Community Health Systems Inc (CYH) 2013 Q3 法說會逐字稿

Good morning, my name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems third-quarter 2013 conference call. (Operator Instructions)

I would now like to turn the call over to Miss Lizbeth Schuler, Vice President Investor Relations. You may begin your conference.

Thank you, Melissa. Good morning, and welcome to Community Health Systems conference call. Before we begin the call, I would like to 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. Mister Smith.

Thank you, Lib. Good morning, and welcome to our third-quarter call -- conference call. Larry Cash, our Executive Vice President and Chief Financial Officer, is also on the call today. After the markets closed yesterday, we issued an 8-K including the press release with our financial statements. Those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanies our remarks. I would like to begin the call with some comments about the quarter and then turn the call over to Larry, who will provide additional details on our financial results.

We are pleased with our results for the third quarter of 2013 during what has continued to be a very challenging operating environment for healthcare providers. Our net operating revenues improved slightly over the prior year period on both consolidated and same-store basis, in spite of ongoing volume weaknesses. We have also realized the benefit of our cost management initiatives, and we remain focused on driving operating efficiencies across our hospital system. We are currently in negotiation with the Department of Justice about resolving its claims in connection with the Department's investigation into Company short-stay hospital admissions for the years 2005 to 2010, as well as their investigation in our hospital in Laredo, Texas. Based on those negotiations, which are not final, we believe that a reserve of $98 million is sufficient to cover the federal government's claims for Medicare admissions; certain claims specifically related to our hospital in Laredo, Texas, and on other related legal expenses. This reserve does not include the claims in an investigation arising from Tricare, Medicaid, or third-party expense. Please note that this is a tentative agreement with the government, and we'll not be able to take any other questions concerning this matter. I would say -- tell you that the Department of Justice is well aware of our public disclosure on this. For the purposes of this discussion, I will exclude this reserve when discussing the third-quarter operating results.

Net operating revenues for the quarter ended September 30, 2013 totaled $3.2 billion; consolidated EBITDA was $473 million; earnings per share from continuing operations $0.69. Net operating revenue for the nine months ending September 30, 2013 was $9.7 billion; EBITDA was $1.4 billion; earnings per share from continuing operations for the nine months ended September 30, 2013 were $1.86.

With that, I would like to highlight some of the recent accomplishments.

We've been very busy on the acquisition front, as you know. In August, we announced exclusive negotiation with Akron General, a health system in Akron, Ohio. This system has three separate facilities with 625 beds and trailing revenue of approximately $575 million.

Sharon Regional Health System in Sharon, Pennsylvania, announced in late August that it executed a letter of intent for the sale of its assets to the subsidiary of Community Health Systems. The system has a 258-bed community hospital and 22 satellite centers throughout Mercer and the large counties. Trailing revenue is approximately $155 million. This would be our 18th hospital in Pennsylvania.

Finally, Metro Health announced in mid-September that it expects to explore a strategic equity partnership with us. Metro Health Hospital, located in Grand Rapids, Michigan, has 208 beds and was opened in 2007,. Trailing annual revenue is approximately $300 million. This would be our first hospital in Michigan that, of these three potential requisitions, represent over $1 billion in additional revenue. We continue to be very selective and have a full pipeline of acquisition prospects.

I would like to address the HMA acquisition. As we reported in our October 9 press release, we did receive a second request for additional information from Federal Trade Commission; the second request is a standard part of the review process that was anticipated. Also, the SEC has notified us that they are not reviewing our registration statement. The Company and HMA amended their merger agreement on September 24, 2013 to allow the new HMA Board of Directors to retain additional financial advisors to assist them in evaluating the merger. Once this evaluation has been completed, the Company expects to have a registration statement on Form S-4 declared effective by the SEC. HMA will proceed with approximate [valence] and the shareholder vote. As we have stated before, we expect the transaction to be completed in the first quarter of 2014.

Physician recruiting continues to be one of our operating strengths. We are very proud of our success in this area of the Company, recruiting 1617 new physicians for the first nine months. System wide, there is approximately 17,000 physicians affiliated with our hospitals.

Based on our financial performance in the third quarter, the Company is updating the guidance for 2013. We have tightened the range of our 2013 EPS guidance to $2.85 to $3.10. We have seen positive reimbursement from our value-based purchasing year-over-year of approximately 25%. Our readmission reduction program also reflects an improvement of 2%. Finally, our Cleveland Clinic quality alliance in heart vascular assessments in selected hospitals is progressing on target.

For 2012, the Company had 63 hospitals recognized as top performers on the Key Quality Measures by The Joint Commission. This is up from 50 hospitals that were recognized in 2011. Only 30% of the eligible hospitals in the United States were recognized for 2012. We are proud of our efforts to improve the quality of care in our markets.

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

Thank you, Wayne.

First, the third-quarter results for consolidated same store are identical, as all of our hospitals are now considered same-store. And I will discuss the consolidated op rates for the quarter and year to date, excluding the $98 million reserve that Wayne just described for the period of 2005 to 2010.

Our third-quarter admissions 2013 decreased 6.8% compared to the same period last year. As previously reported, our small hospitals continue to experience a lower volume than our larger facilities, and adjusted admissions decreased by 3.9%, part contributing to the decline in admissions in the third-quarter. About 20% of the decline related to the lack of fluid and respiratory. The EHR system conversions of both hospitals and physician practices to achieve high-tech incentives account for 15% reduction in cardiology cases, primarily low intensity; 20% of lower [remissions]; both Medicare and managed care, 15%; and the decline in admissions from OB -- women services, 10%. We also had some service closures of about 5%. Just note that the involuntary termination of physician's anniversary during the quarter.

Net revenues in the third quarter increased slightly from $3,212,000,000 last year to $3,218,000,000. On a same-store basis, net revenue increased to 0.2% for the quarter. Before-bad debt is up by 2%; and again, after bad debts, it's 0.2%. As we mentioned, the volume, search, and physician offices conversions from paper records to electronic medical records reduced the physician practice net revenue by approximately $10 million during the quarter. And we converted 800 providers in the third quarter, and we'll convert approximately 1800 providers in 2013. For the third-quarter, same-store net revenue per adjusted admission increased 4.3% versus the same period 2012. And we also -- same-store surgeries in the third-quarter declined 0.5%, a much slower rate of decline than in the first and second quarters. This small improvement is due primarily to orthopedic cases.

Same-store emergency room visits decreased 1.6%. Our same-store Medicare case mix increased 4% versus last year. Our all-payer case mix increased 2.7% in the third quarter.

Consolidated EBITDA was $473 million for the third quarter versus $477 million in the same period a year ago. Expenses associated with HMA acquisition, approximately $4 million; and the strike cost to one of our hospitals was about $2 million. Excluding those, we've been $479 million. For the quarter, EBITDA margin on a consolidated basis is 14.7% versus 14.9% a year ago. Consolidated operating expenses as a percentage of revenue increased 20 basis points in the third quarter primarily due to increased operating expenses, and it's offset by the increase in high-tech incentives. The increased (inaudible) operating expenses includes the expenses associated with the HMA acquisition and the strike in one of our facilities.

Wages and benefits increased 40 basis points compared to 190 basis points quarter to (inaudible). For the year-to-date basis, consolidated admissions decreased 5.4% and consolidated [adjust] admissions decreased 3.1%; same-store admissions decreased 6.2%. And again, what contributed to that similar to the quarter -- decreased cardiology, primarily lower-intensity cases, about 15%; lower admissions for women's services 15%; the lack of fluid respiratory, 15%; service closures and the seasonality in the first quarter, 15%; readmissions, 10%; the involuntary physician turnover, 10%; and system conversions, 5%.

Same-store adjusted admissions were down 3.9%. Our revised guidance for calendar of 2013 now ranges from minus 4.5% to minus 3.5%. Consolidated net revenues year-to-date were $9.8 billion, a slight increase from a year ago. Year-to-date revenue was reduced by approximately $20 million because of the physician office EHR conversions. Same-store revenue for bad debt was up 1% and after bad debt was up 0.2% of a percent. On a consolidated basis, net revenue for adjusted admission increased 3.3%. On a same-store basis debt revenue per adjusted admission increased 4.4%. Same-store surgeries are down year to date 2.8%, and emergency room visits are down 1%. Our same-store Medicare case mix for the nine months has increased 3.2%; and our same-store, all payer year-to-date case mix increased 3%.

Consolidated EBITDA was up $1,381,000,000 for the nine months ended September 30, 2013; and on a same-store basis, $1,398,000,000. Consolidated EBITDA margin was 14.1%, and same-store was 14.4%, down 60 basis points.

For the first nine months, consolidated operating expenses percentage of net revenue increased 120 basis points, payroll increased 120 basis points, also supplies that are operating -- rent increased 10 basis points, offset by improvement in high-tech incentives, and same-store operating expenses increased 60 basis points with payroll up about 80 basis points. We still expect to see improvements that were discussed at the end of the second quarter of $40 million to $60 million in the second half of the year. We achieved at least $20 million of savings in the third quarter and expense decline of about approximately $33 million for the second quarter.

Total AR&As were 66 at September 30, 2013, an increase of eight days at the end of 2012. The increase in the AR&As is due to the growth in state supplemental Medicaid programs, about two days, and also subsistent conversions related to high-tech of about two days. The alliance with (inaudible) Accounts is $2.391 billion, or 51%, at September 30, 2013. And the alliance with (inaudible) Accounts and relating contractuals for self-pay was approximately 84% of our self-pay receivables at September 30, 2013.

Community Health Systems continues to have a favorable payer mix. For the quarter ended, consolidated net revenue by payer source was as follows. Medicare, 24.2%; Medicaid, 10.5%; managed care, 51.4%; and self-pay, 13.9%. On a year-to-date basis, Medicare is 25%; Medicaid is 9.9%; managed care is 51.4%; and self-pay is 13.7%.

Some commentary about the healthcare marketplaces exchanges. 134 of our 135 hospitals in all 29 states are participating in healthcare insurance exchanges, and we have approximately 400 contracts. 128 of our 135 hospitals, 95%, have two or more deals on healthcare insurance exchanges; 83% of CH hospitals have a contract with the lowest-cost bronze plan, and 75% have a contract with the lowest-cost silver plan. 89% of our hospitals have a contract with the first- or second-lowest bronze plan, and 92% have a contract with the first- or second-lowest silver plan. These type arrangements should help us when the exchange activity picks up.

Cash flow from operations was $132 million for the quarter. On a year-to-date basis, it was $441 million versus $778 million. That year-to-date variance has to do with a much higher cash outflow for AP, $146 million. The timing and some compensation related liabilities, $85 million; the increase in taxes due to a refund received last year of $28 million. And also a 2012 cash flow included a $45 million benefit for the favorable B&A settlement.

Lower capital expenditure of the quarter just ended were $126 million, or 3.9% of net revenue. Year-to-date capital expenditures are $421 million, or 4.3%. Replacement hospital expenditures were approximately $5 million for the quarter and $42 million year to date. Our guidance for the year ranges from 75 -- excuse me, $750 million to $800 million, down $25 million. Balance sheet cash is $144 million, and at the end of the quarter, the Company had a valuable credit (inaudible) of $644 million.

Looking at the balance sheet as of September 30, we had about $1.398 billion working capital and $16.7 billion in assets. Total outstanding debt was $9.549 billion, of which approximately 77% is fixed. Our debt to capital ratio is 75%.

At the end of the quarter, we were party to $2.400 billion in interest rate swaps, a decrease of $400 million from the end of the second quarter. We did place two forward starting interest rate swaps totaling $400 million effective July 25, 2014 from a maturity of $900 million of swaps same day.

Some other important things to note, both this earnings report and our 2013 guidance. Approximately $65 million of high-tech incentives were recognized in the third quarter. This pretty much matched what was in our internal budget. We did the first part of the year offsetting these incentive payments with approximately $27 million in expenses, including $17 million for depreciation. The high-tech incentives increased in third-quarter versus preceding quarters because of some updated cost report information resulted in an increase in Medicare days which allowed us to get higher incentives, earlier recognition, and a little bit of a catch-up incentives previously estimated during the first half of the year, also pulling some in from the fourth quarter. Also, we did additional physician incentives in the third quarter. We believe the high-tech incentives will be approximately $155 million to $165 million, and we've also made a slight increase in high-tech expenses for the guidance. Our revenue was approximately $10 million lower in the quarter due to our physician EMR system conversions. And we've done about -- by the end of the year, 1800 providers will undergo systems conversions and probably cost us for the year around $20 million.

Lower and tighten our EPS guidance to $2.85 to $3.10, reflecting our performance to the third quarter, including the acquisition expenses primarily associated with the HMA transaction, which had previously been left out of our guidance at the end of the third quarter and is now included in our guidance for 2013. And a strike in one of our facilities and also investment of effect at a [two-midnight] rule that went into effect October 1. Our acquisition and expense guidance was $0.05 to $0.07 in negative effect on the EPS, we've increased it to $0.15 to $0.17 effect on EPS. The two-midnight rule, again, effective October 1, and we believe a negative effect on fourth quarter will be approximately $5 million.

Also, we are on target for the $40 million to $60 million expense improvements that we discussed during the second-quarter conference call. As I said earlier, we achieved about $20 million in the third quarter, with an absolute reduction of $33 million from the second quarter. As a reminder, our fourth quarter presents a very tough comp in terms of volume in the fourth quarter. Had some fluid and respiratory business with same-store adjusted admissions increasing 2.3%. Wayne will now provide a brief recap.

Thanks, Larry.

While our results for the third quarter of 2013 have been constrained by the macroeconomic environment, we believe these results continue to demonstrate the underlying strength of our operating model.

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

(Operator Instructions) Joshua Raskin, Barclays.

I appreciate you guys can't give any more detail around the settlement, but I just -- maybe a procedural question. I was curious if you are working in connection with HMA and if the government was thinking about those cases together or if everything was just done completely separately.

No, that's totally separate.

Okay. And then, maybe just talking about 2014 -- I know it's early and obviously visibility is a little lower this year than you've seen in the past, but I'm just curious if there's any of the key variables that you guys are monitoring that would change the outlook. And then maybe anything specific in 2013 in terms of an aggregate one-time item number that we should be thinking about that won't recur for next year.

Larry, why don't you talk about the things that have adversely affected volume this quarter and this year that probably will not repeat itself in (multiple speakers)?

Yeah, I think we did a little bit of additional disclosure of some of the EHR system conversions, primarily with what we did in the second quarter, about 10 hospitals. And clearly, it affected our volume in the third quarter, and we think that should improve for sure by 2014. We also are -- most of our hospitals are now through a stage 1; we've got 1800 physicians this year, we had some last year, so it shouldn't have that kind of disruption. And while you do get a lot of high-tech incentives, you do spend some capital on that.

We probably have another year of spending on high-tech activity, but it shouldn't grow. But probably another year of some spending. And we should expect our high-tech to be as good as -- in 2014 as good as 2013. You've got the sequester, which started in April; so you got that quarter -- and the first quarter one there. You have the benefit of expenses -- we did a pretty good job -- it seems a long time ago, we did a pretty good job in the first quarter of achieving expectations when some people didn't. And then in the second quarter, we did not. We made the adjustments and did a good job. I think you saw people commented of expenses improving in the third quarter and also an intensity went up. I expect our intensity to continue to increase; I think it will continue to have a little bit of a challenge around short-stay admissions declining as a result of racks and reviews from managed care. You do have the two-midnight rule; we made an estimate, other people [not made it]. So we'll continue to monitor that because we did think it's something we wanted to point out to good effect for 2014.

I think the big advantage in 2014 will be healthcare reform, and we are well positioned for that. We've got over 450 certified application counselors. We've got our own internal organization out there in 22 of our states and 83 of our hospitals. And we've already -- I know 11 states have expanded Medicaid. We've already got a Medicaid person that has joined effective January 14 in each of those 11 states who have (inaudible) slow, we'll start making some good progress on that. I think that expense management will help us -- (inaudible) bad debts have been up. And I think you'll see bad debts as you probably start the process of enrolling people and trying to manage that activity. And we'll do a lot of work to try to do outreach efforts, but I think you'll see that effort help 2014; probably won't see the full benefits until 2016.

Great. That's very comprehensive. The only thing left on my list was M&A costs. Would you expect those to come down? Obviously HMA one probably larger than what you would typically expect.

Yes. What we generally do is we'll always finish on the transactions underway. There might be a good transaction or two, but if HMA is closed we probably will not be quite as active going forward after that, so we would expect acquisition and also some of the acquisition expenses that we have for HMA -- we'll have to comment about what those are going to be at the date of the transaction, but (inaudible) expect some of that to slow down.

Okay, perfect. Thanks.

Ralph Giacobbe, Credit Suisse.

Just want to go back to sort of the volume side. Any geographies to point to that maybe had any type of disproportionate impact, one? And then two, just in terms of the EHR system conversions, just want to make sure I understand exactly what's going on there. Is there just stricter guidelines that is not allowing you to admit patients? And it looked like for the year to date, had a small impact; obviously a big impact in 3Q. So is it risk sort of that it accelerates into a fourth quarter and the beginning of 2014? Thanks.

No, there is no -- this is nothing more than our ability to try to get as much high-tech incentives as we could and finish stage I, and we went to a very good system in the second quarter in our efforts to put 10 hospitals in in about eight weeks. We took on a challenge that was a little too much for us, and it created some efforts where we could identify some lost volume in the third quarter. I think it's coming back, and we've made some corrections that we didn't make early in the process. I don't think that will have an effect in 2014; it might have a small effect in the fourth quarter.

I think the other question that you had was about the geography. You know, all five divisions are down; there is a little bit of difference, but I think all five divisions are down. The hospitals that are -- small hospitals are clearly down more than the rest of the hospitals. There's probably 40 small hospitals under $50 million of revenue. And I think we are down more in the markets where we did these systems conversions, which we think will correct itself sometime this quarter or early next quarter.

Okay. And then you noted this settlement -- or I guess the reserve was solely related to investigations related to Medicare; and sort of noted Medicaid, Tricare, and some other things were not included. Can you give us any sense or can you size the scope of those other pieces outstanding?

No, I think we've said about all we can say about that. You can figure that out pretty quickly in terms of how much Medicaid business we have and how much Tricare business we have. But I think we've said everything that we can say about that.

Okay, fair enough. And if I could squeeze one more in. Just in terms of — you know, Larry, I think you went through the numbers, and there were a lot of numbers there, in terms of the exchanges and how you were positioned. I guess the one data point I wanted to repeat or make sure I had was what percentage are you contracted with the lowest or second lowest cost plans?

(inaudible) I'd say the 90% range. But on the lowest-cost plan, we're -- 83% of our hospitals have a contract with the lowest-cost bronze plan and 75% with the lowest-cost silver plan. When you look at the two first and second lowest-cost plans, we're 89% and we're 92% with a contract with the first or second lowest silver plan. And where it's not 100%, our managed-care executives have done -- (inaudible) done an outstanding job of working on this in a short period of time that are now going back and looking to see who may have a little bit lower price in the market than some of the people we've got. In some cases, we're the only hospital in town, so it probably won't matter. In some cases, we may try to go get contracts to keep building on these percentage; this should help us immensely because most people do believe that the price will be what a lot of people look at on exchanges. And being in the low cost plans would help us a great deal.

I would think most people would say that, at this point in time, we're about as well positioned as you can be in terms of exchanges.

Just last thing, what's the percentage discount off the commercial rate? Can you give us a sense of that?

Yes. It's in the 5% to 10% range; some a little bit lower, some a little less than the commercial rate, so we're fairly well positioned about what we'd always said of being close to the commercial rates.

Kevin Ficshbeck, Bank of America.

Can you talk a little bit about the healthcare reform outreach that you're doing in your markets? What you're setting up as far as getting word out to the uninsured? What you're doing as far as counselors in your hospitals? And then -- not sure if you saw the HHS guidance yesterday that these qualified health plans are not actually federal programs, so that hospitals would be able to pay the premiums -- subsidize the premiums for people. Any thought about how you might participate along those lines?

Yes, I think I said earlier, we have 450 certified application counselors, or CACs, and they'll work on -- as people come to the hospital, they'll be working on both Medicaid and also be working on the exchange activity. We have about 83 of our hospitals in a Company eligibility screening service, which has done a good job of qualifying people for Medicaid historically. It would be one of our synergies for the HMA transaction. They are set up in about 22 of our states. And we have actually enrolled someone -- really challenging, but we enrolled somebody in 16 of those states. And the exchanges, as I said earlier, we've got somebody enrolled in all 11 states, are effective for January 1.

Outreach effort -- we did target, based on the 500,000 people, individual uninsured business. We sent out about 60,000 targeted mailings; we had another one scheduled and we delayed that to the website. It's [worth] better, so there will be another 100,000 go out. And these sort of people, we'd think, would be the most likely to do it. We've got about -- a lot of full-page articles, and 100 of our hospitals have done mailings of articles (inaudible). I think 2 million have been mailed. We've had 100 media points of coverage which have been captured either in print or TV, radio. I think we've had 175,000 instances on displaying on Google and Facebook. About 1000 clicks on an actual ad, and sort of search efforts. We've had 250 speaking events, lunches, and learnings about it, trying to be ready for marketplace; and these include our Healthy Woman program and [your circle] program with our partner for our outreach efforts. We've had 150 community events, health payers, and hosted by our hospitals. And, again, there's $5 million of government money that has been allocated to our type of markets for community centers, and we are well aware of those.

As Wayne said earlier, we've put a very concentrated effort to try to be ready for it, and hopefully we'll see the benefits as the next few months roll.

Okay, and then just anything about the potential to actually help subsidize premiums for uninsured?

Yeah, that's a question that -- you know, we saw that and it's interpreted -- I think we would use that carefully. I mean, you have to make sure that you're using it for the -- appropriate for the people. We do have a fair amount of foundations that we set up through acquisitions that we would encourage our local management to talk to them about doing that so we don't get in the habit of doing it, but it is something that is probably on our radar screen that we will consider doing selectively; probably not throughout the whole Company.

Okay, that makes sense. And then just wanted to go to the cost side. I think last quarter, Tenet made some comments that, although their volumes were weak, they did not really try to bring down the costs because they thought that cutting in too much would have some potential longer-term business implications. Just -- one of the things that we are focused on is obviously the 2014 opportunity. I wasn't sure if there was some sense like that that in a situation of weak volumes, you're going to pull back on certain things. In the situation when the backdrop is little bit better, some of those costs might come back into the system next year. How do you think about that? Is this operating at a good run rate, or do you think that whatever healthcare reform benefit we think about next year, $30 million of that $40 million to $60 million comes back next year? (inaudible)

You always have to adjust volume when it's up and when it's down. So even if you do get volume, you certainly will bring some of that back. But generally speaking, I think we're in pretty good shape. I don't think we have done anything that would in any way jeopardize our patients, and certainly our highest concern is that we maintain our very high quality. As you've just seen, we had 63 hospitals as the top performers in the Joint Commission. So I think we're in pretty good shape. But I think we will continue to look and adjust our cost. But I think as time goes forward, we will have to look to other areas that we haven't spent a lot of time on. In the past, historically, hospitals have adjusted their staffing. Now everybody is moving to try [weigh] -- consolidate expenses in other areas, and so that will be a big initiative for us in the future.

You know, Kevin, you (inaudible) nice work on healthcare reform. And clearly, as you point out, that about 8% of our business is adjusted -- self-pay adjusted admissions, and it's going to take a few years to reduce that. We think we can get something like a 50% reduction over a few years. We did go out and have, since the last conference calls, some studies done by a pretty reputable consulting firm, which has done work for other companies. And they selected five of our hospitals and thought that we could send -- in those five hospitals, spread around, they got about 5%, 5.5% self-pay admissions, and their belief would be 2%, which sort of supports our theory of cutting the adjusted admissions in half.

So you are already getting that business; so you already got the cost for it. And that's what's going to happen is they're going to come back in -- and clearly we're doing a lot of outreach on high utilizers and people that use our facilities, so -- and I think you've written about how people who need it, who probably use the emergency room, will be the ones that will probably buy it first. So I think you're going to get a lot of your business that you already got. You do stand a chance that some people will get insurance over the next couple of years, that the utilization will go up. We probably average about 50 admissions per [1,000] now in our markets (inaudible) self-pay, probably be somewhere in the [70s], so that's probably going to tick up over time. But I don't think we would have to have substantial staffing increases for a few percentage increase (multiple speakers) --

The other component to this, of course, is that outpatient is moving pretty quickly; in terms of our revenue base, about 55%. So if you move to outpatient, that changes the dynamics around staffing as well.

Gary Lieberman, Wells Fargo.

Would be interested in your thoughts on the slow opening of the exchanges, what you think the impact is going to be, if any, as we had to next year.

I think, and Larry can comment on this -- but I think this has created a lot of uncertainty in the marketplace around the exchanges currently, but I clearly think it'll get fixed. I don't know if it will fixed by the end of this month or not; but if it takes a few months, it takes a few months to fix it. But I think this whole issue around exchanges will be resolved sometime in the relatively near future, and then things will continue -- then things will start to move forward. I would hope that, based on where we are and how well we're positioned in exchanges, that if you get this fixed in, certainly, 2014 we should find -- should have some impact around the enrollment.

Even if our cost efforts that are underway, we allocated some extra staffing and cost all this outreach effort, which probably cost us $1 million or $2 million additional cost throughout the year. I do think -- we monitoring it, especially our own internal organization, and we are glad to see that we've got some -- in all 11 states, we've got some Medicaid enrolls starting in January.

We are probably seeing a little effect from the woodwork effect, Gary, which I thank you've written about. I think it's too early -- you also wrote about presumptive billing, and I think it's a little too early to see that. We'll focus on that also. I do think that it's been very frustrating because we had everybody else hyped up for the exchanges to work well and people enrolled, and then we've been trying to monitor it so it's been a big disappointment to see it be so difficult. But I think that same energy will be there in six weeks or eight weeks when it does get fixed. Once it's fix, it should still give people ample time to enroll. Clearly, I would assume there will be some adjustments in the open enrollment period for the fact it's gotten started slowly.

Have you made any changes to your charity care or discount policies as you head into next year?

Not specifically for this. It's a very good question. We will have to think about how to address that because some of the people who will be getting insurance -- in our charity care policies, if you don't have insurance, you are eligible; but if you have some form of insurance, you are not generally eligible for charity. So we may have to address the people who have 200% under poverty level -- federal poverty level, how we handle trying to collect money from them because they are working on that activity. But we have not made any changes yet. It's a good question.

Okay. And then maybe, finally, any more color on what the impact of the two-midnight rule is and how it is exactly a negative to EBITDA?

I think you've got certain requirements of certification and documentation, and patients -- the doctors have to think they're going to be there two midnights before they admit them. And looking at the number one day admissions that you have, there was a belief that some of those possibly wouldn't have been in observation, we will continue to monitor. But we made an estimate of about $5 million for the quarter, first of all, just to give transparency; and it's an estimate, hopefully it'll be less than that. But at least we put that forth, and we'll have to try to work through it. It would probably continue to have a little bit of effect on this transition. Wayne just referred to inpatient volume going to outpatient; it's happening to us, it's happening to everybody. And we'll continue to monitor that and try to make sure we do the correct thing but also take care of the patients in the correct setting.

A.J. Rice, UBS.

Just to clarify on the comment around the cost reduction activity. You guys have laid out a cost reduction program of $40 million to $60 million, I think, in the second quarter. How much of that have you -- do you feel like you've got in place at this point, and how much is still left for fourth quarter?

It's at least $20 million. And clearly, a fair amount of that is around staffing. There was staffing adjustments made into the second month of the quarter, so it'll be there for the full month for the quarter. And I think we'll hit somewhere within the $40 million to $60 million and hopefully hit the higher end of the range. But we hit at least $20 million; now the absolute dollar of expense -- the best way to see what's happened to expenses is looking to income statement. In the second quarter to the third quarter, expenses dropped $33 million, disregarding high-tech and equity and investments, and that sort of shows that the $20 million -- at least $20 million is a good estimate.

Okay. And then you mentioned in the prepared remarks about the acquisition pace picking up and clearly it has., It seems like some of those deals, you may have gotten some help from the Cleveland Clinic relationship. I was wondering were they actually formally involved with you in pursuing some of those deals? And is there any update on the status on what you're doing with them?

Yes, we -- they have been involved in some of these transactions. Of course, Ohio is an important state to them. And they have been working with us in terms of the kinds of things that our agreement is around in terms of quality alliance and cardiovascular, and they will be doing the same kinds of things in these facilities. Our relationship is going along fine. We are doing assessments now. It just takes a while to do this. We are doing assessments on five or six hospitals, and as time goes along we start putting these things in place. So I think we're making good progress, and the relationship is developing and maturing, and hopefully there will be other things that will come out of this in the future.

Okay. My last one, I guess would be, I think you mentioned in the prepared remarks that your -- the deal with HMA is on track. Obviously now they've got a new board. Any comment that can be made about whether the dialogue is -- how the dialogue is, your enthusiasm towards the deal? Is it sort of the same as it was? I know you don't have any particular outs anyway, but I just wondered if you're -- you feel like there's the same opportunity you thought a few months back. And then is there any update on timing?

Yeah, I don't think there is any change in our view of the transaction in terms -- as far as we think HMA has got good facilities, good opportunities, there's a lot of synergy in the markets and across the board. So I think we are still enthusiastic about the transaction. I will tell you though, as you might expect, and this will be no great surprise, but if you change a board and you change management, it's very disruptive to an organization. So it's moving along at a good pace, and we'll have more to say about that in the future. But hopefully we are on track, as I said earlier, to close this in the first quarter.

Can I just add, A.J., we -- and there's two banks that have been doing the fairness opinion. We've had reversed due diligence of them on our calls and kept them informed of what's going on in our Company. I think that's gone well. And I know there's some heightened concern about how HMA is operating today. And as Wayne just said, it's a lot of turmoil, a lot of changes, a lot of organizational changes, staffing changes. When we bought Triad, they had a certain estimate out in the street of what they were going to achieve, and by the time we took over it was lower by 10%. And we did a great job of improving that to the quarter so it would get going. But we got $275 million of synergies, took a margin from 11% or 12% to 15%. And if we look at HMA as an effort, it's going to take more than just a quarter or two, and we'll work very hard, and we see this as a good asset that we can improve. But clearly there seems to be a heightened concern on a quarter-to-quarter basis, but we're looking at it more from a opportunity for us over a longer period of time.

And it's really our operating systems and our processes and procedures that are important here, when it's all said and done, for us to assimilate this group of facilities.

Darren Lehrich, Deutsche Bank.

Just a few things here. You've talked a lot in the last couple of years about the impact of the smaller hospitals on the overall volume picture. I'm wondering if you can just maybe give us a little commentary on what you think you need to be doing in some of these markets. Whether some of the service closure that you've been disclosing relates more to those types of facilities, you can right size the capacity. Maybe just help us think about the strategy in trying to manage through what's going on in some of these smaller markets.

One thing, Darren, is -- and, you know, as we think about where we are in terms of our -- historically our standalone hospitals or our hospitals that are in individual markets that have been a strong asset as far as negotiating and all of the above. Now we're thinking that we have to make sure they are part of a broader network so that they are inclusive and not excluded. And we've done the things that we think are really good things in terms of demonstrating quality, but we have to continue to work harder (technical difficulty) positions we have to think about. Outpatient services in these markets that we have not really thought a lot about in the past and enhancing our outpatient services. So strategically, we've been working pretty hard to try to figure out all the things that we need to do to make sure that our smaller markets are successful. And, of course, this is an uphill battle because we've got all the issues around racks and observations and readmissions, and then the managed-care companies are a lot more aggressive now than they have been around utilization. So all these things are factored in as we move forward. And then, at the same time, putting to meaningful use -- as Larry has said, it's a little bit of a disruptor as well.

Just to add a little bit there, if you think about the small hospitals that have a higher percentage of low acute business -- flu and respiratory; a higher percentage of women's services, the same thing. It seems like we're talking about it every quarter, and that continues to move out of inpatient over to outpatient, or it's not happening -- with the OB women's services, it's clearly been down for three-plus years now. So having a higher percent of that drives the volume down. I think if you sort of look at 2014, some of the benefit here is -- this would be a big benefit for the smaller markets where aid would be -- some outreach efforts would be more activity in the emergency rooms and the people that are uninsured. Some of the populations -- I think about 40% of our markets have had a bit of a declining population; there's a little bit more of unemployment in those locations. So I think healthcare reform, in itself, will be very helpful in all locations and help us be able to turn there. Some of them have pretty good margins, some of them don't have quite as good margins that some of them have there, and what we have to do is find what works in the markets that are doing better and try to make -- try to put that in place in the others.

That's helpful commentary. Two other things I just want ask. You mentioned the productivity that you lost as a result of some of the conversions. I'm really just trying to understand how that played into the quarter and what areas operationally -- and maybe just size it first in terms of the numbers of hospitals you pushed a little harder to move some of those conversions up?

It was 10 locations in the second quarter [but] worked very, very quickly to get done. We all made a conscious decision to do it. We all felt we executed flawlessly, and we were all wrong. So as a result is we lost some admissions and now we're (multiple speakers) --

Good news is that we enhanced our meaningful use. Bad news is we cratered our admissions.

And it's quite evident that they've got a great CPA to calculate to we lost business from it. And we did it, and now we're trying to recover from it. And it's a good system, and we just have to work better with that system.

On the physicians, it's a little different. I mean, there's been lots of studies -- the 20% to 30% productivity for up to six months, sometimes longer, sometimes little bit shorter. In our analysis, we just had to go to doctor by doctor so we could understand it because we had not talked about it because we were seeing [physician]. I think our primary care office visits were down a little bit in the second quarter, they are down more in the third quarter; some of these physicians we've converted. We'll be glad to get this electronic health roster done. I think we're up to over 2000 doctors to be done by the end of the year, so we're making progress on that perspective, who are employed and we shouldn't have to have as many to do in 2014 for that purpose. And we quantified the drop in revenue versus the preceding quarter, preceding year, for these doctors, and then dropping visits. And the end result is -- and we quantified how much it was in our physician practice area, and it's about $10 million and probably going to be as much as $20 million by the end of the year. The fourth quarter should be less than the third quarter because there'll be less doctors converted in the fourth quarter. But we did get meaningful use incentives, but we paid a little price for it.

Got it. And then, last thing here. You mentioned the $2 million of straight costs in your prepared remarks. I guess I'd be looking for just an update, whether that has been resolved. And maybe a broader comment -- how you're feeling about labor relations in your markets. We've seen strikes come and go, but is there anything else building around labor conflict that we should be thinking about in the next few quarters?

I don't think so. I think our labor relations are probably relatively good. We are going to have conflicts. The hospital industry has been under distress for a good while now in terms of volumes in the economy. So as we -- and we have done and made a lot of acquisitions that have labor unions. We don't have any issues whatsoever. We treat our employees that are part of the union the same way we treat everybody else when it's all said and done. Unfortunately, we just have to negotiate these contracts, and sometimes there are things in these contracts that are not as helpful in terms of productivity. I don't think that they are a distractor, I don't think they are a major issue going forward. And we've made good progress across the country in terms of resolving any labor issues that we might have. But that's not to say that we won't continue to have them in the future.

(multiple speakers) That was a third quarter event. It's not anticipated for the fourth quarter.

Frank Morgan, RBC Capital Markets.

Just a quick one on Texas. Did you highlight -- or did you receive any Texas DISH payment -- Medicaid DISH payment? I know it was highlighted by one of your competitors on the DISH program in Texas.

We did get some money. We've been accruing some money -- some money we got that we didn't have accrued for. One way to look at Texas, you've got uncompensated care, you've got DISH money, and you've got UPL money. If you look at it year over year, we're down about $10 million, even with the money we got on the uncompensated care. So you may or may not remember -- I think I mentioned it at the beginning of the year, we could have about a $20 million reduction in Texas Medicaid, primarily built around the UPL program. I think that maybe closer to $10 million for the end of the year. But we've clearly got a little bit of money, but net net the third quarter of 2013 versus third quarter of 2012, our Texas Medicaid was down about $10 million.

Okay. And then on that subject of the -- some of the headwinds from the readmissions. I'm just curious -- the readmission penalties, are there any particular subset of markets were that is more pronounced? Is that a smaller market or a more rural focus? Or is that -- did you see any difference in terms of where that is popping up as a volume headwind?

As I remember, we had a higher amount of readmissions in our smaller markets than we did in the larger markets. So it would be a little bit more of a smaller market effect. The numbers we gave were clearly a companywide effect, but I think our smaller markets had a little bit higher readmission percentage.

And no good deed goes unpunished. We've done a good job with the readmissions, and that's cost us.

Okay. And do you feel like that's now stabilized at a new normalized rate in terms of what that impact is on volume?

If you look at the Medicare rules -- I think we lost $7 million in 2013, and the penalty's 1%. I think next year we're going to lose $6 million and the penalty doubled, so I think we made progress on that. I would not expect us to continue to see our drop in readmissions. Once you put a program in place, it's sort of affects all your business. You don't necessarily continue to try to have that decline continue. But we've done a good job; our quality area has done a good job of working on readmissions.

Okay. So in terms of just making sure we don't extrapolate something out too far, the readmission issue probably does not continue to extrapolate out. The headwind that you saw on the EHR with your practices, that probably doesn't get worse. And then I think you said the strike impact -- this was a one-time item in the third-quarter, so you don't expect to see that going forward?

That's all correct. I think that we anticipate progress on all those items. And I -- actually, the EHR and the physicians, I would hope we don't have to worry about doing those calculations in 2014 because most of the physicians have gone through EHR and hopefully those will be working (inaudible).

The issue around unions -- I think there was a press conference in Scranton yesterday where the union gave us a notice of a strike sometime in the future, so we may have one here and there.

Justin Lake, JP Morgan.

First, just a quick follow up on HMA. Wayne, is there any date that you know of when HMA shareholders were expected to vote the start on the acquisition?

No. You have to get through all these other filings first before you can notify the shareholders of the potential date for a vote. So I think we think we are on track to get all this done by the end of the first quarter. So if there's something else that comes up, we will keep you posted but I don't -- there is no specific date yet.

I think the fairest opinion, it's supposed to be done by November 19th, I believe. That's progressing -- I said earlier, Justin, we've talked to the two banks and have done reversed due diligence, which is part of it. So I assume that's the next in the interest of fairness opinion to be presented to the new Board.

And how long after that opinion is presented would the vote start, in your mind?

You have to go back and update the proxy filings with the SEC, and that can take a few days to do that. And then once it becomes effective, we'd start after that.

(multiple speakers) the FTC as well.

And the FTC.

Got it. And then Wayne, maybe you could just speak to -- obviously you've gone through some settlement discussions here, got an idea of where the government's head is at. I know you've done your due diligence that you can on HMA's investigation. But I'm wondering if you could share with us any -- can we read through any kind of similarities to what HMA is going through right now?

Every one of these investigations at each company are totally different, and you can go back and look at the history of these settlements and look at some of the other companies and look at us and look at the latest settlements around the country in terms of size and the components --

One thing we found out is every one of these are different. They have different issues. HMA's issues are not exactly the same issues as ours, even though some components are the same. So I don't think you can extrapolate or make any judgment about HMA related to our settlement.

Okay, great. And then last question, I just wanted to get your thoughts on volumes. And specifically, as we look over a number of quarters, there seems to be a real bifurcation, even excluding the likely impact of these investigations. But a bifurcation in terms of volumes from rural markets to urban markets or suburban markets. And given you own both, I'm just curious to hear whether you have seen a material difference between your rural facilities and your suburban facilities first. And then if you can talk -- if you have, what you think the drivers are and when you think they might abate.

Let me just -- and then Larry can talk about the details of this -- let me just tell you a couple of overriding issues I think are important. We're all -- and I said this earlier -- we've all got issues with the racks and observation. Clearly there are more -- as Larry said earlier, there is less acuity in smaller facilities; and less sophisticated, complicated cases. Readmissions, obviously, are an issue, and that may be an impact in smaller facilities more. Commercial utilization is a lot more aggressive now; and co-pays and deductibles; all of the above. Also, I think GDP is growing at 2%, and we are 18% of GDP is hard -- and we've been growing about twice as fast as GDP, so it's very hard to move the needle here in terms of the 18% now. I think there's an overall underlying economy issue that affects smaller markets faster than it does larger markets. So I may be in the minority about that, but I think when the economy does better, these markets will do better. And they have historically.

You know, we've got 40 small hospitals under $50 million; probably about 40% of those probably have population declines over -- all 40 could make it there, but those 40 -- if you look at our markets above $50 million, I think that they've got a little bit better population growth. And I think you'll note that the markets or the companies to do better have the best population growth, so that drives the point that if you're in a market with better population growth, you'll do a little bit better than somebody who doesn't. I think the copayments and deductibles issue --

Population growth, does it have anything do with the economy?

Has to do with the birth rate too. The copayments and deductibles, we're seeing it come a little bit more in our markets. I think I commented earlier in the year that we had the biggest increase in copayments and deductibles this January in our major employers throughout the Company (inaudible) the last three years. I think you talk to people who've been operating in the urban markets, they've probably had it sooner than we got it, so you probably got that happening in the last couple of years. And I think that has some effect on copayments, deductibles; especially on diagnostic testing and radiology work and things of that nature. But, you know, the volume was down. The good thing for us, the case ventures up, the surgeries were better, the revenue looked pretty good, and expenses were controlled well.

I now turn the call back over to Mr. Smith 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. We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers, chief nursing officers, and division operators with a focus on operating performance for the third quarter. Once again, if you have any questions, you can reach us at area code 615-465-7000.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.