Community Health Systems Inc (CYH) 2015 Q3 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 third-quarter 2015 conference call. (Operator Instructions)

I will now turn the call over to Mr. Michael Culotta, Vice President of Investor Relations. You may begin your conference.

Thank you, Mike. Good morning and welcome to Community Health Systems' third-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 reflects the HMA's performance from January 1 for both 2014 and 2015 as well as for CHS. Further, our same-store for this quarter also includes the two acquisitions that were completed on April 1, 2014, Sharon Regional in Pennsylvania and Monroe Regional in Florida.

All calculations we will be discussing exclude discontinued operations; loss from early extinguishment of debt; impairment of long-lived assets; net income attributable to non-controlling interest; acquisition and integration expenses from the acquisition of HMA; expenses incurred related to the Company's planned spinoff of Quorum Health Corporation; expenses related to the HMA legal settlements and related costs; and expense from fair value adjustments related to HMA legal proceedings accounted for at fair value underlying the CVR agreement and related expenses.

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 third-quarter conference call. Larry Cash, President of our Financial Services and Chief Financial Officer, is on the call today, as well as David Miller, President and Chief Operating Officer.

We would like to make it very clear that we are disappointed in our results for this quarter. We are immediately taking action and steps to address this decline.

First, with the planned spin out of Quorum Health we have made internal decisions on the realignment of our divisions and personnel. This includes a series of forthcoming announcements about new leadership for some of our operating divisions.

Second, we're going to continue to review our portfolio rationalization. We have already sold six hospitals in 2015 and have two more under contractual agreements to sell.

Third, we have identified immediate opportunities to control costs through better expense management for the remainder of the year. We are monitoring progress and feel confident we can achieve our projected reductions.

Fourth, we are continuing to move forward with the spin out of Quorum Health Corporation so that we can achieve the upside potential of a refined portfolio and so that Quorum can pursue growth strategies that will be meaningful to the new company that would not be advantageous to CHS. As we have stated before, we believe this transaction should provide shareholder value.

Fifth, we believe our network strategy is sound, but it has taken longer than we expected for some of the business development activities to materialize, especially in some of the previous HMA markets. We are working through action plans to address the underlying causes and deploying additional resources so that we can accelerate toward our performance objectives. We continue to believe there's a good opportunity to grow clinical capabilities, outpatient infrastructure, and market share in these networks. This is a top priority for us moving forward.

And, six, we presently have $150 million of existing authorization from our Board of Directors on a share repurchase program and we will increase that authorization as necessary. We can increase that authorization by over $300 million under our bank credit facility. We will start repurchasing shares as soon as we can do so legally. I do believe, as our Board does, with the lower share price, that this is the most appropriate use of cash and cash availability.

I believe in our strategy of portfolio alignment and developing and growing our network systems. I also believe growing our physician base is also the correct strategy, as I further believe in our acquisition strategy of seeking opportunities in midsize markets. We will also continue to develop and acquire outpatient assets in our existing markets. Year-to-date we've acquired one surgery center and four diagnostic centers, six physicians' practices, and seven other service-related entities.

As it relates to the quarter, we will continue to work on the integration of the former HMA facilities, but we took some steps backwards in certain markets such as Florida and Tennessee. These issues are now being addressed. We continue to see improvements in our legacy facilities and actually experienced good growth, but there still remains challenges in the former HMA facilities.

Let me make it clear, we expect to see improvements in those facilities and markets. These are good assets and good markets and will be successful. Larry will provide a little more color in his presentation.

So let me give you a quick overview of the quarter. Our adjusted EBITDA was $661 million. Our adjusted EBITDA margin was 13.6%. Adjusted earnings per share was $0.56.

We are still in the process with our Form 10 registration statement and we will be filing an amendment with updated information for the third quarter. We are still on target to be completed sometime in the first quarter of 2016. Remember this is a tax-free spinout of 38 hospitals, representing 3,587 beds in 16 states.

Quorum Health Resources, a leading hospital management and consulting service company, is included in the new company. These facilities will be predominantly non-urban. In addition to the shares of QHC, there will be -- distributed to our shareholders there will be a cash distribution to CHS. Then a portion will be used to pay down senior secured debt.

For the nine months we expect the net revenues will be approximately $1.6 billion and adjusted EBITDA will be $186 million for QHC. We're in the process of updating the Form 10 filing and you should refer to it once we have filed the amendment.

As always, we are focused on physician recruiting. Physician recruiting is very important to the expansion of our services that are provided at our facilities. There were 3,200 physicians that were recruited to our active medical staff across all of our facilities for the first nine months of the year. This compares to 2,800 recruited in the first nine months of 2014, or a 14% increase.

So you can see we are still working very hard to improve the number of physicians to the active medical staff. Remember that we have 3,340 employed physicians and about 22,400 active physicians.

We achieved $30 million in incremental synergies this quarter and $130 million in incremental synergies for the year. We estimate that we will still achieve our revised cumulative guidance for at least $275 million of incremental synergies for the year.

A quick update on pending legal matters. Regarding our pending legal matters, we continue to proceed with our discussions in cooperation with the civil division and 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 CVRs on a quarterly basis. I remind you that these expenses and accruals have different financial statement treatment under the CVR agreement. Our current estimate, including probable legal fees, continues to reflect there will be no payment to CVR holders.

As it relates to 2015 guidance, we are adjusting certain components; net operating revenues less provision for doubtful accounts is anticipated to be $19.6 billion to $19.8 billion. Adjusted EBITDA is now anticipated to be $2.9 billion to $3.025 billion. Income from continuing operations per share is anticipated to be $3.40 to $3.75 based on weighted average diluted shares outstanding of 115.5 million to 116.5 million.

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

Thank you, Wayne. We believe our same-store information we are providing is more meaningful and, thus, we predominately discuss same-store results for the quarter, excluding items noted earlier.

The reasons for our lower-than-expected consolidated earnings can be summarized in several key points. First, we did not meet our internal budgets and projections for the year. We were below our net revenue expectations by about 3%.

We experienced declines in adjusted EBITDA in our Tennessee and Florida markets, primarily the HMA facilities. In addition, in our facilities we experienced lower revenues and volumes of approximately $15 million from the first week of September due to a late Labor Day, even considering the late August and mid-September results. Second, we experienced a shift in payor mix. Third, we experienced higher salaries and benefits due to a large number of employed physicians that commenced in the third quarter versus the prior years. And, fourth, we continue to see some increases in drug costs greater than earlier in the year.

Our same-store net revenues increased 1.2% with net revenues per adjusted admission increasing 1%. Our volumes, our adjusted admissions increased 0.1%. ED visits were up 2% and surgeries were up 1.7%. Actually our CHS legacy hospitals continued to show improvements in adjusted additions of 1%, surgeries 2.3%, and net operating of 2.5%. This compares to the former HMA facilities: admissions declined 1.7%, surgeries up 0.1%, and net operating revenues declined 2%.

We should note on volumes that our Medicaid-adjusted admissions increased 1.8% and self-pay adjusted admissions declined 1.4%. Our total patient revenue basis before bad debt expense Medicaid increased 3.3%, while self-pay declined 2.2%. Our consolidated payor mix continues to improve and we saw a 30 basis point improvement in managed care, a 40 basis point improvement in Medicaid, and a reduction in self-pay of 30 basis points.

However, this payor shift in the third quarter was not as significant as the shifts we saw in the first six months. In the first two quarters managed care improved 120 basis points, Medicaid 60 basis points, and self-pay declined 120 basis points. Compared to the first six months our third-quarter revenues declined as follows: change in payor mix $50 million, change in volumes $45 million, and change in case mix $10 million.

Let me also describe for a moment the trends in revenue payor mix between our legacy facilities and the former HMA facilities. For the third quarter at the former HMA facilities Medicare declined 100 basis points, managed care declined 10 basis points, while legacy Medicare was flat and managed care increased 40 basis points.

The declines in managed care, Medicare, and Medicaid revenues and increase in self-pay revenue highlights the payor shift we experienced at the former HMA facilities. The trends were just the opposite at the legacy facilities.

Our overall inpatient case mix increased 1.9%, and Medicaid case mix increased 2.8%, and Medicare case mix increased 2.7%. We continue to see and will continue to see a shift to outpatient setting. Our outpatient revenues represent 58.3% of total patient revenue compared to 56.7% in third quarter 2014, 160 basis point shift.

Our salaries and benefits as a percentage of net operating revenue increased 40 basis points, as a percentage of revenue to 46.2. Our increase as a percentage of revenue is due to the higher costs associated with employed physicians and our lower shift in payor mix.

Our productivity declined 100 basis points in the third quarter compared to the first six months. Our number of employed physicians increased the most in the Florida markets. Salaries and benefits in physician practice increased about $25 million; in the prior year it only increased about half that amount.

Supply expense as a percentage of net operating revenue increased 50 basis points to 15.8%. The increase was predominantly caused by increasing drug costs. This has been very much publicized in the press; this relates to significant increases in drug pricing that we have not been able to shift to payors. This increase was about $23 million.

Our other operating expense as a percentage of net operating revenue increased 40 basis points to 23.2%. Of particular note is our contract labor increased $10 million and ICD-10 represented $5 million of that $10 million increase.

As it relates to HITECH incentives, on a consolidated basis we recognized $54 million in this quarter compared to $88 million in last year's third quarter. On a year-to-date basis, we have recognized $135 million of HITECH incentives compared to $212 million last year for the same period.

Our cash flows provided by operations were $111 million in the quarter and $615 million for nine months. Our adjusted cash flows were $721 million. The adjusted cash flows provided by operations has been adjusted for government settlements and related expenses of $130 million in acquisition integration expense, and the payment of an [old] HMA government liability of $29 million and $9 million related to the QHC spin out. We did tax effect these amounts.

This compares to adjusted cash flow of operations of $833 million for September year-to-date last year. We have a slide in our adjusted cash flow calculations to give you the detail.

There are a couple items to note regarding some very large differences between the two nine-month periods. This year debt outstanding for the [full] period and impact on cash flow relates specifically to interest payments of approximately $125 million. The interest payment expense relates to the HMA acquisition late in January of last year and was built into our guidance. Remember, our payments on interest are higher in each of the first and third quarters by approximately $140 million.

We did receive a tax refund of $80 million in last year's first quarter. We also received refunds in the third quarter of about $16 million and in the fourth quarter of about $92 million. We have not received, nor will we receive -- expect to receive any significant tax refunds this year.

We are adjusting our year-end cash flow guidance generated by operations. We estimate our cash flow from operations will be $1.5 billion to $1.65 billion and we expect reductions in our accounts receivable days in the fourth quarter.

Our CapEx was $696 million, or 4.8% of revenue. Approximately $100 million was spent this year on the Birmingham, Alabama, replacement facility, which opened in early October.

Another item we need to discuss relates to our various credit agreement covenants since we have a number of questions on this subject. As Wayne mentioned, we have approximately $450 million available for share repurchases. Our interest coverage ratio cannot fall below 2; we currently are at 3.14 with $1 billion of cushion on EBITDA.

Now let's turn to the Affordable Care Act. The following information is hospital data only for comparative third quarters.

Self-pay admissions as a percentage of total admissions remained flat at 5.8%. Self-pay adjusted admissions decreased 0.7% and expansion states decline was 13% with the biggest declines in Indiana and Pennsylvania of 34%.

Medicaid-adjusted admissions as a percentage of total adjusted admissions increased 50 basis points to 19.9%. Medicaid-adjusted admissions increased 2.7% with the majority of the increase coming from the facilities in expansion states. The expansion states' increase was 8.5%. Again, the largest increase was in Indiana and Pennsylvania at 22%.

As it relates to monitoring the exchanges, where we have sufficient information we noted an increase in patient visits of approximately 33% this quarter compared to the third quarter a year ago. Sequentially, the patient visits were down approximately 3% from our ? in the second quarter with our biggest decrease in Florida.

Consolidated charity, plus pay discounts and bad debts for the three-months period has increased from 25.1% to 25.3%, or 20 basis point increase, and for the year-to-date percentages actually declined 60 basis points to 24.5%.

Based on various data points on Medicaid and exchange business, we believe we have recognized the cumulative benefit for the nine months ended September 30 of 2015, of approximately $215 million for the Affordable Care Act, which is in line with our overall guidance. We should continue to see higher benefits as the year progresses.

This compares to approximately $165 million for all of 2014. For 2015 we continue to estimate we will received incremental benefits with our guidance range now of $115 million to $150 million incremental for 2015.

Now as it relates to our adjusted EBITDA guidance, and especially in bridging the third quarter to the fourth quarter from $661 million and we've used $775 million as a bridge point. Volume and seasonality improvements should be approximately $50 million. Pricing for both government reimbursement managed care, payor mix, and then government reimbursement should be approximately $45 million. Expense reduction initiatives should account for approximately $44 million, which is about 1% of our expenses, and a reduction in high-tech reimbursement of approximately $25 million.

Just should be noted, for the nine months ended August, EBITDA margins were 14.6%. This compares to a low margin that we had about 13% for our calendar 2013 on a combined basis for CHS and HMA. Wayne?

Thanks, Larry. We are absolutely committed to improving our operations and we are confident that we have the resources and the personnel to get this quarter behind us. This is not a permanent problem; it's a temporary setback that can and will be fixed.

I strongly believe we have the appropriate strategy. As we execute on this strategy, we expect it will result in positive shareholder value.

We have many opportunities as we look to the future: continuation of the rollout of the Affordable Care Act, especially Medicaid expansion; the opportunities for growth in the former HMA assets; the opening of Grandview and it's opportunities for growth in the very vibrant area of Birmingham; our opportunities to delever our balance sheet; our continual operational and clinical initiatives, including the growth in recruiting more physicians; our focus on strategy going forward with an emphasis on large markets and further developing our networks.

We will continue to work on volume initiatives that should help achieve organic growth and grow market share. We will 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 and nurses and the support staff for all their tremendous support during this quarter.

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

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

Thanks. Hello, everybody. First off, maybe just ask about the comments around Florida and Tennessee and the legacy HMA facilities. Can you just give us what you are hearing from the field?

Has there been a change in those markets somehow? Is it people just took their eye off the ball? Have you had some issues with physicians? Can you give us a little more flavor of what's going on there?

It's a combination of a lot of things, A.J. This HMA has turned out to be a little more challenging, clearly, than Triad. Triad was a very well-run company with good facilities, good systems, all of the above. HMA had none of those kinds of things.

We have had to work our way through a lot of contractual relationship issues with physicians, make a lot of changes -- management changes, all the above. They have been more prominent in Florida and in the Tennessee markets than they have in the other markets. It's just been a combination of a lot of different things that's created this issue.

All these things are fixable. As you know, we have a lot of experience in terms of doing this. We pride ourselves on the fact that we bought a lot of facilities through the years that were troubled facilities that we were able to fix and improve.

We will get there and we are confident we will get there. We think that as we do this over the next -- look, by January 1 of the year we will have owned these facilities for two years, so we will get these problems solved.

Then real quick, maybe as a follow-up. If you think about the Affordable Care Act -- thanks, Larry, for the comments on where you are today versus two years ago. But can you give us some flavor for how much of the opportunity you think you've realized at this point and how much is still in front of you and how you might -- how that might roll through over the next few years?

Let's speak to Medicaid expansion. Clearly, we probably got $125 million, $150 million benefit in Medicaid expansion through the end of this year, and I think if you look out into the future there's another $200 million to $250 million of benefit in 2016 and beyond. I know that clearly there's articles out today about how challenging Texas is and trying to get it done, but over time it took a while to get the original Medicaid done and this is a benefit.

And a lot of these states that are not expanding continue to have a very high percentage of uninsured. It seems to be working well in other states that you're bringing down the uninsured. The government is paying its share of it and it's a good activity, and you've also got the issue about supplemental payments that the CMS looks at when they are try to think about expanding Medicaid.

So that's a really good benefit. We are probably one-third of the way through what the total benefit is. We're about 41% done on our Medicaid right now and it's still growing. We probably got another 60% or 59% of our states there and so I would think that's a good opportunity.

We don't own any hospitals in Montana, but another state just came out. We do own some in Alaska. Next year we would hope to maybe own in Alabama, Louisiana, and a couple other states; continue to work on it and hopefully Tennessee revisits it.

So I think this will be up to 30 states, if I'm correct, that have expanded Medicaid. We've said this all along and we continue to believe, sooner or later over an extended period of time all states will expand Medicaid.

If you look at the exchange business; instead of getting into absolute numbers, we had a good year last year. We were up about 16% in enrollment. We still got a fair number of people in our counties and our markets that have an opportunity to take advantage of it. We've got a lot of outreach efforts, a lot of certified application counselors, some new conductivity with the Enroll America to try to do a better job, and so I think we will have a good year there.

But I'll to speak to we still -- and also the penalty goes up which will make it advantageous. But Medicaid is clearly something over time that should happen.

Brian Tanquilut, Jefferies.

Good morning, guys. Larry, thank you for providing slide 19, where you bridge Q3 to Q4. If you don't mind just walking us through where your confidence comes from.

There are three key parts here: obviously volume growth, which we did not see in Q3, that is a $50 million contributor; payor mix obviously an issue in Q3 as well, it's a meaningful amount. So if you don't mind just giving us some color on how we can gain more confidence in these numbers.

Yes, let me workup. The HITECH, we're pretty comfortable we should be near the high end of the guidance; that is the $165 million -- or $160 million versus the $135 million so we should be there. That did drop down from last quarter of $55 million to $30 million and that would be the high end there.

Expense reductions. We clearly will not have as many employed physicians; back to the comment about Florida, that's where most of the employed physicians were. They weren't that productive. Our studies show they get more productive the first six months there and some of those will be in the fourth or fifth month now.

We also have some improvements in productivity. That is probably another $15 million to $20 million that we didn't accomplish last quarter that we will get done there. We've started some processes around the drug increases, and while we won't eliminate all of it, I think it's a good opportunity to do that.

The supplies, we've got some good supply chain initiatives going on which we looked at about a month ago and that will help out. Travel, other operating repairs, things of that nature.

And the pricing you got the Medicare increase that went in on October 1. We've got managed care increases that went in in August and September and October. August and September will be there the whole quarter and October will be there the whole quarter then a few increases throughout.

If you go back to look historically, we've had a pretty good increase from the third to the fourth quarter. We calculated that out and we used less this year in this bridge than we saw in the fourth quarter.

Volume and seasonality. Generally we do -- we think we had an effect on Labor Day. Maybe our markets are -- say we didn't. Again, we looked at the week before Labor Day, the week after Labor Day, and we are confident our revenue dropped so we shouldn't have that issue. Looking at how the holidays fall and calendar falls, we should have some benefit from that perspective.

And I think our initiatives here, while we have done a decent job on the legacy hospitals, we're continuing to work on the HMA hospitals. We think we can see an improvement in the volume and seasonality from the third quarter into the fourth quarter.

Larry, just to clarify on the buyback commentary from Wayne's comments earlier. You are saying that you are probably or most likely going to be in the market buying back stock with $150 million limit under the current authorization? Is that the right way of thinking about that?

Yes, that is. And, by the way, in terms of confidence here, I personally just bought 50,000 shares, so I believe we're on the right track. And, yes, we will be in the market.

Got it, all right. Thanks, guys.

Gary Lieberman, Wells Fargo.

Good morning, thanks for taking the question. Just in terms of the Quorum spin, there's been some -- a little bit of turmoil in the debt markets. Is there any impact or potential impact from changes in the debt market on the upcoming Quorum spin?

Well, we talked to our advisors about it; it's still a couple months off. It is going to be more challenging. I think the high-yield market is coming back a little bit. I think we will be okay. There may be some effect on interest rate, we'll have to wait and see.

They had an okay quarter and looked pretty good year-to-date. I think the team that goes out, Tom Miller and Mike Culotta, go out and talk about the Company there will be some excitement and I think we will find some debtholders to be interested in it. It's a pretty good size, but -- you are right; but I think that with the banks that we've got supporting us and the good bondholders we've had over the years we should be able to find appropriate financing and decent interest rates.

Then in terms of the guidance for HMA, you left it the same. Just in terms of what's going on at the HMA assets, is there any concern that you might not be able to achieve the $275 million or timing of doing that?

No, when you look at synergies and you think about it, we've done a good job. The volume and the revenue of HMA has not been where we expected it, but we have raised the synergies several times already. We are $30 million this quarter, $50 million last quarter.

We clearly don't count something after 12 months, (inaudible) in July. We still got some synergies that we are working through, primarily around contracts. I would think we're going to have some synergies next year in the first part of the year to be a carryover. We are doing a pretty good job on managed care. I think we will get it at least to $275 million and we're pretty close to that right now.

Gary, don't forget; if you go back a couple years when we first acquired HMA, the volumes for the third quarter were down about 8%. So we're moving in the right direction. We are not getting there as fast as we want to, but we are moving in the right direction.

I'll just add the margin for that quarter was like 8% or 9% and the revenue per unit was down 3% the revenue was down. So clearly it was a tough two years ago for them. We think we've done a good job on the synergies and we will continue to work to try to get the revenue and volume headed in the right direction.

Okay, great. Thank you.

Frank Morgan, RBC Capital.

Good morning. I think you had started touching on this on one of the earlier questions. But I'm curious with all the physician hiring that you've done, given what has happened at HMA, do you really -- are you changing your strategy there? It sounds like you might even be reducing some of that physician practices. But any changes there in terms of aggregate numbers of physicians you will be hiring and then any change or shift in the specialties that you will focus on?

No, Frank, the issue there has been that, if you go back, HMA did not recruit for about a year before we acquired them, so we've been catching up in terms of the recruiting. I've forgotten the number, something like 900 physicians for HMA facilities over the last couple years.

What happened is -- well, part of what happened was the fact that we had a huge recruiting group, which happens every year in the third quarter because all the residency programs end in July. So we brought on a lot of physicians and we just didn't get the productivity out of them and we had the expense associated with it. We replaced a number of physicians who were higher performers than the new physicians. That's a way to think about it in terms of volume.

Frank, it has to do with the fact that more are coming in the third quarter, which has historically been the case. There won't be as many coming in the fourth quarter, which will help the challenge and improvement expenses from where we were in the third quarter.

Okay. Then my follow-up question. You talked about evaluating a potential additional hospital divestitures beyond the two that you have pending. I'm just curious; do you have any kind of targeted level of proceeds that you would want to fetch on that or is that just an ongoing process? Thanks.

We've been doing this for a very long time and we talked about it publicly that we are continuing to look in our portfolio and rationalize it if we think there's a facility that doesn't work, that doesn't fit our strategy. So we will continue to do that the rest of this year and next year as we go forward.

We haven't set a target or any -- and we haven't picked any particular facility. We just look for facilities that we think don't quite fit our future. And so if it works, it works. If it doesn't --.

Okay, thanks.

Andrew Schenker, Morgan Stanley.

Thanks, good morning. I appreciate your commentary here on HMA and your ability to get the synergies, but maybe just remind us where are we actually on HMA margin year-to-date. And do you still think you can get them to company average eventually? Or as this has been playing out, you think some of these are just in lower margin markets over time?

It gets a little difficult with all the overhead changes, so if you just look at the Company margin -- that's what the Company comment was. If you go back and add HMA in 2013 to CHS, you had about a 13% or a low 13% margin. It was 15% there at the end of June. It dropped down as a result of the disappointing third quarter to 14.6%.

I think there's still margin opportunities because we've been operating with less revenue growth and less volume growth in HMA for a couple of quarters. It looked a little better in the fourth quarter and first quarter, those easy comps, so I think there's still a margin opportunity there. It's probably another 50 basis points improvement on the HMA margins again next year.

But we are up 160 basis points, which come from synergies and the Affordable Care Act and other stuff, and I think we will still end up with the HMA margins close to 15%. But it takes a lot of work to figure out how to allocate the overhead now because it's not -- the HMA overhead is gone.

That makes sense. Then you mentioned MCO rate increases earlier. Where are you on 2016 contracting and where are rates coming in for next year?

Then related to that, it sounds like there's still a discrepancy between HMA rates and community rates. I guess it sounds like you are hoping to close those, so any more color on that would be helpful as well. Thank you.

We are close to done, of course for 2015, probably 98%, 99%. We think we will be in the 4% to 6% range when the year is done. We hopefully will stay in that range for next year; we are 75% done now.

You are correct; the revenue per unit is lower. It was probably $1,000 lower. We've probably cut that in half over the last year and three quarters. We probably are continuing to make some progress on the HMA managed care renegotiations that's starting to come to an end because we've probably renegotiated most of them by now.

There will always be a little bit of difference because they got more Medicare, but we made some progress on it. It wasn't as good on a per-unit basis because of the mix this quarter that we talked about earlier. But I think, other than the Medicare, we hope to finish out the year what we expect to be for HMA net revenue per adjusted admission.

Okay, thank you.

Matthew Borsch, Goldman Sachs.

Sorry if this is beating a dead horse. I'm sure it is for you, but just back to HMA a little bit more. Can you bucket the shortfall relative to what you hope to achieve in terms of how much was from revenue resulting from payor contracting not meeting your objectives versus from cost management? And if you have other ways of dividing that bucket, fine.

Matthew, I want to assure you this horse is not dead.

Got it, got it.

It may not be American Pharaoh, but it's still running the race.

Right, right, right.

I would just start out as say, look, the revenue is down 2%. That's about $30 million, probably $30 million, $35 million. There's a good component of this and had it increased as well as the HMA did, it's another $30 million to $35 million. So if we can get the -- that's $50 million to $60 million of difference in the two entities, just taken how well the CYH did there on the revenue versus how that.

I think on expenses I would say that probably some of the expenses in the physicians are more on the HMA side. We don't keep totally separate books. We actually treat them all as CHS and the only time we do any discussions is when we get ready for these kind of calls because it's some interest to investors and there is some difference in the operating performance. It's not up to speed, but clearly a lot of the miss in the third quarter would be in the HMA facilities when your revenue is 450 basis points lower in one group of assets versus another.

All right, thank you.

Josh Raskin, Barclays.

Thanks, just had a question on Quorum. Just based on the year-to-date EBITDA it looks like you are sort of trending for, let's call it, something in the ballpark of $260 million. So just want to make sure we are sort of thinking about a flat EBITDA number year-over-year. And were there any unusual items either last year or this year, both, either positive or negative in the Quorum numbers?

Yes, one big one would be in the last year. So I think we had a California provider tax pickup that was more than a 12-month number. Other companies had a similar situation. I think we called out $26 million in all three hospitals or the hospitals operating today are in that number. Not quite all $26 million because one of them has been closed, so that would be your big difference that I would probably say that relates to it.

And there was a couple changes around Illinois that were some benefits in the fourth quarter of a few million bucks that sort of would not be there for a full year. But the main thing would be the big fourth-quarter benefit that you had for the California provider tax.

So I guess to sort of think about that then, then the Quorum EBITDA is running as much as 10% higher this year than last year? Is that possible?

Well, I think -- no, I don't think it's 10% -- well, it's a little bit better than it was last year. You don't take all of it out because you got it this year also, so what you basically had last year was $26 million for three hospitals. There's two today. Some of that related to 2013 so now you've got a year benefit compared to a year-and-a-half benefit a year ago.

Oh, oh, I see. So take out a couple -- all right. So maybe it's running mid single-digit growth or something like that.

Yes, yes.

Larry, as you think about the debt capacity -- and I understand you want to maintain that tax-free spinoff -- should we think about Quorum maintaining lower debt leverage than the overall CYH, that CYH is leverages? I know it's a small impact. Would it be a tiny bit higher after the spin?

We had sort of said it would be somewhere around 5 times. At that time, the 2014 EBITDA, including California was [$275 million] so that's sort of the thought process right now. And of course, we will continue to refine that as we file the next activity, but I would be somewhere in the $1.375 billion amount of debt.

Okay, okay. All right, so it's probably slightly leveraging.

And then based on the run rate you got today that might be a little more than 5, and we're a little bit more than 5. But you're correct in that it's about 8% or 9% of the Company, so it's not going to change the overall.

The margin does get better, the profile gets better, the growth rate gets better from -- unemployment gets a little bit better for the remaining CHS company, but from a debt perspective it won't change that much.

Okay, thanks.

Chris Rigg, Susquehanna Financial.

Good morning. And maybe you mentioned this, but if I did my math correctly, it looks like you adjusted the operating cash flow target a little more than the EBITDA outlook. Is there -- what is causing the difference?

We had a pretty big uptick in receivables and maybe a little bit more than others in the way we handled ICD-10 and got ready for it. Keep in mind; we've got MEDITECH systems, Siemens systems, Cerner systems, HMS, [MedHope] systems, and the HMA system, so it was a pretty big undertaking. Our staff did a good job on it, but our receivables went up.

I think we will bring it back down, but I think we will probably still be ahead of a year ago. Last year in the fourth quarter we had a really big pickup from electronic health records. We'll get some this year, not as much.

There's one of our states that owes us some money on Medicaid and they have informed us they are probably not going to pay us in the fourth quarter. It is a (inaudible) receivable and that's probably going to slow it down. We will get it in the first part of January.

We think we can do a good job of improving the collections and some other activity. I think there was some movement around some of the accrued compensation that affects the fourth quarter. And last year we had a tax refund, which we won't have this year.

Then on the CapEx side it's a pretty wide range for the fourth quarter, $150 million. What would cause you to be sort of at the low end versus the upper end? And can you give us a sense for how we should think about the right level, the right run rate level going forward?

We generally target spending about 5% of revenue. This year we've been able to get that done with the new facility. There will be a little spending next year on a new facility probably in Pennsylvania. But we generally target around 5% of revenue; have been running a little bit less than that.

We generally do have a pretty big uplift in the fourth quarter the way we manage it and sort of think about the year we spend there. But I think would be somewhere in the range, probably in the midpoint of the range, is probably a good thought. But I would assume next year we will be somewhere close to 5%, maybe 5% or slightly less of revenue.

And then I just would also comment that we did have a pretty good quarter, a pretty good year to date. Our cash flow from other investments dropped about $250 million from a year ago.

Thanks a lot.

Ralph Giacobbe, Citi.

Good morning. The payor mix actually improved on a year-over-year basis and then when we look at same-facility staff we are also looking at that year over year. Can you help on the pricing being up 1.1? If the payor mix improved -- I think you mentioned acuity mix was up as well -- it would suggest something on either the peer pricing side or maybe it's mix, meaning the dollar per volume and maybe HMA is higher and you're getting more pressure because the volume is lower.

Can you just maybe help reconcile the year-over-year benefit to payor mix versus the pricing stat?

Keep in mind payor mix is inpatient and 58% of our revenue is outpatient, so that's probably something. Our ER volume was less than it had been running. It's like 2%, which is substantially less than we ran the first six months, and ER revenue was down 4% or 5%, so it slowed.

We also had a slowing versus where we have been running, our radiology and diagnostic and lab, all a percent or so. So we simply didn't have much outpatient revenue for adjusted admission growth in the third quarter, although we did have some case mix increase.

The payor mix got better, but it wasn't quite as good as has been running for a year, both the second -- both the first six months versus the third quarter and the first six months versus the six months a year ago. And the HMA facilities did have a negative revenue per adjusted admission, although it had been positive, and that had a lot to do with the payor mix.

Okay. And just to clarify, you said the payor mix stat that we are looking at is just inpatient revenue, not total revenue?

No, that's total revenue, but when you talk about case mix being up that's only inpatient naturally. Of course, the outpatient is 58% of our revenues, so the movement of outpatient will have a bigger impact on the Company when you have so much outpatient revenue.

Okay, that makes sense. Then did you say something about managed care pricing benefit sequentially? Is there like a disproportionate amount of contracting that's going on as we head into the fourth quarter relative to what we've seen thus far?

Most of it is in the first part of the year, but there are some increases around October and there's some every month. And so we simply took what we saw in August and we will get a whole month -- whole quarter of that in the fourth quarter with September. We also took October and some estimate of November.

If you are doing a good job of getting your pricing up and you are controlling your expenses, it should all go to the EBITDA line.

All right, thank you very much.

Gary Taylor, JPMorgan.

Good morning, just a couple questions. Usually I guess I wouldn't ask this but, Wayne, you had mentioned it. When you did mention buying 50,000 shares I know we saw an option exercise about a week or so ago.

That is what I'm talking about, yes.

Okay.

Yes, I exercised 50,000 options and kept all the shares and paid the taxes and kept it all.

Okay, just wanted to make sure there wasn't another filing coming out.

By the way, a number of people on this management team did the same thing.

Okay. Then, Larry, sequentially on Medicare, I know when we broadly look at final IPPS for October start, for rural hospitals that was up 20 bps but obviously your individual calc could be different than that. Are you anticipating a materially different uptick in terms of your IPPS rate?

I think we will be about double that. We have a much more -- better mix when you look at the rule than -- maybe even as much as 50 basis points.

Okay and last question, if I could. So much of the story historically has been acquisition driven and I know, with the QHR spin, the focus is moving up-market somewhat. I just wondered could you maybe talk about when you do a middle-market acquisition, or however you might describe it, versus that historic sole community provider acquisition? What differences are you seeing when you do those? Are there different sources of success in terms of competing for docs versus just outright recruiting for docs? Just interested in your thoughts on how you execute in that type of market.

Gary, it's virtually the same when it's all said and done. The difference now is that we have 11 networks and we have opportunities within those networks. And generally speaking, we are looking for acquisitions that are helpful, that are additive to those networks. Everything that you can think of, including hospitals -- hospitals is one thing, but rehab, anything else that we can add to the market to help enhance the market share.

Generally speaking, they are a little bit larger. Their problems are virtually the same as the smaller hospitals. We haven't really been buying any smaller hospitals for quite a while. That's one of the reasons we think the QHC spin out is good because there's clearly an opportunity, a market for a smaller hospital. LifePoint has demonstrated that. Matter of fact, LifePoint bought a facility or two from QHR in the past year or so.

That opportunity exists there and we think that will bring great value to that company, but from our perspective, we think the future for us is buying larger facilities. But as you can see, we have not bought and we are being very selective in terms of what we buy right now. We also are committed to the future in terms of making sure that we enhance our cash flow and pay down our debt and all the things that we need to do to enhance our shareholder value.

Okay. Thanks, guys.

We have time for one more question.

Kevin Fischbeck, Bank of America.

Good morning. This is Joanna Gajuk filling in for Kevin today. Thanks for taking the last question.

Just coming back to the discussion around the bridge in guidance, the question I guess here is that this bridge is to the lower end of the guidance. So the question I have is what needs to happen or I guess what do you need to do to get to the high end of your guidance range for the year?

I believe the low end was $756 million and this is to $775 million, just to clarify the discussion, and that's where we felt really comfortable at the $775 million. If the volume and seasonality does better, that would be a benefit.

Clearly, last year we had a pretty strong flu season. We were down 80 basis points in adjusted admissions this last quarter on flu, so if that comes back a little bit that would be helpful.

I think the pricing in the mix; we did not use the entire benefit of the third and fourth quarter in the bridge so it could be better than that. We've historically -- so everyone's aware -- there's a big uptick in the managed care utilization. If that continues to be or even a little bit more, then that would be more helpful.

The expense reduction, it could be a 2% instead of 1%, which would be a good opportunity. And activity, I don't think that HITECH could be any worse than $25 million. It could be probably there, so I think all three categories there would drive the higher end of the guidance. But we felt comfortable with the $775 million comparison and that's just how we decided to present it.

But we have a tremendous amount of resources focused on the fourth quarter making sure that we do the things that we need to do to get to this bridge into this range, but I can tell you the future is in 2016. We think there is great opportunity here going forward based on the assets that we acquired from HMA and some other things that are happening.

Great, thank you.

Thank you again for spending time with us this morning. We are very focused on our strategies we have outlined earlier and that we -- you will see us improve, as we have done historically.

We want to specifically thank our management team and staff -- hospital executive officers, hospital chief financial officers, chief nursing officers, and division operators -- for their continued focus on operating performance. Once again, if you have questions or you -- you can always reach us at 615-465-7000. Thank you.

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