Community Health Systems Inc (CYH) 2008 Q1 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter ending March 31, 2008, conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Wayne Smith, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning. Welcome to Community Health Systems' quarterly conference call. With me on the call today is Larry Cash, our Executive Vice President and Chief Financial Officer. The purpose of the call is to review our financial and operating results for the first quarter ended March 31st, 2008. We issued a press release after the market closed yesterday that included our financial statements. For those of you listening to the live broadcast of this conference call on the website, a slide presentation accompanies our prepared remarks. I'd like to begin the call with some comments about the quarter and an update on our integration progress and then turn the call over to Larry, who will follow with comments on our financial results.

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

In our reported results, the prior year first quarter 2007 consolidated results reflect Legacy hospitals only. Our same store results include the July 25, 2007, acquisition as well as a Legacy CHS for the first quarter for both years 2008 and 2007.

With that we are very, very pleased with Community Health Systems' solid financial performance for the first quarter 2008 with a strong revenue growth and successful expense management. Net operating revenues for the quarter ended March 31, 2008 totaled $2.7 billion compared to $1.2 billion for the same period last year. EBITDA was $383 million. Income from operations was $51.5 million with earnings per share from continuing operations of $0.54 per share.

With that, I'd like to review some of the key accomplishments for the quarter. As you know, by February, influenza was widespread across the country and remained a strong admission force throughout the second week in March. Our same store admissions benefited from this strong flu benefit. For the first quarter, we're up 3.8%. Same store adjusted admissions also increased 3.8% for the same quarter. Same store net revenues increased 5.7%. We completed the sale of nine facilities to Capella Healthcare, effective March 1st for an aggregate purchase price of $315 million.

We continue to work towards the purchase of a two hospital system in Spokane, Washington. The target settlement for that acquisition is now sometime in the fourth quarter due to delays in the certificate of need process. The operations of the hospital have deteriorated and we have negotiated a new and lower price. As we stated, the focus over the next 12 months will be to improve our current hospital portfolio. We recruited 206 new physicians for the first quarter compared to 156 in the same period last year. Over 60% of those physicians were specialists. Our outlook for 2008 is a target of 900 physicians.

We achieved approximately $35 million or 24% of our targeted synergies of the $145 million for 2008 and continue to be on track. We are reconfirming the guidance provided in February 2008 with minor changes in the third and fourth quarter projection range for income from continuing operations. The 2008 projection range remains $2.25 to $2.45. There is no update to the status of the Federal Government's investigation of three of our New Mexico hospitals' allegedly improper receipt of federal participation payments. With that, I'd like to turn the call over to Larry to provide you a summary of our financial results.

Thank you, Wayne. The financial and operating results for the first quarter reflected our solid expansion of our operating staff assisted by increased volume. Our consolidated admissions were 177,280 in the first quarter and the consolidated test admissions were 310,251. Same store admissions increased 3.8% and our same store self-pay admissions as a percent of admissions increased 20 basis points. Flu related admissions represented approximately 120 basis points of increase and an additional day in February represented another 120 basis points. Excluding the flu and the extra day, admissions would have increased 1.4% for the quarter. We also had a negative effect from Easter falling in the first quarter as well as some service closures and a [statistical] reclassification. Had these events not occurred, admissions would have increased approximately 50 basis points or 1.9%.

Same store adjusted admissions also increased 3.8%. Net revenues in the first quarter increased 136% compared to the same period last year, or $2.7 billion versus $1.2 billion. On a same store basis, net revenue increased 5.7% with inpatient revenue up 7.3% and outpatient revenue up 4.6%. The outpatient growth was slowed somewhat due to a reduction in physician clinic revenue, approximately 1.7%. Same store revenue increased $110 million or 4.3% sequentially.

Some points to make regarding revenue are as follows. As one would expect, with the high flu volume, our same store surgery volume was down 0.9% for the quarter. Same store net revenue per adjusted admission increased just 1.9% due to lower intensity of the flu cases. Our Medicare case mix declined for the quarter by approximately 1.8%. And finally, of course, this is indicative of the less severe nature of the flu patients. Same store revenue growth was also affected by an implementation in the discount policy in the Legacy Tennessee hospitals in the third quarter 2007. This impacted revenue and revenue per adjusted admission by approximately 40 basis points. Our discounts policies were implemented into other Legacy CHS facilities in the first quarter 2008 and affected revenue growth and revenue per adjusted admission by approximately 60 basis points. Same store revenue we've increased 6.7% and same store revenue for adjusted admission would have increased 2.9% without the change in the discount policy.

We have continued to deliver good EBITDA growth with 125% increase of $213 million, from $170 million to $383 million. On a same store basis, EBITDA increased $38 million or 11% from $340 million to $379 million for the quarter. For the first quarter, EBITDA margin on a consolidated basis was 14%, a decrease of 70 basis points from a year ago. The same store EBITDA margin improved to 14.4% compared to the quarter ended March 31, 2007. For the first quarter, our non same store margins, 4.9%. The [de novo] Cedar Park Regional Medical Center outside of Austin, Texas, has contributed a lower than average performance to the non same store due to its startup costs and reduced margin by approximately 400 basis points. The credit margin before acquisition of the non same store hospitals was approximately 3%.

In the first quarter, consolidated operating expenses as a percentage of revenue were up 70 basis points due somewhat to the non same store acquisition, specifically Cedar Park. Also consolidated payroll and benefits and bad debt decreased 20 basis points. Supplies increased 260 basis points. On a sequential basis, there was a 30 basis point increase in supplies, which is consistent with historical results from the fourth [or] first quarter. Other operating expenses including rent decreased 100 basis points. On a same store basis, total operating expenses improved 80 basis points driven by improvements in payroll and benefits, and supplies and other operating expenses all increased in bad debt. Same store operating expense per adjusted admission increased only 1% or 100 basis points with very, very good cost controls in the quarter.

Triad has historically had lower combined bad debt and charity than CHS, but higher discounts. Consolidated self-pay revenues as a percentage of total revenue declined 200 basis points, due somewhat to an implementation of discount policies [we discussed] when we discussed revenue. Consolidated bad debt is 10.9% for first quarter versus 11.1% for prior period a year ago. And of course, bad debts were less due to increased self pay discounts. Charity decreased 110 basis points and administrative discounts increased 130 basis points. Our combined consolidated bad debt charity care and administrative self pay discounts as a percent of adjusted revenue are up 10 basis points for the quarter, 17.5% versus 17.4% for a year ago. Our 2008 guidance for bad debt ranges from 11.2% to 11.7% of net revenue.

Consolidated cash receipts were over $103 million. [We'll] collect on that revenue for the last 12 months ended March 31, 2008. Consolidated AR days from 54 at March 31, 2008 unchanged from December 31, 2007. The allowance for doubtful accounts was $1.037 billion or 39% at March 31, 2008 of our total net accounts receivable. For the hospital segment, the allowance for doubtful accounts and related contractual allowance for self pay were approximately 82% of the self pay receivables at March 31, 2008.

Community Health Systems continues to have a favorable payer mix. For the quarter ended March 31, 2008, consolidated net revenue by payer source was broken down as follows. Medicare 28.5%. Medicaid 8.3%. Managed care and other 52.6. And self pay 10.6%.

Our cash flow from operations for the first quarter was $8.9 million versus $120 million for the first quarter 2007. The first quarter cash flow was impacted by the following. We made our first semiannual interest payment of $126 million on our high yield debt, reducing cash flow by approximately $62 million. We also funded prior year annual benefits in the amount of $49 million and headed $18 million more health claim payments in 2008 versus 2007 due to some prefunding in the fourth quarter, 2006. Additionally, to the large volume in February/March, compared to prior periods, our accounts receivable increased by approximately $100 million, generally in the 0/60 day aging category, with the increase being $67 million more than 2007. These four cash flow items total $196 million compared to the 2007 cash flow. These decreases were offset by [apparently] increase in noncash depreciation. The last six months, cash flow from operations totaled $291 million. Our 2008 guidance for net cash provided operating activities remains at $750 million to $800 million.

Total capital expenditures for the quarter [just hit] $137 million or about 5% of revenue. Replacement hospital expenditures including that amount were $58 million or 2.1% of revenue. Our capital expenditure guidance for 2008 remains $775 million to $800 million or approximately 7% of net revenue with $140 million related to replacement hospitals.

Balance sheet cash at March 31 was approximately $164 million. At the end of the quarter, the company had available credit of over $1 billion. We believe that we have sufficient availability to fit our capital expenditure plans.

Looking at the balance sheet, at March 31, 2008, we had $1.3 billion in working capital and approximately $13.3 billion in total assets. Total outstanding debt at March 31, 2008 was $8.9 billion, which 84% is fixed. Our debt to capitalization at the quarter end was also 84%. We did pay off approximately $100 million in bank term loan debt during the first quarter. Additionally, we retired $63 million of high yield bonds which caused us to incur an early [retirement] of debt charge at $1.3 billion and this retirement should generate future interest savings.

At the end of the quarter, we were party to $4.450 billion in interest rate swap agreements, an increase of $575 million for the end of the year. At March 31, 2008, our fixed rate debt is 84%. These agreements limit the effect of changes in interest rates on a portion of our long term borrowings.

I'd like to briefly discuss our minority interest as well as our equity and earnings on consolidated subsidiaries. Our minority interest in earnings was $9.7 million in the first quarter versus $0.2 million in the first quarter a year ago. As of March 31, 2008, 19 of our hospitals were owned by our physician joint ventures, of which two also had some not for profit entities as partners. In addition, six other hospitals had not for profit entities as partners. We recognized about $12.9 million in equity and earnings of unconsolidated subsidiaries in the first quarter. These earnings are attributable to our minority nonconsolidated positions and joint ventures for subsidiaries of the university -- UniversaL Health Systems in Las Vegas, Nevada,; HCA in Macon, Georgia; and the local foundation in El Dorado, Arkansas. Wayne will now provide a brief recap.

Thanks, Larry. The first quarter marks a very strong start to 2008 with $2.7 billion in quarterly revenues. We have consistently recorded double digit revenue growth since beginning June in 2000 and we're going public in June of 2000, 31 consecutive quarters. We expect our growth to continue as we improve hospital operation, enhance services, and recruit physicians to [stem out migration]. With that, I will now open the call for a questions and answer period. And if you would like to talk to us after the call, you can reach us at (615)465-7000.

(OPERATOR INSTRUCTIONS) Your first question comes from Justin Lake with UBS.

Thanks, good morning. A couple of questions. Just first on commercial pricing. Can you talk a little bit about what you're seeing from managed care specifically? There's been a lot of chatter on the market that we might be seeing an inflection point as far as hospital negotiations. Are you seeing anything there that you can kind of point to as far as managed care's willingness to give up price or your ability to get better price from them and then maybe talk to what those components are?

This is Larry. Our guidance has been 5 to 7%. We pretty much think we'll stay in that range of 5 to 7%. We do have some anticipated synergies in the $145 million for managed care which I think we'll achieve for year. In talking to our managed care directors, they feel pretty confident about we'll be within that range -- that's been our range for a while. I wouldn't think that we'd expect to be a lot -- any outside that range right now.

One of the things that's helped us in terms of managed care is the fact that that we've been able to consolidate our operations in individual states and having one manager over that particular state as opposed to the way Triad did it by individual hospital. And that's given us a little advantage currently in terms of working through our contracts.

Great. When you sit down with your counterpart from the plan and talk about a certain pool of revenue for instance that you're putting together Community and Triad. And you're talking to trying to get your rates obviously closer to Triad's or getting a better rate on that total pool. Is there anything that you're seeing from the order community or the plan that's changed as far as your ability to get them to move closer to that higher rate? And within that 5 to 7%, is there -- do you feel like you're moving toward the higher end of that range, or maybe 5 to 6? Is there any movement within that range that you could talk about?

Nothing has changed as far as we can see currently. There's no big trend changes or any of those kinds of things that we're hearing about.

I just add that we're currently renegotiating a higher number of contracts in the first quarter than we would have had a year ago because of having more contracts. 4,300 contracts down to work, which is about double. So we've got more work and more activity. There's a good overlap of activity. Basically we have about the same top -- same five high payers. But I think if we can stay in the 5 to 7%. And again, 65% of the markets are still sole providers, which helps you get some of the contracts you got to give, because if you don't have a contract, you're going to get paid charges.

Just to conclude this part of the conversation, we're not having any difficulty getting contracts that we want. We're not having trouble renewing or renegotiating or any of those kinds of things and we're doing fine.

Great. And then I'll just touch on the volume side. If you kind of ex out some of the one time items, you did a good job of explaining in your presentation. It sounds like same store volumes were in the 1.5 to 2% range. Can you tell us -- looked like surgeries were down. Maybe you can give us an idea of what kind of volume you're seeing there as far as maybe by payer mix. Is it more medical? And what -- can you walk us through, do you expect that to continue -- are you seeing it continue in April? Is there anything you can point us to as to what's driving that?

The answer to your first question first, about 2%. Clearly Medicare was probably -- some of Medicare has now been classified as managed care. So managed care percent of admissions is actually above the 3.8%, looking at that perspective. Some of that is probably Medicare fee for service. Medicaid was a little less. And self pay was up a little bit. I think we were up 20 basis points percentage, but up more than 3.8% in total. We generally don't talk about quarterly volume. We get asked that and we just elected not to talk about each quarter and each week. Clearly we'll benefit in April as a result of Easter being in March, and that should help April out.

Thanks. Just one clarification on jumpoff -- on the commercial side, Larry, you did break out the fact that a bunch of Medicare is now being classified as commercial. Can you give me an idea of what the commercial growth is, how it looks ex the Medicare advantage?

What I have here is the total managed care (inaudible) is greater than at 3.8%. And we have not broken out the Medicare any further than that.

So it's additive. We just don't know how much.

Just to conclude again this conversation about volume. Even when you -- and we're the first ones to say you can't count on the flu. You never know when it's going to come or not come, all those things. And change is imperious. Larry's great about making sure that everybody understands when there's a leap year or Easter, how those things fall. Having said all that, we had almost 2% same store volume growth. It's a very positive thing for us currently. Switches strong for the quarter.

Thanks for all the commentary.

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

Good morning. Just a couple of quick topics. The first on synergies seems to be going a little faster than initially anticipated. Can you talk about maybe some of the specifics there? Is it just faster or maybe can we expect a little bigger synergy too?

We didn't change our guidance. We kept it $145 million. (inaudible) some reductions in the corporate overhead came a little faster than originally thought down there. And we've probably got it in the second quarter. Now we're getting some of that in the first quarter. A lot of the activities in corporate office and productivity and supplies, and we had some benefit in some of the other areas. But I think we'll stick with now for $145 million.

and then I guess Larry, in your prepared remarks, you mentioned some pressure due to doctor/clinic type revenue. Can you expand on that a little bit.

There was a large -- Triad had acquired a large multi-specialty clinic in the fourth quarter 2006. It's in a same store hospital. So it's been showing up in the same store revenue and that's how clinic revenue is done. That sort of anniversaried itself. It's a positive to see the clinic revenue is slowing down. That slowed the outpatient revenue down about 1.7%, I believe. And it's sort of a positive to see clinic revenue not growing. That probably affected the overall revenue growth about 90 basis points. I didn't add that into it. We're in somewhere in the 3 to 4% if you adjusted for that.

Great. And then on the Empire deal, looks like you're getting a little better price. Maybe it's pushed out a little bit in terms of the timing. What are the some of the dynamics that led to that and does it change your longer term expectations at all there?

Just in terms of the dynamics of this, the state is taking an inordinate long period of time to go through this process for certificate of need. So that's really extended this a great deal. One of the things we're always concerned about as we talk about divestitures is when you talk about selling a hospital the things that happen in the market. The dynamics in the market are fairly detrimental to that facility until someone gets in and starts making the right decisions and moving forward quickly. Those are the kinds of things that are happening in that market. So we were successful in renegotiating and reducing the price by $16 million. We think now things are moving forward and it will close sometime in the fourth quarter. I don't know if you want to add anything.

We're still pretty positive about it being a really good acquisition. And the results did slip a little bit in 2007 versus 2006. But this should be a good facility for us once it closes.

Thank you.

Thank you.

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

Good morning. The followup to the synergy question from earlier -- just wanted to think about it a little bit different. You guys have now achieved 25% of the '08 synergies. And if we include what you had in 2007, it's about 35% of among the total. As we think about the integration of Triad, and not just talking about synergies, as we think about the process and things such as integrating the systems and such, how far along are we with the process here? I don't know if there's a way to think about it but just curious to get your thoughts in terms of the overall integration process with synergies being a part of that but also other things.

Let me speak to the integration process. And Larry can talk about the synergy detail again, Adam. I think we've made a lot of good progress. We're in an operating mode now. We're back to doing the things we have done historically in terms of working hard on expense management, looking for revenue growth opportunities, recruiting physicians, doing all the things we've been doing the last 10 years. This acquisition feels a lot like the acquisitions that we've done through the years. There's just a lot more of them. In terms of the kinds of things that we need to do to make the hospital successful. As a couple things that have helped us along the way that we talk about publicly is that we didn't have to do a big systems change to start with, nor a supply system change to start with. Those two things have helped us a lot in terms of moving this forward. We're making really good progress. We're now back to working on perfecting the things that we do in term of our standardized centralized business processes and procedures and getting physicians in place and looking for all these opportunities. We feel pretty good about that. And we're not having any turnovers as I've said over 1,000 times. We've not had any major doctor issues or meltdowns or any of those kinds of things. All that is going better than we expected. And by the way -- this will set Larry up to answer your question for you. By the way, we continue to find great opportunities. The more we work on this, the better opportunities we see.

Just to add a little bit to that, the areas of the corporate office -- it got done a little quicker and I think we're making some progress in productivity. We're real productive in this quarter. Supplies is probably one. We made some progress. There's a lot of opportunity in supplies to speak specifically and our Chief Purchasing Officer will good job the next three quarters improving our supply synergies. To other areas, managed care, home health, case management, [HIM], marketing, IT, all have got annual goals they have accepted and we measure on site. We feel real good about the $145 million. Wayne alluded to other areas. There's other areas in revenue management, ER management, physician recruitment. Opportunities to do a better job there. And as we do those, we'll see some benefit of that too and we'll continue to monitor how we do. $145 million looks pretty good for achieving that in 2008.

And the most encouraging thing so far for us are not only the opportunities in the market, it's the management we have in place around this country. Our management throughout our hospitals and our division managers really stepped up to the process. And that's why we're having good success and making good progress.

Just a follow-up question here and thanks for details there. Around the accounts receivable -- you saw the buildup, it makes sense with the volumes picking up the way they did in February. Just curious if you've already seen improvement there. And also on the AR, Larry -- you said self-pay -- I guess your allowance is now 82% of your self-pay AR, and that's up from 76 last quarter. Just curious if you think about that number staying at that level, I guess. Just your outlook in terms of how think about the reserve as a percentage of self-pay AR. Thank you.

I checked yesterday. And we'd actually done a pretty good job. We will talk about that, since it's specific. We did a pretty good job of April cash collections through yesterday and our [vestible] cash has gone up quite well. It is moving down. I expect to have a real good second quarter of cash flow perspective. As relates to the 82 -- that's on hospital segment. Adam, we decided it a little differently. Most of our receivables -- and it'll show up in our Q -- are hospital (inaudible) clinics or something that were there in -- it's about 82%. It's fairly comparable to what the hospitals said it'd been at the end of the year, had we -- last time we disclosed the total company. We're pretty comfortable that it's going to be somewhere in the high 70s, low 80s percent range there. Our collection company is doing a very good job. We're starting to get some accounts from the Triad hospitals merged into our collection company and that started in March. And we'll see good results there. Doing a pretty good on deductibles and coinsurance, keeping our collections up. Pretty good overall recovery rates. I think we're in pretty good shape on the bad debt reserve right now.

Thank you very much.

Your next question comes from Ken Weakly with Credit Suisse.

Thanks, and good morning everyone. Wayne, I was curious if you could maybe look forward with some of the thoughts about the slowing economy, how labor costs and bad debts change relative to expectations depending on the state of the economy.

I don't know. People have different views about this. My perspective, I think our unemployment rate in our markets is about 5.3%. Historically, it's been 5.2 to 5.3. We may be up to 5.4% now. It would take a pretty big sea change of unemployment for it to really adversely affect our markets in terms of -- and you know better than I do, when you do have a big layoff in a market or a big change in payer mix -- and we saw this in Tennessee a couple years ago when 200,000 people were disenrolled from Medicaid here. We had a big uptick in our bad debt, of course. I think incrementally, those small changes in unemployment rate don't really have much of an adverse effect on us. You can see that we had good productivity in our wages and salaries this quarter, so we continue to have opportunities and make progress there. I think it has to be a pretty major change in a particular market to have a big impact.

The other side of this is we continue to see so many opportunities in terms of market share opportunities. We still are getting about half the available volume in our markets. And we have a lot of physician recruiting opportunities. All those things would offset any of these smaller incremental issues. Having said that, we had really good volume. 2% growth in volume. Ex the issues about the flu and leap year. I'm not too terribly concerned unless there's a major change. By the way, if you had a big issue in a community, it's a community issue and not a companywide issue.

I understand. I would think that a slowing economy could help out the labor margins. Is there any validity to that? Thinking that turnover starts to actually drop considerably on the nursing side. And labor costs starts to improve as a percent?

That's a clearly a possibility. Again, incrementally, it's a relatively small number when you look at it market by market and across the company. It's a pretty small -- and besides, there's always demand for nurses. So you may be right that over a longer period of time, if unemployment goes up, people have to have stability in their jobs.

Okay. And Larry, can you offer some color on the severity adjusted DRGs? What impact it may have had relative to last year, either in pricing or in profitability of the Medicare and patient business?

Let me make one comment. If you go back a couple of years when the unemployment rate actually went up from around 4.2 to 5.7 and that's when you really have January 2001 to 2002 -- that's when you started seeing a lot of the volume. It's going to take a lot more now in part to side volume activity. The MSDRGs we were originally all in. We still think we are going to get somewhere around 2% Medicare increase both sides of the company. We benefited from the Triad facilities would be a little bit higher than the Legacy CHS hospitals. I think we still feel pretty good about that. We've done some work to try to make sure our estimates are right, and so far they look pretty good. As far as the [Haybro] adjustment, we're always working, trying to do a good job on [coating]. Some of our synergies are in the HIM area, so we've made a little progress in that. But I think we still believe we'll get the overall Medicare increase of about 2%.

One last question if I could. You have a target of 900 docs. What's your net addition on a yearly basis? In other words, how many are losing.

We lose about 5% -- 4 to 5% a year and there's about 12,000 physicians. If we're losing 5%, it would be around 300.

Thank you. Okay.

Your next question comes from Matthew Borsch with Goldman Sachs.

This is Shelly Gnall in for Matt Borsch this morning. Just a follow-up on a couple of Justin's comments. Can you clarify -- was flu actually displacing surgical cases in the quarter?

Surgery was down and we have said often that our experience has been when you have a really large flu season -- you had one in 2005, had one in the first quarter of March 2009 (sic). I think we're up 16% March of 1999. You just have less surgery. It's just a phenomena there. To some extent, it could happen. It's got a lot to do with when you have this type of flu, I'm sure a lot of people had the flu on the call listing and it slows down surgery.

We don't know of anything either competitively or systemically that adversely affects our surgeries in the first quarter. It seems to be more about mix than anywhere else.

That was going to be my follow up question. Was there any reduced demand for specific types of surgery. It doesn't sound like there was.

Not that we can tell.

Okay, great. A quick question on the self pay mix. It looks like it's up 2 basis points sequentially. Any thoughts there on what's driving that?

It's spread throughout and we have 115 hospitals. It's probably in 10 or 15 hospitals. It's not a big number. It's 700 or 800 admissions out of 170,000 admissions. It's 0.2. Not a big percentage increase. And we've often said we'd expect self-pay to grow a little faster than the overall admissions growth. We didn't have that happen last year. This 2% increase doesn't seem to alarm us. It's what we think we have going forward.

And then overall, it looks like your payer mix looks a bit better year-over-year. Does that reflect some of the recent divestitures?

It helps on that. Also, when you look at year-over-year, Triad had a lower margin than we've had, even though they've had a much higher revenue for adjusted admission by 9,000. We had somewhere in the 7,000 range. That's sum of the comparison year-over-year as reported. So we don't look quite as good when you put in the [Pride] will help our payer mix going forward.

Great, thank you.

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

Thanks. Good morning. To stay with the theme from the last question on the total uncompensated share claims, looks like your levels were stable on a year-over-year basis and down from last year. I guess in terms of framing, maybe the risk on the uncompensated care side is the [heuristic] that the uninsured admissions pick back up faster than they've been growing, or is it a lack of ability to collect on the copay or the deductible side? What's the biggest risk to the uncompensated care trends going forward?

Historically, bad debts have been about 70% related to pure self-pay, and I think that's stating that trend in 30% deductibles and coinsurance. Our guidance is 11.2 to 11.7. We feel good only finishing the year at 10.9%. Also, the 17.5% was actually up sequentially compared to 17.4, that's CHS only, if you look sequentially, it was 16.8. So it was up a little bit. It was still a pretty a good quarter. We feel comfortable that bad debts shouldn't derail us to make -- what out there is our guidance. Especially knowing that we've got 11.2 to 11.7 versus the 10.9%. One other thing we do a lot of -- you got to always remember that the bad debts and charity and discounts are gross dollars. We start looking at revenue less bad debts and operating expenses less bad debts. In this past quarter, revenue adjusted was up 5.3% and operating expenses were up 4.3%. So we had real good operating management.

And then one quick follow-up on the portfolio. Any thoughts on additional divestitures or are your pretty happy with what the portfolio looks like at this point?

I think we're in pretty good shape. We made good progress early on in making determinations about what we needed to get done. The Capella deal happened fairly quickly. As we said, we would get a fair number done to start with. I think we're in pretty good shape now and really the job here now is continuous operation, operation improvement. I think that's what we -- we have both on the acquisitions side and the divestiture side, our focus is now on improvement. And there's a lot of opportunity for improvement. That's not to say that if somebody wants to offer a great price for a particular facility, then we certainly would consider that. All in all, we feel like we have a pretty stable portfolio with a lot of opportunity for growth.

One point about that. If you go back and look at our first quarter, we sold some CHS Legacy hospitals since the first quarter of 2007. The revenue actually dropped $50 million for those hospitals. EBITDA stayed the same and we increased our EPS $0.03. The de-leveraging is working because we're still under [right assets] and getting a good price for it and that sort of indicates it.

Thanks a lot.

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

Thanks. Good morning, everyone. So just as far as the quarterly guidance goes, you came in towards the upper end here in the first quarter. And if I'm hearing you correct, it sounds like the volumes were ahead of what you would have expected given the seasonal impact of flu. And you probably got a little bit ahead with regard to the corporate office winding down in Plano. I guess I'm just wondering that if there was anything that went against you in the quarter that didn't translate to more earnings. Can you just help me square that question? Was there more startup losses in Cedar Park? Was there something on the supply cost side that didn't go your way? Just if you could help me understand that.

The one thing I'd say is Cedar Park started out a little bit higher loss EBITDA wise what we'd budgeted. This should get better by the year. What the change in the guidance was -- we were $2.25 to $2.45, where this is the second full quarter of owning Triad assets. We just felt it was appropriate to leave the range the same. We didn't change the revenue, the EBITDA, the EPS, the revenue, or the admission guidance. If you look at it, admissions were real strong in the first quarter. What we've said to people is that we'll look after the second quarter and make adjustments. The other couple of things was Spokane did move in the third quarter and the fourth quarter. That affects about $75 million of revenue and maybe $8 million to $10 million of EBITDA possibly. And then a little bit of accretion. And we do think the Medicare increase may not be quite as positive as we thought it would be. I think we thought it might be 3.5%. Now we're thinking maybe less than that for the fourth quarter. Those are events in the future. But we feel pretty good about where we are and have a good quarter. And we'll see where the second quarter takes us and then revisit our annual guidance.

That's helpful. On Spokane, Wayne, is there anything you can do leading up to the close of that sale? You've got QHR. Is that an asset for you to help stabilize operations? Is there anything you can do in the interim given the length of time that it still is that you plan to close?

Not really. We generally don't get too terribly involved in a facility until we own it. You never own it until actually it's closed. We're pretty careful about not trying to get in control or take steps. We're getting good information on a quarterly basis. We think -- on a monthly basis, I'm sorry. We think now they have a good operating team in place that they've employed and they're doing the right things now. It did drift for about six months or so. We're still encouraged. It's over $300 million in revenue. The purchase price is about half that when it's all said and done. It should work extremely well. It's over 500 beds. It's two facilities. That is a great community -- Spokane is a great community with good growth. And it fits our opportunity list in terms of the mid-sized market. We're very encouraged about it. Just taking an inordinate amount of time to get this done.

On the synergy, I know you've talked a lot about that. My one question would be related to supply costs. Is there anything specific, or are there any processes that you're looking to change over the next several quarters on that particular line item? It seemed like it was one of the major opportunities. And a lot of your guidance rests on success there. Can you just flush that out a little bit?

If you look at the area there, it is a lot of opportunity -- and the drug opportunity. And we made progress I think it was drugs did a little bit better in CHS '07 hospitals in the first quarter and historically, that's a very good opportunity and we've got some opportunity probably in the food and stents and stuff as that. I think you'll see us make some progress going forward. The first quarter was up a little bit. And w I think you'll see us do better as the quarters go on, unless we have a lot of surgical growth, which would even be better. I think that from -- the main thing we're putting a lot of focus on right now is drug formulary and trying to drive our drug costs down. If you go back, CHS the last four or five years has improved drug costs as a percentage of revenue 20 to 30 basis points. And I think we can make a similar type progress in CHS '07 hospitals.

Okay. That's great. My last question, Larry, it relates to the swaps. Is there anything you have to say about what you might do with swaps and whether you unwind any of them prematurely to take advantage of the interest rate environment? I think you've been evaluating that.

Yes, I think we evaluated that. Our internal analysis and also external analysis was probably with the kind of volatility going on not a good idea to try to unwind the swaps and [pay] the cost for it. The LIBOR is about 2.9 and we're going to reset here in the 1st of May. It was in the low 3s at the end of February. We'll watch it and see what happens today. Instead of activity, we could do more swaps. Although we're pretty comfortable with 84% fixed, and we still leases $1.5 billion of variable debt. But I think from a perspective of going forward, interest should help us. And I think the rates we got are somewhere comparable to what most people would expect to see for the age the category of swaps we got. And we'll probably wait and see what happens after this next rate decrease hopefully, today.

Great. Okay. Thanks very much.

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

Thanks. The surgery volumes -- getting back to that. It's been down not only for you guys but also for everybody else. Is any of this related to medical management as we see more and more shifts from straight Medicare fee per service to Medicare managed care?

I don't think in our markets. I think most of the growth of Medicare has been in the Medicare fee per service and PPOs. I don't think it's gone that much in the HMOs where you could see some redirection or some slowing down of surgeries. And I think I would expect that we'll have reasonable surgery performance going forward. But it was a little lower that quarter. Historically, as you have a pretty big flu season, you have a little less surgery growth. You do have minor surgeries moving into the doctors' offices, and probably going to continue and we count all surgeries. So some of that movement is to less intense surgeries at the doctors' offices.

Your physician recruiting was very strong for the quarter. You haven't changed any guidance on that. You're up 32% year-over-year but 17% is still kind of what you expect to grow physician recruits by. First of all, why so many in the first quarter? You usually kind of see, I guess, more starting in the latter part of the year. And then what's going on with the mix here? Are you trying to target anything -- some things over other things? Can you give a little color on that?

As you probably recall, one of the things -- when we talked about this transaction when we got into it, one of the things we were a little surprised about was the fact that there was not an organized effort in the Triad hospitals in terms of physician recruiting. And that's a benefit that we didn't really think about all that much. When we did this, we thought a lot more on expense improvement. Having said that, we have ramped up our organization in terms of corporate office staff quite a bit. We're beginning to see the result of that. We also have identified a lot of really good locations across the country, particularly in the Triad facilities that we've acquired. There are a lot of opportunity for physician recruiting. The good news is that we had sort of the mechanism in place to make that happen. We'd been the most consistent and the most successful in terms of recruiting physicians over the last seven or eight or nine years of course. And all we had to do was incrementally improve on that -- or increase that process, and that's kind of what has happened. And we found a lot more opportunities. So we've known about -- we know practically every person who's finishing a training program across the country or transitory or those kinds of things. I think it's just our process working and I think we have confidence that we should continue to be able to have a very strong year in terms of physician recruiting. Which will be very helpful to us, by the way.

From a numbers perspective, we're comparing some of the CHS and Triad for the first quarter to just CHS last year because I didn't track the physician recruitment. In a way we did -- you're right, if we have a really strong third quarter, we'll have to visit to see where that number is. We did have a pretty good start for the first quarter.

In terms of mix of these docs, primary care, hospice, a lot of specialists, diagnostics?

More -- 60 to 70% specialists more than primary care.

Thank you. I'll jump back in queue.

Your final question comes from the line of David Bachman with Longbow Research.

Thanks for sneaking me in here. Follow-up question on the physician recruitment. Obviously, that's been a strong point for you all for some time. Can you just give us a little bit more color of how you think of that in terms of the incremental benefit of a specialist, let's say. Or the ratio of physicians that you're recruiting to your capacity. Can you just provide a little more color on that?

Let me get a start and tell you how we work on the process. We do it by individual hospital. We make a determination based on composition of the medical staff based on the level of services, the types of physicians we need for each of those hospitals. And we go through a fairly detailed process to get there which includes everything from succession planning, if you want to call it that, age analysis for doctors, demographics in the market in terms of growth, new opportunities that we see, all the above to try to make a determination. We've been doing that with our facilities for a long, long time. We've just been through all that process with the Triad facilities and we had a very good result in terms of understanding the nodes and identifying the needs by facility. And then Larry is going to tell you in a second, when you do population work, you can very easily determine the numbers of surgeries you need and all those kinds of things which we put in that calculation. But more importantly, after we do that, then we have a pretty disciplined standardized organized process in terms of how we go about looking for and recruiting physicians and tying those physicians to those communities so that our turnover rate as Larry mentioned earlier is 4 or 5%, which is fairly low. A lot of it has to do with the work that we do on the front end to try and find some relationship with that physician with that community. With that, Larry?

There's about 20 physicians for every 10,000 people. We run about (inaudible) slightly less than that. There's lots of opportunity in these markets now. In some of the markets where there's competition, that may be working at another hospital and then we'll do [active]. We got a large percentage of our markets being the sole provider, so it's been something we've been really good at over the years and I think we'll continue to be good at it. When you got half the population out there, you could add that many more doctors. There is a lot of recruiting opportunity.

And the market share opportunity for us continues to be very strong organically in our market. That also drives the opportunity for physician recruiting.

Great, thanks. You're once again proving yourselves to be very capable operators. My final question is, when it comes to things that you all can control, I think that we all have a pretty good comfort level. What's out there in your operating environment that is outside of your control that gives you pause as you look out over the next nine to 12 to 18 months?

Politics. I think the thing that you always have to be most concerned about in this industry is reimbursement. We talk about it all the time. Who knows what's going to happen politically over the next few months, and then longer term. I think we're pretty stable for a couple of years. It will take a long time to make major changes. It's not clear to me what the Democratic strategy and it's certainly not clear to me what the Republican strategy is in terms of overall healthcare going forward. That's the thing that will keep us a little bit on the edge all the time in terms to have conversations about different ways of solving the uninsured problem. The uninsured problem clearly rolls up -- it's reimbursement and the uninsured problem -- it's the greatest concern to everyone.

So if healthcare reform means finding a new way to shift costs around, how that plays out is a big concern.

Yes.

That's it for me. Thank you very much.

We have reached the allotted time for questions. I will turn the call back to Mr. Smith for any closing remarks.

Thanks for spending time with us this morning. Our strategic objective is clear, deliberate, and consistent results and to ensure that our hospitals achieve a position as a dominant healthcare provider in our respective markets. We're very pleased with the trends in our business. We look forward to another successful year at Community Health Systems. We want to specifically thank our management team and staff and hospital chief executives and chief financial officers and chief nursing officers and division operators for their excellent operating performance for the first quarter. We continue to remain focused on our business strategy and improving results. Once again, if you have any questions, you can reach us at (615)465-7000.

This concludes today's first quarter ending March 31, 2008 conference call. You may now disconnect.