Community Health Systems Inc (CYH) 2011 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you.

Lizbeth Schuler, Vice President of Investor Relations, please begin.

Thank you, Amanda. Good morning, and welcome to Community Health Systems' second quarter conference call. Before we begin the call, I would like to read the following disclosure statement.

This presentation may contain certain forward-looking statements provided by Company management. These statements are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, including statements regarding future operations, financial results, cash flows, costs and cost management initiatives and also be identified by the use of words like may, believe, will, would, expect, project, target, estimate, guidance, anticipate, intend, plan, initiative, continue, or words and phrases of similar meaning. These forward-looking statements speak only as of the date hereof and are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control.

These risks and uncertainties are described in headings such as risk factors in our annual report on Form 10-K and other reports filed with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions, and future financial position and results of operations may differ significantly from those expressed in these forward-looking statements in today's presentation. You are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented, and we do not have any obligation to and do not intend to update any of these forward-looking statements.

The presentation also contains certain non-GAAP financial measures. This presentation and the Company's earnings releases for the quarter and year ended December 31, 2010, and the quarter and year-to-date ended June 30, 2011, located on the Company 's investor relations page at www.chs.net, include a reconciliation of the difference between certain non-GAAP financial measures, with the most directly comparable financial measure calculated in accordance with GAAP. These non-GAAP financial measures should not be considered an alternative to the GAAP financial measures. References to Company or Community Health Systems used herein refer to Community Health Systems, Inc. and its affiliates, unless otherwise stated or indicated by context.

With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman, President, and Chief Executive Officer. Mr. Smith.

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

Larry Cash, our Executive Vice President and Chief Financial Officer is on the call with me today. The purpose of the call is to review our financial and operating results for the second quarter and the six months ended June 30, 2011. After the market closed yesterday, we issued an 8-K, including a press release, with our financial statements. For those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanies our remarks. I'd like to begin the call today with some comments about the quarter, then turn the call over to Larry, who will follow up with additional comments on our financial results.

Community Health Systems has delivered another quarter of solid financial and operating results. These results are in spite of the continued weakness in inpatient volumes and the challenges in the economy. Net operating revenues for the quarter ended June 30, 2011 totaled $3.4 billion, compared to $3.1 billion for the same period last year, an increase of 11.5%. Consolidated EBITDA increased 4.7%, from $442 million to $462 million.

Earnings per share from continuing operations was $0.81, versus $0.76 for the same period a year ago, an increase of 6.6%. Excluding the after-tax expense related to the Tenet lawsuit, shareholder lawsuits, and governmental investigations, our EPS for the quarter would have been $0.85. Net operating revenue for the six months ended June 30, 2011 was $6.8 billion, and EBITDA was $919 million. Earnings per share from continuing operations for the six months ended June 30, 2011 was $1.62, compared to $1.51 for the same period a year ago, an increase of 7%.

With that, I'd like to recap a few significant accomplishments for the quarter. Our acquisition of assets of Mercy Health Partners was completed on May 1, 2011. The assets include two general acute care hospitals; a regional hospital at Scranton, 198 beds; Tyler Memorial Hospital, 48 beds. We also acquired a special care hospital, a 67-bed, long-term acute care facility in Nanticoke, as well as other outpatient and ancillary facilities. Trail revenue was approximately $200 million, with a single-digit margin.

We now have 13 facilities in Pennsylvania. We have signed a definitive agreement to purchase the assets of Moses Taylor Health Care System in Scranton, Pennsylvania. This system has 217 beds in Scranton and a 25 bed hospital in Peckville, as well as a primary care and specialty practice, Physicians Health Alliance, with 14 locations. This acquisition is still subject to regulatory approval. We continue to look for opportunities and have a very strong and active pipeline. When this acquisition is complete, we will have 15 hospitals in Pennsylvania.

After the market closed yesterday, we announced that we've executed a definitive agreement to acquire substantially all of the assets of Tomball Regional Medical Center, located in Tomball, Texas, a rapidly growing community approximately 30 miles northwest of Houston. The 358-bed hospital provides an array of health services and sits on a 155-acre campus that also includes a cancer center, heart center, women's health center, outpatient surgery centers, and sports medicine center. The transaction is subject to the customary regulatory approvals. When the acquisition is complete, Tomball Medical Center will become the 19th Community Health System hospital and Inc. affiliated hospital in Texas.

We also announced that we have executed a definitive agreement to sell two hospitals in Oklahoma to Ardent Health Services. Ardent already had a four-hospital presence in the Tulsa market, and propose transaction complement -- I'm sorry, and proposed this transaction to complement their Oklahoma network. The projected sale price is a reasonable EBITDA multiple and for an amount greater than the stated net tangible assets of the facilities.

Physician recruiting has been an integral part of our operating strategy, and we are very proud of our success in this area. The Company recruited 658 new physicians for the six -- for the first six months, compared to 743 recruited for the same period a year ago. While the number of recruits is slightly behind last year, our turnover rate has improved. The third quarter typically represents our strongest recruiting quarter. Our recruitment target remains at 1,900 for 2011.

The Company is updating guidance. We have raised the low end of our guidance from $3.15 to $3.20, and our 2011 EPS guidance is now $3.20 to $3.35. Our 2011 projections exclude the estimated legal and other expenses related to the Tenet lawsuit, shareholder lawsuits, and government investigations.

I'd like to give you a brief update on significant litigation investigation matters that we have been working on. There will be more detail in the legal proceedings section of our Form 10-Q for the second quarter. First, discovery is continuing in the Baker Qai Tam case. This is a lawsuit in which the government intervened and involves Medicaid upper payment limit for New Mexico. The trial date has not been set. The motions and summary judgment are due in November.

With respect to the Tenet lawsuit, we filed our motion to dismiss their amended complaint at the end of June. At this point, given that we withdrew our offer to acquire their company, we believe there is no reasonable basis for them to continue to sue. Their demand for legal fees and other expenses seem completely contrary to the right of stockholders to nominate directors.

A number of lawsuits have been filed that mimic the allegations made in the Tenet suit. Also, a number of shareholder derivative actions have been filed. We expect these cases be consolidated into two separate cases, which will make them easier to manage. We believe these cases are without merit, and we will vigorously defend them.

There are no notable developments in the report -- in the government investigation that was initiated with the OIG subpoena we received in April. Of course, we are cooperating fully with the government, but at this point, we have only been providing requested documents. This is a very resource-intense activity and could take several more months to complete. It is far too early to predict the outcome of this investigation, as no medical records have been requested. We're also cooperating fully with the SEC investigation, which is following a similar track as the Department of Justice document production.

The Texas Attorney General investigation, which continues to be focused on the functionality and reporting capabilities of Pro-MED emergency room management software tool, is similarly still at the document production stage.

In connection with the May annual meeting of stockholders, there were questions posed about the absence of proxy statement disclosure of our Board of Directors and the audit and compliance committees handling of oversight on some of these matters. Of course, at the time our proxy statement was filed, we had not received the OIG subpoena or the Tenet lawsuit. Supplemental proxy materials will be filed to explain the chronology and the handling of the oversight of the audit and compliance committee. Because we believe this is of ongoing interest to our investors, we have added a section to our 10-Q that provides a summary and update on that committee's processes and oversight.

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

Thank you, Wayne.

Our consolidated admissions growth in the second quarter was up 0.6% compared to the same period last year. Adjusted admissions, which factors in outpatient visits, increased 5.3%. Our same-store admissions decreased 5.6% compared to the second quarter of 2010, and soft inpatient volumes continued in the second quarter. Our sole community provider hospitals were down approximately 200 basis points more than our non-sole providers, consistent with prior results.

The following contributed to the Company's decrease. Weather-related service closures and lack of flu, 30 basis points; lower admissions from women's services, including obstetrics and gynecology, 80 basis points; increased competition from a few hospitals from new services that occurred primarily to the second quarter, changes in physician relationships, as well as some physician practice acquisitions by competitors, 60 basis points. A reduction in one-day stays for emergency room with a corresponding increase in outpatient visits, 160 basis points; and reductions in one-day stays with no emergency room charge; that is, the patient was a direct admit through inpatient registration, we can expect an increase in outpatient visits, 100 basis points. We believe that our volume declined attributed to one-day stays can be due to two separate categories, patients admitted to the emergency room and patients that would've been admitted as direct admits and registered through inpatient registration.

Please note that approximately 60% of the second quarter total decline in one-day stays contributed two factors. An approximate 40% decline per inpatient surgery with a corresponding increase for outpatient surgery, and an approximately 20% decline in chest pain one-day stays. The third quarter 2010 revisions to removal of inpatient criteria to direct chest pain in admissions. We believe that we may have had a natural reaction to the publicity that contributed to our one-day stay decline.

Same-store admissions decreased 0.7% for the quarter. This was within our guidance of minus 1% to plus 1% for adjusted admissions. The second quarter we had good outpatient equivalent admissions growth of approximately 4.8%.

Net revenues to second quarter increased 11.5%, from $3.081 billion last year to $3.433 billion. On a same-store basis, net revenue increased a very strong 5.8% for the quarter, with inpatient revenue down slightly and outpatient revenue increasing over 10%. Physician practice growth is contributing to the strong outpatient growth.

Same-store volume -- surgery buying increased 2.1% for the quarter. The strength in our outpatient surgery, which increased, was driven by the increases in cardiovascular, orthopedic, and scopes. In the second quarter, we recognized a California provider tax revenue of approximately 20 basis points and a related provider tax expense of approximately 10 basis point. At the end of the quarter, we had received approximately 70% of the cash related to this program, and this treatment is in accordance with our revenue recognition policy.

For the second quarter same-store net revenue per adjusted admission increased 6.5% versus the same period in 2010, with a sequential increase of 1.9%. Our same-store Medicare case mix increased 1.9% versus last year. Our overall same-store surgical case mix increased 3.7%.

Consolidated reported EBITDA was $462 million for the second quarter versus $442 million for the same period a year ago, an increase of 4.7%. On a same-store basis, reported EBITDA was $464 million for the second quarter, increasing 4.3%. Our consolidated EBITDA would've been $468 million, excluding expenses related to the Tenet lawsuit, shareholder lawsuits, and government investigations, or an increase of 6.1%.

For the second quarter, EBITDA margin consolidated basis was 13.5%, versus 14.3% for the prior year. The decrease of 80 basis points is primarily due to the low margins of recently acquired facilities and expenses related to the lawsuits and investigations. Same-store EBITDA margin decreased 20 basis points to 14.2% compared to the quarter ended June 30, 2010, and this can be contributed to the growth in physician practices and also to the increase in bad debts.

For the second quarter, our non-same-store margin was 0.7%. Non-same-store margin includes acquisitions costs, excluding the Tenet acquisition costs, also the Tenet acquisition costs as well as systems conversions, and additionally the $6.2 million in expenses related to the Tenet lawsuit, shareholder lawsuits, and government investigations is included. Our consolidated EBITDA margin would have been 13.6%, excluding the $6.2 million of expenses for the various lawsuits and government investigations.

Consolidated operating expenses as a percentage of net revenue increased 80 basis points in the second quarter, due to the acquisitions and inclusion of the various legal expenses. A decrease in supplies and 90 basis point offset the 30 basis points in payroll and benefits, 70 basis points in bad debt, and 60 basis points in other operating expenses and rent. Our consolidated operating expenses included a $6.2 million expenses related to the lawsuits and investigations discussed earlier.

On a same-store basis, total operating expenses increased 20 basis points. Same-store payroll was flat, supplies decreased 80 basis points, and other operating and rent increased 10 basis points. The improvement in supply costs was primarily driven by lower implant costs, medical supplies, drugs, costs, pacemaker costs, and improvement rebates. Business taxes increased approximately 20% in the quarter, due to various provider tax programs. Same-store revenue minus bad debt increased 4.7% from second quarter, while same-store operating expense minus bad debt increased 4.7% and was flat for the quarter.

On a year-to-date basis, consolidated admissions increased 1.2%, and consolidated adjusted admissions increased 5.1%. Same-store admissions decreased 4.4%, and the following contributed to the decrease. Service closures, weather, and lack of flu, 40 basis points; lower admissions from women's services, 80 basis points; increased competition in a few hospitals from these services that had occurred prior to the second quarter and changes in physician relationships, as well as physician practice acquisitions, 50 basis points. Reduction in one-day stays for the emergency room with a corresponding increase in outpatient visits, 130 basis points; and reduction in one-day stays with no emergency room treatment charge; that is, the patient was a direct admit through inpatient registration, with an increase in outpatient visits of 90 basis points. Same-store adjusted admissions declined 0.2%, outpatient adjusted admissions increased a strong 4.5%.

Consolidated net revenue year-to-date was $6.8 billion, an increase of 10.4%. On a same-store basis, net revenue increased 5.6% for the first six months, and outpatient revenue increased a very strong 11.1%, including the growth in the physician practices. On a consolidated basis, net revenue per adjusted admission increased 5%. On a same-store basis, net revenue per adjusted admission increased 5.9%.

Same-store surgeries increased 2.1%, for a very strong increase in cardiovascular, orthopedic, and scopes. Our same-store Medicare case mix for the six months ended June 30, 2011 increased 1.8%. Our all-payer year-to-date surgical case mix increased 3%.

Consolidated EBITDA was $919 million for the first six months ended June 30. On a same-store basis, EBITDA increased a solid 6.9%. Consolidated EBITDA margin for the six months ended June 30, 2010 (Sic) was 13.5%. Same-store margin six months ended June 30, 2011 was 14.4%, an increase of 20 basis points compared to the period ended June 30, 2010. Non-same-store margin for the six months ended June 30 was a minus 5%, and again, consolidated EBITDA would have been $926 million, an increase of 6.6% without the expenses I discussed previously.

For the first six months, consolidated operating expenses percentage of net revenue increased 60 basis points from the prior year. Increases in payroll of 40 basis points, bad debt of 40 basis points, and other operating and rent of 30 were partially offset by a 50 basis point improvement in supplies. Same-store operating expenses declined 20 basis points, payroll decreased 10 basis points, supplies decreased 60 basis points to help offset an increase in bad debts. Same-store net revenue minus bad debts increased 4.9% year-to-date, compared to 4.6% increase in operating expenses minus bad debts, a net positive of 30 basis points.

For the second quarter, consolidated bad debt was 12.6%, versus 11.9% in the same period a year ago, an increase of 70 basis points. On a sequential basis, bad debt increased 60 basis points. Same-store self-paid admissions increased 3.5%, and year-to-date, consolidated bad debt increased 40 basis points, 12.3% versus 11.9%. Our combined consolidated bad debt charity administrator self-pay discounts, divided by adjusted net revenue was 20.5% year-to-date through June 30, 2011, and our combined consolidated bad debt charity administrator discounts as a percent of adjusted revenue were up 100 basis points year-to-date. The year-to-date increase consists of 20 basis point increase in bad debt, 30 increase in charity, and a 50 basis point increase in discounts. Consolidated cash receipts were 102% of collectible net revenue for the 12 months ended June 30, 2011, and our bad debt guidance range is -- remains 12.4% to 12.7%.

AR days were 47 at June 30, 2011, an increase of one day from the end of the year and same as the first quarter of 2011. The second quarter AR days were down one day from the same quarter a year ago. The allowance for doubtful accounts is $1.793 billion or 50% at June 30, 2011. The allowance for doubtful accounts and related contractual allowances for self-pay were approximately 84% of self-pay receivables as of June 30, 2011.

Community Health Systems continues to have a payer mix recorded at June 30 consolidated net revenue by payer source was as follows. Medicare 26.8%, Medicaid 10.1%, managed care and other 51.1%, self-pay, 12% of net revenue. On a year-to-date basis, the payer mix is as follows. Medicare 27.1%, Medicaid 9.9%, managed care and other 50.8%, and self-pay 12.2%.

Embedded in our guidance is an overall Medicaid decrease for changes in calendar year 2011, up 3% to 3.5% compared to the previous decrease of 2% to 3%. Please note that the various state Medicaid cuts will affect the second half of the year.

Cash flow from operations was $397 million for the quarter. On a year-to-date basis, cash flow from operations of $585 million versus $542 million for 2010, an increase of $42 million or 7.9%. The increase is primarily due to increased depreciation and amortization of $23 million, an increase in continuing net income of $12 million, income tax refund of $80 million. These improvements were offset by growth of accounts receivable of $19 million and changes in prepaid accounts payable compensation liabilities were approximately $50 million. The cash flow guidance remains $1.150 billion to $1.250 billion.

Total insurance for capital expenditures for the quarter that just ended were $198 million or 5.7% of net revenue. Year-to-date capital expenditures of $351 million or 5.2%, and replacement hospital expenditures included in the number were $48 million per quarter and $82 million, year-to-date. Our guidance now ranges from $750 million to $825 million, a reduction of $25 million on the high end.

Balance sheet cash at June 30, 2011 was $191 million. At the end of the quarter, the Company had available credit from the revolver of $710 million after outstanding letters of credit. Looking at the balance sheet, as of June 30, 2011, we had $1.072 billion of working capital and $14.8 billion in total assets. Total outstanding debt at June 30, 2011 was $8.852 billion, of which approximately 93% is fixed.

Our debt to capitalization at quarter end was 79%. At the end of the quarter, we were party to $5.350 billion in interest rate swap agreements unchanged at the end of the first quarter, and again, 93% of our debt is fixed. The Company repurchased approximately $50 million of or 1,763,000 shares back during the second quarter of 2011.

We have revised our guidance as follows. The expenses related to the Tenet lawsuit, shareholder lawsuits, and government investigations are excluded from our 2011 guidance. The revenue and EBITDA guidance has been lowered to reflect depending divestiture activity for 2011 and, actual activity. Please note we did increase the low end of our EPS range for 2011 to $3.20.

We have provided an estimate for a meaningful use in electronic health record implementation. We expect incentive payments recorded this revenue to exceed the related expense by five basis points to 1.58% of revenue. We did not recognize any EHR revenue in the second quarter of 2011.

We updated our Medicaid revenue decrease estimates. Several Medicaid decreases will be implemented in the second half of 2011, and just as a reminder that in the third quarter 2010, we recorded a 15 months for new provider tax program. We do not expect such a benefit in the third quarter of 2011. Please also note the third quarter is unusually seasonally lower than any of the four quarters.

Wayne will now provide a brief recap.

Thanks, Larry.

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

With that, I will now open the call for questions. If you would like to talk to us after this call, you can reach us at area code 615-465-7000.

(Operator Instructions) Your first question comes from the line of Tom Gallucci of Lazard Capital Markets. Your line is open.

Good morning, guys. Thanks for all the color.

2 questions if I could. First one, I thought it was interesting how you are framing the one-day stays into sort of the two categories there, from ER and then the other. Do you know the percent of the total one-day stays historically that have sort of come from one versus the other?

Some were in the 30% to 40% range, probably.

30% to 40% other or non-ER?

Yes. Yes.

Okay.

Direct admits, yes.

Okay.

You announced the acquisition in Texas. Wondering if you could give any more color on sort of that market, the opportunity and sort of multiples that you're seeing out there in the acquisition landscape in general.

We haven't talked about the purchase price, but what I will tell you is it a great opportunity, it's in a great location, it's about 30 miles north of Houston. It's on 155 acres, it's got a number of subsets of specialties. It doesn't need a huge amount of capital. It is a great operating opportunity for us in terms of improvements.

The market area, by the way, the primary area has about 218,000 people, expected to grow by 11% by 2015. Secondary area is 437,000, it is a bedroom community of Houston. We understand that Exxon is -- Mobile is relocating their Houston workforce, which is going to be about 8,000 new employees in the area, so we are pretty excited about it.

I will just say in terms of the process, it was a highly competitive process. It was run by Navigant. They are very careful and thoughtful in terms of how they run these processes. You have to work your way through the APA, all the above.

The process worked. We got a unanimous vote by the medical staff and a unanimous vote by the Board of Trustees in terms of this acquisition. So, we are pleased about it, they are pleased about, the employees are ecstatic about it. We just heard yesterday how pleased the employees are about it, so we're excited about the opportunity.

Great, thanks for the color.

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

Hi, everybody.

Two things, if I could ask real quick. Larry, I think you referred to it when you were talking about the one-day stay change, but maybe more broadly, when you think about the different constituencies, payer discussions, physicians, your staff. Obviously, you had a lot of noise that you worked through in the quarter from Tenet, from a regulatory inquiry. Are you sort of back to normal, do you feel like, with your people in the field?

Or can you sort of tell us how the flow of inquiries are coming in from those guys? Are they back to focusing on the job at this point? Or is it still something you're watching closely?

Yes, A.J., let me start the conversation here. What we have tried to do, and I think we've done a pretty effective job of isolating the issues around the Tenet lawsuit and the government investigations here at the corporate office and we are managing those here in a consolidated way. We're not hearing a huge amount of discussion when we go out and talk -- or we ask our executives, there's not a lot of discussion at the hospital level. They are singularly focused on getting their job done and providing high-quality care and getting good results.

So, I think it's a modest barrier here in terms of -- as things continue to go along. But it's certainly not disruptive. And in terms of acquisitions, which is sort of the next part of that, I mean, it's certainly not disruptive in terms of operations. But in terms of acquisitions, we are very straightforward with that. We lay all this out as we did at Tomball and Scranton, and it's not really been -- again it is kind of like a modest barrier, it has not been a major detractor. What -- but we know that we lost a good acquisition opportunity to HMA, which has done a good job, and they did a good job in terms of selling what they can do and accomplishing Knoxville. But that was right during the middle of all the heat around this early in April, in mid-April.

So, as long as our detractors and don't do other kinds of things that stir up the markets, I think we are on track and we believe have a good, solid acquisition pipeline. And we think will continue to be able to acquire, and obviously, we think we can get our operating flows.

I had a second, A.J. I think you mentioned it's about managed care. I think we are doing well with managed care. We are doing the contracts, getting new contracts, getting increases, and there's been no really big issue brought up about this by the managed care companies. To the extent that anyone has any questions, we would address those, but we are doing a good job in managed care. People in that area are handling it quite well, and we still expect to get the 5% to 7% increase we have been getting historically, and we are renewing our contracts as expected.

Okay, and just one other one.

Probably -- this is another sort of big picture question. I guess as I look at the results that people are putting -- posting in terms of divergences and acuity trends, inpatient volume trends, and surgical medical mix, among the public companies. There's probably as much divergence this quarter as I've seen in a long time. Do you guys have any thoughts about why people are seeing such different trends?

Well, I know we've got a mixture of hospitals between urban and non-urban. Our non-urban volume is going down a little more than others. I know we are seeing a fair amount of movement from an inpatient to outpatient. I think others are seeing it too. They might not be talking about it, but others are seeing it.

We're fortunate that our Medicare case mix was up and our surgical case mix is up. We did have a little bit movement, a few more medical DRGs, not much. I think its 75% to 80% of our business has stayed in that range. In surgery there's 20% to 25%. It's hard to describe what other issues may have, but I think, at least in our situation, we've been fortunate to have good intensive growth, good revenue, good outpatient growth, and pretty good expense management.

So, the other thing I think, A.J., that's impacting this -- clearly, the world is moving to outpatient as quickly as it can. Managed care companies are, Medicaid programs are, but you also are having a number of physician practices that are being acquired. The net revenue is now going into a lot of outpatient business as well. So, that may be driving it a little bit. But it's hard to determine by Company but they are doing in terms of physician acquisitions.

Okay, all right. Thanks a lot.

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

Thank you.

I wanted to just triangulate on a couple of comments that you have made. You guys highlighted, as headwinds of volume, this change in physician relationships and things that some of your competitors had done. But then, I think also you said that your physician retention was actually improved during the quarter. And I guess, I'm not sure how those two things go together. Can you just verify that?

Yes, first of all the competition was in very few hospitals, and we decided to carve it out. We have not really talked about that. It's not something that we often see happen, but we did have a little bit of competition that started earlier in the year for our new service, such as the surgery center or physicians -- that invested in a surgical hospital and also in a couple of situations where a competitor made things a bit better.

Physician relationships may not mean they left our medical staff, but just may not be admitting to us at the time. And clearly we had a couple of places where a physician practice acquisition was done by our competitors. This is in 5 or 6 hospitals, but it did amount to about a 60 basis point decrease, and since the volume was down, we thought we would get a little bit more color and some things we are seeing.

Okay, but you are saying outside of that, retention is -- how do you --?

Well, this is in 5 or 6 markets. The retention is down for all 130 -- retention is better and improved for all 130 hospitals. This was just a 5 or 6 hospital situation.

We also seem to be recruiting more nurse practitioners or PAs, as well, but we think we have a good shot to get 1,900 -- last year was a huge year for us, but we still think we're on track to get there.

Okay, so I guess when we think about some of the ways, if you've obviously just want to understand how this situation -- the investigation could be impacting the Company. You've done a great job of outlining the impact on volumes, we can see that. You addressed -- doesn't seem to be really impacting your ability to do deals, although it comes up. It sounds like it doesn't impact your physician relationship. It is not impacting your managed care pricing. Is there anywhere else that you talk about this potentially being an impact or where you would expect it to flow through if it was to?

Well -- go ahead.

Just looking to say, these issues are carved out all sort of occurred prior to the second quarter, but they did affect our volume in the second quarter. So, they're not something -- there's not in an investigation. I think the physician recruitment at this point said we're 50 below first quarter, second quarter. If you they go look at the healthcare practitioners we recruited, which can help, they're up about 100 over a year ago. So, that shows the growth there. I think you've hit upon it. You've got the physician relationships. Acquisitions are doing good, we're still keeping retention of our employees, it's doing well, we're growing the revenue well and most importantly, managing our expenses well.

Just around the employees, for example, we just got back our surveys, our satisfaction surveys among our employees, and we had an 84% satisfied rate among our employees, which is pretty phenomenal when you think about it. So, this is an area of concern, but it's not an area that's disrupting operations.

Okay, great. I think in the past, maybe you said it to somebody but I just didn't catch it, but in fact you kind of made some commentary about volume growth and differentiated between the urban and non-urban markets. Any difference in trend there?

Yes, last quarter, and even last year, we saw the non-urban markets decline a little bit more than the urban markets where we didn't have sole providers. And I know that the urban markets that report, at least one that's reported had pretty good volume growth; more so than the non-urban, most of the non-urban markets. And I think it's probably the economy affects it, maybe a little bit more in those types of situations also, and the lower growth rate in the population. We're just saying that some of our decline may be different than others because we have 80 of our hospitals are sole providers.

Larry, why don't you comment on -- about adjusted admissions, because that seems to be the metric --

Yes, the when we put more interest on here in our own Company's adjusted admissions, and we were down 0.7% and 0.2% year-to-date, right within our guidance. We've had really good outpatient equipment growth, and that's in both urban and non-urban markets. And I think that will continue, and to us, it's well over 50% of revenue growth. And it's sort of been a much more correlation with EBITDA growth, adjusted admissions is, than admissions are.

Okay, great. Thanks.

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

Thanks. Larry, I wanted to cut into the one-day stay discussion just a little bit differently. Can you talk a little bit about your Medicare or managed care denial rates? Just curious if that's changed materially in recent months with what we presume has been somewhat increased payer reviews?

Yes, I don't think the Medicare denial rate has changed much. We are, like everyone, seeing a little bit of activity with the racks. It's a little too early to know exactly how that's going to end up, but we are seeing some. I think the managed care is probably a little bit better. We have not talked about it, but it's probably a little bit better in the quarter there, and we will continue to watch that denial rate, somewhere around 1%-plus or -minus a little bit, and it's probably a little bit better.

Which says, if you don't get in a situation with managed care where you are arguing about the appropriateness, then you will have a little bit better, lower denial rate and you also have a process, will be a little better. One of the reasons that we made the decision to go to InterQual back in the first quarter of 2011, before all of this started was to have a better, smoother process with a managed care company.

So, the 1%, that's your final denial rate?

Yes.

And that hasn't changed?

Actually a little bit better than that it's around that number.

And that hasn't trended--

It's been a little better in the second quarter, not a lot, it will probably get better as the year goes on.

Okay. And, just one other question just with regards to Tulsa and I guess maybe I'm trying to poke a little bit at the third quarter, you didn't give exactly guidance around the third quarter. But, I just want to get a sense for how much revenue and earnings you sold and again, what you are assuming for M&A in the back of this year. I guess you could argue that you've hit your goal already but just anything with the combination of the moving pieces to help us think about the third quarter.

Yes, the ardent transaction, if we take it out of the operations in our opinion would be revenue consensus for the quarter. When you back out, it's approximately $50 million a quarter. We backed out $20 million of EBITDA for the year so somewhere in the $5 million range, plus or minus something was in guidance. So, the actual results for the third quarter do not include anything for the 2 hospitals in Tulsa or the previous transactions from the first quarter. It's related to acquisitions, I think what you have in the second quarter was Scranton closed on May 1, it's probably approximately $15 million to $16 million of revenue a month. So, you will have an extra couple of months in the third quarter, you didn't have in the -- or one month of the third quarter you didn't have in the second quarter. I doubt of the other 2 transactions will not have any activity in the third quarter.

Okay. Any other moving pieces just to think about? So, as we look at our models for the upcoming quarter?

Well, we did, I think we carved out a couple of transactions there netted to about $1 million that will not be there, but the revenue and expense related there will disappear.

Okay, and I guess maybe then ask one other quick one. Just on the non-same-store hospitals, you noted 70 basis negative margin and looks like maybe $1 million to $2 million of an EBITDA loss. Can you walk us through kind of those lawsuits and expectations going forward?

Yes, I think the legal fees that we incur in this quarter, in a 6 -- (inaudible) guidance that's going to continue, we have no reason to think it's going to go down.

And that's in your non-same-store.

That's a non-same-store. We've got the acquisition cost, the system conversion cost, will probably continue I don't think that Tenet acquisition costs are there will not continue. We will incur some money on finalizing the 2 transactions we just announced in the legal fees. You also have Scranton will be in there, they wanted Marion, South Carolina, which we bought last year in July. So, it will flow into same-store. That's about $60 million to $70 million of revenue and then you'll probably have, like I said, a full quarter of Scranton and you understand the form will stay in non-same-store as will Bluefield, for all of the third quarter.

Gary Taylor, Citigroup.

Hi, good morning. Pretty good results with all the noise in the quarter. Just a couple questions, when you talked about the Medicaid cuts, 3% to 3.5% for calendar '11, are you saying the back-half Medicaid rates be down 6% to 7%? Or I assume you probably had some states where you've taken a little bit of a hit in the first half on the Medicaid side?

Yes, we have had some and I think it's the whole calendar effect but the number of reductions in the back half of the year will be greater. I don't know if it's 6% or 7%, as far as the back half, it's going to be greater than the first of the year. Because if you look at why we don't have much in Florida, that was there, you've got Texas, and we also have some changes in New Mexico that affected us in the back half of the year.

Right. On the net benefit from high-tech in the back half, is that still just Medicaid or is there -- is that a combination of some Medicare and Medicaid?

We got an estimate -- mixture of estimate of Medicaid and Medicare. Most of it is Medicaid and I think it will continue to be part -- might be a little bit of Medicare but most of it will be Medicaid, especially on the high end. And, that's also net of expenses. We'll have -- just to give you a little bit of color, all the [menial] per use products we now have received stage 1 certification. 17 states that we operate in are involved in the state incentive programs for Medicaid, that means we've got an opportunity to get some dollars there, so I do expect us to see something. Maybe a little bit in the third quarter, more in the fourth quarter, and if it's at the higher end of the range, probably more Medicaid dollars that would be Medicare dollars.

Last question, just going back to the one-day stays, which contributed 260 basis points of the admissions decline, but I think one-day stays only represent 15%, 16% of your total admissions, at least on the Medicare side. So, the math suggests one-day stays are down somewhere between 15% and 20% year-over-year. Is that about right?

That probably down 15% to 20% year-over-year, and I think we're probably, the way you look at Medicare admissions, running something around 12% probably of the Medicare admissions were historically running 13% to 14%.

And, can you comment or do you care to comment -- I mean how much of a drag on same-store revenue do you think that other headwind that has presented?

Well, we try to point out that a fair amount of that is surgery, 40% and we're getting outpatient surgery. Clearly for managed care some of those are payments or as good as or better. Some are a little bit worse. We had very fortunate good same-store revenue growth. We also pointed out that a fair percentage is chest pains which is the difference between the inpatient payment rate, for most payers is not that big. But we hit 5.8% same-store revenue growth for the quarter. I think there is a likelihood built our guidance we'll stay in the 4% to 5% range for the year. So, we think we'll continue and we do expect the one-day stays to continue to decline a little bit, throughout the year.

Presumably, there's an even stronger number ex this headwind?

They could continue to climb a little bit, I think as long -- from getting the outpatient payment rate in the managed expenses to we should be okay. I think, our overall revenue growth was 5.6% for the first 6 months, it was by 5.8% for the quarter when all this happened.

One more quick one, I'm sorry, I just thought of. We haven't heard anyone talk about any expectations around the inpatient final rule that ought to be out on Monday. Have you guys had any indication or hope from the Association or the Federation that we'll see any movement closer to flat on that, or is your expectation it will look like as proposed?

I think we've always got hope but I don't know if we had any more color we can add to it. We've tried to embed what we think is going to happen into our guidance. Unfortunately this year it's only a quarter of it but if it stays around 0.5% reduction, then we'll just have to continue to manage expenses better. But we really don't have anymore color other than that. Wayne, do you have any?

No, I don't think there's enough good news around reimbursement right now.

True. Okay, thanks.

Matt Borsch, Goldman Sachs.

Hi guys, just wanted to get a better sense of what your outlook is on the volume side, and can you comment at all on what you've seen in the month of July, so far?

As a general practice we don't think commenting about 3 or 4 weeks is in the best interest of everyone. Clearly, July starts off of a holiday which was a Monday, so it would be more challenging there than it is on a strong Friday, Saturday, Sunday. Which is not actually -- it's not strong for our business, so we don't generally do that. Our outlook is still minus-1% to plus-1%. We're 0.2% negative for first 6 months. We've had some drop in -- about a 4% drop in admissions, a little bit more in the non-urban markets, in the urban providers we have competition.

That's probably going to continue from the admissions drop. We don't see much change in the economy if we manage to continue to see a little drop in the one-day admissions. But I think from an outpatient perspective -- more importantly, from a revenue perspective, we've put out guidance which shows we think the revenue will continue to be strong. And I think the outpatient volume that we're seeing will continue, we'll have a little bit of growth in physicians. We have very good OR, radiology, pharmacy, lab and ER outpatient growth and we think that will probably continue.

May I just on top, I think you can assume as long as the economy is in pretty poor shape, unemployment rates of 9.2%, I've been saying this all along, that 2011 looks a lot like 2010.

I think the thing that has changed a little bit is there certainly seems more movement to outpatient for everybody and I think that's a trend that will continue. It's not only managed care companies and Medicaid everyone else pushing for outpatients. Technology continues to improve, that's moving things to outpatient. That's why we are now beginning to think that adjusted admissions is probably a more important metric than just admissions. But I don't see changes in terms of admissions until unemployment rate comes down fairly substantially. It's based -- it's all around how may people --.

We did see that the managed care and other with up 51.1% for the quarter, better than it was year to date. I think it was better than it was last year, which is a positive. We see that managed care was up a little bit, last year was 50.6%. So, we're moving up a little bit in that category and that's a good earnings contributor when managed care mix is better.

And would you describe your rate negotiations with managed care as about status quo relative to a year ago? Or what would you spike out that's maybe changed in the nature of those discussions?

I've got to be careful what I say to a managed care analyst, I think. About 5% or 7% is what we've always said, and we clearly think it will continue to be in that range and we're a good percentage done of our contracts reported 90%, 95% of the 2011 contracts done, and we're 70% to 75% done for 2012. But, clearly, managed care is going to do what they need to do but we're in a decent position with a lot of sole-provider hospitals, a lot of good presence as we continue to build networks. I think we'll be okay and hope to continue to do well.

One of the things, if you look at our acquisition pattern here recently in terms of Spokane. I mentioned several times over the last number of quarters, in terms of the networks that we built in Spokane. That's what the Scranton Wilkes-Barre area is all about, is developing a network that can make us very competitive in the markets. So, that we are not excluded from any managed care company and that we can demonstrate quality at the same time. So, you will see us work hard to continue to develop those networks and it's like adding another hospital in Texas is an important part of our network.

Great. Thanks, guys.

And we have time for one further question. Your last question comes from Gary Lieberman, Wells Fargo.

Thanks for taking the question. Larry, I think you said that your total guidance or total expectation for Medicaid cut was 3% for the year and down 6% to 7% in the second half. Is that any different from what your prior expectation was for it?

Yes, I think what I tried to say was the change in calendar 2011 is 3% to 3.5%. Previously we thought it would be 2% to 3%. So, if you use the midpoint of that, it's going from 2.5% to 3.2%. I do think we saw some reductions in a couple of situations, a little bit more. That's embedded. When we've raised the guidance to the low end of the guidance to 3.15% to 3.20, we were aware that Medicaid cut would be a little bit more in the last half of the year.

Any states, specifically, that caused the change?

Well, we'd originally guessed at taxes at 5% and maybe we're not good guessers but it turned out to be 8%. And we've had some reductions in New Mexico that were more than we thought. I think we sort of said that could be there.

There may be some provider taxes coming, a couple of states that might help us at the end of the year, we'll just have to wait and see if that happens. But right now, we're thinking it's going to be somewhere between 3% to 3.5% for the changes that happened in 2011, affecting the revenue in 2011. Some of that will carry over into 2012. Hopefully with the [F-map] issue behind us and state tax receipts get a little better, 2012 won't be as challenging as 2011.

Okay, great. Thanks a lot.

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

Thank you for spending time with us this morning. Our consistent ability to drive revenues and achieve solid margins in this environment demonstrates solid execution of our centralized operating strategy. We want to specifically thank our management team and staff, and hospital chief executive officers, chief financial officers, chief nursing officers and (inaudible) operators for an excellent operating performance for the second quarter.

I also want to thank our very loyal and supportive medical staffs and great employees. We mentioned earlier that we had an 84% satisfaction on our surveys with our employees. We're extremely appreciative of the good work that you're doing every day for the patients that we serve. We remain focused on our business strategy and improving results. Once again, if you have any questions, you can reach us at area code 615-465-7000.

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