Community Health Systems Inc (CYH) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the call over to list Lib Schuler, Vice President of Investor Relations for Community Health Systems. You may begin your conference.

Thank you, Martina. Good morning and welcome to Community Health Systems' third quarter conference call. Before we begin the call, I would like to raise 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 can 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 positions and results of operations may differ significantly from those expressed in any 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 is for the quarter and year ended December 31, 2010, and the quarter and year-to-date ended September 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 the 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 to review our financial and operating results for the third quarter and the 9 months ended September 30, 2011. Larry Cash, our Executive Vice President and Chief Financial Officer is with me on the call today. 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 with some comments about the quarter and then turn the call over to Larry, who will provide additional comments on our financial results.

Community Health Systems has delivered another quarter of solid financial and operating results. The results are in spite of continuing weakness in inpatient volume and the challenges in the economy.

We believe that the natural reaction to all of the adverse publicity and criticism during the past 6 months has contributed to some of our decline in inpatient volumes, particularly in smaller facilities that have twice the decline as our larger facilities.

Net operating revenues for the quarter, September 30, 2011, totaled $3.4 billion compared to $3.2 billion for the same period last year, an increase of 8.7%. Consolidated EBITDA increased 2.7%, from $441 million to $554 million. Earnings per share from continuing operation was $0.86 versus $0.80 for the same period a year ago, an increase of 7.5%.

Excluding the after-tax expense related to the Tenet lawsuit, shareholder lawsuits, and government investigations, our EPS for the quarter would have been $0.90. Net operating revenue for the 9 months ended September 30, 2011, was $10.2 billion, EBITDA was $1.4 billion. Earnings per share from continuing operations for the 9 months ended September 30, 2011, was $2.49, compared to $2.31 for the same period a year ago, an increase of almost 8%.

With that, I'd like to highlight a few significant recent accomplishments. Effective October 1, we acquired the assets of Tomball Regional Medical Center in Tomball, Texas. The 358-bed hospital is located approximately 30 miles northwest of Houston and provides comprehensive healthcare services on a large campus that also includes a cancer center, heart center, health center, outpatient surgery center, and sports medicine complex. The hospital has earned numerous clinical quality awards.

We have a definitive agreement to purchase the assets of Moses Taylor Health Care System in Scranton, Pennsylvania, a 2-hospital system. This acquisition is subject -- is still subject to regulatory approval. Our acquisition of these -- of the assets and Mercy Health Partners, also in Scranton, was accomplished on May 1, 2011. This was a 2-hospital system, plus a long-term care facility, as well as other outpatient and ancillary services.

As has been disclosed in the press, we've entered in 2 exclusive discussions for acquisitions. One is in Roswell, New Mexico, and the other one is in Reno, Nevada. We continue to look for strategic opportunities and have a very active pipeline.

As previously disclosed, effective September 1, we sold 2 hospitals in Oklahoma to Ardent Health Services. Ardent already had facilities present in the market. Additionally, on October 22, we divested Cleveland Regional Center in Cleveland, Texas. The buyer was New Directions Health Systems.

Physician recruiting has been one of our operating strengths, and we are proud of our success in this area. The company recruited 1362 new physicians for the first 9 months, compared with 1440 recruited for the same period a year ago. While recruitment is slightly behind last year's level, we have also added an additional 81 mid-level practitioners. Our recruitment target remains 1900 physicians for 2011.

The Company is updating guidance. We have increased or 2011 EPS guidance to $3.30 to $3.39, excluding items described in the third quarter 8-K filing. We also provide a midpoint guidance for EPS for 2012 of $3.60.

I'd like to spend just a second elaborating some of our quality initiatives. We've had 18 consecutive quarters of inpatient, and 13 consecutive quarters of outpatient, for measure improvements. The results are both above the national average.

41 hospitals received top performance on key quality measures from the Joint Commission, or approximately 10% of those that were recognized. Community Health Systems hospitals represent about 2.5% of hospitals universe in the United States.

We have implemented proven methodology to reduce readmission rates. These procedures includes post-discharge call and medication reconciliations. We have completed a trial of infection surveillance software system that we rolled out to most of our hospitals in 2012.

The system is currently installed. It will be rolled out in 2012. The system is currently in our Pennsylvania hospitals. And we've also partnered with a national vendor for evidence-based order sets that represent over 200 standard groups -- standardized groups of orders for specific conditions.

I'd like to give you a brief update on the significant litigation and investigation matters that we have been working on. Additional detail will be found in the Legal Proceedings section of our form 10-Q for the third quarter.

First, the New Mexico Qui Tam Case is wrapping up the discovery phase this fall. This is a lawsuit in which the government intervened and involves the state Medicaid upper payment limit program. We will file a motion for summary judgment later this fall.

The Tenet law suit is still in existence. However, our motion to dismiss has been on file since the end of June, and the judge held a hearing on September 8. We continue to believe that there's no reasonable basis for this lawsuit, and that it is contrary to the interest of stockholders for a company that is subject -- of shareholder proposals to be able to sue and recover against those proponents.

There are no notable in the securities class actions case or the stockholder derivative cases, and we have not yet been presented with a consolidated complaint in either of those group -- of cases. The cases mimic the allegations made in the Tenet suit, and we believe them to be without merit.

We continue to work cooperatively with the Department of Justice and the OIG on their investigation. There was some activity last week regarding a motion filed by the government in the Reuille's case. This is the case that, in April, shortly after the filing of the Tenet lawsuit, the government, which had previously decided it would not intervene in, sought an 180-day stay.

The filing last week sought to either transfer the case to the middle District of Tennessee, or for an additional 180-day stay. We told the government that we did not object to an additional 90-day stay, but could not consent to a transfer of the case because we didn't have enough information about the reason for a transfer.

The Reuille's case involves only patients at Lutheran Hospital in Fort Wayne, Indiana. While some of the allegations in that complaint speak to time periods after our acquisition of Triad, the case also addresses Triad's conduct prior to our acquisition, including the use of observation and employment decisions about Ms. Reuille.

Our objection was not sought to delay the investigation. We sought early meetings - we sought earlier meetings with the Department of Justice and have been seeking to work with them to fully investigate any theories of liability against our hospitals.

To date, we have provided a large number of documents. Although we would like to see this resolved quickly as possible, these things do take time. Similarly, we have been providing documents to the SEC in connection with their investigation.

The Texas Attorney General's investigation, which commenced in November 2010, remains focused on documents related to the Pro-MED emergency department software tool. Our Board of Directors and the Audit Compliance Committee of the board, as well as our management team, continue to be very focused on these investigations.

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

Thank you, Wayne.

Our third-quarter consolidated admissions decreased 0.7% compared to the same period last year. Adjusted admissions, which factors in outpatient business, increased 4.9%. Our same-store admissions decreased 7% compared to the third quarter of 2010. And soft inpatient volumes continued in the third quarter.

Our sole community providers are down over 200 basis points more than our sole -- non-sole providers, consistent with previous quarters. Same-store admissions for hospitals with annual revenue less than $50 million are less than double the decrease -- or, have a double decrease of those hospitals compared to the hospitals above $50 million.

The following specifics contributed to the decrease. Weather-related, service closures and lack of (inaudible) - 100 basis points. Lower admissions in women's services that includes obstetrics and gynecology - 60 basis points. Increased competition from new services at a few hospitals that occurred prior to the second quarter, changes in physician relationships, as well as some physician practice acquisitions at a few of our competitors in several markets, about 50 basis points.

Reduction in 1-day medical admissions for (inaudible) - 150 basis points. Chest pain admissions accounted for 40% of the decline. Lower surgical inpatient admissions with a corresponding increase in outpatient surgical visits of 160 basis points, and cardiac surgical procedures represented approximate 45% of the decrease. Same-store adjusted admissions decreased 1.1% for the quarter. In the third quarter, we continued to have good outpatient equivalent admissions growth, approximately 5%.

Net revenues in the quarter increased 8.7%, from $3.16 billion last year to $3.436 billion. By some consensus estimates did not adjust last year's revenue of $3.252 billion per divestiture in 2011 that we announced.

On a same-store basis, net revenue increased 3.8% for the quarter. Our revenue growth in the third quarter slowed from the first 6 months of 2011 due to decline in third-quarter Medicaid reimbursement of 130 basis points. A slowing of the growth rate in Medicare case mix of 10 basis points, although we still had growth, and an increase in our self-pay discounts of 20 basis points. Our revenue also reflects a slowing of our self-pay revenue in physician practice, revenue of approximately 80 basis points.

For the third quarter, same-store revenue per adjusted admission increased to 5% versus the same period in 2010. In the third quarter of 2010, we had some same-store revenue for adjusted admission growth of 5.2%, compared to first 6 months of that year of 3.9%, or 130 basis point increase. Same-store surgery volume increased 2.8% for the third quarter.

Approximately $40 million of governmental healthcare information technology incentives for Medicaid and Medicare are included in the third quarter revenue, and we did received about 1/3 of the cash for this to date. This governmental revenue helps to offset challenges from Medicare and Medicaid reimbursement, and is part of a 4-year program that will continue through 2014.

Our same-store Medicare case mix increased 1.1% versus last year. Our all-payer same-store surgical case mix increased 3.1%. Consolidated EBITDA was $454 million for the quarter versus $441 million for the same period a year ago, an increase of 2.7% on a same-store basis. Reported EBITDA was $460 million for third quarter, increasing 3.8%.

Our consolidated EBITDA would have been about $460 million, excluding the $6 million of expenses related to the Tenet lawsuit -- $460 million if you exclude the Tenet lawsuit, the shareholder lawsuits, and government investigations, or an increase about 0.7%.

For third quarter EBITDA margin on a consolidated basis was 13.2% versus 14% for the prior quarter. A decrease of 80 basis points is primarily due to low margins of recently acquired facilities to growth and bad debt expense and expenses related to the Tenet lawsuit, shareholder lawsuits, and government investigations.

Same-store EBITDA margin was unchanged over the year at 14% for the third quarter. Our non-same-store margin was minus 4.3%. Non-same-store margin includes hospital or other acquisition costs, as well as the $6 billion (sic - see press release) of expenses related to investigations. Our consolidated EBITDA margin would've been 13.4% excluding the $6 million of expense for litigation.

Anticipating an accounting change that will take effect in 2012 for reporting presentation of bad debt. Our same-store margin, excluding bad debt from both revenue and operating expenses, would have been 16.2% versus 16%, a 20-basis point improvement for third quarter and a 30-basis improvement on a year-to-date basis - 16.4% versus 16.1%.

Consolidated operating expenses, a percentage of net revenue, increased 80 basis points in the third quarter of 2011, primarily due to our recent acquisitions and growth in bad debt, a decrease in supplies of 30 basis points, and a decrease of 10 basis in other operating expenses and rent helped to offset an increase of 40 basis points in payroll and benefits and 80 basis points in bad debt. Our consolidated operating expenses include the $6 million investigative expenses.

On a same-store basis, total operating expenses were flat year-over-year. The increase in bad debt was offset by a decrease of supplies of 60 basis points and other operating decreases in the areas of malpractice, medical fees, utilities, and marketing. A reduction in supply expenses helped in improving our drug expenses, as well as various other improved pricing.

On a year-to-date basis, consolidated admissions increased 0.5%, and consolidated adjusted admissions increased 5%. Same-store admissions decreased 5.2%, and as I previously discussed, our small hospitals with less revenue were right at about $50 million, had a decline about twice (inaudible) the hospitals on a year-to-date basis, over $50 million.

And the following contributed to decrease. Service closures, weather and lack of (inaudible) - 60 basis points. Lower admissions from women's services - 75 basis points. Increased competition, as described earlier in a few markets, 50 basis point.

Reduction in one-day medical admissions from emergency room, 140 basis points, driven by decrease in chest pain admissions of approximately 40%, and lower surgical admissions, with a corresponding increase in outpatient surgical visits of 150 basis points. Approximately 40% can be attributed to decrease inpatient cardiac surgeries. Same-store admissions declined 0.5%, and outpatient adjusted admissions increased a strong 4.8%.

Consolidated net revenue year-to-date was $10.2 billion, an increase of 9.8%. On a same-store basis, net revenue increased 5% from first 9 months. On a consolidated basis, net revenue per adjusted admission increased 4.6%. On a same-store basis, net revenue per adjusted admission increased 5.6%.

Same-store surgeries increased 2.3%, with a very strong increase in outpatient cardiovascular and (orthopedic) procedures. Our same-store Medicare case mix for the 9 months, ending September 30, 2011, increased 1.5%. On a same-store, all-payer, year-to-date surgical case mix increased 3%.

Consolidated EBITDA was $1.372 billion for the 9 months, ended September 30, 2011. On a same-store basis increased -- EBITDA increased a solid 5.8%. And the consolidated EBITDA margin for the 9 months, ended September 30 was 13.4%.

And the same-store margin for the same period was 14.3%, an increase of 10 basis points compared to 2010. Non-same-store margin for the 9 months was a negative 4.8%. And again, the consolidated EBITDA would've been $1.385 billion, an increase of 5.7%, without the investigation expenses.

For the first 9 months, consolidated operating expenses as a percentage of net revenue increased 70 basis points from the prior year. Increases in payroll of 50 basis points, bad debts, 60 basis points, was partially offset by a 40 basis point improvement in supplies. And same-store operating expenses declined 10 basis points. Decreases in supplies of 50 basis points and decreases in other operating helped to offset the increase in bad debts.

For the third quarter, consolidated bad debt was 13.1% versus 12.3% for the same period a year ago, an increase of 80 basis points. On a sequential basis, bad debt increased 50 basis points. While same-store self-pay admissions decreased 6%, same-store self-pay adjusted admissions increased 3.6%.

Year-to-date consolidated bad debt increased 60 basis points from 12% to 12.6%. Our combined consolidated bad debt, and charity administrative self-pay discounts divided by adjusted net revenue was 20.5% year-to-date, through September 30, 2011.

Our combined consolidated bad debt and charity administrative discounts, a percentage of adjusted revenue, are up 140 basis points, year to date. Year-to-date increase consists of 60 basis point increase of bad debt, 80 basis point in discounts.

Consolidated cash receipts were 102% of collectable net revenue for the 12 months ended September 30, 2011, and our bad debt guidance range has been increased to 12.6% -- to 12.8%.

Total AR days were 47 as of September 30, 2011, an increase of 1 day from the end of the 2010, and unchanged from the second quarter of 2011. Allowance for doubtful accounts was $1.840 billion, or 50.9% at September 30, 211. The allowance for doubtful accounts and related contractual allowances for self-pay was approximately 84% of self-pay receivables at September 30th 2011.

Community Health Systems continues to have a favorable payer mix for the quarter ending September 30th. Consolidated net revenue by payer source was --Medicare was 26%, Medicaid 9.5%, managed care and other 52.2%, and self-pay 12.3% of revenue.

On a year-to-date basis, Medicare is 26.8%, Medicaid 9.7%, managed care and other 51.3%, and self-pay 12.2%. Please note that the various state Medicaid cuts have already, and will continue to affect the second half of the year. These are the cuts we have recently been talking about.

Cash flow from operations was $236 million for the quarter. On a year-to-date basis, cash flow from operations is $820 million versus $898 million for 2010. This change is primarily due to an increase in continued net income of $16 million, depreciation and amortization $34 million.

Offsetting these increases were $65 million increase in receivables and approximately $100 million, due to the timing of payroll in the third quarter of 2011. Value at year-end of cash flow impact from payroll will be minimal. Cash flow guidance remains $1.15 billion to $1.25 billion.

Capital expenditures for the quarter just ended were $181 million or 5.3%. Year-to-date capital expenditures are $533 million or 5.2%. Replacement hospitals were approximately $44 million for the quarter and in $126 million year-to-date, and we've lowered the high end of our CapEx guidance about $25 million. The guidance now ranges from $750 (inaudible).

Balance sheet cash at September 30, 2011 is $266 million. At the end of the quarter, the Company had available credit of from the revolver of $700 million after outstanding letters of credit. By looking at the balance sheet as of September 30, 2011, we had about $1.133 billion in working capital and $14.8 billion in total assets.

Total outstanding debt at September 30, 2011 was $8.83 million, of which approximately 91% is fixed, and our debt to capitalization at quarter end was approximately 79%. At the end of the quarter, we're (inaudible) $5.15 billion in interest rates (inaudible) down $200 billion from the end of the second quarter, and again 91% of the debt is fixed.

The company repurchased $36 million or 1.706 million shares back during the third quarter 2011. For all of 2011, we repurchased 3.47 million shares for approximately $85 million.

We've revised our guidance as follows. Increased EPS guidance of 3% on the low range, from $3.20 to $3.30. And just note that it is up 5% from what we told people a year ago at $3.15. Expenses related to the Tenet lawsuit, shareholder lawsuits, investigations are excluded from our 2011 guidance, and also excluded from the midpoint of our 2000 EPS guidance of $3.60. We've increased our bad debt guidance to reflect a slight slowdown in collections to 12.6% to 12.8%.

Incentives for meaningful use are currently projected to be at least 35 basis points of revenue. We did recognize about 40 million in the quarter. Previously the guidance was about 30 basis points of revenue, but we expressed guidance (in) meaningful use incentives, less expenses, at 15 basis points of revenue on the high end.

Spending on meaningful use assets to date -- we spent about $100 million. We'll spend about $150 million through the end of the year, and probably spend something in the neighborhood $300 million to $400 million by the end of 2012. In looking at meaningful use incentives revenue, consider operating expenses. We had over 2000 people working on meaningful use, and on that we have capitalized (that spending done as described above). You've got to consider related interest depreciation and amortization when looking at earnings per share.

We perceive this quarter better than some of the research report indicates. Also, we provided 2 pages of detail guidance information for 2011. This should be utilized, and we have consistently provided such information for several years.

Wayne, will you now provide a brief recap? --

Okay, Larry, thanks.

Our results for the third quarter 2011 further [extend -- cut off] Community Health Systems' consistent record of earnings growth in spite of challenging markets. While our volumes have been constrained by the macroeconomic environment, we believe these results continue to demonstrate the underlying strength of our operating model.

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

(Operator instructions) Your first question comes from the line of A.J. Rice from Susquehanna Financial Group. Your line is open.

Thanks and hello, everybody. Just maybe to probe first of all a little bit on this, I guess one of the biggest pressure points on your admissions number -- inpatient admission is this pressure on 1-day admissions and the outpatient commensurate pickup. I guess a couple ways to ask the question -- you sort of alluded to, you think that maybe some of the people in the field are reacting to some of the publicity. Have you -- as you discuss with them, do think that's a permanent change in behavior? Or do think that's a short-term thing? And do you also believe that maybe the switch away from Pro-MED to InterQual is having some impact there? And what are the prospects about -- of anniversarying this and starting at some point to see a moderation in the impact of that?

Yes, A.J. I think, clearly, when you have as much criticism that we've received from our detractors that we're going to get some response in the marketplace and some of our employees. And we're seeing some of that. Some of this, by the way, when you break it down, has to do with just the movement from inpatient to outpatient. I think other companies are experiencing the same thing when it comes to -- around cardiology and PCIs. There's a lot of movement there going on anyway. But there's no question that we've had some adverse impact related to the issues that -- around the Tenet lawsuit.

Having said that, I think this will moderate. I think it will, over the next couple of quarters, things will look different than they do today. But, I think we have to manage what we have to manage now. And, you can see that we've done a good job managing through this, in terms of our expenses are in line. You know, we've got good cash flow, we are doing a great job in terms of physician recruiting. And by the way, we are not having difficulty on the marketplace in terms of acquisitions. So, even though we have these detractors that continue to say the things they are saying, which we don't believe have a lot of merit, we continue to perform, I think, extremely well in this environment. Larry, you want to --?

Yes, let me just speak to InterQual for a second. We now have got most everybody converted to InterQual, a fair amount in the second quarter, finished in the third quarter. In the last quarter, the InterQual group probably had a -- hospitals inside that group already had -- about 60% of those hospitals had a decline. In the hospitals we converted probably had about a 75% decline. There's lots of wide variations in the 2 groups, and so you've got some up, some down, some bigs, some still growing. And also, the InterQual probably had an easier comp in 2010, so I'm sure that had some effect, but I would say, as Wayne said, it's hard to put a number on, and we think a lot of that's got to due to this reaction when you have a lot of publicity about you.

Yes, it's hard to conclude there's any specific thing is at issue here. It's more of the combination of all the negative press.

Okay. And then, maybe I'll ask about the guidance. I know -- admire the fact that you threw out a number for 2012. I think you'll probably be the only one that'll do that. And I understand that traditionally you been somewhat conservative. I guess, is there any high-level input that you can give us about what you're assuming, about the economic backdrop, maybe high-tech revenues next year versus this year, similar amount or not? Any flavor at a high-level on what's embedded in that initial 360 number?

Well, let me just start in terms of so-called economic backdrop. I don't see things improving greatly, in terms of the economy, any time in the relative near future. The unemployment rate doesn't seem to be coming down that rapidly. We've said all along that until we see meaningful change in unemployment, it's pretty hard to see a lot of growth in commercial business across the country. I think that applies to everyone. I think we still face pretty difficult economic times.

We have all the uncertainty around the super committee, which no one knows whether they are going to act or not act, when it's all said and done. And all the other issues going on with Medicaid cuts. So, I think it is a challenging time for us. Having said that, I think we are still a very strong operator and are doing all the right things. We're acquiring good properties, we're recruiting a lot of physicians, we're managing our expenses. I think we will continue to be successful. Larry?

Yes, a couple things. There was a Medicare update -- will be a Medicare update here in October, which will help 2012, starting October. I think the Medicaid challenges that we are seeing today will be better in 2012, as you know, because you'll anniversary some of those. You have got some carry over in Florida and Texas, but a lot of Medicaid reductions that took place effected us, probably will not be as large in 2012. Second, I think you've got some new provider tax programs coming in, some states -- Oklahoma, Indiana, maybe California, which we think will come in the first part of 2012. I don't think they'll be there this year. We always -- we've got about $1 billion dollars of acquired revenue with low margins, which we thinking we can continue to improve, based on history.

The -- I guess the question of the day is about high-tech. We've got about 35 basis point revenue but into this year's guidance. And, that's an at-least number. We've got $40 million -- we're very focused on that program, we're trying to improve that program, trying to get as much revenue as we can from it as fast as we can. If we get more revenue in 2011, then you could get a little less in '12, but I would say the revenue would be at least as much and probably a little bit more in 2012.

When you think about earnings-per-share, you've got to consider the operating expenses, which -- there's a lot of estimates out there. You use 50%, that gives you a chance to have some flavor of what it is, but you've also got to consider the depreciation, the interest and the amortization on all the capital you're going to spend. So, I would not think that the 360 is greatly affected by how much high-tech revenue you're going to have on an earnings-per-share level. It may help EBITDA some in 2012. We haven't put out EBITDA guidance. If we do, we'll give you range for high-tech dollars, though.

A.J., just one more comment on high-tech, since we seem to be getting a lot of questions, and there may be some confusion around this. I think a number of companies who have already reported had high-tech in their earnings, number one. Secondly, I think companies going forward will clearly have high-tech in their earnings in the future. And, if I think about this, you look at the environment we operate in, we've had 130 basis point decline in terms of Medicaid in this quarter, which is -- Larry, $42 million?

$42 million --

$42 million or whatever it is, and this is kind of an offset. I think in the future -- this is just Wayne Smith's view of this -- but, I think in the future, high-tech will be the bridge to healthcare reform. It's going to be 3 or 4 years out because we have such tough operating environment. High-tech is going to turn into a very positive thing for this industry, I would think, going forward.

Great. Thanks a lot.

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

Thank you. Good morning guys. I guess, to follow up, since you just mentioned high tech. So, you guys broke out the impact. How should we think about Q4? Most of the impact -- most of the numbers you broke out, that's impact for the third quarter. So -- but, will there be some in the fourth quarter also, Larry?

Yes. If you take 35 basis points revenue, you get close to $50 million, and then we're at $40 million now. So, we've embedded about $10 million in high-tech revenue. You've got some operating expenses and some fixed cost also. But I can tell you, Adam, we've got a lot of people working on this. And if we can go get more revenue and get it done in December, the fourth quarter, we'll do that. We'll disclose what it is and there will be some expenses. For that, we'll be actually taking revenue away from 2012. This is a program which, I know you're aware, that's going to be there for 4 years, and so everyone is going to start having to talk about this. And we'll be disclosing the revenue. In the fourth quarter, we'll talk about what people expect for 2012, and we'll talk about it -- and it's also going to be broken out in our Qs going forward.

Okay, great. And then you guys have done a good job on the cost management, the other operating costs and some of the other cost line items. Maybe just talk a little bit about what's going on there and some of the initiatives you have in place.

Yes. First of all, our -- if you look at our cost and supplies, as far as, one, we've done the best job and we had a lot of various reductions in the quarter on other operating expenses. Overall, if you take our operating expenses less bad debts, we had an increase of 2.2%, and the revenue was 2.5%, so we did a really good job of holding the costs down for the year. If you look at it in the case of -- we had some improvements in cardiac contracts with pacemakers and drug [alluded] stents. We had a few of our orthopedic contracts we renegotiated, and got a benefit for them. We've done a good job of moving some cost down on the procedure trays and, spine costs and trauma.

Our Chief Personnel Officer is doing an absolute really good job of hitting his goals this year. He's been a big contributor to our success on operating expenses, [too. Also] the man hours per adjusted admission, when you consider the growth in case mix, we've done a good job on man hours per adjusted admission. Payroll doesn't look like it's quite as good as it really is, because we're climbing over a lot of growth [in employee positions]. Our average salaries are probably around 2%, which is probably as good as anybody. We've done a good job of controlling our health insurance and workers comp. I think all in the 2% we got, or 2.2%, is a really good contribution from all the people working hard on expenses.

Adam, this is an opportunity for us to toot our horn here a little bit, but one of the things, as we've said all along, we have not cut our 401Ks, we have not had major layoffs around the country. Having said that, we had an employee satisfaction survey in the last couple of months, and we a 67,000 employees respond to it, and we got a 85% positive satisfaction. I think that speaks to the strength of this Company.

Okay. Great. And let me just -- follow-up question. So, Wayne, maybe just give us your thoughts in terms of Washington, how you see things playing out, and just any updated thoughts as the process continues to --?

I had lunch this week -- I was at a lunch in New York with Senator McConnell, and I asked him specifically, what do you think it is going to happen in terms of the super committee? He believes there is a good chance that they are going to report something out. What that might be, he doesn't know, of course, but I suspect if they report something out, it probably will be more than the $1.3 trillion threshold. I actually don't -- and I said to him, I don't see how that can happen when Republicans want entitlement reform and Democrats want tax increases. I think that's a conflict. It is very hard to resolve. I personally think there's much more probability that it will go to sequester.

Having said that, there are a couple of other things that have happened recently in terms of -- yesterday, or whenever the discussion was -- in terms, of Moody's and S&P relating to the government again. And that could be pressure to get this committee to respond. Other than that, I think we're in for a very choppy, difficult period until post-election. After post-election, you can tell me who's going to be the President, and who is going to have the Senate, and I can give you a better idea, in terms of how this is going to fall out.

Adam, I'll make one comment. I know that if the sequestering cut of 2% is put in place -- you've written about it, and others have -- at least, just right now, the market basket update, if you consider all the factors, should be close to about 3% next October. So if you do a 2% reduction, it'll actually go in place probably January of 2013, from that perspective. So if that happens, you will get the 3% increase for a few months, and [to that effect is] somewhere around 1%, which is what we're going to have this quarter -- or, what we had last October.

Alright, thank you very much.

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

Thanks. I just want to go back about to your commentary that you had on the call, as you talked about the variations you were seeing in some of the markets and as it pertains to volumes. And, I realize -- very difficult to get precision with this, but you did talk to the overhang of the investigation and such. Would there be any reason while that particular -- why that particular impact would be having more effect on the small hospitals than in the larger hospitals? Or, would you see that as totally separate -- that that's kind of more consistent across the whole system, and the smaller hospitals are varying for other reasons?

I think when you think about small hospitals, they have a higher percentage of non-intense admissions probably, and I think that causes the effect on them to be a little higher percentage on their volume. They've also have a little bit more flu and they generally have a little bit more OB business, which is probably unrelated to the investigation. I would think that the smaller hospitals with smaller volume probably have less intense business, so the effect on them could be a little bit greater than other places, especially say, in the area of chest pains.

In -- so, okay, as particulars, that comes out. But, as a related -- is your view here in terms of just -- that there's an impact also from just avoidance because of the issues created by the investigation? When I think about a full community hospital, it's the only guy in the market, there are just fewer places to go. I'm just a little surprised to see more impact on that, if it was just avoidance, or --.

I think what you probably have is possibly more people instead of being admitted, they're treated on an outpatient basis, and [that's happened on] the inpatient surgical admissions are going over, and that's probably all throughout the Company. I would probably set it to drop in the -- 1-day medical admissions for the emergency room is a little higher percentage, but we're probably seen that drop throughout the Company.

John, having said -- saying this just a little differently. I think there is, as everyone I think has acknowledged -- there is a general trend moving to outpatient. I think what has happened in terms of our situation, based on the fact that we've gotten all this negative publicity -- that's gotten accelerated a bit because -- that's already trend that's happening. But, I think it's been accelerated because of the heightened awareness around this, because of the negative publicity.

That make sense. So your view would be the behavioral change has been more apparent in the smaller hospitals perhaps because of their mix? And not necessarily just a higher avoidance of members -- sorry, of patients coming or physicians referring.

Yes, I think their mix is differently -- that you'll have because, all this is chest pains. They've probably got more, and some of its other categories. I think probably in the surgical, there's probably a bit more of a higher mix in the larger hospitals.

And anecdotally, have you been able to see whether this -- it would sound like this is mostly behavioral change -- in particular, in terms of how things are treated when they present. But, have you seen more avoidance -- have you been able to pick up avoidance in terms of shifting share to other facilities, or has it been more just how that particular admit is classified?

I don't think the publicity has affected it that much. We have had some little bit more competition. We called it out at about 50 basis points, both quarter and year-to-date. That's only at a handful of hospitals there. I will say, we've been talking about the 1-day admission and growth and observation I think since the first part of 2009. Now it's accelerated a little bit this year, but it's been a decline that we've been talking about for some time. So --

And, I would say John, there's not a lot of consistency here. Our facilities are different ups and downs and arounds and everything else across the country, there's a lot of differences here.

And, I'm aware that at least 3 other public companies talked about it for a while. They put -- part of them quantifying it now, but I think other people are probably having some of the same 1-day admissions. Especially as a result of managed care's efforts and [rack] efforts and all of that.

Right. Okay, that's helpful. And then, would you -- is your '12 sensitized? As kind of that initial view that you persist at these, with this kind of level of pressure, through '12? In your initial EPS view?

Well, I think what -- instead of giving a specific answer -- we're operating around about between a minus 1 and a plus 1 adjusted admissions range, or sort of close to the middle of that. I think we would generally probably go into thinking about it being close to that. And if the admissions grow a little bit, we probably lose some of the outpatient growth. But clearly, we've had a lot of movement in the last 3 years from inpatient to outpatient that's probably going to continue there. But, I do think we would have less challenges from inpatient probably, but we may have also less outpatient growth next year.

Great, thank you.

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

Thanks, good morning. Maybe just following on some of these volume questions -- you break out some of these other pressure points, the OB area, and competition from other hospitals, and some changes in some physician relationships through acquisitions of physicians. Can you speak to when you see some of those things anniversarying, so we can get a little better understanding of where we are in that curve?

Well, unfortunately, they're weather-related and service closures, they come and go. And we think, if you close the service, you ought to disclose the [head effects]. And the weather-related shouldn't happen for awhile, but we get, I think, floods and some tornado effects in this past quarter. The women's is -- a year ago, we were down about 10%. We are down about 4% now, so that's probably a little bit better. Hopefully -- well, I don't know what this flu season will be like, but we lost about 9% of our flu/respiratory volume in the quarter. And we'll see how this next goes. I think the competition will anniversary itself in the first part of 2011. And as I said, the other 1-day stays and the surgical inpatient admissions should begin to anniverse themselves in the first part of -- in the first half of 2012.

Competition anniversaries in 2012, just to be clear there?

Yes.

Okay.

First quarter. They should anniversary themselves in the first quarter for these locations.

Okay, that's helpful. And then on the collection side, the bad debt side -- it sounds like the more -- the increased outpatient brings a little bit difficulty in collecting. Is it the bigger copays and deductibles there, or what's the dynamic, and what can you do to combat it?

We actually had our own self-pay after insurance. Our deductibles and copayments for the quarter year-to-date are about 12.7% of our payments, and last year they were 12.4%. For all of last year, they probably turned out to be about 12%. I would hope that our self-pay -- pure self-pay collections get a little bit better. We were running close to 8% the last couple years. We were running a little less than that in this last quarter, and we've got a lot of efforts to try to get that. Hopefully, we'll have a little bit better result in the fourth quarter than we had in the third quarter.

Okay. And then, final one. Physician recruiting, just curious -- you've talked about increased practitioner recruitment over time. Just wondering what's driving that, and if you could speak to, on the physician side, the percent that's employed, if that's rising were not? Thank you.

The number of physicians is increasing. I think we are up to about 2,300 physicians now, out of our little under 16,000 number of positions probably. I would assume that the nurse practitioners, who -- number one, they're available. They work well. They do a lot of things that doctors can do. And we see that as a good way to have healthcare services without having to pay the full cost of an employed physician. Wayne, you want to add anything to that?

No, I think it's a trend for the future, and I think we are trying to get ahead of the curve here. When you end up with 32 million more people in the system, you've got to find alternative ways of providing levels of services, and I think that's one way that you do it. And, I think that will continue to grow as time goes along. We're doing fine in terms of the recruiting side of it. You know, like everybody else, we wish we didn't have to employ quite as many as we do, but it's economy related, so we will continue to be both offensive and defensive as it relates to physician employment. But I think we're on a good track, and we're doing well.

Okay, thanks.

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

Okay, thank you. I appreciate the comments about these headwinds on the 1-day stays -- the view is that they'll start to moderate over the next few quarters. Are you seeing any indication of that already, because it looks like that headwind has increased over the last couple of quarters? Are you starting to see a change in that, or is it just a matter of anniversarying and the comps getting easier?

Well, I think that we did make some internal changes to our [look book] criteria about a year ago this time that anniversaries now. And we will -- we probably had about a 200-plus basis point reduction in the first quarter of 2011 all in. And we're learning more on that now, so I think when we get to the first quarter we will have a little easier comp from that. I do think the first half -- we will hopefully see the type of reductions we are seeing today.

Also, Kevin, keep in mind that we have been under attack since April -- a pretty strong and vicious attack for the first couple of, 2 or 3 months. So, this is not like it's been an extended issue. We did -- we were down 5.5% last quarter and down 7% this quarter. I think -- a couple of you all said that we should expect this. We didn't think we should have, but it clearly is unintended on our part, but intended in somebody else's part to adversely affect our business. But, having said all that, I think it will -- as Larry said, next year will be a different year.

I guess, is the view that Q4 will see a similar issue to Q3? Or will it be even -- better or worse, or is it really next year that you'll start to see the things improve?

I would imagine our admission challenge will continue into the fourth quarter.

Okay. And then, just trying to understand a little bit about the economics of a lot of this volume, because 7% decline in admissions is a really big number. Obviously, you're picking up -- some of that's converting into outpatient. How do we think about the profitability of the volumes that you've lost? And, at what point and what types of volumes, do you get more concerned about? Because you've been growing EBITDA pretty well with this headwind. I just want to understand a little bit about the economics of what you've lost and when you might get worried about the volumes really [not] making a headwind?

I think -- we do carve out chest pains. Chest pains probably are, from a Medicare perspective anyway, are $2,000 per admission, a little less than on an outpatient than inpatient. The managed care and the Medicaid varies by state, varies by contract, but clearly in the chest pain situation, we are losing some. If you look at our fourth -- our third-quarter surgical components, clearly our inpatient gross revenue decreased, outpatient increased pretty good. The outpatient revenue increased about twice what the inpatient increased on a gross basis. First comment was about units. If you look at the inpatient per case, it's about 30% more than the outpatient per case, from a gross perspective and similar statistics. The quarter is actually a little bit better from an outpatient perspective. If you look at how much revenue we're losing -- we're losing inpatient revenue, but we are up over 10% outpatient revenue growth. A little bit of that is clinics, a lot of it is just pure hospital business.

I think we've done a good job -- other than the Medicare difference, and there is a little bit of difference in Medicare. I think there's not as much difference in the payment rate between and inpatient surgery and outpatient surgery or chest pain admissions. I wouldn't comment that some of our drop in surgeries are cardiac related. I believe other people have talked about it and have had some challenges on case mixes as a result for it. We've actually had a growth in case mix -- in our case mix for cardiology, even with the drops that we've had. Our Medicare case mix is up probably -- for cardiology, it's probably up about 4% for all payers, and about 2% for Medicare. So, we've had not only good case mix growth for cardiology case mixes. Growth has been pretty good.

The other thing I would say is from an inpatient to the outpatient piece of this, in terms of -- our fundamentals are still very strong and our outpatient growth, is twice or three times now in terms of the inpatient side of that. That's a trend for the future obviously. But the underlying fundamentals in terms of expense management and physician recruiting and all the opportunities that we have in our markets are very sound for us for the future.

Okay. Then my last question here on the payer mix side of things. I guess the self-pay up -- I can understand that. But the government volumes, based upon our surveys, and what some other companies have said, seem to be growing faster than commercial. But, it looks like from a payer mix perspective, commercial increased and government dropped. Any color on that trend?

The Medicare revenue -- and you are looking at our revenue payer mix, I believe and we were at 26% versus 27% last year and probably 26.8% year-to-date. The revenue per unit was roughly flat or slightly down in the quarter for Medicare -- and actually the Medicaid reimbursement was off quite a bit. So, when you look at the payer mix, we give you the revenue data, and our Medicaid payment per admission dropped as a result of some of the reductions we got in Medicaid. The Medicare is -- and a little bit of our Medicare is in managed care. We don't pull it back into Medicare, we leave it there because we negotiated with the payers -- managed care payers, and we probably had a little bit of movement from there to the managed care on a revenue payer mix perspective. I think the bigger drop was in the Medicaid. I think Medicaid is 9.5% this quarter versus 11%, and I think that's a more result of the payment rate we got from an overall admission perspective. Medicaid stayed about 18% of our admissions.

Okay, great. Thanks.

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

Hi, good morning. A couple questions. I guess, just going back to the high-tech thing, because I -- obviously it's an issue where it sounds like your view and maybe the street's view is different on how to understand that. I have one question and one suggestion. I guess the suggestion is, if we had some more detailed disclosure of revenue expense, DNA, interest, capital it would be a little easier to carve out what the recurring impact is, and I know no one else has done that. So, I'm just throwing that out there.

But my one question, IT -- is there some IT expense that actually goes away, so when we get -- by the time you achieve all the targets to hit meaningful use and you get out into14 or 15, is there a material piece of recurring IT spend that goes away? Because talking to some other companies, I've felt like the answer was, we will never spend less in the future on IT than we do -- than we do now. It's just going to be a growing part. So, certainly the revenue once we get 3 or 4 years out goes away, but is there -- there's an expense piece that you think falls away as well?

One of the things I would say, Gary, is -- number one, we think this program is going to run for about 4 years, so we are going to be talking about this for a long time in the future. Having said that, the idea here is productivity and efficiency within the system, so theoretically you should, after you spend -- and all of us are going to spend a lot of money on this, and all of us are going to get a lot of money back from the government on this -- but you should get some productivity out of it in the future, which should reduce some of your expenses. I don't -- in terms of capital spending, that's a different matter. But I would think that we would get some clear improvement in terms of productivity. We've certainly would hope we would, based on how much we're spending.

The guiding principles of the group working on this is to go both efficiencies in healthcare delivery and productivity, so that's in the guiding principles that the committee working on it have set up. I think that current expense that goes away is all your training, and if you read anything about the doctors who went, they'll lose 20% to 30% productivity. We've got the training we've got to do with nurses and other --

They lose that productivity on the front end?

Yes. And they'll lose that. And when that goes out -- and plus, you also have the training expenses. Just -- that's what's driving some of the expenses, all this training that goes on here. Plus stuff with travel and stuff like that. You won't have that type of implementation cost, it's not capitalizable.

I would -- back to your first comment -- I did try to say we'll spend about $150 million by the end of the year next year, somewhere between $300 million to $400 million. Gary, that's probably a 5 to 7 year amortizable life. You know, and you can make assumptions. If you spend $150 million next year, it is $300 million, $400 million cumulative, then you can make some assumptions on how much depreciation and amortization and interest cost to be on that. We had said earlier -- maybe we didn't say it very effectively, but we thought we'd probably spend over $100 million this year for healthcare IT and probably an amount for software and other cost that are capitalizable and -- maybe that didn't [rush] through it correct, because we are still --.

Is that -- is that all capital cost, or is that --?

That's capital cost. I think that's -- people -- some would ask me, why would the government give you a payment when they know there's some -- not as much operating expense going to be made because, you've got to spend so much capital. And that capital's an investment we either [may or may not] make over the next 3 or 4 years, and we're setting up to do that. And there is some interest -- that's why I don't think it's a big affect on our extra shares. Everybody else does. It's because of the interest and the depreciation you've got, and all the training costs you've got. I did say -- I think I said awhile ago, we had over 2,000 people spread about working on this program, and they were in all kinds of different areas, some here in the corporate office, some in the field, some physicians, and some contract help. I can tell you that I approved the growth of people in this corporate office, and it's IT. It's now lawyers, it's not accountants, it's not people working on -- other like operations people.

Thank goodness it's not accountants. (laughter)

Yes, we have too many accountants.

So, on the operating expense piece, so the capital piece, I hear you, and I do recall you talk about that before. And the operating -- I mean, can you say in 2011, on labor and other expense, there's an extra $X million versus 2010 and that partially offsets?

In looking for 2012, I would expect the operating expenses to be something -- because you've got a full year there, instead of just a partial year. How you do it -- I think, our analysis is the operating expenses will be at least 50% of incentive payments we get for 2012. And then after you consider --

Some other people have used that.

Yes, I think other people have used it, too. It might be a little less than that for us this year, just because some of the early dollars will be Medicaid, but I do think that's a general good rule. Some of our talents here have worked up and it was reviewed. I think we're comfortable with it. I think that hopefully will hold. I really don't think it is in our best interest to try to take a project -- and think about the people you're training and trying to say, well let's put your cost over here in this bucket, and this cost over here somewhere else. There's a lot of estimates that go into that. And I think that it clearly was of some help in the quarter. It wasn't near as much as a lot of people who tried to eliminate $40 million of revenue. That's just absolutely wrong.

And so, it sounds like the answer to my -- I appreciate that. The answer to the question -- to the long-term question, it sounds like is -- maybe you'll never have a smaller IT department or spend less on IT, but the clinical efficiency that comes out of all this hopefully is going to be positive in terms of profitability.

And administrative.

(multiple speakers) We will try to try to reduce the spending on IT as this winds down unless new projects come in its place. You know, we fortunately have a good IT department that has done a lot of good conversions to try or conversions we've done -- and other stuff. So, we've got -- we brought a lot of people in. And we'll be bringing a lot of people in between now and the end of the year to get ready for a very busy 2012. Because you've got the stage when you got to get done for Medicare. The Medicaid is a little easier to get done, but the stage one -- we did have some stage one Medicare this quarter. We will have some next quarter.

Gary, of all the headwinds that we have going on in this industry, this is one of the few things that looks like it's relatively positive to get us through the next 3 years or 4 years to get the healthcare reform and get more volumes.

I certainly don't disagree that it is real cash, and it's a positive. Can I ask one more small question? Appreciate it. On New Mexico, we think it's roughly 4% of your beds, and if we just assume Medicaid is 10%, which is your general average, it would imply roughly $15 million, a quarter of New Mexico Medicaid. And so the question is, sequentially is there a big change in UPL or how that's getting paid? I guess I'm trying to think about was there a larger sequential New Mexico Medicaid impact than we might be thinking of, just using the back of the envelope numbers?

The Medicaid percentage and Mexico is at least twice the Company average, and maybe 2.5 times from a revenue perspective. So, that would change your answer. There was some changes throughout the year. We had some changes last year in the fourth quarter. They changed -- the state changed the way managed care would work as it relates to outpatients, and that's cost us some money and it's affected the first couple of quarters of this year, and a big amount this quarter. There were some reductions. It's a program that starts on July 1, and there were some reductions on July 1 -- probably some supplemental payments which have not been received for 2011 that we would've got last year. So, a lot of the portion of our $40 million reduction is in New Mexico. Once that's over, those reductions hopefully won't continue to be reductions. It will be a headwind for 2012 if we can start -- continue to get what we are getting today, but New Mexico was a pretty high component, but it is a lot more Medicaid business in New Mexico than you estimated.

Right. Okay, great. Thank you.

Thank you.

I will now turn the call back over to Mr. Smith for closing remarks.

Thanks again for spending time with us this morning. Our consistent ability to drive revenue between cost effectiveness and environment demonstrates solid execution of our central operating strategy. We want to specifically thank our management team staff, hospital chief executive officers, chief financial officers, chief nursing officers and our division operators for their excellent operating performance for the second quarter. We remain focused on our business strategy and improving our results. Once again, if you have any questions you can reach us at 615-465-7000.

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