 a percent for the second quarter. This is against a very touch comp from last year of 3.3%. Same store adjusted admissions were up 1.3% for the quarter and same store net revenue increased 9.3%. Additionally, same store margin improved 30 basis points for the quarter, 15.8% verse 15.5%. We continue to demonstrate strong leadership as an active acquirer of new hospitals.

We acquired Bedford County Medical Center in Shelbyville, Tennessee, on June 30, our second acquisition of the year. Bedford County is a 104-bed acute care general hospital with trailing revenue of approximately $25 million in EBITDA margin in low single digits. We have a very active pipeline of acquisition candidates and have updated our 2005 guidance from 2 to 3 to 3 to 4 for the year and currently we have two letters of intent.

he company recruited 214 new physicians for the six months compared to 217 recruitments the same period a year ago. Our outlook continues to be strong for 2005 with a target of 550 physicians and we continue to have excellent physician retention with our turnover of approximately 5% in 2004 and thus far in 2005.

The Company has provided updated guidance in our earnings release. We project the revenues will range from $3.675 to $3.725 billion with EBITDA guidance from $550 million to $575 million. We anticipate income from continuing operations for the full year of 2005 will range from about a $1.91 to about $1.96 per diluted share up from $1.82 to $1.92 per share diluted. This updated guidance reflects our sold performance above guidance for the first half of the year. At this point I'd like to turn the call over to Larry 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 second quarter. Our consolidated admissions growth in the second quarter was up 8.8% compared to the same period last year. Adjusted admissions, which factors in outpatient visits, at a 10.4% growth rate over the second quarter of last year. Our same store admissions increased 3/10% against a difficult comp of 3.3% in the second quarter of 2004. Same store adjusted admissions were up 1.3% against a difficult comp of 3.6%.

In reviewing our second quarter admission volume, the following specifics should be noted. One, critical access facilities and certain others approximately 401-day stay admissions were provided as outpatient services which resulted in changes in certain admission criteria.. Service closures, primarily OB, have negatively impacted admissions by approximately 175. On a positive note. The subpaid admissions declined by approximately 100. The volume would have increased approximately 1.3%.

While it's difficult to quantify, our two Southeast hospitals hardest hit by the hurricanes in the third quarter of 2004 are still not totally back online from a volume perspective. In the second quarter of 2004 these hospitals contributed 100 basis- points improvement in their total same store volume. Incremental volume actually declined 30 basis- points of the total thus creating a negative 120 base points swing.

Net revenues in the second quarter increased 19.1%, up $771 million last year to $919. On the same store basis net revenue increased 9.3% from for the quarter. Same store net inpatient revenue increased 10.5% due in part by strong same store patient day growth 1.3%, a hundred basis point greater than admission growth. Same store outpatient revenue increased 8.5%. Total same store surgeries increased 2.4% versus a comp of 7%. Same store net revenue per adjusted admission increased 7.9% versus an easy comp of 2004 of 3.3%. Same store net revenue on a sequential basis increased 2.9%. On a same store basis Medicare cases increased 2% to 1.21 compared to a decline in the first quarter. In our all payers surgical case, increased 2.6%.

We have continued good EBITDA growth with a strong 17.9% increase of $21 million from $119 to $140 million. On a same store basis, EBITDA increased $14 million or 11.5% from $119 million to 133 million for the quarter. Consolidated income from operations was 99 million versus 82 million. For the second quarter EBITDA margin on a consolidated basis was 15.3%, down 10 basis points from a year ago due to the low margins from acquired hospitals. Same store EBITDA margins improved 30 basis points. For the second quarter or nonsame store margin was 9.1%. Market before acquisition was approximately 6%. For the quarter or consolidated income for con so will additions was 10.7 basis points from a year ago. In the second quarter consolidated operating expenses as a percentage of net revenues were up 10 basis points due to the nonsame store AK affiliations. Payroll and benefits consolidated decreased 40 basis points. We also had a 1% improvement in productivity for the quarter. Supplies were flat at 12%. Bad debt was up 10 PAST points to 10%. Other operating expense increased 40 basis points. On a same store basis it improved 30 basis points driven by a 70 basis point reduction in payroll benefits. Supply expense improved 20 basis points. Bad debt, and other operating expenses increased on a year-to-date basis consolidated admissions are up 9.7%. Same store admissions are up 2.2% and adjust admissions are up #%. Same store self-payment have declined 20 basis points as aI percentage of admissions. The 2005 guidance for same store admissions remains at 1.5% to 3%. Net revenues year-to-date increased 17.8% to 1.8 billion compared to the same period last year. On consolidated basis net revenue increased 7.1% on a same store basis, net revenue increased 9% for the first six months with same store up 10.4% and outpatient revenue up 8.1%. On a same store basis net revenue per adjusted admission increased 6.9% and our Medicare case mix increased .7 tenths of a percent and our pay was up 1.5%. Last year's revenue was depressed by the drop in outliers and the increase this charity. We have continued to have strong EBITDA growth of 16.8% increased for the first six months compared to 2004, 284 million versus 243 million. On a same store basis EBITDA increased 29 million or 11.9%. The for six months ended June 30, 2005 was 15.5% versus 15.7 for the same period a year ago to low margins of acquired hospitals. Nonsame store margin was 9.7%. Same store margins for 6 months ended June 30, 2005 was 16%, an increase of 40 basis points compared to 2004. For the first six months consolidated operating expenses as a percentage of net revenues were up 20 basis points from the prior year due to low margins of acquired hospitals. Payroll benefits decreased 30 basis points. Bad debt was flat while supplies increased 20 basis points, and other operating increased 30 basis points. Operating expenses on the same store basis combined 40 basis points payroll and a 10 basis point decrease in supplies offset by increases in bad debt and other operating expenses. Each hospital has a charity care policy and administrator discounts are provided selectively. On a year-to-date basis same store subpayment admissions as a percentage of total admissions decreased 20 basis points. On a year-to-date basis consolidated bad debt was 10.1% unchanged from a year ago. Bad debt does appear to be stabilizing and we've adjusted our guidance for 2005 to be 10.2% to 10.5%. On a June 30 accident 2005 year-to-date consolidated bad debt, charity, administrative discounts were up 30 basis point year-to-date 16.7 versus 16.4. This increase is in administrative subpayment discounts as bad debt and charity are flat year overyear. Consolidated cash receipts were 103% of a collectible net revenue since June 30, 2005. Total AR days for continuing operations were 60 at June 30, 2005. This is a decrease of 3 days from December 31, 2004. The allowance for accounts for 300 million or 30.8% at June 30, 2005. Community Community Health Systems continues to have a favorable payor mix for the quarter. Consolidated net revenue was as follows. Medicare 31.6, Medicaid 11.8, managed care 24.8, self-pay 10.6, private or other 21.2% of net revenue. Self-pay revenue has declined sequentially and Medicaid has increased due to our continuing EST to say qualify patients for Medicaid. A year-to-date the payor is as follows. Medicare 32.6, Medicaid 10.4, managed care 24.1, self-pay 11.7 and private and other 21.2. We had good cash flow from operations for the quarter of 128 million on a year-to-date basis cash flow from operations was 276 million versus 206 million for 2004, an increase of 34%. Our percentage of cash from operating activities to EBITDA was approximately 97% year-to-date, 66% for 2004, and 57% for 2003. For the first six months of 2005, our cash flow was aided by the increase in improved payroll limits of approximately 4 # million. We have increased our 2005 guidance for net cash provided by operating activities from 325 to 340 million, and we've increased it to 360 to 380 million. Total capital expenditures for the quarter just ended with 43.6 million and year-to-date capital expenditures total 76.7 million. We've increased our capital expenditure guidance for 2005 to 190 to 200 million or approximately 5.2% of net revenue. The balance sheet cash at June 30, 2005 was a strong 272 million. At the end of the quarter we had available credit of almost 400 million. In addition we have a $400 million recording future in our term loans. We believe substantial ability to precure. Looking at the balance sheet as of June 30, 2005 we hit 586 million in working capital and approximately 3.8 billion in total assets. Our debt to capitalization at quarter ending was 57%. Our fixed rate of debt is 80%. We did extend one -- and $100 million swap until 2009 and executed two additional slots with a total of $200 million with maturities of May 2008 and June 2009 in the quarter. Total stock equity was $1.3 billion at the end of the first quarter.

We reclassified a hospital during the quarter as held for sale, and this is reflected in discontinued operations. This particular hospital is one of four in this market that's been owned since 1986. As such, we've recognized an after tax loss of approximately $5.6million or $0.06 per share. Our revised annual 2005 guidance does reflects this. Approximately $1.1 million represents the second quarter loss from operations or $0.01 of EPS. The estimated loss from impairment of this hospital is approximately $4.5 million or $0.05 of EPS.

For the quarter earns per share from continuing operations increased 28.9%, $0.49 versus $0.38 on income of continuing operations, or $46.2 million versus $38.8 million. On a year-to-date basis earnings per share on a continuing operations was $1.01 an increase of over 29%, compared to the prior period. As Wayne stated our 2005 EPS guidance is a $1.91 to $1.96. Our weighted shares outstanding guidance has increased to 99 to 100 million and our compensation expense more recently restricted stock rent is now included in our guidance. Wayne will now provide a brief recap.

Thanks, Larry.

We're very pleased with the solid second quarter results for Community Health Systems. Our strong revenue and margin trends for the first half of 2005 validate the strength of our operating model. We expect our growth to continue as we improve hospital operations, add enhanced services and recruit physicians. Our acquisition strategy is also an integral part of our success, enabling us to grow our operating base while providing immediate additional services in our community. With that, I'll now open the call for question-and-answer period. If you would like to talk to us after the call, you can reach at area code 615-373-9600.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everyone. Just wanted to talk a little bit more about the surgical growth you're seeing pretty good over a tough comp. Just wanted to get consensus as to whether that's a sustainable number and if you could talk a little more to some of the surgical specialties that you're seeing growth in. And remind us, please, I think you told us last year about this time that your market share in surgeries was about 40%. Has that moved significantly over the last year? Thanks.

Darren, I think this is a result of our continuing efforts to recruit physicians particularly specialties. As you know we've moved up the ladder a little bit over the last three or four years in trying to recruit more specialist than we have in the past. I think we're beginning to see -- we saw an increase in our intensity as well. We're beginning to see the results of that it's taking a little while. Larry, you want to --

From a market share perspective we're still around 40 or 41% probably based on our international calculations. Cardiac-type surgery was up a little bit in the quarter. Which helped our case mix on it. I would expect our -- we would continue to have good surgical volume going forward. We've had some good recruiting this year, as Wayne just referred to.

Great. Then just one follow-up as it relates to the case mix statistics you share with us. I mean, over a multi-year horizon where do you think that can go. It was 1.21, if I heard you right, in the quarter. Where should we expect that to trend to over say two to three years? Thanks.

Clearly, it should go up. In terms of the increases in our case mix for the quarter, that surgical piece was fastest growing component. As we look at this over a period of time, our case mix index is lower than most of our competitors and most of our peers, so we clearly have an opportunity to move that up. It's a little hard to predict based on the services that we have, but it's moving in the right direction. One of the values we have here is the fact that we have case mix index opportunity as well as volume opportunity. So we have two chances to really improve our growth in the future.

Okay. Thanks.

Your next question comes from Jason Gurda with Bear Stearns.

Good morning.

Good morning, Jason.

My question is fairly high-level. How is the shift in consumer-driven health care impacted your marketing, pricing, and I guess like customer service-type strategies?

We have a very strong customer service strategy in terms of how we approach. You know, we like to talk about our consistency in the way we operate. But from the consumer-driven products, we've not seen a dramatic impact. Some of that may have to do with the markets we're in. Some has to do with the fact that we have a little older population in our market than where you find large numbers of young population, working population you see a much greater effect than you do in the older population. I suspect as time goes along, we will begin to see more impact of that. Our outpatient is growing pretty rapidly. That's another indicator. From our perspective what we have done is, not only have we done things in terms of customer service, but we're continually looking at our outpatient opportunities to determine whether or not we should be building surgery centers or outpatient diagnostic centers to accommodate this growing trend. Larry, I don't know if you want to talk to that.

One comment. From a financial perspective this will be a good point to get it out. Our point of service collections were actually doubled from last year from about $8 million to about $18 million. So, we've done a good job of that. Clearly, that consumer benefit plan which is patients making payments has been doing a good job this year over last year on top of the business we have now we find much consumer benefit plans out there, in our markets.

Are you seeing any pressure to provide retail-type pricing lists?

No.

Thank you.

Thanks.

Your next question comes from Tim Leahy from Goldman Sachs.

Good morning. Thanks for taking the call. I was wondering if you could talk about your experience with uninsured and bad debt and charity trend, that umbrella subject. Obviously, there's been a lot of volatility around that subject from some of your peers this quarter. Can you try and contrast what -- where you said was some real stabilization in your book of business just relative to what we're hearing from some of the other for-profit hospitals.

First, keep in mind we're not urban. Like 85% of our markets we are the sole providers. We get a pretty high percentage of people and there's not a chance for people to come to us because of entering new charity care policies or other discount arrangements. Our hospitals all have a charity care policy, been in existence for many years. A lot of hospitals we bought we have that, and I think that's one reason we've been more stable. Our bad debts from 2001 were 9%. They went up to the low tens and we're at the low 10% range now. Our charity has moved up a little bit from where it was. Now it's 4 1/2%, it was in the 3 1/2% range a couple years ago. Also our markets, the economy which in a lot of places has done better. Our economy has moved up from high unemployment in May of 2003, of 6.8 to about 5.5 now. So the economy is doing better in our specific markets, so that's contributing to it, I believe.

Great. Thanks. Just one follow-up for either Wayne or Larry. The hospital count, you've been fairly stable at give or take 70 hospitals since I think the beginning of 2003. As you think about where the business is going over the next few years, what's the right amount or the right size of the portfolio before there's some level of dis-economies of scales set in?

I think we have a lot waying to before we have any of those kinds of issues. As you know, we've been through this process this year of divesting those facility that we don't think will meet our criteria for the future, whether it be a capital issue or economic issue in the communities that we operate. We've got a lot of opportunities -- there continues to be a lot of hospitals out there for sale. I think our standardized operating platform gives us the flexibility of adding a large number of hospital to say this base, kind of going forward. We're getting better in terms of looking at productivity in areas where we can make improvements both from a quality standpoint and as we move towards quality performance issues, all that is very helpful to having these things standardized. So, I don't think there is a number yet that we see that in any way might slow us down in terms of results.

Great. Thank you very much.

Your next question comes from A.J. Rice with Merrill Lynch.

Hello, Wayne and Larry. Two areas of questions. First of all, to what extent is the switch to the health trust versus what's reflected in the numbers this quarter? How much is still in front of you? I know one area in particular, you were looking at some benefits in orthopedics. Have you been able to capture anything in that area at this point?

Yeah, A.J. I guess we're just beginning to see the results. This has taken a while, as you know, to go through this transition period and change all these contracts. Our supply expense being relatively flat is a pretty good indicator we're beginning to make progress. It's still a little early to see exactly what kind of results we're getting, but we're still very encouraged about the opportunities here and we think made the right decision.

Just from a numbers perspective, supply expense was down 20 basis points same store in a quarter and it's down year-to-date ten basis points. There was a little bit more a benefit in the second quarter then we got the first part of the year. We would think most of the opportunities are in the third and fourth quarter.

Okay. That's good. A little more on the acquisition front. You mentioned that there's plenty of availability. I know a year or two ago you had said you were seeing properties sort of at an earlier stages -- I don't know if development is the right word, but basically lower level of productivity but just as much upside. don't know if you would you change your characterization of the types of properties your seeing today. And then maybe you could just comment on whether you see any change in the pricing dynamics or competitive dynamics in recent months for acquisitions.

We've done two so far this year, and have two letters of intent. I continue to say this. I really don't see -- in general terms, I don't really see the dynamics in terms of acquisitions changing all that much. I think, you know, we do have these periods when there are a number of hospitals being sold by one company or another, and then the pricing on those seem to be a little higher because there seems to be a lot of interest in these collective groups and numbers of hospitals. For us, we've kind of stuck to our guns here in terms of not for profits in the communities that we think will work for us, and our pricing is still pretty stable and opportunities continue to be very good. We continue to see a number of opportunities going forward. So I don't really think it's changed too dramatically. We had a little period there when we had some venture firms interested in buying facilities that seemed like it might drive the price up a little bit. We come back to ones we find -- we seem to like ones that are troubled. We seem to buy a number of those and we continue to find those. I think the prospects are great. I'm encouraged about acquisition opportunities going forward. Our pipeline is very strong.

Good. Thanks a lot.

Thank you.

Your next question comes from Ken Weakley with UBS.

Thanks. Good morning, everyone. I was wondering about the recruitment of doctors. If you'll spent a little time on that, I must have missed it. What's your expectation for this year, number one. Break down between primary care and specialists, number two. And then lastly I was wondering in terms of the income guarantees. Has there been any noticeable change in what you have to offer to get doctors into your local rural markets?

Ken, we've recruited 214 so for for the first six months of the year, compared to 217 last year, so we're about flat. Our goal is to recruit about 550. We think we'll get there without much difficulty. As I've said over and over again, physician recruiting has been one of the easier things for us to do in this company, knock on wood, and hopefully it will continue. Our turnover rate is relatively low, about 5%. We are recruiting about 60, 65% specialists. Now what we have -- and one of the things I think probably has been helpful to us, we targeted a group last year in terms of surgeons and we recruited a good number of surgeons last year. I think we're beginning to see that in our surgical volume. We will continue to look for specialties that we think can be very helpful to us. Maybe orthopedics might be one we will spend a little more time and efforts on, but the prospects are good, continue to be good. Really, the economics of this haven't changed dramatically either as far as I know. I don't know of anything dramatic, Larry.

No. The amount we're spending for physicians is pretty much what it was last year, what we have guaranteed them the amount of money.

Now, I was wondering would the slowdown in volume over the last 12 months, does that lead to a largest percentage of them actually reaching their income guarantees, or is it not that simple?

Generally -- it's not quite that simple. What we've got if we have spend about 50% of our guarantee on the average. We actually monitor that. We've improved it the last couple of years. It's been a little less than 50%. These physicians, we work with them and make sure to get all the appropriate plans. We try to market them and everything we can do. So they generally get -- we spend about half of what we expected to spend on the guarantee income.

Can you give us a sense also, last question, of your 550 physicians that you're recruiting like I'm curious about how many hospitals they actually wind up at. I would guess it's an asymmetric distribution. You must have a collection of facilities that are mature in terms of what's the optimal level of doctors you would need there. Give us a sense of how that actually plays out.

What I'm interested in, then Larry can give the detail on this. One thing we do here every year, we have a detailed plan for physician recruitment by facility, which includes a succession plan, so to speak, in terms of the number of physicians retiring or leaving. You can't really go -- they're all over the board in terms of what hospital. One may recruit six and one may recruit two. Very seldom do we have a hospital that doesn't recruit a couple of physicians a year. Generally speaking, there's not really maturity in terms of medical staff because there's this age issue in terms of people retiring or other issues so there's always turnover as well. The distribution is a little hard to say.

Maybe on top there's 4300 physicians. That's about 7 physicians over 10,000 people in our markets, a little over 6 million people. Nationally it's 25 over 10,000, so you can see hardly any of our hospitals doesn't have an opportunity to add physicians

Okay. Great. Thanks so much.

Thank you.

Your next question comes from Adam Feinstein with Lehman Brothers.

Thank you. Good morning, everyone. After a busy earnings week, thank you for making it easy here. Just a couple questions. You spoke earlier, Larry, just about the mix, just talking about your self-pay mix moving lower and seeing more of that shift to Medicaid. I guess my question is, when will you start to see improvement in bad debt? Is there a lag there? I guess just seeing that much shift, I would think it would be helping you on the bad debt line. Just a second question here is just, you guys were saying you filed and 8K talking about the opportunity to buy back your convertible bonds. Want to see what your thought process is there and when we should anticipate some sort of news on that. Thank you.

The first one is we have guidance of 10.2 to 10.5. We're running about 10.1%. We ran in that range last year. So I think it's prudent for us to sort of say our bad debts continue to be in that range of 10.2 to 10.5. Clearly a slowdown with self-pay will help us, it was a little slower this quarter. In essence our placements from the first quarter of '05 to the second quarter of '05, with Medicaid, increased about 29% on collections about 19%. Usually what happens is we do a very good job of placing Medicaid business and catching up at the end of the year after various performance measurements, and then it slows down the first quarter and we catch up in the second quarter. So I would think that it's prudent to think of our bad debts in the 10.2 to 10.5 range. The convert, we wanted that flexibility. We got that flexibility in our credit agreement approved here a few weeks ago. We haven't decided what we're going to do from that perspective. You have an opportunity to do something with the convert or really to use our money. As Wayne said, we have a lot of good acquisition opportunities so we haven't made a firm decision on the best thing for us to do.

Great. Thank you.

Your next question comes from John Ransom with Raymond James.

Hi. Kind of a picking up numbers, observations/question. It looks like sequentially your supply costs went down about 40 BIPs consolidated and it looks like same store, was your intensity up sequentially? I think you had a big case mix this quarter.

Yeah, case mix was up sequentially. We did have the HPG contract that kicked in, and then we're also doing a pretty good job of managing our supplies and especially in some areas that we focused on as Wayne talked about the standardization, the centralization. There's people here whose job it is to work on supply management.

How much of the sequential improvement was the HPG versus the -- just some of the stuff you're doing internally?

That's pretty hard to quantify. I think we'll wait until the end of the year and talk more specifically about it.

Are you -- a lot of your cousins are seeing pressure from the implantables and the drug cut insent. I know being rural, you're doing less of that stuff. How would you comment on those specific supply line items? Is it you're doing less of them than your peers, or are you doing something different?

I don't think we do less. We may have benefited from some of the pricing changes, you got midyear. Probably the one item that has cost us little money is drug expense is up a little bit on the same store basis.

But the implantables are not something that's given you heartburn at the moment?

Not at this moment, no

Okay. And secondly I guess, gosh, we now have 10, 11 companies out there chasing hospital bills. We used to have four or five. When does that matter? It still looks like you're getting pretty good -- I guess your Pennsylvania looked like a pretty attractive purchase price, but what do you have to do differently to keep your return on future invested capital in the range of sanity, just given all the dollars out there chasing deals?

First, there are a lot of people around, but we continue to basically get the properties that we like for whatever reason. Some has to do with the fact we have a good reputation in the marketplace. We do what we say we're going to do. We've had good performance at our facilities in our markets and that's one of the reasons that Sunberry was a good opportunity for us. It adds to our network and is fairly close to some of our other facilities, 40-50 miles. We've not really had to do anything extraordinary in terms of purchase price. I mean some people are doing that, but for us there are so many opportunities we continue to have a very strong pipeline. We just raised our guidance to 3 to 4 this year. We've done 2, and I said earlier we have two letters of intent. So I don't see that dynamics change that much, Larry.

I'll just add I think we work very hard to do a good job on the due diligence. The people here in our corporate office gets involved and looks at the hospitals. I think not only what we buy we think we can accomplish, in our track record as far as we've disclosed has been pretty good staying above our models and earnings and return on investment.

I'm sorry. I may have missed this. Did you disclose the discontinued OPS hospital, did you say that was about a penny a share?

Yes, it was. Of course, it wasn't in a guidance as a loss, but it was a penny a share and then there was a $0.05 loss on the impairment

Okay. Very good. Nice job.

Thanks

Your next questions comes from Kent [Salaver] with SC Gowan and Company.

Hi, just a couple of questions about volumes. First, on the self-pay, not to be flip, but was the decline a matter of luck or skill?

Let me start and say that, our collection worked that Larry has been work on and trying to perfect. I think he's getting better and better at doing that, going forward, so I think some of it has to do with the dynamics of our market in terms of the unemployment rate is improving. Its also as a result of our increased work in terms of front end collections and doing all the right things.

I might add, it was down about 10 basis points as a percentage it was down 20 year-to-date. I believe last year, '04 of '03 it was down a percentage admission. If it's luck, it's been consistent luck.

Okay. That's helpful. Secondly, with regard to the one-day stays, I suspect that Alabama given comments from Triad. My question is the extent that a lot of this seems to be some kind of, I guess, switch to enter equal standards, how consistent is the view of one-day stays across your payers, because there does seem to be , at least in Medicare, some increased interest in looking at these and whether they're appropriate to be inpatient versus outpatient, et cetera. Well, some of these were Blues and some were Medicaid.

medicaid is reasonably consistent as it has different people look at the activity. The Blues have some, some are consistent and some are not. I would not think they shared our criteria all that much or used the same one. Some not for profit Blues use the same ones and some use other criteria. So it's a little of both.

And I assume, though, this is a change that took effect this quarter?

That affected this quarter, and it started at the first part of the year, some of these changes did, and they were part of there in the first quarter and we didn't comment about them.

Okay. That's great. That's all I have. Thank you.

I might add one of those was a critical access hospital we put in place last year, which is the only one we have. There we have a limit on admissions, and we use the outpatient to try to make sure we don't go over the limit.

Right. Okay. Thanks.

Thanks.

Your next question comes from Oksanna Butler with Smith Barney.

Thank you. Good morning. On the CapEx front, a bit of an increase here in guidance. Can you just tell us what you are prioritizing there in terms of investments?

Well, a lot of that is under radiology equipment and CAT scans. They're a Cat lab involved in it and some other construction projects we have started here. But it's predominantly in the equipment side for the most part.

In terms of inpatient versus outpatient are you now focuses more aggressively on the outpatient front?

Some of the Cat scans will have the outpatient volume more than the inpatient and the Cath lab will likewise. Hopefully the equipment will help both.

In terms of progress on the volume front to the opportunity overall to stem up migration, is there a way to quantify that, or are you beginning to see any acceleration there? How should we think about that?

What we do is take our service areas and compare our performance using Medicare data, and last year we did that. We gained market share and the large share of our markets versus competitors looking at Medicare and that's the most accurate data you got. We'll do that again this year when the information becomes available. We use that to sort of help confirm we're making growth in most of our markets.

Can you update us on the Pennsylvania market and perhaps Tennessee as well, two areas that there have been some concerns over the last several quarters? Can you just tell us what progress you're making there and how you see your --

I'm sorry. I don't -- can you be a little more specific about what the concerns are?

In Tennessee it was Medicaid cuts.

Right.

In Pennsylvania there was a concern that Pennsylvania's just generally not a good market to get into, and I think you've explained that you are -- it depends on the market.

You must have got that from Larry and not from me, because we think Pennsylvania is a great market, we're doing extremely well in Pennsylvania. Medicaid in Pennsylvania, by the way, is 5 or 6% compared to 10 or 11% across the country. Tennessee, on the other hand, as you know does have TennCare issues. We're going through this process now where back in March the CMS agreed in terms of the waiver so that they could start the disenrollment letters. Letters have started being sent and were sent in June. More letters will come up out in July, but all that is built into our guidance. I think we said historically, over the last year or so we think it's about $50 million or about $0.03 which is built into our guidance. These things come and go. As we continue to look, one of the values here that we have is that we're in 22 states. As we get hit in one particular state, there are other states that we're getting improvements and payments in. These things tend to balance themselves out. It's just a little more dramatic right now in Tennessee. But, Pennsylvania is very strong state for us. We have very good earnings and continues to grow. We just signed another letter of intent in Sunberry.

Okay. So fair to say those concerns were overstated?

Yeah. I would guess what maybe the comment is is that Pennsylvania is about 20% of our revenue. Clearly, we're going to watch what we do there and make sure they don't become 35% of our revenue . That may be what it related to.

One of the reasons we've been concerned about getting too many hospitals in one state is the fact that Medicaid and the amount of Medicaid. If you have a big hit like TennCare it could be problematic. The advantage to Pennsylvania, one of the reasons we don't have that concern there, is Medicaid is substantially less than it is in other states.

Okay. Thank you.

Thank you.

Your next question comes from Andrea Stanago with J.P. Morgan.

Good morning. Larry, just one quick thing. Can you give us a little bit more color on the restricted stock award. Where I'm really looking for color is just sort of try to figure out exactly how it hits in each individual quarter?

Sure. It was granted around March 1, and what we had elected to do was give restricted shares and less stock options. We planned on abetting our guidance in July when at one point in time stock options were going to be expensed. That didn't happen. It got put off into January. One you grant restricted shares you have to start expensing that over to a vesting period. There was some expense in the second quarter after we put out our guidance for 2005. A very small amount in the first quarter, and they're in the third and forth quarter and we wanted you to know that's now considered in our guidance. It's was not before. The guidance would have gone up had we not had the restricted shares.

Great. Just in general it sounds like a little over a penny in each of the last three quarters of the year?

That's correct.

Great. Thanks a lot.

Your next question come from Ken Weakley with UBS

Thanks. Two more questions I guess. Wayne, could you talk about the elements of your pricing power, how they have changed over time? I asked that because as I think about the rollout of the Medicare drug act, I guess next year with the PDP regions, are you expecting to see more managed care and perhaps more importantly more proactive managed care in your markets? How do you position yourself for that, if that's the case?

I don't think from our perspective that we will see a dramatic change in terms of the managed care particularly from Medicare within our markets, primarily because 85% of our markets were a sole provider. We are beginning to get a few letters saying we've decided to declined to participate in one of these PPO organizations. They're saying we have to notice CMS, which is perfectly fine with us. I don't think that materially impacts us today. I would think sometime in the future if, in fact, managed care companies get big market shares they might be more interested in us. One, we're pretty small. Secondly, they might get adversely selected for that market if they're not careful. Because our markets are small. That's not a threat to us currently. We'll continue to watch the development of that, but I don't think that's going to be a big issue for us.

I might add it's about 2% of our revenue. It's stayed in the 1 to 2% range most, and some of that is because of the hospitals we required a little bit more of a good area where there is a little more growth.

I guess the last question. You had broken out the payor mix of managed care and private and other. What's the difference between the two?

Managed care is where we have a contract, and it's -- it includes all of the contracts who have other -- Blue Cross, HMOs, and managed care are Blue Cross Contracts because they're similar to indemnity or PPO the same contract. That's a private number.

Okay. Thanks.

Sure.

Your next question come from Joseph Chiarelli with Oppenheimer and Company.

Thanks. A little bit of a connect the dots here, Wayne and Larry. You're see an increase in your acuity and surgical cases, and you have an excellent success rate in recruiting specialists. You've talked about increasing your focus, particularly because of customer service, on ambulatory surgery service centers. Have you reached a point in any of your markets where your docks are starting to make noise or your surgeons particularly about wanting to either set up shop with their own ASE or where you need to do a limited partnership and share that with them. If you haven't, do you see this in the immediate horizon?

Our approach to this has been because of the fact that we -- you know that we control the delivery system in our markets and we're the sole provider, 85% of it, our approach has been to be proactive. By being proactive if we see that there is an opportunity where we have high growth in our markets and we can develop a diagnostics center or surgery center, that does two things. One, it prevents competition coming to our markets, and then secondly, we will go to the doctors and say would you like to participate in some of these. We haven't had very many -- we don't have those kind of competitive challenges in our market to amount to anything. We might have one or two over the last couple of years in terms of challenges where doctors have said they will go do a surgery center. By and large because we have recruited a lot of these doctors to these markets and we're the sole provider, we're able to participate with the doctors and figure out a way to work with them. We will do a joint venture, if that works in that particular market. I think from my perspective on the front end we have been more proactive and strategic in terms of our thinking that we know there's a possibility sometime in the future that somebody might decide to do that. We alway thought it was better to get ahead of this.

Thanks. [OPERATOR INSTRUCTIONS]

Your next question comes from Robert Mains with Ryan Beck. Mr. Mains your line is open.

I think he's gone.

Whoops. Hello

Hello.

Hi. Sorry. Problem with the phone. One question here, guys. Good morning, by the way. If you were to kind of shut off the M&A machine here and just kind of roll forward with the hospitals you've got, I think there have been some structural changes in your portfolio that would change the types of margins that you would attain. Where do you think things could potentially go from where we are now?

First, I think if that were to happen, I think we still have a lot of organic growth left both in terms of just volume because of the fact that we're still only getting about 50% of the admissions across the board in all of our market it is. Secondly, as we discussed earlier, there clearly is a case mix opportunity for us as well. So even if that did happen, I think we could still have pretty consistent growth.

I might comment on some numbers that nobody has asked, but somebody will call me later so I'll just get them out there now. Our acquisition class margins like for 2001, is 17% right now, 2002 is 11 to 12% range and 2003 is 13 1/2. In the last three years it's about 14%. The ones prior to 2000 are in the 17 to 18% range. Clearly the 14% could move up to 17 to 18% range, plus I think the 17%, 18% range can move up a little bit as we grow volume. If look at that, there's a lot of good growth for the next several years if your leases were to happen, which is unlikely.

Right. Understood. Okay. Thanks a lot.

At this time there are no further questions. Do you have any closing remarks?

I do. Thank you very much for spending time with us this morning. Our strategic objective is clear. Deliver consistent results and ensure that our hospitals achieve a position as a dominant health care provider in their prospective markets. We're excited about our prospects for 2005 and we will continue to balance our operating strategy with objective to build value for both our shareholders and the communities we serve. We want to specifically 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 for the second quarter. We remain focused on our business strategy and improving our results. If you have any questions you can reach us at 615-373-9600.

Ladies and gentlemen, this concludes today's Community Health Systems second quarter 2005 conference call.