Community Health Systems Inc (CYH) 2007 Q3 法說會逐字稿

Good morning. My name is Julieanne, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Community Health Systems third quarter conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Wayne Smith, Chairman, President, and Chief Executive Officer of Community Health Systems. Please go ahead, sir.

Good morning, and thank you for joining us for Community Health Systems quarterly conference call. Larry, our Executive Vice President and Chief Financial Officer with on the call with me today. The purpose of this call is to review our financial and operating results for the nine months ended September 30th, 2007. We issued a press release and an 8-K after market closed yesterday that included our financial statements.

To 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 with a more detailed account of our financial results. Before I begin I would like to read the following statements. Statements donated in this conference call are forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from those statements. Such forward-looking statements are made pursue tonight this the safe harbor of 1985 and are made based on management's current expectations or beliefs as well as assumptions made by any information currently available to management . You will refer to documents filed by Community Health Systems, Inc. with the Securities & Exchange Commission 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 other uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

As you know, this is the first quarter that we have reported our combined operations with Triad. Our third quarter and year to date console dated I results included the Triad numbers from the acquisition date of July 25th, 2007. The 2006 consolidate third quarter and year-to-date numbers represent last year's performance of CHS only.

Our same-store results reflect the Triad's performance as of August 1st for both 2007 and 2006, as well as CHS. We believe that our same-store matrix are more meaningful since this matrix represent an equivalent comparison. The same-store numbers reflect some of the synergies discussed after the deal was completed.

Today, we will focus on the same-store matrix during the call and we will not be discussing specific separate performance for either company. Volumes continue to be a challenge for the quarter, our same-store admissions decreased 3%, Adjusted for certain appropriate item, same-store admissions would have been down 0.7%. On a year-to-date basis, same-store admissions were down 1.2%. Again, adjusted for certain items,same-store admissions would have increased 0.1%. Volume was down slightly more in our hospitals and the facilities recently acquired from Triad.

Our senior operating management and I believe that our volume decline is not related to our acquisition of Triad hospitals or any integration or conversion issues.

Revenues for the third quarter -- revenue for the third quarter was $2.35 billion, same-store revenues up 5.7%, $2.13 billion versus $2.02 billion in the third quarter of '07. EBITDA for the third quarter of '07 was $303.6 million, income from continuing operations was $0.17 per share compared to $0.10 per share for the third quarter last year. Excluding the early extinguishment of debt related to the refinancing of our credit agreement, EPS would have been $0.35 per share.

Net operating revenues for the nine months ended September 30 totaled $4.8 billion, an increase of 50%. EBITDA for the nine months ended September 30, 2007 was $645.8 million. up 58%. Income from operations for the nine months ended September 30, 2007 was $124.4 million or $1.32 per share.

On another issue, as you will see in our third quarter 10-Q, we're updating a legal proceeding item that -- from our other Qs and Ks. The Civil Division of the Department of Justice notified us in a letter dated October 4, 2007, that based on preliminary investigation which started in February 2006, it believes that three of our New Mexico hospitals would have caused the state of New Mexico to submit false claims for federal reimbursement in violation of the Civil False Claims Act. The payments received by these hospitals are part of the New Mexico's state program to access and distribute supplemental Medicaid funds that are used by these hospitals solely to fund indigent care. The DOJ has invited us to meet with them. At which time, we will present our position that the company has not violated any Civil False Claims Act and the lawsuit by the Department of Justice will be completely unwarranted. We expect to make the presentation to the DOJ prior to the end of the year.

With that, I would like to review some of the key operating accomplishments for the quarter.

First, the company recruited 558 new physicians for the first nine months compared to 454 recruited for the same period a year ago. Our standardized, centralized approach to physician recruiting and practice development increases utilization by reducing the need for patients to travel outside their communities to obtain health care services,. We believe there are strong opportunities once we have implemented our process in our recently acquired hospitals.

In addition to the acquisition of the Triad hospitals, we have acquired two other hospitals this year with annual trailing revenue of $290 million and trailing margin in the low single digits. We also have one outstanding definitive agreement to purchase two hospital system in Spokane, Washington at a very attractive price.

While we continue to lead the industry in selectively acquiring non-urban hospitals in attractive growth markets, we expect to be out of the acquisition market for the next 18 to 24 months.

We're also providing our initial guidance for 2008. As has been our practice, we have provided fairly detailed guidance. Annual same-store volume growth is expected to be in the range of 0.5% to 1.5%. Our projected revenue range for 2008 is expected to be $11.8 billion to $12 billion. EBITDA is expected to be from $1.640 billion to $1.675 billion and projected EPS for 2008 is expected to be in the range of $2.25 to $2.45.

For the first two months of our ownership of Triad we have accomplished approximately 12% of our first year's synergies. Embedded in the 2008 guidance are our synergies for the acquisition in the amount of $150 million. These synergies cover supplies, productivity and overhead, managed care, home health, case management and health information as well as marketing and IT. The above mentioned items have been included in our 20008 earnings per share in the guidance of $2.25 to $2.45.

At this point, I would like to turn the call over to Larry to provide you more detailed

Thank you, Wayne.

Consolidated admissions were 141,847. Third quarter 2007 adjusted admissions were 236,136. Our same-store admissions decreased 0.3%. This is against a very tough combined comp of 3.2% for same period a year ago. When adjusted for service closures, history classifications and new hospital competition in the CHS markets and a decrease in self-pay admissions, we had a decrease of 0.7% Same-store adjusted admissions decreased 0.6%. Again, this is against a tough combined comp of 2.3%.

Same-store, non-government. non-self-pay admissions were flat for the quarter. Same-store self paying admissions decreased approximately 12% year-over-year or 70 bp. And this primarily occurred at about 12 hospitals in 10 different states, with Texas being the largest state.

Net revenues in the third quarter were $2.352 billion, an increase of over 110%. On a same-store basis, net revenue increased by 5.7% with outpatient revenue up 9.2% and in-patient revenue up 2.7%. Same-store services decreased 1.2%. Approximately 60% of the drop in same-store surgeries can be attributed to two new surgery centers in separate locations, one of which we are now investing in.

Same-store net revenue per adjusted admission for the quarter of 2007 versus third quarter 2006 increased 6.3%, $8,534 versus $8,028.

Combined same-store Medicare to case mix declined slightly per quarter with a slight increase in CHS facilities.

EBITDA was $303.6 million, increase of 228% on a same-store basis. EBITDA was $283.6 million, an increase of 27% compared to the same period a year ago.

On a same-store basis and excluding the $65 million change in bad debt, estimate that the Community recorded in third quarter 2006, EBITDA would have decreased $4.8 million or 1.7% for the quarter with a stock-based compensation at about $6 million.

EBITDA margin for the third quarter on a consolidated basis is12.9%, which compares favorably to the combined 12.1% margin for the second quarter of 2007.

Same-store EBITDA margin was 13.3%, an increase of 220 basis points compared to the same quarter a year ago. EBITDA margin decreased 100 basis points when excluding the bad debt adjustment of $65 million made in the third quarter of 2006. For the third quarter, our non-same-store margin was 9.1% and this does include the last seven days of July for Triad.

On a same-store basis, operating expenses decreased 120 basis points. But in -- in -- excluding the bad debt adjustment, they increased 100 basis points. Supplies decreased 60 basis points offset by increases in payroll and benefits of 130 basis points and bad debt of 50 basis points. Other operating expenses were flat as a percent of revenue.

The Triad payroll and benefits accounted for most of the increased quarter-to-quarter due to a favorable benefit adjustment taken in third quarter 2006 in additional payroll cost as a percentage of revenue recorded in the third quarter.

On a year-to-date basis, same-store admissions decreased 1.2% and adjusted admissions were flat. Adjusted per service closures, the statistical reclassification and new competition and the decline of self pay admissions, same-store admissions went up 0.1%,

Our volume guidance for 2008 is 0.5% to 1.5%.

Net revenues year to date increased 50% to $4.8 billion compared with the same period last year. On a same-store basis, net revenue increased 5.5% for the first nine months. Same-store inpatient revenue was up 2.9% and outpatient revenue was up even stronger, 8.4%. On a same-store basis net revenue per adjusted admissions increased 5.5%, and same-store non-government, non-self pay admissions were up 2% on a year-to-date basis. Our same-store surgery volume was down 1.7% year to date. Our Medicare case mix for CHS only for nine months ended September 30th, 2007 was flat.

Consolidated EBITDA for the first nine months was $646 million, an increase of 58%, same-store EBITDA was $603.5 million an increase of 12.1%. Excluding the bad debt adjustment of 65 million in the third quarter 2006, same-store EBITDA was flat at $603.4 million.

Consolidated EBITDA margin for nine months ended September 30th, 2007 was 13.5% and the same-store margin was down about 90 basis points.

Same-store operating expenses, percentage of net revenue for the first nine months were up 80 basis points and excluding the third quarter 2006 bad debt adjustment. Supplies improved 50 basis points offset by increases in payroll and benefits of 70 basis points and bad debt of 60 basis points. For the third quarter, consolidated bad debt expense decreased 520 basis points, 11.9% versus 17.1%. An increase 60 basis points including the bad debt adjustment.

Our combined consolidated bad debt charity administrative self-pay discounts divided by adjusted net revenue was 18% for the quarter and year to date in a same-store basis bad debt was 11.9% or up 50 basis points compared to the same quarter in 2006 and, again, excluding the increase in provision for bad debt in the third quarter 2006.

We did record an on-top adjustment of approximately $10 million in additional bad debt expense due to the policy in place at Triad at the time of acquisition. Given the proximity of the merger this quarter end, we have not yet completed our review of the Triad bad debt reserving policies, as well as Triad's discount policy. This review includes supply and test for Triad's accounts sheet receivable, much like we do our -- or have done on individual on profitable hospital acquisition. We inherited multiple patient accounting systems, has increased the time necessary to analyze un-insured collection rates and they are a problem at the technology of this policy. We are also updating a CHS test. Once this review is completed, we'll perform s one calculation approach, making the appropriate adjustments. Changes in reserve balance or asset values were resulting from selecting a policy. Our methodology could be a material .

We anticipate being substantially complete with this review by the end of 2007, and our bad debt guidance for 2008 ranges from 11.7% to 12.2%. Consolidated cash receipts were 103% of net revenue less bad debts for 12 months ended September 30th, 2007 and did include two months for Triad. Total AR days were 61. At September 30th, 2007.

On a consolidated basis percentage of self-pay receivables to combined total of allowance of applicable accounts as reported in the consolidated financial statements and related allowances or other contractual allowances was approximately 70% at September 30, 2007 versus 65% at December 31, 2006. This increase is primarily the result of allowances for self-pay discounts assumed in the Triad acquisition.

Community Health Systems continues to have a favorable payer mix. For the quarter ended September 30th, 2007, net revenue by payroll source on a consolidated basis was as follows: Medicare 28%, Medicaid 10.4%, managed care and other 50.7%, and self-pay 10.9% of net revenue. On a year-to-date basis the break down is as follows: Medicare 29.2%, Medicaid 10.7%, managed care and other 48.4%, self-pay 11.7%.

Our cash flow from operations for the third quarter was a strong $188.7 million versus $61 million in the same quarter year ago. In cash flow from operations for the first nine months was $404.7 million, compared to $268 million for same period in 2006. The increase in cash flow from operations is the result of an increase in net income, increases in non-cash expenses of $117 million, related primarily to appreciation and amortization and stock-based compensation, and an increase in cash generating supplies, prepaid expenses and other current assets of $13 million, which was offset by outflows related to accounts payable, accrued liabilities and income taxes for about $8 million.

Our 2008 guidance for net cash provided by operating activities is from $750 million to $800 million. Capital expenditures for the quarter just ended were $169.7 million or 7.2% of revenue and year-to-date we spent about $278.5 million or 5.8% of net revenue, which includes the $101 million or about 2% for replacement facilities.

Balance sheet cash at September 30th, 2007, was $119 million, and as of September 30th, 2007, there is approximately $1.150 billion of available borrowing capacity under our credit agreement. Looking again at the balance sheet as of September 30th, 2007, we had $1,320 billion in working capital and $13.4 billion in total assets. Our fixed rate of debt is approximately 68% of total outstanding debt of $9.163 billion as of September 30th, 2007. At the end of September, we were a party to $3.15 billion interest rates swap agreements an increase of $1.6 billion at the end of June 30th of 2007.

As Wayne stated earlier we provided our 2008 guidance, and we want to point out the following items: The 2008 guidance assumes a 5% to 6% increase in same-store revenue. The guidance includes a previously announced acquisition of the Spokane, Washington health system which is expected to occur in the first quarter of 2008. No additional 2008 acquisitions are planned. And also the guidance does exclude the divestitures of several facilities that has been previously announced in the local press.

Our 2008 interest expense were running from 5.8% to 6.2% of revenue. Our bad debt to guidance, again, running from 11.7% to 12.2% of net revenue, and this does not consider any change in CHS self-paid up front discount policy and Triad does have an upfront self-pay discount policy for all hospitals.

Depreciation and amortization is projected from 4.4% to 4.8% as a percent of revenue. The capital expenditure guidance for 2008 is from $775 million to $825 million, including approximately $130 million or 1% of net revenue for replacement hospitals. The upper end of the CapEx guidance is less than 7% of revenue. And just as a point, for the third quarter, compared to the second quarter combined of both companies, the revenue for adjusted admission increased 4% while the operating less bad debts increased only 2%. So, we had a very good expense management in this quarter.

And as Wayne pointed out, we have achieved approximately 12% of our targeted first-year synergies, and more importantly the 2008-calendar year guidance does include 150 synergies in addition to the normal growth that is expected to occur.

And Wayne will now provide a

Thanks, Larry. While we are pleased with the progress made with our integration with Triad in just a few months, there is still much left to accomplish. And our management team will work diligently to integrate this assets. But we are definitely on the right track and for some of you all, we have not experienced any cultural meltdowns. So, with that I would be glad to open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) your first question is from the line of Ken Weakly with Credit Swiss.

Thanks, and good morning, everyone.

I was just curious on -- your pricing stats, obviously, look pretty strong. Can you give a sense of either what you have done differently or what has been -- or what has changed the volume? The pricing I think must have been -- maybe about 7% per adjusted admission, so where -- where is that great pricing coming from given the surgical volume falloff?

Well, the 6.3% for the quarter --

Okay.

Actually 5.5% year to date. So, just look above where your day-to-day. As the admissions drop what usually happens it's less intense admissions --

Okay.

-- especially on the commercial side of the business. Plus, while if you look at our volume growth, we did have flat growth on the non-government, non-self-pay admissions which is your best profitability perspectives. Clearly, self-pay is a bit hard component of the revenue. I think is the fact with the 3% volume growth we have got good growth activity. The surgeries are down 1.2% but actually the better than what we run on the year-to-date and some of the surgical growth was in some outpatient surgery centers that -- usually doesn't take out the highest business.

We continue to have a very good job on the outpatient revenue growth. It was over 9% versus year to date at 8%. So I think the outpatient growth while admissions were not as strong, we did have pretty good adjusted admissions in outpatient growth.

Larry, do you have an opinion on the impact of the, I would say, very DIGs for pricing or profitabilities? I am sure you can forecast, but what specifically --

Overall think the Medicare increase to be around 2%. I know some people think it is less than that. One of the good values of the Triad they have about two-thirds of the hospital are urban and non-urban we were supportive of the third, non-urban two-third So that helped us in that perspective. We got the .6 behavioral adjustment which we have to work to start offset but I think, all in, we should be about a 2% price increase which has it has been a little higher in previous quarters but it is manageable I think that's built in to our revenue guidance for 5% to 6% for 2008.

Okay. In the income statement, the equity in earnings, can you remind me what is in there.?

Yes, we have got a joint venture, 28% or so I think in Las Vegas. We got another joint venture in Georgia. We got one in Arkansas with another group. And they did have a very good quarter. That is pre-taxed. There is some confusion out there. I saw some analysts thought that was an after-tax number. That's a pre-tax number. And that equity is included in our EBITDA, our guidance for 2008. And we put that in EBITDA but we exclude minority interest.

Okay. Thanks so much.

Sure, Ken.

Your next question is from the line of Matthew Borsch with Goldman Sachs.

Yes. Hi, good morning. Could you just talk on the -- to the extent you have visibility on how trends are shaping up preliminarily for the fourth quarter, if you have any view on that?

We usually don't talk about month to month, it is something we have seen the issues, because clearly October is going to be a little better month given the seasonality of what you pick up a Tuesday and drop a Sunday which helps a lot on that activity. And then, of course, you got the holidays coming. Our practice is not to get into month-to-month discussions. We have not seen any flue yet which have are part of the -- most people are aware of, there is some pretty nice weather in most of the markets we operate in. But we usually do not discuss month-to-month trends.

Alright. Fair enough. How about an update on the numbers that you shared, if they have changed at all from the last quarter, you know, on bad debt, I think, you said 70% pure uninsured, 30% coinsurance, and that your collections were running 10% on the first and 50% on the second.

Yes, I think on the CYH, which is where that came from, those are hanging in there, the assumption is a little bit more than that for Triad which is some of the assumptions we're working on to make sure it is right. Triad does have a front self-pay discount which could increase percentage a little bit but the CYH look at that as holding pretty well to cash receipts versus net revenue and bad debts, so still about 103%. So, the 70% or30%, I think will hold and we did work for that. And also our -- I believe our -- was coinsurance has been under based on our managed care analysis that we did -- it has been under about 12% in the payments and they continued that trend in the third quarter.

Got it. And last question here. Can you just talk to what -- you know, what you see is the key drivers for positive same-store admission growth for next year?

Yes. You know Larry has his -- I think he has been through this with some of you all. The issues that we had in terms of volume for this quarter, some have to do with self-pay admission down couple of hundred, closing some services, some more competition in some of our markets. Probably some of it could be a little bit of transition in terms of focus -- but having said all that, I think we're clearly on the right track here in terms of now getting -- we're back now to getting our focus on volume and improving volume.

We concentrated a lot on expenses, just to make sure we have the expenses to start with so we got a lot of work going on that. We now have turned our attention back to the volume side of this. We put some incentive plans in. I think we will see as we look to next year as well. I think we're really more concerned about '08 now. We had a very strong quarter in terms of physician recruiting. We think we will have a big year next year as far as physician recruiting. We have already identified by the Triad facility opportunities for physician recruiting.

We have been working hard on our ER initiatives where we get a lot of our volume as you know. So we feel fairly confident we'll get back on track in terms of volume here. Starting clearly for 2008, we'll see what the fourth quarter brings, but -- and by the way we have gotten great acceptance in terms of medical staffs across the board. They are all enthusiastic about what we are doing. We have brought a lot of resources in to be helpful to the facilities as well as to the medical staff..

So, we feel pretty good about it.

Fantastic. Thank you.

Your next question is from the line of Tom Galluccu with Merrill Lynch.

Thank you. Just first following up on a volume question. Maybe I missed it, but did you talk at all about, sort of, the relative trends in the core Community portfolio versus Triad in the quarter?

No, we really haven't sort of broken that out, even though we just said that our facilities -- CHS hospitals had a little less volume for the third quarter than the Triad facilities. You know, we don't think there's anything significant there. We haven't found any issues there. We have identified -- we have gone by through facility, looked at every physician and admission trends by physicians throughout the facility. We don't see anything there that is systemic that should keep us from moving forward.

Okay.

Tom, most of the adjustments that go from 3% to 0.7% were CYH adjustments and it has one special service closure, there was one hospital closed in the system there in Ohio for Triad, but most of those adjustments were --

Okay. And then just on the investigation, it sounds like you have had some discussions there. Have they quantified at all for you the amount of claims that are, sort of, in question, just to sort of be able to frame it a little bit?

Just let me say, Tom, first that we have reviewed all activities in our hospitals related to this investigation.. We don't believe that the company or any of employees or officers have violated the Civil False Claims Act and we clearly intend to make these points and defend this vigorously if we have to go to court,.So, we don't think that this is really, you know, a problem for us but we'll just have to deal with it. Whether we have to go to court, we don't know what they'll end up doing. I think, Larry, have you quantified this?

I think we -- in previous filings which stated -- theres were three states which right now this focuses on one state in our SEC filings we quantified it was 30 basis points of overall net operating revenue for 2006 which -- that is for this program.

Sure. Sure. That's helpful. And maybe one last one. On CapEx, Larry, you noted it is a little below 7% in '08. Is that sort of a sustainable number do you think? Is there sort of some shifting of any projects or supposedly just a paring down of, sort of, what might have been expected and we should think about that as a good number sort of in the long run as well?

Yes. What we did and we did most people, I think, expectedly higher net as much as a billion dollars so we're work hard to rationalize to spin it early in 2008. You back out the repayments hospitals, it gets down to about 6%, and I think our statement was we try to run the combined company even though I believe Triad may run it 9% to 10%. We probably run it closer to 5%. We try to run a combined company about 6%. Other than replacement hospitals, there is a couple of other replacement hospitals, some we don't have a certificate of need yet to even start on yet or appropriate other approvals. And then there's one in California, I think, competitive about 2011. But other than that we will probably be working our way down to about 6% is where our expected spending to be when we start replacement hospitals.

And we are making really good progress in terms of managing the CapEx. We're not really having any issues as we work on these big projects in reducing the scope of them and trying to redesign them, all those kinds of things are working well for us.

Great. Thank you.

Your next question is from the line of Adam Feinstein with Lehman Brothers.

Okay. Thank you. Good morning, everyone. Just -- I guess a few questions here. Larry, could you give us a rough sense in terms of a pro-forma EBITDA as if you have owned Triad for the whole quarter. I mean, you know, obviously we can back in to numbers and I'm sure folks have, but just curious if you can provide any feedback there.

Yes, I would say that the revenue shortfall is probably, you know, in the $350 million range for 24 days and EBITDA is probably between $40 and $45 million, and again, that's 24 days, and I'm a pretty good accountant that's pretty hard to get that right on 24 days, but that would be a rough estimate of what we think.

Okay. Thank you.

Just as well you did asked the question.

Sure.

I would like to point out that probably there there is about $38 million in interest and about $20 million depreciation because there's been we have not provided guidance, we have provided some various pro formas, and clearly the quarter would be something like $175 million, $178 million in interest, $125 million, $126 million in depreciation which will help people think about 2008 in addition to our guidance. You want to have a good run rate for the fourth quarter.

Sure. Great that's very helpful thank you. And just a followup question here. I appreciate all of the details on the guidance. As we think about the guidance and try to look at the various components, I guess just two questions. One, you outlined $150 million in synergies, maybe if you could just provide more details and just bridge that from the $84 million you talked about previously. Secondly, with respect to the debt, I know you said you are assuming interest rates stay relatively stable. But what about the outstanding debt balance? So, I guess is there any debt paydown assumed in the guidance? Thank you.

There is not any debt paydown in the guidance because we have the acquisition which we expect to close in the first quarter. We have assumed that the divestitures that we disclosed do generate some cash but no future ones other than that, and there could be some activity on that line. So, the debt will probably slightly move up, possibly. We'll get more specifics about that at the next call.

On the $150 million, let's say probably original supplies for about $35 million of the $84 million. That's probably up to about $50 million and then probably you got -- not -- the corporate overhead and productivity and all of that is probably less than a half of it and the rest of is split equally between -- marketing and home health. So, clearly we think supply is a little bit better for overall productivity and overhead will move up a little bit from where it was. And we've added a new would be the confidence what with the pro termination we can get some higher synergies on, you know, managed care marketing and home health.

Okay. And then just finally, I guess you had talked before about going through the review process for the bed debt. Maybe if you could just provide a little more detail in terms of what that process entails? And then at the same time just in terms of asset-impairment charges that we sometimes see with large mergers, just curious your thoughts there and, I guess, just bring up since Triad always had a very high book value relative to where stock price was, so, just curious if you had any thoughts in terms of some of those intangibles that Triad had on the books. Thank you.

You know, what we'll do is a subsequent receipts test. We bought 55 hospitals over the last 10 years, and there is anyone throughout receivables, we have gone back and valued their receivable balances based on actual cash received in the first year run-off and when we got comfortable with it, and of course we've adapted our method pretty quick. That always would end up probably being a goodwill adjustment here. It would be something we would have to run through earnings, and we're in the process of starting that, and we're used -- and we're working hard to get that done by the end of the year and review that for our auditors. We have taken some efforts in our guidance for 2008 to try to take any change that take place and. I've said bad debt adjustments do not necessarily mean a substantial impact on the run rate. Usually whatever the adjustment is it is 15% to 20% effective on the run rate possibly.

For the impairment of assets you have physician recruitment which you have to determine the fair market value of. And physician belong as relates to fixed assets. We're doing appraisal on all of the property we have got there, and that appraisal is -- but probably with only be a final appraisal sometime in the second or third quarter of 2008. And whenever we get information, we'll -- the next appropriate reporting time we'll disclose what it is and if it has any affect on our goodwill appreciation we'll make adjustments there.

Clearly,Triad probably has got a lot of assets, it got a lot of excess land.. We got excess land which does and like a normal thing we do, We now sell assets that have value to try to reduce debt. I -- I -- a lot of their assets probably have been bought or built in the last few years so we think they'll pretty well hold their value for the most part. Although some of them are underperforming so, we just have to wait and get the evaluation. And that will all go through purchase accounting there, either increase or decreasing land good on the equipment or going to goodwill.

Okay. Thank you very much.

Your next question is from the line of Gary Lieberman with Sanford Group.

Thanks, Larry if I could just test your accounting skills maybe one more time. If we were to look at the additional equity in unconsolidated investments for the additional 24 days for Triad, where do you think that would come in?

Well, probably another $3 or $4 million. There is a couple of million dollars more. They had a pretty good -- what happened was they had a really good stub period there in the two months we had. August was a pretty good month the way it fell seasonality for everybody. If you follow the calendar. September was a little weaker, and July with the holiday and the way it fell wasn't as strong. So, it wouldn't be quite as proportional as much. I think we have got two months and seven days in there. Clearly, in our guidance we maybe have been a little bit less conservative on what we think should be. But those are two pretty good operations in Georgia and Las Vegas.

Okay. I just want to make understand I understand the guidance on the synergies through '08. Should we be -- is the $84 million plus the $150million is $234 million or am I not looking at that correctly?

No, what we did was take the $84 million and it was the first cut at it and we looked at it and we've achieved a pretty good percentage of that going forward and now we think we'll receive $150 million in synergies looking what we bought..

And on top of that you would have the stuff like -- recently acquired hospitals, continue working on other operating elements of it, but these were synergies more tied to what -- predominantly through supplies or corporate office reductions. We still have a fair amount of people doing some work and helping us, doing a good job for us down in Planning right right now and that would not last forever. And then we have the opportunity in the areas of managed care and home health and case management and marketing and IS that will add to that. So $150 million is what is built in to -- over and above what our run rate is running right now.

I'm not sure I fully understand that. So the $84 million is included in the $150 million?

$84 million was the first year through June 30th of 2008. We accomplished some percentage of that through 2 -- at the end of 2007, and we think we have got another $150 million of new synergies we should be able to recognize predominantly in 2008.

Okay. And then --

$84 million --

Yes, the remainder of the $84 million and the $150 million that --

Okay. I think I got it now.

And then we outline --

You need a non-accountant to explain it to him.

And then you also got to take the -- I think we had $275 million of other stuff, which is our improvement, our base margins and hospitals we've done - which we have done a good job, and also continuing to work on improving the margins of Triad back to where we were. And then, more importantly, I think there was $450 million CapEx has been spent such as on facilities for Cedar Park and, as I said, Austin, Texas, Cartsville, our facility in Petersburg. Places like that when they open up which will open up in early '08 and mid-'08, we should drive pretty good EBITDA off of that.

Okay. And finally, on the bad debt guidance, it actually looks like the self-pay admissions went in your favor this quarter and you cited some of the same-store margin improvement from better bad debts. Your guidance for the combined operations for bad debts, the 1.7% to 12.2% for next year which is higher than where community and Triad separately had been historically, so is that just a healthy dose of conservatism baked in there, or are you looking at it a different way?

Well, generally what happens is if you are right, you are right. So, unless you got some discount policy, as you raise rates the uninsured probably drives bad debt because the revenue is higher and goes up faster than net revenue. I think of Austin said if you just had a perfect continuation of often raising rates 7% or 8% your bad debt will go up 20 or 30 basis points, all things being equal and I think that is built into it. The -- we have done a pretty good job of qualifying people for Medicaid which is -- I wouldn't want people to think we think our self-pay business will continue to decline, but we are working trying to find ways to either qualify for Medicaid or not get service or -- The other area that is going up since inpatient admissions is not is the outpatient service and most of that comes to the ER, is where -- the bad debt is built up a little bit.

Okay. Thanks a lot.

Thank you.

Your next question is from the line of Christine Arnold with Morgan Stanley.

Good morning. Thank you. You have said 68% of your debt has been secured and kind of locked in. At what rate did you lock that in relative to kind of where that debt went out?

I believe we did it -- rates range from 4.7% to 5.2%, so it's probably somewhere in the range overall of about 5% or slightly less.

Okay. And then --

Of LIBOR.

Of LIBOR, and then you add the 225?

Yes.

Okay. And then as far as the kind of -- kind of self-pay bad debt trends, does your expectation, just to clarify the last question, assume that the number of people walking through the door remains stable at this quarter's level or normalizes or what are you assuming there?

Once you get -- some of the events or some activities a quarter, people -- we were not doing a good job of qualifying for Medicaid and once you start -- with that which I think a couple in Texas answer anniversary this year, end of the year, we would probably think the self-pay business will generally grow faster than the overall volume business. (inaudible) yes, and of course Triad we think we maybe can do a little bit better job on qualifying people for Medicaid for them. But generally it is a vision that self-pay will grow a little faster than overall --

Okay. And then last question on pricing. The pricing was very good this quarter. And you are guiding for not to kind of remain at this level, kind of going forward. What kind of opportunities do you see on the managed care side for pricing? And does that included in pricing or in synergies?

Well, synergies is just a term that flows through the income statement as revenue on down to EBITDA. So I assume it's -- it's in pricing, because that is where it has to fit from that perspective.

Okay.

I would say that we do think there's some opportunities this managed care. Triad had a group of people to work on it. They were a little separated as they had hospitals in the same states and different divisions. We have not done that which we think helps us to deal with the managed cares companies collectively in the state. We had pretty good success so I think we still average, you know, 4% to 7% overall managed care increases in 2008.

And was there any benefit this quarter, from say taking best contracts -- because there's not a lot of overlap. I do not know if you had some national contracts but you can, kind of, take that. Was there any benefit from the merger and the 6.3% adjustments?

Well, what you have got there's ongoing negotiation, but since we bought stock we assumed all of those contracts, and any negotiations or any benefits were part coming in the future -- or anything was done prior to our ownership, so most of this is primarily mix.

And clearly our standardized centralized approach is doing it all central location and having all of the contracts loaded and making sure we compare them on doing them on a state-by-state basis as opposed to an individual hospital basis will be helpful.

And we haven't seen any of that yet.

Well, we actually started a little bit before we - we did some advice a little bit before we actually did the closings so -- but not substantial Keep in mind it is only a couple of month.

Right.

It's --

Okay. Thank you.

Your next question is from the line of Bill Bonello with Wachovia.

Good morning, just a couple of follow-up questions, I guess. Should we take -- first should we take your previous comments to mean that you are still comfortable with the prospects for $200 million of margin expansion and hospitals in year 2 and 3 in the $75 million of expected returns on previous investments? Yes, some -- some of that may have come out as a result of raising other synergies but we're still comfortable we can improve the community margins and the Triad margins and get the return off of the capital. The capital has been spent, and we know where it is spend, and we're looking to see where that capital is spent. And when we do our 2008 budget we went a through all of the spending for the last three years and expected spendings took those projects and factored that into the budgeting and that's what we expect to achieve by a hospital-by-hospital location.

Okay. So, nothing has caused do you reassess that. And just on the bad debt, just to make sure I understand this. Aside from the discount policy in general, do you feel that you have a handle on the quality of the receivables and the bad debt at Triad or is there a good deal of uncertainty around that?.

There is still some work to be done and the best way to determine the accuracy of the bad debts is a receipts test which are always done on hospitals who acquire modest or bigger bigger acquisition. We're attempting to do that. There's differences in charity care programs work. They had an assumption that they would only give 90% of the charity discount, which we got to think about that, because a lot of that is not probably collectible. We already talked about the self-pay discount programs. The handling of some disproportionate share program -- there are differences which we have to do more work on and each of our hospitals to give us accurate information of where bad debts are, and gives ourselves -- as I said I do not believe bad debt adjustments in themselves totally change the run rate. It's often an effect on the balance sheet going forward and we are -- going in to 2008.

Okay. And then just the -- one more bad debt question, just the $10 million of the additional bad debt expense that you add on to Triad. I'm not sure I totally understand that. Do we think that as a nonrecurring expense? Or is that --

It was a little surprise to us when we wrote up what each hospital has calculated using the previous method. It didn't give an adequate allowance. It just did'nt do that. based on our analysis of it. And so we had to book another $10 million. I would hope that wouldn't keep occurring. One of the reasons we're doing the work we are is so when we roll the hospitals up, because we want them to have accurate bad debts and know where they stand and create that kind of issue and keep going forward. So for the two months it was a little bit of a surprise but it was something we did so we just decided to close it.

Okay. But we should think of that as bad debt expense that you sort of expect to have that -- in other words you won't have to adjust it, but in theory, the hospitals will give it to you at that correct and sort of higher level going forward, is that --

We'll do whatever -- whatever adjustments from that methodology and others we determine we'll try to pick up a method for each hospital to give us an accurate answer so they got accurate results, which is important to us and trying to house and give an accurate answer for the company. But this $10 million which is used in their method and doing the work and it did not give an allowance that we were comfortable was enough when we looked at the amount of self-pay receivables that they had.

Okay. Great. Thank you.

Your next question is from the line of Miles HighSmith with CED Swiss.

Has double questions. Sorry. First of all, I just want to make sure that I understand this synergy comment. Am I right to think that beyond the $150 million in 2008 that there will be an incremental $275 million?

No, if you go in to years two and three there's other opportunities. Now, you know, we're going to be trying to improve the operations of the combined company on top of the $150 million normal organic-type growth, but there should be some synergies from opening the hospitals are going to open the CapEx we have done. We spending a lot of these money on these facilities. They ought to be open in the next 12 month and they should give us some opportunities. There is on top of that, and then we're still sort of committed to improve both CYH and Triad as we previously discussed.

Okay. Let me try it this way then. If I assumed in the beginning you -- and incremental $275 million, could I say that if you get the $84 million and you have $150 million for all of 2008, that you have done another $66 million beyond that $ 84 million towards the $275 million? So, $66 million towards the $275million that leaves another $209 million or so in incremental. Is that a fair way to think about it?

I won't say all of $66 million because you do start overlapping between what is synergy and what is corporate overhead activity? You cannot do is clear that. There is clearly some of that $275 million that should flow in to it. And we should consider that part of our effort to grow -- grow and improve our margin.

Okay. But generally speaking you still, you know, reiterating the same statement that you are comfortable --

Yes, accomplish there. And we thought it was more specific to give a specific number for 2008 than have a 12-month period in June 30th in year 2,3 out there.

Okay. Last one. Can you just make any comments around share buybacks? Is there a level where that gets really attractive versus other capital --

You know, I think we have plenty of debt now to try to resolve our issues around that. I don't think we will be in the share buyback business anytime soon.

Thanks, guys.

Thank you.

Your next question is from the line of Rob Hawkins with Stifel Nicolaus.

Good afternoon. I have got a couple of quick questions. I'm confused a little bit by some of the local newspaper stories on the Triad hospitals. They make it seem as if some of the joint ventures might be unravelling in certain markets. I know this is kind of a touchy subject --

It's a not that touchy, can you be more specific?

I thought there was one up in kind of around the -- North of Dallas, the one up think DFW kind of Denton area?

Yes, THR?

Yes, and I'm -- forgetting where a couple of the other ones are -- I have to go back to my notes.

Let us just point out the two divestitures. One of them had a 40% joint venture, one had a smaller percentage, but that's just the facilities that we decided to sell.

I guess -- is this process done? I mean, do you know -- were there call provisions in the Triad joint ventures, how many more were there?

I think there was only three. And two -- three of those -- there's maybe more of those, I'm sorry, but there are not a huge number of those, all said and done. But the one in Arkansas that we've announced, Barbington, Ohio we have announced. And THR is out there as well. Those three are moving along in terms of the process. Those are the only three, I think, that have exercised any of their call provisions.

Are the call provisions at a fixed multiple and would that multiple be below what you paid?

The call provision is in -- in an agreement that we're not allowed to disclose the specific. Clearly, you know, the one in Denton is a good facility. It's embedded in our guidance in 2008 -- but, you know, there's lots of moving parts of what is going to happen between now and the time laps.

But when it is all said and done I don't think this will be all that material, you know, in terms of our future.

Just to summarize, it sounds like one is in the guidance, and you are talking maybe there is another couple that might have other provisions down the road not very big.

I.

The divestitures only one that is out there of any knowledge that I'm aware of right now is the one in Denton, Texas, and that has not been taken out because we don't have any transaction confirmed yet that would cause us to do that from an accounting perspective except one there

That one will probably -- okay root area I have been curious about as this has all come down on the supply side you both were members of health troop GPO, and, you know, what is going on there. Can you give us color of how you guys can be so different --

Yes as you probably know, you know, we're -- Triad was a partner, now we're a bigger partner. The compliance portion of that, we have a very strong compliance in our disciplined approach to this. Triad was good, but there's an opportunity in terms of compliance. That helps us a little bit. Also, you may know that HPG is combining with -- so all of the pricing is going down. So we're getting the benefit of that as well. And then we have already started the work on our supplies in terms of the Triad hospitals, and we see a lot of opportunities as far as supplies and consistency and the way that we -- you know, some of the products, all of those things will be very helpful to us. I don't know that Larry has disclosed the number in terms of actual synergies, but it's a pretty good number.

If you looked at supplies for the quarter we made progress, so spread throughout, so it just shows at least the first two months, we have made some progress in overall supply --

A good example is we have had all of the pharmacists, we had the pharmacist -- Triad hospitals and our hospitals and put them together and tried to figure out ways that we get, you know, better efficiencies out of the use of drugs and change in some generics. All of that is going really well.

Great. This one may not be a big impact for you, but I'm curious. United health has been talk about how they have made a very big effort to increase their hospital contracts going in to 2008 and sign up something like 1500 hospitals. Did you all participate in that, and go do you guys have a sense of impact -- I mean, I know you have got guidance for pricing for next year, but I mean is there -- they are talking about these being kind of three-year contracts --

We -- we look at each contract to see if it's priced appropriately, to see if it is going to be the type of contract we're going to be in. And (inaudible) is a player in some of our markets. But we do contract united there and I'm not sure what they have said, matter of fact we try to make sure that whatever contract we have got makes sense for us, and if it's not a good sensible product we will probably not be part of it.

Great. Thanks. I'll jump back in the queue.

Okay.

Your final question is from the line of Darrem Lehrich with Deutsche Bank.

Thanks. Thanks for getting all of the detail out. You know, we do have a few things we like to run through just to make sure we're clear. As far as the $150 million number goes, really, and how the full-year '08 goes, Larry, just wanting to get a sense from you, as to how that builds throughout the year, and how you see that $850 million number weighted, you know, first half versus second half to make sure we have the ramp-up of this, you know, accurately.

Well, clearly the 150 million will be a little bit higher in the second half of the year than the first half of the year. We would probably bring down and continue to work on the corporate overhead and get that done in the first quarter of '08, but most of it -- a lot -- it would not be 25% a quarter and it will probably be more like 60 to 65% -- little bit of more of it more proPersian Nately ready to roll in that first 35, some in the first quarter activity that most in the second, third, and fourth quarter.

Okay. That's helpful, and then as far as the depreciation, amortization guidance, it does seem, you know, quite high to us. I just want to make sure I heard the number right for a full quarter. I thought you said $175 million third quarter; is that correct?

I think I said $175million, $170 million -- excuse me depreciation was $126 million, interest was $175 million.

I'm sorry I got that wrong. 126. Okay. So as far as the overall guidance go goes. I guess the real question is for '08, besides these new hospitals opening, have you taken into account or assigned some probability that you will have to, you know, write-up some things in your review process? Just trying to understand why the D&A numbers seem so high.

Yes, we did, that's actually been embedded in these two month's estimates. And that's one estimate we would have to keep monitoring and give information on. But if the value of the billings or equipment comes out higher than we originally estimated then we would have a little bit higher depreciation. We had write-up going on land and go to goodwill. So there is some estimate we have done already and we'll be monitoring that -- I guess the first shot of that sometime in the fourth quarter to take a look at that.

Okay and then -- one other thing just about the operating matrix, the revenue per adjusted admission, would you be able to provide that us on a consolidated basis for the, you know, the full quarter, so we have a starting-point number there as well as the bed in service, which are -- I just want to make sure we have that number right for a full quarter on a consolidated basis.

I don't -- the revenue for adjusted admissions for the quarter was 89.39. It would probably be couple of percent less on the full quarter because the first few weeks of July were less intense business with the holiday, so it would be probably 2% less if you had to look at the whole quarter.

That's real helpful. And the other revenue bucket obviously we know -- is there. Any thoughts as to how you might break that out in '08? It clearly has a distortion effect on your unit revenue matrix.

QHR being embedded in salaries and expenses and the revenue will be in the other category I think is how we're going to be doing that.

Okay.

And up this quarter, and of course we're restating on same-store basis, but it will consolidated basis have a higher, higher amount of growth in other revenue. And I would hope that QHR will start to have some growth. It mean, it's good opportunity over there.

My last housekeeping question here, thank for taking the questions, just as far as the proceeds that you have embedded in the cash flow guidance for '08, what is the net proceeds number from the things that you've disclosed here? And can you give us a rough estimate as to what the cost of the Washington hospitals are, you know, in relation to revenue? I think you have talked about acquisitions and that nature before.

The sales is good price.

We cannot -- we will -- once it becomes public in the state of Washington we send out these statements and we don't do it, as Wayne just said it's a good price and I believe the net proceeds are somewhere between 100 and 125 million for the assets that we talked about so far.

Okay. But the trailing revenues for empire were about 290 million, so it would be some fraction of that number?

Right. And once it becomes known, well -- as Wayne said we think it's a priced at a good price for us.

Price good price.

Okay. Thanks very much.

Okay.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I would now like to turn the call back over to Mr. Smith for any closing remarks.

Thank you very much for spending time with us this morning we believe in our ability -- in the non-urban and mid-sized health markets. We want to specifically thank your management -- Chief Financial Officer and chief nursing officers and group operators for their continued support and operating efficiencies during this challenging operating environment. We would also like to recognize the courageous efforts of our employees in Fallbrook hospital and Fallbrook, California. We have worked tirelessly to evacuate and secure the facility from the recent fires, we have just received final approval to reopen these facilities. In closing, I would say we're more excited today and see more opportunities of the Triad transaction than we did when we announced this deal in March. We're absolutely convinced this was the right strategic move for us to continue to improve and our success and our leadership in the healthcare sector. Thank you, very much, for joining us today. And once again, if you have any questions, you can reach us at 615-465-7000.

Thank you for participating in today's Community Health Systems third quarter conference call. You may now disconnect.