Community Health Systems Inc (CYH) 2013 Q4 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 fourth-quarter 2013 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. I would now like to turn the call over to your host, Ms. Lizbeth Schuler, Vice President, Investor Relations. You may begin your conference.

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

This presentation may contain certain forward-looking statements, 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 those forward-looking statements.

With that said, I'd like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

Thank you, Liz. Good morning and welcome to our fourth-quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer, is on the call today, as well as David Miller, our Chief Operating Officer; Lynn Simon, our President of Clinical Services; and Mike [Colada] who is our new VP of Investor Relations.

As you all probably know, this is Liz Schuler's last call. We all want to wish Liz the continued success in retirement, and as you know we will dearly miss Liz. Liz, we appreciate all your service through the years. Larry was recently promoted to recognize his many contributions and consistent leadership with the Company.

After market close, we issued an 8-K, including a press release with our financial statements. For those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanies our remarks. I'd like to begin the call with some comments about our recently completed acquisition of HMA in the quarter, and then turn the call over to Larry, who will provide additional details on our financial results.

We are very pleased that the transaction acquiring Health Management Associates closed on Monday, January 27. This transaction marks another important milestone for our Company, and establishes us as the largest publicly traded hospital management company in terms of number of hospitals in the United States.

We now operate 206 hospitals in 29 states. We have 135,000 employees and 27,000 physicians on our medical staffs; 93 of our hospitals were named top performers on key quality measures by The Joint Commission.

We have a proven track record in acquisitions, having acquired 115 hospitals since 1997, including the Triad transaction of 50 hospitals. The 71 hospitals acquired represent a complementary geographic fit with our legacy hospitals and expand and strengthen our hospital and physician networks. This acquisition provides a significant growth opportunity as we focus on improving the assets by applying the best practices in our standardized and centralized operating procedures.

As we move forward with integration, we are positioning our management team for the future. David Miller has been named President and Chief Operating Officer of the Company. His operational experience and proven leadership will spearhead the integration of 71 new hospitals, as well as direct the organic growth of our legacy hospitals.

We've added a sixth division, and each of our division presidents will report directly to David. Of the six talented and seasoned division presidents, four were instrumental in accomplishing the Triad integration.

Division 1 has hospitals located in the states of Alabama, Mississippi, North Carolina, and Virginia; Division 2: Arkansas, Louisiana, Missouri, and Texas; Division 3: Illinois, Kentucky, Tennessee, and West Virginia; Division 4 covers the far west hospitals in Alaska, Arizona, California, New Mexico, Nevada, Oklahoma, Oregon, Utah, and Washington; and Division 5 that includes Indiana, New Jersey, Ohio, Pennsylvania; and finally our new division, Division 6, covers the state of Florida as well as Georgia and South Carolina.

Our results for the fourth quarter of 2013 were clearly affected by a challenging operating environment. While net operating revenue was down 1.4% for the quarter, we did realize a benefit of cost-management initiatives. Please note that the EBITDA and the earnings per share exclude the reserve for the government settlement of $3.5 million in the fourth quarter and $101.5 million for the year, as well as the HMA acquisition of $8.8 million in fourth quarter, $14.1 million for the year. Earnings per share also excludes the impairment of long-lived assets.

Net operating revenues for the quarter ended December 31, 2013, totaled $3.2 billion. Consolidated EBITDA was $454 million. Earnings per share for continued operations were $0.49.

Net operating revenue for the year ended December 31, 2013, was $13 billion and EBITDA was $1.8 billion. Earnings per share from continuing operations for the year was $2.40.

With that, I'd like to highlight some of the recent accomplishments. We announced a definitive agreement with Sharon Regional Health System in Sharon, Pennsylvania. This system has 258-bed community hospital and 22 satellite centers throughout Mercer and Lawrence counties.

Trailing revenue is approximately $155 million, including the recently acquired HMA hospitals. This will be our 21st hospital in Pennsylvania. HMA had committed to acquire 2 hospitals in Florida, and we are actively working to complete those transactions. Munroe Regional Medical Center in Ocala, Florida is a 421-bed hospital, with trailing revenue of $315 million and a mid single-digit margin. Bert Fish Medical Center, 112 beds located in New Smyrna Beach, Florida, with a trailing revenue of $80 million and a low single-digit margin.

The Company and Metro Health continue to explore partnership. These discussions were initiated in May of last year. Metro Health is located in Grand Rapids, Michigan, has 208 beds and a trailing annual revenue of $300 million. This would be our first hospital in Michigan. We will continue to be very selective and focused on our efforts on expanding our current markets like we did when we acquired Triad.

The Company recruited 2,141 new physicians in 2013, a slight increase over 2012. Physician recruiting will continue to be a key driver of both volume and market share growth, and clearly represents an opportunity for our new hospitals in the coming year.

You will recall we issued preliminary 2014 guidance on January 6, together with our preliminary results for the fourth quarter. We are now providing our full range -- our full guidance of 2014 and have adjusted downward those preliminary ranges. Revenue will range from $19 billion to $20.2 billion, EBITDA from $2.825 billion to $3.075 billion, EPS from $2.70 to $3.75.

The Company named Dr. Lynn Simon President of Clinical Services and Chief Quality Officer to recognize not only her many contributions, but more importantly to position the 206-hospital Company for the future where quality is such an integral part of reimbursement. It's in its third year of high reliability and safety plan is on track, we are seeing approximately 10% reduction in serious safety events. Our program to reduce hospital-acquired infections has been very successful with a 16.3% reduction in 2012, and an additional 11.7% reduction in 2013. We have also been successful in reducing readmissions by approximately 8% in the quarter.

I would now like to provide you a brief update on the pertinent legal matters. On our January 6 press release, we advised you that we had added $3.5 million to the $98 million already reserved for government investigations in the short-stay admissions and other investigations at our Laredo, Texas facility.

We are continuing to work towards the final resolution of that matter. The reserve is exclusive of third-party legal expenses. We have excluded the reserve in our discussions of the 2013 results.

With regard to the HMA government investigations and lawsuits, we are transitioning these matters to our experienced in-house and outside counsel and will cooperate fully with the government to investigate these allegations. We were aware of the nature of the investigations prior to the closing, and will work to resolve these matters, hopefully without having to fully litigate the many cases.

As we've handled the CHS investigations, we will seek to handle these matters with as little disruption as possible and will keep our Board fully -- our Board of Directors fully informed so they can perform their oversight responsibilities.

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

Thank you, Wayne. First, the fourth-quarter operating results for consolidated same-store identical, as all acquired hospitals are now considered same-store.

Additionally, I will just disclose consolidated operating results excluded $3.5 million reserves established for Tricare and Medicaid in the fourth quarter, and $101.5 million reserve established for the government settlement from 2005, 2010 for short-stay admissions and other claims related to Laredo, Texas, in Tricare and Medicaid.

We also excluded HMA-related acquisition expenses for fourth quarter by $8.8 million and for the year, $14.1 million.

Fourth-quarter admissions decreased 10.5% compared to the same period last year. As previously reported, our small hospitals continue to restrict lower volume than our larger facilities. Adjusted admissions decreased 6.7%, and the following specifics contributed to lower admissions in the fourth quarter and represent about 80% of the decline; the lack of flu 29%; reduction of cardiology cases primarily low intensity 22%; service closures, weather and other about 17%; lower readmissions about 8%.

Decline in admissions from women's services was 5%. We did have an effect on the Two Midnight Rule, which was about 60 basis points effect for the quarter on Medicare. Excluding these specifics, same-store admissions would have decreased 2% for the quarter.

Net revenues in the fourth quarter decreased $3.277 billion last year to $3.231 billion. Physician office conversions from paper records to electronic health medical records reduced physician practice net revenue by approximately $4 billion(sic -- see presentation slides "$4 million") in the fourth quarter, and year to date it's about $24 million.

We had unfavorable revenue adjustment of approximately $10 million for Indiana Medicaid supplemental programs, and an approximate $5 million reduction for the Two Midnight rule. Additionally, a portion of the decline can be contributed to an 80-basis point increase in bad debt.

For the fourth quarter, same-store net revenue per adjusted admission increased a strong 5.7% versus the same period in 2012. While same-store surgeries in the fourth quarter declined 1.1%, we did see a significant increase in need (inaudible) cases, representing a higher level acuity contributing to our same-store Medicare case mix, up 5.2% versus last year.

Our all payer case mix increased 3.1% in the fourth quarter. Our same-store emergency room visits decreased 5.7% against a tough comp in 2012, which had a very strong flu season. And the same-store ER visits in the fourth quarter were up over 8%.

Consolidated EBITDA was $454 million for the fourth quarter versus $482 million the same period. The following affected fourth quarter: strike issues, which lowered EBITDA by $10 million; supplement programs in Indiana represented a $13 million unfavorable adjustment; HR conversions affected EBITDA by $4 million; lower equity earnings reduced EBITDA by $3 million; Medicare $2 million; Midnight Rule affected EBITDA by about $5 million. On a same-store basis, EBITDA was $458 million for the quarter.

Consolidated operating expenses percentage of net revenues increased 90 basis points in the fourth quarter due to an increase in salaries of about 30 basis points, supplies 50 basis points, and other operating 10 basis points. Sequentially, wages decreased 10 basis points compared to the third quarter. As discussed in the revenue section, the increase in supply expense was driven by an increase in orthopedic surgeries contributing to an increase of implanted stents of about 40 basis points. There was also an increase in our cardiology-related supplies.

The increase in other operating expenses was driven by increase in Medicaid supplemental provider taxes, as well as some expenses associated with HMA and other acquisitions and the strike expense not previously discussed.

On a sequential basis, fourth-quarter 2013 versus third-quarter 2013, our operating expenses increased 0.9%, or 90 basis points. Excluding high-tech and equity unconsolidated affiliates sequentially for the same period of 2012, expenses increased 3.1%.

On a year-to-date basis, consolidated admissions decreased 6.7%. Consolidated adjusted admissions decreased to 4%. Same-store admissions decreased 7.2%. The following factor contributed to the decrease: decreased cardiology lower [intensity] 22%; lack of flu and respiratory 18%; lower admissions in women's services 11%, readmissions 9%; the service closures, weather and other, about 8%; involuntary physician turnover 6%; system conversions 3%; and decline in [self-pay] admissions about 4%. Same-store adjusted admissions were down 4.6%. The adjusted admission guidance for 2014 ranges from a minus 3% to 1%.

Consolidated net revenue year to date was $13 billion, a slight decrease from a year ago. Year-to-date revenue was reduced by approximately $24 million due to the cost of physician office system conversions that affected our productivity. We also had an unfavorable adjustment in Indiana supplemental programs.

On a consolidated basis, net revenue for adjusted admissions increased 3.9% a same-store basis. Net revenue for adjusted admission increased to 4.7%. Same-store surgeries are down 2.4% and same-store ER visits are down 2.2%.

Our same-store Medicare case mix for the year ended December 31, 2013, increased 3.6%, and our all-payor year-to-date case mix increased 3%. Consolidated adjusted EBITDA was $1.84 billion for the year ended December 31, 2013, and same-store EBITDA was $1.855 billion. Consolidated EBITDA for the year was reduced to get to the adjusted number for the acquisition cost of $14 million; some strike issues of $13 million; and the loss of physician revenue due to conversion issues of $24 million; and the supplemental programs in Indiana about $15 million; and the Medicare Two Midnight Rule about $5 million.

For the year, consolidated operating expenses as a percentage of net revenue increased 110 basis points from the prior year. Payroll increased 100 basis points; supplies increased 20 basis points; and other operating [revenue] increased 10 basis points, offset by improving our [high tech] by 30 basis points.

Same-store operating expenses increased 70 basis points compared to the same period 2012. Payroll was up 60 basis points, and supplies and other operating revenue up 10 basis points each. Year to date, I believe we achieved our target in expense savings in the third and fourth quarter, which will help 2014.

Take a few minutes to discuss the HMA unaudited performance for the year ended December 31, 2013 and the same volume statistics for the fourth quarter. We've excluded a significant transaction cost, as well as costs associated with the change in control.

On a consolidated basis for the year, admissions declined 4%; adjusted admissions declined 1.6%. Revenue is $5.8 billion, increased 0.7%, and EBITDA of $760 million decreased over 20%. On a same-store basis, the admissions declined 7.6% and adjusted admissions declined 4.1%.

On a consolidated basis admissions declined 3.7% and adjusted admissions declined 2.6% for the quarter. On a same-store basis for the quarter, admissions declined 8.1% and adjusted admissions declined 5.3%.

Additionally, the [BNA SSI] (inaudible) of approximately $36 million from government (inaudible) inspection in the fourth quarter was not received, and they informed us of that in late December. The tax refund for $60 million was received in the fourth quarter. HIT expected return of $13 million was also received.

The Company's 2014 Mississippi Blue Cross contract issues resolved effective January 1. Total AR days were 67 at December 13, an increase of nine days from the end of 2012. The increase in AR days was due to a growth in state supplemental programs by 3 days, system conversions rated high-tech 2 days; also growth in some recovery audit contractor balances.

The allowance for doubtful accounts was $2.448 billion, or 51%, at December 31, 2013. The allowance for doubtful accounts and related contractual allowances for self pay was approximately 84% of self-pay receivables at December 31, 2013.

Community Health Systems continues to have a very favorable payer mix for the quarter ended December 31, 2013. The net revenue by payer source was as follows: Medicare 24.4%; Medicaid 9.2%; managed-care and other 52.8% and self-pay 13.5%. On year-to-date basis the payer mix: Medicare was 24.9%, Medicaid 9.7%, managed care and other 51.7%; and self-pay 13.7%.

134 of 135 CH hospitals in 29 states are participating in health insurance exchange, for a total of 450 contracts. 12% of our CHS hospitals participate in the state-run exchange, 15% in partnership, and 73% in federally run exchanges. 26 states are expanding Medicare coverage, 13 states were CHS' hospitals. Five more of our states are considering expansions. That would be Indiana, Missouri, Pennsylvania, Tennessee, Virginia, and we're still hopeful Florida will also expand.

83% of the hospitals are participating in lowest cost bronze plan and 75% the lowest-cost silver plan. CHS hospital's participating in the first or second lowest-cost bronze plan, or 89%, and one first or second lowest cost silver plan, or 92%. 95% of CH hospitals are participating in lowest-cost bronze plan in their respective markets and 94% in the respective markets in the lowest-cost silver plan.

Turning to healthcare reform, back in October we sent out 50,000 letters with minimal response, due to the website issues. We sent out an additional 115,000 letters in January of 2014 to frequent users. We've been -- approximately 500,000 unique self-pay patients (inaudible) have even started (inaudible) the HMA hospitals since the acquisition.

We are partnering with community organizations to our markets to provide enrollment assistance during local events, as well as generating enrollment awareness through local media including newspaper and TV. We have approximately 400 certified application counselors in our facilities, as well as our internal eligibility screening service, or ESS, in 83 of our hospitals that is focused on a call-back campaign. The government website has improved, and individuals are reporting positive experiences when enrolling.

Medicaid enrollments for the fourth-quarter 2013 were up 7%, 5% expansion states, and [8%] in non-expansion states. Historically about 20% of our Medicaid patients do not complete the Medicaid application process, and the mandate and publicity will reduce this percentage going forward.

ESS has to do weekly records, and we are working with third-party eligibility companies to push exchange enrollment. There's the shift in self-pay to Medicaid and the private option in Arkansas represents a real strong positive for us. We've had anecdotal evidence to individuals on 100% of (inaudible) unable to get coverage in expansion [states] been showing great interest to- become covered.

Comparing January 2014, January 2013, our self-pay unique patients in expansion states have declined 10% versus a 7% decline in non-expansion. These self-pay adjusted admission decline in expansion state was 17% in January and declined 7% in non-expansion states.

Now I'd like to turn to our projection model and offer somewhat a more significant assumptions [from views to frame] reform. First, let me reiterate that reform is not just a 2014 event. We are targeting a 50% reduction from 8% to 4% of our uninsured adjusted admissions by third year -- or 2016. We expect about a 15% reduction in uninsured visits in 2014. Medicaid [enrollment] will be higher in exchange enrollment. We've estimated about 55% of our uninsured will be eligible for Medicaid.

The discount on managed care pricing will be no more than 10%. We have a strong presence; 99% of our hospitals have exchange contracts with 450 contracts. We have a very small crowd-out effect.

We have reasonable assumption to increase utilization for the [new] (inaudible). We expect better payment for Medicaid, as intensity will increase versus the prior Medicaid business, which is comprised primarily of women and children.

Bad debt on deductibles and copayments should be up from current levels, but the silver plan purchases will help minimize the bad debt. Medicare cuts will be approximately 80 basis points of Medicare, and that's in the law also it's in our market basket update. Approximately 10% of our healthcare reform benefit (inaudible) will be the Medicaid woodwork effect, people currently eligible for Medicaid that are not enrolled. Guidance for healthcare reform represents 0.5% to 0.8% of revenue, or $95 million to $160 million of revenue.

Cash flow from operations was $648 million for the quarter. On a year-to-date basis, cash flow from operations is $1.089 billion versus $1.28 billion for 2012. The variance has to do with lower net income offset by higher depreciation of $57 million; lower cash flow from accounts receivable by $80 million; a decrease in cash flow due to timing differences and compensation liabilities; increase in income taxes due to a refund received last year for $17 million; approximately $78 million timing differences; and we did get a 2012 receipt of the B&A of $48 million net of taxes. Our cash flow guidance for 2014 will be $1.6 billion to $1.8 billion, representing 11 months for HMA.

Year-to-date capital expenditures were $614 million, or 4.7%. Replacing hospital expenditures were approximately $62 million or 0.5%. Our 2013 expenditures were very tightly managed; they came in at about $135 million lower than the low end of our guidance for 2014. Expect the guidance to range from $975 million to $1.15 billion, obviously higher for 2014 due to the HMA acquisition. Replacement hospital guidance for 2014 is approximately $150 million.

Balance sheet cash at December 31 is $373 million, and we have available credit of $731 million. Looking at the balance sheet, we had about $1.29 billion working capital, $17 billion in assets. Total of our outstanding debt was $9.453 billion, of which approximately 73% is fixed and our debt to capitalization was 75%.

At the end of the quarter, we reported $2 billion in interest rate swaps, and a decrease of $400 million from the third quarter. We currently have two forward -- starting interest rate swaps totaling $400 million effective July 25, 2014, upon the maturity of $900 million of swaps on the same day.

I'd like to focus on the financing we accomplished for HMA acquisition. This information is on Slide 18. Term loan B has been replaced by a new term loan [ingredient] in E. Term loan D is $4.602 billion. Term loan E is $1.677 billion, issued at a slight discount. Maturity is 2017, and the rate LIBOR plus 325 and no floor.

Secured notes of $1 billion issued at par matures July 2021, with 5.125% coupon and unsecured notes of $3 billion issued at par matures January 2022 of 6 7/8% coupon.

As you can tell, we in essence refinanced the company in what we consider favorable rates. For your reference, the deferred financing cost will be approximately $50 million, be amortized for the life of the loan. But the guidance provided for 2014 does take the refinancing consideration or interest expense the range from 5% to 5.2% of net revenue. Total fixed rate debt, including swaps will range from 60% to 70% of the total for 2014.

Some other important things to note for the earnings reported for our 2014 guidance, first our original January 6 guidance had assumed a full year of HMA to help you understanding on our annual trends, and we stated there we'd adjust it once we had the closing date.

Our same-store statistics for 2014 will include HMA hospitals from February 1 forward, similar to the Triad acquisition. We've included $100 million of synergies in the guidance, similar to the number we disclosed earlier. We've estimated about 0.5% in and 0.8% of revenues as a positive effect of healthcare reform. $95 million to $160 million high techh incentives for 2014 to range to 1% to 1.3% of net revenue at the high end; that's about $260 million.

We've excluded the two HMA hospitals, representing the two we need to sell per the FTC. One additional hospital has exercised its right of first refusal, and one hospital is held for sale for 2014. All those were included in the 2000 January 6 guidance for the full year.

The BNA SSI (inaudible) from HMA has been included in our guidance, since we were informed it will not be received for 2013. Any costs associated with CVR either legal or settlement have not been included in our guidance for 2014.

We included the California Medicaid supplemental programs, that suspect to be approved in 2014. We expect to receive the $25 million in the fourth quarter of 2014, compared to $22 million received throughout the year for 2013.

Please note that the Company's projection excludes any future loss on early extinguishment of debt, any impairment loss; the resolution of any government investigations, including government (inaudible) established during the third and fourth quarter of 2013, or other significant legal settlements or other significant gains or losses, [be] that relate to ordinary course of our business nor reflect our (inaudible) performance.

Wayne will now provide a brief recap.

Thank you, Larry.

While our results for 2013 [have enhanced] a variety of economic issues, we believe the underlying strength of our operating model -- we believe in the underlying strength of our operating model. We are extremely excited about the integration of health management and look forward to working with employees and medical staff at our new facilities.

With that, I would now like to 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)

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

Good morning. I wanted to follow-up on some of the details you guys provided around the reform contribution there. So when you mentioned a decline in self-pay admissions, are you guys seeing a subsequent increase in the Medicaid or exchange lines flowing through to offset that impact there?

What we decided to do, which we don't normally do is discuss month to month. And clearly that we are seeing a decline in self-pay -- I think it was adjusted admissions, and we are seeing a little bit of that come through in Medicaid.

You're also got somewhat a decline in the first quarter is probably cause the flu from a year ago and also some of the difficulty of weather. But it is encouraging to see that the decline was better in the expansion states versus non-expansion states, so it tells us healthcare reform is working. It's not an absolute rollover in to Medicaid; it is early in the program, but we are feeling pretty good that a lot of our states, especially the ones that are state exchanges are doing really well in the private option in Arkansas.

Okay, thank you. And following up on the -- I think you said the 55% of your people would be eligible for Medicaid. I wanted to make sure, was that a 2014 expectation or was that a 2016 expectation?

That was an estimate of all the uninsured. In other words, the 55% of our entire uninsured population would be probably eligible for Medicaid. I think there was some numbers quoted by others a little higher than that in our statistics that we [looked up] and worked with some outside people, showed a more realistic number, but we thought 55%.

Just to be clear that includes current expansion and non-expansion states?

Yes.

Most everyone?

In our overall [perspective], we do expect that these changes in three years will be a much bigger percentage of our enrollment than they are in 2014, which will make the growth in the healthcare reform get a little better as the years go out. But we don't expect that the 55 -- I believe the CBO actually, his estimates were more closer to 50/50.

Okay, great. And finally maybe talking about your outreach program and exchange enrollment, are you guys actually seeing any exchange lines flowing through today? At this point you guys have been [clear on uptake]?

We are seeing some, not a great deal. You didn't see much in October, November. December picked up. Each week it gets a little bit better, it's still some small numbers, but we are starting to see activity there.

Of course, they don't necessarily have to enroll through us. They can enroll through the exchange or a navigator, but we are starting to see a little bit of a pickup. It's clearly started out very slow in October, November, got better in December and we'd expect, I think every week it gets a little bit better.

Thank you.

Your next question comes from the line of Tom Gallucci of FBR. Your line is open.

Good morning. Thanks. Two questions, first on the volume guidance for 2014. Just curious if you could detail some of the drivers within that, obviously looking for some pressure in a majority of the guidance. How much of that is short stay?

And I think Larry, you said you are looking for some reasonable utilization from reformulated lives? So is reform relevant to the adjusted admission volume guidance? And any other key things we should be thinking about there?

I think everybody, Tom, has thought that you would probably pick up some utilization, but it is really a small -- it's 8% of your admissions. It is going to be reduced to 4% in a few years, and so the first year is around 1.5% or so. So if that in fact goes up 20% or 30%, it's still a roughly small number.

I think it's -- just to speak to some of the activities, we are doing a lot of work around orthopedics. We've done a real good job of having some strong physician recruitment the last part of the year. One of the things we're doing is trying to institute the good work on physician recruitment we do in the HMA hospitals. We've got a real strong effort led by our new President and COO to do a much better job on growth.

We did have a lot of things in 2013 that shouldn't repeat in 2014. The electronic health record activity that affected us, we don't expect the system conversions issues or the activities around involuntary physician turnover. Those all should be a little bit more positive for our 2014 guidance. Although, I will repeat again, the weather has been a little challenging in the first quarter so far.

Tom, this is Wayne. Clearly, our past year was not a great experience for us. We obviously had lots going on in terms of government investigation, solving that, as well as a big acquisition.

Having said all of that, David Miller's primary focus now is on growth and how we improve and enhance our market share, which will cover a number of areas. And we will be reporting on that as we go through the year.

Okay. Then maybe, Wayne, a big-picture question regarding HMA. Obviously that business deteriorated as 2013 went on, for a number of different reasons. How would you describe the state of that portfolio at this point? And maybe give us some color on the initial steps you're taking since you gained control in the last month?

I would think that we've had good reception in all the facilities, including the medical staffs, the Boards, the employees. We are excited about the opportunities. As we look at our opportunities, we think that this is a group of hospitals that could use a lot more resources, a lot more directive resources in terms of not only improving, enhancing quality in their HCAHPS, but also around physician recruiting and market share.

So the opportunity is absolutely there for us, not only on the synergy side but also on the growth side. So as we continue to look at this and work on this, and of course, we are only about three weeks into it, but I think we've visited every hospital. And so far, I think our divisions of every hospital, and they are providing their updates as we go along, all of which are positive, all that look like there's a lot of opportunity there. Opportunity, that's code for there are lots of issues for us to solve.

Okay, Thanks, Wayne.

Tom, I will mention one thing about synergies. We've clearly had to make some changes in the original guidance, because we bought them about a month late. We lost four hospitals. We did keep the synergies at $100 million, even though we've got four less hospitals out of the 70, and a month less operations, which should give you some belief that we believe there's a lot of good synergy opportunities.

Okay, thanks, Larry.

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

Hi, good morning, this is Dana Nentin in for Darren. With respect to HMA's EBITDA run rate, Q4 results implied an annual run rate above $900 million. Is that the right way to think about the run rate coming into the fold, or were there any one-time elements in there that you could quantify?

And then looking into 2014, what are some of the big swing factors for HMA in relation to its run-rate EBITDA?

Yes, I don't think that's the quite right way to at it. There was about $70 million of high tech in the fourth quarter and $96 million for the year, and so that would distort the fourth quarter if you tried to annualize it.

The year ended up about [$716 million], a little -- the couple things you got to think about. I'll just do a combined Company for a second about things you'd asked that are sequestered about this. About $20 million, is a headwind because that's an extra quarter in 2014, and again on a combined basis to two midnight rules about $20 million, because it started October 1. They didn't have a lot of physician productivity there. HER, we think we can improve that about $20 million.

Now good thing, specifically HMA had the Mississippi contract, which was about $25 million that they got hit with in 2013 will be there. The synergies, $100 million of course there, and of course the [B&A] will be helpful. Those are a couple of the things you have to think about. They did have some specific expenses that we identified that will be part of our synergies for about $20 million, which will help us get to our $100 million. It's stuff that they probably would not have had in sales. The rest of it is stuff that we will try to accomplish.

And then of course healthcare reform, we've often said that there some were, they had originally estimated $95 million to $100 million, with their consultant study. We think it is going to about half of that, so that's going to be helpful there.

And I think their net revenue was a little weak throughout the year, with some rights and some Medicare Advantage stuff. And I think the fourth quarter was a little better from that perspective. Hope that will carry forward.

Okay, great. Then an update on your Cleveland Clinic relationship, if you have any thoughts on timing of your market initiatives throughout 2014 and 2015? And what are your goals with that relationship?

We continue to work with the Cleveland Clinic. Once we developed this relationship, we had a number of projects; all those projects are proceeding. We are in the process now of really getting them implemented and going. There's a lot of work associated with that.

So we should start seeing results from the Cleveland Clinic work in the next 6 to 8 to 10 or 12 months, I would think. So it's an ongoing relationship.

We've got so many other things, and they've got so many other things. We are focusing on the initial work that we decided to do, and once we get through that, we will decide what the next steps are.

Okay, great. One more, how quickly do you think your opportunities with HMA's portfolio will materialize with the Cleveland Clinic relationship? Are there any markets that may have higher priority over the near-term?

It is a little early to tell about that. And I would tell you that we also have lots of other opportunities in terms of other people who are interested in having a relationship with us all over the country. So we will have to think through this about where it works the best, so there's a lot of opportunities for us now in terms of collaborations.

Okay, great. Thank you.

Let me clarify one thing, actually the HMA margins for 2010, 2011 and 2012, after a statement about 16%, even with the fourth quarter being a little better in the higher high tech, it is about 13%. So similar to the way that Triad developed, it was 14% or 15% margin, got down about 12% and we got it back up in the mid teens. In a few years, I think we got a similar opportunity here, but they clearly had a very challenging 2013. But if you go back and look at 2010, 2011, and 2012, they run 16% fairly consistently.

Great. Thank you a lot.

Your next question comes from the line of Jason Gurda of KeyBanc. Your line is open.

Thank you. Good morning. Curious how you're experience in 2013 has impacted your guidance for 2014? Looking at the bottom end of your range, it looks like if you take your fourth-quarter run rate and EBITDA for community, add in last year HMA's full-year performance, and then also your healthcare reform and synergies, and you're already at the bottom end of guidance.

Well, what you do if you take the combined Company, you first got to remove January and you've got to remove the divestitures, which is about $100 million plus. There is a little tail effect with some acquisitions, $10 million, $11 million. Then the acquisitions that we know of, are working on, that's about another $50 million to $60 million.

Then you've got to remember the two midnight rule will be there and the sequester will be there. I went through the other items before. I still think there's a couple percent growth at the -- using your low end of the range of healthcare reform. The high end of the range of healthcare reform that'd be correct. But the way we looked at it in the low end, we probably should be considering the low end of the range with healthcare reform, because we've still got a lot of ways to go. I think it is $95 million.

Then on high end, you've probably got to get to about 6% same-store growth, excluding items that we named here -- their synergies and other stuff. I don't think the low end is quite -- it should be achievable, but I don't think -- there is some expected drop. I think the revenue probably needs to grow a couple of percent, EBITDA a couple of percent, to hit the low end of your range.

By comparison, do you recall what the range was for your original guidance going into 2013?

It was probably about $1.36 billion, I believe is the midpoint, going up to about $13 billion. EBITDA was over $2 billion -- [$2.25 billion] and we had to step it down throughout the year. I think we made two reductions in the guidance throughout the year, so it's about $100 million or so.

Okay and looking at the overall volumes, volumes are least at the adjusted admission level, were positive in 2012 for you guys in each of the four quarters, but then were strongly a negative in 2013. How do you think about anniversarying some of these volume declines, where you could give you perhaps a little bit of confidence going into 2014?

Yes, I mentioned some of that while ago, Jason. We had the decline around the physician turnover, which is 6% of [a drop] for the year. We've got the HR system conversions, about 5%. We are seeing a little bit better trend in the women's, it got better in the quarter.

I don't expect to always see service closures and weather to be the challenge that we had in the quarter; although, the first quarter has got some weather challenges. The readmission shouldn't be that difficult, and then we have got an easier flu comp in 2013 versus 2014. The guidance of minus 3% to plus 1% should be achievable. We've got to carve out the service closures and weather, but I think it would be achievable.

Okay. Thank you very much.

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

Great, thanks. I wanted to go back and confirm, it sounds like when you talk about this guidance you're providing last night versus what you provided back in January, it sounds like the moving pieces are adjusting for the timing of the HMA deal and then adjusting for these four divestitures on top of that. Is there any other adjustments within the EBITDA number or does everything else remain the same?

Been I think we kept the range at $250 million, so the low end coming down $20 million or $25 million. We did a lot of work on it, and I think we went through all the moving parts here. And probably the only difference would be that the range, instead of letting the range grow a little bit with some of these items, the range was kept at $50 million, which pushed the low end down $25 million.

Okay, all right. That's basically how the math worked (multiple speakers).

That's how the math worked. We bought them 26 days later than we thought. We did it fast so that people that were looking at the Company, especially for the financing purpose, could see a full year and a full year of debt EBITDA.

We couldn't very well talk about the FTC activity until the FTC approved it. They didn't approve it until the second week or third week of January. We received a right of first refusal after January 6 information. And then the facility there, I think we actually thought that the West Virginia facility might not stay in January. But we now believe it may stay that way for a while, as a discontinued operation.

So there's no real difference other than the math.

Okay. Then when I look at the volume number, it sounds like you are saying a 20%, 30% increase in volumes on the small percentage of the people who get insurance. Maybe that's 20 to 30 basis points for the guidance from volume, if I'm doing that math right.

And then you also said that your same-store guidance will include HMA. HMA's numbers were a little bit better than your numbers last year. Does that impact the combined number at all? Or how do you think about combining that?

I don't think it will that much. We are twice their size, and we've tracked pretty well. They had a little worse first half of the year than we had, and then we had maybe a little worse here at the end of the year. They may have had an easier comp in the fourth quarter, I believe, than we did a year ago. And I don't think it will make that much difference.

And I realize Kevin, I know you may be right that most of the people that [row] would be the heavy utilizers. That's probably held out with what we are hearing, it's just we've not put that type of assumption in yet.

Okay. And then as far as HMA goes, I think Wayne made an allusion to how in 2013 you guys both had to deal with government investigations; you both had to deal with a deal between the two companies, and maybe that was a little bit distracting.

Since the Community side seems to be coming close to resolution on the one-day stay issues on that side of the business, do you think that's going to be a tailwind, as far as getting that behind you, but it's still a headwind on the HMA side? How do you think about where you are in the two settlements as far as impacting the ability to grow?

Experience is always good to have. Some kinds of experience are not so good to have, but we are experienced in terms in resolving and working through these now. And as you probably know, we internalized all the work, and we didn't see the impact as much externally as HMA did.

They do have some residual in the marketplace over their investigations and their 60 Minutes appearance. But I think we will bring this in-house and do the work on it, and hopefully, we will come to some resolution. I can't tell you -- you can never predict how long these things will take, but we will put the appropriate resources on it to make sure that we move forward in terms of trying to resolve this.

Okay. And last question, Larry, you alluded to this. Obviously, our view has been that sick people will buy insurance up front. And I think the difference between you and a competitor, as far as your 55% and 80%, it sounded like they were trying to build in with their actual volume that they see today, how much of that volume would qualify versus what the people in their markets would qualify?

So is that right that you guys are talking about it a little bit differently than they're talking about it? They are trying to do how many people came in last year, and you are trying to say how many people in your markets?

We are trying to think about it not just 2014 but through 2016, that we think this changes. For instance, today 80% of the people that have enrolled are getting subsidies, so that's all the way up to 400% of the federal poverty level, a lot of people are buying the silver plan, which is helpful. And it's a little bit older populations. I think we're thinking about it more from a global perspective of the entire population, not just what's happening in the last couple months.

Okay, all right, great. Thanks.

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

Thanks. Larry, to clarify that last point, the 55% is where you are today or that's where you would expect to be in 2016?

55% is the percentage of uninsured in our markets that we think will be eligible for Medicaid. It is not about a point -- it is looking at the entire -- I think we've got 3 million people, I believe, in total of uninsured trying to look to see how much of those would fit in the up to 138% and be eligible for Medicaid and more of an analysis like that. Not just a point in time of a few people, because they've been enrolled over the last couple months.

Okay and where was it -- is there a number that you can compare it to as to where it was last year?

55% is probably a similar number. The uninsured and the life, I think moved 1% or 2%.

I think this is a published number that's pretty well recognized.

If you look at the CBO and CDO and similar types of statistics over the next couple of years.

Okay, there's also been a fair amount of discussion about not only the adverse selection but on the exchange side, the percentage of uninsured or individuals signing up that were previously uninsured, do you have any views there or any interesting statistics?

It is hard to get to that, because some of your ID cards are not that visible. I do know we're seeing a good percentage of people in Arkansas, which has been pretty successful compared to what our previous uninsured is, but it is really not easy for us to know if someone's been insured or not.

Anecdotally, you list the managed care companies that felt like the 4 million people that they lost, a lot of them got them re-enrolled, offered other plans to it. We don't have any really good statistics to answer that question.

Okay and then maybe finally, Wayne, you said you thought there was some lingering impact from some of the investigations on HMAs, admissions or the admission policies. How long do you think that takes to play out? And is Community seeing any lingering effects or have you worked through that?

Yes, I think we are focused now on moving forward in our market share, and I think there is some has been. But these issues, some of which have to do with physician relationships, I think we have said that we have a 90% would recommend among our physicians that are on our medical staffs. Theirs is lower than that.

I think it really is a relationship issue, and I think one of the things that we think we bring to this opportunity is the ability to develop and enhance and improve physician relationships, which is clearly the driver of all this.

Okay, Thank you.

Your last question for the day comes from the line of Ralph Giacobbe of Credit Suisse. Your line is open.

Thanks, good morning. Wanted to clarify some of the commentary, Larry, that you went through. Did you say -- you said January saw a 10% decline in uninsured within your expansion states, and a 7% decline in non-expansion states, is that right?

I thought it was 17% and 7%, but --

I'm sorry, 17% and 7%, and then that's off of a base. If we look at fourth quarter, the uninsured was down about 3%?

Yes. And I think that's much -- I'm sorry, it was 10% and 7% -- for unique patients with the self-pay adjusted admissions in expansion states, which in fact ran, the actual revenue was down 17% and the non-expansion states were 7%.

It made us think like the expansion states, the Medicaid is working well. You're seeing some decline; there's lots of reasons things go down, tough flu comp, weather, other things. But at least expansion states are declining better, and I think that would tell us that some of the Medicaid activity [is happening].We also felt like earlier in the fourth quarter that we saw a little bit of growth in the woodwork effect, which we think would be a benefit to healthcare reform.

Okay. And then going back to the HMA deal, are there any more or any top-line synergies you see in terms of the managed care contracting on either the larger book, obviously, or even just reconciling rates now that you have full disclosure there? And is there any assumption baked into that, into the $250 million two-year synergy target, or would that be included?

There will be some. There's very little in the $100 million. A lot of your contracts are already done for 2014, so you won't have as much. There's always a hope that they'll buy and expand in your network, you can have a little bit of shrink. There will be some built-in, but there's not -- probably a little bit less built in than it would've been for what we had for Triad. But I do think we'll see some opportunity for 2015 more so than 2014.

That is baked in to the $250 million?

Yes, a small amount is. Yes. Most of the synergies we like to deal with costs and expenses, because but if we can determine there's a contract improvement then we might not have otherwise got, we would count that.

Okay. Then my last one on the two-midnight rule, did you say it impacted admissions in the quarter by about 60 basis points, is that right?

That's right, yes. That's on Medicare, and I think that's about 1,000 admissions if I remember correctly.

Do you have what percentage of your Medicare admissions at this point are one-day stay?

Yes, I do, give me a second.

And if you have it too, Larry, just wondering if that stat varies for other payers as well?

Medicare one day is about 13%, and for all payers it is 15% or 16%.

All right, that's all I had. Thank you very much.

I'd now turn the call back over to Mr. Smith for any closing comments.

Thank you, Melissa. Thank you for spending time with us this morning as we embark on an exciting chapter in CHS's history. Our standard and centralized operating platform will help in moving the Company into the new healthcare era.

At this point, again, I would like to acknowledge Lib Schuler, the many contribution she has made over the last 15 years to this Company. We want to specifically thank our management team and staff, hospitals' Chief Executive Officers, Chief Financial Officers, Chief Nursing Officers, and Division Operators for the focus on our operating performance for the fourth quarter.

Once again, if you have questions and you'd like to reach us, you can get us at area code (615)465-7000. Thank you.

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