Community Health Systems Inc (CYH) 2014 Q2 法說會逐字稿

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems Second-Quarter 2014 Conference Call. (Operator Instructions).

Mr. Michael Culotta, Vice President, Investor Relations, you may begin your conference.

Thank you, Sharon. Good morning and welcome to Community Health Systems' second-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 discussion. 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 second-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 President and chief Operating officer, and Dr. 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 of 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.

I am extremely pleased with our financial and operational performance results we were able to achieve this quarter. This is the first quarter that we have reported our combined operations with HMA for a full quarter. I think you'll agree that our results are much improved over the first quarter. We are accomplishing our goals as the year progresses.

Our year-to-date results consolidate the results of Community Health Systems and the CHS 14 facilities from and after January 27, 2014. Prior to the year's second quarter and the year to date historical financial information includes that of CHS only. The same-store results reflect HMA's performance for the second quarter of 2013 and for the year-to-date performance from February 1 forward for both 2013 and 2014 as well as for CHS for all three months and six months, respectively.

For the second quarter, our net operating revenues increased 50% on historical comparison (technical difficulty) to $4.8 billion. Our adjusted EBITDA increased approximately 66% to $699 million. On a sequential basis, our adjusted EBITDA [grew] 29%. The year-to-date comparison and our net operating revenues increased 39% on a historical basis to $9 billion while our adjusted EBITDA increased approximately 36% to $1.2 billion.

Our adjusted earnings per share from continuing operations for the quarter was $0.74. All calculations do exclude the costs associated with HMA acquisition and transition cost amortization, abandoned software costs, and the CVR legal expenses.

First let me discuss what we've been focused on as it relates to the various reports about the Veterans Administration Health System. As a former veteran of the armed services, I am personally pleased that we are committing our resources to help those who have served this nation. All of our hospitals and physicians are expected to be in network for the patient-centered community program.

There are approximately 3.1 million veterans in our service areas of which about 45% of these veterans are located in locations that are over 40 miles from a VA hospital. We have identified direct outreach programs to these veterans to inform them that we are in the communities to meet any medical needs that they may have.

In addition our local CEOs have reached out to their peers at the local VA facilities to offer any assistance that we can give. 63% of our hospitals are located 40 miles or greater from VA hospitals.

Moving on to the political arena, I just wanted to make a quick observation going into the busy election season and impact on the states enacting legislation under the Affordable Care Act. As many hospital systems have reported, hospitals are seeing an important expansion divide in terms of reduction in the percentage of self-pay admissions and ER visits in those states that have expanded Medicaid versus those states that have not expanded.

Of the 29 states that we have in hospital -- we have hospitals in, 12 states have taken action to expand Medicaid and several are seeking to implement expansion in the near future. These 12 states only represent about 23% of our revenue. Our hope and expectation is that as these states that have expanded Medicaid continue to see the benefit of their most vulnerable citizens having access to care, as well as the economic benefit of the $1 billion in new federal funding, that more non-expansion states will come around in seeing the importance of benefits of expanded coverage.

And I believe the likelihood of seeing movement by political leaders in these states will improve significantly after the election cycle, once they are able to focus more fully on the changes facing the states. Simply stated, expansion is the right thing to do for these less fortunate.

Now turning our attention to the HMA integration, David Miller continues to do a great job of focusing on our resources, on getting the acquisition fully integrated, and working with Dr. Lynn Simon on our quality and clinical initiatives. We believe we will now achieve $100 million to $125 million in synergies in 2014 and $250 million in total over a two-year period. We have estimated that we have achieved $35 million in synergies this quarter and now $47 million in (inaudible). The majority of these synergies have come from reducing duplicative functions at the corporate level renegotiation -- renegotiating or canceling redundant contracts, quality case management initiatives, and supplies, and purchasing in compliance with our purchasing organization -- our group purchasing organization.

Let's now discuss our physician recruiting efforts. As always, we are very focused on physician recruiting. We have over 22,000 physicians on our medical staffs of which approximately 3,300 are employed. There were 790 physicians who were recruited through our active medical staffs this quarter. On a year-to-date basis, over 1,400 physicians have been recruited to our active medical staffs.

We are extremely focused on further expanding our physician base. This will be vitally important as we -- the Affordable Care Act gets further rolled out and accepted.

Dr. Lynn Simon and her team are focused on patient safety and quality and we're seeing continual improvement in these areas. We began our high reliability and safety focus in 2012, by the end of 2013. We have reduced our serious safety events by 15%. This has improved over 23% reduction through the first quarter of 2014.

In addition, and according to the CMS preliminary data, released on the hospital-acquired condition payment penalty program, CHS will have a similar percentage of hospitals penalized under the program -- will have a smaller percentage of hospitals penalized under the program than other investor-owned hospitals.

As we have previously stated on our earnings call, we've completed two acquisitions on April 1, Sharon Regional Health System, a 258-bed licensed 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.

Two of our other acquisition opportunities have been made public are Natchez Regional Medical Center, a 179 licensed bed facility located in Natchez, Mississippi, and MetroHealth Corporation, a 204 licensed bed facility located in Grand Rapids, Michigan.

These two facilities have combined revenues of approximately $350 million. We are estimating that these transactions could be completed in the latter part of 2014, which is later than previously anticipated. In addition, we are working on acquiring a small hospital near one of our facilities.

Also, we've concentrated our efforts to expand our presence in non-acute areas through affiliation and joint ventures as well as other new revenue initiatives. We have developed collaborative arrangements in the retail clinic area and are currently in discussions with several urgent care providers regarding affiliations and partnerships.

David and Lynn and our operations executives are working on our service line enhancement initiatives. We're focusing on clinical services such as orthopedics, emergency care, cardiology and neurology along with our physician practices. Within each area, we're standardizing specific programs and the clinical approach to care. We're utilizing quality bench measures -- marks -- to monitor performance and measuring operational efficiencies to reduce costs. Enhancement of a specific clinical service line is tailored to each hospital, market, or practice focusing on particular opportunity for growth and core strengths of the local operation -- organization.

Physician recruitment efforts are aligned with this process. While most are hospital-centric at this point, the structure of this initiative is to purposely position to extend each service line to connect to other care settings, telemedicine will also be utilized to strategically support our service line enhancement initiatives.

As an example, 14 hospitals have initialized -- initiated our standard orthopedic program and approximately another 20 will do so by the end of the year. In the area of emergency care, we are initiating transfer centers and have developed processes-enabled enhanced access for specific patient populations and for EMS providers. Our physician practices are engaging in outreach programs to increase patient access for preventative health services and to help eliminate care gaps for chronic disease states. We anticipate favorable results from these initiatives as the year progresses.

We believe we are very close to reaching a complete resolution of the Department of Justice investigation of CHS hospitals that began in 2011 with respect to short-stay admissions of ED patients. We're comfortable with the reserve of $102 million that was previously established and believe affordable announcement could be made in the next few weeks or maybe even a little sooner.

While we continue to believe that our conduct was appropriate and the submission of claims was defensible, we also recognize it is in the best interest of our Company and shareholders to put this matter behind us and are pleased that we could resolve the matter without the expense and uncertainty of formal litigation.

With respect to the HMA cases, our legal teams are continuing to work with government lawyers on many areas. While some of the smaller cases have been resolved, there's still much work to be done to understand the claims in the key TAM cases that were unsealed in December of last year.

There is a stay in effect in the multiple district litigation until October to give parties time to try to work through an informal discovery process. While we believe that good progress could be made during the next several months, we do not believe we will reach a final resolution of these cases within that time frame. Larry will review the reserves and accruals with respect to these cases and the impact to the CPR.

We are adjusting our 2014 guidance in a few places. We are maintaining our ranges for net revenue, less provision for bad debts and adjusted EBITDA. Those will remain at $19 billion to $19.8 billion and $2.825 billion to $2.975 billion.

Larry will now discuss further our results, the effects of Affordable Care Act, and provide you with other information on our 2014 guidance. Larry?

Thank you, Mike. We believe our same-store information for the second quarter are providing us more meaningful (and [sic]) thus we will predominantly discuss same-store results for the second quarter only. Our same-store numbers for 2014 reflects the synergies previously discussed. All the comparisons will be to the second quarter of 2013 unless stated.

Of course, information we'll be discussing excludes integration and merger costs of approximately $12 million, the amortization of the software we've abandoned of $33 million, and legal fees [with] the HMA government investigation related to the contention value rights of approximately $10 million.

The accelerated amortization of software to be abandoned relates to our corporate integrated decision to replace CHS legacy IT systems with Cerner that has been -- we began use in 2013.

Just on a informational basis, year-to-date basis, these adjustments are an integration and merger cost of approximately $65 million, and legal fees with the HMA government investigation of about $13 million and the accelerated amortization is another number. It's about $75 million.

Our same-store admissions declined approximately 4.8% or approximately 11,600 admissions. The second-quarter same-store admissions improved about 330 basis points from the first quarter. Some of the reasons why we have declined: various service closures -- were reduced admissions, about 1,500. These were predominantly the closing of skilled nursing facilities and other mental health units that were not financially successful; approximately 2,900 fewer admissions from lower volumes related to flu and pneumonia and other respiratory cases; and approximately 3,400 admissions in short stays, including the effect of the two-midnight rule.

Our same-store and adjusted admissions declined 1.2% or approximately 6,200 adjusted admissions due to similar reasons. This compares to a decline of 5.3% in the first quarter or a 400 basis-point improvement from the first to second quarter. Our surgical cases declined 2% and compared to over 5%. And the first quarter we did see our increase of ER visits of 1.3% compared to 3.8% decline in the first quarter, an increase in ER visits in the expansion states was larger than non-expansion states.

We continue to see -- and we will continue to see the shift to an outpatient setting or outpatient revenue represents 57.2% of total patient revenue compared to 53.6% in the second-quarter of 2013. Our pricing and intensity -- we saw same-store revenue per adjusted admission after the provision for bad debts increased approximately 1.7%. This is slower than our CHS historical increase due to the inclusion of HMA, which is at lower revenue per adjusted admission, the last year or so.

Our Medicare inpatient case mix increased 1.9%. On a sequential-quarter basis, we had 26 more days of HMA's revenue in the second quarter that were not in the first quarter. We did record approximately $90 million of revenue for the five-week days of January in the first quarter. This seems to be -- have estimates for the second-quarter revenue being a little higher than our actual.

On the expense front, our salaries and benefits declined $6 million or 30 basis points, and the decline was the result of about 3% productivity improvement. We continue to see improvements in areas as we continue to integrate our two organizations and further achieve the synergies we had previously estimated.

Supply expenses declined approximately $6 million or 20 basis points as a percentage of net revenue and we believe we should continue to see improvements in this area as we continue to increase our overall compliance in our group purchase organizations, to decrease pricing as it relates to the CHS 2014 facilities. Other operating expenses increased approximately $7 million -- as a percentage of revenues, 10 basis points. This increase is due predominantly to a higher cost of our meaningful use efforts.

On our strategic sourcing initiative, so far we've negotiated about approximately $40 million in annualized savings. We will experience more of this benefit in the second half of the year.

As it relates to HITECH, we experienced a larger increase -- larger reimbursement in the second quarter over our original estimate due to additional physician incentives, a faster completion schedule of 10 more hospitals completed, and a favorable volume data for Medicare from our cost reports. However, our actual operating expenses increased $28 million from the first quarter. This is roughly split between salaries and wages and other operating expenses as we outsource more of this project. Even though reimbursement was up $44 million for the first quarter the net impact to EBITDA -- adjusted EBITDA was only $16 million, which is less than we had originally anticipated.

Related to the legal contingencies that may reduce the contingent value rights which were recorded as part of the purchase accounting for HMA, we carried over the problem contingencies of $42 million that were recorded in HMA's 12/31/2013 audited financial statements. This liability is included in other current liabilities in the balance sheet.

In addition, we have recorded an estimated liability of $284 million, representing the fair value of all other legal cases that may reduce to value to CVRs, for which HMA had not previously accrued. The fair value estimate was determined using the system's legal counsel and third-party evaluation experts and is recorded in other long-term liabilities in the balance sheet. These liabilities do not include any estimates for future legal fees.

Legal fees and future change of these assessments will result in adjustments through the income statement in the period incurred. Also in addition to these estimated liabilities for the date of acquisition through June 30, 2014, we've incurred $12 million in legal fees related to these matters. And these legal fees will serve to reduce the deductible of $18 million under the CVR agreement.

Our CapEx for the quarter was $361 million or 4.4% of revenue compared to $295 million or 4.6% of revenue.

I will focus on a year-to-date amount as it pertains to cash flows from operations which were the reported number was 514. The following items impacted our cash flow from operations.

The negative impact of HMA integration cost and legal fees with the CVRs of about $78 million. As you'll recall, this was $56 million in the first quarter. HMA investment-banking fees and other dealer-related liabilities that were in accounts payable and accrued liabilities that were paid in the first quarter in the amount of $51 million. Adding back these items, we had cash flow of $643 million. The $643 million compares to $437 million generated by both companies combined a year ago resulting in a 47% improvement.

The acquisition-related items described above will not be included in our overall yearly guidance of cash flow from $1.6 billion to $1.8 billion. We also received an $80 million tax refund in the first half of the year and are expecting to receive another $80 million in the second half of the year.

In addition, the cash flow from operations were negatively impacted by the increase in patient receivables due to the two recent acquisitions and $50 million increase in receivables from systems convergence.

Now let's turn our attention to the Affordable Care Act. As we said earlier, in three years' time, we expect our self-pay adjusted admissions to decrease from approximately 8% to 4% in 2016. This reduction is actually in line with our estimates by the CBO. Approximately 55% of our self-pay population should be eligible for expanded Medicaid if all state expanded Medicaid according to the statistical data in our markets. In the second quarter and in some year-to-date information, same-store self-pay admissions as a percentage of total admissions in expansion states declined 380 basis points to 1.7% of adjusted admissions. And adjusted admissions declined 400 basis points to 2.2%. While Medicaid admissions increased 440 basis points to (technical difficulty) [3].3% -- 2.63% and adjusted admissions increased 510 basis points or 25.7%.

The expansion states self-pay admissions decreased approximately 2,200 or 71% and adjusted admissions decreased 4,600 or 65%, while Medicaid admissions increased 1800 or 17% and adjusted admissions of Medicaid increased 5,600 or 24%. For Medicaid-adjusted admissions, the second quarter increased 95% over the first quarter's increase.

Self-pay emergency room department visits decreased 41% in expansion states and 5% in non-expansion states. Overall, Medicare case mix is up about 200 basis points over last year at June 30, 2014 year-to-date. And year-to-date Medicaid case mix in expansion states is up 3% versus last year based on the average of the expansion states' increases.

We did follow research this quarter on a year-to-date basis using over 50% of our combined facilities to understand the normal migration and geography of previously self-pay patients to the various payer categories. Using these techniques, we determined that self-pay patients in 2012 and 2013 in expansion states shifted 45% to Medicaid and 22% to managed-care commercial and 28% remained in self-pay.

Looking at just non-expansion states, the shifting to Medicaid was only 21%, and about 25% to managed-care and commercial. And about 50% -- 49% remained self-pay.

We saw the further test of this migration of self-pay patients looking back into calendar 2013 on 2012 self-pay patients to see what occurred in a [non-impacted] year. For the entire year, what we found was about 18% of self-pay patients convert to Medicaid and approximately 60% remain in self-pay. We will continue to analyze this information throughout 2014.

As you may recall from our first-quarter call, we have been monitoring certain payer/patient visits with specific exchange identifications. For these 12 states, though, we can identify for selected insurance companies, the exchange business in our hospitals. In these same markets patient visits were up 100% from the first quarter. From this information we attempted to estimate the Company's ACA exchange benefit. Based on various data points on Medicaid and exchange business, we believe we recognized $40 million to $45 million on a net basis from the Affordable Care Act for the first six months of 2014. Of the exchange volume we estimate approximately 50% were previously uninsured.

I think we cannot stress enough what Wayne mentioned as it relates to our improvements from the first quarter. Our adjusted EBITDA increased $158 million which is better than previously discussed. Of this improvement, excluding the timing of the HMA acquisition, about one third of this was attributable to the Affordable Care Act. The adjusted consolidated margin improved 170 basis points. Our cash flow from operations after the impact of acquisition-related costs for the quarter improved to over $470 million from $172 million in the first quarter. We are exceeding our original estimate of synergies and continue to see this improve throughout the year.

Our adjusted admissions volume in the second quarter improved over 400 basis points. As far as expense control and synergy savings comparing our expenses on a per adjusted admissions basis for same-store salaries and benefits improved 4.5%, supplies 1%, and other operating expenses, 4%. Our adjusted EPS increased to $0.74 from $0.27.

And now for guidance. As Wayne mentioned earlier, we are predominantly maintaining our guidance. Other items we want to call your attention are the share count in the third and fourth quarter. We've been in an approximate average rate of 114 million, 116 million shares in these two quarters. Our synergies will be higher than our original $100 million, our range will be up to $125 million.

We still believe the Affordable Care Act to roll out over the year progresses and we should experience continual improvement in the second half of about $40 million, especially based on the timing of the exchange enrollments. We believe we will be approximately $260 million on HITECH incentives. That would be in a reimbursement of $36 million which we thought we would receive in the third quarter of 2014. This is HMA's -- we now believe will be recognized later in the fourth quarter -- as well as the $25 million relating to the California Hospital provider view program will be in the fourth quarter.

As we mentioned earlier, the acquisitions will come in later in 2014 with a loss of about $20 million EBITDA compared to our original guidance. We are including some expected recovery from our claims from the BP oil spill in the latter part of 2014, approximately 10 basis points of revenue. We could have further upside potential from further improvements in the Affordable Care Act synergies, HITECH, and other operational initiatives and further cost savings.

We have included a slides to reach our adjusted EBITDA to the low-end of our guidance and pointed out the items that we think there's some future upside. We are very pleased with these results and Wayne will now provide a brief recap.

We're very pleased with what we have accomplished this quarter. As you can tell from my earlier comments, we're focused on expanding our markets (inaudible) volumes. We have so many opportunities with continuation of the rollout of the Affordable Care Act, opportunities for growth, former HMA assets including the synergies that we are achieving, our opportunities to delever our balance sheet, and our operational and clinical initiatives. As always, we continue to focus on enhancing quality, building stronger physician relationships, and including increasing physician recruiting and doing what's right for our patients.

I would like to thank all the physicians and nurses and support staff for the tremendous support in this quarter as we continue to (technical difficulty).

With that, we will open the call up for comments and in an effort to get more calls in. We would like to limit one question and one follow-up question so others can have time. If you have further follow-up questions, as always, we're here to take your calls and you can reach us at area code 615-64 -- 465-7000.

(Operator Instructions) AJ Rice, UBS.

First, on the Medicaid experience you're seeing, is -- in the expansion state so does it step up and plateau? Are you seeing continued progression as the year goes on and you made the comment about ER visits. I'm wondering on that Medicaid expansion, can you see anything that suggests there's an uptick in volume among those people that adapt the benefit?

We've continued to see each month in our quarter the Medicaid improvement of both admissions and [suggestions] should each month get better over the preceding months. Now we do have a little bit of a phenomenon about the Medicaid pending for the first quarter. Some of that probably got processed as Medicaid and was in self-paid before.

From an ER visit, we saw continual improvement much more on the Medicaid side throughout the period and continues to get better. I know ER admissions were up a great amount more in the markets where we had Medicaid expansion than they were. I think they were up about 5% versus the other Company average of 1.3% expansion states. And I would expect the Medicaid -- you can continue to enroll people. Clearly I think we will continue to see some benefit happening in the -- we continue to see the growth throughout the quarter.

Okay. And real quick, my follow up would be around the walk forward. Appreciate that. The one item there at the bottom, the $85 million, can you give us maybe just a little flavor on what that represents? Is that snapbacks from the underperformance in the businesses last year that you are trying to capture there? And I guess the walk forward works up to the lo -end of the guidance range. I think you alluded to it in the prepared remarks, but what will be some of the things that could get you to the higher end of that range or even -- you even alluded to some upside maybe. What would be the swing factors in your mind?

I'm going to do the swing factors first and I will probably give you four categories. Maybe Dave will want to speak a little bit more about the volume initiatives. The swing factors of the Affordable Care Act -- we had about a little over $10 million to $15 million in the first quarter and now you got an increase of $30 million or so to $35 million in the second quarter. I think it's going to continue.

I think you've also got to keep in mind its change enrollment grew. It was about 10% to 15% higher than the quarter than it was on average so that's going to probably be beneficial there and probably that will slow down and it shouldn't going higher after the third quarter but I think the Medicaid will.

The second item would be that we've got the benefit of the synergies. We've already done 100 -- I think we actually started at $80 million if I remember correctly a year ago and then we went to $100 million now, up to $125 million. We continue to focus on that. The HITECH -- we didn't go all the way to the high end of the guidance there. We did spend a fair amount of expenses. We didn't quite get the benefit in the second quarter's results of expenses and we think we can manage expenses a little better and also continue to work on that area.

The other category on the bridge of $85 million, we've actually got four categories we're working on. One would be productivity which we did a good job and I think we've still got more opportunity on a combined basis there. One is the improvement of physician practices that Wayne referred to about getting more volume in productivity there. The volume in the activity, we've got a lot more physicians that were recruited over the year which Wayne just referred to.

And then, we also -- we get the normal benefit of the managed-care increase, which runs 4% to 6% when you think about that. And we've also got some good progress starting to be made on some of HMA contracts.

Yes, let me -- just before David jumps in here. There's a couple of other things as I think we are pleased with what we acquired in terms of HMA. We think we have good facilities in good locations and great opportunities in those facilities so that will -- as time goes along and hopefully sooner than later, we'll see an uplift from that.

But I can tell you that we have been very focused in terms of our volume initiatives and tying our quality initiatives and volume initiatives together so that we made great progress in both, in doing a better job of delivering the services and improving our physician relationships which are already very good, as well as looking for opportunities in each one of our markets and thinking about how we work on our network to expand our networks which we've been talking about for a long time.

I asked David just to quickly list a summary of our volume initiatives because I think it's important understand these are the things that we are working on and these are things that we think will make a difference over this next -- the rest of this year and into next year in the future.

Thank you, Wayne. Our volume initiatives really fall into two categories. In the near term, what we've done is identify several priority hospitals in each division where the performance has been less than one would have expected. And with focused expansion, we're already seeing improved results from those facilities. Under longer term, we are pursuing several different initiatives. One would be service line enhancements; we are working to strengthen our physician practices; we're working additionally with new technology in telemedicine and the network development that Wayne just mentioned.

One example might be in orthopedics. We referred earlier in the call to the fact that we have 14 programs in place and we have 26 more programs that will come online by the end of the year. In those programs that have been in place for more than a year, we are seeing our case volume increase anywhere from 10% to 23% in those facilities.

We also have a pretty comprehensive initiative in emergency care. We are partnering with our EMS providers. Those folks are key to our success that the EMS calls that result into patients coming in our ER are about 14% of our ER visits. And we have just completed a survey with 3,300 EMS providers and we will be responding to their request for improvement and we think, by strengthening that relationship, the EMS visits to our facilities will be enhanced.

We have also, as was noted, established four transfer centers in our system in the last quarter. Those have been in Pennsylvania, Texas, Florida, and Oklahoma. With those centers, you will have better coordination of care, you will make sure that the patient gets in the appropriate setting, and it will help to further set up -- support the networks we set up in these respective markets.

We also have a marketing campaign that just completed in the ER. We had two different simultaneous plans being promoted and in those markets where the programs ran we saw increases in ER volumes of 3% to 5%. Now again, as Larry pointed out, there are other things like Medicaid expansion that probably has helped facilitate that growth in ER visits.

We are strengthening our physician relations and physician practices. Dr. Simon has employed two new key physicians, Dr. Pete Powell, who came to us from the Vanderbilt system, and Dr. F.J. Campbell, who came to us from HCA. Those gentlemen have been on board and already, we're seeing progress in the initiatives they're introducing to our Company.

We have new technology that we've introduced in 300 of our physician practices. This technology helps us identify care gaps and assist with employments and we have other systems as well that are automated. And what we're seeing is a great completion rate when we contact patients and schedule visits in our clinics. And we also have put additional emphasis into our physician liaison program. We have 80 of those existing programs right now and we will have 20 more additional programs in place by the end of this quarter.

So those are just a few of the items we're working on.

Thank you, thank you, David. Sorry AJ, this is taking so long for us to answer this question, but we just wanted to get out all the initiatives that are in place here to demonstrate that we are singularly focused on making sure that we improve the corporations of this Company going forward. And it's a good time to do all these things, particularly since we are integrating HMA.

Gary Lieberman, Wells Fargo.

There's been a fair amount of discussion by some of the other companies that have reported about the impact of the economy on the quarter. What's your take on how significant the impact from an improving economy was on the quarter?

One of the things I think you -- I don't know -- I don't really know what [Lifepoint] said about the economy because certainly it's more robust in the larger markets than it is the smaller markets. I still think that even though the unemployment rate today I think was 6.2% it's still not the real unemployment rate yet. I think there's improvement but I think clearly there's a long way to go to see substantial improvement and to see a larger increase in terms. And I don't know that we will now because the dynamics have changed in terms of the commercial side of it which is one of the indicators. Larry, you want to --

Yes, I went back and looked from May of 2011 through May of 2014. Nationally, the employment growth was between 4.5% and 5%. And we are about 3.5%, so we are seeing some employment growth over that period of time. I think another element is -- it appears to managed-care companies, commercial enrollment is starting to grow over and above just Affordable Care Act and our historical process is seeing just -- as the commercial enrollment grows, we will see some managed-care utilization.

We're not going to get into all the specifics but you look at our legacy hospitals that clearly had a good payer mix growth with managed care this quarter. And I do think we probably had a little bit of uptick from that by the end of the course of the Affordable Care Act, a lot of that is existing -- our self-pay business now -- we already have a business now, what we're getting is either Medicaid or exchange business and there's partly is some uptick in utilization from that, but I still don't think it's -- I think a lot of it has to do with just the core improvement of the Company.

Okay. And then maybe you could talk a little bit about the impact of Medicaid pending in the quarter. There was a fair amount of focus on it last quarter. How did that change sequentially?

Medicaid pending did come down in expansion states. It also came down and non-expansion states. It didn't come down as much as it's gone up since the beginning of 2013. I think we've sort of been on -- expansion states have sort of stabilized. Expansion states are still up. That does have a tendency to maybe overstate one quarter's worth of Medicaid growth and decline in self-pay and we will probably see similar activity going forward. And I think we've still got a backlog. I'm thinking they will know in a couple of other states where the processing has gone a little slower so it did improve. But it's still not back at the level where it was at the beginning of the year.

Brian Tanquilut, Jefferies.

Wayne, just a first question for you, as you look at the HMA portfolio versus the legacy CHS portfolio, is there any color that you can share with us in terms of differentiation performance? I know you raised your synergy guidance, but if you can also parse through what you are seeing that prompted you to raise guidance at this point?

I think one of the things -- it depends on your view of this but our philosophy in terms of the way we operate in source standardizing and centralizing work through processes, one of the things obviously we found at HMA had a number of issues related to processes, had a number of issues related to physician relationships.

There is a lot of opportunity, but generally speaking, they are good markets and, clearly, they are good people. They're working hard every day and they are very cooperative and want help in terms of how we can improve and enhance the quality and patient experience, improve the productivity, and performance of the facility.

So, I think we are pretty positive about where we are with this acquisition. We are further ahead today than we were with Triad, and Triad was not as problematic of course because it came out of HCA. Those were well-run facilities. So, it's a little bit easier than this but we found lots of issues, but lots of issues create lots of opportunities.

And Wayne, just comparing your legacy assets versus HMA?

I would say that our legacy facilities are -- they've been running -- we've been running those facilities for a long time. It's totally different operation mentality but hasn't taken very long to get the HMA into that mentality. HMA is very independent individual facilities. We are very independent. We work as a system [gatherer]. That's been a change to try to develop that and work through that. So that's probably the biggest issue.

There's a lot of little things, but most of which -- facilities are good facilities. The main thing that we needed to do which we did very quickly was eliminate that couple of office buildings in South Florida and that happened real quickly as you all know. And I think we're on the right track.

Kevin Fishbeck, Bank of America Merrill Lynch.

I guess, Larry, you mentioned that pricing was 1.7% and it sounded to me like you were saying that it was skewed because last year it was core community, this year it was pro forma HMA. Is that right or were you saying that HMA's pricing is lower than the community spend?

The 1.7% would have been higher, it would have been CHS legacy by itself. We're not going to get into all individual statistics but it would have been closer to 2.5% to 3% on the legacy. The HMA revenue for adjusted admission -- I think we've said this on conference calls before. It's about $1000 last what we thought CHS was. We did due diligence. It's probably $800 or $900 today. And I think that's an opportunity.

If you go back and look at HMA's revenue for adjusted admission, it was up 5% or so and 11% or 10% and 6%, 12 over 11 and it was a negative last year and that has continued.

It's one of the opportunities -- I think we will make some good progress on managed care and also payer mix in the physician improvement. HMA lost a lot of its physician recruitment momentum that Wayne talked about earlier. They recruited about a third of what they did in 2010 and 2013. But that's -- we are trying just to say I think is going to take us a while when we get back up to the 3% to 4% we expect to achieve.

Okay. And then just as far as volumes go, you did a good job explaining all the initiatives that you have going on there but just that big sequential ramp from Q1 to Q2, could you talk a little bit about what types of volumes? Kind of explain the acceleration. And why you feel like it might be more sustainable.

Well, a couple of things. One, the flu was the biggest hit in the first quarter and it was a smaller hit this quarter. We also had the issue -- readmissions were a bigger hit in the first quarter and they dropped back down in the second quarter. The weather was a challenge from an admissions perspective.

More importantly, outpatient surgeries improved nicely. Outpatient revenue improved nicely in the quarter and most all our operating units divisions had improvements in the second quarter over the first quarter. But we did benefit from those categories. But I would say that outpatient was a bigger improvement than the impatient component of it.

I think orthopedics was one of the categories results that saw improvements in second quarter.

Darren Lehrich, Deutsche Bank.

So I wanted to just ask about the synergy numbers. They look very good on -- you're describing I guess a scenario where, clearly, you're going to be exceeding the first year guidance there. I guess could you expand a little bit more on what areas you found a little bit more success in from the synergy perspective? And at this point, you are still keeping to the 250 numbers, so is there any sense that you might want to change that?

Well clearly, the 250 compares to the 275 for Triad. You're right that there's more hospitals. There's 20 more hospitals, it's seven years later and there's a bit larger corporate office, (technical difficulty) and that's something we will think about as we think about 2014 but the 250 when compared to the Triad look like there's some upside and we've already moved it up $45 million from what we originally said. About 40% would probably be payroll and 20% would be in the category of supplies and probably 30% in the contract in case management categories and it's split like that.

I think Wayne's already referred to the fact that the corporate office there, which was probably a pretty good-sized corporate office of 250 people or so and now it's down to a limited number of people so that's probably where some of that opportunity has come. And we still continue to work on supplies and contracts and things of that nature.

Yes, and one of the things that has helped us is the fact that HMA -- all the HMA employees and physicians are very receptive, and enthusiastic, about working with us on our initiatives, so that's why I said we are moving faster than we vended with Triad on this because they're so cooperative and they are so anxious to have our help to work through these issues. So that's a bit positive that it's come out of all this.

Yes, that's great. Now one follow-up ahead just -- Larry, you talked about HITECH and I guess you are seeing [260] in terms of meaningful use payments. Can you just remind us how you're thinking about the EBITDA impact for the balance of the year and then just stepping back, how should we be thinking about the next few years given that the program line's down and do you think you get any productivity or margin offsets from all this investment? Are you seeing any evidence of that?

Two things. One, I think we will have about $65 million or so in the first half of the year and it will be improved about $20 million which gives you an idea of where it would be for the year. I do -- we will drop down in incentives but also, there is a tremendous amount of money being spent on training and consulting. You have to try to do it. I think that will help offset some of the drop in EBITDA.

I do think there will be the opportunity, once the conversions are done, once you're past it, once people use it, we should be able to improve the supply usage, the lab testing and radiology testing and hopefully some of the productivity.

We've not proven that yet nor has anyone, but that was the stated goal. We started about three years ago, it was to put these systems in and also get some productivity. And I still think that could happen but it's not happened yet.

Ralph Giacobbe, Credit Suisse.

Just wanted to go back to the managed-care contracting, maybe even outside of the exchange. Can you give us a sense of what percentage of contracts I guess are negotiated for next year -- the rate and then whether that's combined community HMA at that point or if there's further opportunity to capture those topline synergies?

Yes, all the contracting efforts are combined now. They were combined pretty quickly. We are about 70% done for 2015. I think we will be inside a range of what we said in the 4% to 6%. We've got some specific contracts around HMA we are working on to try to do better, to try to get the revenue for adjusted admission up. But we're about 70% done right now for 2015.

Okay. And then just a follow-up. Obviously you have a border footprint -- largest number of hospitals versus peers. I guess, first, can you give us a sense of whether there are hospitals right now that are running at negative margins. Maybe what percentage of portfolio that makes up to the extent that you have them? Trajectory of improving those and maybe early at this point, but just given the integration with HMA but any thoughts on maybe paring down the portfolio and how should we -- should think about timing around that? Thanks.

I think you should think about it -- we just acquired this company in January. So it's a little early for us to think about any other strategy right now. Other than the fact that we are always evaluating where we are, what we've got, what works best for us, what works best for the future, what works best for shareholders.

So as you know, we've been opportunistic in terms of our facilities and after we bought Triad, we had a few facilities that we sold. So, I think it's too early for us to make any of those kinds of determinations but I think we are pleased with what we have. And I think we'll try to maximize the opportunity here in terms of networks and how we utilize the size of the portfolio to enhance and improve our productivity across the country and our delivery systems so --. But as usual, we're always thoughtful about this, it's just it's too early to tell for us to make any determination about that now.

There are about 10 facilities discontinued right now, so (inaudible) we are starting to make some progress on that. Because several of those are low margins or no margins.

Frank Morgan, RBC Capital Markets.

When you think about the legacy community versus the HMA assets, clearly it appears that the HMA assets were underperforming. I'm curious, would that have in any way affected their benefits from the early stage of the Affordable Care Act? Were they in a position to go out and do the outreach as soon? So is there potential for more impact from the Affordable Care Act out there that still remains for HMA relative to where community is?

They did not do the outreach efforts in the fall of 2013. Had a lot of things going on then and that was not one of the things that they were working on. And during their diligence, we brought it up and thought what we were going to do. But they clearly missed out on that opportunity.

We have made the conversions at our hospitals to some of our eligibility screening service vendors internally. We will be much more prepared in 2014 than they were in 2013 and I would think we'll get to have a better result.

Notwithstanding looks like Florida had some benefits, is one of the states we would see stuff on but I do think we will have a better result and, hopefully, we will continue to work on trying to get some of their states expanded. They've got a smaller number of states percentagewise than the CHS legacy have.

But clearly, we did send out some letters in January when we owned it, but it was probably too late in the process to get much benefit from.

Did they see a slower ramp on the Medicaid expansion states then you did?

They had a much slower ramp, yes. The Medicaid -- you get some of the effort by people coming into the hospital which you can do but you also can do some outreach and they've got us a little bit slower. A ramp -- we do track it and we are having much more success at CHS legacy, which we just say next year round, hopefully we will see a better result out of those locations.

Justin Lake, JP Morgan.

First question just on the VA. A lot of us just trying to figure out what the potential impact might be from greater VA spending on private facilities. Anything you can do to help us there in terms of proportion and potential benefit there in 2015 (technical difficulty).

Well, we seem to be pretty well-positioned for this in terms of -- I'm trying look for my numbers. We are pretty well-positioned in terms of this. I think there is about -- maybe I -- Larry, help me out here. There's 3.1 million veterans in our areas, so if we get -- and about 63% of our facilities are located outside the 40-mile area so there is certainly an opportunity for us and we've been working at this pretty hard now. From the first time that we heard this, and Larry, it's some reason I think is about $60 million or so --

$60 million -- $63 million of revenue and about 175 are hospitals we went back and identified and as Wayne just said that being based on the statistics you gave, it could be decent opportunity here for us.

Not only have we visited all the VA facilities we are working with, we've had relationships with them before. So we are working on those relationships we had to try to enhance our ability to make appointments in all the above. So hopefully we will see something out of this but it's yet to be determined.

We do consider ourself pretty much going to be a network from their previous program where the VA would authorize referrals. That should help you as they look for ways to speed up the care and get it done, if you happen to be a network provider, although you don't necessarily need to be a network provider on the outside of 40 miles.

Sorry, so you said $63 million of revenue currently in the VA?

Yes, right.

And so if these double the amount of spending they do out there with outside facilities, is it reasonable to think your VA revenue might double or is there some other proportion --

It's reasonable, but it's still early to see how they will authorize and how they will do it. Clearly there's lots of effort from an outreach effort as one just said. We will try to do that so we do see it as an opportunity -- .

We don't have high hopes based on past experience that the government will administer this all that well either.

Whit Mayo, Robert Baird.

I might strike out on this but I'm going to give it a shot, Larry. If I take the second quarter from last year and take HMA's second quarter, it looks to me like pro forma, you had roughly $600 million of combined EBITDA. If I then back out the two divestitures from HMA that -- let's just round it down to $550 million, and that compares to the $699 million you reported this quarter and it seems like that you had roughly $120 million in synergies and HRT and ACA benefit, which still implies another $30 million of growth versus the prior year, where is that coming from? Is that core growth, just acquisitions, I guess I'm just trying to get a sense of --

It's coming from good management.

I think the salaries would be your first line that I would say we did a good job on -- a pretty good job on supplies. The outpatient revenue growth bounced back nicely in the quarter. That's up 5/10 of 1%. We are held back a little bit where HMA is.

You're right. We've elected not to give same-store data out but I think we clearly didn't -- as we said on a conference call, the first quarter was a negative, this is a pretty good positive on the same-store basis and then all that comes from both companies. We look at them both together, but David talked about the improvements just making it HMA, but there's opportunities on both sides. So we had pretty good same-store EBITDA growth this quarter much -- but did not have it that quarter. But I would say salaries is a good driver and operating expenses and supplies.

Are there any --? No, go ahead, Larry.

And I think we've got -- one of the bridges is we can continue to do that. Probably the average 3% down from the first couple of quarters and here, we were down 1.2% in the quarter. You just heard all the outline of the initiatives we got going on which, if they work, we ought to get better from this point going forward and we've got an $85 million improvement we need to make. We've got plans way in excess of that that we are working on. Hopefully they will all come through, but the second quarter was a nice step up from not having same-store EBITDA growth.

Are there any other obvious buckets of growth beyond just the acquisitions and [HIT] synergies, the ACA, anything when we compare to the prior year that would have contributed to the --

Operating improvements.

I think as Wayne said, there was a great distraction going on from the end of 2012 and all the way through 2013 by that management. It's capital spending. There's probably about a $20 million benefit getting the return on the capital that's been spent in the second half of the year -- both some CHS, some that.

We've got that outline. We re-communicated to people. The physician recruitment, it will be much stronger in the second half -- first half of this year than it was for them. They pretty much have done physician improvement so those things should all be benefiting the second half.

We have no further questions at this time. Mr. Smith, I turn the call over to you.

Thank you again for spending time with us this morning. Our standardized and centralized operating platform (inaudible) helping this Company forward as one and in achieving our goals, we want to specifically thank our management team and staff, hospital chief executive officers, hospital chief financial officers, and chief nursing officers and division operators for their focus on operating performance for this challenging quarter.

Once again, if you have any questions, you can always reach us at area code 615-465-7000.

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