Community Health Systems Inc (CYH) 2014 Q1 法說會逐字稿

Good morning. My name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems first-quarter 2014 conference call. (Operator Instructions). I would now like to turn the call over to the Vice President of Investor Relations, Mr. Michael Culotta. Please go ahead, sir.

Thank you, Jeremy. Good morning and welcome to Community Health Systems' first-quarter conference call. Before we begin the call, I would like to read the following disclosure statement. This conference call 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 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 discussions. 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 and Chief Executive Officer. Mr. Smith?

Thank you, Mike. Good morning and welcome to our first-quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer, is on the call today, as well as Lynn Simon, our President of Clinical Services and Chief Quality Officer. After the market closed yesterday, 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, a supplemental slide presentation has been posted to our website.

This has been a very active quarter for us with the financing of the Company in early January, the closing of the Health Management Associates acquisition and the implementation of the Affordable Care Act and of course, the impact of the very severe weather we experienced.

Let's start with the impact of the weather. As Fred Smith, the FedEx Chairman, President and CEO, stated in opening remarks of his earnings call, he said, and I quote, in fact, it has been the toughest winter in which FedEx has operated. I would like to state the same fact that this has been the most severe winter weather in which we have operated in our history. In fact, this is worse than the winter weather I had seen in 1997 and 1977 and 1978.

Saying that, I would also like to put in perspective our geographic locations compared to our peers. We have more hospitals in areas significantly impacted by the severe winter weather than our public company peers combined. There were 130 of our facilities that had some form of volume and financial impact on the operations, especially in the states of Pennsylvania, Indiana, Arkansas and Illinois. These 130 facilities represent 65% of our entire portfolio of hospitals. So I think you can see how this has impacted us more than our peers and why we have been mentioning this throughout the quarter in our public presentations.

But saying that, I am extremely pleased with our financial and operational results that we have been able to achieve this quarter. This is the first quarter that we have reported our combined operations with HMA. Our first-quarter results consolidate the results of Community Health Systems and the CHS 14 facilities from and after January 27, 2014. The prior year's first-quarter historical financial information includes that of CHS only. The same-store results reflect the HMA's performance from February 1 forward in both 2013 and 2014, as well as the CHS for all three months.

Our net operating revenues increased 28% on historical comparison to $4.2 billion. Our adjusted EBITDA increased approximately 9.2% to $541 million. The weather impact on adjusted EBITDA was approximately $25 million, which is not included as an add-back to the adjusted EBITDA of $541 million. Our adjusted earnings per share from continuing operations for the quarter was $0.27. All calculations exclude the early extinguishment of debt relating to the financing that transpired, the costs associated with the HMA acquisition and transition costs, amortization of abandoned software costs, the CVR legal expenses and the impairment of long-lived assets, but does not include the loss from weather impact of $0.14 per share. Excluding the weather impact, our adjusted earnings per share would have been $0.41.

Turning our attention to the HMA integration, David Miller is doing a great job of focusing our resources on getting the acquisition fully integrated and working with Dr. Lynn Simon on all of our quality initiatives. We hosted a meeting of the CHS 14 hospital CEOs, CFOs and CNOs in February, as we rolled out our philosophies and expectations. We were very impressed with how everyone is embracing the renewed support and additional attention.

In addition, David and his team, as well as Dr. Simon and her team, have been very proactive in meeting with physicians throughout the organization as we show our full attention to their needs. Let's remember this is not about one quarter, but long-term opportunities, especially with the Affordable Care Act benefits this offers our Company and our shareholders. Of course, we have challenges along the way, but we expect this will bring rewards to our shareholders.

As it relates to opportunities, we are very bullish on our ability to achieve synergy levels that we've discussed before. We still believe we will achieve $100 million in synergies in 2014 and $250 million total over a two-year period. We have estimated that we will have already achieved $12 million in synergies just in two months.

Let's now discuss our physician recruiting. As always, we are very focused on physician recruiting. We have over 22,000 physicians on our medical staff of which 3,300 are employed. We recruited 613 physicians this quarter compared to 418 on a combined company basis a year ago. We are extremely focused on further expanding our physician base. This will be extremely important as the Affordable Care Act gets further rolled out and accepted.

Dr. Simon and her team are very focused on our quality measures and we continue to see vast improvements in that area. We are seeing approximately a 15% reduction in our serious safety events. In addition, our hospital-acquired conditions have been reduced approximately 23% since 2011. Our readmissions for diagnoses included in the Medicare readmission reduction program have been reduced approximately 19% over the same timeframe.

As you have seen in our announcement in early April, we have completed two acquisitions this past month that will be included in our second-quarter results. Sharon Regional Health System, a 241 licensed bed facility located in Sharon, Pennsylvania with 22 satellite centers and Munroe Regional Medical Center, a 421 licensed bed facility located in Ocala, Florida with an outpatient ambulatory center located approximately 10 miles west of Ocala. These two acquisitions further our strategy of concentrating on our existing markets where we can further our network development.

We are also excited to have Shands University of Florida as a minority equity partner in Ocala. These regional partnerships with high-quality institutions such as Shands are part of our overall strategy to be the leader in healthcare in our communities. These two facilities have approximately $475 million in annualized revenue and they were included in our guidance we gave in February.

I'd like to give you a brief update on the pertinent legal matters. As it relates to the government investigations in the short stay admissions and other investigations at the Laredo, Texas facility, we continue to work toward a final resolution and believe we could be close to the final outcome of this matter. The reserve for this matter remains at $101.5 million, which we believe is to be adequate to resolve the government's claims.

With regard to HMA's government investigation lawsuits, we have transitioned all these matters to our experienced in-house and outside counsel and are fully cooperating with the government on the investigation of these allegations. As we've stated previously, we were aware of the nature of the investigations prior to closing and are working to resolve these matters, hopefully without having to fully litigate the many cases. However, we are in the very early stages and do not have a timeframe on when these matters will ultimately be resolved. We are handling these matters with the belief that we will try to have as little disruption as possible and will keep our Board of Directors fully informed so they can perform their oversight responsibilities.

We have just adjusted our upper end of our guidance to narrow the wider than usual range to reflect the effects through the first quarter and reflect the movement of hospitals to and from discontinued operations. The range of net operating revenues as provision for bad debts is now $19 billion to $19.8 billion. The range for adjusted EBITDA is $2.825 billion to $2.975 billion.

Larry will now discuss further our results, the details of the extreme weather impact on our operations, the effect of the Affordable Care Act and provide you with other information on our 2014 guidance. Larry?

Thank you, Wayne. As Wayne has mentioned, our consolidated results are that of CHS since the HMA acquisition effective January 27, 2014, our historical first-quarter 2013 financial results. Including only historical CHS reported results, our same-store statistical information includes the legacy CHS for all months and includes HMA for February 1 forward for both 2013 and 2014. We believe our same-store information is more meaningful prepared this way.

I will predominantly discuss same-store results since that would be the most meaningful use of statistics unless stated otherwise. The same-store numbers for 2014 reflect the synergies discussed after the deal was completed. All comparisons will be to first quarter of 2014 unless otherwise stated. Of course, information we discuss excludes litigation and merger costs of the HMA transaction of approximately $53 million, the majority of which were banker fees and severance payments related to the HMA transaction, impairment of loans of assets of approximately $24 million, the amortization of software to be abandoned of approximately $42 million, the writeoff of (inaudible) debt, approximately $73 million and legal fees associated with the HMA government litigation related to the contingent value of rights of approximately $3 million.

The impairment and [decelerating] amortization of software to be abandoned relates to a corporate integrated decision to replace selected CHS legacy IT systems with Cerner that CHS began to use in 2013. Now this accounting transaction does not relate to the HMA IT system.

I'd first like to discuss the impacts of weather. The weather effect was varied among Company spatial and geographic locations. We have used various methods to estimate our lost volumes to net revenue and adjusted EBITDA in all our hospitals and physician practices. We have estimated we have lost approximately 2,600 admissions and 6,000 adjusted admissions. This equates to our estimates of approximately $58 million of revenue, $28 million of estimated loss to adjusted EBITDA and a $0.14 estimated negative impact on our adjusted diluted earnings per share from continuing operations.

We need to also point out in addition to the three hospitals previously mentioned in discontinued operations, we have included a few smaller hospitals and reclassified Midwest City, Oklahoma back to continuing operations. The total impact in the quarter on net revenue for all the facilities in discontinued operations was approximately $70 million in revenue. Our consolidated net revenue of $4.2 billion was reduced by the weather and current contingent discontinued operations. Same-store net operating revenues declined 4% as a result of the following volume declines. On same-store admissions, the decline is approximately 8.1% or approximately 18,000 admissions as a result of approximately 6,100 fewer admissions from lower volumes related to flu and other respiratory cases. This last year's first quarter had very strong volumes due to the January and February flu season.

Approximately 5,000 fewer admissions and short stays included the effect of the Two Midnight Rule. Approximately 15% of the decline due to the weather impact that we previously discussed and our readmissions declines 1,600 admissions. Various [service] closures also reduced admissions about 900. Same-store adjusted admissions declined 5.3% or approximately 2,400 adjusted admissions due to similar reasons. Total same-store self-pay adjusted admissions dropped 5,500 or about 15% and now they are being about 7.2% of adjusted admissions versus 8%.

Our surgical cases declined 5.1% or approximately 1,400. We did lose surgical cases due to the weather. About 25% of our drop was due to the weather. We do believe we will see some of the business return, for example, the surgeries, but some of the purely medical business is never regained as patients recover from the illness without hospital treatment. The weather and lack of flu had greater effect on the first two months of the quarter. We'd like to note that our adjusted admissions volume in March and April were within our annual guidance range. We have got a current annual guidance range of minus 4 to flat, reflects the lower volumes for the first quarter. We continue to see the shift to outpatient setting. Our same-store outpatient revenue now represents 55% of our total revenue compared to 53.5% in the first quarter of 2013.

We continue to be pleased with the pricing intensity as we saw our same-store net revenue per adjusted admission after bad debts increased approximately 1.4% and our Medicare inpatient case mix increased 2.3%. On the expense front, salaries and benefits declined approximately $48 million, or 2.4%. Although as a percentage of net operating revenue, they increased 80 basis points. We were impacted on productivity due to the weather and on overhead payroll, we started downsizing offices in Naples. We will continue to see improvements in this area as we continue to integrate our two organizations and further see the synergies we have previously estimated.

Supply expense decreased $30 million or 4.6% and declined 10 basis points as a percentage of net operating revenue. We believe we should see continuing improvements in this area as we continue to increase our overall compliance in the group purchasing organization and to decrease pricing as it relates to CHS. 14 facilities, which is our term for HMA. This is another area that we have estimated we will be achieving synergies.

Our cash flow from operations was $65 million compared to $57 million the first quarter. The following items have impacted our cash flow from operations. We had the negative impact of the HMA integration cost, the legal fees of $56 million, HMA investment banking fees that were in payables we paid for in this quarter, $33 million in other costs incurred by HMA and a premium that we paid this quarter for legal and other transaction expenses of $18 million. Adding these items back, we would have had a cash flow of $172 million.

On CHS legacy, we had a buildup in AR of about $70 million due to our subsistence conversions and Medicaid supplement programs in a couple of states. Also our Medicare Advantage receivables were up about $30 million, which we are working on bringing back down. Our CapEx was $181 million or 4.3% of revenue, which approximately $2 million is for replacement facilities.

Now let's turn to the Affordable Care Act. As we said earlier, in a three-year timeframe, we expect our self-pay adjusted admissions to decrease from approximately 8% to 4% in 2016. About approximately 55% of our self-pay population should be eligible for expanded Medicaid of all states expanded Medicaid according to the statistical data in our markets. We have estimated a 15% reduction in self-pay admissions in 2014. Historically, on an adjusted admission basis, approximately 25% are in expansion states and 75% in non-expansion states.

In the first quarter, same-store self-pay admissions as a percentage of total admissions in expansion states declined 140 basis points to 5.2% and adjusted admissions declined 180 basis points to 5.3%. Medicaid admissions increased 250 basis points to 21.7% and adjusted admissions increased 270 basis points to 23.3%. In expansion states, self-pay admissions decreased 1,050 or 28% and adjusted admissions decreased 2,400 or 29% while Medicaid admissions increased 460 admissions, or 4%, and adjusted admissions increased 1,800, or 8%. Self-pay emergency room department visits decreased 16% in expansion states, but did increase 1,600 in non-expansion states for a total overall decrease of about 2%. In the non-expansion states, both self-pay and Medicaid admissions as a percentage of total admissions and adjusted admissions remained relatively constant. Overall, on a combined basis, expansion and non-expansion states, self-pay as a percentage of total admissions and adjusted admissions declined in the same proportion that Medicaid increased.

We do treat Medicaid pending as self-pay until we obtain Medicaid approval. We did see an increase in Medicaid pending in expansion states by about 35% and about 10% in non-expansion states for CHS legacy hospitals from the end of the year. Compared to March, 2013, the increase in expansion states was 43% and over the next few months, these should work their way to be approved as Medicaid.

For about half our states, we have been monitoring Blue Cross patient visits with specific change identifications and we saw about 4,800 patients. For these selected Blue Cross patients, approximately 41% were actual patients in 2013. Of those 4,100 patients, about 38% were previously uninsured and 62% were previously insured, but about 59% of the 4,800 are all new patients that we did not see in 2013. Again, this is a limited test. We did not see -- we did see very good monthly sequential growth in our enrollment efforts during the quarter as each month of 2014 increased approximately 34% from the previous month.

From an enrollment perspective, our internal eligibility screening service company, at present, 80 of our legacy hospitals experienced continued improvement in each of the months in 2014 much like the federal exchange number. We expect to grow our internal service coverage to at least 120 hospitals by our next enrollment period. In the fall of 2014, we expect to see continued strength in Medicaid enrollment in expansion states during 2014 and some benefit from the [woodwork] effect. Our eligibility on-site representatives continue to look for opportunities to enroll self-pay individuals on the exchanges in 2014 if they have experienced a qualifying event outside of open enrollment.

On Medicaid, we continue to have benefit from enrollees currently eligible for Medicaid in 2014 often referenced as the woodwork effect. We continue to monitor states for [resumption] of eligibility programs for opportunities. Currently we are enrolled in these programs in Virginia, New Mexico and Alabama and we are expecting at this time not to have any change in our 2014 healthcare reform guidance.

We believe we have recognized, although on a roughly calculated basis, at least $10 million from the woodwork effect in the Affordable Care Act for additional Medicaid business. We will work to refine this system throughout 2014.

Now for guidance, we have adjusted the upper end of our range downwards as a result of the first quarter, the weather impact, the additional facilities included in discontinued operations and the change in accounting estimate at HMA for 2013. We believe the total HITECH reimbursement should range from approximately $190 million to $250 million of which we believe the reimbursement in the second quarter should be a sequential increase of approximately 60% from the first quarter.

We have gotten lots of questions about the long-term outlook for HITECH meaning 2015 to 2017. We believe HITECH reimbursement and capitalized software and capital will continue to be there and start winding down in 2017. Our 2015 and 2016 incentives should be somewhere around $200 million and the capital expenditures and capitalized software somewhere in the $225 million range and in 2017, the incentives and the capital expenditures should be about $10 million each. The loss of these HITECH dollars will be offset by improvements in productivity, the less convergence expenses we have been incurring the further benefits of the Affordable Care Act.

Other items that we should call your attention are as follows. The share count in the second through fourth quarter will be larger due to the shares issued in late January outstanding for all three months of each of these quarters. We are not changing the guidance on our number, but you will have around an approximate average range of 115 million to 116 million shares in the last three quarters of 2014. Remember the HITECH reimbursement has been achieved mostly in the second half of the year. Our synergies of $100 million will grow throughout the year and are unevenly distributed. The second-quarter synergies are estimated to be approximately $25 million. Another 65% will come in the second half of the year. We still believe the Affordable Care Act rolls out as the year progresses and will be much more of a second-half improvement with approximately 75% being recognized in the second half of the year.

We filed an 8-K on April 8 of 2014, which included a reconciliation on the HMA adjusted EBITDA. Based on our work, we estimate the impact on 2013 EBITDA run rate is about $35 million or for a run rate of $725 million. The California provider tax that we received, about $17 million, in the second quarter of 2013 will not be there in the second quarter of 2014. Although, as we've said on the last call, we expect to receive $25 million for the California provider tax in the fourth quarter 2014. We have also included on slide 18 a bridge for our adjusted EBITDA to our guidance. And Wayne will now provide a brief recap.

Thanks, Larry. We are very pleased with what we have accomplished this quarter in light of all the effects of the weather. Know that the recent acquisition with our other facilities will further our efforts to increase shareholder value and become a larger trend in the new and improved healthcare environment. We are very focused on our historical volume trends and expanding our efforts in terms of being focused on the various avenues of consumer-driven healthcare. We continue to focus on enhancing our quality metrics, building stronger physician relationships, increasing physician recruiting and doing what is right for our patients. I would like to thank all the physicians, the nurses and the support staff for all their tremendous support during this quarter as we move this Company forward as one.

With that, we'd like to open up the call for comments. If you have further follow-up questions, as always, we are here to take your calls. You can reach us at area code 615-465-7000. So I will turn the call back to Jeremy to open it up.

(Operator Instructions). A.J. Rice, UBS.

Thanks. Hi, everybody. Just a lot of numbers going around and there is obviously a lot of moving parts in the first-quarter results. If you sort of conceptually think about Xing out weather, Xing out HITECH, some of these numbers that are bouncing around and you think about legacy Community, legacy HMA portfolio first quarter to fourth quarter, are we seeing, from a volume perspective, from an EBITDA perspective, stability sequentially at this point? Are we seeing an uptick in improvement or how would you describe where you are at fourth quarter to first quarter?

A.J., let me kind of start with this before Larry gets to the details of it. I think what we've been able to accomplish so far, we think there are very positive results. Our integration is going extremely well. We have a very talented team. We are ahead of where we were in the past in terms of how we try it, as far as identifying issues and problems and solving problems. Our synergies are coming along. We have done a good job in terms of working our way north from Naples to Nashville. So all that is coming along and we have identified a lot of opportunities for us.

Having said that, while we are doing this and we do have a very experienced operating team, our division presidents are very skilled, we have been focused on volumes and looking at volumes and as Larry said, I don't know if you quite got this or not, we normally don't talk about prospectively by month, but our March and April volume trends were within our new guidance. So we think that is an indicator that things are at least moving in the right direction. We have made a number of adjustments in the way we think about our volumes and we are focused on working through those.

So I am pleased with the progress that we are making. Again, this is the first quarter in a long process for us to assimilate 71 new hospitals. So I think we are making good progress and I will turn to Larry to talk about the numbers.

Yes, A.J., I think we had a slide out that said that if you were $497 million, if you back out the HITECH and adjust for the divestitures that were in existence on HMA, and also the one month we didn't have it and then if you put in the $40 million EBITDA, 537, I believe, $39 million, at the time we had estimated, $30 million. On top of that, you have got to consider the weather that happened from the fourth to the first.

If you look at the volume for a second, you'll see the consolidated volume was down about 8% -- or same-store volume down about 8%, we are down 10.5% in the fourth quarter. As you'll see, just legacy HMA had another similar type, a little bit less than that, still down. I think adjusted admissions for us were down 6.7%. Now we are down combined 5.3% and HMA was probably a little under 6% or so at that point in time.

One of the challenges of the fourth quarter or any quarter for HMA, it had a roller coaster, okay first quarter, not a great second quarter, saw a really bad third quarter and a bounceback in fourth quarter. Some of that accounting adjustment that took place that we talked about affected some of the activity there at the end of the year. But I think we made good progress. We would've thought somewhere in the $500 million to $530 million range to $560 million range would have probably been what would be accepted. We did have a small benefit of the healthcare reform at $10 million, you had the synergy activity, but you had the weather that we estimated at $25 million. We actually did some calculations, it was higher than that and decided that that would be the number we would go forward with was pretty difficult. Synergies are going to grow a lot and the healthcare reform is going to grow a lot and we have got to do a better job in volume and willing to sit at least until the last most recent two months got much better.

Okay. And maybe one other sort of high-level thing, you said that one of the focus points was to meet with the physicians as much as possible. Any takeaways on what you are finding on the HMA side in the meetings with the physicians and I guess that segues into your comments about recruiting and what you were doing there. Is HMA -- does that recruiting effort have to just pretty much be rebuilt or was there much going on there?

Fortunately, from a recruiting standpoint, we have said this all along that we have a very sound, very strong recruiting team, so we were able to just pick up the slack there. If you look at historically HMA's recruiting has dropped off quite a bit in the last number of quarters. So that is one of the issues that they have had. In terms of medical staffs, we have been very well-received. They are hungry for information, they are hungry for help and as you know, Dr. Simon and her team have done such a great job in terms of quality. They are very receptive to all of our quality initiatives, including our working with some serious safety events. And that is creating opportunities for us in the markets in the marketplace. So all that has been very positive.

Okay, all right. Thanks a lot.

Frank Morgan, RBC Capital Markets.

Good morning. A couple of questions on Medicaid expansion. I was curious if you could -- if you believe there will be a follow-through impact from the momentum on Medicaid expansion that you saw in the first quarter and was the decline in the uninsured volumes and increases in Medicaid, was that directly proportional to your exposure to all those states? Were there any states that had auto-enrollment in the Medicaid?

Those states saw pretty good enrollment. We had a little bit more success in Washington and Arkansas, a little bit slower success maybe in Illinois and Arizona, but everybody saw a pretty good uptick from that perspective. There's a couple states, three states of ours that are still trying to expand Medicaid and hopefully they will get that done. I would expect us to continue to see as people either come to the hospital or we continue some of our outreach efforts to find more people to be enrolled in Medicaid going forward and again, we will also continue to -- if we find someone who has got a qualifying event, we can enroll those people in exchanges.

The exchange activity will get much better. I mean the enrollment activity grew throughout the quarter. Clearly, I would hope that we would see some benefit in our markets and our efforts to be able to quantify it a little bit better. Unfortunately, a lot of the payers just don't identify the exchange patients as well as we've got the Medicaid patients identified.

Frank, I don't know if you saw the paper this morning here in Nashville, but Blue Cross I think is saying they had 132,000 people enrolled in exchanges, which is a large number for the state of Tennessee.

And it was a big increase in December off what they had.

All of the companies that reported so far, they have talked about the increase in uninsured is greater than the increase in Medicaid volume. Are we to presume that all those other people are going in -- are these previously uninsured going into exchanges or is there something we are missing there?

Well, some are going into exchanges, but to some extent the weather and the lack of flu will affect some of the self-pay business. So it is not a one-for-one relationship, but some of the people went into exchanges. I know we can identify some number of admissions off the states that we've got done and I think as we continue to have more quarters, more information, we will talk more about the exchange business.

Okay, just one more and I will hop. Any thoughts on best chances of incremental states going into expansion sometime later this year or next year? Thanks.

Yes, I think we ought to get through this midterm election, this 2014 midterm election. Most Republicans, it is my understanding, are concerned about the tea party, knocking them off early. So once you kind of get through that, we already know that there are certain states like Pennsylvania and Missouri. There is one other, Larry.

Utah, Utah

Utah are thinking about expanding now and then I think as this continues to develop and people begin to get an understanding of what it is doing for the uninsured population not only in terms of coverage, but in terms of improving their health, it is hard to improve your health if you don't have access to healthcare. I think you will see other states come around and it will be much more acceptable after you kind of get through this midterm election. So I think there is some hope there that we will see. I mean Tennessee is a good state as well that will probably do something of some kind in the future.

The only other comment, I might say a lot of people look at admissions, Frank. It is probably a better review on adjusted admissions since a high percentage of the activity for self-pay is outpatient, which is factored into adjusted admissions. So that gives you a much better correlation.

Thank you.

Gary Lieberman, Wells Fargo.

Good morning, thanks for taking the question. You mentioned presumptive eligibility and the use in some states. Could you give us some more color in terms of who you are using it for and how you are using it and how the payments have been?

Yes, there are three states I think we have talked about there and all states are supposed to have adopted -- they have been a little slow in especially what we call the red states. We are using it to try to determine based on information that we believe that someone is Medicaid eligible, we will classify them as Medicaid. They will still go into Medicaid pending, but we are using that to try to make a positive. If they are Medicaid and once we get comfortable with that, then we will classify that as a Medicaid patient and it is much more assured that they will be Medicaid.

To the extent that we use presumptive eligibility and we turn out for some reason not to be right, we will still be paid as Medicaid. We just need to do the proper work. That will help -- there is about 8 million to 10 million people that just got started that were eligible for Medicaid and are not signed up for Medicaid throughout the country. So that will help a great deal; also help in the states to expand Medicaid trying to get the people in the program a little easier, a little faster.

And then just in terms of reserving for the bad debts on the individuals as you book them in Medicaid pending, I am not sure if you said, but are you booking them as uninsured and then moving them in or are you taking some kind of mix of reserve policy?

Based on history, we take 50% of the Medicaid pending and think they will get certified as Medicaid and take a contractual on that. The rest of the 50% falls in the self-pay and stays as a bad debt reserve.

Okay. And then surgeries were down 5%. Anything particular about the markets that were weak?

Other than -- it was pretty much across the board. We still had just a little bit of growth in orthopedics, which we've had for a while, but most other lines were down. I think I did say that about 25% of that drop was probably related to the weather as best we can tell.

Okay, great. Thanks a lot.

Whit Mayo, Robert Baird.

Thanks. Larry, can you go back to just the volumes in the quarter just for a second? You said that March and April were better, but I don't think HMA was in your numbers for January. Did that have an impact and maybe can you just walk us back through why you think the trend line should improve fairly meaningfully for the rest of the year?

Yes, if you look, January was a pretty bad -- was the worst month of the quarter and HMA was not in there and then HMA went in on February 1. Both January and February were substantially down overall on an adjusted admission basis and April and March, as we've said, they were pretty close to the original guidance of minus 3%, and they are clear within a range now of zero to minus 4% and we saw that and also surgeries were better in the two months and they were for the first two months also. So from that perspective, we know also that about half the volume drop was weather and respiratory and flu, so about 49% of it and that predominantly hit January and February. Although some weather affected March. Looking at both months, there is a little benefit of having I guess Easter in April versus March a year ago, so looking at both months, we saw a much better improvement. We have got a lot of initiatives going on in volume. Wayne, do you want to talk about some of those initiatives on volume we have got going on?

Well, yes, Larry has turned into the Willard Scott of this now in terms of the weather (inaudible) [focusing] so much on weather, but what we have done over the last number of months is to go back -- we think a lot of things that we were doing in the past, we've worked on improving, enhancing our analytics to make sure that we understand that things are going on in our market and markets we've taken service lines. All this is in relationship to our strategy where we are building regional networks and service line improvements where we are beginning to work hard about access points and enhancing improving our access points through multiple different kinds of vehicles, everything from mini clinics to urgent care. Again, we've worked on our emergency services in terms of throughput and you'll see us doing a lot more in terms of the marketing on our emergencies.

Our network development strategy is coming along really well. We have 11 networks now that are with a number of hospitals and urgent care centers and outpatient surgery and all of the above and that. So we have enhanced our work around our physician relationships even though you know, if you look at our satisfaction rates, we have a 91% rating among our physicians that they would use a facility for them or their families. So I think we are focused on doing the right things and there is a long, long list of things that we are doing, but some of this is by market, but there are a lot of overall ones that we are doing companywide.

Okay. And then maybe just on the abandonment of IT, just what drove that decision to change out that particular vendor and can you remind us just what group of hospitals that was?

Yes, that was Community Health Systems hospitals. I think we put in a systems conversion about a year ago with Cerner, a good system. We know their system is a good system; we just decided to go a different direction. There was two different systems. One has been in the Company since 2001, one we picked up with the Triad conversions and then some hospitals are still using the one we picked up with Triad and it is a good system to work within those locations.

Looking at the cost of all the stage two activity and conversion cost and things of that nature, we thought we could save some dollars on spending on IT and we have had to spend quite a few dollars on it by doing that. And so we -- look, these two systems decided to replace those for stage two purposes with Cerner or in some cases stage one and we are in the process of doing that this year. As a result, some of it has been replaced and some will be done this year. So some of it went off as an impairment and we'll have another quarter of about $42 million in additional amortization. In the end, we will have a little over $100 million that will write off from there and we will save the $100 million on the spending for Cerner for both conversions we have got to get done and then also with the stage two efforts.

Okay. A lot of numbers there. So you will actually -- I think I called the $100 million. That is the actual cash savings versus what you would have spent on the other system?

That's correct. And on the noncash, there is $24 million of impairment and $42 million over this quarter and next quarter that will be accelerated software amortization.

Okay. And this might be a silly question, but you don't have to re-attest stage one if you change your systems, do you?

No.

Okay. And maybe just on HMA, just updated plans for IT there, just how long you can keep their whole system going and whether or not that can get you to stage two and three?

The former CIO got replaced with a person new to the Company and we have put some staff down there that is experienced with us. We will use them for stage two. A lot of their features in our system we've gotten certified. We will also use our features for computerized physician order entry and also for patient portal and those elements and also MEDHOST is a system from (inaudible) that we will use -- they use, we also use here. We think we can get our stage two money based on this. We can tell now we are also working on getting some of the physician incentives that they had not gotten from physicians. So the plan is, and they are part of the $250 million high-end HITECH number that we will get for 2014. We also expect to get a pretty good size HITECH for them in 2015.

Okay, thanks.

Brian Tanquilut, Jefferies.

Hey, good morning, guys. Larry, if you don't mind just highlighting for us, is there anything as we think about the ramp between Q1 and Q2, other than getting one month more of HMA and the synergy ramp, is there anything that we should think about especially as we look at the consensus showing $150 million ramp sequentially?

Well, we are going to have a little bit of a timing difference around the California provider tax. Somebody else talked about it last year. We got about $17 million in the quarter. That won't be there this year. The HITECH will probably go up somewhere around $14 million and somewhere around $16 million and the synergies will go up, but not substantially more than they were the preceding year. We would hope to have and continue to make some progress on the Affordable Care Act, but we do think if you take the second quarter and you look at it and continue to roll forward in the third quarter and the fourth quarter, we have done the bridge of where we think we are going to get to as far as that.

If you take the weather and add back the first quarter and you sort of annualize that, you have got to add -- we have got flat positions we closed that Wayne mentioned on Munroe and Sharon. We also got -- just talked about the year, you have got the HITECH will be a bigger amount, bigger contributor. More synergies will be greater than the first part of the year and of course, healthcare reform will continue to grow and then you didn't have January. So we looked at it both -- we spent more time looking at the year than we have in the quarter, but the quarter will have some growth, but not near as much as you will see in the second half of the year.

Okay, got it. And then as we think about discussions with health plans for 2015, anything that you can highlight to us in terms of what the discussions are like on the exchange plans and on the regular commercial plans? Thanks.

As you know, we are probably 50% to 60% done for 2015. Our range has been originally 4% to 6%. I think we are within that range, about 90% done for 2014. Our managed care people are doing a good job. They are talking about it. I think the exchange contracting we are starting to have conversations there. We expect to get some novel increases. We will wait and see how they decide to treat their premium rates for the exchanges, but we would expect that we will continue to get our 4% to 6% increase for managed care for 2015 based on what we know today.

Larry, are there changes in the network buildout that they are doing on the exchange plan?

For the most part, the [fortunists] at the top of the market, we are almost -- I think we got -- 99% of our hospitals are in pretty good presence. I don't expect us to see that. We have got some narrow networks we are in. Probably 40% of our contracts will be that. I expect us to stay in it and I would expect us to be in a position of strength in managed care, especially with the growth in the states and one of the advantages of the HMA transaction, similar states to us, especially helped us in Tennessee, it helped us in Pennsylvania, it helped us in Oklahoma and Mississippi and of course together we are pretty strong in Florida.

I think McKinsey has got a study out that says that about 70% of the networks are narrow networks now. So we are fortunate that we are in -- and clearly, in the vast majority of our states, we don't have a problem.

Got it. Thanks, guys.

Kevin Fischbeck, Bank of America.

Okay, great. Thanks. I just wanted to go back to that kind of rampup question just because I think that is probably the biggest question in people's minds is that they see the 540 as a starting point and then your guidance at the midpoint kind of assumes about a run rate of 786 per quarter each quarter in Q2 through Q4. And it sounds like the number in Q2 is going to be a lot lower than that, which implies the number in the second half of the year is going to be more like in the 850 call it type range. I just wanted to see if we could put a little bit of number -- you mentioned a number of things in response to that last question, but if we kind of think about HMA being in for the full quarter, maybe that's $65 million and HITECH, just trying to think bridging Q1 to Q4, HITECH is going to be a lot higher, maybe $100 million. The California provider tax you mentioned $25 million. The deals you mentioned this year, I don't know if that is $10 million and then the synergies ramping up, you said $12 million in the first quarter. So maybe that's an incremental $30 million or $20 million into Q4 and then reform ramping up could be I guess another $35 million, $40 million. I mean is there anything else in there because that kind of gets me to an 820 number for Q4.

(multiple speakers) We've seen a lot of activity here. You had negative volume of over 5% here and we sort of basically said we are running somewhere in the 3% to 4% right now and as we continue to make some progress there that we should -- we also anniversary the Two Midnight Rule in the fourth quarter, which will be beneficial to sequester, which has been a hit. It is over with now and it is down in the run rate of the number. So looking year over year, I think we have got a lot of the synergies activity that will be in the fourth quarter continuing to ramp up. Again, we are going to go from $100 million in one year to $150 million in the second year. So you have got to have a pretty good run rate from that perspective.

The HITECH is usually always the highest number there, usually about 40% of the number in the quarter. That activity will be beneficial from there. The healthcare reform, I think with the positioning we will be in going into the year, I think we will continue to have a good open enrollment activity and of course, people can join. The Medicaid will continue to do better. We are very hopeful that Pennsylvania can come sometime before the next -- before the fourth quarter. It would be very helpful for us with the number of hospitals that we have got there.

And then we've have got the Medicare roll forward, which we expect to get some time between now and the end of the year, which could be the third or fourth quarter, $36 million. Everybody else has got that done; HMA has not got that done and we are working to get that done. That is a good sized pickup. The acquisitions we will continue to build. There's supposed to be a fourth acquisition come on board sometime in the fourth quarter. That is a good sized facility with good margin. Plus we are doing some other smaller acquisitions of practices and surgery centers.

Okay, that's helpful. And if we think about then a Q4 number, that is 850 to plus range and annualize that, even if we adjust the timing of the HITECH, it sounds like the HITECH number for next year isn't going to be that much different than this year. A starting point for next year is going to be just Q4 annualized 3.2 or more before you think about the synergies ramping up and reform ramping up and any kind of growth in the core business. Is that the right way to think about it or is there any other adjustments besides HITECH (multiple speakers)?

Kevin, we don't have by-quarter estimates, but clearly where we are today, the guidance we laid out getting to around 2.9 is what that bridge does. That would require a pretty good ramp up and we concentrate more in the second half of the year talk about the discussions and clearly, just by the seasonality of the third quarter, we'd push more of those results into the fourth quarter. So your answer is right. You have got to be careful about how seasonality falls out, but clearly the fourth quarter should be the best quarter we have and we should have the biggest benefit to the synergies, healthcare reform, HITECH, the growth efforts we have got going on, there has been some savings we got and then so that definitely should be our best quarter.

And if that ends up well, I think as Wayne said earlier, it is not the first quarter that matters. It is the results we make over the next couple of years and we do expect to continue to grow throughout the year.

All right, great, thank you.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning. I just wanted to go back to the -- to what you just said in terms of the roll forward and certainly understand all the moving pieces, but I want to go to the organic growth. I guess it seems to imply I guess about a 2.5% growth rate. I guess is there any comparable number to what the 1Q sort of growth was relative to that 2.5% so we could help understand sort of what the ramp would imply for even just the organic growth rate of the business? Obviously, last year, the business was under some pressure and the same-store results were down year over year and HMA has had those pressures as well. So I think what would help would be just to understand sort of the comfort level around being able to grow the underlying base exclusive of all the kind of one-time pluses and minuses that you talked about.

Well, the 5% growth in adjusted admissions, we had a greater than EBITDA decline in the 5%. So if you sort of break it out by quarters, the March and April business had substantially better results than the first two months and that helps it. I mentioned there was a lot of moving parts there, so we were probably about a 5% decline in the first quarter.

Okay, that's helpful. And then just wanted to clarify, on your prepared remarks, did you say -- was it $70 million in revenue that moved from discontinued ops into continuing ops?

No, from continuing ops to discontinuing ops in revenue.

Got it, okay. And what was -- would you give us what is the EBITDA?

I don't think we disclosed it. It is a small margin. HMAs were a little bit larger and ours were a little bit better; it was a small margin.

Okay. And then just my last one, on sort of a combined pro forma basis, do you have what percentage of Medicare admissions now are one-day stay?

Of Medicare admissions, I think it is 5% of total admissions. Medicare is 5% of total admissions.

No, no, I'm sorry. What percentage of the Medicare is one-day stay at this point? There has been a lot of pressure on that business.

It is 12% to 14%, in that range.

12% to 14%. And that is pro forma for both combined Community and HMA?

Yes.

Okay, all right. Thank you very much.

And this concludes our Q&A session for today. I would now like to turn the call back over to Mr. Smith for closing remarks.

Thank you again for spending time with us this morning as we embark on another exciting chapter in CHS' history. Our standardized and centralized operating platform will help in moving the Company forward as one in achieving our goals. We want to specifically thank our management team, our staff, hospital executive officers, hospital chief financial officers and the chief nursing officers and division operators for their focus on operating performance for this challenging quarter. Once again, if you have questions, you can reach us at 615-465-7000. Thank you.

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