Community Health Systems Inc (CYH) 2015 Q2 法說會逐字稿

Good morning. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Community Health Systems second-quarter 2015 earnings release conference call. (Operator Instructions) I will now turn the call over to Mr. Michael Culotta, Vice President Investor Relations. You may begin your conference.

Thank you, Mike. 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 or furnished to 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. The 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 for this second-quarter also includes the two acquisitions that were completed on April 1, 2014, Sharon regional in Pennsylvania and Munroe Regional in Florida. All calculations we will be discussing exclude the costs associated with the government settlements and related costs, expenses related to the loss from early extinguishment of debt, the impairment of long-lived assets, and the CVR legal expenses and liabilities.

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. I am very pleased with our financial and operating results we were able to achieve this quarter.

But before we get further into the details of the quarter, we disclosed in an 8-K filed yesterday that we have a plan to create a new publicly traded company to be named Quorum Health Corporation. There is also a slide deck that is in the 8-K and posted to our website with this information. We are preparing a Form 10 registrations statement for the tax-free spin out of 38 hospitals representing 3,635 beds in 16 states. Quorum Health Resources, a leading hospital management and consulting services company, will also be included in the new company. These facilities will be predominantly nonurban. For calendar year 2014 we estimate that Quorum Health had approximately $2.1 billion in net revenue, operating revenue, and approximately $255 million in adjusted EBITDA. All results are unaudited.

As you can see from our key highlights, this creates a new publicly traded company with an attractive portfolio of high-quality hospitals, streamlined management structure, independent access to capital markets. Quorum is expected to have an enhanced ability to drive growth by capitalizing on acquisition opportunities consistent with its portfolio, developing facility-specific operating strategies aligned with its community's needs and better leveraging its management and consulting capabilities.

It improves CHS's profitable growth profile by allowing it to focus on large markets and invest in strengthening its regional healthcare networks while maintaining the benefit of scale from being one of the largest hospital companies in the country, provides stockholders with the opportunity to realize the unique growth potential of two focused healthcare companies that are each better positioned to pursue their distinct business strategies. The distribution is intended to qualify as tax-free to CHS shareholders for US federal income tax purposes.

We expect this transaction to close sometime in the first quarter. Our existing credit agreement has a carve out for a spin-out transaction for up to 15% of our trailing fourth-quarter adjusted EBITDA without having to seek any approvals. We will use the cash from this transaction to pay down certain secured indebtedness. We will be naming the executive leadership team when we file the Form 10. I think you will agree that this is a great opportunity for both companies.

I'm also very excited to announce that in October of this year Trinity Medical Center in Birmingham will relocate to its new home, Grandview Medical Center. Grandview Medical Center is a 1 million-square-foot hospital, 372 beds, 30 operating rooms. It sits on 32-acre campus, and there is an adjacent 200,000 square-foot physician office building. We were able to construct and equip this hospital for approximately $730,000 per bed, and the national comparable construction cost is approximately $1.3 million per bed. This site is located in Alabama's largest metropolitan area. Grandview will be one of the most technologically advanced and modern hospitals in the country. The hospital already has made a significant positive impact on the community in terms of construction, jobs downstream, revenue and economic development benefits that result in a major capital project.

Most importantly, Grandview Medical Center, its affiliated clinics, and outpatient services, will provide comprehensive, high-quality healthcare services for residents of Birmingham and the broader region. We are very proud to be opening this spectacular hospital in October 2015.

Let's give a quick overview of the quarter. Our adjusted EBITDA grew $69 million or 9.9% from the second quarter 2014 to $769 million. Adjusted EBITDA margins grew a strong 110 basis points to 15.8%. Sequentially adjusted EBITDA grew $54 million or 7.6% and the margin of 15.8% grew 120 basis points. Our reported cash flow provided by operations was very strong at $565 million this quarter. Our adjusted earnings per share was $1.14 compared to $0.74. Our growth over 54%.

As always, we are focused on physician recruiting. Physician recruiting is very important to expansion of services that are provided at our facilities. There were 1,778 physicians that were recruited to our active medical staffs across all of our facilities for the first half of the year. This compares to 1,403 physicians recruited in the first half of 2014, or a 26% increase.

We have stated on the last earnings call and have assigned operational oversight of our employee physician practices to Dr. Lynn Simon and her team. They are proceeding in centralizing and standardizing our approach to physician practice management with good opportunities for improvement. Remember that we have over 3,250 employed physicians out of our 22,200 active medical staff.

In addition, as you recall, there was virtually no physician recruiting taking place at HMA over the last several quarters before acquisition. We continue to drive recruiting in those facilities, and this is increasing. But we still have many opportunities in this area. But let me assure that you we are focused on this. As we stated before, this is an area that we have upside for our Company.

We achieved $50 million in incremental synergies this quarter and $100 million in incremental synergies this year. We estimate that we will still achieve our revised cumulative guidance of at least $275 million of incremental synergies for this year. We just recently announced that we will not be proceeding with acquisition of MetroHealth in Wyoming, Michigan. The definitive agreement was canceled on August 3.

We will continue to stay focused on the midsized urban markets as we take our Company forward. In addition, we are concentrating heavily on name branding and developing comprehensive health services in our 11 networks and we will be looking at other hospital networks as we continue this strategy.

Turning our attention to the Affordable Care Act, it is an understatement to state that we were very pleased with the recent Supreme Court ruling. We truly hope that both federal and state legislatures will understand the importance of having healthcare expanded to those less fortunate and get politics out of the equation. We continue to work very hard with the Federation of American Health Systems, our DC trade organization, and on monitoring and educating our state legislators on the positives with the Act.

We still continue to hope that governors and state legislators in non-expansion states will strongly consider the newest positive impact of expanding Medicaid. And we hope they understand there are citizens that are not eligible for healthcare with existing specific state Medicaid programs. We continue to remain very active in our states with respect to hospital associations trade groups, including active lobbyists. We still believe other states will ultimately expand over time.

Next, to update you on pending legal matters, regarding our pending legal matters we continue to proceed with our discussions and cooperation with the civil division and the criminal division of the Department of Justice in an effort to resolve the open HMA matters. We continue to reevaluate the estimated liabilities covered by the CVR on a quarterly basis. I remind you that these expenses and accruals have different financial statement treatment than under the CVR agreement. Our current estimate including probable legal fees continue to reflect there will be no payment to the CVR holders.

As it relates to our 2015 guidance, we are adjusting the low end of our adjusted EPS to $3.65 from $3.40, and adjusting the high-end to $4.10 from $4.05. Larry will now discuss further our results, the effects of the Affordable Care Act, and provide you with other information on 2015 guidance. Larry?

Thank you, Wayne. We believe our same-store information we're providing is more meaningful and thus we will predominantly discuss same-store results for the quarter excluding items noted earlier. Our same-store net operating revenues increased 2.2% with net operating revenues per adjusted admission increasing 2.4%. Our volumes of adjusted admissions declined a slight 0.2% or about 1,180 adjusted admissions. ED visits were up 4% and services were roughly flat.

Actually, our CHS legacy hospitals had both increases in adjusted admissions and surgeries for our HMA CHS. 14 facilities had declines in both adjusted admissions and surgeries.

We should note that our same-store Medicaid adjusted admissions increased 8.4% and self-paid adjusted admissions declined 25%. On a total patient revenue basis before bad debts, Medicaid increased 4.4% while self-paid declined 4.9%.

Our payer mix continues to improve, as we saw a 60 basis point improvement in managed care, a 40 basis point improvement in Medicaid, and a reduction in self-pay of 90 basis points. The overall case mix increased 2% while Medicaid case mix increased 3.3% and Medicare case mix increased 1.7%. The Medicaid case mix in states that expanded in 2014 increased 4.4%. In the two most recent states that expanded, Indiana and Pennsylvania, Medicaid case mix increased 5.9%. This compares to only a 2.2% case mix in non-expansion states.

We continue to see the shift to outpatient setting. Our outpatient revenue represents 57.6% of our total patient revenues compared to 56.5% in the second quarter of 2014 or a 110 basis points shift.

We achieved good expense management in the quarter. Our salaries and benefits as a percent of net operating revenue declined 100 basis points as a percent of net operating revenue to 45.4%. Our overall hours declined 1.4%. We continue monitoring productivity. In addition, we have previously discussed there was an actual drop in payroll taxes from the first quarter throughout the remainder of the year.

Supplies and expense declined 10 basis points to 15.4%. We continue to increase our overall compliance in our group purchase organization and decrease our pricing.

Other operating expenses declined 40 basis points to 22.3% of net operating revenue. As it relates to high-tech incentives on a consolidated basis, we recognized $55 million this quarter compared to $84 million in last year second quarter. The second quarter high-tech reimbursement was actually right on the number we had budgeted for the quarter. On a year-to-date basis we recognized $81 million of high-tech incentives compared to $124 million last year at this time.

[Later on] we would like to call your attention just to equity and earnings of unconsolidated affiliates. As you know, we are involved in two hospital ventures. One is with HCA in Macon, Georgia; and the other is with VHS in Las Vegas, Nevada. The large increase is predominantly from our ownership in Las Vegas hospitals.

Our cash flow operations were $565 million for the quarter and $504 million for the year. Our adjusted cash flows for the six months were $588 million. The adjusted cash flow is provided by operations. It has been adjusted for government settlements and related expenses, $104 million, and acquisition/integration expenses, and a payment on HMA-governed liability of $29 million.

We did tax affect these items. This compares to adjusted cash flow provided by operations of $637 million for June last year. We have a slide we will refer to on our adjusted cash flow calculations.

A couple of items to note related to our large differences between the two 6-month periods -- this year there was debt outstanding for the full period, and impact on cash flow relative to interest payments was $125 million this year. This interest expense relates to the HMA acquisition in late January 2014 and was built in our guidance. Remember, our payments on interest are higher in each of the first and third quarters by approximately $140 million.

We received a tax refund of $80 million in last year's first quarter. We also received refunds in 2014 of $15 million in the third quarter and in the fourth quarter of $86 million. We do not expect any significant tax refunds this year.

Another item to note is improvement in accounts receivable collections or cash provided for accounts receivable collections improved $80 million from the year ago and we made some strong improvements in this area. We are reconfirming our year-end cash flow generated by operations guidance. This last three years 66% of our cash flow provided to operations has been in the second half of the year. Our cash flow used in investments and other assets for six months were down approximately $179 million compared to a year ago.

Our CapEx was $474 million or 4.8% of revenue. Approximately $80 million was on the Birmingham, Alabama replacement facility. Once the Birmingham facility opens, we will have additional interest expense of approximately $4 million and depreciation expense of $3 million in the fourth quarter. We are lowering our guidance on capital expenditures to $950 million to $1.1 billion. This reduces the range by $100 million to $150 million for 2015.

Now let's turn our attention to the Affordable Care Act. The following information is hospital data only [partly] compared to second quarters. Self-pay adjusted admissions as a percentage of total adjusted admissions declined 150 basis points to 4.6%. Self-pay adjusted admissions decreased 24%. In expansion states the decline was 49%. The biggest percentage decline were from Indiana and Pennsylvania.

Medicaid adjusted admissions as a percentage of total adjusted admissions increased 130 basis points to 19.5%. Medicaid adjusted admissions increased 6.7% with the majority of the increase coming from facilities in expansion states. And expansion states the increase was 10.3%.

We need to point out this significant decline in self-pay trends and increase in Medicaid trends sequentially for Indiana and Pennsylvania combined. For the first quarter self-pay adjusted admissions declined 76% while Medicaid adjusted admissions increased 30%. Actually, Medicaid adjusted admissions in all expansion states increased 9% sequentially.

As it relates to monitoring the exchanges where we have sufficient information, we noted an increase in patient visits of approximately 77% this quarter compared to second quarter a year ago. And sequentially the patient visits were up approximately 17%. Self-pay emergency department visits decreased 22.7% in expansion states and 5.6% in non-expansion states. In Indiana and Pennsylvania, self-pay ED visits declined 28% from a year ago.

Care-to-care and self-pay discounts plus bad debts for the six-months comparative periods has declined from 26.4% to 24% or a 240 basis point decline. Based on the various data points on Medicaid and exchange business, we believe we have recognized and accumulated benefit through June 30, 2015, to the [data now] approximately $140 million from the Affordable Care Act, which is in line with our overall 2015 guidance. We should continue to see some higher benefits as the year progresses. This compares to an approximate $165 million in 2014. For 2015, we continue to estimate we will receive incremental benefits before deductions within our guidance range.

We are adjusting the guidance to lower our range on net operating revenues less provision for bad debts to $2.3 billion. We are also adjusting our guidance to lower the upper range of adjusted EBITDA to $3.165 billion. These adjustments reflect that there will be no hospital acquisitions in 2015 versus the two hospitals that were in the original guidance.

As it relates to EBITDA expectations for the third quarter, historically the third quarter for our industry has been the lowest quarter of the year and generally declines from the second quarter.

Wayne?

We are very pleased with what we have accomplished this year and what we hope to accomplish throughout 2015 and beyond. We are very pleased to be working on a new spin out company, Quorum Health Corporation, and believe this will provide tremendous shareholder value. We have so 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, the opening of Grandview, our opportunities to de-lever our balance sheet, our operational and clinical initiatives, our focus on our strategy going forward with emphasis on large markets and future developing of our networks.

We will continue to work on volume initiatives that should help us achieve organic growth and grow market share. We've laid a great foundation for our platform. And as always, we continue to focus on enhancing quality, building stronger physician relationships including increasing physician recruiting and doing what's right for our patients. I would like to thank our physicians, nurses, and support staff for all their tremendous support this quarter.

With that, we would like to open up the call for any comments. In an effort to get more callers in, we would ask that you limit yourself to one question so others can have time. If you have any further follow-up questions, as always, we are here to take your call. You can reach us at area code 615-465-7000.

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

Just real quick, maybe just to have you step back and make any comments you care to on the disparity we continue to see between the volume trends in the urban markets versus the nonurban markets. I think that was again pronounced this quarter. I know those investments in outpatient you guys are doing and your outpatient is a significant percentage, maybe more so than anybody else, I think, possibly, of your revenues. The mix of the patients, the economy, the reform benefits -- do you think we will see that divergence close at some point in the future, or do you think it's just the nature of the markets, particularly on the inpatient side, that the urbans will grow faster than the nonurban?

Just on top, AJ, I think the issue in the nonurban markets really is an economic issue more than anything else. There are opportunities for us now to enhance the services in our nonurban markets, which should help the growth. But the real issue is employment. And as time goes forward I think we will see improved employment in those markets, which should be helpful. Also I think, as it relates to our spend, this is one of the things that the new company will be able to focus on in terms of freely enhancing and improving the level of services and recruiting physicians in those nonurban markets.

I might just add that if you go back a few years ago, our unemployment growth was like 50 basis points in 2013. In 2014 it was 80 basis points. Recently, it's 150 basis points. So it got better in our markets, but that's still much different than you are seeing in urban markets, and clearly the commercial enrollment follows employment. So we are seeing good managed-care growth from managed-care as a payer mix, but our employment growth was still lagging a little bit better. The unemployment has come down, but the employment growth was still a bit less.

You always have a little bit more of a movement from inpatient to outpatient in the smaller markets that are nonurban markets because of the change in technology and the activity going on. And there's a lot more medical admissions, higher percentage of medical admissions of your DRGs to surgical. And that's the type of medical admissions starting to be treated on an outpatient basis.

Sarah James with Wedbush Securities.

You mentioned one of the motivators here was independent access to capital. Can you speak a little bit more on how capital deployment decisions were made in the past? Was there one segment that was generating a higher ROIC and so this new structure will give that lower returning entity an additional avenue to access capital? Or were returns similar on an ROIC basis? And related to that, how should we think about the long-term growth profile of each separate entity?

Strategically, I think if you look at our capital deployment over the years we have been deploying capital in our larger markets even though we have not had any capital, real capital issues in our smaller markets. But because of the rate of growth, we have not properly enhanced deployment of capital in the small markets. I think you will see this in the spin out, but there's an opportunity to really focus on some new services that might be available in those markets in terms of telemarketing and other kinds of -- I mean telemedicine, not telemarketing -- telemedicine and some of those other kinds of things they can really focus on. Not that we have done anything and we've got the capital that we have deployed now in the spin markets will continue to make sure that all that happens. But I think there will be greater opportunities for the future.

I just would add generally that the margin will improve when the Quorum Health Corporation hospitals are removed. You can see that from the information provided so far. And actually, when you look at capital allocations, the higher margins would generally get a little bit more of the capital because there's a little bit of assured return, there's generally a little bit more managed-care business that would be there. And I think when you look at that we would allocate it. We will be providing three years of audited financial statements in the Form 10 and it will show that the capital progress a little less in 2014 than the overall Company.

And clearly the other thing, just when it comes to looking at stuff, you will see a situation that, on the acquisitions, we haven't been buying any hospitals in nonurban markets.

Larry, can you just comment a minute on our return on investment and how we look at that, because that's fairly important to this discussion?

Yes. When you look at that we -- in the acquisitions we do or the capital we do, we do a three- to five-year projection out. And we monitor the larger projects inside the Company. We are doing a much better job now of looking at the returns we get on the projects that we monitor. And we think that's on the capital side.

On the side of the acquisitions, we do a four- or five-year model looking at both the first year pretax profitable and then also what the multiple is and what the internal rate of return is.

Frank Morgan with RBC Capital Markets.

Certainly your growth profile should improve, at least on the remain co part of the business. I wonder could you share any kind of pro forma numbers for us, maybe what your admissions and adjusted admissions would have been on a pro forma basis or what will be the remain co going forward? And also you commented on HMA in terms of its weaker relative performance. Is that more of the capital-related issue there, or is it more of an operational-related issue where it's more program research lines? Thanks.

That's two questions, Frank.

Frank, the first one is we will provide all that in the Form 10. We are still finalizing the audit. And we did get comfortable that we gave the revenue of $2.1 billion and EBITDA of $255 million. From there you can see that the margins of the remaining hospitals are higher, when you do the math. But clearly, we will provide all the data on what the performance of those hospitals are.

I would just point out that the 16 states -- that nine of those states have expanded Medicaid. So that has been helpful in those states.

Whit Mayo with Robert W. Baird.

Larry, can you maybe just go back to Quorum and just talk about how you plan on capitalizing that company? Just curious what the right leverage is. And any reason you might be thinking about refinancing on this portfolio? We've seen some attractive rates out there on some other companies.

Yes. The plan on this would be that they will go do [that roadshow themselves], and that management team will raise financing and it will be attractive financing. It would probably be -- haven't decided on the capital structure. It will be a mix of banks and bonds, probably, so similar to what we have done with HMA, still to be decided. And it should be attractive. We have not set up on the leverage. We did disclose that the tax basis is $1.270 billion, which would put -- if you just did all of that, would put the labor at somewhere around 5. You can do the math on that at 255. But that still remains to be seen and we will continue to watch also how well they do this year and what the tax basis may be at the end of 2013. But they will go out and borrow money themselves.

Dana Nentin with Deutsche Bank.

At Q1 you had talked about Pennsylvania Medicaid expansion getting off to a slow start but had seen sequential improvements exiting the quarter. Can you provide any color on how that transitions in Q2? And then also looking at Q2 of last year, what that looks like on a gross basis, because I believe it was previously reported net in terms of the reform benefit?

Yes. On a gross basis, and that's how we're going to report it, I think the Q2 was $80 million versus the first quarter was $60 million. And I think we were somewhere in the $40 million range last year, as I remember correctly. And the visits were up substantially. We clearly didn't have as much of a benefit in Indiana in Pennsylvania, and I think we called out a while ago a pretty good increase in the quarter in Pennsylvania, I think the bullet was from the first quarter, self-pay adjusted admissions decline 76% and Medicaid adjusted admissions in Indiana-Pennsylvania increased 30%. And so we had good results from that activity. And they are a contributor of the $20 million growth in gross healthcare reform benefit, growing from $60 million to $80 million.

Andrew Schenker with Morgan Stanley.

So thinking about your same-store adjusted admissions growth, you have kept that 0% to 2%. Thinking that the comps actually get a little bit more difficult in the second half of the year, is there any drivers or programs you have in place that you think could help drive those volumes more positive, so keep you in the middle of the range or towards the high-end of the range? Specifically, any impact on the legacy HMA facilities that are clearly still a drag on growth? Thank you.

I'd say the big driver there would be that the physician recruitment would do a lot better. If you just look, and we don't like to do a lot of separations of HMA versus the Company, but a year ago we only had about 7% of the overall internal recruiting was HMA hospitals. This year it's 35% for people starting. That's about what you would expect it to be, so our physician recruiting is starting to be much more resulted from that activity. There's a lot of focus here on all the programs we've got going on, and we feel comfortable will do better. We were positive in the first and the second quarter of -- fourth quarter of 2014 and the first quarter. But we did not have that kind of success in the second quarter. And the physician recruitments will be real strong in the third quarter. And a lot of that will be the HMA hospitals.

The other thing I think, not directly addressing your question, is we probably were a little bit short on volume. We've had some good revenue per unit growth in the HMA hospitals. We closed the gap again. They are well above the Company average now, revenue per adjusted admissions for the quarter. And we are now -- I think one time we were $1,000 and were $600 or $700 short there. And they will never be as much, so we are doing a good job of growing the revenue per adjusted admission.

When you think about the volume for the quarter, I just want to make one comment about sequentially. Our adjusted admissions were up 40 basis points sequentially. Our outpatient adjusted admissions were actually up 5%, so we had good outpatient growth. And you can do the math there, looking at the first and second quarter. So I'm hopeful that we will continue to have good results.

We did have a little bit of a challenge in the second quarter of 2014. I think people may remember we had a lot of weather effects in our hospitals in Indiana, Pennsylvania, and Ohio, and Illinois. And we had some surgery growth, probably 1% or 2% of our surgery growth, in the second quarter of 2014, we think, came from the delayed services. And everyone may remember the economy bounced back a little bit in the second quarter. So I think that also created a challenge for the comparison.

Gary Lieberman with Wells Fargo.

On HMA and the volumes there, would you characterize it more as a recruitment issue on the physician part? Or is there still this behavioral change amongst the existing physicians which seemed like existed maybe a year or 1.5 years ago?

I think the main issue here is lack of recruitment. It just takes a while to go through this process and get people lined up and get them working. So I think fundamentally it's a numbers issue as opposed to a principal issue or a cultural issue or any of those kinds of things. I think it's just basically we need to continue very strong recruiting to make this work.

And just a little bit -- remind people of history in 2013. They substantially missed what they'd expect to accomplish. They had declining same-store revenue, declining same-store revenue per adjusted admissions, increasing bad debts, increasing payroll, increasing other operating expenses and declining margins.

We have done a pretty good job on the expense side. We have gotten synergies. We are now got them participating in healthcare reform. We are increasing the revenue per unit. We are doing a better job on managed care contracting. And over time we will do a better job on adjusted admissions. But we did start with some challenges and we made good progress on it. But we've just got more progress to do.

Great, thanks.

Brian Tanquilut with Jefferies.

Larry, if you don't mind just talking us through your views on margin expansion, I know that you guys were preparing for potentially adverse ruling on the SCOTUS and then the HMA moving parts on margins. So if you don't mind just walking us through what you guys are doing and where you see that going over the next year to three years?

Yes. Looking out, we've got a couple centralized projects which will be very helpful in the Company. We just finished centralized payroll for the CHS hospitals, which was helpful. We will be doing that for HMA hospitals. We are well under our way of doing a centralized business office that's going to give us good results, both collecting and lower-cost perspective. We are working on supply chain initiatives, which we've had some good benefits this year and got some more benefits in the second half of the year that will carry over for the next couple of years. You are going to get the benefit of the healthcare reform. You will get another enrollment period. The penalty will go from $350 to $700 next year. More people know about it.

There's more managed-care companies coming in it. We are good participants in those managed-care companies, so that benefit will continue there and it ought to be sequential reductions in the uninsured. Hopefully, some more states will expand Medicaid. Utah looks like it has maybe got a possibility, and Alaska -- both small markets but at least it's a positive if they do follow through with that.

Then you go to HMA margin, which was down to 11% or 12% when we bought it. And I talked about the challenges they had in 2013 with the leadership turnover and the lack of focus that may have taken place at that point in time. We probably already improved it 50 basis points in 2014 and we've probably got another 50 to 70 basis points so far this year that we've got, and we've got more opportunity to go as we continue to work on other volume initiatives and trying to do a better job of getting the recruitment activity that Wayne talked about. I think we will do a very good job of getting their margins back up with synergies and healthcare reform and also the volume growth activities and get them back up in the mid-teens.

Thank you.

Kevin Fischbeck with Bank of America.

This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So just briefly coming back to the guidance and reduction in CapEx, can you just talk about the reason for that?

Well, we often look at, at the beginning of the year, how we are going to operate. And if you will look over the history of us, we generally have brought the guidance down to the near to low end or even below the low end. And so it's a strategy; we will plan early to do it, and once we get throughout the year, we look at projects, we've got lots of opportunities and capital to do it. We are putting our capital in markets that we think will get the best return. We are doing a good job of picking them, projects. And so I think we decided we would spend less money this year. So this was a good time to lower it. It will help our cash flow, help our leverage. We are trying to de-lever, and so I think that was the reason we did it. But we did start off with a little higher spending in 2015 than and we had in 2014, and now we've got it back down to a level more in line with that.

So there are no particular projects that you are giving up?

No, no. There's a handful of projects that will be done, and some of it is routine. And we also probably spent a little less money on replacement hospitals, but $100 million to $150 million will not affect our ability to be successful with that kind of reduction.

And I know the comments around the reform and going forward -- any updates on your view of around additional states potentially expanding Medicaid, how you feel about Tennessee or even Florida or any other states that you think -- who should be next on that Medicaid expansion front? Thanks.

We believed all along that the states will continue to think and consider expanding Medicaid. We think the benefits are very strong in terms of the opportunities for states. It's good for the health of the people. It's good for economic development, all of the above, for people to have health care coverage. So we believe ultimately the states, every state will expand Medicaid.

I think I said earlier there's some more activity going on in Utah and Alaska right now, the two states -- relatively small, but it would be good to get two more states. I think this year we had the most states expanding in Indiana and Pennsylvania, from a size benefit, we saw that come through in the second quarter. Hopefully, it will continue.

Great, thanks. That's all from me, for now. Thank you.

Joshua Raskin with Barclays.

Also on the CapEx, and I want to make sure I got it right, Larry, do you guys have a target investment? It sounds like you've got this one- to three-year plan on your capital expenditures. But is there a way just like a rule of thumb in terms of dollars of CapEx and what sort of incremental EBITDA returns you look for on those?

Yes. If you look at it, we try to spend around 5% of revenue. And I think we are spending a little less than that; we are 4.8% right now. And I think we spent a less last year. It goes up a little bit more when you do a replacement hospital, but that's there. About 1.5% of revenue is probably routine. In the other we would expect to get a 4 to 5 multiple off of that in the first couple of years if we run out.

If it's a large expansion in a hospital or large piece of equipment, we will run both existing hospital and the benefit of the new item and do a review there, and then we monitor that for probably about 18 months after the project opens to see if we've got the revenue and EBITDA benefit there. I think right now, if I remember correctly, we had targeted somewhere in neighborhood of $60 to $80 million benefit in the 2015 year off the capital spent in 2014 or spent in 2015, and we got some of that in a fit coming in the second half of the year.

If it's a substantial project, saying over $50 million, it will probably get reviewed at a higher level, at the Board. But most of them fall under that amount. And then we do review annually with the Board the projects of any size, and we monitor every quarter projects by our Treasury Department to see if we getting results. And if not we will try to get some plans in place to improve that. And we've done a much better job of getting more of our EBITDA, in the range of 4, multiple off of the debt we're spending.

So is the math right on $100 million of CapEx is somewhere in the ballpark of $15 million-ish of EBITDA? I don't know if that's year two or three.

That would be about right. But I'm not free -- and of course, some of these projects will essentially be done in the next year. But yes, there will be -- there could be some -- some of that would be out of routine and some would be out of a project item. And hopefully, we've picked the ones where we probably got a little bit lower result than a better result.

Okay, perfect. Thanks.

Brian Wright with Sterne Agee CRT.

A couple of -- so just wanted to understand the thought process on the timing of why Quorum, that spin out kind of now, and then just one we look at the hospitals within the Quorum, maybe I'm wrong but it only looks like a couple of them are HMA. So just thought process on the hospitals in there versus not?

Timing-wise, obviously, these are the kinds of things that take a long time to work on. And a lot of security around not letting this leak. So we have been working on this for a good while. A couple of good things are that the Affordable Care Act in terms of the Supreme Court -- that was a good sign that we should go forward. And then secondly, our timing really is more around trying to get this done at the end of the year, the end of the first quarter, just from an operational standpoint.

So there are four HMA hospitals in this group. I would remind you that this is a very good, strong company. It will be; it's $2.1 billion in revenue, $255 million in EBITDA. It's spread out in 16 states. Nine of those states have expanded Medicaid. This is a high-quality group of hospitals. 74% of them or 28 of them are top performers in the Joint Commission. So the metrics here are very good. 84% are soul providers. And if you compare these facilities and this spin out to the prior spin outs, the TRI and LifePoint, I think you will find the margin is about the same but the revenue is substantially greater and the EBITDA is substantially greater. So we think this should be a very successful company going forward with a lot of opportunities, particularly with focus on those markets.

Great, thank you.

Matt Borsch with Goldman Sachs.

Just following up on that same theme relative to Quorum, can you just address what are the different capabilities, strategies, or skill sets that you think Quorum needs versus the existing company that causes you to differentiate it?

Yes. I think what -- our focus over the last year to 18 months have been on larger networks. And then, because of the Affordable Care Act and exchanges, we feel like that we have got to be a much broader system now and look at larger markets to get market share and make sure that we do all the right things.

What it requires in smaller markets is a lot of attention to individual items and individual physician recruiting, more hands-on work in terms of the market, a lot to develop the market in terms of extending the market. So we just think that by having more resources in place to do that, and there's a lot of development in terms of technology that will work well in smaller markets. But we may not have an interest in that, in larger markets. We don't want to divert our attention to -- and we haven't bought any smaller markets. These hospitals average about $50 million in revenue. We haven't been buying those unless they are synergistic to our network.

So a couple things -- one is that the skill set is a little different. The other thing is that this is a huge opportunity. There are a lot of smaller hospitals out there that are for sale. If we look at our Quorum management business, last year they lost five or six hospitals, contracts on hospitals they were managing. Those were acquired by not for profits. Maybe one was acquired by a for-profit. We think there's a huge opportunity here by having these two together in terms of actual acquisitions by working with our Quorum management to identify really strong, good targets for the future.

So it's a business that requires a lot of attention and a lot of focus on the particular markets. And the second part of that is opportunity for acquisition in terms of growth. So we think it will be a very strong company.

Makes sense. Thank you.

And I might just add one thing. There's also some very good, challenging services in the area of payroll processing and collections, the eligibility screening and IT that we will be providing to Quorum Health Corporation which will allow them to focus on operations and improving the revenue and volume and expense management.

Got it. The scale-sensitive activities that you will maintain?

Yes.

Thank you.

Chris Rigg with FIG.

Larry, I know we have talked in the not too recent past about an intermediate debt leverage target of 4.5 times. Does this spin impact that all? And I know we had also talked about potentially some divestitures. Should we still think about seeing you guys in selling some hospitals in the residual community portfolio? Thanks.

Well, it's unquestioned, there's always a response to be able to look at your portfolio, and there may be some that don't fit and there's another local buyer that would find a better value for that. So that's just our responsibility to think about and do. And when that comes up we will always do that. There's no books floating around of hospitals but there are some that we would possibly to that on.

You know, we will have to wait to see what the final debt there is. We are very focused on deleveraging in the mid-4's. We are focused on trying to continue to improve the operations and the margins and the EBITDA growth, as you will notice this year but we are not going to buy any hospitals, which will help our leverage there for the end of this year and also some into next year. So I think we are very focused on it. And we will see exactly how much debt we end up allocating to the Quorum Health and then revisit the mid-4's target.

I would just say that, post this Quorum transaction, I think the Quorum facilities and that company will be a strong company. And I think we are very well-positioned with the facilities that we own to move forward.

Our margin will improve and then, of course, we will have some of our own focused activities that we can spend on and working on those 160 hospitals. So, hopefully we will do a better job with that. And we also expect some Medicaid expansion activity next year.

Great, thanks a lot.

Ana Gupte with Leerink.

So the first one was just, again, on the parent consolidation that's ongoing. As you have considered your own core entity and now the spinoffs of Quorum, how do you see these two entities positioned against to change it (technical difficulty) on contracting?

I'll start off and Wayne will have a comment, I'm sure, also. Clearly, the sole provider markets are helpful. And they are the only hospital in town, and if you -- just being there, you probably end up with some emergency room business. And so I do think that, from that perspective, one of the things that is left in the 160 hospitals is a large number of those hospitals, [remember], in the network, they are important to the markets they operate in. You are going to have several thousand, a couple of thousand physicians there, employed. You're going to have a lot of physician office practices and surgery centers and urgent care centers that are important to that.

I think we've done a pretty good job of working through prior our mergers. And we will see how these mergers, once done, how they fall out. But I think we will do well in one of the focus areas, having a good healthcare regional network inside of Community Health after the spinoff of Quorum Health and being a sole provider in 84% of the markets should help on the managed care side. I don't think our managed care rates are what you would call the exorbitant, and I think that also helps.

We obviously have been a consolidator through the last number of years, and this is an opportunity for us to rationalize in one respect. And we will continue to improve in terms of our market share by having attention to these larger markets. But this is also an opportunity for us to be able to expand and grow by having two companies, and it's an opportunity for our shareholders to do well. We think there is clearly a space for smaller hospitals in the hospital industry. There's a lot of acquisition opportunity here as this company starts out of a lower base, so it has an opportunity to grow faster. So we think this is the right idea for both these organizations going forward.

And just as a follow-up on that, in that 4% to 6% contracting rates for commercial, are you seeing a trend more lower, toward the lower end of the range, or is it beginning to again trend up? There has been some buzz in the marketplace that there is more pressure from hospitals on managed care. And one of your peers today talked about commercial pricing as a driver of the better revenue per admission that they saw.

We are in the 4% to 6% range. I think you'll see, as our slideshow, that our managed care percent of business is up over a year ago, both on a quarter basis and it's also up real nicely on a year-to-date basis. So we are improving our managed care revenue. Thank you.

Miles Highsmith with RBC.

You mentioned the credit agreement carve out and the ability to do this transaction via that. I just wanted to confirm as a relates to the bonds that they would not the issues there. I assume it would be a restrictive pay or asset sale carve out that would allow you to do this and just want to confirm that you would not have to go to bondholders in connection with this. Thanks.

That's correct.

I will now turn the call over to Mr. Smith for closing remarks.

Thank you again for spending time with us this morning. Our standardized and centralized operating platform will help in moving this Company forward as one. We are excited about the opportunities for this year and beyond. We are all especially excited about the future of Quorum Health Corporation and 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. Once again, if you have any questions you can always reach us at area code 615-465-7000. Thank you very much.

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