Community Health Systems Inc (CYH) 2012 Q4 法說會逐字稿

Good morning. My name is Tiffany 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).

Thank you. Lizbeth Schuler, Vice President of Investor Relations, you may begin your conference.

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

This presentation contains forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown uncertainties and risks, which 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, actual results may differ significantly from those expressed in any forward-looking statements in today's presentation. We do not intend to update any of these forward-looking statements.

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. Welcome to our fourth-quarter conference call. Our Executive Vice President and Chief Financial Officer, Larry Cash, 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 the fourth-quarter and the year ended 2012. 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 several comments about our performance, and then turn the call over to Larry, who will provide additional comments on our financial results.

Our first -- fourth-quarter performance further extended Community Health Systems' consistent record of growth in 2012. Net operating revenues of $3.3 billion, an increase of 9%, and adjusted EBITDA increased by 3.9% over the fourth quarter last year.

We're also encouraged by the more favorable volume trends in 2012 compared with the prior-year. Excluding the adjustment for asset impairment as well as disclosed legal matters, earnings per share from continuing operations was $0.85. Net operating revenue for the year ended December 31, 2012, was $13 billion; EBITDA was $2 billion, excluding the early extinguishment of debt; and the disclosed adjustments earnings per share from continuing operations for the year ended December 31, 2012 was $3.55 compared to $3.33 for the same period a year ago.

With that, I'd like to highlight some of our recent accomplishments. During 2012, we acquired the asset of four -- assets of four hospitals, several physician practices, and a few surgery centers. While our acquisition team is very busy with a full pipeline, we continue to be very selective.

As I mentioned on the last call, during 2012, we completed construction of three replacement hospitals in Arkansas, California, and Indiana. As of the end of the year, we have commitments to replace two additional hospitals -- one in Birmingham, Alabama, and the second one is in York, Pennsylvania. While we've received a positive CON ruling in Alabama, the opposing parties have continued to appeal.

We continue to focus our efforts on physician recruiting, as this is clearly one of our operating strengths. The Company recruited 2125 new physicians for 2012, compared to 1864 physicians recruited for the same period a year ago -- an increase of 14%. For 2011, the Company had 50 hospitals recognized as top performers on the key quality measures by the Joint Commission. This is up from 41 hospitals that were recognized in 2010. Only 18% of the eligible hospitals in the United States were recognized for 2011, and we're very proud of our efforts to improve the quality of care in our markets.

Our evidence-based order set project continues to move forward with approximately 150 admission order sets in place for our most common admission conditions. This implementation will help us achieve Stage 2 of meaningful use.

There are no material developments to report at this time in our significant government matters, so I'll just take the opportunity to give you a brief recap on two matters that I know you're interested in. In the Baker case, the New Mexico qui tam, we have made additional filings to recover some of our legal fees and to supplement our Motion for Summary Judgment. We're waiting for the Court to rule on both of these.

In the ED Medical Necessity Department of Justice investigation, we are continuing to work on a limited medical record review that was initiated several months ago, provided requested documents, and discussed the case with the government. When you read that 10-K, you will notice that we have streamlined and reorganized our legal disclosures to make them easier to read, and eliminating some of the historical back-and-forth about the cases. As has been the case since the second quarter of 2011, our Board of Directors, the Audit and Compliance Committee, and selected senior management, continue to be very focused on these matters.

And finally, we are providing initial guidance for 2013. Same-store adjusted admission growth ranges from 0.5% to 2%. Our net revenue will range from $13.3 billion to $13.8 billion, an increase of 2% to 6%, and includes three to four acquisitions during the year. EBITDA will range from $1.975 billion to $2.050 billion. EPS for 2013 will range from $3.50 to $3.90.

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

Thank you, Wayne. Our consolidated admissions for fourth-quarter increased 4.7% compared to the same period last year. Adjusted admissions, which factors in outpatient business, increased 6.4%. Our same-store admissions increased 1%. Flu and respiratory admissions represented an approximate 130 basis point increase, offsetting the 40 basis point loss in admissions in OB and Women's Services. Same-store adjusted admissions increased 2.3% for the quarter.

Net revenues in the fourth quarter increased 9% to $3 billion, last year at $3.276 billion. On a same-store basis, net revenue increased 5.4% -- 5.5% for the quarter. On the -- for fourth-quarter, same-store net revenue per adjusted admissions increased 3.2%. We saw a decline of same-store surgery in the fourth quarter of 2.1%. As I've mentioned in our third-quarter call, the fourth quarter had some adverse seasonality of the holiday falling on a Tuesday this year versus a Sunday for last year.

Same-store emergency room admissions increased 8.1%, partially driven by the increased flu and respiratory volume in December.

Consolidated EBITDA was $482 million for the fourth quarter versus $464 million for the same period a year ago, an increase of 3.9%. On a same-store basis, EBITDA was $491 million for the fourth quarter, an increase of 4.1%. We disclosed unusual adjustments of $13.4 million, primarily for the cost of certain legal matters. Excluding these disclosed adjustments for the fourth-quarter, consolidated EBITDA would have been $495.3 million.

For the fourth quarter, EBITDA margin on a consolidated basis was 14.7% versus 15.4%. The decrease of 70 basis points is primarily due to the low margins of recently acquired facilities, as well as the disclosed adjustments as reported in our 8-K.

Consolidated operating expenses for [synergy net] revenue increased 70 basis points in the fourth-quarter 2012, primarily due to our recent acquisitions and increase in Other operating expenses. On a same-store basis, total operating expenses were up 20 basis points year-over-year, with a 10 basis point improvement in payroll and a 30 basis point improvement in supplies - supply expenses helped by continued improvement in drugs, implants, stent expenses.

Also, our malpractice expense is up 30 basis points from fourth-quarter 2011. On a year-to-date basis, malpractice is flat to a year ago.

On a year-to-date basis, consolidated admissions increased 4% and consolidated adjusted admissions increased 6.6%. Same-store admissions decreased to 0.9%. The following contributed this decrease - lack of fluid & respiratory is 40 basis points, and lower admissions for women's services, 40 basis points. Our same-store admissions increased 1.5%, at the high end of our guidance range.

Consolidated net revenue was $13 billion, an increase of 9.4%. On a same-store basis, net revenue increased 4.6% for the year. On a consolidated basis, net revenue per adjusted admission increased 2.7%. On a same-store basis, net revenue per adjusted admission increased 3%. Same-store surgeries are down 0.5% for the year, and same-store emergency room visits are up 5.4%.

Our same-store Medicare case mix for the year ended December 31, 2012 increased 0.8, and our same-store all payer year-to-date surgical case mix increased 1.5%. Our same-store ER visits increased 5.4%. Consolidated EBITDA was $1.978 billion per year. On a same-store basis, EBITDA increased 4.1%. Consolidated margin for the year ended December 31, 2012 was 15.2%. Same-store margin for the same period was 15.6%, down 10 basis points for 2011.

For the year, consolidated operating expense as a percentage of net revenue increased 20 basis points from the prior year. A decrease in supplies of 30 basis points helped offset the increases in payroll and other operating (technical difficulty) expenses. Same-store expenses increased 10 basis points compared to 2011, with improvements in payroll of 10 basis points and supplies at 20 basis points. These improvements helped offset the 80 basis point increase in the Other operating expenses.

Total AR days were 58 at December 31, a decrease of two days from the prior quarter but an increase of two days from December 31, 2011. The allowance for doubtful accounts was $2.202 billion or 51.6% at December 2012. The allowance for doubtful accounts and related contractual allowances for self-pay was approximately 84% of self-pay receivables at December 2012.

Community Health Systems continues to have a favorable payer mix for the quarter ended December 2012. Consolidated net revenue by payer source was Medicare, 26.2%; Medicaid, 9.5%; managed care and other, 51.8%; and self-pay, 12.5%. On a year-to-date basis, payer mix - Medicare was 26.4%; Medicaid was 9.7%; managed care and other was 50.9%; and self-pay was 12.9%.

Cash flow from operations was strong -- very strong for the quarter, $502 million, an increase of 14%. On a year-to-date basis, cash flow from operations - $1.280 billion versus $1.262 billion for 2011, an increase of $18 million. And again, accounts receivable days were two days higher, reflecting the growth in Medicaid supplemental receivables and additional receivables growth from our recently acquired facilities. On a positive note, we did have a decrease in receivables available in Medicaid and reduced the HITECH receivables.

Our cash flow guidance for 2013 ranges from $1.225 billion to $1.300 billion, and just note that the 2012 cash flow actual results were increased by approximately $45 million related to the first-quarter budget [neutrality] rule settlement that was -- we recorded and the cash we got in the second quarter.

Total capital expenditures per quarter - $211 million or 6.4% of net revenue. Year-to-date, the total capital expenditures were $769 million or 5.9%, slightly below the low end of our range for 2012. Replacement hospital expenditures were approximately $4 million for the quarter, $96 million year-to-date. We're below the 2012 guidance due to the lower replacement costs and also some cost reductions and other innovation projects.

Our guidance for the year ranges from $800 million to $900 million and includes $75 million for replacement hospital activity.

Balance sheet cash at December 2012 was $388 million. At the end of the year, the Company had available credit in the revolver of $700 million after the outstanding letters of credit.

Looking at the balance sheet, we had $1.276 billion in working capital and $16.6 billion in total assets. Total outstanding debt at December 31, 2012 was $9.541 billion,(sic-see press release "$9.451 billion") which approximately 84% is fixed. Our debt-to-capitalization at quarter end was approximately 77%.

During the quarter, we did amend our credit facility. This was done to provide increased flexibility. We also paid approximately $23 million at the end of the quarter in the form of a one-time dividend to our shareholders. At the end of the quarter, we are a party to $3.100 billion in interest-rate swaps, down $450 million from the end of the third quarter. Again, approximately 84% of the debt is fixed.

As we noted in our third-quarter call, our interest expense would increase due to all of our recent 2012 refinancing activity. We're providing interest guidance ranging from 4.5% to 4.7% of [net] revenue. This assumes the swaps rolled off during the year will not be replaced. Additional fixed-rate debt will range from 75% to 85% of total debt, including the swaps.

Some other important things to note about the 2012 earnings report and our 2013 guidance - we did take an impairment charge of $10 million from three small hospitals. It was not included in our 2012 guidance. Also excluded from our 2012 guidance was additional costs of $13.4 million, primarily related for legal settlements and reserves, non-government settlements.

In the fourth quarter, we also had $53.1 million additional HITECH incentive reimbursement, which is $7 million higher than the high end of our guidance range. This was achieved due to the incentives on some newly acquired facilities, additional physician practices and also some growth in Medicare days from final cost reports which helps the HITECH incentives.

In the fourth quarter, equity and earnings in unconsolidated affiliates continued to track below last year, down about approximately $2 million. Our net income attributable to non-controlling interest was approximately $4 million higher in the fourth quarter of '12 versus the first three quarters of the year, due to the various allocation adjustments at the end of the year.

I'm now turning our focus to 2013. Our 2013 guidance does not reflect the benefit of the D&A SSI adjustments received in 2012 of about $78 million of EBITDA. We have included an estimate of anticipated Medicare cuts of 0.3% to 0.8% of revenue to begin after April 2013. We are including approximately 10 basis point of EBITDA, reflecting inclusion of the California provider tax after April 2013 and retroactive to July 2011. And also please note that our depreciation expense is higher, 5.7% to 5.9% of revenue, due to the three replacement facilities opened during 2012. And additionally, the amortization is higher, due to the amortization of capitalized software.

We're providing a range in the first quarter of EPS of $0.82 to $0.92. This reflects an average of 75 basis points of HITECH incentive reimbursement for the first quarter versus the year of 100 to 110 basis points for calendar 2013. And we also -- remember, we had a late day benefit of 2012, which is probably about -- $40 million -- $45 million of revenue. And also bear in mind that Easter occurs in the first quarter of 2013 versus the second quarter of 2012. And that'd give you two less weekdays in the first quarter of 2013 versus the first quarter of 2012.

And Wayne will now provide a brief recap.

Thank you, Larry.

Community Health Systems has continued to demonstrate great success in a dynamic and challenging healthcare environment.

Our results for 2012 confirm the strength of our operating model, our proven ability to drive efficiencies in our hospitals, recruit and retain qualified physicians, make selective acquisitions, and deliver high-quality healthcare services in a cost-effective manner. As we look to 2013, we will continue to pursue the strategies that deliver value to both our community partners and our shareholders.

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

(Operator Instructions). Josh Raskin, Barclays.

Larry, just following up on the 30 to 80 basis points Medicare cut. I assume that's a full-year impact, even though that's starting April 1. And I also assume that there's a much more significant impact in the fourth quarter, once you get the fiscal year '14 update. So, could fourth quarter be -- I just want to make sure that's correct. And then could fourth-quarter be 150 to 200 basis points? Is that down in the ballpark?

Well, what that 30 [to] 80 basis point does not include your normal market basket increase. And it's the 30 to 80 basis points of the whole year's revenue applied to the period of time. So it would start April 1 for the sequester. And what we've estimated for sequester would be starting in that period of time and probably be - something like 50 to 60 basis points of reimbursement were cuts in 2013, started at least on the high-end on April 1.

We've also made a shot at the coding adjustment, which would be about 10 basis points or about approximately $10 million cut that would start on October 1. And then you would have the DHS cuts, I think which we estimate at 10 to 15 basis points, which would be something like the $10 million to $20 million of cuts starting in the fourth quarter.

So you're correct that the fourth quarter cuts would be a higher percent. But now the market basket will help improve some of that, and we didn't include the market basket when we quantified these specific three items. Because number one, they're relatively new. The sequester has been around, but the discussion of it happening has been more active lately.

The coding adjustment just started in January. It's going to start in October and the DSH is just part of healthcare reform. But some of that would be -- it's included in our base. You're going to get the market basket for sure and that will help offset some of these cuts.

Okay. And the $10 million for coding and the $15 million to $20 million, that's just your fourth-quarter impact, right? That's not an annualized number, right?

It's correct, right. That's the fourth-quarter dollar amount impact and we expressed the basis points as a percentage [in] whole revenue.

Okay. And then in a couple of months when we get the market basket updates, that will be additional; that will bring your number up for the fourth quarter. Is that fair?

That's correct. And we put the market basket for fourth quarter in what we consider our normal run rate of estimate of earnings and trying to grow EBITDA. But these are three unique items which is going to cause some challenge for 2013.

Got you. And then just a second question on M&A. You guys are sort of picking up your M&A guidance of three to four hospitals. It seems like -- you talked about the bigger pipeline, et cetera. So I guess my question is around the impact of reform and leverage ratios.

So do you think that five times is -- that you guys have been running at -- is that a good run rate? Or do you think there's something in reform that makes you think maybe you could take on a little more leverage or maybe want to move towards a lower level of leverage, as you proceed? I'm just curious if there's anything in the reform we're not thinking about that could impact your ability to borrow some more money.

Larry can talk about the leverage on this. I'll just tell you in terms of the - you know, if healthcare reform continues, and we do insure across the country to all these people, there is a huge opportunity for us in terms of enhancing and developing our networks to provide those services. So we are carefully assessing and looking for opportunities that work for us in our markets.

And so I suppose you could take on a little more leverage if you found the right opportunity in terms of the -- there are lots of larger systems that are now looking for a partner. It seems that size matters now going forward.

You know, Josh, yourself and several other analysts have estimates out there for '14 and '15. If you consider those estimates, it's why we think the healthcare reform is going to be a positive and it should be there in 2014.

There's a lot to be done between now and then, but if you take the estimates done consensus-wise, we're currently running in the high 4's. And you would think that the EBITDA in '14 and '15 moving down to the low 4's, if the healthcare reform plays out as it's currently modeled out there. So that should be a positive for everybody. And then it'd allow for more growth for either acquisitions or, if the cash flow [comes close], paying down debt.

Okay. Perfect. Thanks. All right, thanks, Wayne.

Darren Lehrich, Deutsche Bank.

I just want to pick up on the last part of that question around reform. And I guess just the question here about 2014, it looks like it will be a lot more about Medicaid expansion than the exchanges. So, I guess, how do you feel about your footprint versus what the states are going to do? And can you update us if you're hearing anything new or different on the ground in Pennsylvania, just given what the Governor said there?

Yes, I think we feel pretty comfortable where we are. And we continue -- one of the reasons we're buying physician practices is because to help with our network and our size and our footprint.

I actually think it's still a little early in terms of determination. I don't think anybody wants to speculate in terms of Medicaid expansion, but of course we saw what happened in Florida this week, which was a little bit of a surprise. I don't know if you saw those articles in the New York Times this morning or not.

But I still think there's hope in terms of the expansion side of it, but a determination doesn't have to be made immediately on that. I guess more importantly for the states is their determination around exchanges. And I think that's a complex issue for the states to implement and to administer, and for the Feds to implement and administer.

So I think there's a lot more to this. But I actually think we're well-positioned. I think that's what we've been doing for the last number of years, thinking about this. You keep in mind that our 80 hospitals where we don't really -- we're the only hospital in town. We are the network in those communities. So it's the other larger communities that we're in that we're busy trying to enhance our network.

(multiple speakers)

Like I said, on another point about that, we have always worked really well, working with self patient (technical difficulty) vendors, contacting and enrolling people in Medicaid. I think we've got over $150 million of cash collections in that effort. We do it internally. We do it externally with some good vendors.

And I think this eligibility screening we do will be very helpful when Medicaid expansions starts, and try to make sure we get the Medicaid people enrolled. I know our own internal reference last year enrolled 60,000 accounts for Medicaid, and I think that type of effort will be very beneficial to be able to do it yourself when Medicaid expansion starts.

That's very helpful. And if I could, just one other question here. Really around other operating expense, Larry, you referenced it as having a bit of upward pressure. Some legal, obviously, in there. But just stepping back and looking at the number, it has gone up. So can you just give us a little bit more flavor for what's been driving that? And how we should be thinking about that for 2013?

Yes, if you look at it on a quarterly basis, I think I mentioned the malpractice is up 30 basis points, and year-to-date it's about flat. I think we had an earlier benefit in the second quarter of 2012. I know our contract labor is up slightly, about 20 basis points. And most of that increase revolves around provider taxes, when it's a new provider tax programs. Earlier in the year, no new provider tax programs in the fourth quarter.

And I think that's what's driving most of that activity, maybe a little bit in the repairs category, 10 basis points, but in the quarter and similar type statistics other than malpractice was flat for 2012. But I think our business taxes were also up in the fourth quarter.

Okay.

For the year.

All right. Thanks a lot.

Gary Taylor, Citigroup.

Just a couple quick numbers questions and then a bigger picture question. Larry, on California provider tax, I just want to make sure I wrote down correctly what you said. So, starting April of '13, a figure that comes in at 10 basis points, I thought I wrote down. Is that right?

I thought I said 10 basis points. Yes, correct, that's right.

So it's just -- so that's $13 million for the whole year?

Well, that would be the benefit that would be retroactive from January 1st all the way back. In other words, it's not the whole year. And you'd also get a benefit going forward.

So that's smaller then (multiple speakers)?

Yes.

Smaller then. So basically it's not very material to the guidance?

No, but it seems to be a lot of questions with provider tax programs, and so we elected to announce it early. And then it's included in our guidance, so there's no confusion about what's in the guidance and what's not.

Got it. No, I appreciate that. I just wanted to -- I just -- it didn't look like it was very material, so I just wanted to make sure I wasn't thinking about it wrong.

And then on medical malpractice, I know you talk in basis points and I'm not always quick enough to get that written down and think about it in dollar terms the right way. But can you just kind of run through like -- what was, on a dollar basis, med mal in the fourth quarter? And what's really the right run rate on a quarterly basis going into '13?

Yes. On a run rate, I think 30 basis points would be about $10 million extra expense -- $10 million or $11 million extra expense. So when you look at it on a run rate basis, it's probably around 1.2% of revenue, which would put it somewhere in the $150 million for a year. And I would hope that we would be at that amount a little better.

I just would add, as Wayne referenced, some of the efforts on safety and some of our efforts on our companywide malpractice premium credit program. A lot of our success there and efforts that's helped drive our malpractice are settlement of cases through our lawyers, and risk management has been pretty successful. But on a run-rate basis, around 1.2% of revenues is what we've run the last couple of years. Hopefully, we'll be a little bit less than that for '13, as to all the efforts that we've got underway are there.

So roughly $40 million a quarter but this quarter, you booked almost $50 million -- a little higher than a kind of a normalized number?

That'd be correct.

Okay. And then my two other quick ones.

One, when you're thinking about the DSH cuts for the fourth quarter of '12 that you've put in your total Medicare pressure statement that's built in your guidance, what are you -- can you just kind of walk us through -- HCA raised this issue that, based on a proposal by a consultant that hasn't yet been proposed by CMS, that as much as one-third of all their DSH money could go away from a definitional change before the ACA cuts even actually take place.

And not to have you guys go against them, but just what is your thinking on where that stands? And I think the industry is lobbying for more inclusive definition of uncompensated care to include discounts on a parity basis with charity. But is there any update to your thinking on that?

We don't have any more information than what they would have. There's been some calls I think maybe since they had their conference call. But we're waiting for the regulations to come out.

You would think that surely discounts are similar to what charity and bad debts are and that would be fixed. The other issue is if you use some cost formula of the companies that are efficient, such as us and HCA and others would probably get a little less DSH in that allocation, which would be unfortunate. But that could happen.

And so we tried to take what we do and have gone through a lot of efforts and tried to take pretty much what's out there now. Hopefully, as time moves on, these estimates will be a little high. But we decided to put that in our thought process for 2013 and that's why we developed the range that we did. I think that range is like 10 to 15 basis points, which would be $15 million to $20 million for the fourth quarter.

We'll know more in April and you'll know more -- a final answer in August, I think.

It's the last question, and I appreciate you guys are always pretty candid. So can you just kind of talk about your latest thinking on negotiating reimbursement rates for exchange plans? I mean that's obviously one of the critical assumptions in some of the Street estimates for how the ACA is going to impact the industry.

And we've got payers on one hand who are talking as low as Medicaid rates, then we have hospitals on the other hand saying, for a family of four making $90,000, this is going to essentially be a commercial product at the high end of the scale. So any updated thoughts on how that's going and where that may fall out?

We just -- we're really just getting started good on this and I think we're doing fine. You know, it's a little -- I don't really understand the payers and their conversations; they would like for it to be - we should put that in there -- they would like for it to be a Medicaid rate when it's all said and done. It's hard for me to understand how they're going to get a 40% to 50% increase in the premiums on individuals and then try to reduce the payment rate on that.

But Larry may know more than I do about that. But I think we're doing fine.

Yes, I'd just say -- first of all, negotiations are confidential, and we're happy to respond to it. Because some people -- some major players try to target Medicaid rates or Medicaid to Medicare.

Our negotiations, which have been more with regional players - some good in size - are closer to the commercial rates. And we're not going to get into specific locations of those. But I think, as we've said all along, that I believe that we will stay close to the commercial rates, which we think for 2013 will probably go up 5% to 6%. And that would be our objective. And our managed care team does a pretty good job of trying to stay close to what their objectives are. They're very focused on it.

And from what we can tell right now we're not going to be left out of the networks. And we should -- especially the type of networks we have, hopefully, we'll continue to stay close to the commercial rates.

Okay. Thank you very much.

A.J. Rice, UBS.

A couple of questions. First of all, just to flesh out a little bit your thinking about HITECH. And obviously, it came in a little better than expected in Q4, and then also in your guidance relative to maybe some previous commentary. What's driving that? Or is there any play in there on acquisitions having an impact?

And then maybe just update us generally on where you are in getting the portfolio qualified for the Stage I compliance?

What we've got in HITECH -- we don't have numbers out there, but a lot of analysts doing some math work have done a number that says a $600 million to $700 million opportunity for a company our size. And we've got the physicians, which will be able to get Medicaid and Medicare.

There's still a reasonable number of hospitals we're working on in Stage 1. But we had $60 million approximately in 2011 and $127 million this year. So that's $187 million. If you were chasing $600 million to $700 million, that just says you've got a lot more ahead of you and some of that is Stage 1 activity for probably 15 to 20 hospitals, probably in the ballpark of what we've been working on, and some more physicians.

I think if you think about overall, the one reason it was up, we were able to get a couple of hospitals we acquired in the first part of the year, done. So the growth of above the guidance, high end of the guidance, about half that $7 million related to acquisitions. And the other, about half of it related to -- or about one-third of that related to physicians.

I think we have a good year, and keep in mind you're also into the second year, you're going to get money. So we feel pretty good that we'll be able to stay in that range of 1.1% to 1.2% of revenue, which is an increase over what we had last year.

Okay. I think you'd already been asked earlier about the exchanges and the pricing there. Can you just maybe step back more broadly and give us whatever thoughts you want to give us about reform, and how that seems to be shaping up?

I know there's a lot of discussion about how quickly the coverages will ramp up, and whether that -- what that means for hospitals versus payers, et cetera. And maybe your sense of what are the variables that you need, where the greatest uncertainty is as you look at reform and try to figure out what it might mean for you.

Yes, I think there's a couple of things that - just the administrative side of setting up the exchanges is a huge process. I'm not sure when and if that all can get done by October. And I suspect some states will be faster than other states. But it ultimately will happen. It may take it a little bit longer, but it ultimately will happen.

Whether there will be a consistent way of managing exchanges, I have no clue. I don't know that the government has a great process in place now to do that, and certainly states may not as well. But they may change their mind and turn this over to somebody who can actually do it, so - can actually administer this. So we'll see when all is said and done.

I think it's moving -- it's going to move forward. I don't mean to, in any way, indicate that it's not going to move forward, because it's here and it's here to stay. I'd say in terms of risk, it's around Medicaid expansion. We're working very hard in the states that we have, to make sure that we do everything we can.

I know in Tennessee, it is a very large number for the state. It's $22 billion in 2013 to 2022, and it costs the state about $1 billion to insure another 285,000 people or so. So, as states think about it and look at it, it's the opportunity to -- clearly, to insure those people, it's an opportunity to help in terms of the health issues around that part of the population. So, I think when it's all said and done, rational minds will prevail, and we'll see other states think that it's the right thing to do.

Okay. Maybe one last thing I'll slip in here is on the physician recruitment. You've obviously had a long history of being sort of an industry leader in doing that. As you look at reform, do the type of people you go after, physicians you go after, change? The physician availability, is that changing because of reform? Is there any impact on them?

Yes, I think there is all this discussion around -- and as you look at the numbers of people that are going to be insured going up pretty dramatically over a relatively short period of time, can the current system accommodate? Can the current physician system accommodate? A lot of those patients are primary care patients, and I'm not sure the system can accommodate that.

We, actually, in terms of our extenders, mid-levels and nurse practitioners, I think in 2012, we recruited something over -- like 700. So we're busy doing that as well, and trying to think about that, particularly in our large practices, how we can develop a better system in terms of seeing more people, and providing more opportunity for people to see nurse practitioners and others, as well as get to the physicians.

So, that's a challenge for us. It will be a challenge for everybody. It's a challenge for the country as we move forward.

You know, A.J., we had about 250 nurse practitioners, et cetera, in 2008, so we've added a lot since then. So, as Wayne said, we're up to 700.

The other thing is a lot of the Medicaid population today that's not insured uses ER, and we've done a real good job of enhancing our ER, improving our ER, the structure of ER. So that activity -- a lot of our self-pay business on an outpatient now comes to the ER and that's probably be another -- that probably will continue for a while.

Okay. Thanks a lot.

Gary Lieberman, Wells Fargo.

Thanks for taking the question. What percentage of your 2014 commercial contracts do you currently have negotiated?

You know, we generally like to talk more about '13, and if we waited until middle of the year before we get into 2014. It's similar to what it's been. We're about 70% complete for 2013. So we're probably half of that or a little better. But -- and people didn't say what percent it is and you really can't take 30% or 40% and interpolate for a number. We're 70% complete for 2013. And I think we'll be in the 5% to 6% increase.

Okay. And is there any sense that the commercial payers are sort of going slower with regards to '14, maybe in some attempt to try and tie the exchange negotiations with your typical commercial negotiations?

If I remember correctly, we're about the same percent today for '14 as we were last year for going into the -- I don't think so.

I don't think there's any indication so far that we can see any of that kind of activity.

Okay. And then with regards to reform, there's been -- I guess most of the focus has been on the impact of bad debts. Have you guys given any thought to utilization changes and how you think reform may impact that?

Well, I think everybody is trying to think about how we manage bundled payments and readmissions and all the above. I actually think productivity is going to become a pretty important issue going forward. So all of us are thinking about that in terms of how we best position ourselves. I think that's one of the values of having a very large system, is being able to do things that would be helpful there.

In a prior life, I had the opportunity to manage actuaries and I think every actuary would tell you that (multiple speakers) --

That may be what's wrong with you.

That's probably so. (laughter) Every person would probably tell you that when you give people insurance that don't have insurance, you're going to have an uptick in utilization.

Okay. And so I guess, as you're thinking about reform, is part of that preparing for that? And do you have any initial thoughts in terms of percentage uptick or anything like that?

I think we've got plenty of capacity. And you know, if you look at Massachusetts, it's around 10%. Whether that holds true or not, but it's clearly a -- should be an uptick.

We just talked about nurse practitioners and some of those kinds of things that we're working on, in terms of how we might manage this going forward. But other than that, not really.

Okay. Great. Thanks a lot.

Ralph Giacobbe, Credit Suisse.

Wanted to ask about the volume side. Inpatient admits were up for the first time in years. And so I guess just general commentary around the sustainability of that. And then anything to highlight in terms of geographical region showing better or worse in terms of volume trends? And also, if you can help with volume trends by payer. Particularly interested in the managed care side and whether there's any indications that things are improving there.

Well, we gave out guidance on adjusted admissions because again it's 52% or 53% of our revenue. I know the focus on admissions and it's important, but we'll stick with our guidance there. And we don't have a specific guidance for admissions. I would say the first quarter is going to be a little challenging. As you lose the Leap Day, you lose midweek day as it relates to New Year's Day and you also move Easter in. So that would be a little bit of a challenge.

Our overall admissions, and adjusted admissions, the change in managed care and other was better than the overall for the Company. And I think we've had that way for a while. And so I hope that our managed care admissions would continue to do better than the Company average.

You might -- the terms of geographics or demographics, the only thing is, is that our larger markets are performing better than our smaller markets.

Yes. Our smaller markets still continue to be a little bit below the Company average.

Okay. And then, I guess can you talk about whether you have sort of appetite to potentially take on more risk? There's been a lot of talk on ACOs. And maybe also any interest in maybe even select markets for yourselves to kind of offer an exchange product?

I think it's way early in terms of risk. And a lot of the risk that currently is - people are talking about is bonus risk. If you do certain things, you might get a little higher payment. All that will ultimately go to full risk.

I think it's pretty early. I think we're well-positioned. I think we've got large practices. We've got concentration. We've got resources in place, the ability to provide the services. We clearly have demonstrated quality. All of the above that we need in place to take risk, but I think it's a little early to look at very much risk.

And we may have -- we may end up taking a little risk along the way. But I think it's a little early for us. I think we're very cautious, primarily because Larry and I both have a fair amount of experience with this, and we've seen what happens across the country when people start taking risks and don't have the ability to understand it. That's why Larry managed the actuaries before. It was all about that.

So -- and if you look at risk as a -- around the country in terms of component of payers, the geographics are relatively small. South Florida, maybe some in the Northeast and in Minnesota and the West Coast; there is not a lot of risk all over the country yet. That will come with time, but it will not happen overnight.

And Ralph, if you look at the ACOs, there was a few done here recently, but just before that, I think we looked at it and the ACOs touched less than 5% of our population. So I don't think the ACOs drive the Company. It wouldn't be much of a challenge to us, but if it becomes that, we'll have to adapt accordingly. But as we know it right now, ACO should not be that big a challenge to us.

Okay. That's helpful. And if I could squeeze in one more. I guess, are there incremental investments that you're making in 2013 to prepare for reform in 2014? And I guess I'm talking from both an operational and outreach perspective. I mean, do you think you can have a role in getting people signed up for exchanges and/or processes in place to get people signed up for Medicaid?

Well, I mentioned earlier we have an eligibility screening vendors that -- both internally and externally. Internally, it takes for about 60 of our hospitals that are part of the 80 or 90 by the end of the year. And they'd be a good tool since they're already dealing with Medicaid activity, for us to use them. And we are looking at ways we can use that organization and also use some of our financial counselors in our hospitals to get people enrolled in Medicaid.

So, yes. But I think that would be the primary thing. And -- but I think we have plenty of capacity - I don't think we have to worry about our capacity perspective - and plenty of resources. But we are looking at the eligibility to help us do a good job for that Medicaid expansion.

Okay. Thank you.

Kevin Fischbeck, Bank of America.

I wanted to go back to the rates on the exchange. I wasn't sure if you guys are seeing anything different in your contract negotiations, as far as exchanges go, in those markets where you are the sole community provider, versus markets where you're not.

Are you getting -- is it -- are the rates coming together more quickly in the markets where you have better market share? Or is it -- is that a function of your market share? Is it a function of that's where you tend to deal with the regional managed care payers rather than the national ones? Any color there about sole community versus not?

It's predominantly regional. And when we start to negotiate, we try to do it on a statewide basis, cover most of our states. Most of the national players are not going to be interested in our small A.D. hospitals or sole providers. I think I would think they're probably going to concentrate, as I understand, on the larger markets. So most of our probably activity would be around the regional players with some of our bigger markets. You might do the national players; the negotiations aren't much different.

Okay. That's helpful. And I don't remember hearing you give an outlook on the Medicaid side. Did you give an outlook on Medicaid and what you're seeing there?

Yes. It could be down a percent or two for 2013. I think we've got a few states, Texas in particular, that could cause us to be down a little bit. We were up about 1% in '12, so it could be a little bit of it going the other way. And I'd say that our biggest change would be with one of our UPL programs. It's probably not going to have the funding it had. We also had some provider taxes that were favorable in 2012, that were more than one year and that you've got to take into consideration. So that's the two big negatives for 2013.

But it won't be anywhere near the challenge it was in '11. Not quite as good as it was in '12 and it's down a percent or two.

And then as far as the Medicaid expansion, is there a thought that the rates that you get on the Medicaid side would be similar to what you're getting for comparable patients? Or that we're really kind of creating a whole new benefit, because where we're going to be covering [child with] adults that we just really don't cover in right now. And that the rates for those people may end up being better than what you're currently seeing on the Medicaid side.

All the insurance companies are putting their bids in, I think, in April. Is that when the bids are due?

Yes, about the Medicaid, I think that's on the exchange.

The one thing I would say is that the case mix of Medicaid today is lower because it's primarily women and children. So if you put an adult male in with heart trouble and orthopedics, the intensity of service would be higher. And you should also probably have a higher payment if it's paid in a DRG. But it's generally going to be whatever the Medicaid payment rate.

But the opportunity for having a higher intense business and new people coming in would be better than existing Medicaid people who are predominantly women and children.

Okay. So you think it will be more a mix-shift issue than a rate issue?

Right.

Okay. All right, great. Thanks.

Andrew Schenker, Morgan Stanley.

So, your guidance includes three to four acquisitions. I think, at this point last year, you already had one under your belt and another one pretty close. So if you'd just update us on where you are in the process and how the market looks today, if there's any changes there. And also, if you could just remind us of how your 2012 and past acquisitions are ramping up?

Let me just talk to the opportunity here. There's -- continues to be lots of opportunities, but as I said earlier, we're being very selective. We're looking for opportunities that will enhance our current networks, are there opportunities where we might establish a new network? So I'm not concerned about the fact that we haven't done anything yet. It's still early in the year and I think there's plenty of opportunities out there.

Larry can talk about the other point.

Yes. I'd say the tail of 2012 going into '13 is around $100 million. That's Blue Island that closed in March in New York and there, which is less than it was last year. We had Moses Taylor and we had Blue Island done almost before it was called, and we did -- we had [York] committed to.

We would think in the hospitals that are to be done would be more in the second half of the year, and maybe worth $100 million -- to $200 million in revenue. That's when recent revenues or growth rates are lower. We're doing pretty good on the acquisitions. We did better in the fourth quarter than we did in the third quarter, better than we did year-to-date.

Going back and looking at it, we continue to make progress. If you quantify it there's about $1.3 billion or $1.4 billion revenue that we bought in 2010, '11, and '12. While they've improved over last year, there's plenty of opportunity for improvement. So that's one reason we think we can have good EBITDA growth in 2013, is the benefit of those 13 or 14 hospitals. But we will have less early on acquisition revenue in 2013 than we did in '12.

Okay. Great. And then just wondering if you'd seen any changes recently, at least in the last quarter, on your one-day stays or RAC audits, if those have been trending in line or changing at all? Thanks.

Yes, the one-day stays have been relatively flat throughout the year. We haven't had to call it out. Observations have been relatively consistent year-to-year. Denials came in probably just a little under 20 basis points for the year. Denials and both RACs and Medicare denials and that was consistent for I think we talked about last quarter. So not much of a change on a year-to-date basis versus where we were year-to-date last quarter.

And I hopefully -- we would say that, over time, technology and moving to outpatients is going to happen, but it hasn't been something we've had to talk about in 2012.

Okay, great. Thank you.

Justin Lake, JPMorgan.

First question, just to go back to reform. You mentioned that the -- Larry - that the Street has estimates for reform that would seem to indicate EBITDA should grow meaningfully in '14 or '15. Just curious how you feel about the economic impact here versus the Street estimate. Do you think we're being too conservative, too optimistic? Can you give us some color there?

I know you've got something in the single-digits EBITDA growth and other people have got something 10% to 15%. I think, as Wayne said, one of the variables you've got to watch is in this Medicaid expansion, and of course, the movement of exchanges. But I think most people all tried to do that.

If you'd put out a little later it would've probably had a little bit more factoring. I think it's like in our situation, 70% of the markets probably would expand and 30% may not. But I think, over time, I think, as Wayne said, most people will expand. It may not be in '14, it might be a little bit later, but the current estimates of throughout 2014 and 2015, we're getting about 10%, is where most people fall out -- growth in EBITDA.

And how you -- versus that 10%, how do you guys feel when you look at the numbers?

We'll tell you in sometimes the latter part of the year.

Okay. Great. And then just lastly, on the exchanges, someone asked about rates. I just want to follow-up there. It seems like the focus of managed care is on creating narrow networks.

First, is that what you are seeing? And how do you feel about your inclusion in those networks? And then maybe you could just give us some feel on how your commercial rates look versus Medicare? Your average commercial, was it 150% of Medicare, 200% of Medicare on average? Just to kind of ballpark you versus the rest. Thanks.

Yes, let me just speak to the network issue. I think we're very well-positioned in terms of networks, both on a regional basis, a statewide basis, or a local. As I said earlier, we've got 80 facilities where we are the only hospital in town. We are the network in those communities. In the other communities, we have size and a large footprint.

So we're in very good shape in terms of not being excluded from network. There's two components of being excluded from network. One is not being able to offer the services; and then secondly, is demonstrating quality. I think that's why we've talked about this over the last number of years, that those are the two things we've put a lot of focus on going forward. And I think we're in very good shape in terms of being able to be part of the vast majority of the networks and not being excluded.

Larry can talk about rates if he wants to.

We don't have public information out there, but generally, we're 150% or so of the Medicare rate collectively. But you've got to remember there's a wide range of managed care rates, that not all managed care companies are paid the same.

And just in terms of, as these negotiations are going on, are you here -- is managed care presenting this as we're going to offer you a narrow network -- meaning we're going to offer you on a narrow network, can you give us a discount and you'll get more market share if we're narrowing this network? Or (multiple speakers) -- is that not right?

Justin, we can tell you've been focused on managed care a lot here lately.

Clearly, managed care companies need a lot. I think we'll work well with managed care companies. It's going to vary by market. And I don't think -- there's some managed care companies want to do narrow networks. There's some that may only do 10 or 12 locations; some 20. And I think it just has to play out.

But I think, as Wayne just said, we're in a good position to think we'll be in most of the networks we want to be in. I don't think you'll see us do Medicaid rates, which is what a couple of them (multiple speakers) -- we'll just have to see.

(multiple speakers) We love managed care companies. And we're more than happy to negotiate at the table, but we're not going to negotiate publicly. If they think it helps them to negotiate public, then we're happy for them. But we're going to do our work at the table and then we'll talk about it later.

Thanks, guys. Appreciate it.

Frank Morgan, RBC Capital Markets.

A lot of questions have been answered, so these are a couple of random ones. From a RAC activity basis, can you talk about what your overturn rate is on the denial from RAC audits?

I think on the ones that we go after it's 79%, I believe.

Okay. In terms of -- you mentioned about the investments you're making to deal with the whole one-day observation stay issue; are there any incremental kind of software investments or software updates you'll be making as part of this kind of InterQual implementation that I'm assuming now is mostly done?

InterQual is completely done. And the only thing I'd say we may do this year is enhance some of our case management programs that we've turned to, just to make sure we've got a good, effective case management. It shouldn't be a big investment, though.

Okay. And then finally, just with the recent changes in readmission policies, can you give us any updates or color on how that's going so far for you? Thanks. I'll hop off.

We've reduced the readmissions rather nicely, but I think our annual cost for 2013 starting October, the Medicare year was [$7 million]. And I think the next time it's run, we'll have a lesser percentage of readmissions as an issue. We've also involved our home health to help some of our operating people. So, hopefully, it will come down.

Okay, thanks.

Mr. Smith, I now turn the conference back over to you for closing comments.

Thank you for spending time with us this morning.

Our consistent ability to drive revenues and achieve cost efficiencies in this environment demonstrates solid execution of our centralized operating platform. I 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 excellent operating performance for the third quarter.

We remain focused on our business strategy and improving results. Once again, if you have any questions, you can reach us at area code 615-465-7000.

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