Community Health Systems Inc (CYH) 2005 Q3 法說會逐字稿

Good morning. My name is Michelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Community Health Systems Third Quarter 2005 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. [Operator Instructions].

I would now like to turn the call over to Mr. Wayne Smith, Chairman, President and CEO. Please go ahead, sir.

Thank you. Good morning and thank you for joining us for Community Health Systems quarterly conference call. With me on the call this morning is Larry Cash, our EVP and CFO.

We’re pleased to report that Community Health Systems delivered yet another strong and consistent performance for the third quarter of 2005. The purpose of this call is to review our financial and operating results for the quarter and year-to-date ending September 30, 2005. 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 would like to begin the call with some comments about the quarter and then turn the call over to Larry, who will follow up with a more detailed account of our financial results.

But before I begin, I would like to read the following statement. Statements contained in this conference call regarding speculative operating results, acquisition transactions, and other events are forward-looking statements that involve risks and uncertainties. Actual future events 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 made based on management’s current expectations or beliefs, as well as assumptions made by information currently available to management. You refer to the documents filed by Community Health Systems with the SEC, including the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. These filings identify important risk factors and other uncertainties that cause actual results to differ from those contained in the forward-looking statements.

We are very pleased to report another excellent quarter, with continued growth in volume, revenues, and EBITDA. We have also met or exceeded street earnings expectations for 22 consecutive quarters. Our same-store growth measures for the third quarter demonstrate the strength of our operating model and we believe that we are well-positioned to execute this strategy through a combination of market share opportunities and acquisitions.

Net operating revenues for the third quarter ended September 30, 2005, totaled $929 million, a 14.5% increase, compared to $812 million for the same period last year. EBITDA for the third quarter of 2005 was $137 million, compared with $120 million for the same period last year, a 14.1% increase. Income from continuing operations increased 13.4% to $44 million, or $0.47 per share, compared to $0.38 per share for the third quarter of last year, an increase of 23.7%.

Net operating revenues for the 9 months ended September 30th, totaled $2.7 billion, compared to the $2.4 billion for the same period last year, a 16.6% increase. EBITDA for the 9 month period ended September 30, 2005 was $421 million, compared to $364 million for the same period last year, a 15.9% increase.

Income from continuing operations for the 9 months ended September 30, 2005 was $139 million, or $1.48 per share, compared with $120 million for the same period last year, or $1.16 per share last year.

With that, I would like to review some key operating accomplishments for the quarter. Same-store admission trends continue to be positive for the third quarter, with a volume of a strong 2.3% compared to a negative 1.7% for the same quarter a year ago. Our same-store adjusted admissions were up 2.6% for the quarter. Same-store revenue was up 8.6%. We also improved our same-store margins for the quarter by 40 basis points. These solid year-over-year gains reflect our capacity to improve the level and scope of our services and enhance the financial and operating performance of our hospitals.

We believe that our third quarter 2005 admissions were positively impacted by less than 10 basis points, due to the 2 hurricanes. We had additional volume from Katrina evacuees in Alabama and Louisiana. The Company evacuated our hospital in Cleveland, Texas on September 23rd, prior to Hurricane Rita. And the hospital remained closed until October 4th, or about 10 days, due to power loss.

The Company recruited 390 new physicians for the first 9 months, compared to 391 for the same period a year ago. We adjusted our 2005 physician recruitment target from 550 to 510, reflecting the divestiture of 6 hospitals in 2005 and good retention. Our standardized centralized approach to physician recruiting increases utilization and reduces the need for patients to travel outside their communities to get health care services.

We acquired a total of 5 hospitals this year. Chestnut Hill and Bedford County hospitals were acquired in the first half of the year. We acquired 3 hospitals in 3 separate transactions on October 1, 2005. Newport Hospital and Clinic in Newport, Arkansas; Bradley Memorial Hospital in Cleveland, Tennessee; and Sunbury Community Hospital in Sunbury, Pennsylvania. The Newport facility, with approximately $15 million in revenue, was immediately closed and its operations were consolidated with our Harris Hospital, also located in Newport. This reflects our strategy to be a sole provider in the communities that we serve. Bradley Memorial Hospital joins our Cleveland Community Hospital, a 100-bed facility located in Cleveland, Tennessee. This acquisition will create good efficiencies and good opportunities. Bradley has revenue of about $75 million and a trailing mid-single-digit margin. Sunbury Hospital, with 123 beds, will be our 9th hospital in Pennsylvania. This facility has revenue of approximately $30 million and a low-single-digit margin.

Our Company continues to lead the industry in selectively acquiring non-urban hospitals in attractive growth markets. We continue to have a very attractive acquisition pipeline and multiple opportunities.

The Company has provided guidance for the remainder of the year to reflect strong results of the third quarter, as well as our 3 recent acquisitions, as follows: revenues, $3.7 to $3.725 billion; EBITDA $560 to $570 million; EPS for income from continuing operations will be $195 to $198.

We’re also providing our initial guidance for 2006. By the way, it’s a bit of a milestone for us, in that our revenue will exceed $4 billion. As you may recall, when we started here about 9 years ago, our revenue was about $600 million. Our projected revenue range for 2006 will be from $1.45 billion to $4.2 billion, reflecting a 6-fold increase and a compound annual growth rate of over 20%. EBITDA will be from $635 to $655; projected EPS for 2006, before the new equity-based compensation, will range from $222 to $230. After the equity-based compensation, projected EPS will range from $214 to $218. We’re also expected to acquire 2 to 4 hospitals during 2006.

At this point, I would 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 we achieved for the quarter. Our consolidated admissions growth in the third quarter was 7.6%, compared to the same period last year. Adjusted admissions had a 7.9% growth rate over the third quarter last year. Our same-store admissions increased 2.3%, and adjusted admissions increased 2.6%.

Same-store self-pay admissions increased approximately 20 basis points year-over-year, the third quarter’s most volatile, and has fluctuated from a high of 11.2% in 2000 to 11.17% last year. As you recall, our third quarter 2004 same-store volume was adversely affected by several hurricanes.

The third quarter 2005 volume continued to be affected by service closures and one-day stay classification changes from admission to outpatient that we discussed last quarter, as well as a small increase in hurricanes.

Adjusting for these 4 items, same-store admissions for the third quarter would have been up an additional 30 basis points to 2.6%.

Net revenues in the third quarter increased 14.5% compared to the same period last year, or $929 million versus $811 million. On a same-store basis, net revenue increased to 8.6%, with inpatient revenue up a strong 9.3% and outpatient revenue up 7.7%. Total same-store surges increased 3.6%. Same-store net revenue per adjusted admissions for the third quarter 2005 versus the third quarter 2004 increased 5.8%.

We had an increase in same-store Medicare case mix at 1.9% for the quarter and all prior case mix at 1% versus last year.

We have continued to deliver EBITDA growth to 14% increase this quarter compared to last year, $137 million versus $120 million. On a same-store basis, EBITDA increased $14 million, or 11.6%, for the quarter. Consolidated income from operation was $96 million versus $83 million, an increase of 16.2%. Same-store income from operations increased 14%.

For the third quarter, EBITDA margin, on a consolidated basis, is 14.8%, unchanged from a year ago, due to low-single-digit margins of acquired hospitals. Same-store EBITDA margins, 15.3, compared to 14.9 for the quarter, September 3, 2004, an increase of 40 basis points. For the third quarter, on non-same-store margins, 5.9%. The trade-in margin before acquisitions of these non-same-store hospitals was approximately 2%. For the quarter just ended, our consolidated income from operations, as a percentage of revenue, was 10.4% versus 10.2% for the same period a year ago. On a same-store basis, it was 10.7% versus 10.2%.

In the third quarter, consolidated operating expenses, as a percentage of net revenues were unchanged from the prior year. This would have decreased except for the higher expenses levels at acquired hospitals. Consolidated payroll benefits were unchanged. Supplies decreased 40 basis points. Bad debt decreased 30 basis points. Operating expenses increased 70 basis points as a percentage of revenue. Contract labor increased 30 basis points, primarily when we had strong volume, and business provider taxes increased 20 basis points, and malpractice is flat year-over-year.

On a same-store basis, operating expenses improved 40 basis points, with decreases in payroll and benefits, decreases in supplies, decreases of bad debts, offset by the increase of other operating expenses.

On a year-to-date basis, admissions were up 9% and adjusted admissions were up 9.2%. Same-store admissions are up 2.3%. If we adjusted admissions for impact of service disclosures, the large first quarter flu volume and leap year and impacted hurricanes of 2004 and 2005, same-store admissions would be down about 20 basis points to 2.1%. Adjusted admissions were also up 2.2%. Same-store self-pay admissions are down 10 basis points, as a percentage of total admissions on a year-to-date basis. Our guidance for 2005 and 2006 will range from 1.5% to 3%.

Net revenues year-to-date increased 16.6% [technical difficulty – no sound] [ph$] billion compared to the same period. Last year, on a same-store basis, net revenues increased 8.9% for the first 9 months, same-store inpatient revenue was up 10%, and outpatient revenue was up 8%. On a same-store basis, net revenue, per adjusted admissions, increased 6.6%. Our same-store surging volume was up 2.2% year-to-date. Our Medicare case [indiscernible] for the 9 months ended September 30, 2005 increased .6 of a percent.

We have continued to have strong EBITDA growth with a 15.9% increase for the first 9 months of 2004, $421 million versus $364 million. On a same-store basis, EBITDA increased almost 12%. Consolidated EBITDA margin for the 9 months ended September 30, 2005 was 15.3% versus 15.4% for the same period a year ago, due to low margin acquired hospitals. Non-same-store margins, 8.7%. Currently, the margin for these acquired hospitals was approximately 5%. Same-store margin improved 40 basis points to 15.8% from 15.4%.

Consolidated income from operations was 10.8% of net revenue compared to 10.7% for 2004, and same-store income from operations was 7.2% of net revenue versus 10.7% for the prior period. For the first 9 months, consolidated operating expenses, as a percentage of net revenues, were up 10 basis points. Again, this is due to the low margins of our acquired hospitals.

Payroll and benefits decreased 20 basis points. Supplies and bad debts were flat. Other operating expenses increased 30 basis points, with an increase in business taxes. Operating expenses on a same-store basis improved 40 basis points, with improvements in payroll and benefits, improvements in supplies, offset by an increase of other operating expense.

All of our hospitals have a chair to chair policy. The chair arranges 100% to 200% of federal property level. We also provide administrative [PO] [ph] discount on a selected basis. For the 9 months ended September 30, 2004, same-store self-pay admissions, percentage admissions, are down 10 basis points. Our consolidated self-pay revenues down 160 basis points. Also, our same-store inpatient self-pay revenues are unchanged, but our outpatient is down about 200 basis points.

For the third quarter, consolidated bad debt improved 30 basis points and charity increased 110 basis points and administrative discounts also increased 30 basis points. For the first 9 months, consolidated bad debt is 10%, unchanged from a year ago. Our combined consolidated bad debt, charity, administrative PO discounts are up 90 basis points on a year-to-date basis, 16.9% versus 16%. This is due to a 50 basis point increase in charity and a 40 basis point increase in administrative self-paid discounts, bad debts unchanged. Our 2005 and 2006 bad debt guidance range is 10.2% to 10.5%.

Consolidated cash receipts were 103% of the [indiscernible] revenue for the 9 months ended September 30, 2005. The last 12 months was very much also 103%. Total AR days were 62 at September 30, 2005, down 1 day from December 31, 2004. The [last adoptable] [ph] accounts is $332 million, or 34.5%, at September 30, 2005.

We’ve had a strong increase on service collections, which are about 7% for the quarter, and almost 8% year-to-date, versus 5% in 2004.

Community Health Systems continues to have a federal payor mix. For the quarter ended September 30, 2005, our net revenue by payor source was broken down as follows: Medicare, 31%; Medicaid, 11.8%; Managed Care, 23.4%; self-pay loan, .8%; and private and other, 22%. On a year-to-date basis, the breakdown is as follows: Medicare, 32.1%; Medicaid, 10.9%; Managed Care, 23.8%; self-pay, 11.7%; and other, 21.5%.

We’ve had good cash flow from operations for the quarter of $59 million versus $57 million in the same quarter a year ago. Cash flow from operations for the first 9 months was a strong $336 million, compared to $263 million for the same period in 2004, an increase of 27%. Our percentage of cash from operating activities to EBITDA for the first 9 months was approximately 80% versus 72% from the prior year.

CapEx for the quarter just ended were $56 million. Year-to-date, we’ve spent $133 million. The CapEx guidance for 2005 ranges from $190 to $200 million. We are also providing CapEx guidance for 2006 in the range of $240 to $260 million, with approximately $35 million related to construction of [placement facilities] [ph] and construction of a corporate office.

Balance sheet at September 30, 2005 was $184 million. At the end of the quarter, the Company had available credit of almost $400 million. In addition, we have a $400 million [recording] [ph] feature within our term loans. We believe we have sufficient availability to fulfill our acquisition plans.

Looking at the balance sheet, as of September 30, 2005, we had $520 million in working capital and $3.8 billion total assets. Our debt-to-capitalization at quarter-end was 57%. Our fixed rate of debt is approximately 81% of total outstanding debt. Total stockholders equity was $1.3 billion at the end of the quarter. The fixed portion of our debt at the end of the quarter was $1.5 billion.

Our 4.25 convertible debt issue was callable on October 15th. That’s required number of shares that was satisfied at the holder’s conversion option, including our fully diluted shares. So if we exercised our option redemption route there would be no impact on earnings per share, conditions of our shares. We have included interest expense in our guidance for the remainder of 2005 and 2006. Since, at this time, no decisions to make [redeemment] [ph] notes have been made. Additionally, we think the use of cash in our debt is better served to acquisitions rather than repurchasing significant shares based on the current stock prices.

As Wayne stated earlier, we are updating our guidance for the current year, as well as 2005. Considering an addition of equity-based compensation for 2006, net income was shared [indiscernible] 214 to 218. This includes the required adoption, FAS No. 123R, that relates to dispensing of equity-based compensation. Pro forma EPS would run into $1.84 to $1.87, if adopted in the current year.

Wayne will now provide a brief recap.

Thanks, Larry.

We are pleased with Community Health Systems continued strong performance for the third quarter. We want to acknowledge the hard work and dedication of those employees affected by the hurricanes. Our ability to consistently meet our financial and operating [impact] [ph] reflect the strength of our business model and solid execution by our management team.

With that, I will now open the call for a Q&A period. And if you would like to talk to us after the call, you can reach us at area code 615-373-9600. Michelle?

[Operators Instructions]. Ralph [unintelligible], Credit Suisse First Boston.

I guess just in terms of self-pay, I think it was down 150 bips sequentially. Can you just talk about those trends, you know what’s driving that down, particularly given comments from your peers, you know I’m talking about Acceleration, that trend?

And then was hoping you could also give some comments about sort of the acquisition environment. You’ve met your stated goal, I guess, for ’05, and are looking at another 2 to 4. Given the emergence of some new hospital companies out there, have you seen any of these new entrants when competing for hospitals?

And then maybe if you could comment on the acquisitions multiples. Have you seen any change there and do you expect to see anything different in ’06 and beyond?

Let me take the first -- the last part of that, and Larry can get to the self-pay portion of it.

As you know, we had a very good year this year in 2005 in terms of acquisitions. There continues to be a lot of properties for sale. We see a lot of opportunities. Our pipeline is just as strong today as it’s ever been. We have seen some of the smaller companies that have shown up at some of the acquisitions. For most of us who have been doing this for a good while, they are not that competitive yet in terms of their process or their ability to deliver the level of services that we have. We’ve seen a little bit in terms of pricing. We’ve been very disciplined in terms of what we will pay, not necessarily pricing from the new entrants, but people who have been in the business for awhile seem to be pricing up more than others.

But, as you can see, we continue to be disciplined about that. I think 2006 will be another good year for us in terms of acquisitions. We’re off to a good start. We have a letter of intent on Waukegan and we are working 3 or 4 others currently. So I think the acquisition business looks pretty solid for the foreseeable future. And you know that’s just -- we’ve been very consistent in the way we’ve approached this. People ask us how many can you do at one time and I think we can do 2 to 5 or 2 to 4 without a problem and we have done 10 before. So, as we see opportunities, we’ll take advantage of them.

Larry?

Our consolidated self-pay revenue for the first 9 months is down as a percentage of revenue. I would say a couple of events or several events have contributed to that. Number one, our unemployment rates in our markets are now down to about 5.6% versus, if you look a year ago, it was 6.3%, and 2 years ago, 6.9%. That’s specific information for us, so we get good improvements in our markets.

Another thing would be just our markets. We are generally a sole provider in most of our markets, so there is not a lot of new market share there. You can have shifting of market share of self-pay business, whereas in an urban area, if you’ve got new charity policies or new discount polices you could be attracting more self-pay business.

Second, I would probably also comment a lot of the improvement is some of that is on the outpatient side, which we’ve done a good job of setting up -- pulling service collections and making sure appropriate treatment is there. We’ve done a really good job on Medicare placement activity as far as looking and trying to improve our Medicare placements to -- excuse me, not Medicare, Medicaid placements that we’ve done a good job on this year so far. I think our Medicare -- Medicaid placements versus a year ago, for the first 9 months, are about 39% and our collections are at 44% in those activities. Charity is up a little bit, which could be some of the people who might have been self-pay revenue are now not getting recorded. That’s up about 40 basis points. And then finally, because a lot of questions we thought would come up, we looked back over the last 21 months, 7 reporting quarters, and our self-pay admissions, same-store, are actually flat, where they were for the preceding period. So we’ve just not seen the type of increase the other people have had. Somewhere to the tune of $31,000 versus $31,000 for the same 7 quarters previously reported.

Kenneth Weakley, USB.

I was wondering, in terms of your expectations for Managed Care within raw markets, given the rollout of the Medicare drug act and the concurrent development of Managed Care, what -- I know you are comfortable with Managed Care, given your prior experiences, but what do you think is going to happen within that domain?

First, I don’t -- I mean, I guess, Ken, the strategy for a lot of companies, of course, is the part D and then convert them to a Managed Medicare program. I still don’t think that in the markets that we’re in that we’ll see a huge effect of that going forward. I think some of those markets are -- our markets are even sort of exempt to some of the reasons. So I don’t think we are going to see a dramatic impact. I think we’ll see an increase, but it could take several years for that to have any impact on us at all.

Just to put some numbers on it, Ken. This is Larry. It’s about 2% of total revenue today, what you call Medicare Advantage. It’s been in the 1.5% to 2% range. We’ll see a little bit more in the Pennsylvania markets than you do in say the Alabama markets. But we’ve not done a lot of contracts throughout our Company for new plans and don’t expect to do a great deal.

Okay, and one follow-up question, if I could. I noticed the inpatient growth in the quarter, and in particular, I was wondering, for most of the rural hospitals, obviously, outpatient has been a key driver to growth and success. But, obviously, to the extent you can drive surgical volume and inpatient, but I think that’s at least as important, but what are the a) margin implications for growth going forward within inpatient; b) can you tell us if your kind of capital spending strategy has kind of positioned you already for growth there or do you need to spend more to get up to speed in terms of dealing with a more inpatient structure?

Let me just -- the first part of that. I think, we’ve been talking about this all along in terms of the opportunities we see in our market’s organic growth.

Sure.

So I think our physician recruiting and our work on physician recruiting and expanding services has been very helpful to this. And I think we’re just beginning to see the impact of that and the opportunity still exists.

One of the things that is sort of related to your first question as well, Ken, is what we’ve tried to do is all along is reduce the risk in this Company in terms of taking too much risk, being the sole provider in 85% of our markets, being in 22 different states, so will reduce the risk in terms of Medicaid. Having standardized centralized business processes, being very selective in acquisitions. And then the other thing is just what you just mentioned in terms of opportunity for organic growth, which we’ve been working on that for several years. So I would think we’re beginning to see some results from that.

Larry, you want to put a --

Yeah. I want to talk a second about the capital spending. Looking at ’05, ’04, and ’06, we’ll be spending a little bit more money in ’06 on emergency rooms, which we spent quite a bit over the past few years, so we’ll see some improvements there. We’ll get over 55% of our admissions due to emergency room. Doing a good job there. There’s about 440 emergency room visits per 1,000 in our markets and we think we can spend good money there.

Also, other categories are fairly similar. We spent a little bit more money on the surgery type businesses that we expect to get a good return on, and then on radiology and diagnostic business. The one that we’ll spend a little bit more money in 2006 and 2005 would be on some ambulatory surgery centers and outpatient diagnostic centers, which will help the outpatient growth, because there is both inpatient and outpatient opportunity in our markets. There is probably well over $9 billion of hospital business out in our markets today in our semi-hospitals. Our run rate of revenues, Wayne said earlier, will be somewhere around $4 billion next year. So you can see there is a lot of dollars of revenue, hospital revenue, that we don’t capture today.

Sure. Hey, does return on capital vary a lot between those kinds of research projects, like some -- maybe characterizes sort of defensively, you just have to have them in place to operate? What’s your return on capital expectation for incremental capital spending in the next couple of years?

We expect to continue -- we look at it as a multiple of EBITDA purchase price, which, again, relates to good return and should get about a 4 multiple. Most of our projects made a little better multiple on our radiology and diagnostic equipment. But still good EBITDA multiples versus purchase price in the case of E.R. and surgery spending.

A.J. Rice, Merrill Lynch.

A couple of questions, if I could ask. First of all, on the 2.3% same-store admissions growth, inpatient admissions, obviously that stands in contrast to what we’re seeing from some of the other guys. Have you drilled down to see whether it was a particular strength in one region – east versus west – or would you attribute this more to the rollout of the new services and position recruitment and sort of company specific to you?

I think we believe that it’s across the board as we kind of analyze this. It’s across the board. Our surgery is up a bit. We don’t see any particular pocket it’s in or any particular weakness in any place else. So I think it’s directly attributable to our physician recruiting and services that we’ve added over the last couple of years that are beginning to take hold.

Okay. And then in terms of the contract labor, I think Larry, you mentioned that there had been a slight uptick in that. Is that because the volume was stronger than you expected and you needed to react to that or is there any other dynamic that’s going on there?

It was up in a few hospitals, and probably about 7 of the 8 hospitals here had big increases. Also, had volume increases a couple percentage points better than the Company average. So the volume sort of drove the business there. There were a couple of situations we used otherwise. But in most places it’s because of the strong volume. And we would expect to probably to continue to see that maybe into the fourth quarter a little bit. It might moderate some, but it may [technical difficulty – noise] based on our estimates.

Right. I know you had -- you mentioned the 27% increase in cash flow from ops year-to-date. I think in the quarter it was up slightly less, on a little more moderate rate. Are there any timing differences or anything that account for that?

There are a couple of timing differences. We made a little bit more in tax payments, about $8 million more in tax payments there. Also, the first 6 months of the year, we include AR days from 63 to 60. They went up a couple of days in the quarter from 60 to 62. One day of that had to do with some Medicaid payments in one of our Midwest states that got behind. Those 2 issues there sort of held that quarter down. But 27% year-to-date is a really good performance for us.

Oksanna Butler, Citigroup.

On the pricing front, the pricing continues to be very strong and certainly the increases in the case mix probably are contributing to that. Just wanted to see if you are seeing any changes on the master pricing front and dynamics there, in particular, if the consumer directed plans are having an impact or how you are thinking about that?

We’re still thinking we’ll be in the 5% to 7% range. We still have not seen much movement yet in our markets in the consumer directed plan. We’ll have to see how the new open enrollments go in January of ’06. Our pricing was then up 8%. It was up against about a 5% comp last year. It was down a little sequentially from 7.9%, but that comp was a little less in the second quarter of last year. So I think we should finish out the year somewhere in the 5% to 6% range. And next year should be in the 5% range we believe.

All right, thank you. And in terms of the physician recruiting, are you seeing any changes in terms of guarantees at this point or particular specialists that are either more difficult to recruit?

Not really. I think it’s about the same thing we’ve seen in the last couple of years. There are a couple of areas like radiologists and anesthesiologists continue to be a bit more challenging in terms of recruiting. But by and large, our recruiting is going extremely well. I mean, we’re, again, going to recruit over 500 again this year. We recruited over 500 last year. Our turnover rate continues to improve in terms of the retention. And I say this often, that one of the things that we’ve been able to accomplish and one of the things that’s the least difficult for us has been physician recruiting. And it certainly made a difference in terms of our volumes.

[Rob Halicy], BlackRock.

I may have missed a couple of numbers, but I was just wondering, the recent acquisitions, how are they running for self-pay and bad debt? And how quick are you able to establish a charity care policy there? Just wondering how that affects same-store numbers as they start to roll in next year?

Generally, most hospitals require, being not-for-profit, have a charity care policy, which we will review that and it’s generally rolled forward with maybe some modifications that charity recognized pretty quickly after an acquisition will take place. We, historically, do a lot of due diligence work to restate the financials as soon as we’re buying so we know what bad debts will be and we’ll use that effort, restatement, to know what it’s going to be. So we’re accruing for bad debts and charity pretty much as we go along there.

In the case of the hospital supplier this year, I would say Chester Hill may be a little, it’s in Pennsylvania, it may not have quite as high bad debts as the other facilities because Pennsylvania has not had quite as high bad debts. The one required July 1st as part of the -- about where the Company average is. The ones we just acquired, probably the one in Sunbury will be a little less than the Company average and the ones in the Tennessee and Arkansas will be close to Company average.

I might just add, Larry, that I think we’ve acquired something like 48 or 49 hospitals since 1997. By and large, all of them have worked. The model is fairly consistent here and it works. And as long as we’re disciplined in terms of what we acquire, it should continue to work.

And one of the due diligence is to look at the accounting bad debts, contractuals, and also look at the market, make sure there’s reasonably good economics there.

Great. And just one other question. On the radiology CapEx that you’re spending, any particular areas or is it just putting in your standard imaging machines?

Ours is more updating and putting in multi-slice MRIs or updating equipment. More than doing things like -- we have a number of facilities, we have PAC systems in and all that, but I really -- our focus has been on providing a higher level of service in the market. And when we get to a point where we can accommodate more then we’ll add a second MRI, for example, so we’re beginning to see some of those kinds of trends.

Thank you.

We have really good volume growth on the CAT scans, for instance. It’s one of the areas that’s part of any double-digit driving growth for us.

Kemp Dolliver, SG Cowen

A couple of questions. First, what have you seen from the changes in the TennCare policies? Based on your reported comments, I would assume it’s had very little impact.

That’s correct. The dis-enrollment number is something like 200,000. we’re seeing very little now. Larry can quantify this down to admissions in terms of the little bit of change in admissions. But so far we haven’t seen much impact from it at all.

Just sort of looking at it, we have like 47 new self-pay admissions in Tennessee in the quarter, which is pretty small. And Medicaid admissions growth rates slowed down about 100. So we’re not seeing a big impact on our business yet. It’s early. This enrollment process started in the, I guess, the third quarter. It’s been in our guidance all year. It’s not as if it’s been a secret that it’s going to be a change in [indiscernible] here sometime in 2005, so we’re aware of it and it’s been put in our guidance and we’re starting to see a little bit of self-pay business from it. We’ll probably see some more in 2006.

Keep in mind that when we all looked at this early on, there were a fair number of these, about a third of them, that we believe are eligible that will go back to the Medicare program. Some of these people came out of private insurance that will go back there. So it’s really hard to quantify the impact of this. But so far it hasn’t been material to us.

That’s great. Could you talk a little bit about what the opportunity you see in Waukegan, since you mentioned it in the letter of intent?

We don’t really comment much until we get things done. You can look at the demographics in Waukegan and it’s a pretty simple story when you look at all that. But we’ll be talking more about it once we kind of get down to the wire and get it finished.

[Lee Dia], [Solomon Brothers].

I missed the -- what was the revenue, I think for basis revenue per admission growth?

5.8% was the same-store revenue for adjusted admissions. $6,867 to be exact.

Okay. And what’s the balance under your term loan?

Well, there’s a $1.8 billion in total debt outstanding now, and [indiscernible] revolver is drawn. And there is $287 million in convertible debt and looking at other debt outstanding.

Right. How much is under the term loan?

Probably about $1.3 billion, I believe.

Okay. And you mentioned that there is no plan for stock repurchases. But looking at the cash flow statement, it looks like this quarter there was about $60 million or so under stock repurchases. Can you elaborate on that?

Yeah, I think I said repurchasing significant shares, which if we were to go out and attempt to pull the margin back, [indiscernible] that would be over 8 million shares, which we consider consistent. What we did in the quarter was look back over the year and we had some stock option exercises, and, of course, the tax benefit from that. We took that money, went also into excess, good cash flow, and was off -- the stock price was at a price we would want to buy that back, especially considering we’re taking stock option exercises and some tax benefits from that.

Okay. So how do compare? I think year-to-date total stock repurchase is about 79 million?

That’s correct.

When you say significant, are we talking about over 100? Over 200?

Convertible, if we were to talk about shares in the convertible, it would be close to $300 million. That would be significant.

Oh, okay.

Robert Mains, Ryan Beck.

Just got a Medicare related question, Larry. First of all, could you comment on, in other words in the new fiscal year, sort of what kind -- where the pricing is coming out where you expect it to? And the second one is some of your peers have been talking, complaining, more about the new regulations for inpatient rehab. I just wanted to know how many acute rehab units you have and whether you are seeing any kind of decline in admissions because of the 75% [pull] [ph].

First, I think the overall market basket, once you chose it for transfer policies, is probably going to be around 2.5% for us, and that’s factory charged items. That’s what we think we’ll net out for 2006. We actually have about 12 rehab units today. We are seeing about a drop of a little over 10 and 20 basis points in admissions. We didn’t put that in our commentaries, but we lost about 100 admissions, which is about 16% of our volume. So we’re seeing some like others, it’s not just quite as big for us.

Fair enough.

[Operator Instructions]. Darren Lehrich, Deutsche Bank.

I think most of my questions have been answered. I just wanted to get to a couple of things here. Larry, I thought you mentioned that you said you might be doing some ASE development. So I just want to get your comments there. How many ASEs we’d be developing. And then, if I could, if you mentioned this already, I apologize, but can you talk about the acquisition classes and kind of the margin progression that you’ve seen in some of those classes over the last few years to give us a sense there?

Yeah, Darren, let me talk about the outpatient development piece of this for a second. We continue to look at our markets, and where there are opportunities in our markets for either outpatient surgery or diagnostic centers, we’re working cooperatively with the physicians in our markets. Since we -- 85% of our markets, we’re the only hospital in town. We have sort of a unique opportunity to develop these relationships with the physicians in our markets and continue to grow the business, both on inpatient and outpatient. The numbers are not large for us. There will be a few in development this year and as we kind of go forward in the next year. And they are a combination of both, both outpatient surgery centers as well as the diagnostic centers. So it’s just another part of our market development strategy.

Sure.

What I was commenting, it is part of our increase in capital spending, it’s not a dead portion of the capital spending. But it is an increase over 2004 and 2005.

Looking at the acquisition class of 2001, had a credit margin of about 2%. It’s now about 17%. The class of 2002 is about 1%. It’s around 10% right now and still some opportunity to move up in that class. 2003 was about 6% trailing. It’s now about 14%. So if you look at the last 3 years there, it’s about 14% for the class of 2001, 2002, and 2003. The class of 2004 was in the high single digits. It’s up about 14%, but we think one of us has got a chance to continue -- to move quite well on up. And it’s pretty early in the class of 2005. It’s only about 5% right now, or 5% to 6%.

Great. And then just as I think about bad debt, last thing here, if your bad debt were to be in that higher end of the band that you provided in your guidance of 10.5, you know what would be the driver, the fluctuation there? I mean, you say you are getting most of the self-pay business already. So I just want to understand what you think would be the cause of driving that to the high end of the range?

Possibly a little bit more less people qualifying for charity that could do more deductibles and co-insurance come in, flexing efforts. I think our deductibles and co-payments, as a percentage of our payments, are like about 12% on our main secure contracts today versus 11.6% a year ago. As they continue to move up maybe later in the year or next year, we might have a little less collection results there. You could have some situations where we could capture some more uninsured business. We don’t capture it all today, but we are the only hospital out there. We think we capture most of that already.

Medicaid could be an issue. We are recognizing TennCare could be a challenge. We put that in our guidance in ’05 and some of that is also built in our guidance for ’06 to go up. Other states could do a similar thing I think. Missouri may actually change the enrollment criteria, which could create an issue for 2006.

Of course, overall, if the economy changes and unemployment goes up, there’s clearly an opportunity there that it might change the bad debt. Again, one of the things that we think is helpful to us is the fact that we’re in 22 states. We don’t really have a disproportionate share of our revenues or earnings in any one state. So, as things change on a state-by-state basis, it goes slightly to the negative and we also generally have a state or two that might go slightly to the positive. So that’s one of the values that we’ve tried to work on in terms of our strategy to make sure that we were spread out so that these changes didn’t adversely affect earnings.

John Ransom, Raymond James

Was wondering in all of these machinations between the House and Senate, if the hospital industry, as a lobbying effort to forestall any cuts, as we’re looking for money, had to be heroic, just how you would characterize the tone. I mean, I guess I’m a little surprised that we weren’t hearing about market basket cuts at the time they’re looking for $35 to $50 billion out of these mandatory programs. I’m just wondering what you’re hearing kind of relative to those discussions.

You know the current process that’s going on in terms of the Medicare, reducing the tax, you’ll reduce Medicare spending by about $5.8 billion in Medicaid, about $4.3 is now in the Senate Finance Committee and there is a lot of discussion. It has to get through the Senate as well. Probably the jeopardy here is more at the conference committee level after it passes the House and the Senate in terms of negotiations. I still think that the hospital industry is really in pretty good shape. There is not a lot of opportunity here for too many things that would be problematic to us. It seems to me that Congress is tied up in a lot of other matters other than cutting Medicare currently. These reductions don’t really impact us too greatly. There is one provision in their performance, which will continue to be talked about. There is a piece in there about specialty hospitals that may or may not make its way through this. There is a lot of lobbying on that issue. But all in all, I think the industry is in good shape for another year. I don’t see anything too dramatic or draconian in terms of cuts for us.

Why is that?

[Overlapping Voices] getting FEMA money for our hospitals and I don’t know if we’ll be successful doing that or not.

Wayne, why do you think that is? Is it because Medicare margins for hospitals have gone from 15% to 0% over the past 10 years and there’s a feeling that the industry is kind of at a breakeven and there is nowhere else to go? Do you think that’s the underlying theory?

I think it’s part of that, but I still think you have to go back to BEA-97. We took such dramatic cuts during that period that still there is a concern about if you do anything too adverse to hospitals, you are going in some way upset the system, some way, somehow. So I think people are very careful now about how they approach the hospital side of this. So I think they are sensitive to the issues and I think they [indiscernible]. And keep in mind, even though the for-profit industries had fairly decent margins, the not-for-profits, the other thousands of hospitals that are not-for-profits have 2% or less margins, they represent the vast majority of hospitals in this country. We’re only about 15% or 16%. It’s that group that’s having difficulty as well. So I think you put all that together, I think they are just cautious about how they approach it.

I guess the other thing is, again, I guess we continue to be astounded at how you guys are not in sync from an adverse perspective about what your peers are saying. And you guys are old Humana Insurance guys. Is there something in your markets, you pick good markets, or the insurance dynamics are more stable, but is there something, I know you mentioned the uninsured number dropped, but why do you think you are not seeing the volatility in your markets from a bad debt and insurance perspective that maybe some of your peers are?

I think you can go back to our basic model. I mentioned this earlier in terms of the way we’ve tried to develop the Company and trying to be adverse to risk, being the sole provider in 85% of our markets. Again, being spread out in terms of 22 states. We have very standardized centralized business policies and procedures. We’ve been very selective in our acquisitions, we look for markets, and keep in mind, we have not bought any for-profits, we’ve only bought not-for-profits, the 48 or 49 that we’ve acquired since ’97.

We continue to have organic opportunities in terms of growth within our markets and you are beginning to see, not only in terms of volume, but our case mix move up. So we’ve been really careful. We’ve been on both sides of this issue through the years. So we’ve tried to be as careful as we can be in terms of looking for opportunities that we think that we can sustain through good times and bad times or difficult times. I think that makes a difference. I don’t think we’ve overpaid for any acquisitions. I think we’ve been pretty selective and consistent in terms of our acquisition process. I think now we’re beginning to see the dividends from that.

And if you look at this quarter, and you look at our performance, this is our 22nd straight quarter, and most of you all have said ours is the cleanest and most consistent, which we appreciate your comments on, but also it’s full disclosure. I think you get more facts and information out of us. So you can tell where we are at any time.

Sure.

[Del Brennan], [Runts Capital].

In addition to the dilutive impact and the deleveraging impact of converting convertible bonds, what are your primary considerations as to the treatment of those bonds?

Well, as I said, we made no real decision there. It was an outstanding and if the stock price were to move up in a range that we thought we could convert most of the shares, that would be something to consider. We look at our acquisitions and it’s a use of cash, if you were to try to call it for cash, which we have a right to do now, we got the right to do that, but there are so many good acquisitions for us out there. We just think there is a better use of our available debt and cash flow for acquisitions, especially with the pipeline we’ve got. What acquisitions are doing versus going and using it buy the shares out for convertible debt.

Christopher McFadden, Goldman Sachs.

You’ve talked in the past about the positive impact of having change group purchasing organizations and it certainly looks like here in the third quarter we saw some incremental benefits from that, at least from a year-over-year perspective. Could you update us on how you feel like that is going versus the 11.9% you saw in this quarter? Where do you think the trend level is on that particular supply item in the P&L? And then building on that, could you just update us on how you feel like you are doing relative to unit cost economics, orthopedic products? Obviously, you talked about your volume activity relative to inpatient surgical procedures. But I was wondering what progress you are still making incrementally in terms of pricing with the vendor community?

Let me just overall talk about supplies in terms of our process when we changed from our old contract, Broad Lane, to our new contract. And it has taken us awhile, as we said it would, in terms of converting all the contracts and getting back up to our very high level of contract compliance, which we are beginning to get really good compliance in. We are continuing to make significant progress. We said, again, it would take most of this year before you would start seeing the impact of that. But I still think we have plenty of opportunity going forward in terms of improvement in our supply costs.

Yeah, if you sort of look at it and just say a range of about 5 basis points improvement, we’ve got that in plants, surgical supplies, [indiscernible] supplies, radiology supplies, and there is a couple of -- 20 basis points in food. Looking at it on a trend basis, same-store supplies, per adjusted admission, were up 5%, which is a real good performance for us in this industry overall. And I think, as we’ve said, we thought we would see a little bit better in the second half of the year, and we’re seeing that, and that probably will, on a same-store basis, still continue to go forward. Clearly, supplies will go up a little bit this quarter because of acquisitions. Usually -- acquisitions usually have 16% to 18%. We run about 12%. But we had it pretty much in several different areas, primarily in the ones I just mentioned.

That detail is helpful. Quick follow-up. As you are thinking about 2006, and I don’t want to get into a guidance discussion per se, but as you think about 2006, are you anticipating that there is going to be a higher spending in your network for either traditional information technologies or other patient safety-related expenditures? Obviously, very topical in the industry. One of your peers talked about it earlier in the week and I’m wondering whether that’s an investment commitment that you’re reviewing for your network?

We’re all looking in terms of what we need to do from a patient safety standpoint and electronic medical records standpoint, all those things, in terms of moving forward. And we’re beginning the process. I don’t think we will have complete change in our system. I think ours is more enhancement of our current process -- our current system that we have in place.

Built into our guidance for CapEx, we expect spending more money in 2006 for IS. Not a substantial amount more, but there is -- expect to spend more money, both for some software and some hardware, which will be in the CapEx guidance.

Kenneth Weakley, UBS.

Just a couple of follow-ups. You had mentioned a new headquarters. How much are you spending there for your new plant?

Well, next year, in the guidance, is $35 million, and probably around $30 million of that would be for the corporate headquarters in ’06. The overall number is about $35 million. And basically we’ll make rent because the depreciation and amortization in 2007.

Okay. And, Wayne, I was wondering if you had any comments or commentary on what is called DRG recalibration? You touched upon it just briefly, but what are your thoughts about that happening, actually happening next year?

Well, I think we’ll clearly see a little impact, but it’s fairly immaterial in terms for us. It’s less than a few million dollars. So it’s nothing that -- and besides, there are offsets to that when you kind of look at everything else. So, from our perspective, I think it’s problematic, but I don’t think it’s one of those issues that we’re going to spend a lot of time worrying about because it’s not that large in terms of dollars.

Do you think it happens?

Well, the number of times I’d say well, you are going to go through that [indiscernible] and that’s built in our 2.5% expected.

I think it will happen.

I’m sorry. Say it again. You think it will or it won’t?

I think it will happen because I think it’s moving forward. It may not happen to the extent in terms of the total number, but I think it will happen.

So the idea is to move from a charge base to a relative cost base formula to calculate the relative value within the DRG, correct?

Yes. And that has a tendency probably to move payments away from high case mix procedures to low case mix procedures, which are probably -- possibly increase the reimbursement for non-urban hospitals. We’ll see.

Until you kind of work -- if you call, historically, you always have to go through the details of these things. But what might happen to us is that it might be helpful to us in some instances where we don’t get the high-end DRG anyway, but we might get more for the lower end, if cardiac DRG, for example.

Very good.

Gary Taylor, Banc of America.

Just for the record, I always refer to you as the ex-Humana guys, not the old Humana guys. So I think John misspoke. So you ought to jot him off a little line on that.

I think both are probably [indiscernible].

I wouldn’t say that.

One of us is older than the other.

I jumped in late, so I apologize if this was already asked, but I have two quick questions. One is, have you contemplated any changes to your administrative discount program? Do you see any need to do that?

Our administrative discount program today is more one that’s used for our collection -- collectors of our own collection company, so probably we don’t have any massive changes. You might be a market or two occasionally where we do something, but right now we’ll let our collection agency staff have the opportunity to negotiate some discounts to get payments or get payments in full. That’s running about 2% of revenue. It’s up a little bit year-to-date, but not a substantial amount.

And then my other question is when I look at your allowance, as a percent of gross receivables, it’s up nicely sequentially, 170 basis points. It’s about up 170 basis points year-over-year. I think you have started providing some aging of AR in your 10-Q, but I don’t think we’ve seen any of it yet. So I guess the question is, is that increase in allowance associated with a commensurate increase in uninsured receivables as a percent of total receivables?

The uninsured receivables will be up a little bit, as a percentage of total receivables when you get the Q information. That moved up a little bit, which means we’re also in our collection company, we have to decide do we send it to an outside collection company or do we collect it ourselves? And we are [indiscernible] spend a little more time collecting some of the receivables ourselves because we think we’re getting better results. We’re always looking for ways to go through a collections [indiscernible]. Maybe change it a little bit. So, as a result, that has to do with some growth and self-pay receivables, generally over 150 days old that are reserved for.

You used to send the majority of those out at x days and now if you keep more of it on, it’s going to --

We made that change a couple years ago and all the receivables that we’re collecting are in our receivables and reserved for in our allowance. And the allowance was up from $300 to $332 million. So it was up nicely.

At this time, there are no further questions. Gentlemen, are there any closing remarks?

Yes. Thank you for spending time with us this morning. Our track record of consistent quarterly growth and our ability to deliver quality health care service continues to differentiate Community Health Systems and the non-urban hospital market. We believe we are well-positioned for continued success in 2005 and on to 2006. We want to specifically thank our management team and staff, hospital CEOs, CFOs, and CNOs, 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 the 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 will continue to extend our leadership position. Once again, if you have any questions, you can reach us at area code 615-373-9600.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.