Community Health Systems Inc (CYH) 2010 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you. I will now turn the call over to Mr. Wayne Smith, Chairman, President, and Chief Executive Officer. Mr. Smith, please go ahead.

Thank you, Mason. Good morning, and welcome to our quarterly conference call.

Larry Cash, our Executive Vice President and Chief Financial Officer, is on the call with me today. The purpose of this call to is review our financial and operating results for the second quarter and six months ended June 30, 2010. After the market closed yesterday, we issued an 8-K including a press release with our financial statements. 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 on our financial results.

But, before I begin, I would like to read the following statement. Statements contained in this conference call regarding expected operating results, acquisitions and transactions and other events, are forward-looking statements that involve risk and uncertainties. Actual future events or results may differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made based on management's current expectations or beliefs as well as assumptions made by and information currently available to management.

These are summarized under the caption Risk Factors in the documents filed by Community Health Systems, Inc., with 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. These filing identify important risk factors and other uncertainties that cause actual results to differ from those contained in the forward-looking statements.

Community Health Systems has delivered another solid financial and operating performance for the second quarter of 2010, in spite of the ongoing challenges in the economy. Our ability to continue to drive revenues and achieve solid margin improvement demonstrates consistent execution of our centralized business platform, as well as solid expense management.

Now, operating revenues for the quarter ended June 30, 2010, totaled $3.2 billion compared to $3 billion for the same period last year, an increase of 5.1%. Adjusted EBITDA increased 6.6% from $416 million to $443 million. Net income attributable to Community Health Systems was $70 million. Earnings per share from continuing operations was $0.74 versus $0.66 per share for the same period a year ago, an increase of 12%. Net operating revenue for the six months ended June 30, 2010, was $6.3 billion and EBITDA was $876 million. Earnings per share from continuing operations for the six months ended June 30, 2010, was $1.49 compared $1.29 for the same period a year ago, an increase of over 15.5%.

With that, I would like to review some key accomplishments for the quarter. We completed the acquisition of Marion Regional Healthcare System in Marion, South Carolina, on July 7, 2010, and paid approximately $20 million for the fixed assets. Facility has trailing revenue $60 million and a single digit margin. This is our sixth hospital in South Carolina and is located approximately 20 miles east of our hospital in Florence. We still have an outstanding letter of intent to purchase a hospital in Bluefield, West Virginia, and expect that acquisition to close before the end of the year. We continue to look for opportunities and have a very strong and active pipeline.

Physician recruiting has always been an important part of operating strategy. Adding new physicians to our markets improved not only the quality but also expanded the scope of health services provided in our communities. The Company recruited 751 new physicians for the first six months compared to 704 physicians recruited in the same period a year ago. Our recruitment targets remains at 1,700 physicians for 2010.

The Company is reaffirming guidance that was provided April 10, with the exception of our same hospital annual admission adjusted admission growth and 2010 EPS target. We have lowered our annual volume growth to minus 1% to plus 1%. This recognizes soft volume trends acknowledged by many of the sell-side surveys that have recently been completed. We'll talk more about this later in the call. We are also increasing the lower end of our EPS guidance by 5%. Our EPS guidance for 2010 is now in the range of $2.90 to $3.

Lastly, I would like to update you on the Federal False Claims Act lawsuit in New Mexico. In March, the Court granted in part and denied in part our motion to dismiss to the relater's complaint. On July 7, the Court also denied our motion to dismiss the federal government's complaint and intervention. The case will now proceed to discovery phase, and when discovery has concluded, we will again seek dismissal of this case. We are vigorously defending this action.

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

Thank you, Wayne.

Our consolidated admissions for open second quarter was down 1.4% compared to same period last year. Adjusted admissions, which factors in outpatient visits, increased 0.6%. Our same store admissions decreased 2.5% compared to the second quarter of 2009. Again, this [soft wipe] has continued throughout the quarter. The following contributed to the decrease. Service closures of 10 basis points, lack of Spring flu respiratory represent 80 points reduction in one-day admissions, with a corresponding increase in outpatient observations of 70 basis points, and a lower birth rate driven by the economy reduced OB-related admissions by 100 basis points. Excluding these items, same store admission growth would have increased 0.1%. Same store adjusted admissions decreased 0.9% for the quarter. And, again, excluding these items, adjusted admissions would have increase 1.2%.

Net revenues in the second quarter increased 5.1% from $3.016 billion last year to $3.171 billion this year. On a same store basis, net revenue increased 3.2% for the quarter with inpatient net revenue increasing 2.6% and outpatient net revenue increasing 4.8%. Same store revenue would have increased an additional 30 basis points, except for a change in the market value of certain deferred comp plans from second quarter 2009 to second quarter 2010. And the Company also increased its discounts to self-pay patients, increase the discounts, reduced same store revenue by 50 basis points.

For the second quarter, same store net revenue per adjusted admission increased 4.2%, and again, adjusted for the change in deferred comp plans and additional discounts, same store net revenue per adjusted admission would have increased 5.2%. Same store surgery volume decreased 3.3% for the second quarter. Similar to the first quarter, surgeons were affected by the movement of pain and endoscopy procedures from a hospital setting to the physician's office. The inpatient surgical case mix did increase a strong 170 basis points in the quarter. Our same store Medicare case mix increased 9 basis points versus last year.

Consolidated EBITDA was $443 million for the second quarter, versus $415 million for the same period a year ago, an increase of 6.6%, and on a same store basis, EBITDA was $448 billion for the second quarter, increasing a strong 6.6%. For the second quarter, EBITDA margin on consolidated basis was 14%, an increase of 20 basis points from a year ago. Same store EBITDA margin increased 50 basis points to 14.4% compared to the quarter ended June 30, 2009. For the second quarter, our non-same store margin was negative 8.7%. Non-same store margin includes the expensing of acquisition costs, and also systems convergence cost.

In the second quarter, consolidated operating expenses as a percentage of net revenue decreased 20 basis points. A decrease in other operating expenses of 40 basis offset that increase to 20 basis points in payroll and benefits. Sequentially consolidated, payroll improved 40 basis points, offset by a 20 basis point increase in supplies. On a same store basis, total operating expenses improved 50 basis points, driven by solid improvements in all line items but bad debt. Same store payroll improved 20 basis points, supply 10 basis points, and other operating expenses improved 40 basis points. Contract labor, repairs and maintenance and malpractice all contributed to improvement in other operating expenses. In the second quarter, offset by new provider taxes, Medicaid payments increased approximately 60 basis points.

On the same store basis, consolidated admissions increased 0.8%, and consolidated adjusted admissions increased 2.6%. Same store admissions decreased 1.8%, and the service closures, whether like a flu respiratory, in movement of one day stays to observation, along with the lower birth rate due to the troubled economy, all contributed to decline. Considering these items, same-store admissions would have increased 0.7%, and same store adjusted admissions would have increased 1.7%. We have lowered our same-store admission adjusted admission guidance from minus 1% to plus 1%.

Consolidated net revenue to date was $6.3 billion, an increase of 6.8% on a same store basis. Net revenue increased 3.5% for the first six months. Inpatient revenue increased 3.3% and outpatient revenue increased 4.3%. Same store net revenue would have improved an additional 10 basis points due to the mark-to-market of our deferred comp plans and 40 basis points for additional discounts that I discussed previously. On a consolidated basis, net revenue per adjusted admission increased 0.4%. On a same store basis, net revenue per adjusted admission increased 3.9%. Same store surgeries declined 3.1% due to the movement of amount of procedures from the hospital setting to physician offices. Our same store Medicare case mix increased about 20 basis points. Inpatient surgical case mix did increase 180 basis points.

Consolidated EBITDA was $876.4 million for the six months ended June 30th. On a same store basis, EBITDA increased a solid 5.5%. Consolidated EBITDA margin, which grew six months into June 30 in 2010, was 13.8%, and same store margin for the six months ending June 30, 2010, was 14.2%, an increase of 30 basis points compared to the same period of 2009. Non-same store margin for the six months ended was 2.8%. As a reminder, we do expense acquisitions charges of about $1.8 billion pretax for first six months, and we also expense in system conversion cost of $3.1 million for the same period.

For six months consolidated operating expenses as a percentage of net revenue were unchanged from the prior year. The payroll and bad debt increase of 20 basis points was offset by improvements in supplies and other operating expenses. Same store operating expenses improved 30 basis points for 2009, with improvements in all categories but bad debt. Same store net revenue minus bad debt increased 3% year-to-date compared to only a 2.5% in increase in operating expenses minus bad debts, and that pause to the 50 basis points demonstrated our effective cost management.

For the second quarter, consolidated bad debt was 12% unchanged for the same period a year ago and unchanged on a sequential basis. Same store self-pay admissions declined 1.4% and adjusted admissions declined 1.7% per quarter. Year-to-date consolidated bad debt increased 20 basis points, 12% versus 11.8%. Our combined consolidated bad debt charity administrative self-pay discounts, divided by adjusted net revenue, was 19.9% for the quarter and 19.6% year-to-date through June 30, 2010. Our combined consolidated bad debt charity administrative discounts as a percentage of adjusted revenue are up 100 basis points for the quarter, 70 basis points sequentially, and up 110 basis points on a year-to-date basis.

The quarterly change consists of a 20 basis point increase in charity and a 90 basis point increase in discounts. The year-to-date increase consists of the same increase in charity and an 80 basis point increase in discounts. For second quarter, our same store operating expenses increased 2.4% and our same store net revenue less bad debts increased 3%. Consolidated cash receipts were 102% of the collectable net revenue for the 12 months ended June 30, 2010. Our bad debt guidance range is 12.4% to 12.7% with a small reduction of high end from the previously issued guidance, and we will continue to evaluate this range during the remainder of the year.

Total AR days were 48 at June 30, 2010. Matching AR days at the end of December 2009, and down one day from the first quarter of 2010. The allowance for doubtful accounts was $1.493 billion, or 47% at June 30, 2010. The allowance for doubtful accounts and related to contractual allowances for self-pay was approximately 83% of self-pay receivables at June 30, 2010.

Community Health System continues to have a favorable payer mix for the quarter ended June 30, 2010. Consolidated net revenue by payers was as follows. Medicare 27.4%, Medicaid 10.8%, managed care and other 50.3%, and self-pay 11.5%. On a year-to date-basis the payer mix is as follows. Medicare 27.5%, Medicaid 10.5%, managed care 50.5%, and self-pay 11.5%. Cash flow from operations is $242 million for the quarter. On a year-to-date basis, cash flow from operations is $542 million versus $544 million for 2009, a decrease of only $2 million. Cash flows in the period had a decrease in accounts receivable of $73 million offset by an increase in net income of $24 million and an increase of depreciation and amortization of $23 million.

The 2010 annual guidance remains $1 billion to $1.1 billion. Total capital expenditures for the quarter just ended were $137 million and 4.3% of net revenue. Year-to-date total capital expenditures was $264 million or 4.2%. Replacement hospital expenditures were approximately $3 million for the quarter and $4 million year-to-date. Guidance rates remains unchanged and ranges from $650 million to $750 million, with approximately $50 million related to replacement hospital construction. Balance sheet cash at June 30, 2010, was $548 million. At the end of the quarter, the Company had available credit on the revolver of $650 million, after the outstanding letters of credit.

Looking at the balance sheet as of June 30, 2010, we had $1.478 billion in working capital and the $14.3 billion in total assets. Total outstanding debt at June 30, 2010, was $8.883 billion, of which approximately 92% is fixed. Our debt to capitalization at quarter end was 80%. At the end of quarter, we are party to $5.35 billion in interest rate swap agreements, unchanged from the end of the first quarter, and, again, approximately 92% of our debt is fixed.

As Wayne mentioned, we raised the lower end of our 2010 EPS guidance by $0.05. The range is now $2.90 to $3. The original annual guidance issued in October had EPS ranging from $2.80 to $3. We also lowered the high end of our interest expense by 10 basis points. Guidance for interest expense will now range to 5% to 5.2%, and we increased the high end of the range for associated acquisition charges by $0.01. Expense of acquisition charges will now range from $0.03 to $0.05. We lowered the high end of the bad debt guidance by 10 basis points, and the bad debt range is 12.4% to 12.7% of net revenue.

Later in the second quarter, we purchased 1.5 million shares at a cost of approximately $50 million, which relates to the fact we received stock option proceeds of $53 million during 2010. For six months ended June 30, 2010, all expense categories except bad debt are within the annual guidance range. Bad debt is at 12% of net revenue. Wayne will now provide a brief retail.

Thanks, Larry.

We're very pleased with our strong second quarter performance as we continued to deliver solid operating results through efficient expense management and consistent execution. While economic trends indicate that the overall hospital industry volume will remain under pressure, we believe our proven operating strategy, combined with solid cost controls, will enable us to navigate through this uncertain environment.

With that, I will now open the call for questions.

If you would like to talk to us after the call, you can reach us at area code 615-465-7000.

(Operator Instructions).

We will pause just a brief moment to compile the Q&A roster.

And your first question come from the line of Kevin Fischbeck, from Banc of America Merrill Lynch. Your line is now open.

Okay. Great, thank you. As you mentioned, you lowered the volume outlook but you essentially took up guidance at the midpoint, especially when you throw in the higher transaction costs. In your mind, what was the biggest offset to lower guidance that's allowing you to raise guidance even though the volume is a little bit softer?

We also lowered the interest expense by 10 basis points. That would be a positive. We also have pretty good results in EBITDA in the second quarter, $443 million, which is above all the expectations in consensus. Having jet $0.75 in the first quarter and $0.74 in the second quarter, we felt like we could achieve the $2.90 versus $2.85. Actually the $0.74 in the second quarter would have been little bit higher had it not been for the growth in the outstanding shares in the second quarter. Those are the things we contributed to our decision.

The volume is off a little bit in the first half the year. We lowered the guidance. We kept pretty good same store revenue growth, and good case mix growth in the second growth and in the surgical case mix, all made us feel comfortable. With the good expense management we had, we thought we could continue that throughout the rest of the year.

I guess your bad debt guidance looks pretty conservative based upon where you are now, and I guess in order to hit it, you'd have to see a pretty significant bump in the second half the year, which is not what you saw last year. Why don't you give a bit more color on what you're expecting there?

We are 12%. We simply decided to lower the high end by 10 basis points, and hopefully you are correct. It is conservative, and as we said here, we will continue to evaluate this range.

We just didn't -- thought it was a little early in the year to be lowering the low end of the range right now, and it is hard to predict exactly how much of your admissions are going to be self-pay. We're fortunate this quarter. We're down both in admissions and adjusted admissions, and the revenue was up a little bit over a year ago, although it was fairly consistent for first quarter. We thought it was too early to make other than the minor change we made.

Okay, last question. I guess the change in discounts is pretty clear to me, how that impacted revenue. Can you just go over the deferred comp mark-to-market dynamic? It is not one that I remember seeing.

We're required per certain deferred comp plans and pension plans, as the market value changes, to adjust that. It's adjusted through investment income and some goes through comprehensive income, and some goes through benefit expense. As a result, the last year's movement in the market is more favorable. This year, the market was more consistent, so we had a big pick up last year. We just had this year's investment income. It's really just for the geography issue than anything.

Okay, and the investment income is the part that flows through the net revenue line?

That's right.

You had it last year. You don't have it this year?

Correct.

Okay, great. Thank you.

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

Great, thank you. Good morning, everyone. Maybe just talk a little bit -- you guys did a great job on the cost management at the end of the quarter. You have talked about a lot of the initiatives, but maybe just drill down on the labor, supply, and other line item to talk about some of the things that really stood out in the quarter in terms of where you guys managed it very well.

Payroll was managed quite nicely, improved about 20 basis points. Supply has been about 10 basis points. Actually supplies [year-to-date] are 20 basis points. Payroll is consistent. In the other operating, we had about a 10 basis point improvement in contract labor, and year-to-date it is about 30 basis points, because it sloped down a little bit. Malpractice looks better in the quarter, about 20 to 30 basis points, again year-to-date about 20 basis points.

Repairs were better, about 10 basis points, I believe. A little bit of offset in some broader taxes. So it was spread around, and I would expect that overall expenses were up about 2.4%. And I would think that year-to-date is 2.5%. We think we can continue that for the rest of year, which we also had a pretty good year last year on. Productivity was a little bit better in the first quarter, here, but productivity will take a little bit of volume growth. We'll see a little more productivity here. Our average wages are running in the 2.5% to 3% range.

Okay. Great, and then just a follow-up, I'm curious on the volume side, clearly for the industry, talent's been a little bit worse relative to the beginning of year. Just as you guys look at your operations and look at the different markets, do you see more it concentrated in certain areas or has it been pretty broad based? So, just a broad question there, but just trying to better understand your thoughts on volumes.

Yes, Adam, I think it's pretty clear this is the result of the economy across the board. We've done a lot of work to try to determine if we had any systemic problems or any issues. Our physician recruiting is going extremely well. We have a lot of market share opportunities across the board in our markets, but the volume is pretty consistent across the country in terms of the admissions.

Good news for us is that, of course, we're getting a little more intensity, and a little more surgical intensity, so that's helped drive our revenue as well. But I wouldn't expect the volumes to get too much better until the economy starts to turn. I think we're just in one of those unusual periods where you can continue to see, for lots of reasons, in terms of unemployment, and lack of coverage and higher copays. All of those things are contributing to this.

I don't see any big change coming anytime in the relative near future. We just have to wait, see if the economy comes back a little bit. There could be a little push, I suppose, towards the end of the year when people have already used up their copays and deductibles. I doubt very seriously that would be significant. I think it's an industry-wide issue, and, clearly, a result of the economy.

We know we do have a lot of trouble at the start of (inaudible) the flu, and one day stays. Of course, that's just a switch from inpatient to outpatient. The OB probably is going to be there a while. It's there at least two quarters, and probably start to see that. And if that slows down the cost, the economy, it's going to be a while before it comes back. The only other thing I would add is there was some commentary about June being a lot different than the whole quarter. We just don't get into month-to-month, but our June was comparable with the first month of the quarter. We didn't really see a big drop-off at the end of the quarter that someone else has seen.

The number of deliveries is another pretty good indicator that it's an economy issue.

Great, and then just a final question here. I guess just managed care seems like things have been holding up pretty well for you guys and others. Just curious about your outlook there.

Our outlook is good so far. We haven't seen any significant changes. I think we're comfortable with the range that we've been talking about, 5% to 7% in terms of our increases. Larry will probably want to comment in terms of where we are with our contracts, but we made good progress for 2011. We haven't seen any significant changes.

We're about 75% done for 2011, so we're in good shape on that, and we're about 95% done for 2010. And of course the other thing -- the managed care companies, who had a pretty substantial drop in enrollment in the last couple of years, that does affect in our volume for managed care, but we've been fortunate to have pretty good revenue increases, consistent with what we thought we would have.

All right. Thanks very much, guys.

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

Thanks, good morning. I just want to go back to physician recruiting. I think at the midpoint of the year, maybe a little bit lower than what's implied in the guidance for the full year at least, assumes a pick up in the second half. Anything getting more challenging there? I know, Wayne, you just said it was encouraging and things were going well, so is there something coming up in the back half of the year?

I guess probably the third quarter is the bigger quarter for us in terms of physician recruiting, as all of these programs come to an end and people finish their training programs. I think we're on track. I think we feel very good about our physician recruiting efforts this year. It all seems to be going well, and we have a lot of opportunity for physicians going forward, so there's nothing new or significant that has changed there. I don't know how long that will continue that way into the future, but so far, it's been very favorable.

And then can you maybe give us a sense of what managed care volumes were in the quarter? And then, if possible, I know you break out payer mix by revenue. Would you be willing to give us the payer mix by volume?

We'll just make a comment that the managed care volume is worse than the Company average, and it's primarily attributable to issues we said. Enrollment is probably down 3% to 4% since the last couple years and we have elected not to give specific payer mix information , but I can give directionally. We'll give the self-pay since it's there, and of course, government admissions were still pretty decent. But the managed care business was down a little bit more than the Company

And then maybe can you give us an update on how you're thinking about the balance sheet? Obviously, acquisitions appear to be picking up. Seems like that's where the cash outlay is going. Maybe thoughts on refinancing and how you're viewing the balance sheet at this stage of the game?

I think we have said this over and over again. We don't have a call to 2014, 2015. We have excellent cash flow. We're on track to hit our guidance in terms of cash flow this year. We have over $500 million in cash in the bank and the revolver $600 million. I think we're actually positioned pretty well. We think about this all the time, of course, in terms of whether or not we are going to have any inflation any time in the near future. As we continue to perform, our balance sheet looks better. Our metrics look better. So, as we step --as we move forward over the next year or so, we certainly will be working and thinking about how we improve. But having said that, there are a lot of opportunities acquisition-wise now. Our pipeline is very active. And clearly it's more accretive today to acquire a facility than it is to pay off our relatively low-priced debt.

If you look back, our debt to EBITDA was in the mid-sixes when we did the Triad deal about three years ago. Now, it's close to five, and if we perform well we'll continue to move it down. The other thing about the debt is, we're in very good shape with our covenants and we have plenty of cushions. We pretty much met the projections that we'd achieved, so we don't have any issues from a covenant perspective. And then we also have another $300 million in AR securitization, and maybe some other financing we could do if we need it, although we have plenty of cash right now.

Great, thanks very much.

Your next question come from the line of Whit Mayo from Robert Baird. Your line is open.

Thanks. I think it sounds pretty clear that you think that volumes are going to remain choppy for the remainder of the year. Just wondering if there are any opportunities to add additional resources to physician recruiting. Anything that may change there over the balance of the year that maybe could help to bend that trend as you look out into 2011, if the backdrop remains somewhat challenging.

That's an interesting question, and it's actually a good one if you think about healthcare reform and going forward. You're probably right that we need to be sure that we're recruiting and maximizing our physician recruiting, and we're thinking about that all the time. Because clearly there's 32 million people that are coming one of these days have not been in the system before. So, one of the things that we have to think about is how we're going to develop our delivery systems around that so that we can accommodate that group of people. And yes, one of the good things about the way we operate, and being standardized and centralized, we can expand or contract, as you can see from our operating efficiencies. We can expand or contract fairly easily so we are thinking about that, and I think you're on the right track there.

Okay, and maybe one other question. Wayne, I think you recently made a new hire and begun a process to standardize a lot of your hospitalist functions, and we're just kind of looking at what the major opportunity there is. And is it more on the call side, quality continuity of care, just looking for some color.

As you probably know, hospitalists have become a major component in terms of how hospitals function now. There's a lot less primary care physicians who actually admit patients. More and more, it's to hospitalists firms. And what we're doing is what we've always done. When we get into an area we have started to think about standardizing and centralizing our hospitalist programs in terms of everything from our contractual relationships with physicians to the metrics that we want to use to measure quality and demonstrate quality with those groups. So, we're moving down that road fairly quickly and we have hired an individual to help us do that. I think this is something that you will see more and more of as time goes forward.

Hospitals have developed over at last number of years, and there are a lot of different models. And we are just trying to narrow down our approach to it and our thought process around it so that we maximize the utilization of these physicians. They're doing a great job. Actually we all think it's probably better for patient care over the long run in terms of consistency. We need to bring our sort of view of the world to it, and we're working on it pretty hard.

Maybe one last question. Larry, in the PowerPoint presentation you disclosed, the non-same store margins are roughly minus 8% or so. Can you just remind us what's in that besides the Spokane practice, and just some color behind that number and maybe some opportunities you see in that particular market?

Well, we also put in our acquisition expenses which is about a little over $1 million and we like to put system conversions in there because it [carries] and it keeps it separated, and also makes the hospital financials more meaningful. That's about $2 million, so that's $3 million of the $4 or $5 million in there. You've also got a little bit of Wilkesboro, Vermont, in there. It went same-story May 1, which I think probably created a little bit of the question about our revenue from a guidance perspective, as Wilkesboro became same store this quarter. And then we put an overhead factor for anything, and Rockwood is there in. And then there's some of the Rockwood ancillary business is starting to move into the hospital, but we have a new hospital coming July 7 this year, but there's not much in there after May 1.

Okay. All right. Thanks a lot.

Your next question come from the line of Gary Lieberman from Wells Fargo. Your line is now open.

Thanks. Good morning. Maybe, hoping you could talk a little bit more about some of the Medicaid trends that you're seeing, and perhaps now that there's a lot of focus on FMAP going into your added renewals, talk about that, and then maybe even talk a little bit about some provider fees and provider taxes that are in the process of getting implemented in some of your states.

Just before Larry gets into the detail of that, one of the things that we think we have accomplished here is to spread our risk across the country in terms of Medicaid programs. I think we're beginning to see the value of that again in terms of the provider taxes, all the things that are helping with Medicaid. In the beginning of the year, we were most concerned about Medicaid in terms of our revenue. Even though it's a small amount, in terms of being at risk. It looks better now. I don't think anyone's ready to predict that FMAP is going to pass any time soon, but it certainly will be back for discussion. I actually think that it's going to be hard to let that drop based on what's happening in healthcare reform.

In the beginning we said 0 to minus 1%. Now it looks more like 0. As far as I can see, that's a pretty good perception of where it would be. If we look at it by a state basis, we have had provider tax programs this year down in Alabama, Arkansas, Mississippi. Tennessee started one the first of July, and it helped offset some reductions that we had originally thought. Texas looks like it may be a little bit better that we had originally anticipated. California, the only provider tax program to extended payments. It looks like it could have everyone on board in the third quarter. That would be a positive, and could push it even closer to 1% if that comes through.

Some of the negatives. Indiana and Oklahoma were two, and we had little bit of negative in New Mexico. But right now, there's not anything that's pending as it relates to FMAP that we're aware is going to affect our perception that our operating performance for 2010, and we'll just have to wait and see what happens with FMAP and how people relate to it. Couple other minor increases and decreases, but that's the big one, the big movement's in those markets.

Okay, thanks a lot

Your next question comes from the line of Christine Arnold with Cowen and Company. Your line is now open.

Good afternoon. Thank you. Is it possible to think of what discounts and bad debt would have looked like had they been on the same percentage basis as this year?

Well, a couple things. One, certain states require us to do a discounting, and I think the only one that happened in middle of last year was (inaudible), which happened April 1, I believe, and that's part of the 10 basis points effect. We probably have caused some discounts on a consolidated basis for the first six months to be a little bit higher, about 30 basis points or so. So, you could say that instead of being 12% bad debt, it's might have been 12.3% for the first six months. And clearly that lowers bad debts a little bit, but we look at bad debts and we do a lot of taking it out of revenue and taking operating expenses and try to recognize how we're going to operate. We've done pretty well keeping the revenue less bad debts and operating expenses less bad debts. But probably it'd be up maybe 30 basis points year-to-date, so you would be 12.3% versus 11.8% if you had a comparable accounting.

And then, could you speak to how you're thinking about accountable care organizations, or whether that's something you're interested in or not, and where you stand on the --

Accountable care organizations, this is all about taking risk, and taking risk for patients. And if you have read all of the literature on it, you know a lot about it in terms of the number of patients. There's a lot of risk associated with this in terms of underwriting. There's no underwriting with that patient base. So, we have to think through this long and hard. We're studying it. We're trying to better understand it. I don't know how many organizations are going to try to become accountable care, but if you do the work on it, you know that the patients the first year are not even required to use the group that they're associated with. And then as time goes along, it gets increasingly less flexible, and they are required to do certain things, and you're required to take a risk.

We just need to better understand it. I think one of the things that we think about when we think about accountable care organizations is network structure in our markets, that we have the right network in place, that we have the infrastructure to take care of an increasing number of population that's going to be insured. And that we continue to demonstrate quality. I think those two things will help us, and we certainly, in a number of locations, could step up and be an accountable care organization. We just need better understand all the details of it.

Are you seeing managed care companies narrowing networks or asking you to take risks in ways that might be more acceptable?

Not as of yet. I think that there's not anybody, that much narrowing networks, nor has anybody asking us to take risk. Most of our markets, 80 of them are sole-providers, so I don't think that's likely to be an avenue taken. Others, it hasn't occurred yet. We'll just wait and see what happens.

There's a long way to go, I think, before accountable care organizations start to function, and you see the unintended results of those accounted for the future.

Thank you.

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

Thanks. Good morning, everybody. I wanted to just ask about CapEx, and I guess two things. One, I'm having a hard time seeing how you spend the $650 million, so maybe if you can just update us on what's in the back half the year that would cause it to step up so much. And then just maybe for Wayne, we're in a weaker volume environment. We can see that your outlook is obviously lower. Do you think that you'll need to rethink CapEx any differently as you go into 2011? Are you going to slow down at all with regard to CapEx, or do you think you may go the other way and this could be an opportunity for market share? I would love to get your thoughts on that.

Let me start with the last question and Larry can go back to the first part of that question. We're opportunistic, we look for good opportunities in terms of acquisitions and the way we spend our capital. We've all about the internal rate return, so that we only do projects that we think are good, strong projects for us. As usual, we will do what we need to do to continue to perform. And if we think we're in a position where we need to reduce capital spending, we will do that. We don't see that yet. But we'll do whatever we need to do, expense-wise and everything else, to make sure that we're performing as evidenced, again, by this quarter. But we are opportunistic, and we are looking for good opportunities all the time. We bought a number of debentures at the end of the year last year because of the economy and debenture sales were down and the price was right. So, we try to take advantage of those things all along.

A couple of things on spending. Our replacement hospital spending will be probably about $50 million this year. We only spent $4 million, so that's almost $45 million, which is one of the things that once we get started in that area, will probably happen. We've got some IT spending. IT purchases that will be probably be more spending in the last half the year than the first half of the year. The rest of it is just various projects that have been approved that we're working on in selected locations. I realized that we're less than half of where we are, but I think by the end of year, we'll be probably close to our roof in our guidance range of $650 million to $750 million. Especially considering only $4 million of $50 million for the replacement hospital has been spent.

Which is still percentage-wise a very low number.

And we'll still be probably under 6% for the year.

My last question just with regard to leverage, your net leverage now has a four in front of it. Do you think that keeps coming down from here? Do you think depending on the acquisition I guess, do you think we go back over five?

Well, the money there -- we kept the money because we think it's better used in paying off the variable rate debt at 3%. And if a good acquisition came along, that would be attractive to us, and that pushed it from 4.9 to 5.0 or 5.1. That's not a reason we would not do a good acquisition. Nationally, our outlook is that it's going to keep getting better year in and year out, as we continue to grow the EBITDA. As I said earlier, we were in the mid sixes, now net, we're below five. So, we'll continue to make progress, but it could have a quarter that might go the other way.

Okay, thanks a lot.

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

Good morning. Thanks for all of the color. Just two quick ones. I think following up on some other issues. Intensity, you talked about seeing an increase there. Maybe can you discuss a little bit more of the drivers. Is it some of the OB and maybe lower intensity things coming out of the mix, or is it actually seeing better cases on better volume on the types of cases that are a little more complicated?

Well, the Medicare, having a little drop in flu probably helps a little bit, but I do think we have helped our surgical case mix as a result of physician improvements that Wayne talked about earlier. I think that's got to do with the type of surgeons we've got. And probably, if there is elective surgeries, which are down just a little probably, when they get not performed, it's usually the higher intensity business that's there. So, it's probably a combination of both, but as a matter of fact, our revenue is pretty strong, so we are growing real intensity.

I think this is evidence that in terms of our physician recruiting, the types of physicians we've been recruiting over the last couple of years, we're beginning to see the result of that in terms of growth and intensity in the various cases we're doing. Some of it is just result of the metrics here, but this is a pretty strong advance and intensity and that just doesn't happen overnight.

The OB effect on surgery is not very big. It does affect it, and of course, and that's -- we had the good strong case mix increase was in patient surgery.

And then follow up on that comment about recruiting. You are also talking about a prolonged period here where we have got tough volumes. I know that we've seen more and more of hiring of doctors in recent years. Do you think that's a growing trend, and where do you stand now on that front?

There's certainly a growing trends. Our employment numbers are up, as you might expect, as we recruit. I think that's going to continue to trend, and there's a lot of issues around that. Probably primarily the economy, but also recent grads. They're interested in lifestyles and changing lifestyle issues and ability to have more time off. And I'm sure other companies are reporting this as well, there are a lot of opportunities out there to acquire physician practices, which is about the economy as well. I think you will see more and more of that clearly over the short term, over the next year or two.

Physician employment has been a cyclical issue for years, back to the early '90s, so it's hard to predict. But it looks like, based on healthcare reform and the economy, and all the other things, that it is here to stay for a while.

My last one was just be on IT. There were some definitions around meaningful use in things recently. Any of that change your outlook? Or can you maybe just update us on what your outlook is for some of the projects in that area?

What we're going to be doing is some pilot tests. And full-range systems, we're doing a pilot test in the next couple of quarters, and then we'll have a roll out plan after that. We got some government approaches, organizing ourselves from the government's perspective. The companies we're working with are pretty well qualified, and I think you'll see more activity in the next two quarters than you've seen historically. And now with meaningful use defined, we'll be moving a little faster.

And the definition itself seems ultimately doable?

We think so.

Thank you.

Your next question comes from the line of Kemp Dolliver from Avondale Partners. Your line is now open.

Thanks. A couple of questions. First, given the conversation about birthrates, do you think this will have some effect on your payer mix in that you will likely see it more than, say, self-pay and Medicaid than in your commercial book?

There's a component of it that is commercial. The OB is down a little bit more in commercial, but about 60% of our OB is probably Medicaid. It's probably more commercial in OB. It's just not that much component of it effective in the self-paid yet. It affected both commercial and Medicaid, probably a little bit more Medicaid.

Super. And on the Marion acquisition, are there any future capital commitments associated with that?

There is a capital commitment there. It's a pretty good facility. It's not a substantial amount of money. It's around 4% of revenue or so, I believe, over several years. But the facility is in pretty good shape, and of course, our capital commitments include a lot of different things besides capital and leases, physician improvement, things like that, but there is a small capital commitment.

Okay, fine. And then finally, probably more for Wayne, on your thoughts on the acquisition markets. You all had expressed interest in a large system in Louisville, which I know is a market near and dear to your heart, but could you just refresh us how you're thinking about acquisition targets, in terms what's not appealing to you?

We have all along said that you have to keep your pipeline relatively full if you're gong to continue to acquire, which we have done and been doing. Our acquisition opportunities -- there are a lot of opportunities out now. Our pipeline is very active today. I still think the prices are good, even though some people are paying more than we are paying. I still think the prices are pretty good for us. I think there are a lot of opportunities, and this is a good time to be careful in terms of what you buy, but there are certainly -- we will have opportunities to buy a number of facilities over the next number of years.

All right, thank you.

Your next question come from the line of Justin Lake of UBS Investment Banks. Your line is open.

Thanks. Just wanted to drill down on the operating expenses. Larry, I think you said that the trend there, from an inflationary standpoint, is about 2.5%?

Yes, 2.5% to 3%.

Can you give me some perspective on where that's been, let's say, over the last three to five years? And the trajectory there, until now?

If you go back about three to five years ago, it's probably around 4%, 4.5%, and then came down at 3.5%. So it's come down, it's been staying in that 2.5% to 3% range now for most of 2009 and 2010.

So it's down almost in half, and I guess what I'm getting at is just trying to understand how much of that do you feel like is just the function of what's going on in the economy. Lower level of inflation, things like food expense, whatever, versus what you're doing proactively that you kind of have to keep comping every year. Stuff where you have got to keep squeezing cost out of the business. If you think about a 200 basis points differential there, 150 basis points, can you break it out between those two?

Clearly productivity was very good last year, hasn't been quite as good this year. I think we improved our man hours for adjusted admission. If I remember correctly, somewhere to 150 to 200 basis points, and we haven't had that quite a good of performance in the first half of this year. From a salary perspective, we have done a very good job of managing overtime and the weekend staff, and there productivity usually will probably drive about half of our benefit. And then managing our wage costs to drive up the other half of that component. Clearly, it's a lot easier with (inaudible) this year, having to do it from a salary perspective without volume growth.

And we are also looking for various of components of wages, and what you pay for contract labor. In our case, which is in other expenses, it's down to about 50 or 60 basis points of revenue. If you go back, it was probably 150 basis points of revenue two or three years ago, so that's also helped lock in to some extent, reducing contract labor costs, and increasing the payroll line.

Just in this environment, though, we had to continually think about cost, and how we can drive down costs to be successful. We will continue to work hard on improving our productivity. It's just a tough environment to operate in, and those who can manage that are going to be successful.

Do you think the 2.5% to 3% is sustainable as we move into what is probably going to be a tougher pricing environment with Medicare rates probably coming out this week. Would you have any commentary about Medicaid?

I don't see any change for the foreseeable future.

Okay, great. Thanks a lot.

Your next question comes from the line of Gary Taylor from Citigroup. Your line is now open.

Hello, good morning. Three questions, so we can be brief, so I don't take up too much time. First, maybe Wayne, maybe Larry and maybe we should have Larry Carlton on the call, too. But just going back to FMAP and thinking about that, this is obviously a substantial concern for shareholders who feel like they don't have a good theoretical framework to think about what would happen or could happen to Medicaid rates next year if the states lose the 6% match. Do you have some high-level thoughts on how to think about what the impact could be with or without that matching dollar?

Let me try a little different view and then Larry can talk about that or not. I think it's pretty hard for the government and this includes all of the government, Republicans and Democrats, to let that expire completely because of healthcare reform and the 32 million people that are going to come -- 16 million which are going into Medicaid programs. I don't think you can let these Medicaid programs deteriorate a year or two before you're about to expand them. And look, you've got 45 governors or whatever the number is now, a huge number of governors that are pushing this pretty hard as well. I think, Gary, from my perspective, and this is not any inside knowledge or anything else, but just logic tells you there's a better chance of that passing. Maybe not tomorrow, but before it expires, I think the probability is better and will get better as time goes along. I'm not quite as concerned about it yet. I think there's a lot of issues politically right now that are keeping that from happening, but I think that will change before too long.

It's about a 6% match, it's about 10% of revenues, so looks like a max will be 60 basis points. If you look at what happened last year, we had a reduction in the Tricare program, ended up in about a $30 million reduction. Last year in 2009, we had original guidance of around $245 million, and ended up being $264 million, and we had to eat about $20 million of that.

If you find out in advance, you end up just making adjustments here. I'm not sure 60 basis points change, if turns out to be that way, which as Wayne said, we don't think it will. That's just something you learn to manage to. It's not all going to come out of hospital providers, it could come out of pharmacy, it could come out of enrollment, it could come out of other ways of activity. It's a little early there, but the actual math is about 60 basis points.

Secondly, maybe just a couple of more comments on Rockwood because that was an interesting kind of new approach for an acquisition that you guys did with a number of locations in that multispecialty clinic. And I know we had talked a little bit last time just about seeing some movement of volumes there and that showing some impact on the non-same store revenue margin. Which is mostly Rockwood but doesn't capture some of that revenue movement into the hospitals, which isn't same-store. So, maybe just a couple high-level comments on how that's going, or are you seeing the kind of benefits you thought you'd see from that acquisition and outlook over the next full month?

Let me just say, strategically Rockwood fits our view of the world in terms of going forward, particularly in preparation for the future, as far as healthcare reform is a concern. Because we want to be positioned where we have network resources, infrastructure in place. And Rockwood is 130 physicians in 32 locations with varying levels of service, and a lot of subspecialty services. So, we do not want to be left out of any insurance products in communities of that size, and this is the kind of structure that we think we need going forward.

The other part of it is demonstrating quality, and Rockwood is a very high quality group. It's going along extremely well and we are doing fine. And there have been some movement in terms of the business, and you will see more of that as time goes along.

I'll just add that Rockwood is in the second quarter, a small contributor to the loss that you had there. If you look in (inaudible) basis, it's a positive contributor to the 3% margin. There's a lot of movement, and little movement of locations and sites and expenses being incurred in the second quarter, which should be there for the whole year.

Taken as a whole, I guess, including both the profitability of the clinics themselves and the impact on your hospitals there, you're happy with how it's performing?

Very happy.

All right, thank you.

Your last question comes from the line of John Rex from JPMorgan. Your line is open.

Thanks, just had a couple of quick ones. Back on the self-pay numbers, the volumes are very steady. Looks good. It would just appear also that the acuity was rising faster there than average. Understanding it's a low end here. Did you get any anecdotal data from markets in terms of the particular case that may have been -- so think about this as one time, or should we be thinking about this being more of a trend of rising acuity in this book?

If you look at it in this quarter, we provide a lot of statistics. It's actually that revenue is roughly close in the second quarter than it was in the first quarter, but it's up over a year ago. Because the second quarter of this year, excuse me -- last year second quarter revenue for self-pay business was around 10.8% and it's 11.6% in the first quarter. So, what really happened was, we had a drop in self-pay revenue in the second quarter of 2009, versus there were fairly consistent in revenue. I think we're a little bit lower in admission. So I don't know if it's -- length of stay was a little closer, I went back and I checked, and length of stay was fairly close. So, I think it's more of the dollars of revenues part on the outpatient side. We probably last year just didn't quite as much self-pay revenue related to admissions. It's more of prior year movement than it was a current year movement.

So, more of a comp than just actual anything notable returned with acuity?

Yes. I think this quarter is like 11.5%. Last quarter was like 11.4% of the business, roughly. Relatively close to the same number.

Okay, and you guys made some commentary about how the volume was turning in the quarter, and thinking about June. Beyond the calendar, and how weekends fall in July, did you see anything else unique in July that would be all that different from the June trends you're seeing?

We just won't get into month-to-month. Clearly, there was more seasonality in July, the way the holiday fell, in the last couple of days of the month, but June was, like I said, was not all that much different than April. So, we won't get into the specifics of month-to-month, but July will have a little challenge just because of the seasonality.

Great, thank you.

And this concludes today's question-and-answer session. I will now turn the call back over to Mr. Wayne Smith for any closing comments.

Thank you, Mason. Thank you for joining us this morning. Our proven business platform has enabled us to enhance the operating performance at both our existing and acquired facilities. This model enables to meet our objectives in the challenging operating environment. Our proven ability to deliver results will continue to be a distinct competitive advantage for Community Health Systems, and we also want to thank our management teams and staff and hospital Chief Executive Officers, Chief Financial Officers, and Chief Nursing Officers and Division Operators for their excellent operating performance for the second quarter. We remain focused on our business strategy and improving results. Once again, if you have any questions, you can reach us at area code 615-465-7000.

And this does concludes today's conference call. You may now disconnect.