Community Health Systems Inc (CYH) 2007 Q4 法說會逐字稿

Good morning. My name is Julie Ann, and I will be your conference operator today. It at this time, I would like to welcome everyone to the Community Health Systems fourth quarter conference call. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

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.

Good morning. Thank you for joining us for our quarterly conference call. With me on the call today is Larry Cash, our Executive Vice President, Chief Financial Officer. The purpose of this call is to review our financial and operating results for the quarter and year ended December 31, 2007. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast of this conference on our website, a slide presentation accompanies our prepared remarks. I'd like to begin the call with some comments about the quarter and integration of status of the Triad facilities, and then turn the call over to Larry who will follow with a more detailed account of financial results. But before I begin, I'd like to read the following statement.

Statements contained in this conference call regarding expected operating results, acquisition transactions, and other events are forward-looking statements that involve risk and uncertainties. Actual future events' results may differ materially from these statements. Such forward-looking statements were made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, were made based on management's current expectations or beliefs as well as assumptions made by information currently available to management. These are summarized in under the cash and risk factors in the documents filed by Community Health Systems Inc. with the Securities and Exchange Commission, including the Company's annual reports on Form 10-K, quarterly reports on From 10-Q, and current reports on Form 8-K. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

Our reported results represent the first quarter combined operations with Triad. The year-to-date consolidated results include Triad's performance from the acquisition date, July 25, 2007. The prior year 2006 consolidated results reflect Legacy CHS only. Our same-store results include the Triad operation for the fourth quarter and for both years, and year-to-date for the same. Store results include Triad operations from August 1, 2007. Adjustments represent an integral part and a necessary part of any acquisition. We did complete our review of Triad's accounting processes, including their reserve policies as well as their discount policy, as we discussed last quarter.

Accounting differences were in the areas of charity programs, Medicaid pending, self-pay discounts, collection rate assumptions and the handling of indigent programs. This review resulted in a charge --- a change in the estimate of the Company's net receivable value of account receivable of $166 million, increasing the allowance for doubtful accounts by $70 million, and increase in contractual allowances primarily related to pending charity and Medicaid accounts. Larry will provide a detailed explanation of this in a minute, but for the balance of the call our discussion will exclude the 2007 adjustments. Net operating revenues for the fourth quarter ended December 31, 2007 totaled $2.6 billion, or 138% compared to the $1.1 billion for same period last year. Adjusted EBITDA for the fourth quarter 2007 was $354.4 million, compared to $162.8 million for the same period last year.

Income from operations -- from continuing operation, excluding the adjustment was $0.37, compared to $0.58 for the fourth quarter last year. Again excluding the adjustment, net operating revenues for the year ended December 31, 2007 totaled $7.2 billion, compared to $4.2 billion for 2006. EBITDA for the year ended December 31, 2007 was $993 million. Income from continuing operations for the year ended December 31, 2007 was $165 million or $1.75 per share, adding back the effect of the early extinguishment of debt EPS would have been $1.93, compared to $1.85 for 2006. With that, I'd like to review some key operating accomplishments for the year.

First, the Company recruited 769 new physicians for the year, compared to 594 recruited for the same period a year ago. Of the 769 new recruits, approximately 20% were recruited to the Triad facilities since July 25, 2007. Our 2008 physician recruitment target will be 900 new physicians. We have performed the same detail analysis on the Triad facilities as we routinely do on the Legacy CHS facilities to determine additional physician requirements, both primary care and specialty. Our recruitment target has moved up because of this analysis. We continue to believe that our standardized centralized approach to physician recruiting identifies a more timely manner physician -- timely manner in physician needs in the community. In turn, increases utilization in age and generating volume.

Our historical turnover has been about 6%. This year we have averaged a net increase of almost four physicians per Legacy CHS hospitals. In addition to the hospitals added to the Triad acquisition, we acquired two hospitals this year with combined trailing revenues of about $290 million and trailing margin in the low single digits, Ruston, Louisiana and Valparaiso, Indiana. As previously reported, we signed a definitive agreement to purchase two hospital systems in Spokane Washington, with revenues of approximately $290 million in a single-digit margin. We would expect this transition to close sometime in the third quarter.

We've been working diligently to selectively optimize our portfolio. In 2007, we sold three hospitals, announced two definitive agreements, one for this sale of hospital in Lebanon, Virginia, and another for the sale of nine hospitals to Capella. We did finalize the sale of the Russell County medical center in Lebanon, Virginia on February 1. We also sold our operating interest and assets associated with Beacon Hospital in Dublin, Ireland, effective February 21. We anticipate the Capella transaction to close in the current quarter. These hospitals and one additional unnamed hospital as well, as the facility in Ireland are all classified in discontinued operations. Again, we intend to fully focus on the Triad integration and operation of all of our hospitals for the next 18 months.

The Company has closed three hospital syndications with physicians since the acquisition of Triad, bringing total to 19. We have also added additional physician investors to two of our existing syndications. The Company is updating its previously-issued guidance for 2008 as follows. Revenue $11 billion to $11.3 billion. EBITDA $1.57 --- I mean 1.57 to $1.6 billion with EPS for income from continuing operations the same from 225 to 245. We've eliminated 12 hospitals from our 2008 guidance. For those hospitals included in continuing operations for end of the third quarter, and now classified as discontinued operations, the following information is pertinent. Trailing revenue for these discontinued hospitals is approximately $550 million with a 6% margin. Revenues projected to grow by 8% with a 200 to 300 basis point margin expansion, and annual admissions will range from .5 to 1.5%.

Please note guidance does not include or does not take into account any resolution of the previously disclosed allegation by the Civil Division of the U.S. Department of Justice. And three of our New Mexico hospitals have caused the State of New Mexico to submit improper claims for federal funds in violation of the Civil False Claims Act. In a letter dated January 22, 2008, the Civil Division notified us that based on its investigation, it has calculated that these three hospitals received ineligible federal participation payments of approximately $27.5 million from August 2000 to June 2006. The Civil Division advised us that were it to proceed to trial, it would seek triple damages, plus an appropriate penalty for each of these violations in the False Claims Act. We continue our discussions with the Civil Division In an effort to resolve this matter, but the Company continues to believe that we have not violated the federal False Claims Act in any manner described in the government's letter of January 22, 2008.

I want to give you an update on our synergies, related to the Triad acquisition. Through the end of December we have captured approximately 30% of our anticipated annual synergies, are over $25 million. Our 2008 guidance includes synergies in the amount of $145 million, adjusted for expected divestitures from all the facilities. These synergies include supplies, productivity, overhead, managed care, home health, case management, marketing and IT. Other than sale of hospitals currently held for sale, no additional divestitures have been assumed in the guidance. At this point, I'd like to turn the call over to Larry to provide you a summary of our quarterly and year-end financial results.

Thank you, Wayne. Before I get into our specific financial results, I'd like to comment on the change in estimate and conformity adjustment recorded in fourth quarter 2007. Our analysis included review of all historical cash collections. And please note that cash receipts testing cannot be done on Triad facilities until after the transaction is finalized. These analysis result in our updating assumptions approach used by Triad, as well as updating our own estimates. We used revised approach for subsident receipts testing, compared to methods used by Triad and CHS.

This review resulted in a change in estimates in the Company's net realizable value of accounts receivable of $166 million, increasing the allowance for doubtful accounts to $70 million, primarily from the lower collection rates and actual timing of collections as relates to assets and receivables. Historically, Triad's estimated collection rate was higher than CHS. We also increased contractual allowances, primarily related to pending charity Medicaid accounts and undocumented aliens for nonresidents. Historically, these accounts were initially classified as self-pay with an estimated allowance for doubtful accounts until verified as appropriate charity or Medicaid. This adjustment was the $96 million of reduced revenue.

In the past, we have had to adjust our reserve balances on all of our nonprofit acquisitions, generally through the balance sheet based on collection rates. Also, we've had to estimate the run rate effect of a change in methodology. The estimated 2008 run rate of this adjustment is based on reviewing the change in receivable balances in 2007, and is estimated to be $20-million reduction in 2008 EBITDA, with an increase in bad debt and a decrease in revenue As a reminder, our methodology reserves a percentage of all self-pay accounts receivable without regard to aging category. To establish this percentage, we will monitor historical collection patterns, accounts receivable write-offs, cash collections, percentage of trailing net revenue less bad debt --- peer net revenue and admissions, payer classification, ARDAs, and impact of recent acquisitions investitures. We currently reserve 75% of all self-pay accounts or payer categories to cut and reserves 100% of all accounts aged over 365 days.

The adjustment reduced EBITDA by $166 million and income from operations by $105.4 million or $1.12 per share for the quarter and the year just ended. Since the financial statements for the year ended December 31, 2007 released last night, reflect $166 million made in the fourth quarter. Our discussion from this point, for the quarter and year-end December 31, 2007 will before give an effect to the 2007 adjustment, unless otherwise indicated. Our consolidated admissions were 163,000 fourth quarter, adjusted admissions were 293,000 for same period. Same-store admissions decreased to 0.9% versus a tough comparison of 3% for the same period in 2006. And I note that our CHS Legacy hospitals lagged the Company average. When they adjusted for lack of respiratory related illness, service closures, statistical reclassification and some new hospital competition in two locations, admissions would have increased to 1%.

Monday is generally one of the busiest days for admissions. And this year, Christmas fell on Tuesday so admissions were constrained for both Monday before Christmas, as well as the Christmas Day and the last day of the year. For the hospitals on operating in both periods, which ---- had a CHS hospitals, we had about a 5.6% decline in admissions for the week between Christmas and New Year's. Same-store admissions would have increased 1.2% without this Christmas effect and the other adjustments. Same-store self-pay admissions decreased approximately 8% year-over-year, and declined 50 basis points as percent of total admissions to about 6.1%.

Consolidated revenue as reported increased 129%, excluding the adjustment consolidated net revenues in the quarter increased 138%, compared to same period last year or $2.624 billion versus $1.105 billion. On a same store basis, net revenue increased 5.6% with outpatient revenue up a strong 10.8%, and inpatient revenue up 2.3%. We did see a 1.4% increase of total surgeries this quarter. Same-store net revenue per adjusted admission for the fourth quarter of 2007 versus the fourth quarter 2006, increased 4.9%. Same-store CHS Legacy Medicare case mix increased slightly for the quarter, and then Triad case mix declined slightly about 0.9%. And then, a couple comments on revenue.

As I mentioned before, admissions declined by almost 6% during the last seven days of the year between Christmas and New Year's. This weakness contributed an approximate decrease in the fourth quarter of 2007 revenue of about $10 million or 40 basis points. Excluding adjustment consolidated EBITDA was $354 million versus $163 million for last year. Our increase of 118% on a same-store basis, EBITDA was $350 million versus $259 million, an increase of 9%. EBITDA margin for the fourth quarter on a consolidated basis was 13.5% which compares favorably to the 12.9% reported for the third quarter. Same-store margin was 13.9%, compared to 13.5% for quarter ended December 31, 2006, an increase of 40 basis points.

For the fourth quarter, our non-same-store margin was 3.5%. We opened the Cedar Park Regional Medical Center in Austin, Texas the middle of December, earlier than anticipated. Its operations and pre-opening costs reduced our non-essential margin about 370 basis points, or about $3.6 million on EBITDA line. On a same-store basis, operating expenses for fourth quarter as percentage of net revenue decreased 40 basis points for the prior year, primarily due to improvement supply line, offset by increase in the payroll and benefits. This increase in payroll and benefits, was due primarily to the growth in physician salaries, as well as some favorable benefit adjustments in the fourth quarter 2006. We did see, however, 170 basis point improvement in man-hours per adjusted admissions. So we had good productivity.

Malpractice expense also increased about 50 basis point,s due to a positive malpractice adjustment Triad recorded in the fourth quarter 2006. We incurred approximately $5 million in nonrecurring transaction related operating expenses in the fourth quarter, or roughly $0.03 per share for areas such as legal, audit, tax consulting, a little bit of staffing, and printing area, and travel. For the year just ended, admissions were up 50.4%, and adjusted admissions were up 48.6%. Same-store admissions were down 1.1%. Again, when you adjust for lack of the respiratory-related illness and service closures, the statistical reclassification and new hospital competition, admissions went up about 0.001%, and up 0.002% if adjusted for the Christmas effect.

Our same-store admission rate for 2007, would have been slightly up except for declines in self-pay admissions. Same-store adjusted admissions increased 0.004%. Our guidance for same-store admissions --- adjusted admissions for 2008 would range from .5% to 1.5%. Net revenues for calendar 2007 increased 72.8% to $7.2 billion compared to the same period last year. On a same-store basis, net revenue increased 5.7% for the year. Same store inpatient revenues up 2.7%, and outpatient revenue was up a strong 9.6%. On a same-store basis, net revenue per adjusted admission increased 5.3% and same-store --- volume down 0.002%. --- consolidated EBITDA increased 76%, $993 million versus $564 million.

Same-store EBITDA increased 11% for the year, compared to 2006, $944 million versus $850 million. Consolidated EBITDA margin for the year ended December 31, 2007 was 13.8%, versus 13.5% for the same period a year ago. Same-store EBITDA margin was 14.2% versus 13.5%. Non-same-store margin was 8.9%, about $550 million of revenue. Trailing margin for the --- hospitals was approximately 5%. Again excluding 2007 adjustment, consolidated operating expenses as a percentage of net revenues for the year improved 30 basis points from the prior year. Same-store operating expenses improved 70 basis points with an increase in payroll and benefits, offset by decreases in bad debt and supplies.

For the fourth quarter, consolidated bad debt prior to 2007 adjustment decreased 10 basis points, 11.1% versus 11.2%. Charity increased 10 basis points. Administrative discounts decreased 10 basis points. Our combined consolidated bad debt charity administrative discounts, as a percentage of adjusted revenue, are down 130 basis points for the quarter versus last year. Triad has historically had lower combined bad debt, charity, and discounts than CHS. And as a point we did update slide 17 this morning with additional information concerning this item. For the year, consolidated bad debt excluding adjustments 11.5%, increased to 90 basis points. Our combined consolidated bad debt charity and administrative discounts as a percentage of revenue are down 120 basis points, 17.5% versus 18.7%.

Our 2008 bad debt guidance will be 11.2% to 11.7%. The guidance has been adjusted for the implementation of up-front self-pay discount for legacy CHS to be implemented in early 2008. Discounts should approximate be about 50 basis points of revenue. For the year ended, we've seen our same-store self-pay admissions drop approximately 7%. This represents a 40 basis points as a percent of the total to 6.7%. After the adjustment, consolidated cash receipts were 104% of net revenue, less bad debts for the last 12 months ended December 31, 2007. But with --- about 102%, had we not made the 2007 adjustment.

Including the 2007 adjustment, consolidated AR days were 54 at December 31, 2007, compared to 62 for Legacy CHS at December 31, 2006. Excluding the adjustment, total AR days would have been 58 at December 31, 2007. The allowance for doubtful accounts is $1.033 billion or 40% of total net patient accounts receivable at 12/31/2007. Our consolidated basis, as a percentage of self-pay receivables, the combined total of allowance for doubtful accounts, as reported in the financial statements and related self-pay allowances for contractual adjustments, was approximately 76% at December 31, 2007, compared to 65% at December 31, 2006. We continue to believe that Community Health Systems has a favorable payer mix for the quarter ended December 31, 2007. Debt revenue by payer source, consolidated basis was as follows. Medicare 27.9%, Medicaid 9.1%, managed care and other 53.6%, and self-pay 9.4% of net revenue.

For the year, break down was as follows. Medicare 28.6%, Medicaid 10.1%, managed care and other 50.5%, and self-pay 10.8%. Our cash flow from operations for the quarter was a strong $283 million versus $82 million in the same quarter a year ago. Cash flow from operations for the year was $688 million compared to $350 million for the same period in 2006, an increase of $338 million. This increase is due to the increase in the cash flow from changes of accounts receivable by $221 million, increases in cash flow from the accrued liabilities and income taxes of $74 million, and an increase in noncash expenses of $232 million which $144 relates to depreciation. These increases were offset by decreases in cash flow from supplies, prepaid expenses, other current assets of $46 million, and decreases in cash flows from other assets and liabilities of $5 million, and a decrease in net income of $138 million.

Our 2008 guidance for net cash, provided by operating activities is $750 million to $800 million. Capital expenditures for the quarter just ending were $244 million, about 9.3% of revenue. For 2007, we spent $523 million, or 7.2% of net revenue. We spent approximately $179 million during 2007 on replacement facilities, representing about 2.5% of revenue or about one-third of our total capital expenditures. Our 2008 guidance for capital expenditures ranges from $775 million to $800 million, a $25-million reduction at the high-end from our previous guidance. This range includes approximately $140 million for replacement facilities, or about 1.3% of net revenue.

Please note that some large projects that were opened earlier or will be completed earlier than anticipated. Cedar Park opened in late fourth quarter 2007, when we had anticipated in mid/first quarter 2008. And Clarksville, Tennessee opened in second quarter of 2008, again, earlier than anticipated. As well as Petersburg, Virginia, early in the third quarter of 2008. This earlier open causes both depreciation as well as interest to increase, compared to previous guidance. Balance sheet cash at 12/31/2007 is $132.9 million. At the end of the quarter, we had available credit of approximately $1 billion.

Looking at the balance sheet as of 12/31/2007, we had $1.105 billion working capital, at 13.5 being at total assets. Total outstanding debt at December 31, 2007 was $9.1 billion. The fixed rated debt at 12/31/2007 was about 75% of total outstanding debt. Our debt to capitalization at year-end was 84%. And projected debt to EBITDA is in the six range. We did pay off approximately $85 million in bank debt during the fourth quarter. Additionally, we reduced a delayed draw by approximately $100 million due to our investor activity, as well as comfort level of cash flow.

At the end of the year, we're party to $3.875 billion in interest rates, very much an increase of $725 million in the September as of February. This week, approximately 83% of our debt was fixed. These agreements limit the effect of changes in interest rates and a portion of our long-term borrowings. Rates range from 2.4% to 5.24%, for an average of 4.7% average maturity of 4.4 years. We have provided information on one of our slides, 22, I believe, to enable sequential quarterly comparison of continuing operations. The fourth quarter versus the third quarter pro forma, which includes Triad for first 24 days of July and excludes the divestitures that were announced after the third quarter, revenue was up 2%. EBITDA was up 3.2%. Margin is up 20 basis points. And EPS is up 19.4%, 37% versus -- $0.37 versus $0.31. Again, the $0.37 excludes the $5 million of nonrecurring operating expenses.

For the hospital in continuing operations at the end of the quarter, and are now classified as discontinued, I'll just repeat what Wayne said. Trailing revenue was approximately $550 million with a margin of about 6%. Revenue was projected to grow about 8%, and EBITDA margin about 200 to 300 basis points. Also -- produce other changes. We produced a revenue --- same-store revenue and bad debts by estimating self-pay discounts as a result of a self- pay discount implementation, that will take place in early 2008 at CHS Legacy hospitals. Same-store revenue growth was 4.5% to 5.5%, and bad debt expense 11.2%, 11.7%, both being reduced by 50 basis points.

Fourth quarter 2008 includes the full-market basket increased on October 1, 2008, which will help the fourth quarter of 2008. The Spokane acquisition has been delayed from the first quarter to the third quarter, representing approximately $125 million in revenue, and about $12 million EBITDA, and some reduction of fixed expenses. But it was an -- expected to be an accretive transaction. We've increased depreciation and amortization from the time of the capital expenditures, related to earlier than expected completion of Cedar Park, and the earlier completion of Clarksville, Tennessee, which is a $200-million project, and Petersburg Virginia, about a $145-million project.

Interest expense has decreased as a result of the LIBOR decline affecting the variable rate portion of our debt. The net proceeds for divestitures has also reduced our interest at the current LIBOR rate, which is lower than what it was anticipated back in the fourth quarter when they were announced. There's also been an increase for the timing of capital expenditures as discussed above. Other than the sale of hospitals currently held for sale, no additional divestiture has been assumed in the guidance. We're still waiting the final purchase price allocation for Triad acquisition. We've got a preliminary in the fourth quarter. We expect this final allocation in second quarter 2008. And Wayne will now provide a brief recap.

Thanks, Larry. Our fourth quarter performance capped off a year of significant growth and progress for Community Health Systems. The completion of the Triad acquisitions represented an important milestone and we continue to focus on the integration of those facilities in our portfolio. We know we have provided you a substantial amount of information. So if you would like to talk to us after the call, you can reach us at (615) 465-7000. With that we are now ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from the line of Justin Lake with UBS.

Thanks. Good morning. Larry, Wayne, maybe we can just start off by talking about the bad debt charge. There's a lot of interest there. But specifically, would like to understand the -- I think the charge that you took back at 2006. I think was around $65 million, and the run rate hit was about 15. A little curious as to how a charge that's more than twice that size only has a run rate hit of $20 million. Can you explain that to us?

Yes. If you look at what's happening to our receivables back in 2006, we were seeing a pretty substantial growth in self-pay admissions. I think we had actually had high single digits. And also pretty rapid growth in self-pay revenues as a percentage of revenue this quarter, I think we're down to about 9.4% for the quarter. And then, the year-to-date is probably down to about 10.8%. Both over 100 basis points dropped in the preceding year. So, we had a different assumption of growth in self-pay receivables going forward than we had then. And then the -- I think we had estimated $15 million in --- and probably came out a little less than that, based on first couple quarters before the Triad transaction.

We also went from reserving somewhere in the mid 50% of receivables to 60%, in mid fifties. It's about a 10% change. Here, if you look at where we were at the end of the third quarter, and, of course, we didn't own Triad at the beginning of the year, we had about 70%, or high 60s or 70% of their self-pay receivables reserved for --- here we're going to 76%. So the change, although larger, it's on a much bigger company. And the percent change in reserve in only about 5 or 6% versus a year ago was more like 10%. We also had assumption that the self pay receivables --- grow in 2000, to adjust more like 20%. And of course today, we are thinking in more in the 8 to 10% range.

Got it. That makes sense. If we were to try to think about --- now that you've had Triad on your books for five months, and have your hands around those assets maybe a little better. Can you give us an idea, if we were to try to think about the run rate of EBITDA for 2007 coming out of the year, on an annualized basis, where do you think -- where would you put 2007 EBITDA for the combined Company's --- coming out of the year knowing what you know now?

Well, I think in the fourth quarter the margin for this adjustment was somewhere in the 13.5% margin. You'll notice that we've upped the guidance for 2008. Some of which is a result of the getting rid of the divestitures which I think that's got a low-end assumption of about 14.2%. Clearly the Triad acquisitions --- that we acquire has got a lesser margin. It got down below 12% in the first six months. We he eve been making some progress on that. That still a lot of progress that we could make as it relates to the margin. And just as a point, when you talk about margins, we sort of think of Triad as some really good margin facilities in Indiana. I think, at which is very, very high 20s, and relatively stable. And everybody else outside of Indiana, is probably in the low double digits. There's a lot of opportunity left in the facilities, for six Indiana facilities, I believe. So the rest of the facilities, 44, 45 facilities, probably have a much better opportunity. So I think there's a lot of opportunity. The $145 million synergies, for the most part --- productivity --- continued overhead improvement to be there all year. The supplies and the other stuff that we outlined there. So I think we feel pretty good about the future as it relates to continued improved margins.

Yes Larry, just to continue this just a half a second. I think we have --- our assumptions are ongoing in this transaction. In terms of our ability to identify issues and problems, and solve those problems, I think we're right on track. And I think we have found even other things that we think will be very helpful to us. So I think the $145 million is a good solid number. We're still very encouraged about the opportunities here.

That's great. Maybe could I ask it a different way then. That was helpful. I'm just trying --- really what I'm trying to understand is when you look at the '07 EBITDA run rate. And you had a on the $145 million of synergies, I'm just trying to really back into --- what do you think you have to grow the existing assets ex the synergies? What kind of EBITDA growth rate?

Generally the mid single digits, in which we've done better than that in some years. And I think that's what we've got built into it, is in the mid single digits. It --- excluding the synergies that we've accomplished. I think that's --- the math can be done if you take the current fourth quarter and probably roll that forward.

So that would imply basically, that your revenue --- you grow with revenue and your margins stay relatively flat ex the synergies. Is that the way to think about?

Two and a half to five and a half --- it would be a little higher than that. There would be some margin improvement off ---.

I think we're comfortable with that guidance for 2008 in terms of we kept the EPS growth about --- exactly the same. So obviously we're pretty comfortable in terms of where we are and how we projected it out for the year.

Perfect. Thank you very much, guys.

Your next question is from the line of Darren Lehrich of Deutsche Bank.

Thanks. Good morning, everyone. I just want to make sure I'm clear with regard to reconciling this EBITDA guidance with your prior. It looks like the divestitures would have contributed, I guess, about $40 million. And then Spokane would be about $10 million or $15 million. So it's really the $20 million difference is the change in your discount policy. Is that how we should think about this, Larry?

Well, I think if you've got $550 million, and we proved that up from a 6% to 8 or 9%, you'd be more like $45 million or closer to $50 million, EBITDA. But, it sounded like you said 40. Then you also -- you have that $5-million reduction, divestitures, and probably somewhere in the neighborhood of 10% for the -- for the $125 million on Spokane. So other than --- I think that we would expected those lower margin hospitals to go a little faster, once we'd own them in 2008.

Okay. And then just back to the charge, I did want to clarify a few things. I'm just wondering if you could give us a sense for --- how much came from the Triad side in terms of that $166 million? And, Larry, if you could just briefly review what policies have changed on a go-forward basis? What you've adopted from Triad? What you've changed on your side, given this charge.

Yes. The $70 million is exclusively Triad, and --

Bad debt.

Bad debt side of it. The $96 million is a combination of both. There was the charity, Medicaid, pending, undocumented aliens, a slight amount of managed-care adjustments. What Triad had assumed was about a 14% self-pay collection rate. Our belief now, it's about 10%. We'll use that going forward. CHS has been in the 9% to 10% range. Self-pay after insurance, theTriad assumption was about 70%. We think today, it's more in the --- around 60%. And CHS's assumption is about 50%.

Triad had also had some accounting for indigent funding and Medicare bad debts that looked like it was possibly assumed twice, both on the bad debts and contractual side. Going to the change in contractual allowances, both companies were going to reserve 100% of charity once they apply for charity. What historically CHS had done, had estimated a bad debt on charity accounts, so they become qualified. Medicaid pending accounts were growing. And we had estimated Medicaid pending accounts as bad debts. Now, it's going to carve out the ones that owe us --- qualified for Medicaid, put it charity. Excuse me, a contractual adjustment on that day one, similar to undocumented aliens which is a program the government pays you to help them identify aliens. We're going to put up a contractual on that day one, based on history getting that done.

Those are the primary changes there. Then we will continue to look at the collection patterns and receivable write-offs, and all the --- and good indicators the cash collections, percentage of trailing net revenue. Which why we were 102% for the year without this adjustment. I think CHS was like 102.6 and Triad was 101. So that brought down the average to 102.

And are you running consistent reserving policies now across all your hospitals? Is that the case?

The reserving policies in the hospitals vary a little bit, because there's more self-pay business. We use a little more straightforward method there. The method I'm describing is what we do on a consolidated basis. These were fairly complex calculations. And we think it's a little better to do it on a consolidated basis and use the less complicated calculation on each individual hospital.

Okay. Then just last thing for me here. The timing on the remaining asset sales --- I think you said Capella first quarter, so that's coming up quickly. What are the net proceeds we should expect in aggregate during the first quarter? Then, do you have a target net debt level for the end of 2008, so at year-end?

The answer to the last question is no, but answer the first one, Larry.

Yes. We were $315 million expected gross proceeds which probably around 270 or 75 net proceeds out of Capella. Russell County was 47 or $48 million, including working capital --- net there is about $30 million. So somewhere around $300 million net proceeds for those two transactions. The others we sold. I think I mentioned earlier we paid $85 million of debt off at the end of the year. And that took some of the proceeds from the sale in Arkansas and the sale in Ohio. The unnamed one, there's not assumption yet. Then I think we just announced this morning, that we did Dublin, Ireland, which didn't generate a lot of cash for that transaction at this time. What we would do is pay that -- we're going to look at what the best use of that debt is, and probably reduce debt in some fashion. We did have the Spokane coming forward, which outlay of cash is only about $165 million, but in the third quarter. So we're in pretty good shape. That's why we reduced and delayed --- plus it cost us some money to have it.

If I could just ask Wayne just one quick question about joint ventures. You're doing a lot still on that front. What's your view? I mean, the federation has been really pushing hard on physician ownership of hospitals as a key lobby. And you're part of the federation. So given the amount of activity you have, just curious to know how you as a company feel about that issue.

I think globally all of us think if you could eliminate all physician ownership, both hospital and outpatient facilities, it would it be a good thing for the industry. But having said that, there are a number of markets. Triad already started a number of syndications. We have all historically had a number of syndications. So we're continuing to work on syndications. Our view ours a little different than Triad's. Theirs are much larger than ours. We use a smaller percentage of our facilities in terms of what we'll syndicate. It is not a major strategy of ours. It is a continuing strategy of ours until something changes in the law. And it does give us, in some instances, is competitively --- it's helpful to us. But we can certainly live without it, in terms of our strategic view of the markets, if in fact the law changes. We are clearly in favor of legislation that would change that.

Okay. Thanks very much.

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

Good morning. Thank you. Just a few questions. First, you mentioned the Washington sale -- or, I'm sorry, purchase delayed a bit. Can you just give us a little more color on what the issue is there? And how the the operations are trending if you've got any sort of downside protection on that deal?

Yes. The problem in Spokane really has to do with regulatory problem around the CON. And the fact that not us, but the seller, has taken longer to go through the CON process. It's really just gotten started. It will be another couple months or so before all that happens. And as you might expect, when you announce a transaction there will be a deterioration in the operations. We are keeping in mind --- I don't know if the purchase price is out yet or not.

It is.

We're buying almost $300 million worth of revenue for about $160 million. So we have a very favorable purchase price. But it's never over till it's over. So you don't know what might be the final number when it's all said and done. We'll just kind of judge that along the way.

Okay. And then, Larry, not sure if you said it. May have missed it. Q4 bad debt trends look pretty good. What were some of the key drivers there?

Yes. If you look at the bad debts for the quarter, what helped us was --- I think I mentioned the consolidated net revenue decreased from say the third quarter from 10.9% to 9.4%, about 150 basis points decrease in absolute dollars, 9 or $10 million. There was a change inside the Company, both CHS and Triad. Had some hospitals in Tennessee, they implemented a self- pay discount program in the third quarter. And that grew into the fourth quarter which sort of has a way of lowering bad debts because you're discounting up-front. The other thing was that hospitals being sold with the 6% margin, or in discontinued, have a much higher bad debt percent, closer to 13%, than the Company average that we've got. And those in discontinued have a little bit --- help the fourth quarter continuing operations number.

Okay. And then maybe one last one. I think on volumes in one of the numbers that you had mentioned, a weak flu season, weak respiratory cases you had talked about in the past. Can you give us any insight on how first quarter looks at this point? Seems like, particularly flu, has really spiked.

I think you can go to the CDC and look at the widespread flu, and you will see where the flu is around the country. It's widespread in just about every state now.

So presumably, a lot better trends in the first quarter at this point for you all as well.

Well, as you know, flu is not a big driver, when it's all said and done. It's respiratory business. So I always tell people, don't get too excited about flu one way or the other, because it comes and goes and it's never during the same period each year. So you really can't build flu into anything that makes any sense long-term.

Right, right. Just to clarify that, I guess you're speaking more towards earnings or volumes or both?

All the above.

Okay. Thank you.

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

Good morning. Could you give us a sense for how pricing looks kind of entering 2008 and your progress with Triad, in terms of consolidating the negotiations with managed-care costs?

Yes, I think managed care is still 5 to 7%. We've met with our managed-care staff which is larger today. And they're pretty optimistic. They're incentivized to get good growth from net revenue. And they had a good year in '07. They expect to hit their objectives in 2008. It's a centralized standardized function we use here. So I think we feel pretty good about that.

I think from the area of Medicare, I think overall we thought it was about 2%. It's still pretty close. We're still analyzing the SDRGs. It's a fairly substantial systems change. But the best we can tell, it's close to the 2% we thought early on. Medicaid is probably 0 to 1%. But the most important would be managed-care, and I think we feel like we're doing pretty good . We still got 65% of hospitals are sole providers, pretty good talented team to work

One of the things, Christine, that's happened, as you recall, in terms of how we're organized geographically and how Triad was organized geographically, we've consolidated all those hospitals in one state. And are negotiating collectively wherever we can, like Texas, Alabama, other states. So, all that's going well. We haven't seen any dramatic change on the down side. We've had some favorable opportunities here, but the range is still the same.

There's a little bit of movement, Medicare being sold, Medicare fee for service,. The rates that we're getting on any PPO deals we're doing are pretty consistent with what we've got for Medicare.

Do you have a discount policy that is standard? Do you apply X discount, starting in January? Or does it vary by hospital and by --

It's going to vary by hospital. It will probably, for the most part, be implemented in the first quarter for the CHS Legacy hospitals. We already had the Tennessee hospitals. And we had the requirement in California to do it. So the rest of the hospitals are putting a discount in. It's not a large discount. It's in the 15 to 20%-range of the self-pay. Triad had a similar-type approach. There's some carve-outs for deductibles for outpatient and stuff. But it's pretty much an approach across the Company with someone picking a discount they want to use.

Final question. Could you update us on Presbyterian in Denton?

It's a situation that's in litigation.

It's a dispute.

Oh, okay. So you're disputing it's going away?

There's a methodology of calculating the purchase price. And we think one thing about the calculation and someone else thinks something else.

But it's probably not going to be your hospital at some point in time?

We don't know any of that yet. It's a dispute.

Okay. Thank you.

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

Thanks. Good morning. I wanted to ask you a question on the equity interest line. Looks like you saw fairly substantial decrease sequentially from about $14 million in the third quarter to about $10.8 million in fourth quarter. Was hoping you could discuss maybe what was the driver there. Did something get pulled out of the fourth quarter that wasn't in there in the third quarter? And what the outlook should be going forward?

The same facilities are in there. And the results of the public company --- joint venture for public company is done about as well. There's one that's a not-for-profit joint venture. One of the hospitals did not after very good quarter, extremely bad quarter. And we own 50% of that, and that's what caused it. But I don't want to talk that much about our other companies. But it --- people --- the one in Las Vegas, the one in Georgia had fairly consistent activity. The other one in Arkansas did not.

Okay. And then, I'll just ask you about the synergies in terms of timing for getting the synergies in '08 that you guys modified. Should it be equally weighted throughout the quarters? Back-half weighted? How should we think about it?

Back-weighted a little bit. We've made some progress on it, but to supply it --- the build, we're building that up. And then, probably managed care will be a little back-weighted, some of the efforts in case management. Marketing is pretty well done, but it's smaller number. Some of the productivity will occur, but it will be a little back-weighted. So, it would be more in the second half of the year than the first half of the year.

I guess if you could just update us on any departures, more at that time hospital level on some of the Triad Hospitals. Has that leveled out? Or --- from where it had been, or any changes there?

We haven't had, other than what we had the first -- and this will be the 1000th time that I've repeated this. Other than what we had the first six weeks in terms of departures, we haven't lost anybody. We haven't had any medical staff meltdowns. We just had our Chief of Staff meeting, 130 physicians, very positive, not any negative comments whatsoever. Everything seems to be going extremely well, culturally, operationally, organizationally. All this seems to be working, knock on wood, extremely well. It's clearly attributable to the great experienced people we have in this organization to bring this off. So we have not -- and, you know, our theory from the very beginning, the people disagreed with our operating philosophy. Let's dont' get mad at each other. Let's just go a different way. And that's exactly what has happened here. I think everybody is on board.

So based on that, it it sounds like the integration with the physicians is going well. And you haven't had any, I guess, volume issues or -- with physicians potentially admitting into competing hospitals?

I don't know of any places that we have lost physicians. I don't know of any places where we've had a conflict with a group of physicians. I don't think there are any of those kinds of things that are going on as far as I know. I think most of this has been very positive. And probably one of the things that has helped us the most, and people have realized throughout the organization, both at the administrative level and the medical staff, is the value of all the resources that we have in our standardized and centralized approach to our business practice and policies. They have welcomed that. It's really helped them a lot. It's helped them to not have to reinvent the wheel. So this has been a very positive thing during the transition. And culturally, it's been fully accepted. There's been no issues there at all.

Just from a trend perspective, Gary, I think that third quarter inpatient volume is down about 3%. It got down to 0.009%. So it made some progress year-over-year. And again, we've had pretty tough comps compared to 2006, both companies.

Great. Thanks a lot.

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

Hi. Thanks. This is [Shelly Nall] in for Matthew Borsch today. Question on the asset sales. It appears that your having --- the recent asset sales are having a pretty modest impact on deleveraging. Can you talk about maybe some other benefits from these asset sales? It sounds like it's an opportunity maybe to divest some of those that had higher self-pay exposure. As far as offsetting that reduced EBITDA contribution.

One of the things that we did when we start looking for asset sales, we look at markets and whether or not we think the markets are going to fit for us going forward in terms of growth. And some of these market will do extremely well. We have some overhead that we use, our standardized centralized approach to --- costs to do that. They will do better in those markets without us. So these work for us. And I think they also work for the communities. And they work well for Capella, because, the nine for sure. And then the other ones are individuals that have gone to systems where they get more synergy out of that particular system in the local area. You can talk about that.

I think, for instance, the margins are generally in the mid single digits. While we think we can improve it, it does it allow to us have more time to work on the others and improve upon that. And we'll take the proceeds here and put it to good use. The bad debts will be an issue, to probably the payroll --- a little bit on the higher line. And it just gives you a better chance to work throughout the Company. Some of the ones had been in here were bought several years ago. The old CHS went back in a big merger, back in 1994, so that came as a package. We tried to improve it some. Some we have, and some we haven't.

As Larry said, a couple times, now with interest rates down, the sales are not as accretive as they have been. They would have been early on. So in terms of our future, we continue to look and we will continue to do this in terms of rationalizing our portfolio, and look for things --- our facilities that don't quite fit. But having said that, I don't think you will find us doing any major transactions. We'll continue to look at the number of them by the ones, particularly for facilities that are in areas where a system might want to pay us really well for that facility. We would think about that, but other than that we're really not in the process of selling a lot more facilities.

Okay. Thanks. Then just one quick follow-up. Are you seeing any impact -- I know you had strong physician recruiting during the quarter, I think about 200 physicians were brought on. But were these asset sales --- did these asset have any impact on your ability to recruit physicians?

None.

Okay. Great. Thanks so much.

We have time for one more question from the line of Rob Hawkins with Stifel Nicolaus.

Thank you for taking my questions. I've got just a couple of little ones. First one, I know you said the new discount policy is changing the -- I guess the revenue rate by about 50 basis points. But what does, from a percentage of charges basis, what does the discount policy represent? Are you giving them a half off, or --

It's in around the 20% range.

So it's a 20% discount?

That's the general idea.

Do you see -- I mean, in your average, I guess, revenues that you get from your average commercial or institutional payers is about what, a third of the charge?

It varies. It's somewhere between a 30% discount to maybe some of the ones may get up to at half --- percent discount. All in Medicare, Medicaid, commercial. It's about 70% of revenue. It's got Medicaid real high to Medicare.

Okay. My next one kind of --- deal I guess with supplies and surgery. There was a little bit of a pickup in the supplies expense line. And then we're hearing from Zimmer that in the fourth quarter there was a strong pickup across the country in knees and hip surgeries, and your OP revenues were jumping. Can you tie all that together and see what's kind of going on there?

Well, our supplies are up on a -- but not on a same-store basis. I think we improved supplies on a same-store basis. Keep in mind that Triad had about 17% supplies as a percentage of revenue and we had about 12%. So we got three months in this quarter, and two months in last quarter but we've done a pretty good job in improving supplies year-over-year. I think our opportunity still exists to do a real good job on supplies going forward. And there's various categories in the area of drugs, which is built into the synergies. And also probably -- lower costs, it's down to --- rebates are up. The implant costs were up maybe five basis points, not substantially, but they're up just a little bit.

And then, were you seeing, in terms of revenues --- I mean, it looks like your outpatient revenues jumped substantially during the quarter. And -- is that in relation to -- are you getting kind of a better quality mix of surgery?

A little bit better quality mix of surgery. You're also -- it's good growth in diagnostic, which has been a good contributor for us. And I think the surgery growth was a little stronger for outpatient, than it was inpatient, which helped the growth activity. It's up more in the fourth quarter than it is the first three-quarters, but I think even for the year we're up over 9%. So we had a pretty good year in outpatient growth. And that's probably one thing that maybe is not quite as understood. It's 50% of our revenue now. And it's growing at a pretty good pace, offsetting some of the weaker volume from --- inpatient.

Sure. But are you seeing anything in hips and knees or stints? Those are two big areas that have been lower recently.

I don't think one quarter of the trend has changed substantially in any of those.

Okay. Thank you. That's all my questions.

Okay.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Smith, do you have any closing remarks?

Yes, thank you. Thanks again for joining us on the call this morning. We believe that our ability to deliver quality healthcare services continues to differentiate Community Health Systems in both nonurban and mid-size markets. As we look ahead to 2008, we continue to pursue our ongoing strategy of recruiting qualified physicians, adding new healthcare services, and investing is in our existing facilities. We're excited about our prospects for growth and remain focused on delivering value to both our shareholders and the communities we serve. We also want to specifically thank our management team and staff, our hospital chief executives, the our chief financial officers, our chief nursing officers, and our group operators for their continued support in operating efficiencies. 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 fourth quarter conference call. You may now disconnect.