Community Health Systems Inc (CYH) 2015 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 2015 conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Michael Culotta, Vice President Investor Relations. 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 discussion. We do not intend to update any of these forward-looking statements.

After the market closed yesterday we issued an 8-K including a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call a supplemental slide presentation has been posted to our website.

As you know our results consolidate the results of Community Health Systems and the former HMA facilities from and after January 27, 2014, the date of acquisition. Same-store volume and financial results reflect the HMA's performance from January 1 for both 2014 and 2015 as well as for CHS. Further, our same-store does not include the other 2014 acquisitions.

All calculations we will be discussing exclude the cost associated with the HMA acquisition and integration, government settlements and related cost and the CVR legal expenses and liability that is more detailed on our earnings presentation on slide 5.

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, 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.

I'd like to take a quick second to recognize Lynn for her inclusion in Modern Healthcare's list of top 25 women in healthcare and one of the 50 most influential physician executive leaders. We're extremely proud of Lynn and all of her accomplishments.

With that said I'm extremely pleased with our financial and operating results we were able to achieve this quarter. I think you will agree that our results continue to improve and we continue to see volume improvements.

Let's give a -- let me give you a quick overview of the quarter. Our same-store adjusted admissions grew 2.5%. This compares to a decline of 5.3%.

Last year's first quarter on a same-store basis our ER business increased 7.8%. Our same-store net operating revenue grew 5.2% from a year ago and grew 17.6% on a consolidated basis. Our net operating revenues per adjusted admission grew 2.6% on a same-store basis.

Our adjusted EBITDA was approximately $715 million, a 32% increase from the prior year. Our adjusted EBITDA margin improved 160 basis points to 14.6% from 13% a year ago. Our adjusted earnings per share was $0.85 compared to $0.29 or a growth of over 190%.

As always we are focused on physician recruiting. Physician recruiting is a very important to our expansion of our services that are provided.

There were over 877 physicians that were recruited to our active medical staffs across our facilities this quarter. This compares to 613 physicians recruited in the first quarter a year ago or a 43% increase.

In addition, we've recently assigned operational oversight of our employed physician practices to Dr. Simon and her team. This will enable a more centralized and standardize approach to physician practice management by physicians and operators with experience in managing these entities.

Now turning our attention to HMA integration, David Miller continues to do a great job of focusing our resources on getting this acquisition fully integrated as well as Dr. Simon on our quality and clinical initiatives. We achieved $125 million in synergies this past year and $50 million in synergies this quarter. We estimate that we will still achieve an additional $125 million to $150 million synergies this year.

We continue to advance our access points strategy by expanding our outpatient services with our markets. Our current approach is to expand services in our existing markets versus a capital heavy high multiple large-scale acquisition that would include a significant number of assets in our non-market areas. That being said we continue to evaluate a variety of outpatient opportunities with different capital and strategic approaches.

In the meantime our outpatient access strategy will continue with several of our current partners to deploy additional surgery centers, urgent care centers, freestanding EDs and diagnostic imaging centers along with provision of telemedicine services. We presently have in our portfolio 59 surgery centers, 41 urgent care, 6 freestanding EDs, 148 diagnostic centers and 1,600 physician clinics. As always we are focused on delivering patient care to the lowest possible cost setting and the highest possible quality standard.

We will also continue to make selected acquisitions where it makes sense. We're still in the process with Metro Health in Wyoming, Michigan. We expect this to close sometime in the third quarter.

There has been a couple of letters of intent that have been disclosed by the sellers. As you can tell we are looking to larger markets predominantly in midsized metropolitan areas or in markets that would complement our network strategy.

We also sold four facilities this quarter. We received $74 million in cash at the end of the fourth quarter as one facility closed effective January 1. We received [$63 million] this quarter on the other three.

Let me now update you on the Affordable Care Act. But before I do that we continue to hope that governors and state legislators in non-expansion states will strongly consider the positive impact of expanding Medicaid.

They have some key decisions to make with shortfalls in state budgets and the decision before the Supreme Court. I'm sure they don't want their citizens to lose their subsidy that helps with the cost of being insured and we hope they understand that there are citizens that are not eligible. These are citizens that are not eligible for healthcare with existing specific state Medicaid programs.

Expanding their Medicaid program will open this up to those who also deserve to be covered. Research published in the New England Journal of Medicine found a 6.1% reduction in mortality among low income adults in the states that had previously covered coverage in Medicaid programs. This is consistent with a previous analysis that found 8.5% reduction in infant mortality and a 5.1% drop in child mortality as a result of Medicaid expansion aid.

We continue to remain very active in our states with respective hospital association trade groups including active lobbyists. We presently have 14 states that expanded with Pennsylvania and Indiana being the most recent. These 14 states represent approximately 30.9% of the uninsured population in our markets eligible for expansion.

These percentages are based on information from Enroll America data. You are aware that the current outcomes in the states we still believe that states will ultimately expand. Larry will give you a lot more detail and insight on this in his first-quarter analysis.

Next to update you on the pending legal matters, we have been working with the Department of Justice to resolve a number of pending investigations and expect there will be announcements in the coming weeks and months. With respect to HMA matters we're continuing to have discussions with the Department of Justice in an effort to resolve the open qui tam cases.

We have recently been told that the criminal division is continuing to investigate former executive level HMA employees as well as considering whether any HMA entity should be held criminally liable for the acts of the former HMA employees. We are voluntarily cooperating with these inquiries and have not been served with any subpoena or like.

As you may know beginning last fall the Department of Justice has spoken several times on their intention to have main justice review all civil qui tam cases to determine whether a criminal case should be pursued or not. We continue to reevaluate the estimated liabilities covered by the CVR on a quarterly basis. Our current estimate including probable legal fees continues to reflect there will be no payment to the CVR holders.

As it relates to our 2015 guidance we are reiterating the guidance we set in February. Larry will now discuss our results, the effects of the Affordable Care Act and provide you with other information on our 2015 guidance. Larry?

Thank you, Wayne. We believe our same-store information we are providing is more meaningful and thus we'll predominantly discuss same-store results for the quarter. Of course the information we'll be discussing excludes the integration and merger cost of the HMA transaction and the government's settlement and related costs and reduction estimated liability census associated with the HMA government litigation related to the contingent value rights.

The first quarter's net operating revenues increased 17.6% on a consolidated basis and were relatively flat with the sequential fourth-quarter 2014. Our same-store net operating revenues increased 5.2% and operating revenues per adjusted admission increased 2.6% and our volumes our adjusted admissions increased 2.5%.

The flu did positively impact our adjusted admissions approximately 40 basis points in the quarter. We also experienced a 2.2% increase in surgeries.

We noted that our actual revenues were above consensus and we believe this can be due to the following. Last year we did record five days of January 2014 HMA activities, we closed the transaction January 27, 2014. It appears some of the estimates may have included an entire month of January 2014 revenue developed in the first quarter's 2015 results.

Divestitures or discontinued operations after March 31 may have been omitted from the first-quarter 2015 estimates and also the bad debts, it increased slightly from the fourth quarter.

We should note that the Medicaid adjusted admissions increased 7.5% and self-pay admissions declined 12%. On a total same-store revenue basis before bad debt expense Medicaid increased 14.8% and while self-pay declined 10.4%.

On a same-store payer mix continues to improve as we saw a 220 basis point improvement in managed care, 100 basis point improvement in Medicaid and a reduction in self-pay of 180 basis points. Total Medicaid revenue per adjusted admission prior to bad debts expense grew 6.7%, the Medicaid case makes grew 1.3% and 4.1% expansion states.

Our all payer case mix increased 20 basis points and our Medicare case mix increased 40 basis points.

We will continue to see the shift to an outpatient setting. Our outpatient revenues represent 56% of our total patient revenue compared to 54% in the first quarter of 2014.

Our salaries and benefits as a percentage of net operating revenue declined approximately 170 basis points as a percent of net operating revenue to 45.7%. The decline was the result of a 3% productivity improvement.

Supplies expense increased approximately 10 basis points to 15.4% and we continue to increase our overall compliance in our group purchasing organization and decrease our overall pricing.

Other operating expenses declined 110 basis points to 22.4% of net operating revenue. As it relates to HITECH incentives on a consolidated basis we recognized $26 million in 2015 compared to $40 million in 2014 and a March 2015 impact on adjusted EBITDA was $21 million. This compares to $24 million in the first quarter of 2014.

And just a note that the sequential impact on HITECH in the fourth quarter we recognized $47 million in HITECH incentives and $38 million on adjusted EBITDA. So we had a $17 million, $18 million headwind from the sequential fourth quarter.

Our cash flows used in operations was a negative $61 million. This compares to cash flows from operations last year of $65 million. There is a slide 13 that sort of looks at the various movements in cash flow.

This year the debt was outstanding for the full period and the impact on cash flow and related specific interest payments was approximately $25 million more this quarter than last year's first quarter. This is due to the two debt instruments that did not have a first-quarter interest payment in 2014 but did in 2015.

And just remember our payments and interest are higher in each of the first and third quarters by approximately $140 million. We received a tax refund of $80 million on last year's first quarter. We did state on the earnings call in February that we'd be impacted in 2015 from our tax refunds in 2014 to our tax payments in 2015.

We also received refunds in 2014 in third quarter of $15 million and the fourth quarter of $86 million. We had a negative impact at HMA integration cost and legal expenses associated with the CVR of $2 million. This compares to $53 million for the first quarter of last year.

We had outflows on certain government settlements and related costs of $87 million and a year ago we had HMA banking fees and other liabilities related to $50 million. Adding these items back after estimated tax benefits, comparable number for this year would be $200 million. This compares to approximately $148 million last year.

As Wayne said we reconfirmed our 2015 cash flow from operations guidance of $1.650 billion to $1.850 billion. In the last 12 months adjusted cash flow was approximately $1.7 billion.

Our CapEx was $241 million or 4.9% of revenue compared to 4.3% for 2014. Approximately $34 million was spent on our Birmingham, Alabama replacement facility compared to only 2 in the first quarter last year.

Our cash flows used in investments in other assets were down approximately $60 million compared to a year ago. As we've stated earlier we should see this number decline approximately $150 million this year.

Let me speak just a second to non-controlling interest and other items below the dial. This amount was comparable to last year's percentage of revenue and the non-controlling interest is lower than the fourth quarter due to one of the lower earnings, a different distribution of earnings and we also bought out a syndication in the fourth quarter that had a non-controlling interest.

On interest and depreciation we have future planned acquisitions and open a new hospital that need to be considered when you think about the interest and depreciation going forward. Additionally some of our forward-looking swaps become effective later in 2015 as disclosed in our public filings.

Now let's turn our attention to the Affordable Care Act. The following information is hospital data only.

Self-pay admissions as a percentage of total adjusted admissions declined 100 basis points to 6.2%. Self-pay adjusted admissions decreased 11.9%. In expansion states the decline was 15.1%.

Medicaid adjusted admissions as a percentage of total adjusted admissions increased 110 basis points to 19.6%. Medicaid adjusted admissions increased 8.3% with some of this increase coming from facilities in non-expansion states. The expansion states increased to 7.7%.

Sequentially expansion states saw an increase of 28% in Medicaid adjusted admissions while non-expansion states experienced a decline of 14%.

As it relates to monitoring the exchanges we have sufficient information. We'd note an increase in patient visits over 200% this quarter compared to the first quarter a year ago.

January and February were relatively flat with March experiencing a 27% increase in visits over January and February. Self-pay emergency department visits decreased 22% in expansion states and 1.2% in non-expansion states.

Over the last five quarters the decline in self-pay admits and adjusted admits an increase in Medicaid expansion states has grown quarter over quarter. Taking a look over the last five quarters at the trend of charity care plus self-pay discounts plus bad debts it has continued to decline. It has gone from 27.2% to 23.7% or about a 350 basis points decline.

Based on various data points on Medicaid exchange business we believe we've recognized an accumulated benefit in the amount of approximately $60 million from the Affordable Care Act for the quarter which is in line with our overall 2015 guidance. We should continue to see higher benefits as the year progresses.

For 2015 we continue to estimate we will receive incremental benefits between $100 million to $175 billion before the government deductions. And this compares to an increase of $165 million 2014.

Briefly on a sequential quarter basis the best approach would be to describe our bridge from the fourth-quarter adjusted EBITDA of $785 million and adjusted margin of 16% to adjusted EBITDA of $715 million and 14.6% margin. As previously said the effect on EBITDA of HITECH was approximately $20 million on HITECH incentives.

We had previously stated in the year-end call we'd see a spike in bad debt as a percentage of operating revenue related to the resetting of copayments and deductibles that takes place in each first quarter. This impacted EBITDA margins by approximately $20 million.

We had previously mentioned that the benefits would be higher as we had have the reset of employer payroll taxes and raises to take effect January 1. We did have an increase of approximately $25 million.

We did receive an annual payment or did recognize a California provider tax for a year in the fourth quarter of 2014 and the sequential difference was approximately $20 million less than the first quarter. These four items we had previously discussed and noted accounted for a majority of the EBITDA and margin decline.

We were also impacted by the weather. And as we stated in previous earnings goals the weather impacted about 80 facilities at an estimated reduction of about 2,300 adjusted admissions and about $25 million in revenue and approximately $10 million in adjusted EBITDA. This is significantly less than the severe weather impact we experienced in 2014.

Wayne?

Thanks, Larry. We are very pleased with what we've accomplished this quarter and what we hope to accomplish throughout 2015 and beyond. We have many opportunities with the continuation of the rollout of the Affordable Care Act, the opportunities for growth in the former HMA assets and other recent acquisitions including the synergies that we expect to achieve.

Our opportunities to delever our balance sheet and our operation with clinical initiatives. We expect to continue to increase EBITDA margin in the former HMA facilities exclusive of synergies. We'll continue to work on volume initiatives that should help achieve organic growth and marketshare.

We have laid a great foundation for our platform. And as always we continue to focus on enhancing quality and building stronger physician relationships including increasing physician recruiting and doing what's right for our patients.

I'd like to thank all the physicians, nurses and support staff for all their tremendous support during this quarter.

With that we would like to open the call up for comments. In an effort to get more calls in we will limit to one question so others can have time. 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.

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

Hello everybody. Maybe just ask you about the ACA benefit. I think sequentially you're saying it was a $5 million incremental benefit.

I know you had Pennsylvania go live in January on Medicaid expansion and Indiana in February go live and obviously there is some exchange pickup. Give us your thoughts on do you think you haven't seen the full benefit of that for some reason?

I know you mentioned in January and February it seemed a little modest build up in the new year. Any thoughts about what was behind that?

Pennsylvania did not get off to as good a start as we had hoped. You remember last year even though Medicaid expanded in the first part of the year it was a big uptick into 10 states we had at the time. Pennsylvania we saw a minimal benefit.

We saw little bit more in March. We are seeing some more through April. I just looked at April statistics today.

Indiana got off and had a decent March. It's got presumptive eligibility which helps it a little bit and we had a little bit better in Indiana.

I think both will be much stronger similar to last year in the second quarter, there is much more better recognition of the Medicaid activity. From the exchange enrollment we were up about probably 35% I believe due to information that was around January 2015, we ended up being about 65% or 70% in our enrollment in our markets. And we saw the reason I commented there in the script in January and February were not up that much, a lot of that came through in March which would say that the second quarter should see a bit better benefit than we saw for the whole quarter.

Is that order of magnitude of increase on the exchange is more than you were thinking? It sounds like a big number.

That's the ones in our county. Of course we can't service all those. Some we can.

It turned out a little bit better than we initially anticipated from it. We'll just see how that plays out. We've got a pretty wide range of $100 million to $175 million.

I'd say at the low-end it is definitely better at the high-end, that's probably somewhere where we thought it could happen. We were very careful to try to take the estimating of the ACA, we try to take where we were in the fourth quarter, add Indiana and Pennsylvania and add I think about a 40% to 50% growth in exchange we came out a little bit better.

Okay great. Thanks a lot.

Kevin Fischbeck, Bank of America.

Great, thanks. I just want to talk a little bit about volumes because the admission growth was I think the first time positive in a number of years. I was wondering if you could give a little more color about what's really driving the overall admission adjusted admission growth?

First off breakout between reform and other factors? And then I guess secondly the comps start to get more difficult as the year goes on. Do you think that you will be able to show positive volume growth each quarter or did the comps just get too tough in the back half? Thanks.

Kevin let me just on top before Larry breaks all this down for you, I think all the initiatives that we've talked about in the last couple of quarters are beginning to work for us. We've had an interest in orthopedics. We've got transfer centers, we've got a lot of marketing going on.

You can see our ED visits are up, our surgeries are up. So I think this is just hard work, it just takes time to do this but I think we're making very good progress. I don't know, David, if you want to comment, David Miller?

Thank you, Wayne. Maybe just a comment or two, all of our operators, Kevin, are committed to increasing marketshare and have embraced one or more of these growth strategies that we have initiated.

As Wayne mentioned the ER service line has demonstrated nice growth this year, first quarter versus last year nearly 8%. We have some targeted marketing campaigns going on. We have stronger EMS relationships.

We've obtained stroke and cardiac certifications and we're ensuring that we have capacity in our ERs. The transfer centers which we started last year we now have seven that are operational and again that's to help us enhance our referral capture within our networks and we've seen very strong growth there. The physician recruiting emphasis that we've placed especially on the former HMA facilities has paid great dividends for us.

I believe we've added something like 870 odd physicians this year to our medical staffs versus slightly over 600 last year. We have a professional outreach initiative going on and we now have over 100 liaison-type folks in or markets that are working with physicians, employers and payers helping to tell our story. You've seen that the surgical growth was 2.2% quarter over last year's quarter.

The orthopedic initiative is helping there and of course we continue to expand our access points including partnerships with other vendors. We think these things combined with Medicaid expansion have really begun to pay off for us.

Thank you, David. Kevin that's more than you ever wanted to know but good job. Larry?

Yes, just on trend, you know we clearly had an easier comp this quarter and we're positive. We're also 2.7% up in the fourth quarter and 2.5% and I think the flu helped the fourth quarter a little bit.

We're negative in the second quarter in the round of 1% and flat. So we should do okay in the second and in the third quarter. And we'll have a little bit of a tougher comp because of the flu in the fourth quarter but the initiatives we've got I think we'll continue to hopefully see positive volume growth.

That's what we're trying to get done and we're also doing a good job on expenses. We put a lot of efforts on supply chain and revenue, so (inaudible) management and staffing so that's also equally important.

Great. Thanks.

Frank Morgan, RBC Capital Markets.

Good morning. I want to go back to the exchange discussion. I know HMA got off to a really slow start, you weren't really able to influence it that much in the 2014 season but do you have any color specific to that market?

Did you see a little bit of a catch-up activity in 2015 open enrollment and has that translated into incremental volume on those set of assets? And then the other one was just on EBITDA margins you specifically mentioned you think you got upside in the HMA portfolio.

Just curious maybe percentagewise how much upside do you see in that book in terms of margin expansion? Thanks.

Yes, as it relates -- I think we did a little bit better in the HMA markets as the year went on. Florida is the state with the most exchange business. There's not that many -- we had a pretty good overlap in states that HMA didn't have in states we weren't in or weren't in as large, some of the expansion didn't go from their size of Medicaid expansion but we are seeing good benefit this year in Florida.

We saw it at the end of the year and we did a good job on the outreach effort for HMA this year. So on both where like where there's been expansion of Medicaid. As far as the HMA margin I think we made a small progress last year.

We'll make hopefully 50 basis points of improvement this year off the run rate of revenue and hopefully 100 basis points next year. And you have to be careful how you count synergies and margins and ACA and all of it. But I think the underlying belief is we can improve the HMA margins which are about 12% when we got it and they have been running 15% to 16% and we're targeting on a comparable basis to get it back up to about 15%.

Okay, thank you.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning. I just want to stay on the volume side of things.

Can you help on volume trends maybe by geography if you're seeing anything spike out there? And maybe if you're willing to I know you talked about a little bit about HMA and their markets within the exchange but more broadly can you compare the trends within the HMA markets versus the legacy community markets? Thanks.

Yes, if you go back to January and February we did have a little adverse weather in a number of our markets and a lot of people missed that. But when it's iced over in North Alabama you know you've got a problem.

But generally speaking I would say our volume trends are pretty good. And look as everybody knows in our smaller communities the volumes were little slower in terms of returning.

It's generally population growth and jobs, all the above. But I think we're on the right track and we're getting good improvements generally across the board. Larry, do you want to add anything to did?

Yes I'd say the majority of our divisions all had positive adjusted admissions. One was close to that. We're not going to get into absolute specifics but HMA did have positive adjusted admissions which that's a question people ask.

From a revenue per adjusted admission we closed the gap some. It was about $1,000 and now it is down to maybe $600 or $700 in the first quarter. That's important to continue to try to get their revenue per unit up.

We'll never quite get it where our revenue per unit is because of all the Medicare business they've got in Florida. But we're making progress on and both were positive revenue per adjusted admission and we closed the gap a little bit there. And one of our synergies this year is to improve some of the managed care pricing at HMA.

We have high expectations of HMA facilities since they did a relatively poor job of recruiting physicians last year. So we have a great opportunity in terms of continuing to improve the numbers of physicians in those markets.

By last year I think Wayne means 2013. We made some progress in 2014 just to clarify that.

Okay, thank you.

Brian Tanquilut, Jefferies.

Hey good morning. Larry just a question on the divestitures, so you highlighted as one of the reasons on the miss on the revenue line.

So how should we think about divestitures going forward? And then if I may just add another question on your exchange exposure, I know you've mentioned that in the past, if you don't mind giving us that number again? Thanks.

Yes, the divestitures last year's reported revenue was about $20 million higher than the restated revenue so there shouldn't be that issue going into the second quarter. There's no new divestitures that have been come up that weren't there in the second quarter I believe.

And then I think as it relates to the SCOTUS exposure I think we've said taking the 29 states we operate in the majority of them are in the federal exchange. We've pick some we think that may not find a workaround although I think most people believe the Republicans are going to help find a workaround on a national basis. But if these states didn't go through we would probably have a 2% to 3% effect on the 2016 EBITDA effect because we've got so much federal exchange business.

Got it. Thank you, Larry.

Gary Lieberman, Wells Fargo.

Good morning. Thanks for taking the question. Can you talk about your focus on the outpatient business and where you see the most opportunity and where you might be the most acquisitive?

You know over the last year or so we continue to look for opportunities in terms of everything from outpatient surgery centers, diagnostic centers. Our physician locations I think we have 1,600 physician locations now across the country.

The other thing that's important to us is what's going on in terms of CVS and Walmart and all the rest of them entering bringing in nurse practitioners and opening up mini-clinics. We have a number of those relationships so I guess our view is that as things continue we need to have relationships in just about every different sector of this in terms of who's doing what on any of the outpatient expansion areas.

We're going slow, not as fast as some people but we want to make sure we are careful and that we not only are acquiring in terms of properties we are acquiring but also probably more importantly the relationships we have in joint ventures that they are the right relationships going forward. And mobile devices all those kinds of things are important now in terms of access so we will continue to do that and you will hear more and more about that as time goes along.

So how do you view the mini-clinics? Are they competitors or are you trying to use them and develop relationships for referral sources?

No, the mini-clinics just a quick tutorial basically go back a few years, what they wanted from us they wanted us to hire the employees, rent the space, all of the above and whomever it might be they get the scripts there. Now all they want from us is a referral and like a 24-hour referral. So it's a pretty interesting dynamic that has changed going forward.

And I guess our view is that whether this is right or not but we need to have that relationship going forward because we believe access through mini-clinics is going to dramatically increase. The more people you have insured the more opportunity in terms of people getting quick access to a medical practitioner and getting their problem at least halfway diagnosed or diagnosed so that they get to the right person.

Once that starts and even more I think you're going to see a greater portion of the population doing that even instead of maybe even calling up a physician and waiting a week or two weeks for an appointment and waiting an hour or two for an appointment in a physician's office. So that trend is clearly here.

It's moving forward. We think it's got momentum and now this is not going to happen overnight but over the next four or five years I think this is one of the things that you will see that will have more momentum to it than some of the other initiatives.

Okay. And then maybe just an update in terms of where you see your primary uses over the priorities for free cash flow.

I think your questions are over. You only get one. You're on the third now.

Gary we've got an acquisition pending that would be one of them, the free cash flow activity. We will be putting we've got some CapEx that we're spending on and probably in 2016 we will be thinking about some paydown of debt. And we may have some this year but more than likely we spend the money on our acquisitions.

Great, thanks for taking the questions.

Jason Gurda, KeyBanc.

Thank you. I want to ask you about a comment you made in your prepared remarks about consolidating or centralizing and putting your physician practices under a single management. I was hoping what are you looking to improve or what are you looking to get from that approach?

We historically have managed our practices and our physician practices in the markets and as we've gone through EHR conversions and we've started to get centralized approach to a lot of parts and pieces of practices and working on centralized appointments all those kinds of things it occurred to us that we probably ought to think about this in a more consolidated way. And since we'd get more synergies a lot there's a lot of as you probably know there's a lot of IT going in physician practices now, there is a lot of requirements, reporting requirements, all the above.

So instead of doing it individually in markets we think we can get a fair amount of synergies, productivity, even an improved product better patient experience all that by bringing that in-house and managing that in-house.

Thank you.

Andrew Schenker, Morgan Stanley.

Thanks, just going back to the bad debt you mentioned the reset of deductibles as one of the headwinds impacting that seasonality. Can you talk about maybe how that trend in the first quarter differed maybe year over year?

I mean the similar reset are you seeing more pressure as more people move into high deductible plans? And maybe related to that are you still seeing any changes between your exchange population and the general commercial population on payment of deductibles and collection rates? Thanks.

Our hospital deductibles and copayments are probably up 12% to 15%. I know some other people disclosed some higher percentages but that's what we saw for our self. Importantly our point of service for first quarter was up about 180 basis points so we did do a little bit better job on point of service.

I would think the deductibles are up probably more from the managed care component than they are from the exchange of business we got. The exchange business is important but we've still got a whole lot of managed care business, been putting in higher deductibles. They have been growing, every year our percentage of payments probably versus a year ago are relatively close to about 12.9% and 13% for the quarter this year versus last year.

By the end of the year you get down to about 10% or 11%. So that's just the way the math works from a collectability perspective, because a lot of people are in the Silver plan we do expect to collect a reasonable amount of the deductibles from the Affordable Care Act people. The ones in the Bronze plan we probably will not but overall we should have close collection percentages.

And we monitor we may be running a little bit higher bad debts but not substantially considering what type of volume it is. But it was up and it will get better in the second quarter and third quarter and then it drops in the fourth quarter and you will probably actually see a little bit of business in the fourth quarter from people who reach their deductibles and copayments.

Thanks.

Josh Raskin, Barclays.

Thanks good morning. I appreciate you taking the question.

I want to get back to the outpatient and sort of maybe juxtapose that with the physician recruitment and see if those strategies are aligned. And then I wanted to make sure I understood you talked about selective acquisitions. Should we think about that as all sort of in-market strategy or would you be open to a larger acquisition of whatever sort of centers you guys are looking at?

As it relates to the outpatient you know our outpatient revenue now is up to about 56% or so, so we continue to move and look for opportunities. There's a lot of initiatives to try to move business to an outpatient. So we're working down that road to make sure that we can accommodate that in our market so we continue to grow and enhance our marketshare.

Physician recruiting obviously is our physician recruiting is around all that. As we continue to look for locations to expand our physician's office practices we have as I said we've got about 1,600, that's very helpful in terms of being able to accommodate outpatient business as well.

In terms of acquisitions there are a lot of opportunities still there. We have a couple of letter of intents. We have one that we mentioned in Wyoming, Michigan that we will close in the third quarter.

We have a couple more. We're looking for facilities that generally are synergistic that work within our markets but as you know we also every now and then will decide look we think Michigan is a pretty good market and so we will go to Michigan.

We were the first in Pennsylvania, now we're clearly by a long shot the largest in Pennsylvania in terms of for profits. We were the first to go through a conversion, so we just look at them by the ones.

We're looking really our first priority is to enhance the markets that we currently have. But in addition to that if we find a really good opportunity in a good market then we will take advantage of that. But we're not the pace is lower than it has been in terms of our acquisitions.

You know Josh we have about eight physicians for every 10,000 people in our collective markets which are around 30 million population. Nationally it's over 20, so there's lots of remain our markets, clearly we're not going to go to 20 but we've got a lot of room to continue to add doctors and we do a lot of analytics so it's something we've done and we think we will get a return off of that activity.

I just would add the one in Michigan when we were looking at HMA we had four markets, one in, Wisconsin, Illinois and Ohio and Michigan, three of them we decided not to do or not to pursue. We did stick with the Michigan and it would be the first one real size that we've done since we bought HMA. Most of the others were either very small or in a town where we were already located or something was working when we did the deal.

Okay, great. Thanks.

Chris Rigg, Susquehanna Financial.

Good morning. Just wanted to talk about some of the information on slide 14. The 7.7% increase in the quarter, is that comparable to the 30% increase that you had cited for all of 2014?

And if that is, how should we think about that 7.7% increase trending in the latter three quarters of the year assuming no new states expand? Thanks a lot.

Yes, that's a good question. And I think I mentioned earlier Pennsylvania did generate the kind of growth in the first quarter. Indiana a little bit the last month so that's one minus 7.7.

They are relatively comparable. And we had a state that has changed its processing, a big state for us in the South and that's probably caused that to be a couple percent lower, that activity.

In the first quarter often the recognition of Medicaid is a little different because the way self-pay pending works and how you start the year over and a lot of efforts into the year. I would think it would probably go up in the second quarter and third quarter (technical difficulty) Pennsylvania, Indiana and also the state that caused us not to have as good will get fixed hopefully in the second quarter.

Great. Thank you.

This concludes our Q&A session for today. I'd like to turn the call back over to Mr. Smith for closing remarks.

Thank you again for spending time with us this morning. Our standardized and centralized operating platform continues to help us move forward.

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