Community Health Systems Inc (CYH) 2011 Q4 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' fourth-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Lib Schuler, Vice President of Investor Relations of Community Health Systems. You may begin your conference.

Thank you, Martina. Good morning and welcome to Community Health Systems' fourth-quarter and year-end conference call.

Before we begin the call, I would like to read the following 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, should, 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 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, the quarter and the year ended December 31, 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. Thank you for joining Community Health Systems quarterly conference call. Larry Cash, our Executive Vice President and Chief Financial Officer, is also on the call with me.

The purpose of the call is to review our financial and operating results for the quarter and the year ended December 31, 2011. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. A slide presentation accompanies our prepared remarks, for those of you listening to the live broadcast of this conference call on our website.

I would like to begin our call with some comments about our quarterly results, then turn the call over to Larry, who will follow with additional detail of our financial results. We were pleased with our consistent financial and operating results for the fourth quarter and the year ended December 31, 2011.

Net revenue for the fourth 2011 increased 3.9%, $3.4 billion versus $3.3 billion in 2010. Adjusted EBITDA for the quarter of 2011 was $464 million, an increase of 2.8%. Income from continuing operations, included the loss on early and extinguishment of debt, was $0.38 per share. Adding back the loss of extinguishment of debt of $0.47 and the investigation and legal expenses of $0.02, our EPS for the fourth quarter would have been $0.87.

Net operating revenues for the year ended December 31, 2011, increased 7.9% to $13.6 billion. EBITDA was $1.8 billion, an increase of 4.3%.

Income from continuing operations, including the loss of early extinguishment of debt, was $336 million or $2.87 per share for the year ended December 31, 2011. Adding back the loss of early extinguishment of debt of $0.46 and the investigation and legal expenses of $0.11, our EPS would have been $3.44, an increase of 12%. Cash flow from operations was $1.262 billion, an increase of 6.2% over 2010.

With that I would like to review some of the key operating accomplishments for the year. The Company recruited 1,864 new physicians for 2011 compared to 1,852 for 2010. In addition, we added another 50 mid-level practitioners during the year.

Our standardized and centralized approach to physician recruiting and practice development identifies physician needs in each of our communities and increases patient access to the services. We scored a 90% satisfaction level on our recent physician satisfaction survey, and among our almost 90,000 employees an 85% satisfaction on the employee satisfaction survey.

Our CMS inpatient measures, core measures improved for the 19th consecutive quarter to 98.6%, among the highest in the healthcare industry, and 14 consecutive quarters for outpatient core measures. Both inpatient and outpatient core measures continue to be better than the national average. And we continued our compound annual growth rate in revenue and EBITDA over the last 15 years.

While we are actively focused on quality, we are also concentrating on our efforts on safety. Last year we applied for and obtained listing by HHS Agency for Healthcare Research and Quality for our component patient safety organization, one of only 76 currently listed PSOs, and are using an industry leader healthcare performance improvement to implement behaviors in practice and reduce errors and serious safety events.

As we discussed last quarter, we acquired assets of Tomball Regional Medical Center in Tomball, Texas, early in the fourth quarter. This 358-bed hospital has trailing revenue of $200 million and a single-digit margin.

On January 1 we purchased the assets of Moses Taylor Health System in Scranton, Pennsylvania, a two-hospital system. Trailing revenue for this acquisition was $200 million with a low single-digit margin. We now have 16 hospitals in Pennsylvania.

We have a definitive agreement to purchase a 244-bed hospital, Blue Island, Illinois, with trailing revenue of $160 million at a purchase price of approximately $40 million. Additionally, we have a definitive agreement to purchase a 100-bed hospital in York, Pennsylvania, with $115 million in trailing revenue.

We also purchased a large physician practice with 90 physicians in Texas. This is the third physician practice over the last couple of years that we have acquired, consistent with our market strategy.

During 2011 we acquired $400 million in revenue. Over the last two years, we have acquired almost $1 billion in revenue. Our pipeline continues to be very strong; and more importantly, we continue to be very selective in our acquisitions.

Our 8-K filing includes our expanded guidance for 2012. Annual same-store adjusted admission growth is expected to be in the range of a -0.5% to 1.5%. Our projected revenue range is expected to be $12.7 billion to $13.1 billion.

EBITDA is expected to be from $1.920 billion to $1.950 billion. Projected EPS for 2012 we expect to be in the range of $3.45 to $3.70. Our net cash provided from operations is projected to be $1.2 billion to $1.3 billion. We have included four to five acquisitions in our 2012 guidance.

Now, I would like to update on our pending significant litigation and investigation matters. First, the New Mexico qui tam case is still pending. The filing of our motion for summary judgment has been delayed while the relator replaces one of their (technical difficulty) physician, the parties are briefing the court, a number of threshold questions relating to the government's proof in the case, and their handling of evidence. Our motion for summary judgment is now due at the end of the first quarter.

There has been a related development that has been in the news, and some of you have commented on it. Earlier this month the state of New Mexico and CMS settled a $53 million dispute over this precise issue, the source of funds used for federal funding matching payments. They settled it for only $7.9 million.

Our New Mexico hospitals were part of the settlement, along with four not-for-profit hospitals including St. Vincent's in Santa Fe. This settlement demonstrates what we have said all along about this case. It is an administrative matter to be resolved between the state and CMS, and not a Federal False Claim Act.

There are no developments in the Tenet lawsuit. Our motion to dismiss was argued in September 2011. We are waiting a judge ruling.

Nor are there any notable developments in the related private security class-action cases, our shareholder derivative suits. We believe all of these cases to be without merit.

We continue to cooperate with the Department of Justice and OIG on their investigation. The Reuille case in Indiana was stayed on April 30, 2012. We continue to produce documents and provided over 85,000 separate documents.

The Department of Justice is conducting some interviews, and we are assisting with those as well. We continue to seek out meetings with the Department of Justice and its representatives to discuss the complex elements of this matter and see if there is a path to resolution.

The SEC continues to receive the same documents that we produced for the Department of Justice. Also, other than continuing to produce documents, there's no developments in the Texas Attorney General investigation which started November 2011.

As always, our Board of Directors and Audit Compliance Committee of the Board and our senior management continue to be very focused on these matters.

I want to make sure that you saw from yesterday's 8-K that we received a letter from CtW Investment Group last week. As you recall in the third-quarter 2010 they had done some short-stay admission analysis and written to our Board about their findings. Their concerns carried over to the 2011 proxy season.

Their most recent letter discusses the inherent limitations in using only public available data and points out, as we have done on many occasions, that other factors can affect admission and length of stay patterns. The letter goes on to conclude that CtW is satisfied that our Company, management, and Board of Directors are committed to acting in accordance with our duties and obligations. We are pleased with the letter and believe that we have put this particular shareholder concern behind us.

With that, I would like to turn the call over to Larry to provide you additional details on the fourth quarter and the 2011 financial results.

Thank you, Wayne. Consolidated admissions decreased 3.5% in the fourth quarter of 2011. Adjusted admissions increased 1.8% for the same period. Our same-store admissions decreased 6.7%; same-store adjusted admissions declined 1.4%.

The following specifics contributed to the decrease. The lack of flu and respiratory is 120 basis points; weather-related service closures 20 basis points; lower admissions from women's services, 90 basis points; increased competition for new services in a few hospitals that occurred prior to the second quarter, change in physician relationships at a few of our hospitals contributed 40 basis points; reduction in one-day medical admissions for emergency room, 130 basis points, with a corresponding increase in outpatient visits. Chest pain admissions accounted for approximately 40% of the decline.

Lower surgical inpatient admissions with a corresponding increase in outpatient surgery visits of 110 basis points. Outpatient surgeries increased over 2% for the quarter and cardiac surgery procedures represented approximately 35% of the decrease.

From the third and fourth quarter, flu and respiratory and women's services decrease was greater, about 80 basis points. Same-store adjusted admissions decreased 1.4% for the quarter with managed care being better than the average. We continue to have strong outpatient equivalent admissions growth of approximately 5%.

Our net revenues in the quarter were $3.443 billion, an increase of 3.9%. HITECH incentive payments are not included in revenue. On a same-store basis net revenue increased 1.2%.

We had very strong same-store outpatient revenue growth of over 10%. State Medicaid cuts affected our same-store revenue growth by approximately 50 basis points, and we had an increase in charity discounts due to same-store revenue by approximately 200 basis points due to improved recognition.

Same-store net revenue per adjusted admission increased 2% year-over-year, which is affected by both the charity and the Medicaid. Our same-store Medicare case mix increased 1.5% for the quarter, and increased 1.4% on a sequential basis. All-payer same-store case mix increased 1.4%.

Same-store surgery volume increased 0.6% with outpatient surgery up a very strong 2.2% for the quarter. This increase was driven by very strong cardiovascular growth.

Our same-store surgical case mix for all payers increased 1.9%. Our same-store fourth-quarter managed care payer mix was the best of the year.

Consolidated EBITDA was $464 million for the fourth quarter, versus $451 million for the same period a year ago, increasing approximately 2.8%. Consolidated EBITDA would have been $467 million excluding investigation and legal expenses. On a same-store basis, EBITDA was $477 million for fourth quarter, a 4.9% increase.

EBITDA margin for fourth quarter on a consolidated basis was 13.5% versus 13.6% last year. Same-store EBITDA margin increased 50 basis points for the quarter.

Anticipating an accounting change taking effect in 2012 for reporting presentation of bad debts, our same-store margin excluding bad debt for both revenue and operating expenses would have been 16.2% versus 15.7%, a 50 basis point improvement for the quarter and a 40 basis point improvement for the year, 16.4% versus 16%.

Consolidated operating expenses including the offset of HITECH incentives increased 10 basis points as a percent of revenue in the fourth quarter of 2011. Same-store operating expenses for the fourth quarter improved 50 basis points compared to the same period a year ago.

Supplies improved by 10 basis points. We had improvements in malpractice and repairs and maintenance.

Same-store revenue minus bad debt increased 0.9% for the quarter, while same-store operating expenses minus bad debt increased by only 0.2% for the quarter, an improvement of 70 basis points, demonstrating another quarter of great expense management.

For 2011, consolidated admissions decreased 0.5% and adjusted admissions increased 4.2%. Same-store admissions decreased 5.6%; same-store adjusted admissions decreased 0.7%, within our original and most recent 2011 guidance.

The following contributed to the 2011 decrease. A lack of flu, 60 basis points; weather-related service closures, 20 basis points; lower admissions from women's services, 70 basis points; increased competition from new services or a change in physician relationships, 50 basis points; reduction in one-day medical admissions from the emergency room with a corresponding increase in outpatient visits, 140 basis points; and again approximately 40% in relation to chest pain admissions; lower surgical inpatient admissions with a corresponding increase in outpatient surgery visits same-store, that was 130 basis points.

Same-store outpatient surgery increased a very strong 4% for the year. And, as Wayne said, our volume for 2012 guidance for adjusted admissions is minus 0.5% to 1.5%.

Net revenue for 2011 was $13.6 billion, an increase of 7.9%. Again, there is no HITECH revenue -- HITECH incentives included in revenue.

On a same-store basis, net revenue increased 3.7% and net revenue per adjusted admission increased 4.5%. Same-store revenue decreased by approximately 70 basis points due to the recognition of charity, and 80 basis points decrease in Medicaid revenue as we previously discussed.

Our outpatient same-store revenue increased over 10% for the year. Our same-store surgery volume was up 1.9%, with outpatient surgeries up 4%.

Our same-store Medicare case mix increased 1.5% for the year. Same-store all-payer surgical case mix for the year increased a very strong 2.7%; and same-store all-payer case mix increased 210 basis points.

Consolidated EBITDA for the year was $1.837 billion, an increase of 4.3%. Excluding legal and investigative expenses, EBITDA was $1.852 billion.

Same-store EBITDA increased 5.6%. Consolidated EBITDA margin for the year ended December 31, 2011, was 13.5%.

Same-store margin was 14.3%, an improvement of 30 basis points. Our consolidated margin was affected by approximately $16 million in acquisition costs and $15 million in investigation and legal expenses.

For 2011, consolidated operating expenses as a percentage of net revenue increased 50 basis points. Same-store operating expenses improved 30 basis points, with same-store supplies improving 40 basis points and improvements in malpractice of 20 basis points. On a same-store basis, net revenue minus bad debt increased 2.9% compared to a 2.4% increase in operating expenses minus bad debt, an improvement of 50 basis points, showing the 2011 effective expense management.

For the quarter, bad debt was 2.7%, an increase of 30 basis points from the same period a year ago. For the year, consolidated bad debt has increased 50 basis points, 12.6% to 12.1%. Same-store self-pay admissions for the quarter did decrease 7%. The same-store self-pay adjusted admissions for the quarter increased 2.5%.

Our combined consolidated bad debt, charity, and administrative self-pay discounts, divided by adjusted net revenue was 22.4% for the quarter, 21.3% for the year, an increase of 250 basis points. Charity was up 170 basis points; the discounts 80 basis points; and then the increase was 150 basis points on a year-to-date basis. Again, charity was up 60 basis points; the discount was up 60.

Our consolidated cash receipts were 102% of collectible net revenue for the year ended December 31, 2011. Total AR days were 49, an increase of three days from December 31, 2010. Approximately half of the increase was due to nonpayment from Illinois Medicaid program.

The allowance for doubtful accounts was $1.891 billion at the end of 2011 or 50.8%, compared to 49% at the end of 2010. The allowance for doubtful account and related contractual allowances for self-pay was approximately 84%, with the hospital segment self-pay receivables at December 31, 2011, unchanged from December 31, 2010.

Community Health Systems has a favorable payer mix. For the quarter ended December 31, 2011, net revenue on consolidated basis was as follows. Medicare 26.7%; Medicaid 9.4%; managed care and other 52.5%; and self-pay 11.4% of net revenue. On a year-to-date basis, the breakdown was as follows -- Medicare 26.8%; Medicaid 9.7%; managed care another 51.4%; self-paid 12%.

We'd expect the 2012 managed-care commercial pricing to increase 5.7%. The managed-care payer mix has improved every quarter 2011 over 2010, fourth quarter being the best for the year.

We had an approximate reduction in Medicaid revenue of 8% in 2011 versus the prior year. The expectations for Medicaid reductions in 2012 over 2011 should be approximately 3%.

Cash flow from operations for the quarter was $442 million. Cash flow from operations 2011 was $1.262 billion compared to $1.189 billion for the same period in 2010, an increase of 6.2%. Net income adjusted for non-cash expenses and depreciation and, amortization, $48 million. Impairment of hospitals $48 million.

Loss on extinguishment of debt of $66 million. Other non-cash charges were $9 million, resulting in an increase in cash flow from operating activities of $100 million. In addition, an increase in cash flows from accounts payables, accrued liabilities, income taxes, primarily as a result of timing payments, increased cash flows from operating activities $112 million.

These increases were offset by a decrease in cash flows from supplies, [prepaid] expenses, and other current assets of $3 million, a decrease in cash flows generated from the change in [other] assets and liabilities of $25 million, and a decrease in cash generated from accounts receivable $111 million. Primarily the result of a three-day decline in AR days outstanding in 2011 compared to a two-day improvement in 2010. Actually that's a three-day increase in 2011.

Our 2012 guidance for net cash provided by operating activities will range from $1.200 billion to $1.300 billion.

Total capital expenditures for the quarter just ended were $244 million or 7.1% of net revenue. For 2011, our total capital expenditures were $777 million or 5.9%. Capital expenditures for replacement hospitals was approximately $165 million.

Our CapEx guidance for 2012 would range from $800 million to $900 million including replacement hospital expenditures of approximately $170 million.

Balance sheet cash at December 31, 2011, was $130 million. As of December 31, 2011, the Company had available credit from its revolver of $682 million.

Looking at the balance sheet at December 2011, we had $935 million working capital, $15.2 billion in total assets. Total outstanding debt at December 2011 was $8.8 billion, of which approximately 87% is fixed. Our debt-to-capitalization at the quarter end was 79%.

In the December we were party to a $4.9 [billion] interest rate swap agreements. During the fourth quarter, we did tender for some of our 8-7/8% coupon bonds. We refinanced approximately $1 billion, lowering the coupon to 8% and extended the maturities from 2015 to 2019.

We recorded (technical difficulty) approximately $66 million or $42 million after-tax, representing $0.47 per share in the quarter, $0.46 year to date. We recently received the lender consents for post-amendment restatement of our credit agreement dated as of July 25, 2007, and submitted and restated as of November 2010, which stood at approximately $1.6 billion to January 25, 2017, and the pricing increased by approximately 125 basis points. The price on the remaining non-extended $2.9 billion in term loans remains unchanged and maturity is July of 2014.

As reported by the rating agencies, we have proposed replacement of $750 million revolver with a new $700 million with an October 16 maturity date and issuing a new $500 million term loan A with the same maturity. Proceeds from term loan A will be used to repay the 2014 term loan [B].

In the fourth quarter, we did recognize some additional $23 million in HITECH, with expenses being about 40%. Our 2011 HITECH incentives were $63 million, all Medicaid related. Associated expenses with HITECH were approximately $25 million for the year.

In the fourth quarter we did incur an operating loss of at least $0.04 for an acquisition purchased on October 1, 2011. Our income tax rate in the fourth quarter was low due to a 20% increase in a noncontrolling interest versus the year to date through September 30. We also recognized income tax benefit from the early extinguishment of debt. And we also recognized an anticipated state tax benefit that had been previously disclosed and was included in our guidance.

For 2011 our EPS adjusted for early extinguishment of debt, charge, and legal and investigative expenses of $15 million was $3.44, this compares favorably to our original guidance in October 2010 and February of 2011 of $3.15 to $3.35 and our revised guidance provided in October 2011 of $3.30 to $3.39.

As Wayne stated earlier we provided our full 2012 guidance; a couple highlights. We'd expect same-store growth for revenue and EBITDA should be approximately 3% to 4%. HITECH incentives should range from 0.6% to 0.8% of revenue compared to the $63 million in 2011. HITECH expenses will be 0.3% to 0.5% of revenue compared to the $25 million in 2011.

2012 costs will be higher because of Medicare conversion costs are greater Medicaid. We will also incur some cost with our physician practices. The HITECH 2012 benefit compared to 2011 would be around 1% at the midpoint of the guidance, and there is no effect on pretax income.

We included in the February 2012 guidance the interest expense of the $8 million from the $1 billion note financing done in November 2011 and additional interest expense of $20 million from the February 2012 amend-and-extend of $1.6 billion. We have also included the benefit anticipated from the AR securitization that we hope to complete in the first quarter.

The interest rate effect and any other significant refinancing has not been included in 2012 guidance. The fixed rate of our debt should average from 72% to 77% for calendar 2012.

The legal and investigative expenses are included in the 2012 guidance. We expect to incur cost in 2012 of approximately $20 million compared to $15 million in 2011.

Our 2012 midpoint guidance of $3.60 did not include the additional interest expense that I just described nor did it include the legal and investigative expenses. Our 2012 guidance now includes both of these items, which would be approximately $0.20 per share.

The EBITDA range for 2012 is $1.910 billion to $1.950 billion. The EPS range for 2012 is $3.45 to $3.70. We believe by including additional interest expense as well as the legal and investigative expenses we have in fact increased the [current] midpoint of the guidance provided in October that excluded these two costs.

Wayne will now provide a brief recap.

Thanks, Larry. As you can see, 2011 while economically challenging was still a very strong year for growth. For the year, operating revenue increased a solid 7.9% for a record $13.6 billion. Our ability to increase revenue and improve the expenses demonstrates solid execution of our standardized business strategy.

The focus on expense management has been crucial to our success during a very tough year. We continue to work on improving performance at the individual hospital level in all of our markets especially in our more recently acquired facility.

This is something a little new. As a general practice we don't usually discuss volume during the quarter or at conferences. However with more than half the quarter completed and with such increased interest surrounding our admissions, we are making an exception today.

Our same-store volume projection for the first quarter is in the negative 3% to 5% range. As we look ahead in 2012 we see additional opportunities for continued growth for the Company. We remain focused on the fundamentals of our business and believe our proven success in recruiting physicians and other healthcare practitioners, improving operational efficiencies, enhancing essential healthcare services, and careful deployment of our capital will continue to support our long-term growth strategies.

With that I will now open the call for questions.

(Operator Instructions) Adam Feinstein, Barclays Capital.

Good morning, Wayne, Larry, Lib. Wayne, just a follow-up on that last point. I appreciate you providing the Q1 guidance. So that implies some slight improvement relative to the fourth quarter in terms of admissions.

If we look at it on an adjusted admission basis, should we also think about slight improvement in the first quarter?

I would think it would improve over where the fourth quarter was also. We did provide, I think, a range of EPS for 2012, in our detailed guidance we sent out.

Okay, great. Just wanted to follow up on that. Okay.

Then so I guess the question is on the acquisition side. You guys have acquired about $1.4 billion in revenues, so a decent size, a lot of opportunities. So just want to get your thoughts in terms of the opportunity there.

I don't know how you would compare the most recent opportunities, but back 2002, 2003 you guys had some really great years in terms of acquisition -- integration, pardon me, and just upside from that. So just curious, just as you think about acquisitions you guys have done in the past, like how you would think about the current.

I think, you know, we feel pretty comfortable about what is going on in terms of acquisitions. There are a lot of properties available, as everyone I think has said, primarily around the fact that the economy continues to struggle. Over 8% unemployment.

I think HITECH has been another burden that a number of not-for-profits have had to overcome and just in terms of the dollar amount being difficult for them to do. So, there continues to be a lot of opportunities for us.

We continue to think about this fairly strategically. As you know, we bought four hospitals in Scranton over the last year. We now have eight in that market. We have 16 within the state.

As we have said all along -- and we bought a large physician practice in the same area. So as we have said all along, strategically we are about infrastructure, trying to develop markets and infrastructure for the future. It's one piece of our strategy.

The other piece is demonstrating quality. And you can see from our metrics, our quality metrics in terms of core measures, our physician satisfaction, our unbelievably sound employee satisfaction that we are on a good track here in terms of doing that.

We have turned down a number along the way, by the way. We are not experiencing any difficulty around acquisitions. We are -- they are competitive, as usual.

Pricing is a little more than it has been, I would say. It is not back to pre-economic difficulty times, but it still is going up a little bit.

But we feel good about the opportunities we see, and I think it is good for the industry. I think everyone in the industry will have opportunities to acquire within this -- in 2012.

You know, Adam, I might just add, I think we still believe there's good opportunities in supplies when we take hospitals on, private and managed care, especially as you are able to build infrastructure.

The other thing would be the HITECH. I think we have demonstrated, I think we will be able to get money for HITECH. We have actually -- Wilkesboro, which we bought in 2009, we got [qualified] for Medicare, because of the accounting change; we will recognize that in 2012. But I think there is still good expense opportunities which will help the first-year earnings.

And the only other -- this is a little bit of a shift in terms of thinking about acquisitions going forward in terms of primary care. You may have noticed in our discussion about physician recruiting, we are now recruiting a number of extenders, nurse practitioners. That will be an important element going forward in terms of developing primary care networks for new acquisitions.

All right. Thank you, guys.

AJ Rice, Susquehanna Financial.

Thanks. Hi, everybody. A couple questions if I might. First of all, just maybe a little more incremental discussion on the discounting. I don't know whether to call it a charge or what that was incurred in the fourth quarter.

Is that --? It sounds like you went to some facilities and said we are going to take a more conservative approach relative to discounting. Presumably if you didn't do that you would end up with bad debt in subsequent quarters.

Is that the way to think about it, that you absorb some expense in the fourth quarter that might otherwise have flowed through in 2012?

Well, I think what we try to do is accrue to get the correct receivable balance at the end of the year. But clearly there is a lot of self-pay dollars which we do reserve for sometimes that become charity.

What we did do was give our CFOs the right to say if the work has been done -- we think something is -- would be charity in the past they had to get tax returns and forms filled out. Then if they want to go ahead and recognize it as charity, we could do that.

We had a few hospitals. We also wanted to celebrate the work they had done. Clearly most of your self-pay dollars is 90% reserved for anyway, and the copayments and coinsurance about 50%. So if something weren't self-pay and you recognize it as charity you write it all off. So to some extent, the bad debts probably would have been benefited -- would have been higher had we not done this.

And it maybe helps a little bit in the future, but it was primarily done just to recognize the charity a little more timely. We also noticed that we're spending a lot of money on trying to collect accounts both at the hospital and our collection company without much results. And the [review of those] says that probably some of them were other customers who had been classified as charity historically; they just wouldn't cooperate with the paperwork so now we had to give our CFOs the right to recognize it more timely.

Okay. Then you referenced the $0.04 impact from an acquisition in the fourth quarter. Is that -- I'm assuming that's a sort of one-time, one quarter in nature, and you will get it at least to break even going into 2012. Is that the way to think about that?

Yes, usually almost all the models we do -- and we consistently do the same models -- that are some pretax contribution in the first year. This was the larger one that we bought, and we were not as successful climbing over the depreciation and interest. And EBITDA was positive but it wasn't enough positive to pay that the first quarter, and we had to recognize that because of the size of it, the depreciation and interest cost, to have a loss.

We wanted to point that out. A lot of people look at things that go [positive] and this is one that we climbed over and still had a pretty good quarter.

It will get better throughout 2012, and I think the facility itself should get close to its model, as most of our acquisitions usually do.

This is not anything to be terribly concerned about. We like the facility, we like the market. This was a highly competitive contest for this particular hospital.

It is just a timing issue in terms of -- we have only had it for a quarter. So as usual, we have got a pretty decent track record in resolving these problems and making them work.

Right, okay. Then the last question was you mentioned, obviously, the redone bank -- part of the partial bank deal. I think one of the aspects of that bank deal was to give you the flexibility to maybe spin out 10% of assets over time.

Is there any further commentary on what you are trying to do or what you were looking for, the incremental flexibility to do there?

Look, what we were doing there was as you know we bought Triad five years ago and you cannot do any type of spin-off. It is just another ability for us to have the opportunity to do that. There is not any approved plan to do something at the time.

You need five years to own something to do that. We got to our ability to do a 10% spin-off and use the proceeds to pay off our debt.

They also -- the value of a spin-off as other companies have demonstrated is that there'd be more focus on those assets, and also you save taxes. So if you were to think about doing something it would be good from, we think, a shareholder perspective and also save some taxes.

Okay. Thanks a lot.

Tom Gallucci, Lazard Capital Markets.

Hi, good morning. This is Colleen Lang on for Tom. Larry, on the cost side, you guys have done a great job all year of managing the cost structure despite the tough operating environment. What areas within the cost structure do you still think you can see improvement next year?

I think we will still see improvements in the area of supplies. We have had a very good success. When you looked into 2012 I think we will have a [center] of good improvement that we have had so far this year.

I think we will probably do a good job of managing payroll. The payroll gets camouflaged a little as a result of the growth of physicians. But if you look at our man-hours per adjusted admission, adjusted for case mix, they're probably better by 140 basis points. Our payroll is a lot better if you can not consider the cost of employing physicians.

We have got something -- those two categories. Malpractice was better for the year. We are doing a very good job; Wayne talked about the efforts on patient safety and other stuff we are doing, which will have maybe a longer-term payback, but have some in 2012.

Colleen, I would also add to this is that we have been able to accomplish this -- I say this all the time, but I think it speaks a lot to our management and our organization that we have not, like a number of other organizations, discontinued funding our 401(k), frozen payrolls, had major layoffs, stopped retirement plans. We have not done any of those things.

We have managed it the good old-fashioned way in terms of trying to project what we think our volumes and business is going to be and work around that. For us, that is a pretty major accomplishment.

And the other thing, I know there is a lot of concern about HITECH being the driver of a lot of success. We think looking at what we provided here in the midpoint of the guidance for HITECH, it could be about a 1% improvement of our EBITDA in 2012 or 2011; but we think there will be much more improvements of our day-to-day operations.

Okay, great. Then just a follow-up on the HITECH. I'm sorry if I missed it. Are the proceeds more heavily weighted towards the second half of the year?

There's more expected to be recognized in the second half of the year. The first half of the year. The first half of the year will have some Medicaid that we didn't get done in 2011, so there will be some Medicaid.

Physicians will be a little bit more done in the second half of the year; then Medicare would be the second half of the year.

Okay, great. Thanks.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, thank you. Can you talk a little bit about the volume outlook for 2012? It was helpful to get the Q1 admission number. But adjusted admissions were down; I guess the most have been this quarter in Q4, even though the headwind from one-day stays seems to be moderating.

So I just want to get a little bit more color from you about what gives you confidence that you will see improvement versus your minus 0.7% number in 2011.

Yes, I think the minus 0.5% to 1.5%, if you go back and look at the last quarter it was down 6.7%. About 80 basis points of that decrease compared to the third quarter was less flu and less OB and women's services. I would think the flu by (inaudible) now, you won't have the kind of challenge throughout all of 2012. I think also the women's we would expect in the second half of the year to be a little bit better.

We have recruited a lot of doctors, a lot of healthcare practitioners. We got some replacement hospitals we spent a lot of money on this year; they will open in the third quarter most of them. But those historically we have had a very good volume growth, almost helping the Company by almost 0.5% to 1% on overall volume growth as a result of the new hospitals we open up, because they have done really well.

I think the services we spent money on in the ER and surgery and things like that and the equipment we bought will help us. And our managed-care admissions, especially adjusted admissions, should continue to do better. That would be a good help (multiple speakers).

Kevin, I would also say that the last six months or so I don't think we would call that a normal period for us. We had been under intense scrutiny. All the Tenet allegations, the government investigations, all the related press, all that is a very different scenario than we have ever experienced.

So we are working our way through all those things as suggested by the CtW letter. But I think going forward we certainly see there is opportunity for improvement.

Okay. No, I think that all makes sense. But just to follow up on the replacement hospital contribution, in the past you mentioned 0.5% to 1% benefit to volumes when you open up a new hospital. Is that what you would expect in 2012? Or is that with a full year of operation of a new hospital that might add --?

That would be a full year of operations.

Okay, and that is Q3 that --?

That is Q3.

Okay. Then I guess since you mentioned it in the prepared remarks, the letter from CtW Investment Group, I guess when I first saw that allegation I guess back in 2010, I was a little bit skeptical about it. Because I think that they run pensions for labor unions, so I wasn't sure whether there was the motivation behind that initial allegation or not.

But is there anything -- I guess on the flip side then, is there anything around the motivation of them doing it now? Has there been any discussion with labor unions and you that may have helped address that issue? Or is this just independent analysis by them irrespective of your communications?

I think the letter speaks for itself in terms of their own analysis when it is all said and done. We are always in talks with the labor unions and we continue to be in talks with them. We are actually trying to improve our relative posturing so that we don't have as many conflicts as we have had in the past.

Okay. Then just to clarify, Larry, I wasn't sure if you said that your commercial outlook for 2012 -- did you say it was 5.7%, or 5% to 7%?

5% to 7%. 5% to 7%.

Okay, perfect. Thank you very much.

Gary Lieberman, Wells Fargo Securities.

Good morning. Wayne, could you just clarify the comments you made about acquisitions? I think you said that prices for acquisitions had increased a little bit but aren't back to sort of the boom levels. Is that what you were saying?

Yes. You know, if you go back to the boom times we were paying about 1 times revenue. We are not paying anywhere close to that now.

But we are not paying $0.30 on the dollar either. It has moved up into the $0.60, $0.70 -- or 70% of net revenue. So it is back into that range.

And they're all -- you can see from our acquisitions and the couple that we just talked about, they are all over the board still, and some hospitals are more troubled than others. We actually like troubled hospitals, as you know, because we think there is a huge opportunity there.

But having said that, I think the driver is a little different than it has been in the past. People are either looking for a strategic partner that can be helpful to them because of the fact -- and they are putting it in those terms -- because of the fact the economy continues to be a problem and HITECH money is a problem for a number of them.

Okay, great. Then, Larry, I think you said you have $4.9 billion of the debt swap. Did you give an average rate what it swapped at?

Somewhere between -- I think around 4%, I believe. 3.9% I think is what it is.

Okay. Then can you just give us an update on the conversion to InterQual? Are all the hospitals there, and so should we think of that impact as being fully baked in? Or is there still some incremental impact that will come from that?

I believe we said on the third-quarter conference call that all the hospitals have been converted to InterQual. I think we also said that even the hospitals that have been on InterQual had a volume decrease in the third quarter as they did in the fourth quarter.

But everybody is on InterQual unless we just bought a hospital that may not be. But every hospital was completed by the end of the third quarter, and we actually decided to do the InterQual conversion -- just to refresh everyone's memory -- in February of 2011 and signed the contract in March of 2011 before all the other allegations were made.

So is there some -- is there essentially a learning curve as the hospitals go on InterQual? Or is the impact pretty discrete, and once they are on it you see the impact that you're going to have on the admissions and that's about it?

There's a couple things. One is that we had already decided to do this, but once we came under attack we made a decision to accelerate it. So we accelerated very rapidly. We put InterQual in pretty quickly with a lot of intense training around that.

As I said earlier, all the intense scrutiny, all the Tenet allegations, all the government investigations, all the related press, all that had an impact on this, not just the fact that we installed InterQual when it was all said and done.

Now, having said that, that is why we think this is moderating. We understand more about how to manage under that system and all the above. That is why we think our volumes are improving now. Probably we lost a lot of opportunities over the last couple of quarters because of all the scrutiny.

I just would add, the one-day medical admissions they were down a little bit less in the fourth quarter; and the surgical admissions were down about 50 basis points. Of our third-quarter to fourth-quarter decline in volume, which got a little bit better, actually the flu and the respiratory and the women's services were worse by about 80 basis points.

Okay, great. Thanks for the color.

Ralph Giacobbe, Credit Suisse.

Thanks. Good morning. Just want to go back to the volume side of things. Obviously it sounds like the year was off to a better start at least. So as we think about moving through the year, is it your estimate or thought that it is just a matter of comping out some of these difficult quarters and that is how we will get to normalization?

Then I think in the past you have talked about seeing more pressure in some of your smaller markets or smaller facilities. Is that still the case?

The smaller markets are still declining faster than -- the ones under $50 million are still declining faster. They're a smaller percentage of the Company, but they are declining faster.

I think we have also said that we expect the second half of the year from volume to be better. Wayne has already said the first quarter is going to be better, and we could be a little bit better in the second quarter.

We are also trying to make sure we have handled the criteria change correctly and looking at people to go on observation, how long we are there, and looking at the criteria to make sure we have interpret it correctly. So it is both a comping out and also our efforts to make sure people are treated in the right setting.

The small hospitals will continue probably. The small hospitals have a lot more OB, a lot more flu and respiratory business, and a few of them have a little bit more on one-day surgeries because (technical difficulty) very high case mix. So I think the small hospitals have multiple challenges. As we recruit doctors and do a good job there, that will get better.

One of the things not to forget about the volume, even though our inpatient volume is down, we haven't lost a substantial amount of business. A lot of it has moved out to outpatient. You can see in our revenue line how fast the outpatient is growing.

That is not only -- that not necessarily has everything to do with one-day stays or observation. It has to do with the national trend in terms of it's moving in that direction for everyone.

Yes, our outpatient revenue growth both in the quarter and year-to-date was up over 10%. We have had good outpatient growth in diagnostic imaging and ER and OR and pharmacy, so that has helped us -- helped good revenue growth as Wayne talked about.

I would think the focus in the future would be around adjusted admissions, because it is moving in that direction anyway.

Okay. Then just on the same-store EBITDA growth, I just want to clarify. You had said that you think same-store EBITDA growth in the 3% to 4% range for '12?

Yes. Revenue and same-store EBITDA growth will be somewhere in the 3% to 4% range, which possibly either a third or 25% of that could be contributed to HITECH.

Right, okay. So a third of that is contributed to HITECH, so it is less on the truly organic, if we exclude HITECH?

If you want to go to all the accounting to exclude HITECH, I might just spend just a second on that. When I go talk to Wayne about how we are doing for the quarter or the month, we don't do separate accounting.

To us it is a program; it is a government program that was done in 2009. But we know there is a lot of effort to understand it separately.

But when we look for the Company we look at the total results and think that's the best way of doing it. But we did decide to provide all the detail that people have asked for about revenue and expenses.

Okay. No, that's fair. Then just lastly, on the interest expense side, just want to be clear. The 4.7% to 4.9% is based off the revenue less bad debt number?

Yes, yes.

It is? So it kind of means that the midpoint interest expense is down about $25 million year-over-year, $26 million, roughly?

That would be somewhere in that math, yes.

Okay. So is that all because of the swap termination savings basically outweighing the bump in the rates from the amendments?

Well, you have got the swaps, you have got the bonds we did, you've got cash flow benefit, you have got LIBOR could've been a little bit lower. All those, it's a combination.

The best thing would be the swaps are helping us because we did do a lot of swaps back in 2007, 2008 at 4% and 5%. As they roll off it is beneficial.

We think it is wise to go ahead and let the floating-rate to go up a little bit as long as the interest rate predictions are pretty tame as far as going up. So we will -- I think we said we would be sitting at 72% to 77% from that.

I thought our interest prediction was a little bit -- I think it is 4.6% to 4.8%. I believe that is correct.

Just to be clear, on the swap rate did you say it was 3.9%?

3.99% I think is the average. It is in all our detailed guidance.

Okay. That's fine. Thank you.

Matthew Borsch, Goldman Sachs.

Hi, this is actually Ariel Herman in for Matthew Borsch. I just wanted to ask more detail on the outpatient shift and the volume numbers. So I just wanted to know basically how you are thinking about the profitability of the volumes with the shift to outpatient.

So even though you had low inpatient admission numbers you were able to have year-over-year revenue growth. Can you just give a little bit more clarity on that?

Yes, you really need to look at it by payer. Clearly the Medicare outpatient is not as profitable as the inpatient. Medicaid is fairly comparable.

From the managed-care perspective, fortunately we are having very good managed-care adjusted admissions which means the outpatient growth is good. In some cases the outpatient growth and the outpatient revenues are a little more profitable. It varies by contract, but there are some contracts that we get paid pretty good on that versus the inpatient.

I think the Medicare would be one that where the shift to outpatient is usually a little less profitable than it is on the [retention] side on an overall basis.

And our outpatient versus our inpatient is about 50-50 now.

Yes, might be a little crossed over a little bit.

(inaudible) more on outpatient now. So, this continues to be a trend and I think it is moving that direction. Most companies have somewhere in that range now I would think; Larry you can comment about this. Around the 50% range in terms of outpatient/inpatient?

Yes, we probably have gone over 50%. It's been growing about 1% or so a year. This year the revenues are very positive for outpatient, up over 10%. Some of that is clinic related, but it is predominantly on the hospital side.

I would say there is a lot of competition for outpatient business as well in some markets. In some facilities in some markets. Physicians have taken a lot of the outpatient volume out and into their own facilities.

So that will be a little problematic as time goes along. But having said that, for us we don't really have that issue to amount to anything.

I think it would be challenging for a hospital company or hospital to have something less than 40%.

Okay, great. Then just really quickly, can you just touch on the new payroll or docs fix legislation regarding the Medicare bad debt, and what kind of impact you think that would have on your bad debt expenses going forward?

Yes. What we have studied so far, it is probably going to be around somewhere around $10 million it is probably going to be the effect for us. I think Medicare the bad debt is probably $3 million or $4 million.

We're also going to have a little bit of loss reimbursement from Section 508. In our current estimates it's something like $10 million, I think, we actually lowered our EBITDA before we went public there from 1920 to 1910 which is still above everybody's range on EPS, which excluded the legal fees. But we did have 1910 to 1950 when we tried to factor in about $10 million for that, bad debts being $3 million to $4 million of it and probably some money for the Section 508 which drops off after March 31.

Okay, great. Thank you.

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

Thank you. Delivering quality healthcare services in our markets requires an executable, predictable, and sustainable strategy; and we continue to demonstrate that this strategy works.

We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers, and chief nursing officers, and division operators for their continued support in operating efficiencies during this challenging time. We are convinced that solid performance will propel the Company to another level of success, extending our leadership position in the healthcare facility sectors.

Once again, if you have a question you can reach us at area code 615 465-7000. Thank you.

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