Community Health Systems Inc (CYH) 2010 Q4 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 fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.(Operator Instructions)I would now like to turn the call over to Ms. Lizbeth Schuler, Vice President of Investor Relations of Community Health. Ms. Schuler, you may begin.

Thank you, Sarah. Good morning, and welcome to Community Health Systems fourth quarter and year end conference call. Before we begin the call, I would like to read the following, somewhat lengthy, disclosure statement. Any statements made in this presentation that are not statements of historical facts, including statements about our beliefs and expectations, including any benefits of the proposed acquisition of Tenet Healthcare Corporation, Tenet, are forward-looking statements within the meaning of the federal securities laws and should be evaluated as such. Forward-looking statements include statements that may relate to our plans, objectives, strategies, goals, future events, future revenues, or performance, and other information that is not historical information.

These forward-looking statements may be identified by words such as anticipate, expect, suggest, plan, believe, intend, estimate, target, project, could, should, may, will, would, continue, forecast, and other similar expressions. These forward-looking statements involve risks and uncertainties, and you should be aware that many factors could cause actual results or events to differ materially from those expressed in the forward-looking statements. Factors that may materially affect such forward-looking statements include our ability to successfully complete any proposed transaction or realize the anticipated benefits of a transaction; our inability -- our ability to obtain stockholder antitrust, regulatory and other approvals for any proposed transactions; or an inability to obtain them on the terms proposed, or on the anticipated schedule.

Uncertainty of our expected financial performance following completion of any proposed transactions. And other risks and uncertainties referenced in our filings with the Securities and Exchange Commission, the SEC. Forward-looking statements, like all statements in this presentation, speak only as of the date of this presentation, unless another date is indicated. We do not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. This communication does not constitute an offer to sell or the solicitation of an offer to buy any security. This presentation relates, in part, to a business combination transaction with Tenet proposed by Community Health Systems, Inc., CHS, or the Company, which may become the subject of a registration statement filed with the SEC.

CHS intends to file a proxy statement with the SEC in connection with Tenet's 2011 annual meeting of shareholders. Any definitive proxy statement will be mailed to shareholders of Tenet. This material is not a substitute for any prospectus, proxy statement, or any other document which CHS may file with the SEC in connection with the proposed transaction. Investors and security holders are urged to read any such documents filed with the SEC carefully in their entirety, if and when they become available, because they will contain important information about the proposed transaction. Such documents would be available free of charge through the website maintained by the SEC at www.SEC.gov, or by directing a request to Community Health Systems, Inc. at 4000 Meridian Boulevard, Franklin, Tennessee, 37067, attention Investor Relations.

CHS and its directors, executive officers and nominees may be deemed to be participants in the solicitation of proxies in connection with Tenet's 2011 annual meeting of shareholders. The directors of CHS are Wayne T Smith, W Larry Cash, John A Clerico, James S Ely III, John A Fry, William N Jennings, MD, Julia B North, and H Mitchell Watson, Jr. The executive officers of CHS are Wayne T Smith, W Larry Cash, David L Miller, William S Hussey, Michael T Portacci, Martin D Smith, Thomas D Miller, Rachel A Seifert and T Mark Buford. The nominees of CHS are Thomas M Boudreau, Duke K Bristow, PhD, John E Hornbeak, Curtis S Lane, Douglas E Linton, Peter H Rothschild, John A Sedor, Steven J Shulman, Daniel S Van Riper, David J Wenstrup, James O Egan, Jon Rotenstreich, Gary M Stein and Larry D Yost. CHS and its subsidiaries beneficially owned approximately 420,000 shares of Tenet common stock as of January 7, 2011.

Additional information regarding CHS's directors and executive officers is available in its proxy statement for CHS's 2010 annual meeting of stockholders, which was filed with the SEC on April 9, 2010. Other information regarding potential participants in such proxy solicitation, and a description of their direct and indirect interests by security holdings or otherwise, will be contained in the proxy statement that CHS intends to file with the SEC in connection with Tenet's 2011 annual meeting of shareholders. With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman, President, and Chief Executive Officer. Mr. Smith?

Thanks, Liz. That sounds like an outstanding group of directors, by the way. Good morning, and thank you for joining us for the 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 this call is to review our financial and operating results for the quarter and the year ended December 31, 2010. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. A slide presentation of the Company's prepared remarks for those of you listening to the live broadcast of this conference call on the web. I would like to begin the call with some comments about the quarterly results, and then turn the call over to Larry, who will follow with additional details of our financial results.

We're very pleased with our solid financial and operating results for the fourth quarter and the year ended December 31, 2010. Net revenue for the quarter of 2010 increased 10% to $3.4 billion versus $3.1 billion in 2009. Adjusted EBITDA for the fourth quarter of 2010 was $452 million, an increase of 4%. And income from continuing operations was $0.76 per share. Net operating revenues for the year ended December 31, 2010 increased 7% to $13 billion. EBITDA was $1.770 billion, an increase of almost 6%. Income from continuing operations was $348 million, or $3.01 per share for the year ended December 31, 2010 versus EPS for 2009 of $2.64, an increase of 14%.

With that, I would like to review some key operating accomplishments for the year. The Company recruited 1,852 new physicians for 2010 compared to 1,679 recruited in 2009. Our standardized and centralized approach to physician recruiting and practice development identifies physicians' needs in the community and increases patient access to the services. Our recruiting target for 2011 is 1,900 physicians. As we discussed last quarter, we acquired Bluefield Regional Medical Center in Bluefield, West Virginia early in the fourth quarter. We also completed the acquisition of Forum, a system of hospitals and other healthcare providers based in Youngstown, Ohio. In 2010, all acquisitions represented approximately $650 million in trailing revenue.

As has been reported in the press, we also have a definitive agreement with Mercy Health Partners in Scranton, Pennsylvania to purchase two hospitals, plus a LTAC facility. This agreement is subject to regulatory approval. Trailing revenue for this transaction is $200 million with a mid single-digit margin. We believe there are a growing number of facilities that can benefit from our proven operating strategies -- and systems, I might add. We continue to be very selective with our acquisitions and have a very strong pipeline.

Our 8-K filing includes our expanded guidance for 2011. Annual same-store admission, adjusted admissions growth is expected to range from minus 1% to plus 1%. Our projected revenue range is expected to be $13.9 billion to $14.2 billion. EBITDA is expected to be $1.850 billion to $1.875 billion, and projected EPS for 2011 is expected to be in the range of $3.15 to $3.35 per share. We have included two to three acquisitions in 2010 guidance. And please note that the potential acquisition of Tenet is excluded from our guidance. There has been no material update to the New Mexico False Claims Act case.

I would like to just quickly update you on the status of our purchase of Tenet Healthcare. As you are aware, right before Christmas we announced that we intended to propose a slate of directors for election at Tenet's 2011 annual meeting. Initially, we had a window to nominate this slate from January 4 through February 3. Due to the change in Tenet's shareholder meeting, we had to put forth our nominees by January 14,. We did, in fact, put forth ten names to stand for election at the annual meeting. The date of which Tenet has moved forward six months to November 3. We have a very capable investment bank assisting us with financing in M&A activity at Credit Suisse and Goldman Sachs. Goldman was originally added to our team. We continue to be encouraged and enthusiastic about this great opportunity. At this point, I would like to turn the call over to Larry Cash to provide you with additional details for our fourth quarter and 2010 financial results.

Thank you, Wayne. Consolidated admissions increased 2% in the fourth quarter of 2010. Adjusted admissions increased 5.1% for same period. Our same-store admissions decreased 2.8% and same-store adjusted admissions were essentially flat. Again, soft volumes continued throughout the fourth quarter, similar to the third quarter and previous quarters. The following contributed to the decline. Service closures were under about 10 basis points. Lack of flu and respiratory represented 190 basis points, predominantly due to the H1N1 in the third and fourth quarter of 2009. Reductions in one-day stays for corresponding increase in outpatient observations are 100 basis points. And our low birth rate driven by the economy and reduced OB-related admissions by 70 basis points. Excluding these items, same-store admission growth would have increased to 0.9% and same-store adjusted admissions would have increased 3.2%. Our sole Community providers continued to experience softer volume issues than our larger hospitals.

Net revenues in the fourth quarter were $3.402 billion, an increase of 10%. On a same-store basis net revenue increased 4.9%, which is the largest in several quarters. Same-store inpatient revenue increased 2% and same-store outpatient revenue increased by a very strong 8%. Same-store net revenue per adjusted admission increased 5% year-over-year, due to good outpatient growth. Same-store revenue decreased by about approximately 50 basis points due to the increase in self-pay discounts. Our fourth quarter revenue was increased by approximately $2.9 million, and was less than the 10 basis points increase representing three months of California Hospital fee program. The state of California Department of Health and Human Services issued a recent letter to the California Hospital Association, stating all necessary final federal approvals in the quality assurance program were received in calendar 2010, which is consistent with our revenue and expense recognition.

Our same-store Medicare case mix increased 0.1% for the quarter and increased 0.5% on a sequential basis. Same-store surgery volume increased 2.4% for the quarter. This increase was driven by a very strong outpatient orthopedic growth. Our same-store surgical case mix for all payers increased 1.9% for the quarter, demonstrating our growth in intensity with fewer less intense admissions such as flu and respiratory.

Consolidated EBITDA was $452 million for the fourth quarter versus $434 million for same period a year ago, increasing 4.1%. On a same-store basis, EBITDA was $462 million for the fourth quarter, a 5.4% increase. EBITDA margin for the fourth quarter on a consolidated basis was 13.3%. Same-store EBITDA margins was 14.2%, unchanged from the same period a year ago. For the fourth quarter, our non-same-store margin was a negative 0.6 -- a negative 6%. As we discussed in prior quarters, non-same-store margin was affected by higher acquisition costs due to multiple transactions in the quarter of $4.5 million, which about $1.5 million related to the Tenet transaction and the system conversions cost of $1.7 million.

Consolidated operating expenses increased 80 basis points, percentage of revenue fourth quarter due to our recent acquisitions. An increase of 100 basis points in payroll and benefits, a 20 basis point increase in bad debt, and a 30 basis point increase in other operating and rent was offset by a 50 basis point decrease in supplies. Same-store operating expenses for the fourth quarter were flat when compared to the same period a year ago. Same-store supply expense improved a strong 60 basis points, offsetting some other expense line increases. Several new provider type programs increased other operating expenses by approximately 80 basis points, and improvement in both contract labor and malpractice helped to offset this increase.

For 2010, consolidated admissions increased 0.1% and adjusted admissions increased 2.5%. Same-store admissions decreased 2.5% and adjusted admissions decreased 0.5%. Service closures, severe weather and other represented 20 basis points of the decline. The lack of flu and respiratory was 100 basis points. The movement of one-day stays to observation was 70 basis points. And the lower birth rate due to the economy of 100 basis points also contributed to the decline. Same-store admissions would have increased 0.4% and adjusted admissions would have increased 2%. Our volume guidance for 2011 for admissions, adjusted admissions is minus 1% to a plus 1%.

Net revenue for 2010 was $13 billion, an increase of 7.3%. On a same-store basis, net revenue increased 3.9% for the year due to acquisitions. Same-store inpatient revenue was up 2.3%, and outpatient revenue was a strong 6%. On a same-store basis, net revenue per adjusted admission increased 4.5%. Same-store revenue decreased by approximately 70 basis points due to increased self-pay discounts. Our same-store surgery volume was down 1.6% due to the movements in minor procedures from hospitals to physician offices, as well as a decline in C-sections. Same-store Medicare case mix increased 0.5% for the year and same-store all surgical -- all payer surgical case mix for the year increased 1.6%.

Consolidated EBITDA for the year was $1.770 billion, an increase of 5.9%. Same-store EBITDA increased 5.6%, $1.780 billion. Consolidated EBITDA margin for the year ended December 31, 2010 was 13.6%. And same-store margin of 14.1% improved 20 basis points. Non-same-store margin was a negative 2.5%, again, non-same-store. Includes acquisition costs of $8.5 million and system conversion costs.

For 2010, consolidated operating expenses as a percentage of net revenue increased 20 basis points from the prior year due to acquisitions. Consolidated payroll increased 30 basis points. Bad debt increased 10 basis points and other operating expenses increased 10 basis points, offset by a 30 basis point improvement in supplies. Same-store operating expenses improved 20 basis points from 2009, with improvements in payroll of 20 basis points, supply of 30 basis points, offset by a 40 basis point increase in bad debt. While other operating expenses were flat year-over-year, the implementation of several provider tax programs caused an increase in business taxes of approximately 80 basis points as a percentage of revenue. Offsetting this increase were improvements in contract labor and malpractice of 20 basis points each.

On a same-store basis, net revenue minus bad debt increased 3.5% compared to 3.1% increase in operating expenses, less bad debt, demonstrated our continued effective expense management. For the quarter, bad debt was 12.5%, an increase of 20 basis points from the same period a year ago. Same-store self-pay admissions were basically flat year-over-year. For the year, consolidated bad debt increased 10 basis, 12.2% to 12.1%. And same-store self-pay admissions decreased 0.2% year-over-year, and increased 10 basis points as a percentage of total admissions to 6.7%.

Our combined consolidated bad debt charity administrative self-pay discounts, divided by adjusted net revenue, was 20% for the quarter, 19.9% for calendar 2010, an increase of 80 basis points and 100 basis points, respectively. As we have said, the real cost of treating the self-insured is the cost of care in our same-store operating costs, less bad debt's increase 3.1%. Consolidated cash receipts were 102%, collect on net revenue for the year ended December 31, 2010. Our 2011 guidance for bad debt ranges from 12.4% to 12.7% of net revenue compared to 2010 actual of 12.3%.

Total AR days were 46 at December 31, 2010, a decrease of two days from December 31, 2009. The allowance for doubtful accounts is $1.639 billion at the end of the quarter, or 49%. The allowance for doubtful accounts and related contractual allowances for self-pay was 84% of the hospital segment self-pay receivable as of December 31, 2010. This compares favorably to the 82% at December 31, 2009.

Community Health Systems has a favorable payer mix for the quarter ended December 31, 2010. Net revenue by payer source on a consolidated basis was as follows, Medicare, 27%, Medicaid, 10.4%, managed care and other, 51%, and self-pay, 11.6% of net revenue. On a year-to-date basis the break down was as follows, Medicare, 27.2%, Medicaid, 10.6%, managed care and other, 50.6%, and self-pay, 11.6%. We expect 2011 managed care and commercial pricing to increase 5.7%. Medicaid changes implemented in 2011 could reduce Medicaid revenue in 2011 by 2% to 3%.

Cash flow from operations for the fourth quarter was $290 million. Cash flow from operations for 2010 was $1.189 billion compared to $1.076 billion for the same period 2009, an increase of $112 million, or 10.4%. For 2010 cash taxes were $70 million higher. The increase in cash flow from operations reflects an increase in net income of $42 million, an increase in noncash depreciation and amortization of $43 million, an increase in other noncash expenses of $23 million, an increase of $76 million from accounts payable, accrued liabilities income taxes related to timing, as well as increase in changes to other assets of $19 million. These increases were offset by decreases in cash flow from supplies prepaid and other current assets of $5 million, and a decrease of accounts receivable of $85 million due to a two-day improvement in accounts receivable outstanding from 48 to 46.

Our 2011 guidance for net cash providing operating activities range from $1.150 billion to $1.250 billion.Total capital expenditures in the quarter was $286 million. For 2010, total capital expenditures were $667 million, or 5.1%, and capital expenditures for replacement hospitals of approximately $36 million. Our CapEx guidance for 2011 will range from $750 million to $850 million, including replacement expenditures of approximately $180 million and IT costs related to Meaningful Use of $75 million.

Balance sheet cash at December 31, 2010 was $299 million. As of December 31, 2010, the Company had available credit from (inaudible) of $668 million after outstanding letters of credit. Looking at the balance sheet as of December 31, 2010, we had $1.2 billion in working capital and $14.7 billion in total assets. Total outstanding debt at December 31 was $8.9 billion, of which approximately 93% is fixed. Our debt to capitalization at quarter end was 80%. At the end of December, we were party to $5.3 billion of interest rate agreements. And again, approximately 93% of our debt is fixed.

As Wayne stated earlier, we provided our full 2011 guidance. I would like to highlight a couple of items. Our 2010 results did include two months of interest expense from our recent amend and extend of $1.5 billion of senior secured debt. Our interest expense assumption for 2011 is 4.7% to 4.9% of net revenue with no new financings during the year involving stable interest rates. And this includes the additional interest expense from the refinancing we completed in November of 2000 -- November of last year, which is about $0.10 a share. Please note that our 2011 EPS guidance of $3.15 to $3.35 has remained the same as what we originally forecast in October, even with this additional interest expense impacts on EPS of approximately $0.10. We did increase in net income -- we did see an increase in net income attributable to non-controlling interest for the fourth quarter to 0.7% of revenue compared with 0.5% for the nine months ended September 30. This was due to the fourth quarter reallocation of various favorable adjustments to 2011 guidance that's projected to be 0.5% to 0.6% as a percent of revenue for 2011.

The fourth quarter income taxes as a percent of income, continuing operations, is lower than guidance due to the higher net income attributable to the non-controlling interest described earlier, and an anticipated tax benefit from tax revaluations in 2010. Year-to-date taxes of 31.4% of income from continuing operations were within the annual 2010 guidance of 31% to 33%. And 2011 guidance is -- will be the same as 2010, 31% to 33%. The 2011 projection includes an estimate of $0.03 to $0.06 per share of acquisition costs that are required to be expensed, but excludes any significant costs associated with the Tenet transaction. The EPS guidance, $3.15 to $3.35, is based on the outstanding weighted average diluted shares of 92 million to 93 million, and no significant share repurchase has been assumed for 2011. And Wayne will now provide a brief recap.

Thanks, Larry. As you can see, 2010 was successful reflecting our proven ability to deliver consistent quarterly results even in the face of the challenging economy. Our consistent pattern of growth reflects our success as an operator and a consolidator in the industry. For the year, operating revenues increased a solid 7% for a record $13 billion. And net income increased over 15%, with EPS a strong $3.01 per share. We have continued to focus on improving performance at the individual hospital level in all of our markets, especially at our most recently acquired facilities. We look ahead to 2011, we see additional opportunities for growth. We remain focused on the fundamentals of our business and believe our proven success and recruiting positions have proven operational efficiencies and enhancing essential health services will continue to support our long-term growth strategies. With that, I'll now open the call for questions.

(Operator Instructions)Our first question comes from the line of Darren Lehrich from Deutsche Bank. Your line is open.

Thanks, good morning, everybody.I wanted to start out with the $0.10, obviously we were expecting the higher interest expense. I'm just wondering, Larry, what offset that as you look at the various components of your 2011 guidance, how are you able to offset that?Or should we just think about it as still being in the range and maybe impacted still by that $0.10?

The fourth quarter was stronger. I think the range was $2.93 to $3, and we ended up with $3.01. And I think we're just looking all the detail that we had after the year was done, and looked at where we thought the managed care rates would be and the volume, et cetera, that we could achieve $3.15 to the $3.35. So I think it's both a combination of fourth quarter and just a little more confidence in what we could achieve for 2011.

That's helpful. And then, if I could, I just want to ask you, because you have been calling out for several quarters now some of these unusual adjustments on volume. And if I heard you right, between observation visits and births, there was about 170 basis points of impact. I wasn't sure if you said that was in the quarter or the year. But the question is, relative to observation visits, can you just help us think about when you started to see that shift begin to spike for you. And at what point do you think there is a plateau, where does it start to comp out? And if you could give us any commentary about what you're seeing on observation visits at this point.

I think we could talk about it all year, probably started little bit at the end of '09. I think we're at 100 basis points for this quarter and it's 70 basis points year to date, which it's going to be for a while. It's now in the category of more Medicaid and managed care. I think you're going to have more of this happening, where people are having, in their managed care contracts, an interpretation of what should be likely an outpatient observation versus inpatient. And I think that you're probably going to see this for at least some into 2011.

Yes, Darren, clearly this is a trend, a national trend in terms of observations. Insurers are trying to figure out ways to reduce costs. The other thing to keep in mind is that there are certain insurance companies that the payment on observation is essentially the same as when they stay. So the economics on it sometimes are not all that different. But it is -- we will see more of this.

I would add one other thing, on the line of questioning. The birth rate was down 70 basis points for this quarter and 100 on a year to date basis. Hopefully that's a sign that maybe future quarters will not be as high as 2010.

Right, I hope so. Last thing, I just want to clarify what you said, because I thought your wording was a little bit confusing. On Medicaid, are you saying you're expecting Medicaid rates to be down 2% to 3%? I don't know if the script was designed differently, but I think you said Medicaid funding, so I just want to make sure we're talking about rates.

We're talking about the effect on net revenue in 2011 based on changes that would take place in Medicaid reimbursement in 2011. In other words, changes that would take place either January or going forward, we could see a 2% to 3% reduction in our revenue for 2011.

Okay, so if volumes stayed the same, down 2% to 3%?

It would be Medicaid revenue, too. It's the effect on the Medicaid revenue. And again, of course it's about 10% of the business. And we think, as best we can, we factor that in. We've been studying all the states there and it's in numerous states. A fair amount of this activity will take place later in the year, some now. But we will clearly see a little bit of a reduction as a result of changes January 2011 forward.

And that number excludes any special funding mechanisms that would exist in some of your states?

That is correct, although if we know of something that we think could be an issue and it's in Medicaid revenue, that would be included if we know of anything.

Okay, thanks a lot.

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

Thanks. Just wanted to first start with the outpatient revenues. If my model's right, it looks like they were up about 8% for the quarter. And it looks like one of the higher numbers in maybe two years or so. Larry, can you maybe help flesh out just in terms of mix, is that the surgeries and case mix you mentioned? Ortho was pretty strong in the quarter, and I think something rolled into the same-store count. So, lots of moving pieces, just wanted to get a better sense for the underlying trends.

You're correct. Outpatient revenue was up 8%. We had really good orthopedic surgery growth, we had good surgery growth, which most of the surgical growth was outpatient. And then we had some other good growth in various categories. But we continue to see pretty good outpatient revenue growth. I think year to date it's 6%, I believe, so it's a little bit better than the year to date.

And maybe just on the same line of thought just with the surgeries, you have the ability that we don't see scheduling trends. And do you think that there's anything sustainable as you look into the first quarter, not to pin you down on intra quarter.

I think what you're seeing is that our model is a pretty sustainable model as we continue to perform year in, year out. As we recruit physicians, we had a huge year in terms of physician recruiting. I think we're on track and you will see more and more of that. There's a lot of things shifting to outpatient, as we go further, and in the next few years you'll probably see more things go to outpatient. But I think, really, it is evidence that our model is working pretty well in terms of physician recruiting, as well as our integration.

And of course our shift of inpatient admissions was a little higher in the fourth quarter to outpatient observations which contributed to it.

Yes. And if I can just maybe follow up on that, too, just for a second, back to Darren's question about all the observation visits and one-day stay shifts. Wayne, could you talk a little bit maybe about how your operators have responded on length of stay management and how the discharge pattern have evolved? Maybe helping us think out about the net-net impact and what your confidence level is that you're offsetting some of those shifts.

I think if you look at the quarter in terms of our revenue base, our observations have been going up. But our revenue continues to be strong. That's probably the best indicator. As I said earlier, the economics of it may or may not have a huge impact, because it just depends on the carrier or whomever it is, the person, the insurer in terms of the rate. But I think this is just a trend that we have seen and we're going to see more of as time goes along, and I think everybody is adjusting to it. I think it's an industry-wide issue and I don't see it as anything that's problematic for us. It's just a change in location basically.

And our length of stay is, I believe, 4.2, is consistent for same-store. Consolidated's 4.3. And I think the patient days are dropping about the same as admissions in the quarter, maybe a little bit more year to date.

Okay, and maybe just one last question. Just backing into the acquired revenue, it looks like it was about $160 million in the quarter, which seems high since what you bought, I think, only maybe had about $130 million of LTN quarterly contribution. Larry, where is that delta coming from? Is that managed care, charge capture? Just curious where that upside contribution has come from.

The acquired revenue would probably be about $125 million in the quarter, if you look at the two we did. We also had a couple small physician transactions in the quarter. But the upside in the revenue for the quarter, we had pretty good growth in managed care. I think our managed care payer mix was the best in the quarter it's been all year compared to year to date. So I think it was 51%, and we're doing better than that on a year to date. We did better in the quarter than we did on year to date basis on the managed care.

Okay, and did you say that the non-same-store margins were minus 6% in the quarter?

Right. We had a little bit more acquisition expenses. We did buy some hospitals in the fourth quarter, which we think will do fine. And of course we bought in July in that quarter. But the acquisition expenses were a little bit higher. I think I mentioned some of that, about $1.5 million related to Tenet.

And we should think about those group of assets getting close to break-even pretty quickly, correct?

Yes, I would say early 2011.

Okay, great. Thanks a lot, guys.

Your next question comes from the line of Frank Morgan from RBC Capital Markets. Your line is open.

Good morning. Two questions here. One, looking at the same-store margins, is there anything that you could call out to us in terms of maybe the lumpiness of some of your more recent acquisitions that have just rolled into the same-store count? But any kind of color you can give us about the opportunities to see further same-store margin expansion going forward. And then secondly, maybe one for Wayne, just in terms of your pursuit of Tenet, does that in any way affect your normal acquisition activity of smaller onesy, twosies? And at what point would either one of those change? Thanks.

Let me take the last one first. It's more like the onesy, twosies, there's a lot of them out there. We have a lot of opportunities in terms of acquisitions. As you can see, we have a definitive agreement on Scranton. We're just waiting for regulatory approval. We had a pretty strong year this past year in terms of acquisitions. There are a lot of opportunities out there. Lot of them are size. There are more systems than there have been in the past.

So we're going to continue down that trail and we're making great progress. And as you know, we have very little difficulty in terms of assimilating those. We built our model here in terms of making sure we do a good job on our same-store business, but looking for opportunities going forward.They are still there. They are still priced properly. By and large, there may be some change in the price in the future, but having said that, I think we will continue. And there's some good sized opportunities.

The Tenet acquisition would just be additive. It's nothing that we're concerned about in terms of, we are going to continue to do business, as we have been. But we are absolutely continuing to be excited and we think there's a great opportunity here in terms of acquiring Tenet. We think it works. It works extremely well in terms of the things that we think we can accomplish. So I think we're on track, and with or without, we have the capability, we have the financial capability to do both. And so we'll just continue to take advantage of those opportunities.

Your first question, I would say that the class of 2008 in '09 was 3% or 4%. Now it's a little under 10% and the class of '09 was probably 7% or 8% and it's now around 9% or 10%. So there's definitely good opportunity there. That's probably on a revenue basis, it's $800 million to $900 million of revenue that you will achieve from those two. The class of 2010, we've gone one of them for six months and we've gone to three of them for three months and they are pretty low margins right now, and I think they will be very helpful in the latter part of 2011.

Okay, thanks.

Your next question comes from the line of Gary Lieberman from Wells Fargo Securities. Your line is open. Could you talk maybe a little bit about Medicaid and some of the assumptions that you're baking into your guidance for next year on the Medicaid front?And any specific states where there could be greater variability?

There's some chances there could be a reduction in Florida, a small one in Illinois. There's probably going to be a reduction in Oklahoma. There's a provider tax going to be going on in Pennsylvania and Georgia, and maybe a reduction in South Carolina. We think there will be expanded provider tax in Tennessee and maybe some cuts that we got to take into consideration for Texas. All of those are factored into what we think will happen for there. We believe there might be another provider tax coming in Arizona, and maybe even in Oklahoma, but that's a little uncertain right now. And we probably will see an extenuation of the California provider tax in 2011 for the first six months.

One of the things that we have been able to do through the years is , because we're in 29 states, we have generally had offsets and not been adversely affected very much in terms of one state's change versus another. And there's still a lot of that going on. But generally speaking, as you know, most of these states got a lot of difficulty and trouble, so probably Medicaid may be one of our biggest challenges going forward. But this past year, we had some challenges around TRICARE and a few others and we were able to manage through them. It's problematic, but I think we'll be able to manage through it. As we get further in the year, we'll know

And speaking about provider taxes and provider tax programs, last night we got a couple of questions about the accounting for the California provider fee program, a couple of comments about that. As we understand, other public hospital companies this size recorded the California provider fee program in 2010. We prepared an extensive internal accounting analysis with exhibits to conclude that revenue recognition was appropriate for 2010. And Deloitte Touche, our auditors, concurred. From a perspective of faithful representation in financial statements, we've included 2010 was the appropriate period for recognition. There was a recent state of California letter, where the state of California Director of the Department of Healthcare Services gave us the authority to conclude on behalf of the state of California, stated all financial approvals were obtained as of December 30, 2010. From the state of California letters and state statute does not specify a final CMS approval had to be provided in written form. From the state of California letter, approvals were received in CMS on December 30, 2010, represented all final federal approvals, the last federal approval necessary to fully implement the program.

Accordingly, any payments made or to be made under the bill were or are no longer conditional as of December 30, 2010. And from a 2011 run rate perspective, EBITDA and EPS we think that the benefit of the California program from April 2009 to December 2010 should not be recognized as 2000 revenue EBITDA and EPS. And if included, should be excluded any valuation analysis or broker prospectus.

This is clearly a 2010 event, and people handle it differently. They handle it differently, but it's a very strange way of doing this.

Maybe if I could follow up. If you were just to try and summarize the overall impact on Medicaid pricing for all the states that you're baking into the guidance for 2011, is there a number that you could give us? Would it be positive, negative, and to what extent?

It would be a negative 2% to 3% on Medicaid revenue.

Okay, thanks a lot.

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

Thanks, good morning. Larry, I just wanted to follow up on your comments on commercial mix. I think you said it was 51% in the quarter. Am I correct in thinking that that is pretty much flat year-over-year versus down closer to 200 basis points for the first three quarters?

I think year to date, it's 50.6%, and managed care for the quarter is 51%. And I was comparing it m ore to what we've had in the first three quarters, which is encouraging to see that the quarter is better than the run rate for the whole year.

Is there any way that you could share with us that number on a year-over-year basis? I'm just thinking about inflection points here, Larry. And am I right in thinking year-over-year, that it was 51% in the fourth quarter of last year versus 51% this year?

I think in the fourth quarter of last year, it was 51% -- 51.2% - and this year is 51%.

Okay, so that's flat year-over-year on the quarter, where for the first three quarters it was down 200 basis points year-over-years. So it looks like a pretty significant trend change. I'm just curious, is there anything you would point to there in terms of what's driving that kind of inflection point?

I wouldn't get too excited about that. The economy is maybe improving, but unemployment is still around the 9% level. I would think until unemployment gets down to the 7% or 8% level, we probably won't see any meaningful volume out of it, which means commercial insurance companies are not insuring that many more commercial people when it's all said and done. So I wouldn't take too much out of that yet. We think 2011 looks a lot like 2010 in terms of unemployment.

On a year to date basis, I believe that same status of 50.6% to 51.9%, so the quarter was definitely better.

Okay. And, Wayne, just speaking to that on the unemployment side, I agree it's probably too early to call an inflection point, unemployment getting better. But you've seen a pretty substantial decline in the number of commercially insured out there over the last couple of years, especially switching over to Medicaid. I'm just wondering if you're seeing maybe the first signs that that's a stabilization there where you won't have that head wind of mix change going against you next year.

Yes, I think that's the case. I don't think unemployment is growing. It's certainly, it's coming down slowly, but surely. We have not had the adverse impact that some other people have had in terms of losing commercial patients. But I wouldn't get too excited about it yet because I think maybe you might be right. There might be some stabilization at this level, but I don't think we're going to see much improvement until we see unemployment come down.

And the spread on managed care and other admissions was a lot closer to the total this quarter than it was on a year to date basis, which this says the quarter was better from a managed care perspective.

Right. Larry, that's the last question I wanted to try to dig into here, given how everyone is very focused on utilization over the last couple of years and how it's moderated. Is there any way to give us some color there as far as what you saw on commercial volumes? You're saying commercial was closer to that 2% overall number rather than what we've been hearing in the industry is down 4% or 5%, 6% year to date?

Same-store commercial admissions were closer for the quarter, to that answer. It's still a bit worse, but they were much worse for the year compared to the 2.5%. So the quarter was better from a commercial admission perspective.

And if you look at it on a longer term basis, we've got a very positive trend in terms of commercial additions over the last four or five years. There are other people who have not had those kinds of trends. I don't know if it's our markets or what it is, but we've been fortunate, even with the downturn.

And you're correct. If I remember correctly, the commercial admissions were down 6.6 million people in '09, about 4%. The PIN numbers, I don't think are out, but if you just follow the managed care companies, which you do a good job of, they are clearly in better condition for '10 than they were '09.

Is there anything you saw in the quarter -- this is my last question -- is there anything you saw in the quarter there as far as what might have drove that change in commercial admissions improving in the quarter there? Anything you could add as far as how you are seeing the first 45 days of 2011 shape up from a payer mix perspective?

We don't usually get into trying to make comments for six or seven weeks at a time. That's usually not a good idea.

Okay. The fourth quarter then, can you talk about anything you saw?

It's better and it was pretty much throughout the Company. It just had better results. That's probably got a lot to do --.

But you tell me the real indicator in terms of commercial enrollment will depend on the employment. As more people get employed or go back to work, then the commercial enrollment will go up, which will drive the commercial admissions.

Absolutely. Thanks, guys.

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

Hi, thanks. Wayne, can I just ask, I think previously we've heard your comments that the jobs growth outlook gets meaningfully better, and the unemployment situation is starting to get a little bit more meaningfully improved at a 6% to 7% rate.

Yes, I think that's right. I think that's probably more accurate. I did say, 7% or 8%. I think it's much more like 6% to 7%. You're right.

Yes, because your markets are now down to, I think, 8.3% through the end of December. So I was just wondering if you thought that we were getting that much closer to an important inflection.

No, you're correct, you're correct.

Okay, great. And then question on the bad debt guidance. It's pretty moderate and your performance on bad debt has been obviously better than expected. But I saw that the receivables for self-pay ticked up sequentially into the fourth quarter. Could you talk a little bit about your collections trends and your expectations around collections for 2011?

Yes, I'm not for sure what you looked at for self-pay. I believe the self-pay receivables have actually declined in the quarter.

The allowance, the allowance as a percent.

The allowance went up, but the net self-pay receivable were actually down from the year-over-year and from the preceding quarter. Inflection rates are holding pretty strong. We've got a really good internal collection company that does a good job, and some very good, talented patient financial services people. I think we're in pretty good shape from our receivables perspective. But actually the net self-pay receivables were down from the quarter and down from a year ago.

Okay, and then on the bad debt expense, the expectation for further bad debt pressure in 2011 is pretty modest. Is there an expectation built in there that collections improve in 2011? And can you break out how much of your bad debt inflation is related to the Chargemaster?

Yes, usually it's a 20 or 30 basis points. It could be a little more if you put in more rates, but I would think on a common basis, it would be 20 to 30 basis points. We do raise our discounts occasionally throughout the year. I know we raised some in the third quarter in one of our states, which will affect us, but next year. As it relates to looking forward, I think that we believe we're doing a pretty good job of holding our collection rates stable, and we're doing a lot of concentrated effort to get our point of service, our efforts up. I believe for the year, we're over 13%, which the year prior to that, we were at 12%. Our collection company's doing a pretty good job of maintaining its collection rates. I do think based on our analysis of our top employers, the growth in deductibles was not as strong in 2010, at the end of 2010 to 2011. It was the preceding year. You have got the requirements about not changing the deductibles, there's still be a grandfather plan under the Affordable Care Act, so that's probably going to help a little bit.

Okay, thank you.

And we have time for one more question. Your last question comes from the line of Adam Feinstein from Barclays Capital. Your line is open.

All right, thank you. Good morning, everyone. Maybe just following up on a couple of things. Larry, maybe you could just go through how you're thinking about the components of revenue per adjusted admissions as you think about managed care, Medicare, and Medicaid. What kind of ranges can you give us there?

I think we expect to be somewhere in the 5% to 7% range for managed care, absolute rate increase, which would equate to a similar type increase. I would think our case pace would continue to get better by 50 basis on Medicare.Medicare is probably flat to slightly down. We said Medicaid would probably go down, so we're going to need some managed care revenue per adjusted admission. This year, I know our revenue per adjusted admission was up 4.5%. It would be similar to that, maybe a little bit less as a result of the Medicare being down a little bit. So we should have pretty good growth in the managed care revenue line.

Okay. And then your surgery volumes were up. You have mentioned earlier a lot of that was outpatient, and you also mentioned before that you still think the economy is having an impact and not expecting that to change. But it was a pretty strong surgery number. So I was just curious, would you guys say some of the surgeries were elective cases? How are you thinking about that? And I know you don't give volume necessarily on the surgical cases, but just trying to better understand thoughts in terms of some of those cases coming back.

Some of the orthopedic probably could be a little bit elective, but a lot of our surgical growth was outpatient. Although Inpatient had a better trend in the quarter than the year to date. We've lost some minor procedures to physician offices. We also lost some C sections. That pretty much counts for most of our surgical change. I would think if the OB stays keep getting a little bit better, maybe C-sections would not be down quite as much. But probably some of the movements to physician offices is probably going to continue.

Okay. And then maybe a final question. You guys have talked about some of the recent transactions in Marion and Bluefield. But maybe just a quick update in terms of how things are going with those deals, and also Mercy, whatever you're able to say. But just trying get you to update the opportunity for those deals and any updated thoughts would be great.

Yes, all of those are going well. As you know, all of those are single-digit opportunities for us. We think our model continues to work. Like I keep saying, we bought 54 or so over a 10-year period and another 52 in one fell swoop. We've been able to improve the margins all along. So the opportunity continues to be there for us. There are a lot of hospitals in the same position as all the rest of these hospitals that have had difficulty for lots of reasons. All the same reasons that people struggle and have been struggling in this industry. Which it makes it a great opportunity for us, and clearly we're opportunistic about this. So we're going to continue to do that and there are a number of good projects. Our pipeline is as deep as it's ever been. We don't see a big acceleration in pricing. There's been a couple of incidents where people have gotten excited and paid more than what we think we would pay, but as you know, we're disciplined about this. And, the other thing is, we're excited. And we are opportunistic and we're looking forward to getting to the table with Tenet. We think that's another great opportunity as we look to the future.

All right. Thank you very much.

And I'll turn the call back over to the presenters for any closing remarks.

Great. Delivering quality healthcare services in our markets requires an executable, predictable, sustainable strategy, and we continue to demonstrate that this strategy works. We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers, and chief nursing officers, and division operators for their continued support and operating efficiencies during this challenging operating environment. We're convinced that solid performance will propel the Company to another level of success, extending our leadership position in the healthcare facility sector. Once again, if you have any questions, you can reach us at 615-465-7000. Thank you very much.

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