Community Health Systems Inc (CYH) 2010 Q3 法說會逐字稿

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

I would now like to turn the call to Mr. Wayne Smith, Chairman, President, and Chief Executive Officer of Community Health Systems. Mr. Smith, please go ahead.

Thank you. Good morning and welcome to Community Health Systems quarterly conference call. Larry Cash our Executive Vice President and Chief Financial Officer is on the call with me. The purpose of the call is to review our financial operating results for the third quarter year-to-date ended September 30,2010. We issued an 8K including press release in our financial statements after the market closed yesterday. For those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanies our remarks.

I would like to begin the call with some comments about the quarterly and turn it 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 and accusations, 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 were made pursuant to the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995 and made based on management's current expectations or beliefs as well as a assumptions made by information currently available to management.

These are summarized under the caption risk factors in the documents filed by Community Health Systems, Inc. with the Security and Exchange Commission including Company's annual report on form 10K quarterly reports on 14Q and current reports on form 8K. These filings identify important risk factors and other uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Community Health Systems has delivered another very solid financial and operating performance for the third quarter 2010. Benefiting from the consistent hospital level performance and favorable revenue trends and same store margin expansion. These results confirm that the fundamentals of are business are strong and our centralized business platform is working across all of our markets.

Net operating revenues for the quarter ended September 30, 2010, totaled $3.3 billion compared to $3.1 billion for the same period last year, an increase of 5.4%. Adjusted EBITDA increased 5.7% from $418 million to $441 million. Income from continuing operations was $85 million versus $75 million for the third quarter last year. Earnings per share from continuing operations was very strong, $0.76 per share versus $0.65 per share the same period a year ago, an increase of approximately 17%. Operating revenues for nine months ended September 30, 2010, was $9.6 billion, EBITDA was $1.3 billion, earnings per share for continuing operations for the nine months ended September 30, 2010, $2.26 compared to $1.94 for the same period, an increase of over 15%. With that, I would like to review some key accomplishments for the quarter.

We completed the acquisition of Marion Regional Health Care System in Marion, South Carolina, earlier in the third quarter. Additionally, on October 1, we acquired the assets of Bloomfield Regional Medical Center in Bloomfield, West Virginia. This 265-bed Hospital has a trailing revenue of approximately $95 million and very low margin. This is our third Hospital in West Virginia. We also completed acquisition of-- a system of Hospitals and other healthcare providers based in Youngstown, Ohio. Form Health includes two acute care hospitals. Trumbull Memorial Hospital, 346 beds in Warren, Ohio, and Northside Medical Center, 398 beds in Youngstown. Ohio as well as a 69-bed rehab facility located in Warren, several outpatient clinics and ancillary facilities. The drilling revenues is approximately $370 million with low single-digit margin.

Our pipeline remains full and we continue to look for strategic opportunities. Position recruiting continues to be our key driver of our operating strategy. The Company recruited 1448 new physicians for the first nine month compares to 1356 physicians recruited for the same period a year ago, representing an increase of almost 7%. Our recruiting target remains 1700 physicians for 2010. We're tiding our 2010 EPS range given successful third quarter results. EPS for 2010 will range from $2.93 to $3.00. We're also providing abbreviated 2011 guidance with revenue will range from $13.9 billion to $14.2 billion with two to three acquisitions, assumed acquisitions, an EPS for income from continuing operations will range from $3.15 to $3.35. We will provide additional guidance with our fourth quarter earnings released in February.

There is no update on the Federal False Claims Act lawsuit in New Mexico. So at this point, I would like to turn the call over to Larry to provide you with a summary of our financial results.

Thank you, Wayne. Our consolidated missions growth was down 3%, compared to the same period last year. Adjusted missions which factors in the outpatient business decreased to 0.2% versus the third quarter last year. On the same store basis admissions decreased 3.6% compared to third quarter 2009. Again, soft volumes continue throughout the third quarter.

The following contribute to the decline. Service closures whethered about ten basis points, the lack of the summer flue and respiratory represented 110 basis points decrease, which has been the biggest drop in the quarter throughout the year. Reduction to one-day stays with the course funding increase in the outpatient observation, 70 basis points and our lower birthrate, given by the economy reduced in OB related admissions by 110 basis points. Excluding these items, same store admission growth would of declined 0.6%. For third quarter same store admissions decreased 1.3% against a strong comp at 1.9% for the third quarter 2009. Again, excluding these items, suggests admissions will increase 1.4%. Net revenues in the third quarter increased 5.4% from $3.086 billion to $3.252 billion. On the same store basis net revenue increased 3.8% for the quarter. Please note that the same-store operating revenue includes approximately 50 basis points for the implementation of the California Hospital fee program.

Same store revenue for adjusted admission increased 5.2%, year-over-year also increased 120 basis points sequentially. Same store revenue decreased by approximately 80 points due to the increase in self pay discounts. Same store surgery volume decreased 2.7% for third quarter, again, similar to the first half of the year and also be procedures and pain managements were moved to physician offices. Additionally, there were a fewer C-sections performed due to lower birthrate. Adjusting for these items, surgery volume would of been down approximately 1%. On a sequential basis, same store surgery volume improved 60 basis points for the second quarter. For the quarter, same store Medicare case mix increased 0.5% versus last year in same store inpatient surgical case mix increased 40 basis points.

Consolidated EBITDA was $441 million for the third quarter versus $418 million for the same period a year ago, an increase of 5.7%. On a same-store basis EBITDA was $447 for the third quarter, increase of 5.9%. EBITDA margin on consolidated basis for third quarter was 13.6%, an increase of 10 basis point from a year ago. Same story, margin increase 30 basis points to 14%. Compare to a quarter ending September 30, 2009.

For the third quarter, our non-same store margin was a negative 12.4%. Non-same store margin includes expensing of an acquisition items, which you see capitalize and systems conversions cost. In the third quarter, consolidated operating expenses percentage of net revenue decreased 10 basis point. A decrease in supplies of 30 basis points also an increase of 20 basis points on our operating expenses. On the same store basis total operating expenses improved 30 basis points driven by solid improvements of payroll of 40 basis points and supplies 30 basis points. Offset by increases in bad debt and other operating expense. The increase in other operating expenses driven by privatized programs approximately 60 basis points. All setback continued improvement in contract labor and malpractice. Same store revenue minus bad debt increased 3.5%, while same store operating expense minus bad debt increased 3% for the quarter.

On a year-to-date basis, consolidating admissions decline 0.5% and consolidated adjusted admissions increased 1.7%. Same store admissions decreased 2.4% and service closures of weather contributed to this along with the lack of fluid and respiratory movement of one-day stays authoration and again the lower birthrate, due to the economy, all contributed to the decline. Considering these items, our same store admissions would have decreased 0.3% and year-to-date, same store adjust admissions would have increased 0.7%. Excluding these items would of increased 1.5%. Net revenue was $9.6 billion, consolidated basis, net revenue for adjusted admission increased 4.5% on a same-store basis net revenue increased 3.6% for the first nine months. Same store inpatient revenue increased 2.4% and outpatient revenue increased 5.3%. On a same-store basis, net revenue per adjust admission increased 4.3% and same store surgery declined 3% on year-to-date basis due to the movements of minor procedures from hospitals to physician offices and a decline of C-sections. On the same store Medicare case mix for nine months ending September 30 increased 0.3% and same store inpatient surgical case mix increased 140 basis points.

Consolidated EBITDA was $1.318 billion for the nine months that ended September 30, 2010. On a same store basis, EBITDA increased 5.6%. Consolidated EBITDA margin for nine months ended September 30 was 13.8%. Same store margin for nine months, ended September 30, 2010, was 14.1%, increase of 30 basis points compared to same the period in 2009. Non-same-store margin for nine months ended September 30 was -0.2%. Non-state store includes the expensing of acquisitions and system conversions cost. For the first nine months, consolidated operating expenses percentage in that revenue increased 10 basis points.

There was a small increase of 10 basis points in payroll and an increase in 10 basis points of bad debt. These increases were offset by improvements in supplies and other operating expenses. Same store operating expenses improved 30 basis points with improvements in all categories but bad debt. Same store revenue minus bad debt increased 3.2% year-to-date compared to a 2.7% increase in operating expense minus bad debts. A net positive of 50 basis points, again, demonstrating our strong cost management. For the third quarter, consolidated bad debt increased 10 basis points. 12.4% versus 12.3%. Increased 40 basis points sequentially. Same store self pay admissions for the quarter declined 1.1%.

Year-to-date consolidated bad date increased 10 basis points, 12.1% and 12% and same-store self pay admissions declined 0.12% year-to-date. Our combined consolidated bad debt charity and self pay discounts divided by adjusted net revenue was 20.3% for the quarter and 19.8% year-to-date through September 30, 2010. Our combined consolidated bad debt discounts as percentage of adjusted revenue up 100 basis points for the quarter and up 100 basis points on a year-to-date basis. Consolidated cash [inaudible] 102% collect on that revenue for the [inaudible] end September 30, 2010. AR days were 47 in September 30, 2010, down 1 day from December 30, 2009. It's the lowest AR days in five years for Community Health.

The alloweds for doubtful accounts is $1.554 billion or 48%, as of September 30, 2010. Allows for doubtful accounts were related contraction for self pay was approximately 91% of the self pay receivables at September 30, 2010. Community Health Systems continues to have favorable payer mix for the quarter ended at September 30, 2010. Consolidated net revenue by payer source was as follows, Medicare 26.9%, Medicaid, 11.1%, managed care and other 50.2% and self pay, 11.8%.

On a year-to-date basis, the payer mix is follows. Medicare, 27.3%, Medicaid, 10.7%, managed and other, 50.4% and self pay 11.6%. Cash flow from operations was $357 million per quarter on a year-to-date basis. Cash flow from operating $898 million versus $901 million for 2009. And cash taxes were approximately $120 million higher year-to hit date 2010 versus year-to-date 2009. The slight decrease in cash flow as compared to prior years is a result in decrease accounts receivable $15 million. Decrease in supply and prepaid expenses is $14 million. Decrease in account payable through liabilities and income taxes is $22 million. And a decrease in owner non cash expenses of $25 million. These decreases were offset by increase in net income. $34 million increase in appreciation, $30 million in increase in other assets, liabilities to $10 million.

We've increased our 2010 guidance $1.050 billion to $1.100 billion. Total CAP expenditures of quarter just ended to $118 million or 3.6% of net revenue and year-to-date, CAP expenditures were $382 million or 4%. Capital expenditures for replacement hospitals were approximately $15 billion or 0.2%. Balance sheet cash of September 30, was $568 million. At the end of the quarter the Company had available credit for the revolver of $668 million, after outstanding letters of credit. Looking at the balance sheet as of September 30, 2010, we had $1.403 billion in working capital and $14.4 billion in assets. Total outstanding debt was $8.877 billion of which 93% is fixed.

Our debt to capitalization at quarter end was 81%. At the end of the quarter, we reported $5.350 billion in interest rates swap agreements unchanged for the end of the second quarter, and again, 93% of our debt is fixed. This part of our long term strategy and manage our capital structure and provide flexibility to pursue other [inaudible] we tend to seek amend and extend transaction respect our Senior Secure Credit Facilities. This will give us stability among other things to extend the maturity a portion of our Term D, due July 2014.

We plan to take advantage of the current market conditions and expect to launch these transaction shortly. We did make some selected change to the guidance assumptions that Wayne referred to. We included three acquisitions for 2010. Proves within two, bad debt will now range from 12.2% to 12.4%. Tied to depreciation range to 4.7% to 4.8% and a tax provision will now range from 31% to 33%.

Finally, our 2010 and 2011 projections do not see news change in financing terms or new financing arrangements. Wayne will now provide a brief recap.

Thanks, Larry. What continues to be a challenging economic environment, we are pleased with our solid financial performance. Our conservative and centralized operating strategy and strong focus on expense management continues to serve us well. We see opportunities to leverage our assets and realize additional operating improvements and gain market share at our same store facilities, as well as our more recently acquired hospitals. With that, I will now open the call up for questions. If you would like to call us after the call, you can reach us at area code 615-465-7000.

(Operator Instructions) Your first question comes from the line of Christine Arnold from Cowen and Company. Your line is open.

Good morning. You just referenced opportunities to leverage operating improvements. You've done really well on a lot of your operating cost items. Could you talk about where you feel you're going to need to increase costs next year versus where you see opportunities?

Well, I think we continue to do a good job of managing our payroll and benefits and then I see -- I think we see some opportunities in supply category and talking to our Chief Purchasing Officer. He's outlined plans for 2011, which should get better results than we got 2010. The last quarter we're about 30 basis points better on supplies and probably some of that could be in drugs and other type of supplies. I think our malpractice will continue to do well, we had pretty good success for patient safety program. I say what we probably won't continue see much improvement in the contract labor area, we've got it down to be about 10 basis point improvement, we have been working on it pretty hard, so that's probably one we won't get much better.

And then you've increased your discounts, could you give a sense for kind of year-over-year what bad dealt would have looked like on a same discount basis? I know that also reduced your revenues, so it looks like you probably had more operating expense improvement than we even saw there. So can you kind of level set that to the change in the discount policy for us?

Yes. We did increase our discount a little bit on the self pay business back in the first of the year, and we also had another regulated increase this year. And it's probably a 30 or 40 basis points there that would go up. This is where I got a little bit more self pay dollars, so bad debts are 12.1%, It might be 30 or 40 basis points higher had we not made those changes. We made one change in one state in third quarter.

Thank you very much.

Your next question comes from the line of A.J. Rice from Susquehanna. Your line is open.

Hello, everybody. A couple of quick questions, if I could ask them? On the re-doing of a bank deal, the amend and extend or re-working of it, are there any particular flexibilities beyond just extending the maturity a couple of years that you're trying to get out there?

Not really anything substantial. It's just a good time to do that. We thought about it for awhile. We talked about and it, and once we get the transaction done, we'll put out a AK about what we actually did. But, it would be something to go extend partial portion of our approximately $6 billion of debt due a little over -- well, in July 2014, extend it for a period of time. And once we get that done, if we're able to accomplish it, we'll put out the specifics

A.J., I think we've been-- Clearly, Larry and I have been talking about making sure that we have flexibility kind of going forward, and we that would have to do something like this sooner or later, and I think we have communicated that to everybody.

Sure.

It seems to be the right time for us.

Obviously you've had announced three good deals this year. One of them is obviously bigger than maybe some of the things we traditionally have seen, not that if you haven't done big deals, including try. But, would you say where you're getting you're at a nice discount to revenues. Where are you starting out with these properties in terms of what needs to be done? Are you starting out with them in any worse shape than what we have traditionally seen you go after or are they about the same and the opportunities would be similar?

Yes, I would say, I would say they're about the same. I think probably the big difference is purchase price is less than we've been paying in the pas,t and there continues to be plenty of opportunities. Our pipeline is very strong and we feel pretty good about the acquisition opportunities kind of going forward. Things clearly, the economy is having an impact on a lot of the not-for-profits, so it's created a huge opportunity for us.

Ok, this last question--

The same basic things we have been doing over and over again.

Right. Last question. Larry, you have mentioned from time to time, you expect at some point the manage care pricing environment to get more difficult. Can you update us on what you see for 2011, and are those comments just sort of a general sense of where the market will ultimately go or is there anything you see that would actually concretely say you've got more challenges in front of you on that?

Yes, I think we're in good shape for 2011. We're about 70% done or 75% done there and I think we're done for 2010. And I think we'll be within the range for 2011 of 5% to 7%.

It's more of a general comment that clearly, the managed care companies have gone through a lot of changes the last nine months. And I think it may have some affect, but at the same time, they are going to have a certain laws for a show, which may help some negotiations, but you have to think about their efforts to try to hold down cost and it could be an issue to come up a little bit in 2012. We're not seeing anything that causes us to think we'll be able to do different than what we have historically done but just the point that it could be something down the road we've got to think about.

A.J., the other thing, of course, you know we have 80 facilities that we're the sole provider. That sort of gives us a lot of protection in those markets and then you will see, as you see us do acquisitions and look for opportunities, in terms of expanding our network and other markets like the Rockwood acquisition and Spokane where we have two facilities and now a large physician group of 130 physicians in 30 locations. All that will help us go forward not to be excluded or give us a little more leverage than we had in the past.

Okay, great. Thanks a lot.

Your next question come from the line of Kevin Fischbeck from Bank of America. Your line is open.

Ok, great. Thank you.

You broke out the head winds to volumes and I guess, let me try to get a sense of here the impact on self pay volumes, which continue to come in pretty nicely compared to overall volumes. And when I think about some of the head winds you highlighted, as far as, birth and service closures, etc , how should I think about those head winds in the context of paying admissions? I would assume that births being down would be generally be a paying admission, and maybe the flu being down would maybe skew towards nonpaying admissions, but how do I think about service line closures or one-day stays, or things like that? And, how that would have impacted your

Well, I think we have said the managed care admissions have been down a bit more than average this quarter. Part of the flu is predominately Medicare. One-day stay is probably about half of that is managed care or a little bit more. And the birthrate is predominantly probably a third to half of managed care, some is Medicaid.

I would add, as I understand the commercial enrollment, it's down about 4% last year, so with the commercial enrollment being down, part again down this year, some maybe not as much. Just looking at the utilization rates you probably have in our percentage of business, you would expect to have some challenges on commercial and admissions as a result of that drop. We've done a pretty good job of moving some people without insurance, which has held our self pay admission down to Medicaid. Our Medicaid efforts to qualify people has been pretty successful,l so that's help grow and avoid self pay admissions and get some more Medicaid.

Okay, great. That's helpful. I appreciate that the fact you're only providing a general 2011 guidance at this point, but I was wondering if there's any kind of broad factors that you focused on as head winds or tell winds into 2011 when you set that guidance?

Yes, broad factors would be the acquisitions that we have done and the acquisitions expect to happen and they're pretty helpful, plus we've gotten a fair amount of acquisitions prior to this year, which is helpful. That's factored into it. I think probably the concern about the Medicare update being weaker than it's been in quite some time is factored into it and again, the Medicaid is a broad factor you have to take into consideration because, look, what could be the expiration [inaudible] could affect the latter half of your Medicaid and there's a few states that will be challenged in 2011 with Medicaid.

And any preliminary comments on volumes into next year?

I don't think if you look -- I think most everybody now agrees the volumes related to the economy and what is going on with the economy. Surely, the economy is about as low as it's going to go. Hopefully, as that changes, and jobs come back, certainly by 2012 we should see some improvement. But, I would think we would begin to start seeing some improvement in 2011. For us, though, we have done a very good job in terms of managing our expenses, but we still have market share opportunities. I always say this , we only have about 40% market share, so we have market share opportunities. As you can see, our case mix continues to improve.

That's probably a result of a couple of things. We probably are getting more severe cases and the less severe, but more importantly we're recruiting a lot of physicians. Our target is about 1700 this year and we're already about 100 over where we were this year at this time. All those things including acquisitions, all those things should be helpful to us as we think about 2011. I don't think there's a big C change coming, but I think it's not going the other direction. It's at least level and might be

Partial enrollment should not be down as a motion ten over nine as it was nine over eight.

That's very helpful. Thank you.

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

Thanks. Kind of similar vein, but focusing more explicitly on payer mix, expectations there. You have talked about before and today again, managed care has been continually running under the overall, but are you seeing stabilization in terms of magnitude of the gap that the gap isn't expanding any longer?

It's pretty stable. I mean, if you look at the managed care in the quarter and look at the year-to-date, it's fairly stable. From a drop again in specifics, but it's pretty stable in both the admissions and adjusted admission basis.

I mean, it just seem in the 3 Q maybe it actually -- the pace of the deterioration had ease and I don't know if I was kind of overreading that or not?

I think from revenue perspective that's probably true. Looking at the revenue and pay mix and all that, but the volume is fairly consistent quarter to quarter. [inaudible] is driving to that also. I think our overall revenues is 50% and it was 51% last year and 52% two years ago. So, it's been roughly consistent. It's come down a little bit and I think we're staying roughly stable. I think, we'll just see how the fourth quarter -- the drop in volume for us started apparently in the fourth quarter 2009. We'll see how that falls out end of this year, first part of next year.

The other factor in all of this is, we talked about this along the way in terms of Cobra. And, how Cobra was layered in as this recession started and unemployment started to rise. Well, all at Cobra now, a lot of it has come off so people -- that's kind of over with. There doesn't seem to be another big wave of Cobra where people would be coming off of Cobra that would add to the number of uninsured. So, that may be helpful when it's all said and done. It's been very hard to quantify that anyway.

Assume kind of in the broad 2011 view, you're looking towards kind of a stable payer mix, kind of this run rate we're jumping off here in the back half of the year, that this would be roughly stable, not get better but not get worse as you think about 2011?

I think Medicaid has been roughly flat. I think we've had some provider tax programs itself this year. We've got some new states already and Pennsylvania and Georgia they're coming off. I would think unemployment wouldn't have a big uptick. It's had one last year.

Wayne just talked about the Cobra. And, I know most main secure companies expect utilization to tick back up next year. It's hard for us to predict that. And, we've not yet provided detailed guidance and we will probably talk more about it in February ,but we are seeing fairly stabilization right now. It's not just getting worse. It's more stabilized .

So kind of the broad 2011 view kind of thinks towards stable, at this point.

Yes. The birthrate would eventually -- we have seen statistics point out that OB visits are starting to go back up so maybe that will--

But, they'll have to start on that pretty soon, though, for us to get caught up.

Right. Another topic. Are you seeing any increased opportunities-- in larger-scale physician groups? So maybe larger scale than traditionally done or they still kind of more of the exception like Rockwood -- it just seems like we're seeing more interest here in the insurer, payer communities and these compilations too, and I just didn't know if you were seeing that kind of same trend?

Yes, I think it's across the board. Size, there's a lot of two-and-three-main groups, but there's also a number of large groups. Some of it has to do with reimbursements. Most of it has to do with the economy and stability and the practice, but having a good partner, I actually -- physician -- employing physicians is not a main part of our strategy or buying practices. Certain instances it's very helpful. The Rockwood piece is very helpful.

We bought a practice in Alabama that we think will be extremely helpful to us, a large practice in sports medicine practice that has a huge network throughout the state. I think if you think about strategically and you're doing this -- both sides, by the way it's offensively and defensively, sometimes you have to do this to protect your base. Other times you have to do this as opportunistic. So, this would probably be a good thing for us as we kind of build through the next year or so. After that, it's like a lot of things in this industry, they're cyclical. When the economy comes back, I think that the dynamics of that will change some. Absent the fact that we don't know yet what managed care and accountable care organization might mean and bundling might mean for the future. That also may drive this as well as we get closer to better understanding how all those things, those components of health care reform might work.

Great, thank you.

Hey, John I want to mention one thing. We've studied a little bit in our nonurban hospitals. Hospitals with a lower case victor actually have a little bit better faster drop in admissions and other. That may mean as the flu and other stuff will be starting there, we should see a little bit of opportunity in the future. It's a nonurban hospitals to decline a little bit more than the other hospitals of ours.

You said that was looking back over the past 12 or so?

Looking the last nine months. Just looking to see both quarter and year-to-date, it does look like some of the bigger, larger percentage drops are in the nonurban hospitals or hospitals--

More primary care as opposed to tertiary, as you would expect.

Right, Right. Absolutely. Ok, thank you.

Your next question comes from the line of Gary Lieberman from Wells Fargo Securities. Your line is open.

Thanks, good morning. I was wondering if maybe you could clarify. You noted that you extended or increased the share repurchase authorization. Did you repurchase the $13 million additional dollar from that authorization in the third quarter or did some of that fall to the fourth quarter?

A little bit was in the fourth quarter, I think about half of it, I believe.

Okay. Then, I guess maybe big picture, if you could share in terms of how you're prioritizing use of cash and accusations versus additional share repurchases?

Yes, clearly it's more accretive if we can find great acquisitions, which we have, and if the price is certainly right in terms of these acquisitions now. $0.30 on the dollar is a pretty good opportunity. If you go back a couple of years, we were paying about $0.80 on the dollar. Or closer to one times. So, obviously, when we find those opportunities we will take advantage of those, but we also think our stock is underpriced so along the way we'll buy some stock back.

We're probably in pretty good shape in terms of what we have done. But, we always look for the opportunity and think about that all along. We don't really have a cash issue since we have about $560 million in cash, so we have the availability and the revolver to be able to do both and hopefully both successfully.

Are there any restriction from a covenant perspective in terms of the how much stock you can buy back?

Yes there is. We've pretty much used most of it we can use stock option proceeds and then of course, we'll see how the results of the amend and extend get finalized.

Okay, great. Thanks a lot.

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

Thanks, Larry. Maybe just back on the amend or extend, or the partial amend and extend. Clearly, it doesn't sound like you're going to come to market with a $6 million term deal.

Whit, could you speak up a little bit? We're having difficulty hearing you.

Can you hear me better, Wayne?

Yes, that's fine.

Yes, on the amend and extend, just wanted to have get an idea maybe around pricing, just a sense of pricing and whether or not the bank market requires a [inaudible] right now? I understand there is some sensitivity around the subject.

We haven't launched it yet and when we do, it will become knowledgeable and when we finish it we will disclose it. Several amend and extends have not had a [inaudible] Some have, so I think we'll just wait and let the terms get negotiating and done and then we'll disclose it.

Okay, and would you think about swapping any more of that debt or do you think you're pretty good there at this point?

I think we're pretty good. 93% is pretty good shape. I mean, we've done some swaps there. We've done some forward looking swaps, but I think from only having 7% variable debt is probably okay.

Okay. And maybe one other question, just kind of on volumes. Maybe not foe focusing on the inpatient side since half of your business is outpatient and perhaps the market doesn't focus on that enough. But, if my math is right, your same-store outpatient revenue grew by over 7%, which would be one of the strongest quarters I can recall from you. So, can you maybe talk about the trends there? is that mixed driving pricing, surgeries, acquisition on the outpatient side? It just would be helpful to parse that out.

Yes. Very, very almost very little acquisition, a few small physician practice that not be 10 or 20 basis point affect. We had -- if you look at the components of admissions and adjusted admissions and separated outpatient admissions, we're up 2.5%, I believe, and year-to-date up we're up 1.5% , so we had pretty good growth. I think it was in the radiology area was pretty strong. And our ER revenue was pretty good for the quarter. Even though we have a slight decline against a tough comp last year and then the rest, which is spread throughout, but there's really not much related to outpatient acquisition, so just good results and good outpatient. And again, I said the volume for outpatient was

Probably some of this is result of our physician recruiting activity, as well.

That's what I was going to ask about, and I was just kind of curious if you look at the productivity level for some of your physician recruits is there just any demonstrable difference in the admits per doctor in the recent class that you've brought on board or is there still just macro pressures maybe on the outpatient side? How they're contributing, how you gauge your satisfaction?

If you look at the for recruiting physician -- it's around 100 or 110. It's been staying at that level and looking at what we recruited last year. We're at that level now. It's too early to measure the class of 2010. We'll do that next year. I think we're getting admissions, but usually early on it's more outpatient growth.

Maybe just one other question, sorry, just on kind of the supply side. Wayne, we have obviously heard creative initiatives that are being rolled out over at HPG. Maybe can you talk a little bit more about some of those supply opportunities whether it's big-ticket physician preference items and--

I would tell you about it but, I would have to then visit you because this is confidential, proprietary information within HPG But let me tell you, they're doing a great job. They're doing a fantastic job for all members of HPG and we're very pleased even with the results and look forward to better results going forward. If that's problem to you, [inaudible]

It has it's perks. Ok, thanks a lot.

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

Thanks, good morning. Just one quick follow up on the refinancing. Even where the market is right now. And, Larry, I remember remember you doing this at a pretty good time when you did the original PO. Any color on whether you think the cost of debt might be higher or lower just in general?

Well, generally, the cost of an amend and extend, the cost is a little more expensive and it's expected -- cost of interest from portions extended but will probably be greater than it is today.

Okay. Any ballpark there?

It will be when we finish.

Got it. Did you mention sizing at all? I might have missed it, as far as portion of that $6 billion?

We did not, but we are very judicious in what we're trying to do and will be like we always have.

Okay, so you would like it to be on a larger side if possible?

We'll disclose it as soon as we get it done.

Got it. And just the -- couple of quick follow-ups -- In the prepared commentary, I think you mentioned something about malpractice expense, potentially benefiting the quarter. Did I mishear that or can you flush that out a bit?

Yes, I think the malpractice is probably down 30 basis points. We have done a real good job in our program, our reinsurance that we do and looking at our claims and I think we're down about 30 basis points, pretty similar to that both quarter-and-year-to-date.

Okay. Does that -- if we think about the run rate, is that a reserve release that might not repeat or do you think this is kind of a good run rate going forward in 2011?

I think that's a pretty good run rate. Now, there is a little bit and as interest rates went down last year with discount claims we had a little increase in our malpractice because of that. Now the discounting interest rates stayed about the same.

Okay, last question just around the Q4 guidance. I think you've already mentioned Medicare rates were obviously a little more disappointing than you thought earlier in the year. Looks like it's about $0.03 or $0.04 at the midpoint. Can you walk us through kind of just as a reset where you kind of see the fourth quarter changes to guidance versus what you talked about in February? And, obviously, there's a much wider spread than you typically have fourth quarter. I know --your still annual guidance, but is there--given that width of that guidance, is there anything you're trying to signal as far as fourth quarter uncertainty?

No. What we're really just saying is we had $2.90 to $3.00 at the end of the last quarter. If you go back to a year ago, it was $2.80 to $3. 00 and then we upped it to $2.85 to $3.00, then $2.90 to $3.00. All as we've had good quarters here we've done the same thing. Looking at the quarter and of course we did have a provider fee program, which we disclosed there, that could have been the third or fourth quarter,-- was the third quarter event. So we recognized that so we rolled up the feed in the quarter to about $0.03 and to there and what was put out in February was long before we had a 2% Medicare update and now it's a slight negative.

Medicaid is thought to be negative. Looks like it may be flat, but there's some Medicaid programs in the quarter that we're aware of now. So we basically beat by $0.03 or $0.04 in this quarter. Raised to the low end of the guidance. And, I think if I'm correct that we circled consensus for year of $2.97 and $2.93 to $3.00 circles quite well. [inaudible] trying to keep guidance in this range we lowered our bad debt guidances. We stood there and try to be conservative in that.

It's just a math around all this now.

Got it. Thanks for the color.

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

Thanks, good morning. I think you talked a little bit about some softness and I guess more of the rural areas than the urban areas. Just wondering if there's any differentiation towards geography in terms of softness in one area versus another, whether it's market or by state?

No, there's not. This just a quick down and dirty analysis that we did to make sure that we understood where our volumes are and this is about case mix index more than anything else because of severity in terms of the larger facilities. I think this is what you find in difficult economic times. In terms of deferrals and primary care things that you can put off. For example, we have a lot of OB business out in our nonurban hospitals across the country. Obviously, OB is one of the big declines across the country in terms of hospital admissions and C-sections and all the above.

So that would be a big factor in this. But I think this is just a general look at we probably have more decline in terms of volume in the nonurban Hospitals than urban Hospitals. Or just by percentage wise we have a higher amount of flu than OB in our nonurban hospitals. That is what seems to be dropping.

Okay. I guess in terms of the acquisitions, obviously we see the benefit of the topline and the guidance. Can you give us a little bit of the since of aggregate margin profile of some of the recent deals and maybe just remind us again of how we should think about the ramp-up as the margins should improve kind of year-to-year?

Yes, generally it starts off at 5% margin or thereabouts. I think West Virginia may have been a little bit lower than that and the rest are close to that. Front end 400 basis point improvement the first year and 200 to 300 basis points the second year and 100 to 200 the third year and close to company average if you look at what we have done in the class, say, of 2006, it's moving up nicely from a low single-digit margin to about 14% or 15% or 16% so done well in the class of 2008.

It's probably doubled from a 3% or 4% margin to 7% or 8% margin now, so historically we've done a pretty good job of following that. Some a little faster and some a little slower, which gives us some comfort of our guidance for 2011. I think we're one of the few hospital companies that continue to buy acquisitions, got more hospitals today than we did three years ago so that will help us in -- helps us in 2010. It will help us in 2011.

And then just my last one. Obviously you talked about acquisitions. What about anything in terms of pearing back? Should we expect any--see any divestiture in your portfolio or you think that's not likely?

I don't think so. We have consistently said all along that we continue to look at our facilities and if we think something doesn't strategically fit. Yes, but I think we're in pretty good shape. After the triad deal we divested ten or 12 hospitals immediately and we feel pretty good about where we are.

Okay, great. Thanks very much.

Our next question come from the line of Adam Feinstein from Barclays Capital. Your line is open.

Alright. Thank you, good morning, everyone. Maybe just on the acquisition theme, bigger deals create great opportunity and you mentioned before about pipeline being pretty robust and there have been some news articles about potential deals. So I guess a as you guys think about -- you said two to three acquisitions for next year, were you assuming bigger deals or were you assuming the typical size? I just want to make sure that we were thinking about the right way.

Well generally, on that premise we generally do, average-sized deals.

Okay.

Instead of larger deals. So again, buying two or three, one partly large and one partly a little bit smaller, and the average type deals.

Okay. And then, I guess just as you guys think about, -- you were talking before, obviously Medicare and Medicaid being one -- easy thing about puts and takes -- I guess, any updates related to some of the bigger states, Indiana, Pennsylvania, anything you guys have come across with respect to reimbursement for some of the larger states?

We just, of course, had the pick up that we had in the California.

Right.

We've had pickups in Arkansas and Indiana, Mississippi was good. New Mexico went the other way. Oklahoma went the other way. Tennessee is about flat. There is some up and some down. Those are the different ones there. But overall, I think we will be roughly flat for 2010 when we get through the year. Basically the places where we have an increase and places we had a decrease are pretty well offset.

This is -- even though there's more concern around the Medicaid programs today than there has been awhile this is consistently what happened to us because of our spread across so many different states. We have a balance here, so that not one particular state turns out to be too big a problem for us one way or another.

Sure, absolutely.

I think I may have mention that there's a couple of new states we expect to see a provider tax program. Maybe Pennsylvania and Georgia, in the first part of the year.

As you think about -- you were talking about before the strong outpatient growth relative to inpatient. Let me talk a little bit about -- I guess, the trend is going to continue to be more growth on the outpatient side and it's something we have seen for a long time but just the growth rate was so much more higher here. As you think about marketing in trying to capture more of the outpatient business, maybe just, thoughts in terms of what you're doing to attract more of the outpatient business.

Yes. I think we think of it -- if you think about health care reform, there's a couple of things we are concerned about. And, one of which is having infrastructure, so that we don't have a problem and we are in all insurance products. The others demonstrated quality. But, when you think of infrastructure, I think Spokane is a very good example. So is Birmingham and Lutheran network in Fort Wayne.

Is it the broader network we have, the better opportunity we have in terms of capturing more market share both inpatient and outpatient. Clearly, some of our peer companies are out buying a lot of surgery centers, which is probably a good strategy as well to increase outpatient. But I think ours is much more around network, a little broader approach to it strategically so we capture both inpatient and outpatient. The outpatient is growing, as you say, just by the nature of health care and changes in health care moving from inpatient to outpatient. So, I think ours is not solely focused on outpatient, but much more strategically on being able to be included in all insurance products.

Okay. And Wayne, since you mentioned health care reform, with midterm elections coming up next week, what are your thoughts in terms of any implications from a change in the house?

Well, I think if, in fact, there is a change in terms of Congress, it probably doesn't need to be a change, as big a change in terms of the Senate, but a number of seats go -- I think we will start,, again, to see rationalization so to some of the think that are problematic in health care reform. I don't think you're going to overturn this bill. I don't think you're going to take away the 32 million uninsured getting insurance when it's all said and done. But I think you will see rational approaches. The problem is for us as an industry is we're in regulatory phase now, so when we go through the regulations, the current administration drives all that, all the regulatory people essentially work for them, and it's be pretty difficult to make changes. But I think incrementally you will start to see some change that will be positive changes that will not only be good for the economy, but will also be helpful for us, the providers.

All right, thank you.

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

Hi everybody. Just a few things here. I wanted to go back to the 2011 outlook and just better understand the puts and takes. Larry, you laid out a number of things --

Darren, could you speak up? We're having a little trouble with our communications today, I guess.

Sorry. Is that better

That's better. Thank you.

Yes, I was asking about the 2011 outlook and some of the puts and takes there and I think, Larry, you laid out a number of things. I just wanted to understand the I.T. conversion cost, though. It seem likes they have been stepping up sequentially and I'm just curious how that played into the outlook as well and how we should be thinking about those costs in particular.

Well, we'll have more capital spending for that in 2011 than we had. And, we'll also have some software costs and some cost will be deferred like other people. The training cost will probably get expensed and we're incurring a certain amount of money today to do systems and quite a few of those done. I think we'll roll in the spending a little bit on the conversion that we're doing today plus also the EHR. But, I think we've tried to take that into consideration both our corporate costs and what occur in our hospitals and we've added some resources, and I think we have that capture into 2011 guidance. And we'll think about what we want to give specifically in February as to what we'll spend but it's a little early to give a number now.

Okay and then just so I understand what you said previously, the acquisition played a big factor next year? Just from a timing perspective with the two to three acquisitions, is there anything unique about how you built them into the guidance, more ratable or is there an expectation they come sooner?

Usually their built in midyear. That's how we generally do that.

Okay, alright. And then just as it relates to reason acquisition with forum, I'm wondering if you can just comment briefly about whether there's any unique labor agreements you need to reach there, anything at all that we need to be thinking about in terms of structure of that asse?

I don't think so. I think forms of these great three facilities, a great opportunity for us to -- the economy seems to be picking up there a little bit. There's some new industry coming to the area. These are hospitals that have been under capitalized for the last number of years. Obviously, they had issues and problems-- we don't see anything that's unique or different that much that's different from a number of our other facilities.

As it relates to the labor there we're comfortable in that environment, we treat all our employees the same, we negotiate fair contracts. So I think we should see good results out of this market when it's all said and done. It looks like there's big opportunity, very little physician recruiting over the last -- the same sort of things that we talk about all the time. The same elements are there for opportunity.

Sure. Just a couple of other things I want to ask. On the volume side of things, a couple of discreet impacts, maybe if you could comment on observation visits and bursa. I know you mentioned it quickly in your dialogue, Larry, but I missed what you were saying. How much did observation visits have an impact on period, in terms of volumes and can you comment on what your observation visit growth has been and same for birth?

Well, I think observations affected overall admission growth about 70 basis points, if I remember correctly and the OB affected about 110 basis points. Observation clearly would have helped the outpatient growth, which was real strong for the quarter. Having the drop in short day stays. The OB probably lost both-- outpatient and inpatient work. There's 110 basis points there and the observation, 70 basis points. In the quarter, what was different than we had in the first half of year was a bigger contributor and a lot of that was in September. It was down 110 basis points, which was the highest it's been in the first half of the year.

Are you seeing any plateauing of the observation visits at all, just in your underlying trends?

It's staying about the same. It's about -- it's not a big number, but it's staying about the same.

Okay, last --

Read my comment in terms -- observation is a trend around the country and insurance companies and everyone are trying to shorten stays. But, you might comment on the payment for observations, in general term--

Yes.

That's a key issue here. The Medicare is a little different but the manage care is close to the same payment of Medicaid will be, a little bit different. We're getting paid maybe not quite as much on the outpatient side. It's really more of a stat issue than it is anything and just happens since you're dropping admissions and focus on admissions. We know a lot in-house, no one particular area, but we have a small decrease. I think year-to-date, 60 basis point drop in the quarter with 70, so it stayed relatively consistent. If you go back last year, we probably have a smaller drop also.

Eventually we're going to comp this out, I would think.

You may and again you may continue to have some efforts on managed care and others to try to have a short day stay, treated as outpatient observation. It may be there.

Last thing --

It's not just us. I've seen it commented by several other companies, so s Wayne said, you know, with the effort you got on managed care side and others, you're probably going to continue to see a little bit of this.

Right. My last thing here is the California item in the period. Some of that relates to prior period so if we work the math, was it about a $0.04 pickup you saw from that item discreetly?

It's $0.05 or $0.06 and some belong in the quarter and some in prior quarters. It was in our anticipated 2010 guidance and hard to say exactly which quarter we anticipated in. We, of course, had a little higher fourth quarter expectations. We thought it happened some time end of year -- I think we have been talking about it almost all year. I know others have had it. It's not that big for us. Maybe $8 million or $9 million and for the quarter, and we'll get a quarter benefit fourth quarter and we'll get a benefit, we think, going forward in 2011.

Okay, but $0.05 to $0.06 and then $0.04 roughly would be a reasonable guess, in terms of what would be out-of-period benefit?

That would be correct, but it had to go somewhere this year ,but it's either in the third or fourth quarter.

Thanks a lot.

This concludes today's Q&A session. Mr. Smith, do you have any closing remarks?

I do. Thank you for spending time with us this morning. We are pleased with the trend in our business and look forward to future progress. We want to specifically thank our management team and staff, hospital Chief Executives, Chief Financial Officers, Chief Nursing Officers and division Operators for their excellent operating performance for the third quarter. We remain focused on our business strategy and improving results. Once again, if you have questions you can reach us at 615-465-7000.

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