Community Health Systems Inc (CYH) 2008 Q2 法說會逐字稿

Good morning. My name is Julie Ann, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems second quarter 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 the turn the conference over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer of Community Health Systems. Please go ahead.

Good morning and welcome to the 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 result for the second quarter and year-to-date ended June 30, 2008.

We issued an 8-K, including a press release, after the market closed yesterday with our financial statements. For those of you listening to go the live broadcast of this conference call, on our website, a slide presentation accompanies our prepared remarks. I'd like to begin the call with some comments about the quarter, an update on our integration progress, and then turn the call over to Larry who will follow with comments on our financial results.

But before I begin, I'd like to read the following statement. Statements contained in then conference call regarding expected operating results, acquisitions transactions and other events are forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from these statements.

Such forward-looking statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. and are made based on management's current expectations and beliefs as well as assumptions made by and information currently available to management. These are summarized under the caption risk factors in the document filed by Community Health Systems Inc. with the Securities and Exchange Commission, including the Company's annual reports on Form 10-K, quarterly reports in Form 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 materially from those contained in the forward-looking statements.

We are pleased that Community Health Systems has delivered another solid quarter and -- solid financial and operating performance for the second quarter of 2008. Our results continue to reflect our consistent execution as well as our integration of our large 2007 acquisition. In our reported results to prior year's second quarter, 2007 year-to-date 2007 consolidated results reflect Legacy CHS only. Our same-store results include the July 2007 acquisition as well as Legacy CHS for the second quarter of 2008, and 2007, as well as year-to-date 2008 and 2007.

Net operating revenues for the quarter ended June 30, 2008 totaled $2.7 billion, compared to $1.2 billion for the same period last year. Adjusted EBITDA was $369 million versus $169 million for the same period a year ago. Income from continuing operations was $50 million versus $54 million for the second quarter last year. Earnings per share from continuing operations was $0.52 per share versus $0.57 per share for same per.

In the second quarter, we had a $9 million reduction in pretax profit or $0.06 EPS which was primarily related to the reduction in reimbursement and nonpayment under the State of the Indiana Medicaid program. Larry will provide additional details about that item in a minute. Net operating revenues for the six months ended June 30, 2008 was $5.4 billion. EBITDA was $752 million. And income from continuing operations for the six months ended June 30, 2008 was $101 million or $1.06, compared to $1.17 for the same period a year ago.

With that I'd like to review some key accomplishments for the quarter. First our same-store admissions were a strong 2.3% for the second quarter and year-to-date same-store admissions are up 3.1%. Same-stored adjusted admissions also increased 2.4% for the quarter and same-store net revenue increased 4.9%.

We continue to move forward with our acquisition of Empire Health, a two hospital system, with 511 beds and almost $300 million in net revenue in Spokane, Washington. The targeted closing for this acquisition is sometime in fourth quarter. Again, our focus for the next six months will be to improve our current hospital portfolio.

Additionally, we did purchase the remaining 35% interest in Trinity Medical Center in Birmingham, Alabama from the [Basgis] Health System on June 30 for approximately $51 million in forgiveness for a note. As you know, physician recruiting has always been a key component of our operating strategy, adding new physicians to our market improves not only the quality, but also the scope of healthcare services provided in our communities. The Company recruited 475 new physicians for the six months, compared to 295 physicians recruited for the same period a year ago. Our physician turnover is approximately 5% and we have increased our target for 2008 to 1,000 physicians.

We have achieved approximately $42 million in synergies in the second quarter, $77 million on a year-to-date basis, over 50% of our target synergies for $145 million for 2008. We continue to be on track with our expectations. We are updating our 2008 guidance to reflect a strong volume experienced in the first quarter, and second quarter same-store annual admissions invested admissions growth will range from 1.5% to 2.5%.

Revenue, $10.9 billion to $11.1 billion EBITDA of $1.550 billion to $1.570 billion with EPS for income from continuing operations to $2.20 to $2.35 as a result of the Indiana Medicaid reduction. At this point, I'd like the turn the call over the to Larry to provide you a summary of our financial results.

Thank you, Wayne. Good volume and continued expense control has contributed to our good operating results for the second quarter. The State of Indiana provided a formal notification in June 2008 to note medicaid payments for the hospital care for the indigent program, called HGI, will be made for it's state fiscal year ended June 30, 2008. The program had been in existence for over ten years with all CHS Indiana hospitals expected to receive payments. CMS did not [estate labor] for the program for fiscal year June 30, 2008 and beyond. Therefore, we did not receive an expected payment of $4.2 million in the second quarter in June 30, 2008.

In the second quarter, the state communicated one of its CHS Indiana hospitals would not receive all expected disproportion share payments -- for the state fiscal year ended June 30, 2008. The DISH underpayment was a surprise because the state payment determination is strictly different from the prior year's payment determinations and from previous communications from the state. Through reduction, DISH was directly attributable to an increase in DISH funds paid to the large municipal hospitals, thereby reducing the overall DISH funds available to Oaks Hospitals, classified as nonhistorical DISH hospitals. Those hospitals are classified as historical DISH hospitals to maintain their historical DISH funding.

Efforts to contest reduction to receive additional payments continue throughout the second quarter of 2008. It was communicated by the state in early July that additional payments would not be received unless additional Medicaid days for 1997 were identified which would then qualify for CHS hospital as a historical DISH hospital. As a result, we received $4 million less than expected in DISH payments for fiscal June 30, 2008.

I would now like to move to the quarterly metrics. Our consolidated admissions growth in the second quarter was up 101.3% compared to the same period last year. Adjusted admissions which factors in outpatient business had a 93% growth rate over the second quarter of last year. Our same-stored admissions increased a strong 2.3% compared to second quarter of 2007.

Adjusted for the Easter movement as from the first quarter to the second quarter -- from the second quarter to first quarter, this year as well as service closures, same-store admissions would have increased 2.2%. Same-store self paid admissions as a percent of total admissions were flat for the quarter, 6.4%. Same-store adjusted admissions increased 2.4% for the quarter.

Net revenues in the quarter increased 125% from $1.197 billion after eliminated approximately $50 million of revenue for divested hospitals since June 30, 2007 and they increased to $2.7 billion in the second quarter of 2008. On a same-store basis, net revenue increased 4.9% for the quarter, with both inpatient and outpatient net revenue increasing 5.3%. Several points need to be made with regard to the revenue growth in the second quarter.

Same-store net revenue per adjusted admission increased 2.4% year-over-year, and an increase of 2.3% on a sequential basis. Same-store surgery volume decreased 2.3% or 20 basis points for the second quarter, a slight improvement over the first quarter. Our [emotions] admissions have increased in the same period a year ago with our average length of stay is decreased 2/10 of a day, indicating less acute business.

Our Medicare case mix decreased 1%. As for the first quarter, our same-store revenue growth continues to be affected by the -- of the discount policy in the legacy Tennessee hospitals that was regulated beginning the third quarter of 2007. The affected revenue and revenue per adjusted admission by approximately 40 basis points.

The impact of discounts implemented in our other legacy CHS hospitals in the first quarter is approximately 90 basis points on both revenue and revenue per adjusted emission for the quarter. Considering only the discount policy, same-store revenue would have increase 6.2%, and our same-store revenue per adjusted admission would have increased 3.7%. The growth in self-pay discounts is higher than previously estimated by about 30 basis points, and has been factored into the revised annual guidance.

Consolidated EBITDA was $369 million the second quarter versus $169 million for the same period a year ago. On a same-store basis, EBITDA increased a strong 10.7% or $35.5 million from $330 million to $366 million for the quarter. For the second quarter, EBITDA margin on a consolidated basis was 13.7%, down to 60 basis points from a year ago. Same-store EBITDA margin increased 80 basis points to 13.8%, compared to the quarter ended June 30, 2007. For the second quarter, on a non same-store margin of 7.9%.

In the second quarter, consolidated operating expenses as percentage of net revenues increased 40 basis points. Consolidated payroll and benefits increased 60 points, and supplies increased 230 basis points to 15%. Bad debts decreased 100 basis points to 10.8%. And other operating expenses, including rent, decreased 110 basis points.

On a sequential basis, we saw improvements in bad debt and supplies. On a same-store basis, total operating expenses improved 80 basis points, driven by an improvement in supplies and other operating expenses, including rent offset by an increase in payroll and benefits. The payroll and benefit increase is driven primarily by the movement from other operating expenses to salaries, and benefits of the IT personnel previously employed by Perot, and now employed by CHS, as well as higher payroll and benefits from our physician [plantage] growth. Bad debt improved in the second quarter. And our operating costs per adjusted admissions on a same-store basis, increased only 1.6% for the quarter, demonstrating our strong expense control.

On a year-to-date basis, consolidated admissions were 342,000. And a consolidated adjusted admissions were 609,000. Same-store admissions, as well as same-store adjusted admissions, increased 3.1%, adjusted for service closures and flu-related to admissions, and an extra day in February same-store admissions would increase to 2% for first six months. As Wayne mentioned, we are increasing our guidance to reflect the volume for in the first quarter. Admissions and adjusted admissions for the same-store went from 1.5% to 2.5%.

Net revenues year-to-date were $5.4 billion, an increase of 130% from the same period 2007. On a consolidated basis, net revenue per adjusted admission increased 16.6%. On a same-store basis, net revenue increased 5.3% for the first six months. Same-store inpatient revenue increased 6.3% and outpatient revenue increased 5%. Total same-store surgeries were down 0.5%.

On a same-store basis, net revenue per adjusted admission increased 20%. And our Medicare case mix for six months ended June 30, 2008 decreased 1.3%. And again, additional discounts reduced our same-store revenue growth -- in revenue per adjusted admissions by 120 basis points. Consolidated EBITDA was $752 million for six months ended June 30, 2008. On a same-store basis, EBITDA increased 11%. Consolidated EBIT margin for the six months ended June 30, 2008 was 13.9% versus the same-store margin ended June 30, 2008 was 14.1%, an increase of 80 basis points compared to the same period of 2007.

For the six months, consolidated operating expenses percentage of net revenues increased 50 basis points from the prior year due in part to the low margins of our acquisitions. Salaries and benefits increased 20 basis points, attributable to the higher payroll and benefits cost for physicians growth. Suppliers increased 240 basis points. Both bad debt and other operating expenses combined improved 170 basis points.

Same-store operating expenses improved a strong 80 basis points from 2007. Our operating cost per adjusted admission increased only 1.3% for the six months ended June 30, 2008. And our man hours per adjusted admission improved a strong 2% year-to-date. Prior to this, historical had lower combined bad debt and charity for CHS, but higher discounts.

Consolidated self-pay revenue as a percent of total revenue declined 200 basis points due somewhat to the implementation of discount policies. Consolidated bad debt is 10.8% for the second quarter versus 11.8% for the prior year. Of course bad debts was less due to increased discounts and charity decreased 100 basis points, and [inter-spring] discounts increased 100 basis points. Our combined consolidated bad debt charity administrative discounts, as a percentage of adjusted revenue, are down 140 basis points from the quarter of 17.2% versus 18.6%.

Looking at revenue minus bad debt, it was up 5.2% for the quarter while operating expenses minus bad debt was up 4.3% for the quarter. On a year-to-date basis, revenue minus bad debt was up 5.3%. And operating expenses minus bad debt was up 4.3%. As we have consistently said, the real cost of treating the uninsured is represented by an incremental cost in care. Our same-store operating costs for adjusted admission increased only 1. 6% for the second quarter and only 1.3% on a year-to-date basis.

Our 2008 guidance for bad debt now ranges from 10.9% to 11.4% of net revenue. Consolidated cash receipts were over 103% of collected net revenue for the last 12 months ended June 30, 2008. Total AR days for continuing operations were 54 at June 30, 2008, unchanged from December 31, 2007. Same store AR days were also 54 at the end of the quarter. The allowances were down -- counts as $1.053 million or 39.6% at June 30, 2008. For the hospital segment, the allowances for doubtful accounts and related contractual allowances for self-pay was approximately 80% of the self-pay receivables at June 30, 2008.

Community Health Systems continues to have a favorable impairment . For the quarter ended June 30, 2008, consolidated net revenue by payer source was broken down as follows; Medicare 27.5%, Medicaid 8.7%, managed care and other 52.8%, and self-pay 11% of net revenue. On a year-to-date basis, the payer mix is Medicare 28%, Medicaid 8.5%, managed care and other 52.7%, and self pay 10.8%. Payer mix is an important driver of the hospital revenue. Margin on a consolidated revenue per adjusted emissions for the quarter was $8,991. On the same period for 2007 was $7,740, demonstrated an increase from the prior statistics.

Cash flow from operations was $408 million for the quarter versus $96 million for the second quarter 2007. On a year-to-date basis, cash flow from operations was $417 million versus $216 million for 2007. The increase in cash flow from the prior year is the result of net inflow from accounts payable, accrued liabilities, and income taxes up about $34 million and supplies and prepaid expenses and other assets of $27 million. We had an increase in noncash depreciation expense of $143 million, and increase in other noncash expense of $34 million.

Total capital expenditures for the quarter just ended $138 million or 5.1% of revenue. Approximately $53 million was for replacement facilities. Year-to-date, total capital expenditures are $276 million or 5.1%. And $103 million has been spent for replacement hospitals. Our capital expenditure guidance remains $775 million to $800 million, with $140 million related to replacement hospitals.

The balance sheet cash at June 30, 2008 was $264 million. At the end of the quarter, the Company had available credit from the revolver is $700 million and $300 million in the delayed draw, approved January 2009. Looking at the balance sheet as of June 30, 2008 we had $1.2 billion of working capital. We had approximately $13.4 billion in total assets. Total outstanding debt at June 30, 2008 was $8.9 billion of which 84% is fixed. Our debt to capitalization was --- at quarter end, was 83%.

At the end of the quarter we were party to $4.450 billion interest rate swap agreements, unchanged from the end of the first quarter. And again, our fixed rate debt is 84%. We recognized about $10.5 million in equity earnings of unconsolidated subsidiaries in the second quarter, down from $12.9 million in the first quarter. Some of the decrease is due to seasonality and also an $800,000 change of estimate of bad debt allowance, related to one unconsolidated affiliate resulting in reduced earnings.

As Wayne mentioned, we did provide updated 2008 guidance. Again, our bad debt range has been reduced to 10.9% to 11.4%. Recently, we've opened three replacement hospitals, totaling approximately $380 million that will cause interest and depreciation expense to increase in the third and fourth quarter.

The annual and quarterly guidance includes an adjustment of between about $0.08 and $0.09 for the reduction in Indiana Medicaid to-date and throughout 2008. Wayne will now provide a brief

Thanks, Larry. We are pleased with the solid second quarter operating results for Community Health Systems. Our margin improvement trends through the first half of 2008 validates the strength of our operating model and success of our integration of Triad. We expect our growth to continue as we improve hospital operations, add enhanced services and recruit physicians. With that, I will now open the call for questions. If you would like to talk to us after this call, you can reach us at area code 615-465-7000.

Thank you. (OPERATOR INSTRUCTIONS). Your first question is from the line of Darren Lehrich with Deutsche bank.

Thanks. Gad morning, everyone. A couple things here. I wanted to start off with the pricing topic. Making the adjustments for the discounts, you're revenue per adjusted emission would be closer to 3.5% which still lags the pricing we have seen thus far. Can you talk about what you are seeing relative to surgery? Whether you are having any issues with specialty physician retention? Maybe if you can comment on Medicare advantage mix and how that's impacting your pricing as well. Just want to get a little more visibility into your pricing going forward.

Let me just comment on surgery and our surgery is relatively flat from the first quarter. And there's nothing systemic there. We are not having any issues anywhere. We've had a little more competition in a couple of little places, but I don't think that's the major issue. When you do math on this, it is just very few surgeries down per facility.

It is enough that it could be vacations and other kinds of things. None of that is too problematic for us. But as we talked about early on when we did this acquisition, we knew there were opportunities in surgery for surgery growth. That's another reason we increased our numbers of physicians for physician recruiting, because we have found there's a lot of opportunity in -- for us going forward in terms of surgery opportunities.

Yes. Darren, one thing that has happened is we've had pretty good growth with ER admissions which generally are a little less of acuity business. While we have very good admissions growth, there is a little bit less acuity. Our patient days are down slightly and our -- day was down about 5% in 2/10 of a day. The other is our Medicare case mix has decreased about 1%.

There's no one particular area that's affected that, it was pretty much throughout our divisions. We are doing a little more internal work, and efforts, and trying to look for opportunities with MS DRGs. Hopefully, we will find some opportunities to improve tha. We are taking a little bit of reduction for that as anticipated. I think that when you consider the discounts we're giving, we're back up to 3.7% with the case mix dropped in Medicare and probably a similar case mix in the other business. As a result of the growth of the ER and other admissions, that put us back in closer to the 5% which would be our historical change.

The managed care business is still strong. It is about a 7% increase, not getting much of an increase in Medicaid. And the Medicare increase is about 2%. The other thing I would add, having flat self-pay admissions is a good thing from a bad debt perspective. But from a growth or revenue perspective, that slows down your net revenue per adjusted emission, because it is your highest portion -- component of net revenue. And slowing that down might helped you on your operating expenses and bad debt, so it does slow down your net revenue per adjusted admission.

One other thing, Darren, and just to follow up on Larry's comment about -- one of the things that we thought we had a good opportunity with the Triad facility as well is improving ER admissions in our admissions in our -- admissions are up over 3% or so. When you do that, you are going to have less acuity and that's adversely affecting our case mix to some extent.

Okay. Then when you look at the major employers in some of your key markets, can you just talk about what you are seeing relative to their hiring and any mass lay offs, anything like that? Can you share with us your thoughts on the major employers in your key markets? Those are probably the most important.

I don't know of any major lay offs in any of your markets. Any time you think about the automobile industry, you certainly think about Michigan, Indiana, and some of those places. But so far, we don't seem to have had any -- we went through a period of time where we had a number of lay office around the textile industry in South Carolina. But so far, we don't know of any really major issues along those lines. And it would have to be a pretty substantial lay off in a market to really adversely affect that market, which should not overall adversely affect the entire company anyway. It would have to be a big lay off to adversely affect us.

We do track our counties' specific unemployment rates. And May '08 versus May '07, it is up about 70 basis points. Nationally, as we read it, it's up about 90 basis points. Still we are about 5.2%.

It is pretty low unemployment versus historically. Actually, it is lower than what it was in May of '04 and flat what it was in '05. And slightly up from '06 and '07. It is not as much nationally. As Wayne said, there's no big employer that is exodus. A couple of quarters back or last year, we probably had a textile business move, but that's about three or four quarters ago.

That's helpful. And then Larry, just last thing here, a question about the cash balance. Are you holding cash to fund CapEx and the Empire deal? I want to get your response on what would be a normal cash balance going forward. And just speaking of CapEx, it looks like you have to spend about $500 million in the second half to hit the guidance. Can you just share with us your thoughts about any potential for slippage on how that CapEx gets spent? Or do you think that number just comes down and probably stays lower going into '09?

Well, two things in relation to CapEx. You are right, we have only spent $276 million. We thought some about where our guidance is at $775 million to $800 million. We have got a lot of projects and renovations starting underway. We'll spend some money on - a lot of money on radiology, diagnostic equipment, and some other equipment.

We are trying to take advantage of the bonus depreciation, which Sunsets, we get to deduct half of the depreciation first year. This year is a stimulus to try buy equipment. We didn't want to lower it, because we are trying to take advantage as much of that as possible. We will look again at the end of the third quarter to see where we'll be. But right now I think we've done a good job in the first year. This six months, we have only spent 5% of revenue. And probably about 40% of that is on replacement hospitals which we will finish up a couple here.

It is a CapEx perspective. We have to watch what we are going to spend there. What was your first question there, too?

Just the normal cash balances, I am curious that your cash was so high.

The cash is high. We generated a lot of cash flow, had really strong cash flow and did a good job of managing our receivables and bringing the balances down a little bit and good job on our income taxes. We have got the Spokane acquisition coming up in the fourth quarter, which will eat up about half of that. We also have a semiannual interest payment on our bonds, about $130 million or so that we had to pay mid-July so that would reduce some of that cash. But we are operating, perform cash.

We will get back to the normal range of $20 million to $50 million in 2009. The one thing we are focusing on also is the late draws and very good financial terms, and think about how we can best use that and make sure we use it effectively if we need to.

Yes. Okay. Thanks very much.

Thanks.

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

Thanks. Good morning. Could you give us a little bit of an update in terms of where you are in the synergy front? It looks like you are at least a little nicely ahead of your full-year guidance for the synergies. And thinking back, it sounded like you initially thought it would be a little more back-end weighted. It looks like it is maybe a little more front-end weighted. Is that just a timing thing or have you found additional opportunities on the synergy front?

The $145 million, we originally had said back at the end of the first quarter, we would probably be back. And we ended up reducing the corporate overhead a lot faster in most all areas and it got eliminated pretty much in the middle of first quarter, a little faster than we thought. We were able to get I think $35 million or so in the first quarter. Then that benefited having that here this quarter, which got us to $77 million year-to-date which is a little -- about 53% of the $145 million.

We will anniversary some of the savings in the first quarter -- excuse me, in the third and fourth quarter, we will anniversary some of those savings in the corporate overhead so it won't be quite as much opportunity in the third and fourth quarter. We are still comfortable with $145 million. I think you have heard us say there's other areas that we don't have in there, like Wayne talks about the physician recruitment and emergency room management which is revenue driven. We have some opportunities in some of the other areas of management, but we are pretty comfortable we can hit the $145 million. On a cumulative basis, that would be $170 million. Based on what we have today, I think we're in pretty good target.

Okay. And then just on the salary and benefit front, it looks like you have had pretty good expense control on that line item. Can you talk a little bit about how the economy either helps you or hurts you with regards to hiring and staffing?

I know there's a lot of theories out there historically when the economy gets bad, more nurses go back to work and there's more availability. I don't think we have seen any of that yet. If in fact that does happen -- if the unemployment rate changes 0.5% or so, that's a relatively small change across the country when you spread it out across the country. I don't think we have seen any changes in terms of availability or lack of availability for employees over the last six months or so.

I just don't think that has changed much about all. We seem toe be doing fine in terms of recruiting and retention. All of the above.

Gary, a lot of times people forget, still 65% of our hospitals are sole providers. There's not a lot of competition in our markets which helps us manage salaries nicely. Those are 65% of the hospitals, and generally people aren't going -- in a day's time, want to leave the community to go work somewhere else if they have a good job in the community they live in.

Okay. Thanks a lot.

Your next question is from the line of Ralph Giacobbe with Credit Suisse.

In terms of the guidance, revenue and EBITDA look like it maybe came down a little bit more than just the Indiana Medicaid. But EPS was more in line with that Medicaid impact. I was hoping maybe you could just talk about the lower numbers and the offsets to EPS.

The revenue would be -- of course, the discounts probably about a third. We lowered the minimum of the guidance, $100 million, the high-end, $200 million. Two things; one was the discounts, it is about a third of that that we -- actually the discounts we gave. The Medicaid would be about -- that adjustment. It would be about $10 million to $15 million.

We also probably -- as a result of the case mix being a little lower in the second quarter, that we brought down the same-store revenue guidance from 4.5 to 5.5 -- to 4.5 to 5 just because the (inaudible). We are going to improve that. We will do a lot for it. We thought it was appropriate to reflect that adjustment.

The EBITDA, if you look at the pay on -- the minimum guidance was $1.570 billion. The carry forward is about $13 million or $14 million of the Indiana adjustment for both the 12 months ended June 30, we're booked into the second quarter, then the rest of the year. That gets -- somewhere in the $1.5 million or 57 or 56 -- we just round it down to $1.550 million. It was simply rounding our part to use a round number for the guidance. The only thing that I would comment -- we didn't have a strong first quarter -- the equity. Looking at some of the estimates out there, they -- it carried that $12.9 million forward for the rest of the year. Clearly, this quarter was $10.5 million -- much like the run rates, more like $11 million, the $11.5 million.

Okay. And then just shifting over -- looking at medicaid. Any other states presenting any challenges or any discrepancies versus what you or where your expectations are? And then maybe, I think you mentioned your expectations are for aggregate flat pricing in the Medicaid bucket.

That would be correct. It's been publicly known, there's a small reduction out in California. We've only got the three hospitals, and only one of size would be affected. And there's a small reduction in Florida which we got two hospitals.

Other dialogue in other states, but nothing of this size or consequence that we are aware of that has been implemented as it relates to what happened in Indiana. Indiana was just a reimbursement change that took place in the quarter, that affected a program that had been around for ten years which we confirmed with a state contractor. In the second quarter, we get paid. We didn't get paid. Of course, the DISH, which we are still contesting, we got less money than we thought we were entitled to and what's built in our guidance as to what the rest of the year what we received in the period ended June 30, 2008.

Historically, of course one of the things that we think we had done and have accomplished is spread our risk across the country in terms of Medicaid changes like this. We have been able to get over those without having increases in one state and we have decreases in other states, and work our way through this. This one was such -- was such a large number, one. And secondly, the timing on it was such that we didn't have any choice. Historically, we have been able to figure out a way to spread that risk across the country and deal with it. This is just a little unusual in terms of the way this all happened.

Okay. My last one. I know in the past, you said that there has been no physician recruiting retention issues. I just wanted to confirm, one, that still remains the case at this point. Obviously, you have the stats and the presentation. It doesn't appear to be an issue Just more from the point of view of any push back from [docks]. Maybe your spending habits are a little more constrained on a relative basis to where the Triad was.

I don't think so. We haven't -- we've had national PLG meetings. We've had national chief of staff meetings. I've not had one physician say to me, I haven't been able to get this piece of equipment or we haven't been able to do this or whatever it might be in any of the facilities.

I don't think we have any issues along those lines. I don't think we've lost any major groups that I'm aware of. We are working on and we have talked about this a couple of times. We working on some of the physician arrangements that were in place in the Triad facilities that were unfavorable arrangements.

We are working our way through those, But having said that, we have not lost any or had any big issues as related to our operating skills or our operations or as to our spending habits or lack thereof. That's just not been an issue at all. As a matter of fact, we think we are getting improvement in terms of physician satisfaction across the country.

Okay. Great. Thank you.

Your next question is from the line of Jason Gurda. Jason, your line is open. There is no response from that line. Your next question is from the line of Matthew Borsch with Goldman Sachs.

Hi, this is Shelley Gnall on for Matt Borsch. Just wondering if we could talk a little bit more about the Indiana issue. Just wondering on what grounds they halted the payments or refused payments, for both of the programs, the DASH as well as the hospital care for the indigent.

Is this a state budgetary issue? I am wondering how much advance notice you had that there would be changes from Indiana. I'm trying to get a sense of whether there is truly a state-specific issue here or there could be a broader issue around state budgetary concerns. Really to the economy.

The first program had been in existence for ten years. What we expected to receive was about what had been received in proceeding years for the six or seven hospitals we have in Indiana. We got formal notice in June of 2008 that that payment wouldn't be made. CMS had denied a state waiver for the program. We were not made aware of that until we heard in June 2008 which meant that it was part of being discussed at CMS.

When they did not make the payment, it was implied they would transfer some of that payment over to other programs. But in our case, what we ended up getting under the second program, the DISH payment, we got about $4 million less than we thought we'd receive for both '08 and preceding years. We confirmed throughout the year what we expect to get for this program now. What they did was to reallocate some funds to larger municipal hospitals which brought down a reduction available to other hospitals. We consider it as a pretty important dish hospital, because taking care of a lot of Medicaid business. In contesting if they went back to an analysis of what days were performed over ten years ago in 1997, and said the hospital below what it should have been to keep this historical DISH designation. And as such, they communicated in early July they would not be giving us any extra money.

We still have a right to look to see if the 1997 account was incorrect. We are doing that. We have done communications with the state, and we'll still continue those. But as of the county dictates us to both not recognizing the revenue for program that was discontinued in the recorded receivable. Or actually got the payment in the second quarter, report a payment for what we received. That's what's caused us to take the two adjustments we did.

Okay. Thanks. I apologize but if you've already spoken to this. The same-store growth year-to-date is up about 3.1%. The guidance is only raised 1.5% to 2.5%. Can you -- again, I apologize if you spoke to this, but does this imply that you are expecting pressure in the back half of year?

We went into to the year 0.5% to 1.5%. We had a really strong flu season and of course, that's what's help driven some -- and we also got leap year in the first quarter. If you look at the second half of the year, you wouldn't want to anticipate the flu coming in the fourth quarter. It could, but historically it doesn't come that frequently.

Of course, the benefit of -- I think is 120 basis points for the quarter. Leap year would not be during the second half of the year. We went back to looking more of what we thought would be still good growth, maybe around 1% or 1.5% growth the rest of the year which is less than we have been for the first two quarters.

Hopefully, the programs we have in place will help us do better than that. We are clearly working to do better than that, and hope our hospitals do better, but that was the guidance we decided. It wasn't smart to go ahead and continue in the second half of the year, what happened the first half of year, because of the flu and leap year and other stuff.

Okay.

And also, as we have said, there's always services we are looking we want to close or some other activities. I think it still will be pretty much at the high end of the hospital admissions guidance after -- when you see us at 1.5% to 2.5%.

Just to re-emphasize that, we continually look at this and think about this. We are at the high end in terms of the industry, so we want to be careful about how we view this going forward. We will continue to have good growth in terms of our guidance.

Just on the other point. You didn't ask. We are working pretty hard to get the revenue up. But based on what we've seen in the first and second quarter, we thought it was appropriate to adjust the revenue slightly.

Okay. Great. Thanks.

your next question comes from the line of Dawn Brock with JP Morgan.

Good morning. First, I just wanted to -- of at least for myself on the Medicaid issue. And just confirm that the reduction in the DISH payment issue is isolated to Indiana and you don't see this spreading to any other states.

Yes. This is only in Indiana. This is one hospital in Indiana and that we don't expect -- in our other big states where receivables are -- in South Carolina and Texas. To the best of our knowledge, what we expect to receive are going receive, but DISH does fluctuate. This is the first time we've had one fluctuate of this size, but to our knowledge we are in good shape in other states.

As far as the nonpayment for the indigent are, you don't necessarily see any shift from a budgetary perspective there either?

No. This was -- CMS denied the state of waiver for this program. The dollar should have been shifted into other programs. They're looking at a Healthy Indiana program, which may end up generating some extra dollars there.

But as of right now, we don't see any other programs. There's very few other programs that have that type of program throughout the states. I don't see this shifting to other states.

Okay. And then quickly, just wanted to ask you to remind us the size of the three replacement hospitals by bed count and the expected EBITDA contribution.

The Petersburg is about 300 beds. And the -- the beds really didn't change from what's out there now substantially. I think Hartselle us a couple hundred beds. And Chevyville hospital is about 50 beds. And then the size of -- one of them is about $200 million in Clarksville. One about $150 million in Petersburg. And the Chevyville is about $35 million cost.

And EBITDA -- is what we expect to have happen is, you would see some volume growth and EBITDA growth from that in the second half of the year which is built into the guidance. More importantly, what I was trying to point out was -- people remembered the interest and appreciation will go up as a result of these openings in the third and fourth quarter.

Okay. That was my next question. The $30 million to $40 million that you are expecting to see increase in the second half of the year, we should associate that with the replacement hospitals?

Well, that plus as we buy equipment, and we are clearly trying to buy equipment a little faster than we normally would because of the bonus depreciation. That's a tax arrangement that will have significant depreciation in that equipment buying. But most of the big fluctuation in fixed costs would be related to the opening of these facilities which has been in June, mid-July, and late July.

All three of those facilities are now in the new facility. Last weekend, we moved Petersburg in Virginia. And we moved like 150, 160 patients over the weekend. All three of those facilities now are open and running.

okay. Excellent. Then just to maybe yet a get a little more color around labor. Are you seeing less pressure on wage increases, based on the economy for nurses right now?

Not substantially. In our markets again, we are soul providers, there in a situation. Clearly, I think we have done a good job of managing contract labor which is probably -- might be a contributor to that to some extent. Our contract labor is down a little bit on a same basis.

It was a bit better in the quarter. That's helpful. But from an overall perspective, I think contract labor is down 20 basis points in the second quarter which is better than then. That, and we are still in the 4.5% to 5% overall labor cost.

You have to have a pretty substantial change in unemployment or change in the economy in a market I think for us to really start seeing a big difference. But so far as I said earlier, we have not seen any difference whatsoever.

On that front, are you seeing any major shifts that are different, say over the last six months in employing physicians? Is that something that you would expect to continue or is there any trend line that you can point to that might be beneficial or detrimental going forward?

Clearly the trend is, and I think most people would tell you that we're employing more physicians today than we have in the past. It's certainly not a strategy that we -- our main strategy for us, but it's the nature of physicians that are finishing their training programs, as well as the mix. In terms of the male/female mix. It is 50/50 now.

This year, we are employing more than we have in the past. But I don't think that's anything too different than what we have been doing. It is up a bit. I think we have about 1300 physicians or so employed across the country. You will see a change going forward. There are probably more employed physicians in the future than there have been in the past. By the way, these tend to be cyclical as well.

We have gone through this a couple times. Historically, when we've had more employed physicians and then it goes back up a bit. It is a little hard to tell what the future is going to bring. The economy will drive that as well as you might expect.

The physicians does cause our consolidated payroll benefits to move slightly.

Would that actually be a positive as far as just being a national -- natural deterrent in attrition levels?

In some instances, you find people who -- there are large not-for=profits that are employing everybody in the market for that purpose. That's certainly not our theory, but you can see that does work to a certain extent.

Okay. Thank you.

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

Good morning. Thanks for the color. Just following up on that last questioning, thinking about the recruits. What's the percent of specialists at this point? Is the expected incremental recruits, is there any difference there in the level -- in the number of specialists?

It stayed around 60%.

But as we would think about Triad and the opportunity of Triad. And we think about surgery and surgery volumes, we will clearly be focused on the specialty side, particularly the surgical side, because we think there's a lot of opportunity there. It is 60% to 70% in that range now in terms of the specialist piece.

Was there any discernable difference in acuity levels between the head legacy, community or Triad portfolios? Or has this been a phenomenon you have seen across the board?

We have five operating divisions, which they are split out. It was pretty much in most of the divisions or some acuity mission. Some of that had to do -- our maybe better managing the ERs and addressing the admissions side of the ER which are usually lower acuity.

Right. Expectations for Empire in terms of timing and what that business is trending at right now? It had been deteriorating a bit. What's your latest there?

It should be around the first -- the fourth quarter or early in the fourth quarter, we hope. Then also, it has better. It did not have a very good 2007. It has performed better for the last six months and did it during 2007. It will come on somewhere -- we will be somewhere in the high single-digits margin. That would have paid about 50% of revenue, so it's a pretty good price. I think it would be a good opportunity for us.

It should work pretty well. It fits our strategy going forward, in not only having nonurban facilities, but these mid-markets that we think have opportunities for pretty substantial population expansion over a longer period of time, primarily around the baby boomers. We think it will be a good facility for us and it's certainly priced right.

Last question just on the balance sheet. At this point, what are your expectations in terms of delevering? I saw you bought a few shares there, not a big number, but it was surprising. Wondering what the thought process was there.

Well, we have almost had our authorization out and we decided that the price we bought at was a good price. We had -- I think another question asked about the excess cash we have got and that was a good use for $10 million or so of cash. You will see us delever by continuing to grow earnings. I don't think we've got any active divestiture programs right now, other than one facility that is still being worked. We think --

If you go back here a few quarters ago, we are making around $0.35 a quarter. Even with this adjustment this quarter, we are making $0.52 adjusted -- Indiana is $0.58. We made a lot of progress since the third quarter or the second quarter pro forma, or it's fourth quarter results. In a short period of time, we've growth our earnings pretty substantially and think as we continue to work on the plans we got there, we'll continue to grow EBITDA and the margin.

But I think the best way to deleverage is probably to continue to grow EBITDA. We've done a good job on CapEx. Historically, the Triad facility has probably spent 9% or 10% of revenue. We spend 5% or 6%. I think we can bring that capital spending to the Company going forward.

The only thing I would add to that is that keep in mind, I think we just had or first anniversary date from this transaction last week. This is still early on in all of this. As we continue to improve, our stock price continues to improve. We have other opportunities going forward as far as deleveraging.

The other thing is we -- whatever stock options proceeds we get which is not large, we usually redeploy that back into buying stock.

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

Okay. Thank you. Good morning, Wayne. Good morning, Larry. Maybe just on the interest costs, Larry. I am sorry just to follow up.

There was a question earlier, talking about the guidance and some of the components changing. I just may have missed, but the interest expense number was lower. Was just curious, in terms of what drove that. Then know you guys have some swaps coming off of your -- they came off of the second quarter and some of the third. Was just curious in terms of how factors in, and I have a couple follow up questions as well.

The interest actually was about 5.8% of revenue, which our range was 5.8% to 6.1%. The preceding one is 5.8% to 6.2%. Interest was a little different because one, we reset the LIBOR throughout the quarter at a lower rate. We had really good cash flow, and we redeployed it pretty well.

Those were two things that probably helped interest. Also, a lot of debt that was being incurred was for these replacement hospitals. As you spend more on those before they open, you capitalize the interest on that and of course that is going to go away once these hospitals are open. I think our range is still 5.8% to 6.1% for the year. We are comfortable we'll fit into that.

I just wanted to point out to people that we have now finished some pretty big projects. That were -- as debt was being incurred, was being capitalized now, we have expensed that going forward. But I do believe we were pretty close to the 5.8% for the quarter.

Okay. And then just with respect to the balance sheet. If we look at the uninsured AR, in the past, you have talked about just a percent reserve. How is that trending?

It's 80%, a little different than it was in a preceding quarter of about flat, but it was at the end of the year. Basically, as we look at that, you have to look at both the locations that are receivables by hospitals in which states, growing in. And also, you got to look at the mix between self-pay and self--pay after insurance because we collect five times more for self-pay after insurance into self-pay. Again, as you discount receivables self-pay, you have less receivables. 80%, we are very comfortable with that. Our allowance was 39.6% of our overall receivables. Our net self-pay dropped a little bit in relationship to overall receivables for the first quarter to second quarter.. Our allowance -- I believe the third -- in the first quarter is 38.9%, so it moved up to -- versus 39.6%. Pretty close to what it was at the end of the year at 40.3%.

Okay. Just on the supply cost area, I know this area, you guys have been aggressively targeting. It was relatively flat versus the first quarter. Just in terms of expectations there. Just in terms of -- as you talked about a lower case mix, the thought being that maybe you utilize less high-cost supplies. Just how are you thinking about that?

Well, I think if you look at it, we still think that there's synergies and better probably another I think if you look at it, we still think there's synergies embedded in it, probably another $20 million or so in synergies for the rest of the year. We did a pretty good job -- actually on a same-store basis, we got real good improvement in supplies (inaudible). Prior year, because we were running about under 12% of revenue and Triad was running about 17% . We had progress in the quarter in drugs and implants, and a little bit better rebate program. Probably the one program -- the rebate program has been pretty helpful for us.

I think you'll continue to see it. I don't think you will see us take the 14% down to 13 percent, but I think you can see us making some incremental progress in supplies. Of course working, as you are aware of on our orthopedic program, but that's been changed from a purchasing agreement to individual hospital companies working on that. I think we'll manage that pretty well.

The issue about the concern about the inflation in plastics; it's a pretty small percentage of the supply stand so I don't think it's going to make a substantial benefit or a challenge to us going

Okay. Just a final question. Wayne, you mentioned it's the one-year anniversary of the deal. Here we are a year later. What are your thoughts in terms of what has really been the biggest surprise as you think about it, both positive or a negative?

Yes. I think what we have seen through this year, we have had a relatively smooth transition in terms of this acquisition. It has worked pretty well. The things that I think are very positive about this is as we looked at this and we thought about it more -- we mentioned this a couple times, that opportunity in terms of the emergency services and doing a better job of managing our emergency services. Which we have seen an increase in our ER admissions, so we think that clearly is an opportunity going forward.

Physician recruiting is a very good opportunity for us. As we mentioned, that's the reason we are upping our goal this year from 900 to 1,000. Both of those are very positive things. One surprise that -- this was no surprise to us, but I think it might be a surprise to a lot of people in the market was that we might have some adjustment issues related to medical stats and physician relationships. We've had zero -- none of those kinds of issues. We've had no physician meltdowns. We've had no physician problems. I have not gotten any adverse calls about you guys don't know what you are doing. None of those kinds of things. It has been a very smooth transition in every facility as it relates to medical staff.

All of those things are positive surprises. I would say, we think there is a lot of opportunity here. That is the thing that keeps us moving forward pretty quickly is the opportunities that we see going forward. All of those are positive things. I don't think we have found anything that's very discouraging to us. I suppose the only thing that will take us a little longer than we thought is working on some of these physician relationships -- that physician deals that were done prior to this transaction. That will take us awhile.

Okay. Thank you for the detail.

Adam, one point, I do believe we improved the supply sequentially. They went from 14.2% to 14%. There was a 20 basis point reduction. That may be what less than people had thought, but we were pleased to see at least a 20 basis point improvement.

Okay. Fair point.

Your next question is from the line of Witt Mayo with Robert W. Baird.

Thanks for taking my call. Larry, you touched on briefly the announcement at HPG -- cancelled some of its contracts with various large orthopedic vendors. Can you talk a little bit more about the pressure there in the near term or if that's longer-term. And walk through how you manage that going forward. And any opportunities that come out of this.

What we are going work individually for our company, our chief officer with this staff will work with the the various vendors to do our own contracts. I don't think it is going to be an issue that is going to cause us to see an uptick in our expenses. We will work on it, on both a national basis and where appropriate, a regional basis. We had a little improvement in implants this quarter and a little bit of improvements on a year-to-date basis. But from a supply stand, we will manage it fine going forward.

I don't think we are having any issues in terms of contracts getting worse. It's only an opportunity for them to get better, I think is generally what's happened to us so far.

Okay. That's helpful. And just can you remind me how many doctor deals you have begun to unwind at this point? I think I know about one of them?

We don't talk to them -- we don't talk about these specifically. As you might expect, these are highly sensitive arrangements, so we are careful about how we describe them. I would just tell you that it will take us awhile, because we don't want these to implode or we don't want to create any major issues or problems for ourselves.

It will take us longer -- some of which will -- contracts from it run out. Some of which we will do the things that we need to do quickly, in terms of manage them down. But it is going to take us awhile. They're all over the country. And there is -- but by the way, it is not a substantial issue. It is a sensitive issue,is maybe the way I should put it?

It's pretty well isolated to a few locations, just not something that's in numerous and numerous hospitals.

It is in different locations across the country.

You are very early in the stage?

Yes, yes?

Okay. That's fair. Thanks a lot, guys.

Your next question is from the line of Jeff Englander from Standard and Poor's.

Morning, guys. Just a quick question. Larry, you mentioned tracking the unemployment by county. Can you talk about whether you have seen any uptick, either statistically or anicdotally, in usage in front of increases in unemployment? Or if there's any lag effect due to Cobra?

There is a lag effect. I'm not for sure. I think the last call, we said we were up 20 basis points in the period. Now we are up -- was February. Here we are up 70 basis points. If you go back to the activity in 2002, when Cobra went up quite a bit. I think there was a large uptick of about 150 to 200 basis points increase in the unemployment. We saw a fair amount of uptick from Cobra, co-utilization is about 150% more than it is for general insurance. People we could track after our counties -- we saw on a go up.

It is little too early, as Wayne said here, on a 70 basis point uptick. All current year in the last three or four months before you can start to see the uptick in unemployment. If it keeps going -- and right now at 5%, if it gets up in the mid 6s, you will probably see some Cobra utilization based on history, will go up. That usually occurs for the first six to nine months of Cobra people who are paying for it, use it. Because they would not be buying it if they didn't plan on using it.

Still having said that, that's a pretty small increase when you spread it across 28 states in different locations. If you have one major event in a big city, where there's a huge employer, that you would -- that city would probably see it. But when you spread it out all across the country, it is pretty small in term of the numbers.

Any comments or color you care to add in terms of the -- where that usage might be picking up in terms of the states or in your marks at all?

I didn't understand the question?

In other words, within that -- you mentioned that there have been some pick up ins Cobra usage. Have you seen in any particular states or any particular markets?

No. I think what we said was that it is too early to see that. Because if you go back to -- our unemployment is only up about to 20 basis point ins February. And now we have got information through May and it's up 70. That's not enough of an uptick yet to have that activity. We are fortunate on the reverse side of that, we don't have a lot of presence in Florida or Nevada or California or -- ?

Or Detroit.

Or your challenging states. From an economic perspective or from a housing perspective. I think we are fortunate which is probably helping maybe us a little bit on our self-pay business and other stuff, being in better locations. We much prefer to be in those locations and have the unemployment going up, getting a little bit of Cobra benefit.

One other question is one of your competitors made a statement that it is more the unemployment and the -- even the unemployment number than so the rate opposed to even housing that is more key to volumes and usage. I just wonder if you would concur with that?

I don't think so. I think you have to have a pretty substantial change in unemployment in a market for it to adversely affect your volumes. First, it would positively affect your volumes. If -- I like to use the example, if you're in Detroit and General Motors goes out of business, you're going to have a pretty big increase in terms of your volumes on short-term. And then long-term, your bad debt is going up because people are not going to have insurance.

I don't think -- because we are spread so far. If somebody's concentrating on a particular city and that city has a huge problem; it seems to me that's probably applicable. But when you do it across the board across so many markets, even this issue that you were asking about in terms of Cobra increases, that's spread so thin, so far, it would be very difficult to make determinations about any kind of substantial increases in that. Any time in the near feature unless you have a big unemployment issue in one particular market?

One final point, if there's a lot of Cobra activity and Cobra utilization, you would be hearing from the managed care companies because they would talk about it when they are trying to explain their utilization. And they're not commented about it yet. I'm not for sure what's happening yet.

By the way, our volumes are up.

Right. Great. Thank you very much.

Thanks.

Your next question is from the line of John Ransom with Raymond James.

Hey, guys. If you look at your Medicaid pricing, the state budgets mostly reset July 1. What do you look for the next twelve months on your blended -- taking Indiana out, but what do you look at for Medicaid pricing for your next twelve months?

It is generally around zero to 1%. There's a few little increases. I think -- I may have mentioned earlier that the states that we think we can see some reduction in -- might be a small reduction in California. A really small reduction Florida. A small increase in Georgia and Virginia. Maybe a little bit of reduction in one of managed care companies here in Tennessee, but not substantial overall impact for us.

Are you seeing any big eligibility changes?

No. Not yet. Nothing like you had here a few years ago with ten care. There's always the talk -- I know Texas has got -- coming up in September. There's some discussion in Mississippi; nothing of any substantial nature yet where decisions has been made. But the ones we know about are here and they're all relatively small compared to the overall company.

Okay. My other question, if you look at the Triad book -- I know outside of Indiana there are a bunch of high single-digit, low-double digit hospital margins. Do you still think -- what do you view as the three to five-year margin potential of those hospitals? I'm also curious, where you are -- I know there's a big IT conversion job and just where you are there?

We continue to think -- one of the things that was a -- that we thought about when we did this is the Triad. If Triad had a substantial amount of earnings and a particular market like the Fort Wayne area, then the other hospitals fit the kind of hospitals that we have been buying through the years which are lower margin hospitals. The things that we have done through the years, in terms of improving those hospitals, we could do with the Triads.

We wee that as still the case. It is real opportunity for us. I don't think we have talked about what we think margin improvement would be by facility or those kinds of things, but I would tell you that we still think there's a lot of opportunity here in terms of going forward and in terms of improvements.

I think what we have said is that Indiana is probably 25% to 30% margins which forces everybody else to be, as Wayne said, in the low double-digits.

Yes.

Historically, which is what we can talk about. Generally, we buy hospitals in 5% to 6% margins and take it up to 14% to 15%. We would think the same opportunity exists in most of those markets to get them up in the mid-teens. The IT conversion, we have done some pretty good sized conversions, one in the -- a couple in the Southeast, and one up in the Northwest. They have generally gone pretty well.

Southeast has gone well. We have done two big facilities there. We have done several where we have gone to our standard HMS system which in most of our hospitals, that has gone well. We're not rushing into it. Spirotech is two to three years to get it done. And we are spending a little money for our vendors to do it. but it is pretty much on target. Other than we're probably going a little slower than we have historically done with purchases.

And of course our strategy is totally different than strategy Triad had.

Sure.

We are doing key conversions based on the size of the facility, not one-size-fits-all which is a lot more economical way to do it. So far it is working pretty well.

What we did early on was to extend the ACA contracts and they worked well with us to get that done. We have a much more opportunity and time to do it under a timeframe we want to do it on.

Okay. Thank you.

Your next question is from the line of Kemp Doliver with Cowen and Company?

Thanks and good morning. What are the trends in your med mal?

Pretty descent. We've got $332 million reserve at $300 million at the end of the year. We are pretty comfortable. We are -- we do actual Ross studies throughout the year. We are probably doing some here -- sometime in the middle of this summer. I would think that we're in pretty good shape -- we moved. We renewed our reinsurance and actually had a reduction in cost going forward the rest of the year which isn't good.

Because that was some -- encouraging to see. People think about that. I think there's no -- been no surprises to picking up the Triad reserves and rolling them into our reserves. Of course, they are managed by the malpractice [suraro] ASA, and they did a good job and we carried that performance forward.

Okay. That's great. And then on your self-pay, the inpatient mix has been stable. What have you seen on outpatient as in say, ER visits?

ER visits were up some in the first quarter which you would consider in the flow business, the ER business was not up as much in the second quarter. It stabilized, because the flu does bring a lot, so it's been relatively -- roughly stable going into this quarter. ER still drives about 75% or 80% of our inpatient admissions. You add OB to it, and you're up to about 90% -- some odd percent. It's actually been pretty consistent.

Great. Thank you.

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

Good afternoon. I just got one question, regarding contract pricing. We have seen a lot of the managed care companies struggling with MORs this last quarter. Putting yourself in their shoes, how do you expect these guy to behave? What do you think might be changing, regarding the pricing environment for incentives?

We have got about 90% done for '08 and probably 65% or 70% for '09. What I think they would be talking about would be pretty much past '09 and that activity. We've done a pretty good job. It one of the centralized, standardized processes we do. And executives, we have doing it -- had lots of experience working for managed care companies and working for us.

We are pretty comfortable we can continue to stay in the 5% to 7% range for managed care. We renewed some large contracts that which -- we think we did a pretty good job on. I think we are in pretty good shape for managed care. On their perspective, they probably want to work on utilization.

I got the impression most of them are struggling more for -- the cost of Medicare advantage than they are with the commercial business. But that's where most of the growth is.

One of the things that has helped us and one of the things that we thought would help us is the fact that we are organized on a state-by-state basis, where Triad was not organized on a state basis. We are getting leverage in terms of being able to negotiate for a larger number of hospitals on individual states. That's been a little helpful to us.

Are you doing the three-year contracts like a lot of folks? Or are you doing any nationals and are you negotiating utilization incentives?

Most of our contracts are more regionally-driven. We do have some multi-year, but not a large percentage of our contracts?

We do whatever we can do to get the best price.

Okay. I know you guys are well-versed. All right. Thank you.

Thanks.

Your next question is from the line of Mark [Afrosiby] with Tenco .

Hi there. Thanks a lot. Just in terms of the bond buy backs earlier this year, I was just wondering if there's any further bond buy backs in the quarter or after the quarter.

There are no buy backs in the quarter or after the quarter?

Okay. Great. And then, just in terms of the bad debt guidance coming down 30 basis points, slightly improved there. I was wondering -- I am trying to reconcile that with some of the other guidance from other companies out there. For example, HCA which has guided to more deterioration in bad debt, fairly significant. What is the thinking here in terms of reconciling that?

We'll talk about our own company. I do know there are -- based on information I read, they are located in the little more challenging markets of -- Florida being a little more challenging and where Texas is a bit more challenging. It could be the mark location. Our uninsured missions are are about 6.4%. Of our admissions -- and we have been relatively flat, fortunately flat. It could be based on the geography. We work hard on qualifying people for Medicaid point-of-services which I am sure they do also.

Okay. Great. Thanks a lot. That was it. Everything else was answered. Thank you.

Thank you.

Your next question is from the line of Gary Taylor with Citigroup.

Hey, good morning guys. A few quick questions. Larry, on the Indiana -- the bad debt charge or the $8 million or even the total $9 million if you pick up that other piece. Did that all run through the bad debt line, not a revenue adjustment?

No. It was a revenue adjustment. $8.2 million was a revenue adjustment. And then, the $800,000 ran through the equity unconsolidated subsidiaries. 800 -- $8 million -- $8.2 million ran through revenue. Of course, EBITDA and pretax. The other $800,000 ran through the line of equity and unconsolidated subsidiaries.

Okay. Thanks. Commercial admissions, can you talk about growth versus your 2.4 consolidated?

Generally, we have not broken down our admissions there. I would say probably -- (multiple speakers).

Payer mix.

Yes. On the -- our payer was pretty good. It's better versus a year ago. From an overall admission perspective, we probably had -- fortunately the self-pay was relatively flat. If you take the other three components Medicare, Medicaid, managed care, it averaged about the same.

And then -- ?

Down just a little bit.

kay. Sorry. On Same-store Revenue, What Is the Right Prior-year Comparison Going Into the Third Quarter? I Know We Have Divestitures. Third Quarter of '07 Was Not a Full Quarter of Triad?

That's a really good question, because it appeared that last year we had reported revenue of about $50 million more than actually got this year because we discontinued some operations. It probably is about another -- about $100 million less than what was reported for third quarter of '07, approximately. Because you got the $50 million of CHS and now in the third quarter, you've got some Triad hospital with -- so since the end of the third quarter. About $100 million less than what was reported.

My last question, I want to make sure I understand what you have said. It looks like if you exclude -- excluding Indiana, revenue guidance still came down a bit. EBITDA came down, but earnings guidance would actually have gone up maybe $0.05, excluding Indiana. Is the differential there LIBOR basically?

I think we've managed our CapEx pretty good which meant your depreciation has -- we've had pretty good cash flow which has helped the interest expense. We looked at it that the Indiana adjustment for the year is $13 million, $14 million or so which we lowered to the lower end of the guidance. $20 million on EBITDA. Basically to us, that's just rounded.

The revenue, the discounts were about one third of it. The case mix slowed down a little bit in the second quarter. We will work to pick it back up, but we have another quarter of lower than that. Then we also just decided that taking Indiana Medicaid gets us close to the $100 million that we took out on the bottom end.

Okay. Thank you.

You have a follow up question from the line of Darren Lehrich Deutsche Bank?

Thanks for taking the follow up. Just a really high-level question for you. When you think about the kind of volumes you have been doing -- in this business you tend to see better operating leverage. Just a question, Wayne, if volumes continue to -- about the 1.5%, 2% range, which is above where the trend has been. Would you expect to see some operating leverage from here? I just want to get your sense for where you think we are relative to achieving operating leverage in the business.

I would think so. If you look at all of our metrics though, we are in good shape. We managed our expenses. One thing that is maybe driving some volume is that we have been working hard on these emergency rooms.

We've increased our emergency room admissions up over 3%. We are getting a little less acuity in terms of those. That would be expected when you start really pushing and working to improve your emergency services. You are right about that as we go forward. I would think that would be the case.

Darren, I would add we have increased the same-store EBITDA on a comparable basis, 11% first six months. The margins up 80 basis points. We have some leverage. There are some facilities that we've opened that are non same-stores which -- a little bit of a drain the second quarter and a little bit the second quarter. But we have that 11% same-store growth in EBITDA and 80% improved in basis. With the margin that we had -- again it was less intense and little bit less revenue growth, but we did a pretty good job.

But I am not concerned about the fact of that -- because we are making really good progress and things continue to move forward. There's still lots of opportunity here.

And that's 11% and 80 basis points after the adjustment for the shortfall.

Right. Okay. Thanks a lot.

Your next question is from the line of Brian [Ludwick] with [Hajenemy] Capital Management.

Hi, guys. To get a better handle on how operating expenses are managed or controlled on a hospital-by-hospital basis, I just want to start with average length of stay overall in all of the hospitals. Do you have that information?

Yes. It was 4.2 on a same-store basis. And then versus last year, a 4.4; on a consolidated basis, 4.2 versus 4.1. And keep in mind that a lot of that consolidated number doesn't have Triad in it a year ago. It's 4.2 versus 4.4 quarter. On a year-to-date basis, it is 4.3 versus 4.4.

Okay. What about the in the ICUs? Your average length of stay within the ICU

We don't really talk about that. We don't break it down to that kind of granularity in terms of that kind of detail?

You wouldn't know whether it is nine times or -- ?

I didn't say we wouldn't know. I said we didn't talk about it.

You don't talk about it. Just to go further, industry trends have shown increases in hospitals and intensive programs?

Sure.

To tie in expenses within each hospital. Leapfrog, that organization that basically sets the quality parameters for hospitals. Has this been happening for some time?

That's a democratic organization I think?

I'm sorry.

Yes. Go ahead?

I didn't hear what you said. But in any event?

It is not exactly one of our favorite organizations, by the way?

Okay. Well, either way, do you have these programs in place in any of the hospitals programs?

We have a number of hospitals programs around. We have a number of intensives, depending on the size of our facilities throughout the country. There is an increasing trend in hospitals, as you might expect because there are a lot of primary care physicians now who don't want to go through all of the work to get patients in hospitals. And besides, they don't get paid very well for that. But it is yet to be determined whether or not hospitals per se are improving quality or not improving quality.

That's really the theory behind people like Leapfrog, is trying to improve the quality. I don't think there's any question that intensives are very helpful in terms of acute care and intensive care units, that they are very helpful there. The other part of that is, it is really a convenience issue for a lot of physicians in terms of the hospitals.

But in terms of intensives care. We are based in Florida and there's a bunch of hospitals down here that have started those programs. Intensive programs that is, and they're basically in the hospitals all day, all night. They're able to lower the length of the stay.

That's exactly how they work.

Right. They're able to lower the length of stay which is able to tighten up expenses and reduce hospital expenses at the same time?

Maybe.

Maybe? Okay. Do you have plans on going forward in implementing these throughout hospital? No. I don't think -- you have to do this on a hospital-by-hospital basis?

Some of it depends on the level of the intensives and what he's doing and all of the above. This is a very complex area in term of how you go about administering this and how they work and how they deliver the care. But generally speaking, I would say that intensives are very good for quality.

Okay. And do you classify this as a doctor deal or is this something separate from the doctor deals you are trying to get away from?

I'm not sure what you mean by doctor deal?

You talked about it earlier about aligning some of the arrangements. They're sensitive, et cetera.

This would not fall in that category. This is a totally different category.

Agreed. Okay. Okay. That's all. Thank you.

Your final question is from the line of Frank Morgan with Jefferies and Company.

Good morning. Quick question here. One on CapEx for '09? Any ideas there? I know you said it should normalize back down, but in '07 it was around $525 million, $530 million. Is that a good number to look at for 2009? Then can you give us any anecdotal evidence you have seen so far on some of the CapEx projects that you inherited from Triad in terms of how those returns are developing and improving? And then finally, just one out of curiosity. Was there any detail given on why CMS actually denied that waver program in Indiana?

The last one first. We weren't given any details. I would assume that the program had to do with some action with some proper tax which CMS elected not to continue to carry it forward. But there still was some money to be spent from the state, but they did not allocate it at least to us. On the 2009, we haven't provided any guidance yet. We have said publicly we would work towards -- it's about 7% this year. Over time, we'll work to try to bring our guidance down closer to 6%.

We will give out the specific guidance -- we give that earlier than about anybody, sometime in late October, early November. We release the third quarters earnings. But our intent is to continue to move it back towards the 6% that we've generally averaged.

One adjustment would be if there's any replacement hospitals which we've got a lot of them are done already. Looking at the performance that we have moved on through, probably about 15 projects. They look overall pretty good. There's a couple that we are trying to get better performance on that has been spent. But overall, we think we've managed to give it a decent return. We generally have targeted about a 4 to 5. And these are running 5 to 6 -- purchase price.

Some of these projects we have done a lot of work on to improve them as well. We want to make sure we don't miss this point. Frank?

That's got it. Thank you very much.

Thank you. Thank you for spending time with us this morning. Our proven ability to deliver results, we continue to be a distinct competitives advantage for Community Health Systems. We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers, and chief nursing officers, and division operators for their excellent operating performance in the second quarter. We remain focused on our business strategy and improving results. Once again, if you have any questions you can reach us at 615-465-7000.

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