Community Health Systems Inc (CYH) 2009 Q2 法說會逐字稿

Good morning. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems second quarter ended June 30th 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) Thank you. I would now like to introduce our host for today's call, Mr. Wayne Smith, Chairman, President, and Chief Executive Officer of Community Health Systems. Sir, please go ahead.

Thank you, Casey. Good morning and welcome to the Community Health Systems quarterly conference call. Larry Cash, our Executive Vice President and Chief Financial Officer is with me on the call today.

The purpose of the call is to review our financial and operating results for the second quarter and year-to-date, ended June 30th, 2009. We issued an 8-K, including a press release, after the market closed yesterday with our financial statements. For those of you listening to a live broadcast of this conference call on our website, a slide presentation accompanies our remarks. I would like to begin the call with some comments about the quarter, and then turn the call over to Larry, who will follow with additional comments on our financial results.

But, before I begin, I would like to read the following statements. Statements contained in this conference call regarding expected operating results, acquisition transactions, other events, or forward-looking statements and uncertainties. Actual future events or results may differ materially from these statements.

Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are 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 with the Securities and Exchange Commission, including the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. These filings identify important risk factors and other uncertainties that's could cause actual results to differ from those contained in the forward-looking statements.

We're very pleased that Community Health Systems has delivered another very solid, consistent financial and operating performance for the second quarter 2009. We accomplished this performance the old fashioned way by managing our expenses, such as payroll and benefits, and still maintaining our pay raises, and without significant layoffs or eliminating benefit contributions. Our results continue to reflect our strong expense management and our market growth opportunities.

Net operating revenues for the quarter ended June 30th, 2009, totaled $3 billion compared with $2.7 billion for the same period last year, an increase of 12.9%. This is the first quarter that we have exceeded $3 billion in revenue. Adjusted EBITDA increased 14.7%, from $362 million to $416 million.

Income from continuing operations was $74 million, versus $55 million for the second quarter last year. Earnings per share from continuing operations was a very strong $0.66 per share, versus $0.50 per share for the same period a year ago, an increase of over 30%.

Net operating revenues for the six months ended June 30th, 2009 was $5.9 billion. EBITDA was $819 million, and income from continuing operations for the six months ended June 30th, 2009 was $145 million, or $1.29 compared to $1.02 for the same period a year ago, an increase of over 26%.

With that, I'd like to review some key accomplishments for the quarter. We completed acquisition of Wyoming Valley Health Care Systems in Wilkes-Barre, Pennsylvania on May 1st, 2009. The facility has trailing revenues of $295 million, and a single digit margin. This is our tenth hospital in Pennsylvania.

We acquired the remaining 50% interest in a joint venture of a 166-bed hospital, Medical Center of South Arkansas, in El Dorado, Arkansas, on April 1st. For your reference, annual revenues at this facility is approximately $100 million. Additionally, we acquired the joint venture minority interest in Affinity Medical Center in Massillon, Ohio on June 1st of 2009. We continue to look for opportunities, but remain focused on our current business.

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 the health care services provided in the communities. The Company recruited 704 new physicians for the first six months, compared with 475 physicians recruited for the same period a year ago. Our recruitment target remains 1,500 physicians for 2009.

We have achieved approximately $58 million of the targeted $100 million in improvements through the second quarter of 2009, approximately half of the improvements have been generated from Managed Care and Materials Management.

We are updating our 2008 guidance to reflect the acquisition of El Dorado, Arkansas, previously owned in a non-consolidating joint venture, as well as the return of an unnamed facility from discontinued operations to continuing operations. Revenues will range from $11.8 billion to $12 billion, and EBITDA from $1.635 billion to $1.665 billion, with EPS for income from continuing operations for a range of $2.50 to $2.65.

I would also like to update you on the Federal False Claims Act lawsuit in New Mexico, which you will remember, following a three-plus year investigation that we've been briefing you about. On June 30th, 2009 the Department of Justice filed its complaint in the lawsuit. A few days later, the relator filed another version of his complaint.

These filings do not add anything to the government's theories about this state federal funding dispute, and we intend to continue to vigorously defend this case. We have 60 days to file a response to each of those filings.

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

Thank you, Wayne. Our consolidated admissions growth for the second quarter was up 5.8% compared to the same period last year. Adjusted admissions, which factors in outpatient business, increased 7.7% versus the second quarter of last year.

Our same store admissions decreased only 0.4% compared to the second quarter 2008. Adjusted for service closures and the positive effect of Easter and other non-recurring events, same store admissions would have increased 0.2%. Same store admissions increased 1.7%.

Net revenues in the second quarter increased 12.9% from $2.7 billion last year to $3 billion. On a same store basis, net revenue increased 6.7% for the quarter, with inpatient revenue increasing 5.4%, same store outpatient revenue increased a very strong 8%, coupled with the 1.7% increase in adjusted admissions, demonstrating the large [role] of our outpatient business as 49% of our total patient revenue. On a sequential basis, same store net revenue increased 0.9%, with a sequential increase in same store adjusted admissions of 0.7%. This compares the adjusted 2008 second quarter to the first quarter decrease of 40 basis points of same store revenue.

Same store net revenue per adjusted admission increased 4.8% year-over-year, due to good outpatient growth. Same store surgery volume increased 3.5% for second quarter, assisted by strong outpatient growth. Sequentially we saw a surge in growth by 4.8%, this helped drive a strong second quarter same store revenue increase.

Our same store Medicare case mix increased 1.5% versus last year, another indicator of higher revenue generated by the increased surgical growth. Consolidated EBITDA was $416 million for the second quarter versus $363 million for the same period a year ago, an increase of 14.7%. On a same store basis, EBITDA was $412 million for the quarter, an impressive increase of 13.8%.

For the second quarter, EBITDA margin on a consolidated basis, was 13.8%, an increase of 20 basis points from a year ago. Same store EBITDA margin increased 90 basis points to 14.4%, compared to quarter ended June 30th, 2008. For the second quarter, our non-same store margin was 2.5%. The non-same store margin includes the expensing of acquisition cost and system conversions cost.

In the second quarter, consolidated operating expenses, as a percentage of net revenue, decreased 20 basis points. Consolidated payroll and benefits supplies [and our] operating rent decreased to 150 basis points, offsetting the bad debt increase of 130 basis points. Sequentially consolidated payroll improved 50 basis points, offset by a sequential increase of 40 basis point in bad debt.

On a same store basis, total operating expenses improved 90 basis points, driven by improvements in payroll and benefits, 90 basis points, other operating expenses including rent and supplies, offset by the increase in bad debt. Contract labor, which is in other operating expenses, decreased over 40% or 80 basis point in the quarter, contributing to the reduction of operations expenses.

Payroll productivity improved 200 basis points on a same store basis. Same store revenue minus bad debt increased 4.9%, with the same store operating expenses minus bad debt increasing 3.3% for the quarter. We had very strong expense management second quarter improvement from the first quarter.

On a year-to-date basis, consolidated admissions increased 1.7%, and consolidated adjusted admissions increased 3.8%. Same store admissions decreased 2.7%. (Inaudible) in February of 2008, and [lack of fluid respiratory] in our markets in 2009, accounting for 200 basis points of decline.

Service closures, severe weather, other non-recurring events represented a decrease of 70 basis points. Considering these items, our same store admissions would have been flat. On a same store admissions, adjusted admissions guidance remains a negative 1% to a positive 1% for 2009.

Net revenue to date was $5.9 billion, on a consolidated basis. Net revenue per adjusted admission increased 6.1%. On a same store basis, net revenue increased 5.5% for the first six months. Same store inpatient revenue increased 3.8%, and outpatient revenue increased 7.5%.

Total same store surgeries increased an impressive 2.8%. On a same store basis, net revenue per adjusted admission increased 5.9%. Our same store Medicare case mix for for the six months ended June 30, 2009 increased 2.5%.

Consolidated EBITDA was $819 million for the first six months ended June 30, 2009. On a same store basis, EBITDA increased 11%. Consolidated EBITDA margin for the first six months was 13.8%, and same store margin for six months ended June 30, 2009 was 14.4%, an increase of 70 basis points compared to the same period in 2008. Non-same store margin for six months ended June 30th was 0.4.

For the six months consolidated operating expenses, as a percentage of net revenue, decreased 10 basis points from the prior year. The bad debt increase of 110 basis points [is] offset by improvements in all other categories. Same store operating expenses improved a strong 70 basis points from 2008, with improvements in all expense categories but bad debt. Same store net revenue minus bad debt increased 4% year-to-date, compared to an only 2.8% increase in operating expenses minus bad debt, a net positive of basis points.

For the second quarter, consolidated bad debt increased 130 basis points, 12% versus 10.7%. Same store self pay admissions increased 2.8%, or 20 basis points as a percentage of total admissions. Year-to-date consolidated bad debt increased 110 basis points, 11.8% versus 10.7%.

Our combined consolidated bad debt charity, and administrative self pay discounts, divided by adjusted net revenue was 18.9% for the quarter, and 18.5% year-to-date through June 30, 2009. Our combined consolidated bad debt charity care and administrative discounts, as a percentage of adjusted revenue, are 180 basis points for the quarter, and also up 130 basis points on a year-to-date basis.

Consolidated cash receipts were 103% [of collected] net revenue for the 12 months ended June 30, 2009. Our 2009 guidance for bad debts remains unchanged, 11.8% to 12.5% of net revenue.

Total AR days were 50 at June 30, 2009, down three days from December 31, 2008. The allowance for doubtful accounts was $1.275 billion or 43.5% at June 30, 2009. The allowance for doubtful accounts and related contractual allowances for self pay was approximately 81% of self pay receivables at June 30, 2009.

Community Health Systems continues to have a favorable payor mix. For the quarter ended June 30, 2009, the consolidated net revenue by payor source was broken down as follows, Medicare 27.2%, Medicaid, 9.0%, Managed Care and Other 53%, and self pay, 10.8% of net revenue. On a year-to-date basis, the payor mix is as follows, 27.5%, Medicare, Medicaid, 8.7%, Managed Care and Other, 52.6%, and self pay, 11.2%.

Cash flow from operations was $285 million for the quarter. On a year-to-date basis, cash flow from operations was $544 million, versus $417 million for 2008, an increase of $127 million or 30%. The year-to-date increase in cash flows from prior period is from an increase in net income of $23 million, increases in non-cash expense of $35 million, consisting primarily of depreciation, and an increase in cash flows from improved collections on accounts receivable of $84 million.

These increase were offset by decreases in cash flow from net changes in supplies, prepaids, other current assets of $8 million, and net changes of accounts payable accrued liabilities, income taxes, and other working capital, assets, and liabilities of approximately $6 million.

We are adjusting the lower end of our cash flow guidance range to $950 million from $900 million, in a revised guidance. The 2009 will range from $950 million to $1 billion.

Total capital expenditures for the quarter ended were $131 million or 4.4%, year-to-date capital expenditures were $267 million or 4.5%. Guidance remains unchanged and ranges from $600 million to $650 million, below the spending for 2008.

Balance sheet cash at June 30, 2009 was $269 million. At the end of the quarter, the Company had available credit from the revolver of $660 million after the outstanding letters of credit. Looking at the balance sheet as of June 30, 2009, we had $1.139 billion of working capital, $13.9 billion in total assets. Total outstanding debt at June 30, 2009 was $8.940 billion, of which approximately 91% is fixed. Our debt to capitalization at quarter end was 82%.

During the quarter, we repurchased $61 million of our bonds, back in open market. This brings our bond repurchase in 2009 to $121million. Subsequent to end of the quarter we repurchased an additional five million. We could purchase an approximately $75 million in either stocks or bonds.

We repaid $110 million of our term loans during second quarter of 2009. At the end of the quarter we were a party to $5.954 billion in interest rate swap agreements, unchanged from the end of the first quarter and again, 91% of our debt is fixed. We no longer have any continuing operations classified as discontinued on the Company's income statement. And our year-to-date financial schedules for '08 and '09 have been revised, and our guidance is revised to reflect on unnamed hospital that's moved, and as Wayne said El Dorado's operations are now consolidated.

While we've increased our net revenue guidance, please be aware that we are assuming a 0% to 1% increase from the inpatient Medicare Update, effective October 1, 2009 and continuing into 2010. We have included in our 2009 guidance an increase in the estimated acquisition cost now being expensed from $0.02 to $0.03, to $0.04 to $0.05. This is due to the new business combination rules.

As Wayne mentioned, we've increased the lower end of our 2009 EPS guidance to $2.45 to $2.50, with the high end remaining at $2.65. And Wayne will now provide a brief recap.

Thanks, Larry. We're very pleased with our strong second quarter performance, as we continue to deliver solid operating results through efficient expense management and consistent execution. While the expected economy trends indicate that overall hospital industry volume will remain under pressure, we believe our proven operating strategy will sustain us through this uncertain environment.

With that, I will now open the call for questions. If you'd like to talk to us after the call, you can reach us at 615-465-7000.

(Operator Instructions) We will pause for a moment to compile the Q&A roster. Our first question will come from Gary Lieberman with Wells Fargo.

Thanks. Good morning. Was hoping maybe you could talk a little bit more about what you saw on the elective procedure front, and where you think discretionary utilization is and where it might go, given the economy.

You know, this is a little different twist on that question, and I think this is kind of what you're asking, is maybe what's the impact of unemployment and COBRA, and all those kinds of things, on what's going on in outpatient, is there a spike in utilization. We cannot determine that there's - - there is some increase COBRA, but it's probably relatively minimal. We can't make any great determinations about that unemployment has caused any increase in terms of our outpatient, that's what you might assume.

I think what we think is we have a lot of market share opportunities and we've been recruiting a lot of physicians, and we're beginning to see the result of our consolidation of [the two companies] and execution in terms of our operating plans. Larry, I don't know if you want to add anything to that.

Yes, I think it's been reported that some of the managed care companies have seen a very nominal increase in COBRA, (inaudible) up 50 basis points, and [since] up 20 or 30 basis points. I think we had very good surgical growth and very good outpatient growth, and we think it's got a lot due with market share, and there may be a little bit of COBRA utilization there. But it's pretty hard for us to tell.

Our unemployment has moved up there, and we tried to do a correlation in the second quarter if unemployment [were to revive], and we really don't see anything that tells us that it's had a significant impact one way or another.

Okay, and then just one follow-up question. On the expense front, how much room if any do you think there still is on either contract labor or other expense items to squeeze out of the business?

Well, I think we mentioned we made some progress in the third month of the first quarter, that's carried over into this quarter. I think there's still some operating opportunities, contract labor is down to 70 basis point of revenues. There's not too much left there. But I think you'll see us be productive and we're looking at other opportunities. Our operators are always looking, trying to be cost effective and I think they'll carry it on for the rest of the year.

Okay, great. Thanks a lot.

Next question will come from A.J. Rice with Soleil Securities.

Hello everybody. I had a couple quick things. You guys obviously have added to your beds. It's interesting to see by licensed beds, by bringing some things that were in discontinued back, as well as buying out some minority or some partners and consolidating. As you guys get to the point where your free cash flow has sort of bought in what you can buy with the public debt and you're left with just paying down bank debt, does that perk your interest up in getting back in the acquisition market? What are you seeing out there, is there any resurgence in activity and will we see you do more in that front, first off?

Yeah, AJ, I think we've said all along that our intentions are clearly to work on paying down debt, but we're also strategically, as we look at opportunities and find opportunities, Wilkes-Barre added our tenth hospital in Pennsylvania, it's good for negotiating managed care, all of the above, all of the synergies we get out of having a number of hospitals in one state, we continue to look for strategic opportunities that are helpful to us. And there are a lot of them.

I've said this publicly a number of times, there are a lot of people having difficulty now, as you know, in terms of not for profits, not only are their operating incomes down, but their investment income is down as well. So we will continue to see those kinds of opportunities, and so we'll just be careful and thoughtful about that.

And then Larry can speak to this a little more, but if you do the math on, I don't know what LIBOR is now, but it's pretty low, it's one point, whatever it is. And so if you do the math on this, we probably can clearly get a better return in terms of finding good acquisitions that work over a longer period of time than even paying down bank debt. Larry, do you want to comment?

LIBOR is today about 0.5, [plus a 2.25] margin, so it's under 3%. We have the right to buy some more stocks or bonds, buy stock back now and the bonds will trade a little higher. So we'll sit with our cash and use it. We did buy off $110 million of our term loans this year, and year-to-date we've been about $230 million of bonds this year and last year. We have delevered some, but probably there's a better use of cash at least today, as Wayne said, on something other than [paying those back].

We get this question a lot. We're continually looking at and thinking about and evaluating the use of our capital and the best use of capital in terms of return for our shareholders.

I would just add one thing - -

How much flexibility do you have on buying shares, Larry?

It's the same $75 million, it's either stocks or bonds.

Okay.

Plus, there's some exercises of stock options, we can use that money. But there's not a lot there. Another thing, you mentioned the growth of the beds and just to make sure where we added about over $700 million in revenue in Spokane and Wilkes-Barre and other acquisitions that we did buy that 50% out. It's a pretty low margin right now. That gives us an opportunity to improve those margins the rest of this year and a good year for 2010 off those recent transactions.

Okay. Just wanted to ask you one other thing. On the physician recruitment, you had a banner year last year. Sounds like things are going very well, on the recruitment front again this year, even better. There's a lot of dynamics going on with what's happening in the economy and all, but you how do you expect, if you bring in a lot of physicians last year's back half, this year's first half, when that might start to impact your consolidated admissions numbers?

One of the things, A.J., as we bring these in, we layer them in, in terms of when they come on. I think we're already beginning to see some of it. You can see our adjusted admissions are up, and our surgeries are up. Inpatient is about flat, but we're beginning to see progress. These things take a while, and as we said early on, we had a lot of opportunity in the Triad hospitals, and as you said, we are having another very strong year.

Just statistically, new physicians [we're admitting] should average about 100, 110 admissions, and they don't get there the first year. They probably get there some time in the second year or third year.

Did you give the numbers for how many you've recruited so far this year? I may have missed it.

704.

704. Okay. Thanks a lot.

Our next question will come from question Kevin Fischbeck with Banc of America, Merrill Lynch.

Okay thank you. Good morning. This quarter pretty much played out the way that everyone else's quarter played out, in that you beat the quarter nicely, but you don't seem to be assuming much of a flow-through into the second half of the year. Can you talk a little bit about the outlook for the second half?

I'm not sure what you mean by played through about everybody else. One of the things Kevin, I think it's a little different from this Company, and we've been very consistent in terms of our operating strategies and our performance, is that our expense reduction, as I keep saying, we got it the fashioned way. A you recall, there are a number of other companies who made major changes in their benefit plans, did major layoffs, gave no salary increases, all those things. I think that's clearly different, we've not done any of those things, by the way, I think that's a clearly different strategy in terms of a one-time kind of opportunity.

For us, this is about market share opportunity and consistent growth. So that's why we changed our guidance a little bit, improved it a little bit. We even said if the Medicare update is zero to one, we can get over that hurdle and continue to earn where we are.

We have opportunities that I don't think everybody else has, because of the fact that we still only have about 50% market share, so we have good growth opportunity. We're recruiting a huge number of physicians. Things are working. Our case mix index is up 1.5%, so we continue to have opportunities for growth in our case mix, and we do have a lot of opportunity left, I think, in terms of expense reduction going forward.

So I wouldn't say that it played out like everybody else played out, is my only point. I just would add one point. I think clearly we had had good results in same store performance. We had some acquisitions to sort of camouflage that a little bit on the consolidated basis. But we had a 6.7% same store revenue growth, which I think will probably be the best in the industry.

Now, to your question about guidance, a couple of things. We sort of thought it would be 2% to 3% the market basket, and you know every 1% is worth about $20 million, and now we're assuming 0% to 1%. That's has been factored into the guidance for 2009, and of course will affect 2010.

The other thing is we brought a hospital that's been in discontinued, that we tried to sell, we quit trying to sell it. That had a really rough year in 2008 and brought down our performance when you see the year-to-date numbers you'll see that. And then that's an area and we didn't reflect negatively in our guidance for that.

El Dorado, again, we bought it out and we now own all of it. It's another probably slight detractor on earnings per share, a little bit of contributor on EBITDA. The other thing, just last quarter, we had the reduction in Tricare which we sort of said we would factor that in for the year, and did not reduce guidance for that. Of course, that's something from last quarter.

And I think you looked at the 265 high end of guidance, that's probably about the highest growth rate anybody's going to have when you look at guidance or close to it. So I think we did maybe in a way, in our opinion, did raise our guidance, by looking and climbing over these items.

Okay, that's very helpful. I guess Wayne, maybe to follow up on your comments, I want to get your thoughts about 2010 just from a broad perspective. You guys have done a great job managing costs, and in particular labor costs, and wanted to get your thoughts about the extent that the challenging environment you guys talked about as far as volume pressure and bad debt expense, to the extent that that continues next year, the economy does not get better, - -

if you can tell me what's going to happen in healthcare reform, what's going to happen around the swine flu, what's going to happen in terms of immigration, I can give you a much better picture about all that. I think we think terms of our business plan we're on track. We're doing the things that we need to do. We've got continued growth opportunities in our markets.

We're recruiting physicians. We think we can improve our case mix ,which should drive our revenue. We think we're in good shape with managed care companies and we can manage our expenses. Beyond that, all these other things are, you have to be determined, I believe.

Kevin, I'm going to add one thing. If you looked in the first quarter, we saw that the volume[on there] made some pretty substantial - - some adjustments in the last quarter of the month, and this quarter our same store payrolled wages are down 90 basis points. What we generally do is react, hopefully timely, to whatever outcomes or issues are ahead of us and reflect appropriately in our operations.

I guess that's makes sense. There's a lot of uncertainty out there. Is the thought that the economy's weak, that there still is maybe another leg to go down as far as controlling the cost as well, so we shouldn't just assume weak volumes and bad debt, but we should also assume that means that we're going to have leverage again next year to help control cost growth?

I think it's not just the cost side of this. I still think even if you have, and look, we've been unable to correlate unemployment, COBRA, to any of this, by the way, as we look and work our way through all this, and because we've not had any huge layoffs in any of our markets. Our unemployment is probably a little bit less than the national average, maybe a half a percent or something like that.

Having said all that, we think we have so many opportunities that we should be able to trump some of those things, if it doesn't get too strong or go too far south when it's all said and done. This is a very resilient industry, by the way.

We've always been able to figure out ways to be successful, whether it be on the cost side or on the growth side. But I think the thing that differentiates us, I believe, is the fact that we continue to have growth opportunities. I'm not sure that's the case for every other company, but we certainly think we bought an opportunity to have a lot of growth going forward.

Very helpful thanks.

And I think Wayne mentioned 65% of markets are sole providers, which helps you a lot in challenging times. The other point as I said, we've got $700 million of recent revenue, which historically, we've done a very good job in the second year improving that revenue and improving margins from that. The other point about bad debts, to some extent it's in revenue, and it's in bad debts, and accounting principles cause us to recognize that.

But it's really the companies that really have low costs and the control of their costs, that's [why] we always talk about net revenue minus bad debts and operating expenses minus bad debts, because that's the real cost of taking care of people. You may have a little growth of bad debts, but if you control your operating expenses it shouldn't have the effect on your final income statement that you would think it would.

Our next question will come from Shelley Gnall with Goldman Sachs.

Hi, thanks. I guess my first question is your bad debts looked pretty good in the quarter, but it looks like you have increased your allowance for doubtful accounts as a percent of self pay. Can you talk, it sounds like it's moved up from 80% to 81%. Can you talk a little bit about what you're seeing for collections?

Yes, if you look over the last 12 months, the historical collection rate [looking to trade] is slightly down, if you look over 24 months, we're doing okay, which says that we're still collecting what we think we'll collect, but it's taking longer to do it. We are aware that we have more self pay receivables, especially in the self pay after insurance, a little bit there. And we are aware that some of our new bankruptcies and other accounts like that have gone up in our own collection company here. So we thought it was appropriate to move it up.

It's an estimate on our part to think what could happen in the future, but our collection rates, over a long period of time, are holding and we keep looking at it every six months really hard, and we'll look at it again in a few months. I think we have adequate reserve right now and expect to do reasonably well going forward, but we did move it up a percent.

So just to confirm, sounds like your collections of your copays from managed care accounts, the copays and deductibles piece, that hasn't really deteriorated?

It is still about 50%, and the self pay by itself is still about 8%, and that's holding pretty close to what it has been historically.

Okay. Thanks. And then a question about how you've controlled your salaries expense the old fashioned way. I'd love to know a little bit more about what that means. So, it sounds like you didn't do a lot of headcount reduction. Sounds like you did offer some wage increases. Didn't really cut back on benefits, so is this a question of managing productivity and efficiency? Is it a question of leveraging your existing staff over a stronger revenue base?

Were you trying to say good management? Is that what you're trying to say.

Tell me a little bit more about how you did it.

That's what it really is all about is productivity. Our management team across the country are doing outstanding job.

It's a difficult job, but we've always tried to be ahead of the curve in terms of managing our wages and salaries, and I think we're doing a really excellent job, and we saw a little increase in the second quarter from the first quarter because we started this early on. But it really is more about productivity and doing a better job in terms of matching our resources to our needs.

Our man hours per adjusted admission improved 200 basis points, which is the productivity side of it. And we've held our wages below 3%, which I think is better, we've historically been closer to 4% last year.

Okay. Great. Thanks. And then I guess I just have one clarifying question. On the guidance update, it sounds like there was a dilutive impact from moving the two hospitals into continuing ops and it sounds like it was a dilutive impact, revising expectations for IPPS. Can you quantify the total impact from those two items for us on the EPS guidance?

Well, every 1% would be $20 million, and of course for a quarter that would be $5 million; if it's 2% it would be $10 million or about $0.06 a share. Like we said, we were two to three, now you're zero to one, so it would be something like $0.05 to $0.06 on that. It's a couple of pennies, a penny or so on those two facilities coming in, if they get the projections we think they will, both the one that we acquired 50% of and the one we moved. The other issue I think we mentioned the acquisition costs we thought we would have to expense were $0.02 to $0.03, now it's $0.04 to $0.05. so that could be as much as another $0.02.

And by the way, we moved our guidance up, not down. Which really net-net is an increase.

Yes. Thanks.

Our next question will come from Darren Lehrich with Deutsche Bank.

Thanks. Good afternoon, everyone. I want to just ask a couple of things here. The first was related to the new accounting rules around the acquisition spending, and we've seen that number move up. We clearly have gotten your commentary around your desire to do deals, given the limitations you have with buying back more of your publicly traded debt.

What's a good way to think about what the normalized spending levels would be, the spending that you previously capitalized, obviously not in a year where you do a Triad kind of deal, but just over time, how should we think about that as an impact to your earnings on a go-forward basis?

Well, right now it's $0.04 to $0.05, is the current estimate which would be around $5 million to $7 million or $8 million pretax. I think probably a normal spending year, probably would be $4 million to $6 million pretax on that activity. It sort of revolves around how complicated a transaction is. We use some legal fees, external legal fees, accounting fees, and also a lot of travel and other things like that, but I would probably say it's $5 million to $6 million or $7 million a year, and this year will probably be somewhere in that range.

Okay. That's helpful.

Last year we got to capitalize that. This year we're having to expense that, and we're going to spend a little more now than we thought we were back earlier in the year.

You did call out materials management as one of the areas you're seeing some improvement relative to the $100 million number. I'm wondering if you can just maybe flush out a little bit what you're doing on that front, if there's any particular successes with regard to supplies or implants that you'd maybe share with us. I think you've been doing a number of things with Orthopedics, but can you just talk a little bit more about that?

Before you get to that Larry in terms of the detail, one of the things that I would tell you that we have done, which I think is very impressive and speaks well of our management team, is our compliance, in terms of our contract compliance is over 90% now, and that's Company-wide. That is a major accomplishment, and that in itself is worth a fair amount in terms of improving our supply costs, and I'm very proud of our team because of the fact they've been able to do that in a relatively short period of time.

Yes, on a consolidated basis, it looks like we made a 10 basis point improvement, it's more like 30 or 40 basis points. They've done well on same store. The Drug area's one, and then also we've had a little progress in the Implants, and the Food and Rebates, and in Pacemaker costs, those are primary categories that sort of support that on a quarter basis.

Similar to that probably on Drugs is a little better on a year-to-date basis than it was for the quarter. We have a direct formulary here that we monitor throughout the Company. It's been very help for us. It's something Triad had not done, so we're benefiting from that. And as Wayne said, the compliance has gotten much, much better.

And I think our GPO has done a very good job in terms of helping renegotiate contracts during this period of time. So all that's helpful.

Okay. Fair enough. And then just on the cash flow from operations, you're trending at least year-to-date, pretty well relative to the guidance. I know you brought it up at the low end. I'm just wanting to get some comments from you, Larry, as to how we should think about the back half of the year. It seems like you would be able to push through the guidance, given your run rate, so are there any seasonal items or working capital items that we ought to be thinking about in the back half, just besides normal seasonal earnings patterns?

Well, probably taxes, there's probably a little more of tax payment. We had a tax refund in the first part of the year of $60 million I believe in the first quarter. We probably won't have that the second half of the year.

The other thing, probably, we're at 50 AR days, we never know if there's going to be some hold back from some of the Medicaid states. We do need to get money this past quarter from Illinois. But we do seem to have a little bit of slowdown as the year goes on, either from other states on Medicaid. There's a chance we may do better than that, we're at 544, and we probably have a shot at getting better than $1 billion on the high end. We thought we would wait one more quarter and see how we're doing before we change the high end, but we did change the low end.

Very good. My last thing here, just for Wayne, on physician recruiting, can we just get any updated comments you have about employment models and whether you're doing anything differently at all on that front? Are you employing more doctors this year versus last year?

No, I think it's about the same. And again, we seem to be doing well. We don't seem to be having a huge amount of difficulty in terms of locating and finding physicians who are interested in us. And it's about the same.

We had a big year last year, and what we have done historically is we've moved up and geared up, and gotten our organization sized up, so that we could do the job that we need to do as we project out our needs over the year. So nothing really has changed all that dramatically. We were up a little last year in terms of employment, we're probably about the same this year. We're not up. I think we're about the same in terms of the amount, the number of physicians we're employing.

Now, you know, if the Obama plan happens, we might have to employ a lot more physicians, but having said that, no, there's nothing really , and I say this a lot, there's nothing that's really changed too dramatically. It's just hard work, and it's just identifying leads and doing the work to get the physicians

All right. Thanks a lot.

Our next question will come from Ralph Giacobbe by with Credit Suisse.

Thanks. Good afternoon. Just first on the pricing side, a little bit stronger than your peers. Can you go back to maybe talking about what's driving that stat? You talked a little bit about mix. Just wondering maybe about peer pricing and then the sustainability of that trend?

Well, I think we got overall about a 6.7%; clearly pricing got us 3% of that probably, and then you've got the Medicare case mix. I don't know what everybody else's was. Ours was up 1.5% and that helped us. Our outpatient growth and our surgery growth helped us there.

I think we're ahead 4.8% for the quarter, and I think we probably have a good likelihood that we're going to be in that the next couple of quarters. We were much higher than that in the first quarter because of probably the flu comparison, other stuff, but I think we should be able to run somewhere 4% to 5% the next couple quarters, on a revenue adjusted admission basis.

Okay. And then can you remind us on your uninsured and discount policy, it just appears some of your peers seem to be witnessing a little bit of a spike there, which is depressing their sort of pricing stat, if you will, and showing maybe a little bit better on the bad debt line. So just wondering if you could just remind us of the uninsured and charity discount policy?

Yes, the charities varies by facility, it would somewhere in the 150% to 200% of the federal poverty level And some of it may be a little lower. Most everybody is probably at least a minimum 150%.

I don't think we were increasing our charity level arrangement, unless we were mandated by the state, which I think this year we might have gotten an increase in one of the states that told us we had to do that. On the discounts, it's probably about a 20% average discount we're giving, which we think is appropriate. We're not trying to encourage the uninsured to come there, but we are giving them a 20% discount. It's been fairly consistent. Others may use a higher percentage than that.

Okay. I don't know if you mentioned this, any swine flu impact in the quarter?

Probably a little but of ER activity, but no inpatient activity.

Okay, and then I think in the past you've given us margin profile, I think by how long you've operated the facility. Haven't seen that in a little while. Do you still have those stats, by class, remember you used to do class of 2006, et cetera.

The most important stat probably is the class of 2007. I looked that up. That was probably around 13%. That's closing in closer to 14% now, so that's moving up. The rest of them are moving up better, but some of the improvement is more coming into the class of 2007, and it's so large, being about a $6 billion, over half the revenue right now, that's part of the class that we focused on there.

Right. Classes before that, I'm assuming they're sort of up to corporate average, or is there still ability to bring that up?

I would say the 2001 class is above the corporate average to 2004, 2005 [is there]. There's probably a little bit of room still in the 2005 class to bring it up.

Okay. All right. And then just the last thing, was wondering, I don't know if you've given this to us in the past, but sort of the bad debt guidance, do you guys think about it in terms of what the average unemployment rate would be in your markets around that? I know you said there's not a direct correlation with that, but just in terms of high level, did you guys think of sort of that range incorporates bad debt of "X" percent?

Yes, what I think we'd said, for every 100 basis points we expect bad debts to go up 30 basis points, assuming you did comparable discounting and charity, which we're generally doing unless we're, I think we had one state that changed. So for every 100 basis points increased in unemployment, you would have about a 30 basis point increase in bad debts.

Okay. Great. Thank you very much.

Our next question will come from Adam Feinstein with Barclays Capital.

Alright, thank you. Good morning everyone. Let me start by saying Wayne I enjoyed seeing you on TV with Vice President Biden during the press conference for the hospital deal. So maybe that's a great place to start. Maybe just - -

I really appreciate you bringing that up.

But just certainly was curious just to get your thoughts in terms of the deal that was signed, and I know you were actively involved. So whatever you're able to say, just curious to get just some high level thoughts there.

I think what has happened in terms of what the hospital industry did was get well positioned in terms of whatever might happen going forward. I think it's clearly still a jump ball as you see every day, every minute on the minute, there's a change in terms of what's going on in Washington. So it's yet to be determined, and I don't know what will happen after this August recess.

But I think we positioned our selves well in that we're willing to work through issues, all of which, by the way, it seems to me is helpful to us as an industry, because of the fact that if you get the uninsured insured, which everyone seems to agree on that, if you can get that done that's clearly very helpful to us in terms of our bad debt.

I'm optimistic that when it's all said and done, that we will have some version of a healthcare reform, and I think you have to divide it in two parts. One is getting the uninsured insured, so I think something will happen on that front. The other part is the reform piece in terms of how you reform Medicare, and that's going to take a long time and has to be slow and progressive in terms of the way it's done so it doesn't adversely affect the system.

And I think people will come to the realization after this break, and I'm almost positive that, I don't know anything about politics, but the most politically expedient thing to do is for the President to get the uninsured insured. I think that helps him going forward, but it also helps us as well. I think it's two parts, and I think you have to look at it that way and think about it that way.

Absolutely. Okay. And just a couple follow-up questions. I guess maybe just talk about the commercial mix of business, clearly a trend seen in the last year is with less people have commercial insurance, is seeing that mix. I know you guys have actually held up pretty well relative to others. Just wanted to see if that was still the case.

On a reported basis we're better than the overall average of the [Company], which was down 0.4. If we dug a little deeper, there's a little bit of managed care in there for Medicare, and with that, we'd be slightly worse than the average, down 40 basis points, but still much better, just a low 1% or 2% down. The one thing I guess is that admissions, if you look on our revenue basis we've held really strong. We've maintained it for almost seven quarters, in six quarters, above 52% of our revenue mix is coming from managed care and other, so there's one way to look at it on volume, and another is your revenue holding strong, and our revenue is holding really strong.

And then just in your slide deck you talked about that you've already gotten $58 million out of the $100 million of the cost savings that you anticipated for this year. Maybe just talk a little bit about what's still left there, and just as we think about think about the opportunity.

If you think about it, there's probably still some opportunities in some of the categories in the area of revenue management, looking at revenue opportunities and ER management. There's ER, and Managed Care's probably got one more smaller component of it, a little of supply activity I think will be there. We'll be getting close to $270 million of reported numbers here by the end of the year. There's $100 million this year; there still should be some opportunities left, and I think probably payroll and maybe a little bit on the benefits side.

Okay, and I guess just a final question here. I know you spoke a little bit before about the recruiting and just the success you've had there, and certainly you kind of joked that if healthcare reform happens, more doctors will want to come and be employed, but we are hearing more and more about that, and that seems to be one of the key issues these days in terms of employing doctors. Maybe just talk about your strategy in terms of just engaging doctors, and I don't know if you have a number in terms of the number of employed doctors now relative to a year ago, but just curious in terms of how you guys are thinking about that.

It's up slightly, but it's not up all that significantly, and we think about it this way. We look at our needs, we do our work in our markets and make determinations in terms of succession planning and demographic and mix of physicians in a particular market, and we do these strategic plans for physician recruiting. Once we get through that process, then we make a determination about how we best can fill those needs. In some instances, it is clearly we have to employ physicians to get the ones that we need there, and some we can continue to use the old traditional model that's around in terms of income guarantees.

So it really depends on the market. That hasn't changed all that much, except that when the economy changed in the last 12 months, we did see more physicians who were interested in having guaranteed incomes or on an employment basis, but it really hasn't slowed us down in terms of recruiting. And by the way, it really hasn't increased in terms of number of recruits.

I would say, Adam, that one area that we are seeing a little more activity in are in group practices and the opportunities in group practices, which we have not seen as many of in the past, so that might be one dynamic that's changing a little bit, but other than that, you know, it's still about the same. I think the demographics on this are pretty strong in terms of the future.

What might happen if you substantially reduce in some way physician pay, in terms of availability of physicians and all of the above in terms of primary care, all of those things which is a huge topic for discussion. But I think if we're not careful, we could significantly adversely affect the system, particularly if we add a lot more people in the system, in terms of trying to access primary care.

All right. Thank you.

Our last question will come from David Bachman with Longbow Research.

Hey, good afternoon. Thanks for fitting my question in here. Just a couple quick things here.

I want to go back to the case mix index. Nice improvements there this quarter and year-to-date. Can you just talk about the breakdown of some of the things that are driving that, whether it's physician recruitment, driving higher surgeries, or anything on the documentation, coding front, that you guys are doing to drive that up.

Well, probably increased surgical growth was the first thing I would say, and we've acknowledged that probably when the [MSDRG] was put in back in '07, we were busy on a lot of things with the transaction, and we've done a little bit of review on that, and some of that could be a little bit better appropriate documentation [recently]. But I think surgical growth is probably the biggest correlator for that.

Are you seeing that consistent across the hospitals, or in the Triad hospitals, is that opportunity any different than - - ?

I think the physician recruitment opportunity and recruitment of surgeons and that is pretty much across the Company. Triad had a little bit higher case mix than we had.

So it's [bowed] up pretty evenly through our divisions and the Triad hospitals in both the non and former [CHS] hospitals. It also clearly is consistent with our strategy in terms of improving our physician mix in the markets and recruiting some of the specialists in terms of surgical specialists. So we're doing a better job and are continuing to improve that going forward, and we're beginning to see the benefit.

We knew all along that one of the opportunities we had was case mix and we said, as we look at our growth opportunities, one of the additional things we have is an opportunity to improve the intensity in terms of the kinds of cases we do.

Great. Thanks. And just in terms of self pay volumes or collection rates in the quarter, do you see anything at the end of the quarter different on that front than at the beginning of the quarter or I guess in 2Q?

No, I don't think at the end of the quarter or beginning of the quarter. I think we saw a little more growth throughout the quarter of outpatient self pay revenue, than the inpatient self pay revenue, which means that admissions is one indicator, but the outpatient is another. But that was throughout the quarter.

The collection rates have been fairly - - looking at our own collection company, we usually do a little bit better job of collecting cash in the third month of the quarter; it's just the way we focus some of our performance indicators, but it's not substantial.

Okay, and then just one last question, just on ER volume, just consolidated in the same store, some peers have reported real strong ER growth in the quarter. Just wondered, maybe you touched on that, but what you guys are seeing?

We as a general practice have not given out ER volume. It's in the 3% to 4% range on a same store basis. It isn't something we have routinely given out. But to ask, it's in the 3% to 4% range, which (inaudible) company have talked about.

I would say, just in conclusion here in terms of emergency services, that's one of the areas that we identified early on in this transaction that we had a significant opportunity in, and we are seeing improvements in that across the board.

The focus of course is your inpatient admit rate, we've done a good job on that especially in some of the Triad hospitals.

Bringing that admit rate up. Okay, great. Alright, thanks.

I will now turn the call back over to Mr. Smith for closing remarks.

Thank you for spending time with us this morning. Our proven business platform has enabled us to enhance the operating performance at both our existing and acquired facilities. This model enables us to meet our objectives in a challenge operating environment. Our proven ability to deliver results will continue to be a distinct competitive advantage for Community Health Systems.

Want to specifically thank our management team and staff, hospital Chief Executive Officers, Chief Financial Officers, Chief Nursing Officer, Division Operators for their excellent operating performance for the second quarter. We remain focused on our business strategy and improving our results. Once again, if you have any questions you can reach us at 615-465-7000.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participation. You can now disconnect.