Community Health Systems Inc (CYH) 2006 Q1 法說會逐字稿

Good morning. My name is Brooke and I'll be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems first quarter 2006 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to introduce Mr. Wayne Smith, Chairman, President, and CEO of Community Health Systems. Thank you, Mr. Smith, you may begin.

Thank you, Brooke. 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 results for the first quarter ended March 31, 2006. We issued a press release after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanys 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 with more detailed account of our financial results.

Before I begin, I'd like to read the following statement. Statements contained in this conference call regarding expected operating results, acquisition, transactions [other/against] are forward-looking statements that 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 made based on management's current expectations or beliefs, as well as assumptions made by and information currently available to management. These are summarized under the caption Risk Factors filed by Community Health Systems, Inc. with the Securities and Exchange Commission, including the Company's annual report on form 10-K and current reports on form 8-K. These filings identify important risk factors and other uncertainties that could actual results to differ from those contained in the forward-looking statements.

We're very pleased with Community Health Systems solid performance for the first quarter of 2006. While volume was a challenge due to difficult comps and lack of flu and respiratory admissions, solid revenue growth and successful expense management in tandem with our focus on our effective standardized operating platform, a proven acquisition strategy, and successful physician recruiting, all worked together to allow us to surpass our earnings per share objective. This is the 24th consecutive quarter that we have met or exceeded street estimates.

Net operating revenues for the quarter ended March 31, 2006 totaled $1 billion, a 13% increase over the prior year compared with $908 million for the same period last year. EBITDA was $158 million or 10% increase over the same period a year ago. Income from continuing operations was $57 million versus $49 million for the first quarter of last year, an increase of almost 17%. Earnings per share from continuing operations increased 11.5%, $0.58 per share versus $0.52 per share as reported for the same period last year. Had SFASB-123R been adopted for 2005, EPS would have increased 15%, $0.60 versus $0.52.

With that, I would like to review some of the accomplishments for the quarter. First, our same-store admissions were down 2.4%. We had a very difficult comp for the first quarter due to the strong flu and respiratory season experienced in the first quarter 2005. Same-store adjusted admissions decreased 0.9% for the quarter. Same-store net revenues increased 6.8%.

Community Health Systems strong leadership in the acquisition arena is reflected in our ability to identify and selectively acquire not-for-profit hospitals that fit our criteria, On March 1, we acquired Forrest City Medical Center in Forrest city, Arkansas, a 118-bed acute general care -- general hospital with trailing revenues of approximately $18 million and EBITDA margin in the low single digits. This hospital was attractively priced with solid upside potential and is located about 40 miles west of Memphis, Tennessee.

Additionally, on April 1, we acquired two hospitals from the Baptist System; DeKalb Regional Medical Center, a 34-bed hospital in Fort Payne, Alabama, and Cherokee Medical Center, a 60-bed acute care hospital in Centre, Alabama. These hospitals are located approximately 90 miles northeast of Birmingham, combined trailing revenues of $60 million with trailing EBITDA in the mid single digits.

We also have two outstanding definitive agreements to purchase hospitals in Waukegan, Illinois, $140 million in revenue, and in Ponca City, Oklahoma, another $40 million revenue facility. We have one letter of intent and our pipeline remains robust.

We recruited 133 new physicians for the quarter, compared to 107 physicians recruited in the same period a year ago. Again, over 60% of those physicians were specialists. And our outlook for 2006, with a target of 550 physicians.

As we disclosed in our 10-K, the Department of Justice has advised us they're investigating Medicaid matching or supplemental payments in three states; Arkansas, New Mexico, and South Carolina and affects seven hospitals. As you know, over the past few years, there's been a great deal of legislative and administrative inquiry into the way states apply for and distribute Medicaid funds. We have provided the documents the Justice Department has requested and based on our review, as well as outside consultant's review of the documents they requested in research of applicable laws and regulations, we do not believe we have made any inappropriate requests for payments or that we have received any inappropriate payments. This inquiry is still at an early stage, so we'll continue to cooperate with the government in this matter.

The Company's updating guidance; revenue is $4.25 billion to $4.275 billion, an increase of 13 to 14.4%. EBITDA is $620 to $645. Projected EPS for 2006, after equity-based compensation, will range from $2.16 to $2.21. Our same-store volume guidance will be 1 to 2%. These changes reflect a solid financial performance for the first quarter, somewhat softer volume, and the addition of acquisitions.

At this point, I'd like to turn the call over to Larry Cash to provide you with a summary of our financial results.

Thank you, Wayne. We are very pleased with the financial and operating results for the first quarter. Our consolidated admissions growth in the first quarter increased 4.6% compared with the same period last year. Adjusted admissions, which factors in outpatient businesses, was up 6.4% over the first quarter of last year.

Our same-store admissions decreased 2.4%, against a really tough comp of 4% that included a strong flu season of first quarter 2005. Same-store adjusted admissions were also down 0.9% for the quarter. It should be noted that January of 2006 was the warmest January on record and significantly warmer than January of 2005.

As we previously discussed, our first quarter continued to be affected by selected 301 days state classification for admission to outpatient. Additionally, there was less flu and respiratory illness in this quarter. Flu and respiratory admissions dropped 2600; flu was down 20% and respiratory was down 10%. This quarter, the same-store admissions declined cost of -- the same-store Medicare declined costs -- the same-store decline. Considering these two items, volume would have increased approximately 1.5% compared to 2005.

Net revenues in the first quarter increased 13% compared to the same period last year, or $1.027 billion versus $908 million. As a same-store basis, net revenue increase 6.8% with inpatient revenue up 4.7% and outpatient revenue up a strong 8.8%. Our inpatient, outpatient surgery volume was up 5.4% for the period, fueled by stronger growth in out-patient surgeries. Same-store net revenue for adjusted admissions increased 7.8%. For seven of the eight quarters in 2004/2005, we have had revenue for adjusted admission growth above the industry average. Our Medicare case mix also increased approximately 3.5%, again, through the strong surgical volume. Our all-payer surgical case mix increased 4.5%.

We have continued to deliver good EBITDA growth of a 10% increase of $14 million from $144 million to $158 million. EBITDA would have increased almost 12%, excluding the stock-based compensation expense of $3.2 million. On a same-store basis, EBITDA increased $12 million or 8.5% from $144 million to $156 million for the quarter. Same-store EBITDA would have increased 10.6%, excluding the additional stock-based compensation. Consolidated income from operations was $57 million versus $49 million, an increase of 16.7%.

For the first quarter, EBITDA margin on a consolidated basis was 15.4%, a decrease a 40 basis points from a year ago due to the low single digit margins of the acquired -- the hospitals. The same-store EBITDA margin improved 30 basis points to 16.1% compared to the quarter ended March 31, 2005. The additional stock-based compensation expense reduced margin by 30 basis points. For the first quarter, our non same-store margin was 4.2%, so there are significant improvement opportunities in these hospitals. The trailer margin for acquisition of a non same-store hospitals was approximately 3%.

In the first quarter, consolidated operating expenses as a percentage of net revenues were up 40 basis points due to the non same-store acquisitions. Consolidated payroll of benefits were flat. Bad debt increased to 10.5%, up 30 basis points. While supplies decreased 40 basis points. And other operating expense increased 50 basis points, primarily due to the recent acquisitions. Utilities did increase, both same-store and consolidated, 20 basis points. On a same-store basis, total operating expenses improved 30 basis points, driven by improvements in payroll and benefits and supplies, offset by increases in bad debt and other operating expense.

Each hospital has a charity care policy that generally provides free care for those patients whose household income ranges from 150% to 200% of the federal poverty level. Also an administrative self-pay discount may also be provided on a selected basis. Consolidated self-pay revenue decreased 110 basis points for the quarter. For the quarter, same-store self-pay admissions increased 40 basis points as the percent of total admissions, and 4% compared to the same period a year ago. Sequentially, self-pay admissions as a percent of admissions decreased 30 basis points.

Consolidated bad debt is 10.5% for the quarter, up 30 basis points from a year ago. The lower Medicare revenue from less flu volume and an increase in self-pay revenue from the TennCare disenrollment contributed to the overall bad debt increase. Our 2006 bad debt guidance remains at a range of 10.2 to 10.5%. Our combined consolidated bad debt, charity and administrative self-pay discounts divided by adjusted net revenues of 30 basis points for the quarter, sequentially, 16.8% versus 16.5%, and up 120 basis points on a quarter-over-quarter basis.

Consolidated cash receipts were 102% of collectible net revenue for the last 12 months, ended March 31, 2006. Total AR days were 61 at March 31, 2006, unchanged from December 31, 2005, and were up two days from March 31, 2005. The [inaudible] accounts was $341 million or 32.8% at March 31, 2006.

Community Health Systems continues to have a favorable payer mix. For the quarter ended March 31, 2006, consolidated net revenue by payer source was broken down as follows; Medicare, 32.1%; Medicaid, 9.3%,; managed care, 23.9%; self-pay, 11.7% and private and other, 23% of net revenue.

Our cash flow from operations for the quarter was $91 million versus a very strong $149 million for the first quarter of 2005. The first quarter cash flow was impacted by the following; a $31 million increase in AR due to flat AR days in 2006 compared to four-day drop in the first quarter of 2005 from $63 to $59, and the lack of a provider number on our recent acquisitions of about $6 million, additional income tax dispersements of approximately $16 million, reduction in accounts payable of approximately $15 million with some of that related to some payments of accounts payable for an acquisition, reclassification of $4 million tax benefit for option expense to the financing section of cash flow.

Our percentage of cash from operating activities to EBITDA was approximately 57% for the quarter, versus 72% for calendar 2005 and 66% for 2004. The cash flow for the first quarter of 2004 was $61 million. Our guidance for net cash provided by operating activities is $430 million to $450 million, or approximately 70% of our guided EBITDA.

Total capital expenditures for the quarter just ended were $49 million, or about 4.8% of revenue. Our total capital expenditure guidance for 2006 is now $250 to $260 million, or approximately 6% of net revenue.

Balance sheet cash at March 31, 2006 was approximately $112 million. At the end of the quarter, the Company had available credit of $400 million. In addition, we have a $400 million accordion feature within the term loans that we believe we have sufficient availabilities to fulfill our acquisition plans.

Looking at the balance sheet as of March 31, 2006, we had about $523 million in working capital and approximately $4 billion in total assets. Our debt to capitalization for the quarter ended was 47%. Our fixed rate of debt is 81%.

As I mentioned on our fourth quarter call, our 4.25% convertible debt was converted at the end of January. The shares related to a convertible debt were already in the earnings per share calculation, but this transaction has reduced our interest expense in the first quarter. The stockholder's equity was almost $1.8 billion at the end of the first quarter. In the first quarter, we completed the sale of our one hospital held for divestiture, we've held it since the second quarter of 2005.

For the quarter, earnings per share from continuing operations increased 11.5%, $0.58 versus $0.52. And the income of continuing operations was $57 million versus $49 million a year ago. Again, the earnings per share would have been increased 15%, considering the effect of those additional stock-based compensation expenses of $3.2 million.

Wayne will now provide a brief recap.

The first quarter marks a very strong start to 2006, with over $1 billion in quarterly revenues for the first time in Community Health Systems' operating industry. In addition to our impressive top line growth, we have compiled an enviable track record of consistently meeting our earning targets. We expect our growth to continue as we improve hospital operations, add and enhance services and recruit physicians to stem out migration. Our acquisition strategy will continue to be a strong component of our success, enabling us to grow our operating base and extend services into our new communities.

With that, I'll now open the call for questions-and-answer period. And if you would like to talk to us after the call, you can reach us at area code 615-465-7000.

[OPERATOR INSTRUCTIONS] Your first question comes from Glen Santangelo with Credit Suisse.

Hi. It's actually Ralph Giacobbe in for Glen. Just on the admission front, if you could provide any details around what you're seeing by geography? Are there any markets where you're seeing more challenges versus others? And then just in terms of your same facility per adjusted admit, up 7.8% in the quarter. Obviously it's been strong for some time now, I guess I'm just wondering -- sustainability of that number as we come up on tough comps with the mix, et cetera. Any comments around that would be helpful, as well. Thanks.

On the first issue, in terms of admissions, this is across the board. It was not located in any particular facility, one way or the other. It was pretty much across the system. We're convinced, if you listened to Larry's commentary earlier about what it is composed of, basically flu and respiratory. As you know, our surgery was up pretty strong. So we don't look at this -- as we've always said about the flu, it's not something systemic, it's something seasonal. And we may or may not have flu to contribute. Our comps were pretty large from last year at 4%.

I think we have sustainability in terms of our revenue per admission growth because of the fact we still have a lot of room left, in terms of in opportunity for volumes in our markets as well as intensity and improvements. As you can see, we had a big improvement in our case mix again this quarter. We've had good improvement over the last three or four quarters. But if you compare us to other people in the industry, we think we still have a long way to go. And we're making headway, as you can tell from our physician recruiting -- it's still very strong and positive for this year. I think we still have the ability to grow substantially in our markets, as we kind of look to the future.

Larry, do you want to kind of break down again -- ?

If you look at the revenue per adjusted admission, you would probably Medicare would be somewhere this year in the 2 to 3% range from a pricing perspective, Medicaid maybe 0 to 1%. Managed care, 5 to 7%. Clearly, Medicare case mix and surgical case mix was pretty strong this quarter. And again, with having the flu in the first quarter of 2005, that helped us get to 3.5%. If you go back, as Wayne said, we were up 2% in the second quarter and third quarter of 2005. That would probably be -- in the 1 to 2% range would be more likely to occur going forward. Which would probably think is revenue per adjusted admission would be in the 5 to 6% versus the 7 to 8% going forward, but still real strong.

Great. Thank you.

Your next question comes from Erik Chiprich with Harris Nesbitt.

Good morning. Question on the bad debt trend. Are you still battling the bad debt across all regions? Or are some better than others? And the 10.5% in the quarter, that was at the higher end of your guidance. What gives you comfort that you can stay in the 10.2 to 10.5% range for the year? Thanks.

If you look at the bad debts -- the self-pay revenue was actually down a little bit over a year ago and it's trending pretty good. And the self-pay admissions while up slightly, it decreased as percent of admissions. The other thing in the quarter was -- not having the strong Medicare volume, which caused the decline in our same-store business -- brings your bad debt percentage up. The TennCare disenrollment started happening in the third quarter of 2005. So we'll start anniversary that here in about four to six months, so that should give us a better comparison. We're at the high end there. We still got a lot of opportunity on point of service, it was up nicely this quarter around 8 to 9%. We've still got room to grow on that.

We think we still have an opportunity as we continue to work on collections and -- also our [inaudible] doing better on our markets. We'll stick with our 10.2 to 10.5%. And most of the increase, from a geographical perspective, was in Tennessee. We've clearly got some other states that are higher, but Tennessee is where we saw most of the increase this quarter.

We don't see this as some systemic change in bad debt across our facilities or some change in economy. Our is fairly easy to explain. And as you, ours has been fairly consistent and easy to analyze for every quarter. Thank you.

Thanks [technical difficulties - audio dropped off] what your long-term outlook is for admission growth? Thanks.

I think the guidance, which was 1.5 to 3%, we lowered it to 1 to 2% as a result of the first quarter. And we have generally had guidance in the last couple of years in the 1.5 to 3%. So long term, you'd probably think -- we'd think we'd do in the 1.5 to 3%.

Yes.

Thank you.

Your next question comes from Ken Weakley with UBS.

Thanks and good morning, guys. I was wondering, how do you establish your target CapEx as a percent of revenues? How do you know it shouldn't be five or six or two or three? Can you walk me through the strategy there. And, I think it's come down a little bit over time, it was over five four of the last six years. But I would think, as you're going forward, you may have to bring that up to get the higher intensity care into the hospital.

Just in terms of process -- we analyze every facility and look at it in terms of the thing that we think need to be done. Historical, we've done a lot of different things. For example, early on, we looked at cat scanners and MRIs and decided which facilities had them and didn't have them, all those kinds of things. We went through a process where we evaluate all our facilities and put in the revenue generating. And that's really the key. We continually look at those opportunities. As you know, we are a little reluctant to buy hospitals where we have to build new facilities. We try to stay away from those as much as we can, to sort of preserve our CapEx.

But generally, I think you will find that we've gotten a good return in terms of the things we've done. If you look at this year, it's around items like -- emergency room has been big issue for us for a long time because of the fact that's a place where we get a lot of our admissions and intensive care units. We're doing a little more in term of day surgery and a little more in terms of outpatient surgery. We're very focused on the return to make sure that we're going to the return. And we look at those retrospectively, as well, to make sure that we're doing a good job.

If you go back for the last couple of years, it's been in the 4 to 5% range, this will be up around 6%, which I think is still less than industry average, which is probably 7 to 8%, which may be a part of your question. We've got plenty of good projects if we needed to spend it -- we do balance the spending on acquisitions versus the spending of that. If, by chance -- which we don't it will be that way for some time -- if you didn't have acquisitions, there are plenty of other projects which could drive growth. It's sort of a number we picked that we think works well for our cash flow spending and looking at our debt to cap and looking at our debt to EBITDA. But usually good projects get done -- it may take a year longer than some people may want. But we've got a lot of good -- and still a lot of good projects we can turn to to the future.

If you had to guess, what percentage of this year's CapEx is spent on hospitals you've acquired in the last three years? Is it about all of it? Or you still spending on some of the older facilities?

We're still spending some on some older facilities. Just in 2005 spent the money; one in Blueridge, Georgia, which has been around awhile, and we spend some money down in Lancaster, South Carolina. We're spending some money on one in Louisiana -- Louisville, which is a good project. There are still opportunities there. Keep in mind, we only capture 50% of available admissions and 40% of the surgeries. Even some of the markets have been here for quite some time have got a lot of opportunity for us to improve the services.

And strategically, we continue to look for opportunities. If we think -- in one of our markets which has good growth, in terms of population, that we need to do something outpatient surgery-wise, we'll do that to try to prevent anybody else from entering the market. We don't have a lot of those kinds of markets. But in some of the markets in Pennsylvania and some of our bigger markets, we're now looking at some outpatient surgery facilities. But we think they have a great return.

Wayne, are you seeing anything out there in terms of labor -- are there hospitals where labor margins have worsened? And I'm wondering about turnover and -- obviously, there's a relationship between the economy and your ability to both keep and retain good help. So walk us through what's happening in terms of that.

If you look at this quarter, our labor costs were down. We continued to grow our labor costs at 4, 4.5%. We're not having the issues that we had back even two years ago or so, when there was a lot of discussion about nurses and nurse retention. We've done a lot on nurse retention. Our retention is actually up, in terms of our nurses. So today, we're not seeing the kinds of issues. And I don't know why that is. I don't know why it has changed so dramatically, but there seems to be more nurses.

One of the things we're doing -- just to look out in the future -- is that we have developed, over the last couple of years, an online nursing program, where nurses can actually go from being an orderly or an aid to an RN or an LPN. And actually continue their job in our facilities and use that as their practical and do the didactic portion of it online. We're just kind of getting start with that now -- after it started getting approvals around the states. But we're pretty excited about the opportunity, now. to generate our own nurses in the future. Which would be a lot less expensive for us than using all these outside services.

So trend-wise, we seem to be doing fine. We don't seem to be having any great difficulties. And we're not having any trouble, as far as I know, recruiting. Periodically, we might have one or two issues around a particular specialty like an OB nurse or an intensive care nurse, but nothing of any substance.

Very good. Thanks so much.

Thanks, Ken.

Your next question comes from Kemp Dolliver with Cowen and Company.

Thanks and good morning. One thing that jumped out at me with regard to the physician recruiting statistics is your Q1 growth rate -- recruited physician is about 24% against your target of 3%. Is there something that's going to be different about the ebb and flow of your physicians coming online -- coming to your markets this year? Or is there -- are you just being conservative on the target for '06?

Well, we're up quite a bit. The 107 was a little -- versus a year ago -- was a little less than we would normally would recruit, when you look at it over the last couple of years. 133 is pretty strong. It was a little bit more than we probably would have thought it would have been, but we don't see a reason to change the target of 550. So if we continue to have -- and most of them come in the third quarter, when they come out of the residency program. So it does look like we're off to a good start. I think we had a few more start in January and February, versus sometimes they start before the first of the year -- last year.

The good news for us is that, again, we're not having a lot of difficulty in terms of recruiting physicians. We had a good year and a strong year last year and it looks like we're off to a terrific start this year. And as we've said over and over again, about 60% plus of these are specialists, which goes to our issue about improving our intensity level and improving our case mix. So this is working pretty well.

I think last year, we had a little stronger fourth quarter, which drove it up at the end of the year, also.

And retention -- I assume that's been stable, or any changes there?

No, it's been fairly stable. The thing that's helped, in terms of stabilizing that -- I wish we could say it's all the good things we're doing, which we are doing a number of good things -- some of which have to do with malpractice over the last couple of years and the physician's reluctance to move because they have to pay off their tail or whatever it might be, in terms of issues around malpractice. That's helped us a good bit. Our core group is fairly stable.

Okay. Second question just relates to one-day stays. You've had modest volume pressure there. Are you at a point where you'll start to anniversary the payers who have made these changes or their new payers who are implementing similar changes?

Some of these payers we're going to anniversary. And we should anniversary some in this coming quarter. It seems like there is new payers replacing. If you look at one-day stays over the last three or four years, the percent growth has slowed down, which has of course, caused some pressure on admissions, because it's a certain percentage of admissions that's slowing down. So I think it probably will continue. And it's probably 10 or 12 hospitals that drove this number, and part of new hospitals and new payers driving it in the future.

That's great. Thank you.

Thank you.

Your next comes from Adam Feinstein with Lehman Brothers.

Good morning. This is [Raj Gamore] sitting in for Adam Feinstein. I have a couple of questions here. Volumes were weak in the first quarter mainly due to weak flu season, do you see volumes coming back up this quarter.

By giving out a guidance of 1 to 2% for the year and being down 2.4% for first quarter, we're in essence expecting the volume to improve the next three quarters. We don't give out quarter-by-quarter guidance, but we are expecting the next three quarters to be better than the first quarter.

All right. Also, can you provide some color on how the proposed DRG reforment will effect you?

It's a little early in terms of what the DRG recalibration might mean. Generally speaking, we think it'd be relatively positive when it's all said and done. We've said this for the last couple of quarters looking at Medicare in general, the Medicare looks pretty positive to us in terms of being stable, as far as reimbursement is concerned. If there's anything we would think that the 2007 numbers would be better than 2006 in total. But it's a little early to tell in terms of how the DRG would impact us. But generally speaking, it should be a positive -- slight positive.

All right. That's helpful. I have one last question, it's again related to the bad debt. And you mentioned that most of the bad debt was related to the changes in the TennCare program. And can you give us a sense of -- are you expecting more people to come off of TennCare in the next few quarters? And also, I'd like to get your views on the recent federal government requirement that is requiring all these citizens to sign up for Medicare if they need a benefit, so it's documentation of citizenship. And there's some speculation that there'll be a lot of people coming off of this Medicare program because of documentation requirements. And can you give us, like, how is this going to affect you?

I think it's a little early in terms of documentation issues for us to really understand where it might impact us. I don't think it will be a big impact in Tennessee. And I think -- we're probably close to where we're going to be in terms of TennCare. But I view that in this state, even though TennCare is problematic, the economy is so robust in Tennessee that this problem will get resolved. The Governor is working on it so sooner or later the problem will get resolved and this will be less of an issue going forward, but maybe not this year. It will clearly be an issue for this year until it anniversaries.

There's been no enrollments for what they did in the third quarter of 2005. And those numbers should not -- and I think, as Raj just said, there's some talk about possibly adding some of these people back. As far as the -- requiring the passports or other eligibility -- birth certificates, if anything, that's probably going to slow a little bit of the payments down. And it could have some effect on that, but that perspective is so early to now. And they don't have the rules and regulations out on how that's going to be implemented this summer.

Thanks. One last question before I jump off. One of your peers mentioned that they saw weakness in cardiac trends in [inaudible] markets. Do you experience similar trends in your markets?

No.

Well we don't have the five open heart programs. And, so we don't have the volumes that other people -- we just want to -- it's an opportunity for us to increase intensity there, but we don't have that kind of volume to see that negative hit.

All right. Thank you very much.

Thank you.

Your next question comes from [Mike Feringella] with Merrill Lynch.

Hey, guys, good morning. Larry, just one quick question for you. Looks like you're ahead of schedule on acquisitions. Just trying to understand how the funding might work throughout the year. Will you have enough cash and free cash flow, or do you think you'll need to borrow to make that all happen?

I think we've got a fair amount of money now in the bank, but based on what we've got now and if we do the 7 -- between the 5 and 7, we're could end up borrowing a bit of money.

Do you think leverage ticks up? Or no?

Probably not. Not materially.

Not materially. Okay, thanks, guys.

Thanks.

Your next question comes from Gary Taylor with Banc of America Securities.

Good morning. Hey, Gary. Thanks for all the details in the slides. Slide three is my favorite. You're supposed to laugh at that. I have one question about non same-store EBITDA margin. In the fourth quarter, you showed that at 5.7% and I think this quarter was 4.2% -- and I don't know if maybe that was not adjusted for the discontinued ops from a year ago. But I'm just wondering -- it looked like the only thing that came into same-store would have been just a month of Forrest, Arkansas -- and it didn't look like anything went out. So is there just seasonality? Or just impact maybe of that discontinued ops number? Or is there just perhaps noise in it?

Well, Chestnut Hill did come out of non same-store and the same-store recorded. And the first quarter did get restated for -- we put Lubbock, Texas in discontinued in the second quarter, so there is some adjustments that took place for that. But you would have Chestnut Hill coming out March 1 for non same-store to same-store. And then Forrest City, which is a lot smaller.

So Chestnut, theoretically, was running above that 4.2% level and hurt the non same-store numbers when it came out?

When the non same-store numbers were at 4% were a little bit lower. And there are some opportunities there to be better and one of of them, of course is, some of the hospitals.

Okay. I guess, maybe I'm not asking it well. Outside of the movement of hospitals in and out of that non same-store component, was there any material deterioration in margins sequentially? Or is it primarily movement of hospitals in and out of that?

There was one of the hospitals we still a lot of opportunity to do. Could have gotten a little -- less results in the first quarter of '06 than it had in 2005. So, it's one of our non same-store hospitals. Still got a lot of opportunity for the future.

Okay. Thank you.

Sure.

Your next question comes from Darren Lehrich with Deutsche Bank.

Hi, it is actually Sundeep sitting in for Darren Lehrich. I actually just had a more global question. I was wondering if you could give us your expectation for Part D enrollees as they convert to Medicare Advantage? And if you could just give us some color on what the potential exact of that would be in your markets?

We don't really have very much risk business at all in our markets, we have 1% or something -- less than 1%?

1 to 2%.

So it's a pretty minimal issue for us. So I don't think it's going to have much impact at all, when it's all said and done.

Clearly, if people join the fee-for-service plan, we'll be paid normally what we're been paid. We've done some contract with some PPOs, but not a great deal. And we've done that, generally, at the full Medicare rate we would have gotten otherwise from Medicare. A couple of places we're deemed as the central hospital, so we'll participate with Medicare on that. If you look at it from a market perspective -- most managed care companies will spend their time and effort marketing in an urban area where there is more population to get a better return for their dollars spent for marketing.

And would you happen to know what the differential would be between a fee-for-service rate and the Medicare Advantage rate?

Well, the fee-for-service rate and the Medicare rate -- and the Medicare Advantage rate is what you contracted for. And on the PPO side of what we've contracted for, in most cases, is 100% of the [inaudible] or 100% of what we would have gotten for Medicare under 1 or 2% of revenue, it's generally post what we get from Medicare.

Keep in mind that our markets are different than what you're hearing from the big urban markets. They're not that competitive and we're the only hospital in town in 85% of our markets. So we don't have to do a lot of things that other people have to do because there's a hospital down the street or down the road. So it won't impact us like it will other people, I assume.

Great. Thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from A.J. Rice with Merrill Lynch.

Hello, everybody. Just a couple of questions, if I could ask them. Not to beat the TennCare thing to death, but could you give -- how much of that year-to-year adversely impacting bad debts? Do you have a sense of the actual basis point impact it's having, maybe?

It's in the 20 to 30 basis point increase of our bad debts. Looking at it, it's in the $2 to $3 million. If you look at it, the self-pay admissions, I think -- in Tennessee were up about 140 admissions out of a total of 200. So it was 70% of the increase in self-pay was in Tennessee. If you look at the last couple of quarters, it was in the 100 admissions. So it's clearly grown a little bit over what it would be, as a result of the disenrollment, but it's not a big number. But it did increase the bad debts.

When you said you'll anniversary that in the third quarter, you'll basically -- it will be a modest or small headwind that you won't face anymore, but it won't necessarily turnaround?

That's correct. Probably in the fourth quarter, it should be comparable to what it was a year ago in the third quarter. A lot of people just started disenrollment. And clearly, some of those people have found other insurance, but it shows up -- it means these people are bad debts and some that have found other insurance, which has keep our -- have been able to grow the earnings nicely with the bad debt increase.

Okay. You referenced the improvement you saw in supply expense, is that continuing to see the benefits of HPG? At this point, are we in the buying group? Or is there other dynamics at work there? And have you realized most of those benefit at this point and you're at a steady state? Or are there more to be realized?

That's pretty much compliance and our ability to continue to focus on compliance. I think we still have a little benefit left. We're getting there. But it's working real well.

Okay. I was just going to ask you on the acquisition comments you made, can you update us from a different perspective; competitive landscape, how that may have changed over the last year in the deals you look at, if at all? And certainly, there's -- unfortunately a number of your public peers that are having issues and maybe sellers. Is your thoughts about willingness to look at those types of assets changed in any way?

The landscape, as you know, some of our competitors are out of the market -- essentially out of the market. They might look at something every now and then. And again, there's a few of the smaller players that are out and around. But by and large, we have a lot of opportunities for us because of our reputation. Our reputation is so strong in the market and we've done well. And we're only buying not for profits, so when you ask us about these other properties that might be around, we pretty much stuck to our straight-forward view of this, in terms of there's so much more upside on the not for profits. And they're so much less expensive than buying something from one of our peer groups. And the pricing seems to be pretty good, all-in-all. We're still seeing good pricing. So we've got plenty to d,o if we just continue doing what we've been doing.

We're having a very strong year, obviously we have six properties or so right now. And as we kind of work through the year, I think there'll probably be other opportunities. So I don't see any reason much for us to change our strategy and take on anybody else's problems. Our models work pretty well, all in all.

Sound great. Thanks a lot.

Thank you.

Your next question comes from Oksanna Butler with Citigroup.

Hi, guys. This is actually [Corrina Sun] for Oksanna Butler. One of your peers highlighted consumer-directed health care as a growing issue, but it doesn't seem like it's been a problem in your market. Can you comment if you're seeing any impact from consumer-directed health care this year in your markets? And on a side note, I also know that you've provided this in the past -- can you please provide your margins by acquisition class? Thanks.

We don't see consumer-driven health care as that big of issue. A large portion of our markets, as you look at what happened last quarter in terms of our admissions being down, most of which was Medicare and flu-related and most of those are Medicare respiratory-related.

And then if you look at consumer-driven, that being the definition of HSA, that's a relatively small percentage of the population, when it's all said and done. That hasn't changed in our markets at all. If you look at copays and deductible -- there might be a slight change in copays and deductibles, but that's not really a big issue for us. We haven't seen the impact. We might at some point in time, but we're certainly not feeling that anywhere in our markets, particularly if you do the analysis on it. Larry, do you want to add anything to that?

Yes. The copayment deductibles are up a little bit, maybe 30, 40 basis points a percentage for our payments are still -- somewhere around 11.5 or 12%. They're not up much, but they are up slightly.

Your answer on the acquisition by class, just just start looking at both the first quarter and end of the year 2005, cause one quarter sometimes has fluctuations. It's around 17% for those prior to 2000, and 17 to 18% for the 2001 class. If you look at the class of 2002, today it's in the mid teens -- 13, 14%. And the class of 2003, 15 to 16%. The class of 2004 would be in the 16 to 17% range. And the class of 2005 --it's real early, it's single digits. So there's still a lot of opportunity there in the class of 2005 and the other classes to keep moving up. And we think most classes can get in the high teens.

That's great. Thank you very much, guys.

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

Yes, thank you. Thank you for spending time with us this morning. Our strategic objective is clear; deliver consistent results and ensure that our hospitals achieve a position as the dominant health care provider in their respective markets. We are very pleased with the trends in our business, as we continue to build our portfolio of hospitals and extend our business model to more communities. We look forward to another successful year at Community Health Systems.

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 quarter. We remain focused on our business strategy and improving our results.

Once again, if you have any questions, you can reach us at at area code 615-465-7000.

Thank you. This concludes the Community Health Systems first quarter 2006 earnings release conference call. You may now disconnect.