Community Health Systems Inc (CYH) 2009 Q4 法說會逐字稿

Good morning. My name is Mason and I'll be your conference Operator today. At this time I would like to welcome everyone to the Community Health Systems fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr Wayne Smith, Chairman, President, and Chief Executive Officer of Community Health Systems. You may now begin.

Thank you, Mason. Good morning and thank you very much for joining us for the Community Health Systems quarterly conference call. Larry Cash, our Executive Vice President and Chief Financial Officer is also on the call with me. The purpose of the call is to review our financial and operating results for the quarter and the year ended December 31, 2009. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. A slide presentation accompanies our prepared remarks for those of you listening to the live broadcast of this conference call on our website. I'd like to begin the call with some comments about our quarterly results and then turn the call over to Larry who will follow with additional detail of our financial results.

But, before I begin, I'd like to read the following statement, statements contained in this conference call regarding expected operating results, acquisition transactions and other events of forward-looking statements that involve risks and uncertainties. Actual future events or results may differ materially from these statements such forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 or made based on management's current expectations or beliefs as well as assumptions made by and information currently available to management. You'll refer to the documents filed back in Health Systems Inc with the Securities and Exchange Commission including the Company's annual reports on Form 10-K, quarterly reports on form 10-Q and current reports on Form 8-K. Now these filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

We are very pleased with our solid financial and operating results for the fourth quarter and for the year-ended December 31, 2009. Net revenue for the fourth quarter of 2009 increased 11.1%, $3.1 billion versus $2.8 billion in 2008. Adjusted EBITDA for the fourth quarter of 2009 was $430.4 million,(Sic-see press release) an increase of 11.5%. Income from continuing operations was $0.70 per share compared with $0.57 for the same period of 2008, an increase of over 22%. Net operating revenues for the year-ended December 31, 2009, increased 10.9% to $12.1 billion. EBITDA was $1.671 billion, an increase of 10.4%. Income from continuing operations was $304.8 million or $2.64 for the year ended December 31, 2009, versus EPS for 2008 of $2.11, an increase of 25%. We also had very strong cash flow from operations over a billion dollars for 2009.

With that I'd like to review some of the key operating accomplishments for the year. The Company recruited 1679 new physicians for 2009 compared to 1472 recruited for 2008. Our standardized and centralized approach to physician recruiting and practice development identifies physicians needs in a community and increases patients access to services. Our recruiting target for 2010 is 1700 physicians. We have exceeded our 2009 goal of $100 million in performance improvements, over 50% of those improvements were gained in supplies and managed care. We finalized our transaction and acquired the Rockwood Clinic in Spokane, Washington on December 31, 2009. The clinic was founded in 1930 and is the largest medical specialty medical provider in inland Northwest with over 130 physicians and 25 specialties. Rockwood Clinic operates 32 separate locations including a surgery center, lab and numerous physical therapy and urgent care sites.

Our 8-K filing includes our regular guidance for 2010. Annual same-store admission adjusted admission growth is expected to be in the range of 0% to 2%. Our projected revenue range is expected to be $12.9 billion to $13.2 billion. EBITDA is expected to be $1.745 billion to $1.775 billion. Projected EPS for 2010 is expected to be in the range of $2.85 to $3. We've also included two acquisitions in the 2010 guidance. Just by way of information, there's been no material updates to the New Mexico false claim case. So at this point I would like to turn the call over to Larry to provide you with additional details of our fourth quarter and 2009 financial results.

Thank you, Wayne. Consolidated admissions increased 4% in the fourth quarter of 2009, adjusted admissions increased 6% for the same period. Our same-store admissions decreased 0.5% when adjusted for service closures primarily OB and some severe weather related issues in several of our markets admissions would have been down 0.3% year-over-year. Flu admissions did increase slightly in the fourth quarter of 2009 versus fourth quarter 2008. Additionally, we did do the clients one day stays that affects inpatient volume and a corresponding increase in outpatient visits. Same-store adjusted admissions increased 1.6% reflecting strong outpatient growth. Net revenues in the fourth quarter were $3.091 billion and increased 11.1%. On a same-store basis net revenues increased a strong 7.3%. Same-store inpatient revenue increased 6.4% and same-store outpatient revenue increased a strong 7.6%. Same-store net revenue per adjusted admission increased 5.7% year-over-year due to good outpatient growth. We did have additional revenue from Alabama and Indiana Medicaid programs in this quarter representing approximately 25 basis points. We recognized additional investment income of approximately 50 basis points related to an increase in deferred comp, employee counts and there's no affect on operations because there's also a corresponding increase in benefit expense and operating expenses.

Same-store surgery margin increased 0.2% for the fourth quarter or same-store Medicare case mix increased 1.4% for the quarter and also increased to 1.3% on a sequential basis. Consolidated EBITDA was $434 million for the fourth quarter versus $390 million for the same period a year ago, increased approximately 11.5%. On a same-store basis EBITDA was $428 million for the fourth quarter, a 9.9% increase. EBITDA margin for the fourth quarter on a consolidated basis of 14.1%, an improvement of 10 basis points. Same-store EBITDA margin was 14.3%, a 30 basis point improvement. For the fourth quarter our non-same-store margin was approximately 6.3%, as we discussed in prior quarters, non-same-store margin is effected by acquisitions costs that are now expensed and system conversion costs.

Consolidated operating expenses decreased 10 basis points as a percentage of revenue in the fourth quarter 2009, a bad debt increase of 80 basis points was offset by decreases in payroll and benefits, supplies and other operating expenses. Same-store operating expenses improved 30 basis points with decreases in payroll and benefits, supplies and other operating expenses and an increase in bad debt. Same-store payroll and benefits excluded deferred compensation reclassification declined 60 basis points. Same-store contract labor and other operating expenses and its decreased 45 basis points in dollars or 45% in dollars and 60 basis points. Additionally, man hours per adjusted admission improved 190 basis points. Same-store net revenue minus bad debt increased 6% for the quarter and still had a 70 basis point improvement.

Income from continuing operations for the quarter ended December 31, 2009, reflects an after-tax impact on earnings from impairment write downs in a transcription company investment, equipment replaced in a closed facility demolition totaling about $7.8 million after-tax or $0.08 per share. Income continuing operations also includes the recognition in anticipated deferreds and other tax benefits of $3 million or $0.03 a share. The total net impact on income from continuing operations is approximately a loss of $0.05, excluding these adjustments our EPS would have been $0.75 per share.

Now turning to the full year results. For 2009, the consolidated admissions increased 3.6% and adjusted admissions increased 5.6%. Same-store admissions decreased 1.5% and adjusted admissions increased 0.7%. Adjusted for a strong flu season early in the year and late day and service closures and other items we discussed previously, same-store admissions would have been flat and adjusted admissions would have increased approximately 2%. Our guidance for 2010 for admissions adjusted admissions is 0% to 2%. Net revenue for 2009 was $12.1 billion, an increase of 10.9% on a same-store basis net revenue increased 5.9% for the year. Same-store inpatient revenue was up 4.9% and outpatient revenue was a strong 6.9%. On a same-store basis, net revenue per adjusted admission increased 5.2% and our same-store surgery volume was up 1.7%. Same store Medicare case mix increased a strong 1.9% for the year. Consolidated EBITDA for the year was $1.671 billion, an increase of 10.4% and same-store EBITDA increased 9.8%. Consolidated margin ended December 31, 2009, was 13.8%. Same-store margin of 14.4% improved 50 basis points year-over-year. Non-same-store margin was 2% and again the non-same-store margin includes the new accounting for expensing of acquisitions cost and some system conversions cost.

For 2009, consolidated operating expenses as a percentage of net revenue increased 10 basis points from the prior year due to acquisitions. Consolidated payroll was flat and we saw improvements in supplies and other operating expenses coupled to approximately 90 basis points for bad debt. Same-store operating expenses increased 50 basis points from 2008 with improvements in all items, but bad debt. Same-store payroll and benefits improved 50 basis points as included in deferred compensation reclassification and same-store contract labor improved 60 basis points. The man hours per adjusted admission improved 100 basis points year-over-year. On a same-store basis net revenue minus bad debt increased 4.6% compared to 3.6% increase in operating expenses minus bad debt, demonstrated our continued strong expense management.

For the quarter, bad debt was 12.3% unchanged from the third quarter, but up 80 basis points from the same period a year ago. Same-store self-pay admissions increased 7.3% and same-store self-pay adjusted admissions were flat. Sequentially same-store self-pay admissions declined 3.7% or approximately 30 basis points from the third quarter 2009. For the year, consolidated bad debt increased 90 basis points. And same-store self-pay admissions increased 3.2% year-over-year and same-store self-pay adjusted admissions increased 0.2 of a percent. Our combined consolidated bad debt charity administrative self-pay discounts divided by adjusted net revenue was 19.2% for the quarter and 18.9% for 2009, an increase of 150 and 140 basis points respectively, sequentially combined bad debt and charity, care and discounts declined 10 basis points from the third quarter 2009. As we've consistently said the real cost of treating the uninsured represents a cost of care and our same-store operating expenses less adjusted admissions, increased only 3.9% for 2009. Consolidated cash receipts were approximately 103% of collectible net revenue for the year-ended December 31, 2009. Our 2010 guidance for bad debt ranges from 12.4% to 12.8% of net revenue compared to 2009 actual 12.1%, also it should be noted that the increase in gross charges will cause bad debts to increase.

Total AR days were 48 at December 31, 2009, a decrease of five days from December 31, 2008. The allowance for doubtful accounts is $1.417 billion at the end of the quarter or 46.7%. The allowance for doubtful accounts and related contractuals for self-pay was approximately 82% of the hospital segments self-pay receivables at December 31, 2009. That compares favorably with 80% at December 31, 2008.

Community Health Systems has a favorable payer mix for the quarter ended December 31, 2009. Net revenue by payer source on a consolidated basis was broken down as follows, Medicare 26.6%, Medicaid 11%, Managed Care and other 51.2%, self-pay 11.2%. On a year-to-date basis, the breakdown was as follows, Medicare 27.1%, Medicaid 9.8%, Managed Care and other 51.9%, and self-pay 11.2%.

Cash flow from operations for the fourth quarter was $171 million which was reduced by some year-end tax and benefit payments and other payable reductions. Cash flow from operations was for 2009 was $1.076 billion compared to $1.057 billion for the same period of 2008, an increase of $19 million. This increase reflects an increase in net income of $54 million, increase in non-cash depreciation amortization of $59 million as well as a increase in $118 million generated by a reduction in accounts receivable for $53 million to -- from 53 days to 48 days. These increases were offset by decreases in cash flow from accounts payable, accrued liabilities and income taxes $114 million, primarily as a result of timing payments made on an increase in cash paid for income taxes during 2009. Cash flow from operations also affected by a reduction of approximately $100 million in non-cash expenses primarily due to lower deferred income taxes. Our 2010 guidance for net cash provided by operating activities will range from $1 billion to $1.100 billion.

Capital expenditures for the quarter just ended were $181 million versus $220 million last year. For the year we spent $579 million or 4.8% of net revenue. Our actual 2009 capital expenditures came in approximately $20 million below our low end of our guided range. Our 2010 capital spending guidance will be from $650 million to $750 million and approximately $60 million has been included for replacement hospitals, primarily for the one in Valparaiso, Indiana. The balance sheet cash at December 31, 2009, was $345 million and at December 31, 2009, the Company had available credit from the revolver of $660 million after outstanding letters of credit.

Looking at the balance sheet at December 31, 2009, we had $1.2 billion in working capital and $14 billion in total assets. Total outstanding debt at December 31, 2009, was $8.9 billion which approximately 92% is fixed. Our debt-to-capitalization at quarter end was 81.6%. In 2009 we bought $126.5 million of our 8 7/8 coupon bonds back in the open market. Our credit agreement allows us $200 million of stock and bonds that could be repurchased so we could repurchase approximately $75 million of stock or bonds. At the end of December, we were party to $5.3 billion in interest rate swap agreements and again approximately 92% of our debt is fixed.

As Wayne stated earlier we've updated our 2010 guidance and I'd like to highlight a couple of line items. We've included the acquisition of Rockwood Clinic in Spokane, Washington; the guidance 2009 revenue was approximately $130 million with a purchase price of approximately $50 million. Equity and earnings of unconsolidated subsidiaries was projected to range 0.3% to 0.4% of net revenue and cash from operating activities to be $1 billion to $1.1 billion for 2010. The capital expenditure guidance ranges from 650 to 750 or approximately 5.7% of net revenue for the coming year, again higher in 2009 primarily due to expenditures on a replacement hospital in Valparaiso, bad debt guidance will range from 12.4% to 12.8% of net revenue, depreciation and amortization are projected to be 4.6% to 4.8% of net revenue for 2010. Our interest expense assumption for 2010 is 5% to 5.3% of net revenue, with roughly stable interest rates. The 2010 projection assumes an estimate of 3% to 4% -- $0.03 to $0.04 per share of acquisition costs will now be expensed due to business combination rules. The 2010 EPS guidance, $2.85 to $3 is based on weighted average diluted shares of 93 million to 94 million and no significant share repurchase has been assumed for 2010. Wayne, will now provide a brief recap.

Thank you, Larry. As you can see 2009 was successful in all levels reflecting our proven ability to deliver consistent quarterly results even in the face of a challenging economy. We ended the year with record consolidated revenues of over $12 billion, 11% increase over 2008. We've continued to focus on improving the performance at our individual hospital level in all of our markets, especially in our more recently acquired facilities.

As we look to 2010 we see additional opportunities for continued growth for the Company. Our geographically diverse portfolio has always been one of our strengths and our hospitals have strong positions in each of their respective markets. We remain focused on the fundamentals of our business and believe our proven success in recruiting physicians and improving operational efficiencies and enhancing essential health services will continue to support our long term growth strategies. With that we'll now open the call for questions.

+++ q-and-a

(Operator Instructions) Your first question comes from the line of Gary Lieberman from Wells Fargo. Your line is now open.

Thanks, good morning.

Good morning.

It looks like your uncompensated admits behaved themselves pretty nicely in the quarter. I was just hoping maybe you could talk a little bit about the trend in Medicaid and how that helped you in the quarter and then maybe talk a little bit about how you expect that to play out in 2010?

Well, the Medicaid admissions were up a little bit more than the Company averaged in the quarter and there was a lower payment rate, we also had pretty good payment. I think we did also get some extra payments in Alabama and Indiana and Indiana is actually a recovery of some of the reductions we had in 2008, we're able to get that back up in the latter part of 2009 for additional money in Indiana.

As it relates to what we look to the future, it's about 10% of our revenue and we got 29 states, there's a few states I think you've actually written about that look like it's had some increases and there's a few other states would have some decreases. If that increase does come through which looks like it may, the $25 billion will probably help 2010 and maybe into 2011 activity. Overall, probably we're targeting around a possibly 1% decrease for Medicaid in 2010 and again it's about 10% of our revenue.

I'd just point out as it relates to the ability to achieve our guidance, we got about a $30 million range there on EBITDA and about a $0.15 range in EPS, so what happens to Medicaid should work nicely within that. Also, this time last year, unbeknownst to us, there was a big tracker change took place in 2009 on May 1 which we thought would cost us $12 million to $15 million and basically will end up costing us $20 million, but still ended up with a very good year with over 25% EPS growth. So we do expect to have some Medicaid challenges in 2010, just a little bit uncertainty right now, but we got it covered in our guidance.

Just to follow-up on that, Gary, we have had these challenges year in and year out, but if you sort of look at in terms of pricing, our pricing is pretty solid in terms of our commercial pricing that we know what we're getting for Medicare this year. We do have FMAP money through the end of this year, so Medicaid may be more stable this year than it is in the future. The good thing for us is that we're in 29 states and as one goes down, another one goes up, so we do have this balance, but I think that the key thing for us is that we continue to demonstrate that we have the ability to manage through even problems like this, but this is a problem or issue, but it's not a major issue when it's all said and done, it should not be.

How big was the recovery in Indiana?

Together, it was about 25 basis points, so somewhere around $2 million to $3 million each state in the quarter.

Okay, great. Thanks a lot.

Your next question comes from the line of Adam Feinstein from Barclays Capital. Your line is now open.

Thank you, good morning. Just to follow-up to that last question, I just want to quantify, you said you're assuming a 1% decline in Medicaid for 2010?

Yes, around that range is what we've got embedded in looking at the 29 states and what we know about some going up and a few going down. So I think we've got a slight -- about approximately 1% decrease factored in.

Okay, great. Just wanted to get your perspectives just in terms of doctors and just employment and things of that nature. Just you purchased that clinic in the quarter and have been hearing a lot more about that throughout the industry. So just what are your updated thoughts and just maybe talk a little bit more about that opportunity in Washington and then just a follow-up question.

Yes, we have maybe about 10% of the total number of physicians on our medical staff that are employed, but I would say over the last couple of years, there's certainly been an increase in interest in employment, I think primarily around the economy and lifestyle issues, probably has as much to do with it as anything else.

So there is a little bit of a trend there in terms of that, but our activity around the acquisitions like Rockwood really had much more to do with strategic opportunities that we see in terms of developing integrated networks in a market area where we have a couple hospitals. Now we have 30 some odd additional sites in terms of physician locations. All that goes towards in terms of improving the quality of care and providing a higher level of service and obviously integrated well into our facilities in terms of our ability to expand and enhance our services in those facilities. So our objective here in terms of part of our employment, particularly when we buy a large group like that, is a strategic issue.

By the way, historically buying physician practices has not been a good idea or a good practice because of the history in terms of they just have not worked all that well. So I think you have to think about it long and hard and think about it in terms of how it works for you strategically all in all, but I think clearly, there's two parts to this. One is the new physicians that we are recruiting, there is an increase in terms of the number that want to be employed and not only by us, but by practices that are in our community. So there is a trend in terms of moving that up, but then for us the opportunities in terms of large practices that, particularly multi-specialty practices, we think can enhance our market share is what we're most interested in.

Okay, and then just a follow-up here on the acquisition market. So you guys are factoring in possibly two deals for 2010, but just curious to get your thoughts. It seems like we've been reading more and more articles about things being shopped around. So is it correct to say that the acquisition pipeline has picked up recently and just any anecdotes or thoughts there?

Yes, I think there is clearly, there has been a fair amount of activity over the last 12 months, I think that will continue over the next 12 to 18 months. I think it's a result of the economy in terms of the number of hospitals having difficulty, particularly the not-for-profits, as their investments have gone down and now are beginning to come back, but not enough to support them the way they've had in the past and our support their ability to be able to spend capital. So I think there are a number of opportunities out there. We always keep our pipeline relatively full because we believe if you let the pipeline drop, then it takes a long time to come back. But we are seeing a little more activity. We have a number of opportunities.

I think two is probably a good number for us in 2010, but as usual, it could be more than that, and the price if you look at our last round in terms of acquisitions, the prices have been very good. I mean $0.50 or $0.60 on the dollar, so that's in terms of net revenue. So that's a good price compared to the 100% of net revenue that we paid in the past. So I think the opportunities are there. Also probably as we move forward and as there's a lot of discussion about this now, I think you will start beginning to see in the future in the next six to 12 months, more competition in the market place for acquisitions and which historically has moved the price back up a little.

And Adam, you also sort of look at the hospitals in the latter part of 2008 and all of 2009, there's probably $750 million of revenue and and that should be a good contributor to our margin opportunity to grow in 2010 because usually we pick up 200 basis point improvement about that time for that group. So 200 to 300 should help us quite a bit.

One other comment about Rockwood, it does have a small EBITDA margin. It's probably not going to be something that is going to be at the Company average, so it's a little bit of drain on our consolidating margin for 2010.

The only other strategic issue about acquisitions, if you know historically, we have acquired a few facilities, I think we acquired 53 or something for 10 year before we acquired Triad, in one fell swoop, but part of our strategy has been historically to layer on new acquisitions, to help with our growth rate. Not that we're trying to, not that we have to do this because we still have a lot of opportunity in terms of growth in this Company, if we didn't do anything else, but it has worked for us and it has been helpful in terms of just consistent growth for us historically. So we'll continue to do that.

All right, thank you, very good quarter.

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

Thanks, good morning. Just want to go back to the pricing number, the revenue per adjusted admission growth. Maybe you could talk about what's really driving that. I'm assuming -- I don't know how sustainable that number is, so any color or thought on how we should think about trend as we think about 2010?

Well if you look at it, it was 5.7%. Year-to-date it was 5.2% and I think it was a little lower in the third quarter because we're up against an 8% comp. We sort of have got embedded somewhere in the neighborhood of about a 5% overall revenue growth, little bit more than 5%. So I think we do have an opportunity to continue to be somewhere in the 4% to 5% range. The Medicaid could be a little bit of a 1% decrease compared to maybe a flat what it usually runs, but I think our Managed Care will be strong. We've had very good strong Managed Care growth in the fourth quarter and in the year, actually Medicaid per revenue adjusted admission was pretty strong in the quarter also.

The other thing I think is helpful here is that we think about this and going forward is that we recruited a huge number of physicians over the last number of years. Those physicians and those practices should start to mature and be additive in terms of our growth as well as intensity as well because we recruited about [70% of those recruits] in specialists.

Okay, great, and then just sort of shifting over to kind of cost side, you didn't squeeze as much as maybe some of your peers in 2009 and I know in the past you talked about that giving you maybe a more sustained opportunity to going forward. So maybe what does that mean for 2010 and would you still expect to sort of have leverage in each of the controllable cost line items and how much opportunity is there?

I think on a same-store basis there's still leverage and you're correct, we continue to give salary increases and continue to give 401(k) matches and so we don't have that challenge ahead of us when that change takes place for other people that eliminated the increases or the benefits. I think we still got opportunity embedded in the guidance, there's same-store margin improvement, this year it was 50 basis points and it's probably more like 30 basis points in 2010 inside the range there. So I think we'll have a good quarter. We still got good opportunities to have good volume growth and good productivity management this year. I think our operators do a very good job of managing the payroll and in 2010 there's probably still some opportunity in supplies to help us out. Contract labor has gotten a little bit lower percentage. So it's not going to come down as much as it has because it's worked its way down, but I think we have got good synergy opportunity in 2010.

Okay, great and just my last one. Does the bad debt guidance assume a worsening of the unemployment levels or does it really reflect the increases to the charge master flowing through?

Well the charge master is a 20 or 30 basis point effective. Usually our unemployment is about 9.3% right now I believe and the average is somewhere a little under 10%. Last year it probably averaged somewhere in 9.4% to 9.5%, so we're about like the average for 2009 I would expect it to stay around that range. So I don't think it will get substantially worse. We did increase our allowances related the to our self-pay receivables of a couple hundred basis points throughout the year and we also increased allowance of overall receivables as AR days came down. So I would expect that we had a little bit of decline in collections about a percent, I think that will stabilize into 2010, but unemployment will stay roughly stable. The COBRA is schedule to run out in February and make it extending or not, I think if it doesn't get extended the ranges we've got there we should be okay.

The economy clearly is getting better, that gives you some stability around your bad debt and the other thing that I noticed the other day again there was a relatively small number of illegal immigrants that have come, matter of fact the number is going down recently, all of that should help in terms of just some stability, but we're comfortable within the range we're in.

The other thing I would add, we've set up our own Medicaid eligibility service and that has done about 20% of our hospitals and that will grow over time. We've recovered from that work either outside or inside the Company, grew about 9% this past year. So we have done a pretty good job of qualifying people for Medicaid which helped us on the bad debt situation.

Okay, great. Thank you.

Your next question comes from the line of Kevin Fischbeck from Banc of America. Your line is now open.

Great, thank you. Just maybe to follow-up on that last point there, you mentioned that the COBRA extension is one of the things that give you comfort in your guidance for bad debt. Any thought about what the impact would be if there was no COBRA extension?

No, I said we know it's February and it should happen in maybe four to five months. It's probably inside the range there. We've got a 40 basis point range and I think that's covered whatever if the COBRA doesn't get extended and it's moved up, but I think as we've said before, the unemployment didn't grow all at once. It grew over a longer period of time so people would fall off over there.

And we've never really been able to quantify the effect of COBRA when it's all said and done. We think it's good, but we've never really been able to quantify.

And if you look at the effect it has on Managed Care companies to talk about 20 to 30 basis points on the overall claims cost. So it's really a small impact when you start to look at it from that perspective. It's helpful, but it's not all that large.

Okay, and then I guess going back to the commentary earlier about the deal environment, you mentioned you kind of expected increase competition for deals. Are you commenting in particular about the publicly traded companies getting more active or are you talking about some of these startups looking to put some cash (multiple speakers)?

Well I think it's all of the above. I think when you kind of take the universe of people who are interested in acquisitions if in fact the economy gets better some of the large not-for-profits become stable, they will be back in the market again. There are a few startup companies. So I think it's all of the above but I don't think it's anything that is that different than we have seen in the past. Clearly, we have been the Company that has acquired most facilities. We've got a very strong track record and great reputation. So I think we will certainly do fine. We are very careful though that we don't overpay and I think that's sort of a -- so far, pricing has been really good and we are opportunistic, but if you look at our purchase price over the last number of years for facilities, we're very careful about what we will pay.

Okay, and then just to clarify, the 25 basis points from the Alabama and Indiana benefit and Medicaid you mentioned, are those kind of what you would call more one-time kind of recoupments or are those kind of ongoing?

Those are ongoing although I do believe that Indiana did have a reduction on January 1, but that component is ongoing, but they had a small 5% reduction which cost us a few million dollars on January 1.

Okay, so you're not saying like that $6 million or $7 million is necessarily one-time?

That's correct.

It's a boost that you got in Q4 versus Q3?

Right.

And these adjustments come and go. You can't really, they come and go and they depend on the legislature and they depend on the activity in the state and it will drive you crazy if you try to keep up with all of them by every state. So that's why the net effect of this for us is really what the important thing and the ability -- and being in 29 states which certainly helps us in terms of risk.

Okay, and then I guess last question here. When we look at the cash flow guidance, it looks to be pretty stable with where the cash flow has been the last couple of years, but your EBITDA over the last couple of years is up a couple hundred million dollars. Can you give us some sense of kind of what the differential is there and why we're not seeing more of that EBITDA growth fall through to cash flow?

Just because our cash taxes is expected to go up about a hundred million dollars, as we know today. We'll be working on some avenues to try to reduce that, but as we know today, our cash taxes in 2010 will exceed 2009 by about $100 million.

Great. Thanks.

Your next question comes from the line of Whit Mayo from Robert W Baird. Your line is now open.

Thanks. First question I had is just on IT and sort of the EMR spending. Wayne, I think I know your personal opinion about this, but have you guys got a handle on what you're going to do there and can you comment on where you are in integrating some of the Triad Hospitals on your systems and do you think you're sort of ahead or behind schedule at this point and how should we be thinking about any expenses there going forward?

Let me just talk in general terms and Larry can tell you specifically, I think we're making good progress. I think we will know exactly what we need to do by summer. I think we understand conceptually what we need to do and I think we're pretty well positioned as I said a couple of times when I've been out on the road, is that this is really assistance from our vendors to get these, to make sure that we meet all of the criteria here. And so I think we're in about as good a shape as anybody else as it comes to this and it really is across the Company, not just the Triad facilities. Larry, you want to talk about specifics?

Yes, just to go back to the Triad integration, all of the accounting materials, management's and payables and stuff is done. This year we'll finish up a lot more clinical conversions and a little bit into 2011, but we made good progress on that also. All of the ProMed which is important for us which we get over 55% of our business in emergency room but that's in all of our hospitals, our system, it works just like it, [it's not on] hospitals.

EHR, we've made a comment in our guidance there and you may have seen it, it excludes its spending for that just because it's a little bit of an unknown, but probably will test a few hospitals out this year and maybe three or four and it could cost $3 million or $4 million a hospital, some software and hardware, but it's a little early and we'll do that test. The more important thing, as Wayne said, we've got four vendors all of which feel very comfortable and they need us to be comfortable because they want to stay in business, to help us meet meaningful use and those four vendors have given us pretty good assurances they will be there to help put in systems the latter part of this year and next year and we'll update the guidance as we go along for 2010 on how we're doing on it.

We just want to be conservative about this because as you know, you sort of mentioned this to start with, this IT can be a black hole and we know what our number would be if in fact we meet all of the criteria, but it might cost us twice that much if we're not careful. So we just want to be conservative and careful here and by the way, we want to make sure that we get the right system and the systems work properly and properly integrated in terms of quality so that it works for us.

I appreciate that. And Larry just maybe back on the clinical conversions, how far along or can you maybe give us a number for how many of the Triad Hospitals you have fully converted and just historically can you give us a perspective for any disruption around that?

Well from a clinical perspective we're about half way there I think.

Okay, and--

And we've got some -- it hasn't created issues that will cause you to have concerns as reported quarters. There's always a challenge with conversions, but I think we've managed through it pretty well.

And maybe one other question just on the equity earnings line and it was down, I know you're a little hesitant Larry to comment too much on that number, but just any color would be helpful and then when we look at your guidance for that particular number, it does imply that it's flat to up a decent amount this year. So can you just give us a sense for just how you're thinking about that number for 2010?

Well, I've often said that's not a perfect correlation and people try to do the correlation because there's not a perfect cutoff on information from both of the companies that we work with. There's also adjustments that come through at times. So we may not be a perfect indicator of how somebody else may perform.

We've got a guidance out there of 30 basis points to 40 basis points. It's a big -- it's only 10 basis points and it's on a big number and it's pretty hard to have guidance less than 10 basis points, but we basically anticipated it not getting -- continuing to be where it is now and it may get a little better in 2010. There's two companies in there and some other smaller companies we have investments in and I think we're 30 basis points, last year it was 30 basis points and the outside is there, if it gets better, but it's probably not going to get a whole lot -- it should stay in that range, right now we probably think it will stay close to the low end of it.

Both of those companies obviously are solid good operators so we aren't losing a lot of sleep over this when it's all said and done.

Sure, and maybe one last question. The minority interest was up a good amount in the quarter and presumably that's a pretty good thing. So just any recent occasions that have occurred in the past quarter or two, developments, AFC projects, just anything there we should be aware of?

We're up to 26 indications today. I think in 2009 we grew about 11 and we had two secondary offerings in the fourth quarter and two new ones in the fourth quarter. So some of the growth had to do with some real good results of stuff one have been around and one came into the third quarter 2009. I think as you may remember, there was a thought that all of this would stop around the first -- end of December, so we worked pretty hard to get a lot done this year and there's still an opportunity to do others. So that line is probably going to grow a little bit.

Great. Thanks a lot.

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

Thanks, good morning everyone. I wanted to circle back on the pricing question and maybe Larry if you could give us an outlook by payer class and maybe comment a little bit more on how mix may play into the outlook for 2010. I'm just wanting to get a little bit more perspective on what you're expecting there on the pricing side.

Yes, I said the main one would be Managed Care and we're about 90% done, 85% to 90% done for 2010 and it will be 5% to 7% and that's consistent with where we are, I think we've had a very good talented team that's done a good job on Managed Care pricing. We expect that to continue into 2010.

Medicare is probably about 1% that we got in October which is a good increase. Medicaid I think I said earlier is somewhere around maybe minus 1%, it could be a little better than that, but that's probably the range we're thinking there now. Self-pay generally goes up with charges somewhere in the high single digits, which from an acuity perspective we've had a very good year this year, probably expect to have a good year next year, maybe not quite as good as we had in 2009 because we're up almost 2%, and I think -- I'll just add there's always a lot of discussion about Managed Care.

Managed Care is 51% of our revenue right now and it's done nicely and the same-store Managed Care is up between 4% and 5% there. You would expect Managed Care volume probably to go down a little bit because if we look at all the Managed Care companies, their overall enrollment is down almost 2%. So it's pretty hard to keep growing Managed Care volume when their enrollment is going down.

And is it fair to say that the charge master has been increasing more than the high single digits the last couple years just given the level of growth or is that about the same as what you've done?

It's probably a little bit less in 2009 than it was a couple years ago. It's probably in the eight plus percent range, somewhere like that. It really varies by location as to what's going on, but there's generally most all facilities have some charge master incurred which again drives bad debt.

Right, and then just the other piece of the question I guess is as it relates to the Triad opportunity that you've recognized for some time. You said half of the $100 million was related to Managed Care. Is the pricing pretty much now rebased in Triad's book on par with where you are? Can you just update us on how much might be left?

I think it was half of Managed Care and supplies, so it's split between those two items so it's not $50 million (inaudible). They're good but not quite that good. But I think we probably -- we came in late in 2007, so we probably had a little bit of challenge to get '08 done and you've got '09 and '10, there might be a little bit out there still as a result of a few multi-year contracts and one of the things that Triad, they worked on the five top contracts, our management team works on all 5,000 contracts which has helped us and there might be some multi-years. So there's still probably a little bit, but we've gotten a lot of that captured already and I think overall I think we can continue to have a pretty good year in 2010 based on the increases we negotiated so far.

Just to sort of recap here in terms of pricing though, clearly this industry historically has traded around reimbursement, but if you go through [and that] Larry did, pricing is pretty solid for 2010. It looks about as good as it did in the past, other than this Medicaid which we generally get zero to less than zero on Medicaid anyway. So pricing looks pretty solid.

Great, and then another question I had just relates to the RACs, I'm just wanting to hear from you, how do you characterize the activity you're seeing and maybe discuss how you're set up to respond to these RACs and if there's any early commentary?

It's still early. We started to see some activity, not in all locations yet. We took an approach to centralize that effort which we think will allow us to both work with physicians and experts and help us through appeals and we've got some case management efforts to help us do that under our executives who manage patient management throughout the Company, or at least from an oversight perspective. So I think we'll do well in that.

If you go back to the states that were looked at a few years ago, I think we had about a million dollar hit in the -- well we had about about six hospitals in South Carolina and a couple in Florida. So it wasn't that much and we'll just have to watch to see what happens. We've done a lot of reviews ourselves and made a couple of changes along the way based on these reviews. It's a little early to say what's going to likely happen, but it's just another challenge we have to work through.

Just from a process standpoint, what we've tried to do is learn from the past here and we don't have much history in terms of what the RACs were looking for, but try to better understand it and then implement educational programs and work hard on documentation, so that we fix those problems so that it doesn't get to be a bigger problem kind of going forward. And so far that process seems -- just like we do everything else, when we standardize and centralize and get after these things, we have the same process in place to work on this to make sure that we have the proper and appropriate documentation and education in place.

Fair enough and my last question, Larry, you've alluded to this in the call here just about contract labor and you've had some good improvement there. Where do you stand with contract labor as a percent of revenues and maybe just remind us at what point does that perhaps become a headwind for you to the extent that you've reached a low point?

Well for the year it's about 80 basis points of revenue and for the quarter it was 60 basis points. So we've still got a little bit of opportunity to have the contract labor. What it was for the quarter, but if you go back a year ago we ran 1.4% of revenue for the year, so we have come down nicely and I expect us to probably still have an opportunity to manage that as needed as we find more nurses that want to work full time or we get more productive. You wouldn't see a 60 basis point reduction in 2010 if you're down to the 60 basis points today.

This is one of the things that I think that's sort of the -- one of the issues around the way we approached reductions in our salaries and wages for the past year compared to other people. We're getting the benefit in terms of productivity out of our workforce because we didn't do major cuts in 401(k)s and all of those things, I think it's very helpful to us.

Yeah, I think I said earlier our man hours per adjusted admission improved 190 basis points in the fourth quarter which -- 100 basis points for the year was off a tough comp for the first there so we had real good productivity.

Okay, thanks a lot.

Your next question comes from the line of Tom Gallucci from Lazard Capital Markets. Your line is now open.

Larry, just on the one day stay issue we saw this quarter is that something we should expect to continue in 2010 pressuring the admissions growth?

Well Managed Care companies are looking at that as others are, so it probably could continue a little bit. It's gone on a little bit this year. We haven't talked too much about it, but it is one of the reasons why there's a little bit of drop in inpatient volume this year.

Okay, great. And as it relates to your same-store admissions and adjusted admissions guidance of 0% to 2% for next year, just looking at Q1 you have a pretty easy comp, so should we expect results to be somewhat lumpy as a result of the comps next year?

Lumpy, is that a defined term?

Well, the volume will be -- it will go up and down in the quarter, so I think you're asking there -- and I would say that, I don't know if I'd say lumpy is a good word or not, but it does move up and down.

Okay, great. Thank you.

The only other thing I would add to this is when you talk about one day stays is keep in mind 50% of our revenue comes from outpatient as well.

Okay, great. Thanks.

Your last question comes from the line of Shelley Gnall from Goldman Sachs. Your line is open.

Great. Thanks for taking my question. Could you talk a little bit about your CapEx priorities for 2010 in the context of the current competitive environment?

Yes. It's really not changed a great deal from what we would probably spend our money on. It could be ER, cardiology and surgery, probably in some radiology diagnostic activities, clearly there's some facility renovations. We don't spend a great deal on the OB, but a little bit, as I said earlier $60 million for replacement hospitals and some money will be spent on systems probably --

Shelley the only other thing is of course we look to the competition throughout our markets. If we see opportunities, particularly in markets where there are large not-for-profits that don't currently have the resources to acquire a particular piece of equipment or add any service, we are working hard to try to figure out where those are and how we can do that because we had the resources to do it. So there is a little bit of a competitive window here over the next 12 to 18 months for us to look for those kinds of opportunities.

Thank you. Just to be clear the bulk of your CapEx spend is going to be targeted towards market share expansion and it sounds like you're increasing your physician recruitment target in 2010 and I know it's a little early to see a return on that stepped up recruitment, but Larry, could you just confirm for me, sorry, what was the same-store adjusted admission growth in 2009? The run rate?

Well 0.7 if you adjust it and the fourth quarter was 1.6. If you adjust the end of the year for what we've talked about in [all of the] leap years, some service closures, we get about 2% and again the guidance is 0% to 2%.

Right, so I guess my question is if the run rate admission sort of same-store adjusted admissions was 2% in 2009, you're clearly focused on market share expansion in 2010 and physician recruitment. Is there something -- is there some assumption on deterioration in the industry, admissions opportunities?

Yes, we had about almost a 1.7% increase in surgery. There's no assumption in deterioration. If anything if could be if everything comes together well, maybe we'll do better than 0% to 2%.

Okay, that's what I was wondering.

I'd say you could label that as conservative here if everything works the way we want it to.

Got it, okay. And then just on Medicaid rate, sorry to beat this to death, but can you remind us, I think your expectations were for flat Medicaid rates in 2009, is that correct and how did that play out?

Pretty well. We got a little bit of a pick up here at the end of the year as I said, but it's been around zero for the most part in our Medicaid rates. We did get a little pickup in a couple of states there at the end of the year which helped the fourth quarter and that's sort of ongoing and it's early and I'd just remind everybody if you go back to 2008 and to January 2009, everybody was extremely nervous where Medicaid's going to go due to the stimulus package and we had a pretty good year from a Medicaid perspective and we'll see what happens to the stimulus package here and how some of the states react.

Great. Thanks a lot.

At this time I'd like to turn the call back over to Mr. Smith for any closing remarks.

Thank you. We believe that we have an executable, predictable, sustainable strategy to deliver quality healthcare services in non-urban and mid size markets. We want to specifically thank our management team and our staff, our hospital Chief Executive Officers, Chief Financial Officers and Chief Nursing Officers and Division Operators for an outstanding year and for their continued support and operating efficiencies during this challenging operating environment.

In closing, continue to be excited about our business prospects. We are convinced a solid performance will propel the Company to another level of success, extending our leadership position in the healthcare facility sector. Once again if you have any questions you can reach us at area code 615-465-7000.

This concludes today's conference call. You may now disconnect.