Community Health Systems Inc (CYH) 2009 Q3 法說會逐字稿

Good morning, my name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter conference call.

(Operator Instructions)

I would like to turn the call over to Wayne Smith, Chairman, President, and CEO of Community Health Systems. You may begin your conference.

Thank you, Rachel. Good morning, and welcome to 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 this call is to review our financial and operating results for the third quarter and year-to-date ended September 30, 2009. We issued an 8-K including press release and our financial statements after the market closed yesterday. For those of you listening to the live broadcast of this conference call on the 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 and financial results.

But before I begin, I would like to read the following statement. Statements contained in this conference call regarding expected operating results, acquisition, transactions and other events are forward-looking statements that involve risk and uncertainties. Actual future events or results may differ materially from those statements -- from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Security 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, Inc. with Securities and Exchange Commission, including the Company's annual reports on Form 10-K and quarterly reports on Forms 10-Q and current reports on Form 8-K. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in forward-looking statements.

Community Health Systems has delivered another very solid finance and operating performance for the third quarter 2009, benefiting from consistent hospital level performance with favorable revenue trends, and same-store margin expansion. These results confirm that the fundamentals of our business are strong, and our centralized business platform is working across all of our markets. Net revenues for the quarter ended September 30, 2009 totaled $3.1 billion compared to $2.8 billion for the same period last year, an increase of 12.1%. Adjusted EBITDA increased 8.3% from $386 million to $418 million.

Income from continuing operation was $75 million versus $59 million, for the third quarter last year. Earning per share from continuing operations was a very strong $0.65 per share, versus $0.52 per share for the same period a year ago, an increase of approximately 25%. Cash flow for the quarter was $356 million. Net operating revenue for the nine months ended September 30, 2009 was $9 billion. EBITDA was $1.2 billion. And income from continuing operations for the nine months ended September 30, 2009, was $221 million or $1.94 per share, compared to $1.54 per share the same period a year ago, an increase of over 25%. Cash flow year-to-date through September 30, was $901 million, up an impressive 31%.

With that I would like to review some of the key accomplishments for the quarter. We continue to look for opportunities in acquisition market again. We can afford to be selective in the current market environment, and are looking for attractively-priced synergistic opportunities in states where we currently operate. Physician recruiting continues to be key driver of our operating strategy. The Company recruited 1356 new physicians for the first nine months, compared to the 1092 physicians recruited the same period a year ago. We have increased our current recruiting target to 1650 physicians for 2009.

We have achieved approximately $82 million of the target $100 million in improvements through the third quarter 2009. Approximately half of those improvements have been generated from managed care and materials management. We're updating our 2009 guidance to reflect our strong performance through the quarter. Revenue will range $12 billion to $12.2 billion, adjusted EBITDA from $1.645 billion to $1.665 billion. We have also tightened up the range on EPS from continuing operations to $2.57 to $2.65. We're also providing abbreviated 2010 guidance, revenue will range from $12.8 billion to $13.2 billion, with two assumed acquisitions. And EPS for income from continuing operations will range from $2.80 to $3.00. We do plan on providing regular, all- encompassing guidance with fourth quarter earnings release in February.

There is no material update to the New Mexico Federal False Claims Act case, although the case is progressing. At the end of August, we filed motions to dismiss all of both the government's and relater's claims. Both the government and relater filed responses October 16th, and we will be filing a further response. The responses filed did not add anything to the theories of the case, and we're continuing to vigorously defend this case and our actions. At this point, I would like to turn the call to Larry to provide you a summary of our financial results.

Thank you, Wayne. Our consolidated admissions growth for the third quarter was up 7.2%, compared to the same period last year. Adjusted admissions, which factors in outpatient business, increased 9% versus the third quarter of last year. Our same-store admissions decreased 0.2% compared to third quarter 2008, adjusted for service closures and other non reoccurring events, and same-store admissions would have increased 0.4%. Same-store adjusted admissions increased 1.9% for the quarter.

Net revenue in third quarter increased 12.1% from $2.8 billion last year to $3.1 billion on same-store basis as net revenue increased 5.2% for the quarter. In-patient revenue increased 5.3% and outpatient net revenue increasing 5.1% on sequential basis, same-store net revenue increased to 2.4%. Same-store net revenue from just admission increased 3.2%. The net revenue per adjusted admission growth of 3.2% is lowered than the previous growth, somewhat due to higher emergency room volume with higher medicaid utilization. ER volumes generate lower revenue per unit than other non-ER volumes. Also, in the third quarter 2009 included three full months of increased three full months of Triad outpatient reduction.

We had strong revenue per adjusted admissions growth of 5.6% in third quarter 2008. And again, the same-store revenue did increased 5.2% against a tough comparable of 8% in the third quarter 2008. Same-store surgery volume increased 1.3% for third quarter, with in-patient surgery increasing faster than outpatient. Our same-store Medicare case fixed 1.1% versus last year. Consolidated (inaudible) $418 million for the third quarter with versus $386 million for same period a year ago, an increase of 8.3%. On the same-store basis, EBITDA was $415 million for third quarter, an increase of 7.2%. EBITDA margin on consolidated basis for the third quarter was 13.5%, of decrease of 40 patients a year ago due to low margins at recently acquired hospitals. Same-store EBITDA margin increased 30 basis points to 14.3 compared to quarter ended September 20, 2008.

For the third quarter our non same-store margins 1.6%. The non same-store margin includes the acquisition costs now being expensed versus capitalized last year and various system conversion costs. In the third quarter, consolidated operating expenses and percentage net revenue increased 50 basis points. Consolidated payroll, benefits, supplies, and bad debts increased 120 basis points, partially offset by the decrease of 70 basis points in other operating. On a same-store basis, total operating expenses improved 30 basis points driven by solid improvements in other operating expenses and supplies, and offset by the increase in bad debt. Same-store payroll and benefits, excluding deferred compensation reclassifications would have decreased 30 basis points.

Man hours per adjusted admission improved approximately 300 basis points. Same-store contract labor decreased over 40% or 60 basis points in the quarter, contributing to reduction of our operating expenses. Same-store revenue minus bad debt increased 4. 2%, while same-store operating expenses, minus bad debt increased 3.6% for the quarter. On a year-to-date basis consolidated admissions increased 3.5%, and consolidated adjusted admissions increased 5.5%. Same-store admissions decreased 1.9%, the extra day in February of 2008, and lack of flu in the first quarter accounted for approximately 60 basis points of the decline.

Service closures and severe weather and other non-reoccurring event represented a decrease of 130 basis points. Consider these items are same-store admissions would have increased 0.1%. Year-to-date same-store just admission 0.4%, and excluding these same items would have increased 1.4% versus a year ago. Revenue year-to-date was $9 billion on a consolidated basis. Net revenue per adjusted admission increased 5%. On a same-store basis net revenue increased 5.4% for the first nine months. Same store in-patient revenue increased 4.3%, and outpatient revenue increased 6.7%. Total same-store surgeries increased 2.3%.

On a same-store basis, net revenue per adjusted admission increased 5%. Our same-store Medicare case for the nine months ended September 30, 2009, increased 2.0%. Consolidated EBITDA was $1,237 billion for nine months ended September 30, 2009. On a same-store basis EBITDA increased 9.7%. Consolidated EBITDA margin ended September 30, 2009 was 13.7. Same-store margin for nine months ended September 30, 2009, was 14.4, an increase of 60 basis points compared to same period of 2008. Nonstore same-store margin ended September 30 was 0.9%. And again non same-store, includes your acquisition costs that we're expensing now, as well as conversions cost.

For the first nine months consolidated operating expenses percentage of net revenues increased 10 basis points. It was a small increase of 10 basis points in payroll, and increase in 100 basis points of bad debt. These were offset by improvements in supplies and our operating expenses. Same-store operating expenses improved a strong 60 basis points from 2008 improvement in all categories but bad debts. Man hours per adjusted admissions improved 100 basis points year-to-date. And contract labor improved 70 basis points. Same-store revenue minus bad debt increased 4.1% to date, compared to 3.1% increase in operating expenses minus no debt they got positive 100 basis points.

For the third quarter, consolidated bad debts increased 60 basis points to 12.3% versus 11.7%. Same-store self-paid admissions increased 6.3% or 40 basis points as percentage of total admissions. Consolidated self-paid net revenue payer percentage increased only 30 basis points in the third quarter and year-to-date of 2009. Year-to-date consolidated bad debt increased a hundred basis points 12% versus 11%. Our combined consolidated bad debt, charity and administrative self-pay discounts, divided by adjusted net revenue is 19.3% for the quarter, 18.7% year-to-date through September 20, 2009. Our combined bad debt charity administrative discounts as percent of adjusted revenue are up 130 basis points for the quarter, and 120 basis points on the year-to-date basis.

Consolidated cash receipts were 102% of collected revenue for the 12 months ended September 30, 2009, this percentage was impacted somewhat by our non same-store hospitals. The guidance for bad debts for 2009 is now 12% to 12.4% versus the previous guidance of 11.8% to 12.5%. Total (inaudible) were 50, September 30, 2009, down three from December, 31, 2008. The allowance for doubtful accounts was $1.367 billion, or 45% of September 30, 2009. The allowance for doubtful accounts and related contractuals for self-pay was approximately 81% of self-pay receivables at September 20, 2009.

Community Health Systems continues to have a favorable payer mix with the quarter ended September 30th, consolidated net revenue by payer source was as follows. Medicare, 26.8. Medicaid, 10.3. Managed care, 51.5 and self-pay, 11.4. Medicaid gross emergency room did have some increases of about 130 basis points. On a year-to-date basis, the payer mix is follows -- 27.3, medicaid 9.3, managed care other, 52.2 and self-pay, 11.2%. Cash flow from operations is $356 million for the quarter, an increase of 33% on a year-to-date basis. Cash flow from operations was $901 million versus $685 million, an increase of 32%.

Increase in cash flow year-to-date is an increase from net income. Increase in noncash expenses of $84 million consisted primarily of depreciation of $44 million. The increase in cash flows from change of accounts receivable about $107 million, supplies, prepaid expenses and other current assets contributed about $15 million in the accounts payable, current liabilities and income taxes for these items are $122 million. These increases were offset by decreases in cash flow from other assets and liabilities of $20 million. Due to our strong third quarter cash flow, wer're increasing our 2009 cash flow guidance to range $1 billion to $1.1 billion. Previously it had been $950 million to $1 billion.

Total capital expenditures for the quarter just ended were $131 million, or only 4.2% of net revenue. Year-to-date total capital expenditures were $398 million or 4.4%. We've lowered the upper end of our CapEx guidance for 2009 from $650 million to $625 million. The 2009 guidance will now range from $600 million to $625 million below the 2008 spending. Balance sheet cash at September 30 was $433 million. At the end of the quarter, the Company had available credit from the revolver of $663 million after the outstanding letters of credit. Looking at the balance sheet as of September 30, 2009, we had $1.234 billion working capital, $14 billion total assets, total outstanding debt as of September 30, 2009 was $8.927 billion, which approximately 91% is fixed. Our debt to capitalization in the quarter end was 82%.

During the quarter we repurchased about $5 million of 8 7/8 coupon bonds in open market. This brings our total bond repurchase in 2009 to $926.5 million. We could repurchase approximately $75 million in either stock or bonds. At the end of the quarter we're party to a $5.954 billion interest rate swap agreements, unchanged from the end of the second quarter. Again, approximately 91% of our total debt is fixed. Our 2009 guidance that does include expense and acquisition cost of 3% to 4% that were previously capitalized. Even with the lower revenue per unit growth in the quarter, we still exceeded analysts expectations in terms of net revenue, EBITDA, and EPS in a very difficult economy. And Wayne will now provide a brief recap.

Thanks, Larry. Our conservative and standardized centralized operating strategy has been very successful, and we recognize the critical need to manage our costs and improve margins. We continue to see opportunities to leverage our assets, and realize additional operating improvements, and gain market share at our same-store facilities, as well as our most recently acquired hospitals. With that I will open the call for questions. And if you would like to talk to this after our call, you can reach us at area code 615-465-7000.

(Operator Instructions)

And your first question is from Gary Lieberman with Wells Fargo. Your line is now open.

Thanks, good morning. Can you guys comment maybe on what the trend has been for flu, either visits to the ER --

Gary, can you speak up a little bit? We're having a little trouble hearing you.

Sorry, can you hear me now?

That's perfect.

Can you talk about the trend you have seen on flu so far in the fourth quarter, and maybe what the impact has been from an ER. perspective or admit perspective. And also there's been a lot of discussion about how -- since this flu is trending towards the younger population, it might have an impact on payor mix, so any data on those points would be very helpful.

Well as you know, we don't generally talk about the fourth quarter when we report on the third quarter. But having said that, we didn't see a huge amount of flu during the third quarter. We are beginning to see some increases in our ER volumes for fourth quarter. Very little of this, I think, will turn into inpatient volume, and you're right. The probability is greater because the critical group here seems to be the younger population. So that might mean that we might see more medicaid business in the fourth quarter in terms of the mix. But it's always better to get paid than not to get paid. But there's really nothing specific that I think we would be comfortable reporting on now. I think everybody in the country probably is seeing an increased volumes in the emergency room related to flu.

Hi, this is Larry. Generally we don't -- there's a lot of concern about the ER, we were only up 6% for the quarter, and it's up more than that since we started fourth quarter. And our self-pay ER business was only up percentage wise about 1% in the third quarter. And about 95% of our children usually have some type of coverage, which is better than overall average.

Gary, the only other comment about this is all the flu we have seen so far is H1N1. We have not seen the seasonal flu yet. But obviously it's on the way. So some time until the next 60 days we'll start seeing seasonal flu and H1N1 together, which will make things more complex.

Right So maybe a quick f follow up on CapEx, you lowered the high end of your guidance for CapEx. Is that a function of fewer projects, or are you seeing less pressure because of some of the slowdown from competitors? It has more to do with the timing with projects taking place. We have not spent capital quite as fast as we anticipated. We slowed down I think in the first quarter, and lowered our guidance in February after we released it in October a year ago. And just looking at what we are doing and ww probably spent about $25 million less, some will be on equipment and some will be on projects. You will recall when we acquired Triad, capital spending was fairly substantial. We have been able to bring that down. We have no issues, no problems, no concerns across the country in terms of our capital spending among our CEO's or physicians. It's all going well. It's more measured than it has been in the past, and as always, we're very conscious about our returns and in terms of our investments.

Great, thanks a lot.

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

Thanks, good morning. First, I guess can you maybe talk about the margin opportunity at newly-acquired facilities where they are today, and also maybe the revenue base of those newly acquired facilities as you think about next year?

Yes. If you look at it -- the reported same-store margin is about 2%. You start add backs the acquisition cost, and it's in the 4% to 5% range. They run higher payroll, and higher supplies and operating expenses, and start recruiting physicians for those markets are good markets, attractive too. If you look at the size of it, Wilkes-borough is over $300 million revenue today, and Spokane, is over $300 million of revenue today annualized. Siloam Springs is about $35 million to $40 million which we bought in February, and then Eldorado is about $100 million of revenue. All those collectively should move up nicely, usually in the second year, we're moving up 200 or 300 basis points so if we move up 300 basis points on that group of assets, it would be about $750 million, which would give us a pretty good opportunity to see some earnings growth from that in 2010.

Ralph, as you recall, I think we bought 53 facility in ten years and 54 in one year. This is not rocket science is my point. These are good facilities and good opportunities. These are the acquisitions we're looking for, that are attractively priced and have a lot of upside potential, and also are helpful in terms of developing a larger market for us. We're excited what we're -- and we will continue to look for those opportunities going forward.

We usually do a four-year or five-year model. We expect all four of these to achieve the timing of the earnings in the model for 2010.

Okay. You obviously gave top and bottom line guidance for 2010, and given your comments that you just made, let me ask directionally when we think about kind of EBITDA or EBITDA margin next year. Are these directionally higher, lower, the same -- any details there?

From a same-store perspective we think we can have our same-store margin grow up. I think we're like between 85% and 90% of all the quarters we reported since we went public in 2000. We achieved same-store margin improvement this year at 60 basis points. It is going to be less than that, it was 30 this last quarter, so I think we will have some same-store margin. We usually don't -- since we don't have specific guidance out, we don't have that out there. But usually the acquisition to acquire, which the guidance had two in it, probably would -- could bring the consolidated margin down.

Having said all that, what you have, is what you get today.

And then just my last one on the acquisition side -- seems like talk is picking up more entrance into the acquisition fray. Wonder if you're sort of seeing that as you look at acquisitions, and whether you think valuations pick up because of that.

I think there continues to be opportunities. There's a lot of pressure on particularly on not-for-profits. We do see a lot of good opportunities. As I said all along, we will be selective, and we clearly have a fair amount of cash on hand. If we find something that works for us, we'll move aggressively, but we will not overpay. We were involved in an acquisition not too long ago in a southern state, a fairly large one, and when the price got up fairly substantially, we got out of that. So the pricing range so far has been it used to be 70% to 80% of net revenue. Recently it has been about 50%. And today we don't think we have to pay too much more than 60% to 70% in that range, when it's all said and done. So we're not going to buy anything that we don't think works for us, or is overpriced.

Okay, great. Thanks, guys.

Your next question come from the line of Shelley Gnall from Goldman Sachs. Your line is now open.

Thanks. I guess my first question -- can you talk about the synergies you saw in the materials management line?

I think as Wayne said that, in the good words, that our managed care does account for about half of theirs. The other good progress in other areas throughout the company also. But in supplies, we've got continue to do a good job of compliance. I think we are more compliant today than we have ever been (inaudible).We have done a good job on compliance. We have been doing a good job of managing drugs which has brought in a good reduction of supplies. And also by being compliant, we benefit from various pricing and rebate programs we got there.

Okay. Are there any new initiatives --

May I add, Larry, one thing that helped us is facilities were not as compliant. Larry and our operators have been very successful in moving that group of hospitals up. And that has worked extremely well without any issues.

So it sound like the primary improvement is coming from better compliance with your GPO.

That would be the primary opportunity for such a large percentage of our supplies are bought from GPO.

Okay, thanks. Could you just maybe summarize for us -- what was the key reason the third quarter actually exceeded your expectations? So you actually came in ahead of your guidance for the quarter. What was the key reason?

Good management.

I think we had adjusted admissions growth and revenue growth and it was a pretty strong. We had a tough comp, and when you think about being up 5% that's good but 8% comp I think we continue to do a good job and supplies are in good shape so we continue there. Our range was $0.58 to $0.64, and I think we were a $0.01 above the range. But it was pretty much all things worked pretty well, but we had good adjusted admissions growth.

This is consistent of what we have said over the last year or so. There's a lot of opportunity in the Triad acquisition for us. Has been in the past, there is today, and will be in the future. As we continue to work in term of market share improvement and getting synergies. So I think it's exactly what we thought, in terms of opportunity here. in term.

I can ask one more -- where are the inpatient surgeries actually tracking better than expectations? I see there's another quarter of positive inpatient surgery growth.

Inpatient surgery did better than in the first quarters. It grew faster in this quarter than the first two quarters, and also out grew the outpatient surgeries slightly. So that would probably be a little better than expectation.

Okay. Thanks.

Thanks.

Your next question comes from Darren Lehrich with Deutsche Bank.

Thanks, good morning, everyone. I wanted to ask a little bit more about what you're seeing on the self-pay uninsured front. Larry, can you just maybe walk through what the trend was in terms of your underlying self-pay volume growth in the period, and how that looked in an absolute basis sequentially? And if you can maybe give us any commentary about sort of the monthly trend or over the course of the quarter, whether you saw any difference there, just given the economy and backdrop we're in. Thanks.

Yes, the self-pay was up 6.3%. It's not off a large basis, 700 out of 164,000 admissions. Same-store, it's not a large percent, but it did cost 6.3% I think it went up 40 basis points as percent of admissions. There wasn't much of change throughout the quarter. If I remember correctly, July and August are pretty constant, maybe up a little more this September. But it was fairly consistent throughout there. The last quarter, I think we were up a little bit more in this quarter. What was interesting was, is the front of outpatient actually slowed down in this quarter versus the second quarter, which allowed our net revenue by payor, I think it was up 60 basis points, 10.8 versus 11.4 in the second through third quarter, but over a year ago we were only up 30 basis points.

Okay. I guess just in terms of the bad debt, obviously you just tweaked the 2009 guidance a tiny bit, and I don't want to split hairs with you, but if you were to do the upper end of that range for the year, it would imply your bad debt may be over 13%. So can you help us think about that line item? Is there any reason to believe it will be a whole lot different than the recent trend line? any color there would be helpful.

Here's a little color. In terms of how we think about this, and how we look -- we don't see any sea change going on in terms of bad debt new. What you see from us is incremental bad debt. And Larry's projections have been right on, in terms of how this was growing. As you know, when you put in rate increases you get a little increase. All the above. We have not seen any dynamic in the marketplace including unemployment or uninsured or any of those kinds of thing that have dramatically changed our bad debt to date. So I know there's a lot of conversation around this, but we have not seen real evidence of a change in bad debt. Larry?

We started out a year ago, 11.8 to 12.4, and we raised it after the economy got bad in the fourth quarter. And now we're at 12% through the first six months of this last quarter, 12.3 or 12%. Your math's probably right and I wouldn't want you to think we're going to 13. We basically decided to lower high-end from 12.5 to 12.4 back what it was, and on the low end we took it to 12%. So it's a range there. It's not meant to be scientifically exact but a range to show it's where we thought it would be a year ago.

That's great. My last question here -- just cash flow continues to exceed our expectations and forecast, so good job with your cash flow generation. I guess -- I know you're not giving out your guidance, but maybe just help us think a little bit about the level of cash flow you have been able to generate on an LTM basis. Anything unusual as we look forward on that line item -- it looks like you're just generating almost two times the amount of free cash flow we thought you would. And some is lower CapEx ,but you have also done pretty well on working capital side.

We brought the receivables down from a years ago, 54 to 50, which helped year-to-date performance. We did have a little benefit in the way accrued payroll works. There was a little more benefit in this quarter. We will get some of that back this quarter, which is built into the guidance. The only thing I would say about 2010, we're working for some tax savings and tax cash savings. We benefit from no tax payments in 2008, some small tax payments in 2009. We'll have to work hard to find ways to minimize our taxes in 2010. That's is one of the things we will be working on before, we put out guidance. But you're right. We've done a very good job on cash flow, and will continue to work to try to find ways to do that. Taxes will probably be a little variation, and could be a little bit more. I would expect to be more in 2010 payments than we will probably have 2009 as it was.

Okay, great, thanks a lot.

Your next question come from the line of Tom Galucchi from Lazard Capital Markets Your line is open.

Thanks. I guess you mentioned self-pay volume metrics. Can you give us any color on the commercial and managed care?

They were down a little more than the company average. And managed care, not much more than but slightly more than the Company average, and I think revenue was down a little more than running. It's probably had a lot to do with the less outpatient surgery and less admissions, but not substantially different than the overall company.

And maybe just two macro questions. How do you think of the medicaid landscape? Is there any states high on your radar screen where there may be some talk of change given state budgets?

There's a few that are looking at provider taxes and some -- couple of them that passed. One has got a proposed, and Indiana, a little bit of an uptick in benefit in what we're getting there. We're watching Washington, I think they had a reduction. And Tennessee, those are the states that. are on our radar screen right now that we know about. We're watching the states, but those are the ones we have good information on right now.

And as you recall, one of the things we tried to do through the years is to be diversified, and now that we're in 29 states, it gives us an opportunity to offset any cuts we have in some states with other states going up. So far the dynamics of this have not changed too dramatically.

Sure.

And the one change in Indiana which caught us late in the quarter -- -- if you have enough advance notice about changes and reimbursement, hopefully we can make changes in other states, or efforts to try offset what might happen.

Just the last one -- I know it's a smaller piece of the business, but given your commentary about the not-for-profits and struggles they're having out there, is the core management business doing any better? Seeing any higher demand these days?

We continue to see improvements in the core management piece of this. They're doing a great job. As you know, we're going through a restructuring working on process improvement. This is a business that historically has been looked at as sort of a pipeline for acquisitions. We look at it as an opportunity in terms of developing synergies and improving the process and delivering the services there. So yes, it is getting better and there continues to be more and more opportunities as hospitals struggle across the country.

Okay, thanks, guys.

Your next question come from the line of A.J. Rice from Soleil Securities. Your line is now open.

Thanks. Hello, everybody. A couple of quick questions here. Going through the data you provided yesterday, looks like you're running about $2.6 million pretax charge related to conversion of the systems. As well as I guess some acquisition-related cost that you are writing off. I just want to make sure I understand -- does that -- are you calling that out? It looks like it's about a $0.015 to $0.02 for quarter of additional cost that I guess could be characterized as one time in nature or short-term in nature. Is that flowing through the numbers or is it somehow called out?

It's flowing through the numbers, the $0.54. What we have done is the acquisition is an accounting change, I think for the year it was $0.03 to $0.04. So just pointed out the fact that we're having good earnings growth. It would of been better if it had not been at an accounting change. On a systems conversions cost, it's a little unique to us, to have a long term system conversion. Most all the accounting conversions for the Triad, which we are doing some of them, patient accounting and clinical systems now, that will probably continue, it just gives a little more visibility to what is actually happening to the business, it's a cost that will eventually go away although we'll probably have more of that type cost in 2010. And we put it non same-stores since it doesn't relate to anything specific in the day-to-day operations that we broke out.

Another question. On the two acquisitions that are included in the 2010 guidance, are those identified at this point? Or are those things that you assume will come along?

We always have, as I have said a number of times, A.J. , a pipeline. If you let your pipeline dry up, it's very hard to get into the business. So we're continually evaluating and looking at projects as we think about the year, but again, it depend on a lot of things. Whether it works for us, improves the markets we're in, the price is right, all of the above. But our pipeline is very

Okay.

It's just a place marker.

Right. Right. And talking about the pipeline, you guys haven't said a lot about it but there's certainly be a fair amount of local commentary about this physician group that I guess you're in discussions with out in Washington. Is that -- I mean, you probably can't talk too much specifically about that situation --

We can't really talk about that specific situation but it is sort of an important piece of -- as we think about our markets going forward. And these integrated health networks is what we're trying to develop. That's why we're looking for markets like Spokane where we have an opportunity to work together with a number of facilities in the marketplace, so we can expand our reach and market share. And that dynamic is one we're working on pretty hard in all our large markets, and then trying to figure out ways we can connect our smaller hospitals into a larger market, and services we can provide our core facilities as well. So it is part of a strategy that is work in progress in terms of development. And part of that always has to do with physician base in that particular area and how we can integrate the physician base into that. Other than that, A.J. , that's about all I can

So the comment general on buying multi specialty group practices of a group of doctors, which I guess we're talking about in that situation -- that's something you look at opportunistic basis, not a shift in strategy?

It clearly is not a shift in strategy. It's not our main business or one -- we have to look at it opportunistically whenever there is an opportunity to do a large market development. And we continue to look at those kind of things, but it's not a main strategy of ours.

Okay. My last question will just be along the lines of your recruitment. You inched that up -- your target for this year. Can you just comment on availability of docs, seeing them. And also I know there's a lot of cross currents with the economy this year, but you basically been flattish on your same-store admissions. I guess the comps get easier from here on out. Do you think the physician that you've recruited in the last year and a half, are ramping up about the same as they would have historically, and when do you think we will see some inpatient benefit from the docs?

We have clearly had a very strong year in term of our physician recruitment. We moved our number up to 1650 now. We had a lot of success. We've said this all along. If you look at our stats, in terms of physicians, that's one of the things we have done an exceptional job of. It's one of the things really driven our volume in terms of market share, all the above. So yes, we should start seeing the benefit of those physicians as we look out the next 12 months. I don't see much difference in terms of your term the ramp up here, in terms of their practices and developing their practices. It seems about the same track that it has been in the past, and we do have our list going forward. So generally speaking, you would hope we would do better in terms of having higher volumes. But I think we are comfortable that we are on the right track. We continue to to do a good job. The mix is about the same in terms of physicians, both recent graduates as well as the specialty mixes, 65% to 70%. So this is one of the things that has been the backbone of this company in terms of being able to contract and retain physicians across the country to build our volumes and we're still on track.

I'll just add, you're right. Through the first three quarters, we did not have the admissions growth we historically had. But if you carve out the items we always talk about, we would be relatively flat versus where we're down. And I think more importantly, the adjusted admissions would be probably 1.5% or so. And we've had real good revenue growth, so we have demonstrated even when slightly down, 5% revenue growth, which is pretty good for this industry, or any industry.

Yes. No doubt. That's great. Alright, well, thanks a lot.

Your next question comes from the line of Adam Feinstein from Barclay's capital. Your line is open.

Aright, thank you. Good morning, everyone. Just -- I guess a few questions here. Maybe just if you could talk a little bit about mix. I guess one of the things we have seen this year is acuity has been somewhat weaker for the industry, and with everything going on with the economy, I think the thought process come into the year was acuity would go up because the serious cases would be getting done. Just curious to get your thoughts what is going on there and, you know, what kind of cases you guys are seeing. I know you spoke about case mix index being up slightly but curious to get some feedback about mix.

One of the things we have said all along in terms of opportunities we had with this Company is moving our case mix up. and you can see our case mix for the year is up about 2%. I think that's correct. So it's working for us in terms of the case mix going up, and some of that obviously driven by our surgery in the surgery volume.

Yes. Also, just Wayne mentioned earlier hospitals buy up almost 3% so we bought some more hospitals with more intensity than what we have today. Another thing I'll add, length of stay is flat, where I have seen other people with good admissions growth, but length of stay drop, so the acuity of hospitals has been not what you hoped it would have been. I think we had good inpatient surgery growth, which others have not had. I think with the economy surge growth was not as strong but we had surge growth so far this year.

Okay, great. And then, this is something I know is hard to quantify but curious in terms of your thoughts are. What impact do you think Cobra is terms of what was stimulus package. Do you think that provided much of a benefit and just any anecdotes you have there?

It's very difficult for us to quantify COBRA because it looks like normal insurance when it's said and done. One of the things it seems to me -- if you look at what happened to COBRA today -- for example, versus COBRA around 9/11. 9/11 you had a huge number of people that lost their jobs so a date certain COBRA started, and a date certain when it ended. Currently what you have is layering effect of COBRA, as these industries have gone out. And they have not all happened on the same time. So you've got this 18 month that layered in. And in addition to that, the auto workers have sort of prepaid COBRA, part of the union contract is COBRA is paid for. And in addition to that, you have the stimulus package, which paid 65% of COBRA. and I wouldn't be too surprised that whenever it ends, it would get extended because that's a big item for lots of people.

So I think it's very hard to judge the impact of COBRA on this industry. If you go back historically, you know, since I am over 25, I remember a few things that have happen in the past. We used to peg unemployment and volume very easy to make that correlation. Today you can't do it and it's primarily because of COBRA and the way it works now. If you look at the 9/11, back to that scenario, we had huge volumes because everybody was using COBRA. And all of a sudden you go a year or two years out, our volumes dropped off. So I think that was a much easier way to sort of look at this compared to today when you have COBRA over a long period of time.

So within the cost -- you're doing a great job on managing cost. it's been a theme throughout the year -- I want to drill down on operating expense line item, and some of the benefits you guys are seeing there. So maybe if you could talk more detail about the specific items in terms of liability costs and contract labor and such. I just wanted to get some more details.

Quickly I wanted to say this earlier when someone asked about cost -- as you recall, we're one of maybe the only Company that did not cut, reduce our 401K, did not reduce our employees salaries, did not do layoffs and I think if you compare our expenses as percentage of net revenue we're right in the ballpark. I would think -- and sooner or later, people who did that would have to add that back, and would have to start giving salary increases and go back -- if they're going to recruit, if the volumes are going to increase. if the volumes come back for those individual companies. I think they would clearly have to go back and reinstate those, which is a little concerning to us that part of what we have seen in the past, has been done because of that cost reduction, which we don't see as sustainable.

Yes. Contract labor year-to-date about 70 basis points. Malpractice is actually up 20 basis points. Travel down 20%, about $6 million in travel costs. That is some of your main components in the other operating -- contract labor and travel being well managed, and then malpractice was slightly up about 20 basis points. It wasn't just -- one comment about COBRA, we tried to quantify it for medicaid screening vendors, but just impossible to do. Our outpatient revenue has been strong, over 6% last quarter. If the COBRA was a big percentage of your business you probably would have seen outpatient be real strong in the third quarter also.

Okay, great.

I think the managed care company say it's gone from under 1% to slightly over 1%, so it can't be a big impact.

Okay. Final question -- and appreciate the feedback, as always -- Wayne, a Washington question, I guess putting politics aside here, there was this talk about putting the public option back in and the ability to potentially negotiate with hospitals. just curious to get your thoughts on that and certainly, you know, sound like it would be difficult to get that through. But just curious to get your thoughts how something like that would be structured, and whether you would be, think that would be favorable.

I think the probability of that is fairly low. The complexity of that is -- as you might know -- would be enormous. There are a couple of things I would tell you. I know you notice this morning the house is out. One of the issues that hospital industry was concerned about with the Baucus bill, is it only covered 91% of population versus 94%, which is sort of the -- I don't want to use the term trigger, but its sort of an important point for us. And the bill out this morning from the House covers 96%. So if in fact -- and I think there's -- the probability is moving up that maybe nothing will happen this year -- I think something will happen, but may not happen this year. But that bill this morning had 96% in it, which I think is a good thing for the industry. So when you get some blended -- when they work on it together, we'll get back to our 94%. And if you recall, we agreed to reduce our cost over -- to take $155 billion reduction over ten year period. That was based on the fact we would get the vast majority of the uninsured, insured, which meant that a great portion of that or maybe even more would come back over a longer period of time. Absent of the discussions around public options and all that, from a hospital industry standpoint regardless of what happens, we're in pretty good shape, because of the fact that we stepped up, agreed to what we thought would work for us, and we've not backed up from that. So I think we're in pretty good shape.

Alright. Thank you very much.

Your next question come from the line of Christine Arnold from Cowen And Company. Your line is open.

(inaudible) (inaudible)

Christine, this is Wayne. Would you start over again. We missed the first part of your question.

Sorry. Many companies have said they have seen code creep -- not you specifically -- but kind of industry-wide -- and they're going to work in recontracting maybe narrowing networks. How have your contracting efforts gone for 2010? Are you seeing a change in the composition or pricing?

No, I think it's about 75% for 2010, and there was one managed care company in particular made that comment. I noticed that one out today had no comment about it, one of the bigger ones. And we are not having any issues brought to us about code creep. Our DRG work is up a -- index is up a little bit somewhat for surgery, and we are also trying to make sure we do code correctly, but we haven't had negative feedback from managed care companies. We checked with people that do that work, and said the company who said that publicly has not brought any of that to our attention. Keep in mind 80 of our hospitals are sole providers.

I think companies are more survived about survival than code creep.

Yes, that's a big problem. They don't have a deal like you guys do, which brings me to the next question. The house hasn't signed onto the hospital deal. What probability do you assign to it holding in the end?

I think it will hold. It has held through all this. I think part of the reason you saw today, that the 96% coverage has to do with the hospital component of this. The senate has been working hard since theirs was at 91%, working to get it up to 94%. So I think when you put these together, the hospital industry is actually in pretty good shape here.

Great, thank you very much.

Your next question come from the line of Kevin Fishbeck from BAS-ML. Your line is now open

Thanks. The quarter was great, but you may have reiterated theQ4 outlook of this. Is this just kind of typical conservatism in the guidance, or is there anything to highlight kind of sequentially into Q4, that you got this quarter, that will be a head wind next quarter?

There's nothing specifically. We rolled the $0.07 into the year, and kept pretty much the guidance the same. We didn't raise the high end of the guidance. But we're growing 25% of the year, and look at it the year to be over 20% if we hit where we are for the year. So there's nothing about the fourth quarter that would be any different. Actually, the ER activity and other activity may help the fourth quarter some.

Okay. And then you mentioned the lower CapEx this year is due to timing. Should we expect CapEX to be higher next year, or is a there going to be a continued shift of next year's number?

I'm not sure, $25 million lower this late in the year makes much difference in 2010. We would comment -- we didn't have any specific guidance but would comment we're going to work on replacement hospital in 2010, that we didn't have much this year, and probably $70 million or $75 million more replacement-type spending which would drive CapEx up, is usually added to what we spend, instead of trying to bring others down. We got a lot of new projects. We got some capital commitment in Spokane and Wilkes-borough, and we got several years to do. We have a lot of stuff, ten or twelve years. So, it would probably be the same type of spending.

Okay. And then the commentary about the acquisition sound bullish. I guess maybe it goes back to earlier about that two deals being a place holder. Is there a sense that two might be kind of the low-end of where deals might be, or are you thinking the deals might be bigger?

I think what we are saying is that we're conservative. We don't really have to do any acquisitions. We have a lot of opportunity for organic growth, as you recall when you look at our markets. We have a little less than 50% market share. We have a case mix that is 1-3-5 now, up 2%, but we have a lot of room for case mix improvement, market share improvement and opportunities. We have a very strong year in terms of physician recruiting. We're on track in terms of consistency, and our standard way of doing things. So we just are looking for those opportunities that are synergistic, that will work for us, that will be additive to our markets, and will also help us develop larger networks as we look to the future. So it's really -- your guess is as good as mine, whether or not it's one or three. So when it's all said and done. it depend on the opportunity in the market and the price.

Okay.

We wanted to give some indication into guidance there's a likelihood there could be some acquisitions and factored that.

We used to do it on the dollar amount , said a couple hundred million for acquistions a

The guidance was built with two, more like a mid year, lateyear activity. not a early year activity.

Okay. That's helpful. Let's see -- I guess one question -- I understand that you obviously aren't providing full 2010 guidance, but at this point but maybe this is something that you can give some thoughts on. this point. What are you building into medicaid and Medicare outlook as far as 2010 goes? Medicare inpatient is about approximately 1%. It's a little more than that, but we lost money with outliers . And what we know today -- medicaid is probably somewhere 0% to 1%., a lot of activity in medicaid which we'll have to watch. But it's not that big of a concern. Great,

Your last question come from the line of Justin Lake with UBS. Your line is open.

Thanks for getting me under the wire. Two questions. one on the increase on the inpatient volume for the uninsured. And it looked like there must have been some offsetting outpatient decline. Can you talk a little bit about that, and maybe give us some color how we should think about it given the ER volume increase you've seen in the fourth quarter so far?

Yes. Same-store inpatient admit were sequentially up about 4%, and outpatient adjusted admits decreased sequentially about 3.6% And revenue didn't go up as much on outpatient as it has been going. Net revenue by payer year-over-year is up 30 basis points and sequentially up 60 basis points. Self-pay revenue growth consolidated is exactly where year-to-date is and outpatient is what is strong. As it relates to the fourth quarter, we don't usually talk about month-to-month activity. generally large growth of ER visits will bring self-pay business. I think we said earlier there's a higher coverage for the younger population than the overall population, from an insurance coverage.

Got it. So you don't see there is a likelihood there ppof meaningful increase because of the ER .

If ER is a little active, you could have activity. We say this a lot. the real cost of bad debt is your operating expenses. We inmproved a 100 basis points. When you have growth and self-pay revenue, it's revenue, and you put bad debts, its a wash, it's your operating expenses, And we have done a good job of controlling operating expenses. As long as we continue to do that, large swings of little bit of inpatients -- which is a big percentage, but it's a very small number of admissions, than if you manage your operating expenses, your effect on your EBITDA will be less than you anticipate. It may effect your margin, but it won't effect your overall EBITDA performance.

That makes a lot of sense. When I look at 2010 guidance, I know you didn't give EBITDA numbers but seems to incorporate some modest decline in EBITDA margins. I'm wonder if you could talk about the head winds and tail winds as far as margins are concerned.

I think we said earlier, that we put in some acquisitions and that will probablyhave some effect on that. You may have some continuing spending on system conversion in mid-teens, a pretty good performance in this type of environment. We don't have any specifics. Every year we had some margin improvements since we went public, and we strive to have that in 2010.

So you expect to have same-store margin improvement again. Perfect. Thanks, guys.

There are no further questions at this time. I will turn the call over to Mr. Smith for any closing remarks.

Thanks again for your support and for spending time with us this morning. We're please with the trends in our business, and look forward to continued progress for the remainder of 2009 and for 2010. We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers, chief nursing operators and division operators for their excellent performance for the third quarter. We remain focus on the business strategy and improving results, and if you have questions reach us at 615-465-7,000.

This concludes this conference call. You may now disconnect.