Community Health Systems Inc (CYH) 2013 Q1 法說會逐字稿

Good morning. My name is Adrian and I will be your conference operator today. At this time, I would like to welcome everyone to Community Health Systems' first-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, Adrian. Good morning, and welcome to Community Health Systems' first-quarter 2013 conference call. Before we begin the call, I would like read the following disclosure statement. This presentation may contain certain 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, and good morning and thank you for joining our review of the financial and operating results for the first quarter ending March 31, 2013. Larry Cash, our Executive Vice President and Chief Financial Officer, is on the call with me. We issued a press release and an 8-K after the market closed yesterday that included our financial statements. A slide presentation accommodates our prepared remarks for those of you listening to the live broadcast of this conference call on our website. First, I will discuss some parts of our quarterly results and then turn the call over to Larry, who will add some additional details.

Our results for the first quarter reflect the current dynamic market conditions and a more challenging operating environment for healthcare providers. Our consolidated adjusted admissions were down 3.5% for the quarter, with the same-store adjusted admissions down 5.2%. Approximately half of our same-store adjusted admission decline is directly related to seasonal issues we discussed on the fourth-quarter conference call. Consolidated net revenue was $3.3 billion and adjusted EBITDA was $494 million for the first quarter of 2013. Income from continuing operations, including the loss of early extinguishment of debt, was $0.86 per share diluted; adding back the loss of extinguishment of debt of $0.01, our EPS for the first quarter was $0.87.

With that I'd like to review some key operating accomplishments in the quarter. The Company recruited 418 new physicians during the first quarter 2013, compared to 423 for the same period of 2012. In addition, we added 30 mid-level practitioners during the quarter. Physician recruiting remains a key component of our operating strategy. Adding new physicians improves not only the quality, but also the availability of services provided in our communities.

The Company is updating the guidance that was provided for the fourth-quarter earnings results. We've tightened the revenue guidance for 2013, lowering the high end of the range by $200 million. We have also tightened our adjusted EBITDA and EPS guidance, lowering the end of the range by $25 million and $0.10, respectively. These adjustments reflect the actual timing of sequester now implemented.

As we announced in March, the Company and the Cleveland Clinic have entered into a strategic alliance to find new and collaborative ways to enhance quality, reduce costs and create greater value for the services provided to our patients. We believe that this collaboration will allow us to identify synergies and develop solutions for ever-changing healthcare delivery landscape. Some key components of the alliance include the assessment and implementation of the Cleveland Clinic Quality Alliance in selected CHS markets, and a potential affiliation with the Cleveland Clinic Heart and Vascular Institute's cardiovascular quality management model in multiple CHS markets. There clearly is the potential for future joint ventures, clinical research and shared innovations. We are very excited about the future opportunities with the Cleveland Clinic, and will continue to update you as this alliance evolves.

Moving to our government investigation matters, there are no significant updates since our last call in February. We continue to cooperate with the Department of Justice regarding their inquiry into the medical necessity of short stay in-patient admissions from our hospitals' EDs. In the Reuille case in Indiana, another six-month extension to the pending stay has been requested by the government, with our consent, and has been granted by the judge. And in the Baker [Keitam] case in New Mexico, we are still awaiting scheduling from the court on a pending motion for summary judgment.

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

Thank you, Wayne. Consolidated admissions decreased 4.4% in the first quarter of 2013. Adjusted admissions decreased 3.5%. Our same-store admissions decreased 5.9%. Same-store adjusted admissions decreased 5.2%. As we previously discussed during the fourth-quarter call, the first quarter had a number of seasonality factors. January 1 fell on a Tuesday this year, versus a Sunday. We lost Leap Day in 2013. And finally, Easter fell in March, the first time since 2008. All totalled, seasonality represented approximately 50% of adjusted admission decrease in the first quarter.

While flu was rampant during the end of 2012, it was no longer a factor during the latter part of the first quarter, and actually accounted for approximately 10% decrease for the entire quarter. We continue to see lower Gyn and Ob admissions, and this reduction accounted for 10% of the decline in adjusted admissions. There were also some involuntary turnover in employee physicians since mid-year 2012, in an effort to improve physician productivity that generated approximately 10% of the decrease in adjusted admissions. And finally, a decrease in self-pay adjusted admissions represented 10% of the decrease. Adjusted admissions would have been slightly negative, taking into consideration the seasonality, flu, lower women's services, and the decline in employee physicians and self-paid.

We decided to review our historical performance from the fourth quarter to the first quarter for only the same hospitals for the past three years. 2012 first quarter, even adjusted for seasonality, had a much stronger volume growth in 2011 and 2010 versus the fourth quarter. So it simply states we had a very tough comp. I would also like to note that our managed care adjusted admissions decline were better than the overall Company average, as the most significant decrease was in Medicare and Medicaid.

Net revenues in the first quarter were $3.312 billion, compared to $3.297 billion for the first quarter. Please remember that the BNA settlement and the SSI adjustment of approximately $81 million were included with the consolidated revenue for the first quarter 2012. Excluded this, consolidated revenue increased 3% on a same-store basis. Net revenue increased 1.4%. Same-store net revenue per adjusted admission increased 6.9% year-over-year, due to higher intensity and improvement in payer mix. The March 2012 first-quarter revenue for adjusted admission was up only 1.9%. Our same-store Medicare patient mix increased 2.6% for the quarter. Our overall payer mix increased 2.9%. Same-store volume decreased 6.6%, with out-patient surgery just being slightly less than in-patient. And again, the seasonality issues explained earlier contribute to about 50% of their decline. Almost all the in-patient and out-patient surgical classifications were down. While our volume was down, our intensity increased. Our same-store surgical case mix for all payers increased 3.1% for the quarter, and our same-store ER visits were up 0.07% for the first quarter 2013.

Consolidated EBITDA was $494 million for the first quarter, versus $535 million for the same period a year ago, again excluding the fact that industry-wide budget and traveling settlement including expenses associated with the settlement and SSI adjustment, and reserves set up in the first quarter. Our consolidated EBITDA increased 3.4%. On a same-store basis, EBITDA was $496 million for the first quarter, a 4.3% increase. EBITDA margin for the first quarter on a consolidated basis is 14.9%, versus 16.2%. Again, excluding the items that I discussed earlier, the margin would have been 14.9%. Same-store margin improved 40 basis points for the quarter, 15.2% versus 14.8%.

Consolidated operating expenses increased 130 basis points as a percent of revenue in the first quarter, again excluding the BNA and SSI adjustments, the percent of net revenue was affected by that in the first quarter of 2012. Payroll and benefits also affected the increased same-store operating expenses improved 40 basis points for the first quarter, while payroll was up only 10 basis points. We had very strong expense management supply us with 50 basis points. Supply savings have been generated from reductions in cardiovascular, including pacemaker and stent, drugs, food and chargeable supplies.

Total AR days were 60 at the March 31, 2013, a two-day increase from December 31, 2012. The allowance for doubtful accounts was $2.258 billion at the end of the quarter, or 50.5%. The allowance for doubtful accounts and related contractual for self-pay was approximately 84% of the hospital's segment in self-pay receivables at March 13, 2013, unchanged from December 31, 2012. I am pleased to note, while bad debt is seemingly flat, our uncompensated care was 22.6% of adjusted revenue for the first quarter of 2013, compared to 21.4% for the same period of 2012, an increase of 120 basis points. Community Health System has a favorable payer mix. For the quarter ended March 31, net revenue by payer source on a consolidated basis was as follows -- Medicare, 26.1%; Medicaid, 8.8%; managed care and other, 51.7%; and self-pay, 13.4%.

Cash flow from operations for the first quarter was $57 million, compared to $187 million the first quarter 2012. Cash flow from operations for the last 12 months ended March 31 was $1.150 billion, or approximately 10% lower than the last 12 months ended March 31, 2012. The following items affected our results for the first quarter, compared to the first quarter of 2012. A two-day increase in accounts receivable in the first quarter caused about $75 million. Approximately $60 million was affected by the timing differences of payroll and some related liabilities. A reduction of $24 million related to a legal settlement where we paid $10 million in the first quarter of 2013, compared to an accrual of $14 million first quarter of '12, and there was significant reductions in accounts payable from accelerated payments in the first quarter of 2013.

Cash flow for the first quarter of 2012 also started off slowly. And similar to the results of quarter one 2012, we started off slowly in 2013. We'll be working to improve cash flow results for the remainder of 2013, but are maintaining our 2013 guidance of $1.225 billion to $1.300 billion. Total capital expenditures for the quarter just ended were $113 million, or only 3.4% of net revenue. And this compares to $185 million, or 5.6% of net revenue, for the first quarter of 2012. Our CapEx guidance range for 2013 ranges from $800 million to $850 million, a reduction of $50 million on the high side.

Balance sheet cash at March 31, 2013 was $285 million. As of March 13, 2013, the Company had available credit from the revolver of approximately $700 million after outstanding letters of credit. By looking at the balance sheet at March 31, 2013, we had $1.4 billion in working capital, $16.6 billion in total assets. Total outstanding debt at March 31, 2013 was $9.5 billion, of which approximately 82% is fixed, and our debt to capitalization at quarter end was 76%. At the end of March, we are party to $2.9 billion in interest rate swap agreements. During the quarter, we did buy back approximately 523,000 shares of stock at an average price of $35.80, or $18.7 million. The Company also amended its receivable securitization program to increase the availability from $300 million to $500 million.

Look at a couple other highlights from the quarter. Our revised 2013 projection of 0.5% to 0.7% versus 0.3% to 0.8% includes the implementation of the sequester on April 1, as well as also an estimate for our revised new Medicare disproportionate share and coding adjustments effective October 1. The prior low end of 0.3% assumed the sequester would be implemented in the third quarter. We tightened our wide guidance range in revenue, EBITDA and EPS, but lowered the high end to recognize those changes, as well as the first-quarter results. Also please note, we lowered our adjusted admission guidance to reflect our first-quarter results. Guidance will range from minus 2% to 1% positive. The slow down in adjusted admissions seems to be nationwide in the first quarter.

The first-quarter high tech incentive was $21 million, or $4 million below our guidance. The second-quarter high tech should be approximately 10% to 20% higher than the first quarter. Finally, our fourth-quarter high tech should be the highest quarter for 2013. The first-quarter 2013 high tech depreciation and amortization increased by $8 million, which reduced EPS in the quarter by approximately $0.05. Our EPS for the first quarter adjusted for overage to meet our debt was $0.87. The growth in diluted shares of about three million caused a reduction of approximately $0.03 in earnings per share in the first quarter of 2013.

Thank you, Larry. As we navigate through this transformative period in our industry, we look forward to growth opportunities as healthcare reform begins to take shape. We continue to focus on the fundamentals of our business and believe in our proven success in recruiting physicians and other healthcare practitioners, improving operational efficiencies, enhancing essential healthcare services, and careful deployment of our capital for continuing to support our long-term growth strategies.

With that, I will now open the call for questions.

(Operator Instructions)

Your first question comes from the line of Darren Lehrich from Deutsche Bank. Your line is now open.

Thanks. Good morning, everybody. I had a question with regard to your observation visit trends. I am curious to know if you can talk a bit more about the percentage of your observation visits that span to midnights. I would be curious just to see how the recent clarification in the IPPS regs might have an impact on you guys.

Yes. While we track that, it's not a big percentage of our admissions, the ones that would be over two midnights. The exact percentage right now -- it's a small percentage of those. But it is growing. I think you've heard other people talk about it growing. I think what the CMS has done will help that issue, but it also will help all the efforts of two-day admissions. The RACs are looking at it. And as I recognize, probably the RACs, generally when they come out and look at claims, maybe 20% or 25% may be two-day admissions. That could help from that perspective. But it's not that big a percentage of the observation that we have right now, but it is growing.

But their having physician order and giving a little clarity around this is helpful to everybody. It's obviously been confusing through the years.

Absolutely. Just staying on the proposed reg for a minute here, I am just wondering if you can maybe update us on your thoughts with regard to DISH and how your hospitals may fall out, given what CMS has proposed here?

Our executive, Larry Carleton, worked pretty hard over the weekend. And we originally had thought that the DISH, from a dollar perspective, would probably be in a quarter this year, a $15 million to $20 million. You can annualize that and see $60 million to $80 million. While we're still doing work on it, we conservatively think the quarter will probably be under $5 million. And that's probably a conservative estimate. It may actually be a little bit lower than that for 2013, which will mean it's going to be substantially less than what we thought on an annual basis. The various estimates, including ours, out there are generally anywhere from as low as $5 million to as high as $15 million for the year. And our estimates are probably in the range of that, ourselves. We tried to factor that in by lowering the reimbursement cut we had before of 0.8%, which included the sequester, and the Medicare disproportionate share down to 0.7%, so we tried to factor that in our revised guidance.

Got it. Okay. That's great. Thanks very much.

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Your line is open.

Thanks. Good morning. I just want to go back to the volume. I know you guys don't typically comment on inter-quarter trends. But just given what was a steep fall-off in March, any color on April trends so far, first? And then second, anything to highlight by geography or maybe by market size?

Let me just kind of start this conversation. We don't really like to comment on the months. I think the first quarter would be a good example of why you don't want to comment on the months, because January was pretty strong and then February dropped off and then March got even worse. So I think it is a slippery slope to do that. Larry can make up his own mind here in just a second about what he wants to tell you about that, when it's all said and done. But generally speaking, I think what we're seeing is across the board. It's across the country. It's not any particular one hospital. There is nothing systemic within our system. You can see that other companies are having exactly the same issue. I think Larry will give you a little color on April.

Just once. We don't like to do that. But we looked at April, and keep in mind, April got a little benefit because of the Easter movement. That's not a big component of seasonality. And also, it's got a little bit better stub, the last couple days. But that standing, April should be within a range of what our guidance is, a minus 2% to plus 1% for the month. That doesn't mean the entire month will be that. But it does at least mean April started out much better. We were down well over 5% for the first quarter in adjusted admissions, and if you back out half of it, it says April is running much better than the first quarter. And so hopefully, that will continue. But it has got some good seasonality factors in it.

And I tell you, we're not sure what that means.

Okay. And then, on to exchange contracting, maybe help us with what percentage has been negotiated. I am assuming whatever has been, that's sort of a carved out product. Is that right? And then the rates you are getting or would expect to get.

We are doing for 29 states, 135 hospitals. We've got signed contracts in 19 states. The 5 largest states are done. We've got 4 states we are in negotiations and we would change proposals. We've got 3 states we're seriously in discussions. We've got 3 states which have had little to no discussions. They are 3 states with only one hospital each. So we've done a lot, and we've got 19 out of 29 states done, and the 5 largest are there.

The prices, instead of getting into specifics, we've targeted to be close to commercial. We're in that range right now. We hope to stay in that range. And I think we'll be successful. I would add, I don't think we'll be in every narrow network. We are in some narrow networks inside of here, and there will probably be a couple narrow networks we won't get in. But so far, I think our managed care people have done a good job, and we hope they'll continue to finalize the 3 states we're still working on and eventually get the 3 small states done.

And Larry, just as it relates to that narrow network, to the extent that you're not involved in a narrow network, how does that work? If somebody shows up, is it just gross charge, reasonable charge? How does that work?

As I understand it, the way the programs work today, if an emergency happens and you don't have a contract, you're obligated to pay the charges. They may pay their charges. The patient may pay their charges to us. And of course, in a lot of our markets, we are a sole provider, being 80 hospitals. So that should help us. So that should be how it should work. And we'll work hard to be in all the networks we need to be in. And we've done a really good job of getting a lot of the contracts done in the last few months, and expect to finish it up and be a big participant with managed care.

Okay. Great. Thank you.

Your next question comes from the line of Josh Raskin from Barclays. Your line is open.

Thanks, and good morning. Larry, I think you mentioned that physician -- involuntary physician turn over was about 10% of the impact on volumes. I'm just curious, is that more or less than what we saw last quarter and maybe any color on what happened there.

It's more. We started the effort at the end of -- in the middle of 2012, and started making a little progress in the fourth quarter, just trying to improve the productivity of our physicians. We've got a lot of them. This is not a big number of physicians, but we did see, looking at the individual market volumes, we saw that affect us a little bit. I think we'll get these replaced. We're in the efforts of doing it now. We'll get out our people to do the work. But these are the volume statistics that our doctors who have left us, pretty much when we started talking about productivity and what needs to be done to make sure you're successful and we're both successful.

Got you. So these were docs that weren't buying in to it. And then, what's the lead time on replacing those physicians?

It's probably about a six months effort. And to some extent, if you're aware of what you may do, you may start a little sooner than that. So it will be a little bit of a volume hit this quarter and maybe a little bit next quarter, and it should work itself out in the second half of the year.

Got you. On the Cleveland Clinic, I am just curious, are there any sort of milestones that you guys have in place in terms of implementation of procedures. And then maybe related to the first question, are you seeing any impact on physician recruiting? Are you already getting a little more interest from the docs?

We've had a lot of interest in our relationship with the Cleveland Clinic, obviously, across the board from all kinds of different constituents. There is really no particular milestone. We have announced this week that we're starting our early assessments in five or six hospitals, and we're working on creative alliance in another four or five hospitals or so. So we've already started down the road. This will take a while to develop. This is about everything for enhanced quality to improved physician integration. So it's a great opportunity for us. We're excited about it. Everyone in our organization is excited about it. But it is a work in progress, and it will take a while before we see any real results out of it.

Josh, I think you heard say earlier also, one of the objectives was to reduce cost. So it should help us on that side, also.

Okay. Thanks.

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

Thanks. Hello, everybody. A couple of questions. On the cash flow trends, Larry, you mentioned that Q1 the last two years, this year and prior year, have been seasonally weak for you. Is there any dynamic going on there that would drive that weakness that's worth highlighting?

There is a lot of efforts in the Company, in receivables and performance, and a lot of people are paid base on year-end performance, and some are paid on a quarterly activity. And we work really hard at the end of the year, and that probably had some effect on receivables maybe climbing back up, and then we get better as time goes on. The legal settlement, we reserved for it there, and we paid it at the time we had to pay it. As it relates to the accrued payroll and items like that, you clearly have some payments for performance plans and stuff in the first quarter. Sometimes the health insurance that you had, probably the growth in the flu business in the fourth quarter of 2012 partly came through, including more health insurance payments in the first quarter of 2013, and that's unlikely to continue. And then probably some of our provider tax programs that we got, we get usually payments throughout the quarter. And usually, our first quarter is not one we get many of those. So that's some of our receivable increase. We had a little bit of a build up in Medicare HMOs, which we are working on trying to help us get through some of the processes there that may have been -- that got a little active in their cost containment efforts in the middle of 2000, in the first quarter. And that probably will correct itself over time.

Okay. And then on the high tech, you laid out nicely the incentive payment trend for the rest of the year. What about on the expense side? I know it was a drag for you this quarter. When you take it all the way down to the bottom line, what do you think expense trend looks like for the rest of the year?

It should get a little better, because we've got some trends out there in our guidance that shows us we have a little bit of earnings from it. I think what would happen would be is the fourth quarter's a lot of incentives, expenses to get that probably being done in the first couple of quarters. So probably the next couple of quarters expenses will stay the same. Depreciation will stay relatively flat, and probably grow a little bit as we get more done. But the operating expenses on a percentage of revenue should drop in the fourth quarter. But the next couple of quarters are probably close to what they are now.

Okay. And then, just my last question. Maybe just comment on the deal pipeline. I know you've got now three to four deals. At one point, I think it was maybe one more deal you were looking at. Do you think, as we get on top of 2014, the market stalls out for a little while, while people regroup and figure out what's happening, or do you see a steady pipeline that just persists right through the rollout of the HCA?

I think that some of these things are undeterminable, currently. But the opportunities are still there. We are seeing plenty of them. What we're trying to do is be very selective, that we add to the markets where we're trying to enhance our networks. And we've got opportunities. We have turned down a few along the way. And we've been very careful not to overpay in this environment. So I think we're in good shape. I think we'll do well. And I'm not sure what 2014 will bring. I suspect that we will continue to see opportunities for consolidation, because I think once you start seeing more and more people insured, I think that will drive more consolidation instead of less.

Okay. All right. Thanks a lot.

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

Great. Thanks. I just wanted to get a little more color on the volume numbers here. You mentioned that Medicare and Medicaid were down the most. I forget, do you just do fee for service in that number? So is mix shift impacting those year-over-year growth rates?

I don't think so. We put Medicare managed care in managed care other. It's about 6% of our revenue. I don't think it's changed that much as you go along. I think Medicare managed care was about 10% of our admissions in the quarter, and previously it was like 9.3%. So it's not going to be much difference. And Medicaid is in the Medicaid area, and managed Medicaid is approximately 50% of our business. And I don't think it's being Medicaid activity. What we did notice, as we've said, is the biggest change in the admissions, decline-wise, was in the Medicare and Medicaid. They were both higher than the company average, and the lowest drop was in the managed care. The self-pay was down 4.5%. That's been happening that way. It happened that way a lot in the quarters of 2012. One of our efforts in recruiting doctors and trying to grow is to capture as much managed care business as we can, because we try to recruit and add services that would help us in that category. And usually the first quarter, Medicaid is a little bit lower than the rest of the year. As we get out in the quarters, we find more people from the self-pay to be Medicaid.

Okay. So just to recap that, the Medicaid number is not skewed by mix shift. The Medicare number may be skewed a little bit, but you didn't feel like that was a big driver to the numbers.

No. Looking at the admissions, they didn't change that much from quarter to quarter.

Okay. So then, when you think about the reduction in guidance, is there an assumption that there is a certain payer that will account for disproportionately the reduction in volume outlook? And then also, since we're talking about adjusted admissions, is there anything in there about in-patient volume versus out-patient volume trends being dramatically different?

Well, we went to the adjusted admissions because 53% of our revenue is now out-patient. Go back a few years, it was mid-40s. Usually, admissions grow a little bit slower or decline a little bit faster than adjusted admissions, because moving to out-patient, it's a similar activity here. We're down 5.9% and 5.2%. I would expect that the admissions would follow. Had we given guidance, they'd follow similar to what we had here, that we'd have a little bit bigger decline, a little bit smaller increase in the admissions. The adjusted admissions by payer, I would expect for the managed care hopefully to continue to do well. You heard us talk about all the exchange contracting we're doing. You've heard us talk about trying to get contracts with managed care companies. We've got a lot of help with the fact that we've got 80 sole provider hospitals. We've got a lot of talent and contracted people who I think will help us make sure we get good activity. And a lot of the recruitment is around trying to get doctors that will see managed care business.

Okay. So you think that the total numbers should look, directionally, payer wise, similar to Q1 results?

That's similar to what we had in 2012, as the growth in the business was a little bit more for managed care and other. There's a little bit of Medicare and managed care admissions in there, but not that much.

Okay. And then, last question. Medicaid outlook. I don't think I heard you give an update on that. Is there any change in trend there?

Last year, we were up about 1%. I think we'll still be down about 2% for 2013, which is similar to what I think I said in the last quarter. So it's pretty much where it was, that we had in February.

I think last quarter, it was down 1% to 2%. So is it a little bit worse, or you're just saying it's the same as what you said last time?

It's around 2%.

Okay. All right. Great. Thanks.

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

Hello. Thanks. Larry, you don't have a ton of Medicare Advantage, but you have some. I think you said maybe 6% of revenue. Are you seeing any material change in behavior with those health plans on denials, risk sharing with docs, incentive payments, anything that's different today versus perhaps last year?

We're not seeing a lot of risk sharing or incentives in our markets. We are open to do that, if that would help us grow and assuming it works for us. Wayne and I both have a little bit of experience doing Medicare risk and Medicare risk sharing. As it relates to the denial effort, there was a little bit more in the first quarter. It seemed to start as the quarter went on. And we just have to work through that and get us help as needed, to try to make sure that the appropriate work we're doing, we get paid for. I think it was the receivables that were up a little bit in the Medicare HMO category. Overall, I would say overall, denials -- because it's not a big percent of our business, and maybe as a follow-on to your question, or a good comment was our denials are about same percent of revenue today as they were a year ago. And it's been relatively flat. We were up a little bit throughout the year, but we're pretty close to the same percentage of revenue for -- I think managed care is 20 basis points. It's not a big number.

Okay. But overall, you don't feel like their behavior is much different today than it was 6 months or 12 months ago.

Not overall. But in a few situations, we have a little work do trying to make sure we get paid for appropriate work we're doing.

Okay. And maybe just any color on any internal discussions you guys are having about outreach efforts to educate some of the uninsured in your markets about coverage options. Just curious maybe what process you guys may be developing.

What we did first was go back and look for 2012. We had about 500,000 individual self-pay uninsured patients visit, and they generated about 750,000 visits. As you would expect, most of that came through the Emergency Room. And we had about 450,000 in 2011, and again, most came through the Emergency Room. We've looked at the age of those people, and it's spread around, like 12% over 55 and a few percentage are under 19. We are beginning to develop efforts, used our eligibility screening vendors who now qualify people for activity. And actually, they had a good first quarter, too. We got about $15 million more from that effort, which helped bad debts in the first quarter.

Gathering all accounted data, looking at our marketing department, do we use direct mail or fairs or community affiliations? We've got the Senior Circle program out there. We've got a Healthy Woman program, and how we use that. We will probably not be a navigator, but there are efforts that we may probably be on some type of certified application to counsel or try to help people. To the extent that we use mail. And we'll probably have them dial into our call center. We have a large call center with eligibility screening service. We also have one inside our collection company, which we could use. We are thinking about how we, in our eligibility to screen people, we take care of about 60% of our hospitals. And our other hospitals are looking at how our financial counselors can help people. We may try to have, when people contact us to try to use the market place or the Medicaid portal to try to direct people and try to make sure they get through the process. There will be some effort going on, on our part. We'll probably spend a little money in the latter part of the third quarter to fourth quarter to try to help on this process.

Do you have a sense of what your success rate is in converting a Medicaid pending receivable to Medicaid? And then if you look at the newly eligible Medicaid patient population, is that percent any different, and do you think you could be more successful in converting some of those into an insured patient?

I think the advantage here is the process might be a little bit more automated and you'll have to help the people activity. I think it will make it a little bit more streamlined. What your issue is, is that people who get outside of the hospital are not as good about filling out the paperwork. I think the paperwork will be a little bit more standardized, and we'll try to be able to work through that activity. We've been pretty successful at getting people there. We only have about 15% or 20% of the people who just don't cooperate with us. And we've got a pretty good success rate. I think it's in the 60s, 70% of getting people qualified that would qualify. I would think this might be a little bit better.

I mean, the government's going to spend what at one time was $30 million of allocated, $300 million for marketing and outreach. I think that there's going to be a lot of advertisement activity. There will be some navigators involved, which we probably won't have that role. They'll actually get paid for their efforts to get someone enrolled. I believe in the markets we operate, most markets, where Medicaid has been expanding in the market, in the commercial market place or exchange market place, whatever term you want to use, there will be a lot of activity going on trying to make sure people take advantage of this.

Okay. Great. Thanks a lot, guys.

Your next question comes from the line of Andrew Schenker from Morgan Stanley. Your line is open.

Great. Thanks. So you guys mentioned the involuntary turn overs on the physician side related to productivity process you've got going on. Can you give us a little more color on how the productivity strategy is playing out, besides the turnovers, and what kind of ramp you are hoping on that?

Well, as you think about productivity, you can look at their work units and look to see what kind of specialty they are and how well they're doing, what kind of revenue they're getting and the collections off of that. And if they're working at a 25% productivity, that's probably not good. If they're working at a 60%, that is probably better than the average. So that's the kind of statistics, over the years, we've been gathering. I think Wayne has mentioned that we've added some talent in the area. We've added a new executive in charge of -- we've added a new financial person. We've got a good team in charge of billing and collecting. So we are doing a lot more statistics around physicians and how well they work, and trying to make sure that they're productive. And as with any process, if we find ways we can improve it, we'll go about doing that. That's what this is. I don't think it's something that's going to continue a lot throughout the year, but we did start something we hadn't done as much of last year. This is creating a little bit of a challenge on volume, and we'll work through it in the second half of the year to get these physicians replaced.

This is also a result, over the last numbers of years, in terms of the number of practices that all of us in the industry have acquired, our physician recruiting. So our skill level in terms of trying to be helpful, in terms of managing practice and enhance quality and improve productivity, are changing. And so we're working hard at that. And this is a result of all that.

Great. Then your pricing per adjusted admission was strong in the quarter after and normalizing for the rural floor. Can you maybe talk about the moving parts in there? I sense some of it was mix in acuity, but if you can give a little more color there, that would be helpful. Thanks.

Yes. I think I mentioned that Medicare case mix was up 2.6%, and all payer, 2.9%, and surgery up 3%. That's probably the best thing that helped the revenue grow. And our price increases are in the line of 5% to 6% for managed care. That's what we would expect. The volume we had, we had pretty good intensity. We had a little bit of a government increase, which of course, that went away on April 1. Those hurt categories. The out-patient intensity was pretty strong. Managed care payments probably fit well within that range there. We had some government reimbursement programs probably helped about 1% that we got. We did get a little bit of a help from some Medicaid provider tax programs that were there in the second, third, and fourth quarter and not there in the first quarter a year ago. But we were -- I think it was 1.9%. So we had a fairly easy comp last year. And actually, last year we were answering the question why it wasn't 3% to 4%. And so now you're 7% versus 2%. I would expect, just to be simpler, in the 3% to 4%, or maybe 3% to 5% going forward.

Okay. Great. Thank you.

Your next question comes from the line of Gary Lieberman from Wells Fargo. Your line is open.

Good morning. Thanks for taking the question. Maybe just go back to the proposed in-patient rule. You talked about the DISH cuts being less than your original estimate. Were there any other impacts in the in-patient rule, either from Medicare dependent hospitals or low volume hospital impacts that would apply to you guys?

The Medicare dependent hospitals would apply. We've got, I think -- you can go look on the cost profile -- we've got 11. Only a few of those are really affected the way they're paid. That's probably a few million dollars. The low volume is probably $10 million to $15 million of effect. Again, last year, that was stopped and then it was put back in place as part of the Taxpayer Act. And we've got that embedded in here, though, and that's likely to go away.

As it relates to the coding adjustment, we had an estimate there. I think we said $10 million, and it's probably now somewhere around $5 million for the fourth quarter. So that's a little bit better, and we tried to factor that into the reduced reimbursement cuts on the high end.

On the Medicare dependent hospitals, that's a few million annually or per quarter?

Annually.

Okay. And the same for the low volume? That was $10 million to $15 million annual.

Right, right. That's annual.

Hopefully, that will stay in place.

Okay. Great. That will do it for me. Thanks a lot.

Your next question comes from the line of Matthew Borsch from Goldman Sachs. Your line is open.

Hello. Thanks, and good morning. This is Brian Zimmerman in for Matt. Your supply costs were down below our estimates this quarter. Can you comment a little bit more on what you're seeing in that area, and what do you think the right level is for this going forward?

Well, we're down 50 basis points. We generally, for the years, I think last year was 30 basis points and the year before that was 40. So the quarter is a little bit better. When the surgeries drop 6%, that helped a little bit. I think we mentioned that the chargeable supplies, which were probably the biggest opportunity, and the categories were pacemakers, stents. We had a little bit of rebate benefit from the program we're in in drugs and food. I would not think that our supplies would always be 50 basis points better to help our volume increase and better performance, and surgery would make it a little more difficult for us to have low supplies, so that would probably help our overall earnings. But we are fortunate that the good cost management, good compliance in the quarter, because that helped us.

Okay. Then I know you're still expecting to add three to four hospitals this year. But have your views changed at all around capital deployment? Are you considering more debt repayment or buy backs?

We have about $80 million left on a Board authorization to buy stock, and we do at times buy, especially as stock option exercises that may take place. We have about $230 million availability in our credit agreement, and we will occasionally do that. But I think most of our -- and we did reduce our CapEx. But we think that we can grow the Company reasonably well at the $800 million, $850 million. I doubt if there would be a big pay down in debt. We are pretty happy with where the credit agreement is and the debt, and we've done a good job of extending it out. And we'll use our money primarily for acquisitions.

Okay. Then my last question is, you mentioned the commercial pricing trends remain at around 5% to 6%. What percentage of your 2014 contracts are booked, at this point?

Give me just a second. It is about 40% to 50%. We're about 80% done for 2013.

All right. Thanks a lot, guys.

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

Thanks. Good morning. Two quick follow-ups. First, on the acquisition landscape, can you talk about the competitive environment? Are you seeing any particular players become more aggressive of late, whether it's some of the for-profit but not public entities that are trying to get bigger or any of the local not-for-profits trying to round out their systems ahead of reform?

Yes, a little bit. You can see a little bit movement in terms of some people moving up and their price moving up a little bit. I would say that another area for large systems, there seems to be more competition than there has been. Obviously, there are some not-for-profits who are interested in large systems and are willing to adjust upward in that effort. So I would say the competition is increasing a little -- or said another way, price is moving up a little bit. But I don't think it's too terribly meaningful when it's all said and done. I think there is still a lot of good properties out there and a lot of good opportunities. And the difference that we continue to see is they're system opportunities versus just individual hospitals.

Okay. Then on the Medicaid expansion side, I think you've got a little exposure in Arkansas. Just curious, now that that alternative type of a plan seems to be going into place, what your thoughts are there on that versus a traditional expansion, rate differentials, things like that, and any other key states, from your perspective, in your book that are still outstanding, at this point, from an expansion standpoint?

I think the Arkansas project, if you want to call it that, is an opportunity. And clearly, Tennessee is working hard to determine the best way do this within Tennessee, and looking at Arkansas. A lot of this has to do with, I think what you're going see is a continuing interest in Medicaid expansion in every state, practically, when it's all said and done. But it's just going to take a while. Some of this is held up by what's going to happen in 2014, election in these states, and the Republicans' view of it, in terms of the Tea Party and all that. But having said that, we continue to hear discussions about there are a number of states who have an interest in moving forward. We are obviously close to Tennessee. And Tennessee is working very hard to try to find a good solution that works for them, similar to Arkansas.

Tom, and one comment, not about Medicaid. But if you look at the percent of Medicaid people, there's a pretty good percentage that fall within the 100%, 138% of the poverty level. With the subsidies that they'll be available to have, they'll be able to probably get the bronze or silver plan at little to no cost. And so there will still be an effort to hopefully enroll some of those people in the plan. And clearly, the Arkansas plan looks like one that should be helpful, if it rolls out as we think it will.

Okay. Good perspective. Thanks, guys.

Your next question comes from the line of Chris Rigg from Susquehanna Financial. Your line is open.

Good morning. Thanks for taking my question. I just wanted to come back to the comment you guys have in the slides about the Medicare and Medicaid adjusted admissions decline being higher than the Company average. What you saw in the first quarter, does that represent a change relative to what you've seen in recent periods?

I think the Medicare and Medicaid were a little bit more of a decline than they've been. But I think we said, if you check our transcripts, and we don't give a specific payer mix, directionally the commercial either growth or decline has been a little bit less. If you look at our revenue per payer, it's 51.7%. I think it's up over a year ago. It continues to move up. We lost a lot of our managed care in other back in 2009, and we've been slowly building it back up. So it's encouraging that when you lose volume, you lose first of all, self-pay business, and then Medicare and Medicaid was the best revenue producer, from a per unit perspective, is the managed care. And it's had a slower decline. And I think we had a similar situation to that for 2012.

Okay. Great. And then one other maintenance question here. Does the same-store EBITDA and EBITDA margin in the 2012 period include the rural floor benefits?

No, it does not. We wanted to not distort the same-store results, so we kept it in the non same-store consolidated results for the first quarter of 2012 and all the remaining year-to-date statistics. Our same-store will not have, either for the first quarter or any other first quarters comparing to 2012, it was put in non same-store.

Okay. Great. Thanks a lot.

Here is your last question from Justin Lake of JPMorgan. Your line is open.

Thanks. Good morning. First, on the IPPS reg seems to have some commentary on observation visits. Talk to anything over two midnights being billed as in-patient. Can you tell us how you think that might impact your volumes and the observation visit pressure, in particular, going forward?

Yes. I think we answered that question early on. But we don't have a lot of our observations over 48 hours. It is growing. You've heard other people talk about it. Ours are growing, also. I think the positive component would be the RACs, which some percentage of, 20% or thereabouts, probably the RACs look at two days. I think that would probably clarify that activity. And I think it would be helpful to have it talk about the doctor orders and should give us some clarity of what was a lot of confusion, prior to this.

Okay. Great. Then on Medicare Advantage, there was some commentary on a payer call this morning in regards to the contracting. Plans are clearly facing pressure here. Just curious in terms of if you've seen any engagement from plans in terms of renegotiating these contracts post the final rate release for Medicare Advantage earlier this month?

There's been no activity to renegotiate contracts. You know, it's only been a couple months. A lot of our managed care contracts are tied lower to the first of the year or some other event, and I think we'll do pretty well. We've not had any change of heart about the managed care that I'm aware of. We had a session, I think back in March, with our managed care people. Nothing came out of that discussion. There may be something, as time goes on, and actually the market basket update for them was a little bit better than the initial rule.

Sure. And just particularly, do you have any color you can share in terms of how many of your Medicare Advantage contracts are paid at a premium to the fee for service rate?

I don't have it committed to memory. There are some. It's not very much. I think early on, we probably got in some of our markets, and there's probably a few now that are there. But it's a relatively small percentage. I think I had mentioned a while ago, it was 10% of our admissions for Medicare, or 10% of our admissions. And it was 9%, so it's not moving much. There's a few in some locations where we are maybe a sole provider, but I don't think it's a big dollar amount.

Great. Thanks for all the color.

That concludes our question-and-answer session. I'd like to turn the call back over to Mr. Smith for closing remarks.

Thank you. Community Health Systems has a proven track record, with experience and financial resources to support and keep our hospitals viable in the local community. We firmly believe that hospitals will ultimately benefit from reform, as coverage is expanded, and we remain confident in our ability to execute our strategy in today's dynamic environment. I want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers, chief nursing officers, and division operators for their continued support and operating efficiencies. Once again, if you have a question, you can reach us at 615-465-7000.

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