Community Health Systems Inc (CYH) 2015 Q4 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 2015 fourth-quarter and year-end conference call.

(Operator Instructions)

Thank you. 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 fourth-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.

Yesterday afternoon we issued 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. We will be referring to those slides during this earnings call.

As you know, our results consolidate the results of Community Health Systems and the former HMA facilities from and after January 27, 2014, the date of acquisition. Same-store volume and financial results reflect the HMA's performance from January 1 for both 2014 and 2015 as well as for CHS.

Further, our same-store for this fourth quarter also includes the following acquisitions: Natchez Regional Medical Center that was completed on October 1, 2014 in Natchez Mississippi and Upstate Carolina Medical Center that was completed on November 1, 2014 in Gaffney South Carolina. This acquisition is in the same-store for only two months.

All calculations we will be discussing exclude discontinued operations, loss from early extinguishment of debt, impairment of long-lived assets, acquisition and integration expenses from the acquisition of HMA, expenses incurred related to the Company's planned spinout of Quorum Health Corporation, expenses related to the HMA legal settlements and related costs, expense from fair value adjustments related to HMA's legal proceedings accounted for at fair value underlying the CVR agreement and related legal expenses and the $169 million increase in the provision for bad debts reflecting a change in estimate in our allowance calculation.

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 the fourth-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.

First, I want to state the obvious, we're disappointed in the quarter's results and in where we ended the year. Clearly we expected to deliver a better performance. Our entire management team is dedicated to achieving sustainable improvements and to demonstrating progress as we move forward in 2016.

We did experience some sequential improvements in the quarter that we'll outline during the call. We know we have opportunities to improve further and we are fully focused on achieving better operational and financial results.

Let me start with a few comments about volume and our other key metrics and Larry will provide more details for you in a few minutes. Our volumes including emergency room visits were lower than expected in the quarter as compared to a year ago mainly attributable to the lack of flu and respiratory illness which we historically see during this period.

On a same-store basis if you factor out the flu-related volume decline we would have had reported slightly positive growth in adjusted admissions. Slower than anticipated growth in some former HMA markets also affected volume during the second half of the year, especially in Florida. We continue to believe we have growth opportunities in many of these markets and we're working aggressively to accelerate a positive turnaround.

We did experience growth in surgery in the fourth quarter, predominantly on the outpatient side. We saw higher net revenues in the quarter and continued to see a positive impact from our expense management practices. We have a disciplined approach to expense management, a daily endeavor at every level in the organization.

Touching on some of our strategic initiatives as you know, we continue to pursue the planned spinout of Quorum Health Corporation which will ultimately create two companies with distinct growth opportunities and a potential to deliver enhanced shareholder value. We will be filing an amendment to our Form 10 registration statement with updated information for 2015 soon and we are on target at this time to be completed sometime in the first quarter of 2016.

The decision to delay the spin as we had previously stated is the sudden disruption in the debt markets. This is a market-driven decision. We understand that the debt markets have not been like this since 2008.

We expect to complete the spin once market conditions are favorable. The transaction is designed to be a tax-free spinout of 38 hospitals representing 3,592 beds in 16 states. Quorum Health Resources, a leading hospital management consulting services company, will also be included in the new company.

We continue to reshape our portfolio in other ways by adding more outpatient locations and also divesting of operations that are not complementary to our long-term plans. We have sold or terminated leases in 10 hospitals since 2014 including one hospital divested in January and one more under contractual agreement to sell later this year.

Over two years we have gained approximately $250 million in cash proceeds from the disposition of these hospitals. We believe our strategy to build regional networks is a keystone to our future success and we have prioritized these key markets by deploying resources to grow clinical capabilities, outpatient infrastructure and market share.

This is a top priority for us. And as we refine our portfolio we are able to commit more of our resources to this important initiative.

We continue to develop and acquire outpatient assets in our existing markets. During 2015 we acquired three surgery centers, six diagnostic centers, seven physician practices and nine other health services related to any of these. These represent about $80 million in annualized revenues.

We opened our newest facility at Grandview Medical Center in Birmingham on October 10 and successfully transferred patients from Trinity Medical Center that day. We are very pleased with the early results of Birmingham.

Just a few points on Grandview's fourth-quarter financial results when compared to a year ago. Net revenues increased 15.5%. Admissions were up 8.6% while self-pay admissions were down 7.5%.

Adjusted admissions were up 6.1%. Medicare case mix was up 6.8%.

I want to take just a second to discuss debt. Once excess cash is generated later in the year or when [we sell the facility] we intend to pay down debt in order to decrease our leverage. We know it can bring value to both our shareholders and our debtholders by doing this.

Let's give a quick overview of the quarter. The following information and calculations have been excluded -- have excluded the $169 million increase in provision for bad debt which reflects a change in the estimate of our allowance calculations.

Our adjusted EBITDA excluding bad debt adjustment was $696 million, a sequential 5.3% growth. Our adjusted EBITDA margins including bad debt adjustments were 14% or a sequential 14 basis point improvement. Our adjusted earnings per share excluding the bad debt adjustment was $0.69 or a sequential increase of 23%.

As it relates to quality, we are very proud that 118 of our facilities out of 193 eligible facilities or 61% have been designated joint commission top performers on key quality measures. Once the Quorum spinout occurs they will have 76% of their eligible hospitals designated joint commission top performers on key quality measures. As you know only 31.5% of all hospitals get this designation.

As always we're very focused on physician recruiting. Physician recruiting is important to the expansion of services that are provided at our facilities. There were over 4,100 physicians that were recruited to our active medical staffs across our facilities this year.

This compares to 3,700 physicians recruited in 2014 or a 10% increase. But also remember it takes 18 to 24 months for physician practice to get to full utilization.

We have over 3,380 employed physicians out of our 22,000 active physicians. Our turnover rate on all our physician medical staff has been about 10%.

On the HMA acquisition synergies we achieved $25 million in incremental synergies this quarter and $155 million in incremental synergies this year. We have achieved $280 million of incremental synergies, primarily expense improvements culminating over the last two years.

As it relates to our pending HMA legal matters there has been no material change since our last earning release call. We continue to proceed with discussions and cooperation with the civil and the criminal division of the Department of Justice in an effort to resolve the open HMA matters.

We continue to revalue 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 than under the CVR agreement. Our current estimate including probable legal fees continue to reflect that there will be no payment to CVR holders.

Our guidance is as follows. Net operating revenues less provisions for doubtful accounts are anticipated to be $20 billion to $20.6 billion. Same-store hospital adjusted admission growth is anticipated to be 0.5% to 2.5%.

Adjusted EBITDA is anticipated to be $2.9 billion to $3.05 billion. Income from continuing operations per share is anticipated to be $3.40 to $3.80 based on weighted average diluted shares outstanding of 111 million to 113 million.

Larry will now discuss further our results and provide you other information. Larry?

Thank you, Wayne. We believe our same-store information we are providing is very meaningful as some information on consolidated sequential quarter basis calculation is based on the cost through the items noted earlier including the $169 million increase in provision for bad debts reflecting the change in the estimate of our allowance calculation.

Speaking to that, during the fourth quarter of 2015 all the way up into January of 2016 we updated our hindsight analysis which took a look at write-offs on September 30, 2014. Our accounts receivable to measure collections and estimate our allowance for doubtful accounts we do this hindsight analysis twice each year.

This most recent hindsight analysis showed higher write-offs than we anticipated which led us to record a change in estimate to increase our allowance for doubtful accounts by $169 million and a corresponding increase in provision for bad debts. This increase in write-off activity is primarily the result of larger declines in anticipated average collections of patient responsibility and co-pays and deductibles of approximately 20% of our self-pay receivables, increases in personal bankruptcies, a decline in growth of patient payments over time and decreased collections from continued self-pay growth in non-expansion states.

Looking at specific categories other than pure self-pay contributing to the change in estimate of the decrease in collections of deductibles and co-payments represent about approximately 40% increase in personal bankruptcies, represent about 20% and a significant decline in the growth of scheduled time payments represented about 10%. In determining allowance for doubtful accounts this estimation process with many variables.

Just if you may recall HMA recorded under our guidance a $246 million increase to their allowance for doubtful accounts as part of their final 2013 audit. And in 2014 we reversed $60 million of their change in estimate with an offset to goodwill.

In 2007 there was adjustments made to the estimation process made in connection with the acquisition of Triad totaling $166 million. The run rate of the Triad acquisition investment was estimated at approximately $20 million.

Our total gross self-pay accounts receivable balance at December 31, 2015 is approximately $8 billion and our allowance for doubtful accounts along with other contractual discounts now represents 88% of the self-pay accounts receivable, representing 160 basis points increase in our allowance coverage compared to the prior year. Including accounts written off to secondary agencies for which we still receive recoveries as if they were fully reserved, our allowance coverage would be 92%. We believe the going-forward annual run rate of this change in the estimate will be approximately $20 million.

Now let's discuss the fourth quarter. And as a reminder the calculations discussed on the call excluded items noted earlier including the (technical difficulty) bad debts reflecting a change in the estimate of our allowance calculation.

The reason for our lower than consolidated earnings versus our estimated guidance can be summarized on several key points. First, we did not achieve the sequential volume growth in the third quarter and the fourth quarter. We had estimated sequential volume growth of approximately 1.8% but experienced a 1.6% decline in adjusted admissions.

This equates to an estimated sequential decline in adjusted EBITDA of approximately $60 million. We experienced a higher estimate than anticipated in year-end actuarial calculations of the malpractice insurance reserves of approximately $25 million. We had an unanticipated state supplement program cost of $10 million and four of our high-tech incentives were lower than expected by $5 million.

On a same-store basis we should note the following. On a comparative basis 2014 versus 2015 quarter basis net revenue grew $62 million or 1.3%. This is comprised of a 2.5% increase in net revenues per adjusted admission offset by a decline of 1.2% in volume.

Our adjusted admissions, the rate increases result in a payer shift to managed care of 60 basis points, a decline of 90 basis points in Medicare. Self-pay was relatively flat at 11.9% and Medicaid increased 20 basis points to 11.7%. Approximately 50% of the hospital volume declines were from Florida facilities.

Related volumes on a comparative basis we experienced an increase in adjusted admissions in managed care of 0.8% or 90 basis points. Medicare adjusted admissions declined the most, 4.4% or 100 basis points. Self-pay admissions declined 2.6% or 10 basis points.

Medicaid adjusted admissions were flat on volumes. We did not experience the heavy flu volumes we experienced in the prior year. Actually if you factor out the decline of 1.4%, include respiratory-related activity our adjusted admissions would have had a 0.2% growth.

Our ER visits are down 9/10 of a percent. This is also due primarily to the lower flu season. We were up 6.5% in the fourth quarter of 2014.

Our surgeries increased 1.6% with a strength in outpatient surgeries. On a consolidated basis for the quarter I should find out on a sequential quarter basis net revenue grew $120 million or 2.5%. This is comprised of a 4.2% revenue per adjusted admission increase offset by a decline of 1.6% in adjusted admissions.

The rate increase is a result of a sequential payer shift to managed care of 190 basis to 53.3% and a further decline in self-pay of 90 basis points to 11.9%. Medicare declined 80 basis points to 23.1% and Florida actually had a sequential increase of volumes of 3.3%.

Related to volumes we experienced an increase in adjusted admissions in managed care of 6/10 of a percent or 110 basis points. While self-pay adjusted admissions declined 13.9% or 80 basis points. Medicaid adjusted admissions declined 5.8% or 90 basis points.

Medicare adjusted admissions increased 4/10 of a percent or 60 basis points. Sequentially ER visits declined 1.8% and surgeries increased 1.5%, primarily outpatient.

On a consolidated comparative quarter basis 2014 versus 2015 net revenue grew $49 million or 1%. This comprised of a 2.6% revenue per adjusted admission increase offset by a decline of 1.5% in volume.

The revenue rate increase was a result of a payer shift to managed care of 60 basis points and a decline of 90 basis points in Medicare. Related to volumes on a comparative basis we experienced an increase of adjusted admissions to managed care of 90 basis points while Medicare declined 100 basis points. Self-pay adjusted admissions declined 2.5% and also Medicaid adjusted admissions declined 4/10 of a percent but increased 20 basis points.

And just remind again that this calculation soon we'll discuss excludes the $169 million increased provision for bad debts. Let me also describe a few trends from the former HMA facilities and the legacy CHS facilities. Through comparative purposes our fourth-quarter 2014 versus 2015 the former HMA facilities experienced a 2.3% decrease in adjusted admissions.

This compares to a 7/10 decline at legacy. The larger decline at the former HMA facilities was predominantly due to lower volume in Florida that we described earlier.

A 2.4% increase in net revenue per adjusted admission which compares to a 2.5% increase in the legacy facilities, an increase of surgery of 0.5% predominantly in the outpatient setting while legacy increase experienced a 2% growth in total surgeries. Net revenues were basically flat at 1.8% increase in legacy facilities. Net revenues in HMA was flat versus a 1.8% increase in legacy facilities.

The two groups also experienced different shifts in payer mix. Managed care as a percent of total revenue increased 20 basis points. Medicare declined 80 and Medicaid declined 30 basis points.

Self-pay increased 90 basis points at the legacy facilities. Managed care as a percentage of total revenue increased 80 basis points. Medicare declined 90, Medicaid increased 30 basis points and self-pay declined 20 basis points.

For the year adjusted admissions legacy was up 1.1% while the former HMA was down 1.5% and revenue was up 3% at legacy facilities versus 1.1% for HMA. And surgeries were positive at legacy for the year of 2.2% compared to minus 1%.

On a sequential consolidated quarter basis these same HMA facilities saw improvements as they experienced a 1% decrease in adjusted admissions although Florida hospitals sequentially improved. This compares to 1.9% decline at legacy, a 3.7% increase in net revenue per adjusted admission. This compares to 4.4 in legacy.

An increase of surgeries of 3/10 while the legacy experienced a 1.9%. Net revenues actually grew 2.6% compared to 2.4% at legacy.

Managed care as a percentage of total revenue increased 200 basis points while Medicare was flat and self-pay declined 140 basis points. And Medicaid declined 50 basis points. This compares to 190 basis points increased in managed care, 100 basis points decline in Medicare and Medicaid was flat and self-pay declined 80 basis points at the legacy facilities.

For the fourth quarter compared to 2014 fourth quarter overall our inpatient case mix increased 4.5%. While Medicaid was up 6.5% Medicare increased 4.4% and managed care increased 4.6%. The decline in flu and respiratory contributed to this increase.

We continued to see and will continue to see a shift into outpatient settings as our net revenue outpatient revenues before provision for bad debts represent 57% compared to 56.4% in the fourth quarter of 2014, a 60 basis point increase. For expenses that we'll now discuss, and again the calculations exclude the $169 million change in estimate for allowance for calculation. Our salaries as a benefit of net operating revenue for same-stores increased approximately 70 basis points as a percent of net operating revenue.

The 2.7% increase, approximately 30% was from physician claims. I will just point out for the year 2015 same-store salaries and benefits declined 40 basis points.

On a sequential consolidated basis salaries and benefits decreased as a percentage of revenue 30 basis points. Of the absolute $38 million increase in the third quarter approximately $19 million was the result of sequential change in market value as it relates to the deductions in the deferred compensations plan. The offset in this is other income and the adjusted EBITDA impact is not material.

Our man-hours per adjusted admission improved 1.5% sequentially from the third quarter. Last year sequentially was relatively flat.

Supplies expense as a percentage of net operating for the same-store remained flat at 15.6% but improved sequentially 10 basis points from 15.7% on a consolidated basis. Cost of drugs as a percentage of net revenue increased 30 basis points from a year ago and declined about 20 basis points sequentially.

Other operating expenses as a percentage of net operating revenue for the same stores increased 40 basis points to 22.7% of the $46 million absolute increase to change in the medical malpractice reserve estimated increased operating expenses $29 million. On a consolidated sequential quarter basis other operating expenses as a percent of net revenue decline 50 basis points but the actual dollar increase is only $10 million.

As it relates to high-tech incentives on a consolidated basis we recognized $25 million this quarter compared to $47 million in last year's fourth quarter and sequentially we recognized $54 million in the last quarter. For the year we recognized $160 million of high-tech incentives compared to $259 million in the prior year.

Let's spend just a minute on adjusted EBITDA reconciliation. In the fourth quarter a year ago $785 million to this quarter's $696 million. The $696 million does exclude the $169 million increase in provision for bad debts that reflects a change in our estimate in our allowance calculation.

This list does not intend to be a complete comprehensive itemized list but to just give you some color on certain points. If you recall we had a large adjustment for our California provider tax in the fourth quarter last year in the amount of $24 million. The net change in adjusted EBITDA was approximately $19 million.

We had lower volume from a year ago but offset somewhat by revenue per adjusted admission increases we estimate the net adjusted EBITDA to be approximately $12 million. The estimated increase in drugs to be about $12 million. The decrease in high-tech incentives represent approximately $22 million.

The difference in the medical malpractice expense was approximately $28 million. And the impact of $7 million to settlements related to expected bankruptcies and co-op plans, a bankrupt long care healthcare payer and some net overpayments under payments with a payer.

Our cash flow provided by operations is $306 million for the quarter and $921 million for the year. Our tax affected cash flow for the year was $1.046 billion. The adjusted cash flows provided by operations has been adjusted for government settlements and related expenses of $153 million.

Acquisition integration expense and payment of HMA settlement liability of $29 million and $16 million related to expenses incurred in connection with the QHC spinout. This compares to a tax affected adjusted cash flow by operations of $1.8 billion for last year.

We have included a slide on our adjusted cash flow calculations in the presentation on our website. There are a few significant items to note related to the differences between the two years. This year the debt was outstanding for the full period and impact on cash flow, specifically the interest payments was $125 million.

This interest expense relates to the HMA acquisition late January last year and was built into our guidance. Remember our payments on interest are higher each of the first and third quarters by approximately $132 million. We received tax refunds of approximately $180 million last year and paid $12 million net of refunds and taxes this year.

Our high-tech cash incentives received were $110 million less this year. We had a timing effect of accrued payroll this year amounted to approximately $100 million. Our third-party cost settlements paid increased $55 million and the timing of payment on our payables increased to approximately $93 million.

Our cash flow from operations were $454 million less than the lower end of our guidance that we had estimated at the end of the third quarter. The difference was less estimated collections from accounts receivable and supplemental programs and lower fourth-quarter volumes which we believe represent about $340 million.

We estimated the remaining difference to be an increase in the timing of payables we mentioned above. Our 2016 net cash flow from operations will be $1.5 billion and $1.7 billion which includes the term amount on receivable performance for 2015. Our cash flows used in investments on other assets are down approximately $300 million compared to a year ago with the majority of this reduction related to our information systems.

This relates to the timing of our rollout of the electronic health records. Our CapEx was $953 million or 4.9% of revenue. Approximately $124 million was spent this year on replacement facilities of which Birmingham, Alabama replacement opened in early October and was a significant component of the amount.

Factored in our replacement facilities our CapEx was 4.3%. Our CapEx guidance range will be $800 million to $950 million for 2016.

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

Self-pay adjusted admissions as a percentage of total admissions remained flat at 5.1% for both periods. Self-pay adjusted admissions decreased 2.5% and in expansion states the decline was 22%. The biggest percentage declines were Indiana and Pennsylvania at 33%.

Medicaid adjusted admissions as a percentage of total adjusted admissions increased 20 basis points to 18.7%. Medicaid adjusted admissions decreased 0.2 with the majority of the increase coming from the facility in expansion states.

And expansion states increased to 7.8%. The largest percentage increase again were from Indiana and Pennsylvania at approximately 22%.

As it relates to (inaudible) and its changes where we have sufficient information we note an increase in patient visits of approximately 32% this quarter over the fourth quarter a year ago. And the patient visits were down 3/10 of a percent in this quarter versus last quarter sequentially.

Consolidated charity self-pay discounts plus bad debts for the three months comparative periods increased from 23.9% to 25% or 110 basis points and this comparative amount excludes the $169 million increase in provision for bad debts reflected in change in our allowance calculation. I refer you to slide 23 on this subject.

Based on our various data points Medicaid and exchange business we believe we recognized the fourth-quarter benefit of $75 million and a cumulative benefit for 2015 in the amount of approximately $290 million from the Affordable Care Act which is in line with our overall 2015 guidance. This compares to approximately $165 million for all of 2014.

As it relates to our guidance for 2016 adjusted there are several items we would like to note and these are not all inclusive. We believe we will still experience a $50 million to $75 million incremental improvement in the Affordable Care Act. We believe there will be approximately $50 million in synergies and margin improvements at the HMA facilities.

Our payer mix and volume improvements are estimated to be approximately $50 million to $100 million. We get improvement in physician practice performance and improvement from centralizing our payroll processes and our health information management consolidation of approximately $60 million to $70 million.

Other items such as supply chain and purchasing and revenue cycle improvements rated to our various centralization should be approximately $70 million to $80 million. The contribution from acquisitions of approximately $30 million to $40 million.

We believe we will have a decline in high-tech incentives of approximately $80 million to $90 million. Reimbursement reductions including DSH and Medicaid reductions of approximately $75 million to $80 million. Wayne?

Thanks, Larry. Let me go back and correct something I said earlier.

I was talking about filing an amendment to our Form 10 registration. I think I said we would be completed sometime in the first quarter of 2016. I meant to say we'd be finished in the first half of 2016.

2015 was a difficult year for us. Not the year we had expected but we remain convinced and many of the right long-term strategies are in place and that we will see the results from these initiatives in 2016 of beyond.

We will be diligent in our work to improve operations, continue to recruit physicians to our medical staffs and we continue to prioritize our investments to create the right portfolio for long-term success. We come out of the past year determined to be a stronger and more profitable Company.

Before we open for questions I'd like to highlight some promising trends coming off the 2015 including an increase in inpatient orthopedic volumes of 5.2% with further program expansion planned in 2016. For our emergency department we saw 65% larger increases in our ER volumes with marketing campaigns and EMS affinity programs and an increase of over 8,000 successful transfers in 66 hospitals affiliated with our 12 transfer centers.

In addition, we are always working to make ED throughput more efficient to ensure patients can be seen quickly with good patient satisfaction. So we'll continue to emphasize these programs. Other service line programs such as neurology, specialty stroke, behavioral health and rehab should begin to drive volumes in 2016.

Our professional outreach program now includes 100 directors of professional outreach across the enterprise which thus far has shown implement in outpatient and surgery trends. Expansion of our urgent care centers and ambulatory surgery centers and a focus on improving our physician practice productivity remain key drivers of growth.

In addition, we are investing in some mid- to long-term strategies that will position us well for the future including the development of several clinically integrated networks, enabling our new opportunities to partner with physicians, our bundled payment initiatives and our virtual health programs for telemedicine. As Larry has stated earlier we are seeing improvements in the HMA assets and had encouraging trends from the third quarter sequentially.

I'd like to think all the physicians, nurses and support staff for all their tremendous support this quarter. With that we'd like to open the call for comments. In an effort to get more calls in we'll limit to one question and one follow-up question so others can have time.

If you have a further question, follow-up question as always we're here to take your calls. You can reach us at area code 615-465-7000.

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

Thanks, hi everybody. Maybe just first to drill down a little bit on the cash flow comments, this year you had thought that you would see this big pickup in the fourth quarter. And I think a lot of the shortfall, the $454 million you talked about was largely a fourth-quarter shortfall.

It's hard to delineate the things you're highlighting there, the AR, the timing on payables as to whether that's also part of the HMA ongoing issues or whether that's more broadly at the Company. Can you give us some flavor for that and some flavor for how you think you'll lay out the cash flow as you look at 2016?

Would it be back-end loaded to the fourth quarter again or is it more evenly spread? Maybe I'll stop with that.

Yes, first we do have a little bit of extra interest in the first and third quarters so that affects the cash flow. I think you'll still have a little bit of back loading ending the way we do some of our measurement performance of our AR days. We should see some progress in the second quarter when we won't have the interest payment.

Clearly we had a growth in receivables notwithstanding the change in estimates and we had a growth in some of our supplement programs. I think we're going to get $45 million this quarter from one of our states and another good size from another state in this quarter which will help a little bit in the first quarter. But I think where we fell short was primarily in the receivables and those supplemental programs.

We did have a little bit more higher payables that we got. We at the end of the year which we anticipated had about $100 million change in our payroll accrual which you shouldn't have next year we collected a lot a year ago in our high-tech into next year and we didn't have that this year of about $30 million.

We do expect to have some growth in EBITDA which will probably be built up throughout the year as it normally happens. And I think we'll also manage our payables better pretty much hopefully each quarter going forward hopefully there.

And I think the other thing I just would add one of the challenges we had in 2015 was the consolidation of our service centers. We had a lot of activity going on throughout the year taking both closing down a few service centers, and converting more service centers in such a way that that caused trouble for us.

I think if you go back in 2013 we had nine locations, now we've got six or seven. We had 90 hospitals, now we've got 168. We converted probably about 20% to 30% in 2015 and the lesser percentage going forward in 2016.

And when you do those service center conversions even though we work hard to try to keep receivables stable in the hospital that you're bringing in we are starting to see a little bit of deterioration during the time we announced the conversion activity. ICD-10 clearly caused us a little bit of an increase, probably have more different IT systems than anybody we saw an increase in IT. Our ICD-10 receivables in the third quarter, excuse me, fourth quarter which we should work off in the first and second quarter.

Okay, and then maybe just for the follow-up, to think about the guidance for 2016 and this is more of a big picture question than any specific line item, clearly as we got to the back half of 2015 there was quite a bit of variance from the original guidance. Is there anything different about the way you have approached guidance this year?

I know your range is much narrower, it's only about $100 million versus $300 million last year. Anything otherwise we can point to that says hey, we're taking a little bit more conservative approach for 2016 versus 2015?

And specifically I might ask about the first-quarter outlook since trying to get back on track with expectations aligning with what you guys feel comfortable you can do. Is there anything you can say about the first-quarter outlook specifically?

Yes, clearly we were in 2014 I think that 7-7-7 and we went out to $3 billion, $3.2 billion. We had a drop in high-tech there a little bit than we expected and we got another drop in high-tech actually a little bit less this year.

I think we finished out excluding the bad debt adjustment of 2.8, 3.9 if you used a run rate that we've said going forward of $20 million used that as some benchmark maybe for what could be the 2015 effect you're somewhere in the low 2.8 range to maybe $20 million roughly. So we've gone out with 2.9 to $3.050 billion which we think is a lot more realistic.

We finished out the year somewhere around 700. We called out the malpractice adjustment which we thought we would get it this year, we should get that next year. So I think that's sort of a starting point you've got there.

I would expect the first quarter to be similar to where fourth quarter was, maybe a little better. You clearly don't have the flu in the first part of January that we had a year ago. From that perspective we are making some progress on things, a lot of these will kick into place a little bit this year, a little bit in the first quarter or throughout the year.

So I think and we also I know there was some question about the volume guidance of 0.5% to 2.5%. I'll spend just a second on that activity if I would.

We don't usually get into all the detail about our CapEx projects. But I know we've got a lot of CapEx projects which we think will help us from a growth perspective. And we've got activities which I think will probably drive about $65 million to $70 million of CapEx going forward.

And I think from that perspective we feel good. I believe we've spent $520 million in the last couple of years which should probably give us about another $40 million of EBITDA in 2016. We've got another $200 million that's locked and loaded that we'll get done which should give us another $30 million EBITDA.

So that will be very helpful when it relates to our 2016 guidance. A lot of the supply chain is centralization of purchase and revenue saw improvements are all underway and they should be helpful.

Health information is underweight as is the physician practice improvements. So these are all things that are sort of underway right now.

Okay, thanks a lot.

Brian Tanquilut, Jefferies.

Hey, good morning guys. Wayne, you mentioned something in your prepared remarks about Florida being 50% of the weakness in volume. Would your mind is giving us some more color on that issue and also how you think that will correct itself over the course of the year as it relates to Larry's comments about volume improvement?

Yes, I think we said this on the last call when we talked about Florida before in terms of physician recruiting. I think we recruited about three times more physicians in Florida than we have for our legacy facilities. We have a lot of cleanup work to do in Florida to start with.

It took us a while to work through the issues there. As we said incrementally from the third to the fourth quarter we are beginning to see progress in Florida. Florida is a good state.

Population wise it's great, it's growing. Other companies are doing well. We will do well in Florida.

It's just taking us a little while to get there. But we are beginning to see progress and we have gotten everything in place now in terms of the number of doctors. So we feel pretty comfortable that we'll make even more progress going forward.

Okay and then as a follow-up, capital deployment, in your prepared remarks you talked about paying down debt. So how should we think about balancing debt paydown versus share buybacks? And also given the outlook you have for divestitures of hospitals, it is that an area of opportunity where we could also see more hospitals get sold to fund either debt paydown --

Let me talk about divestitures in terms of -- and then Larry can talk about our debt, our opportunities in terms of debt paydown and going out a little bit. We continue as we've said we have over the last two years we've divested about 10 facilities, terminated leases at about 10 facilities.

We probably we continue to look for rationalizations. And what we're doing now is focusing on our strategies in our big larger markets to make sure that the hospitals fit. Our priority obviously is to get the spin done.

That takes out 38 hospitals and then for us to continue to look at performance of the hospitals that are not performing the way that we'd like for them to perform or do not fit in terms of our portfolio going forward. So it's an ongoing process and I think there's good opportunity for us and a good opportunity for us to monetize a number of facilities that will help us pay down some debt.

Yes I think, Brian, what we're looking to at the end of the year when you think about we'll have extra generating cash flow, first of all let me mention that we're in good shape on our covenants. With our interest rate calculation and our secure debt calculation we've got plenty of cushion there and we don't have any future maturities. So while the leverage is a little higher than we expected to finish out at the end of the year as the EBITDA dropped we are also doing very few acquisitions.

We've got one that will close here this quarter, maybe one either this quarter or next quarter, real small one in the $20 million range. So we're seeing a lot of acquisition activity going on and if we generate excess cash either through operations or later we'll use it to pay down debt we do have the opportunity to buy stock.

And this is something that's there. But I think our focus right now is to generate a cash and continue to operate the Company and think about what's the best thing to do.

Got it. All right, thanks guys.

Matthew Borsch, Goldman Sachs.

Hi, this is (inaudible) on for Matthew Borsch. With regard to the $169 million increase in provision for bad debt and just your total allowance in general can you give us a rough sense of how that would break out percentagewise between the contemplated in the Quorum spinoff assets versus the hospitals that would remain?

You know, we've done the consolidated audit there and we don't think it's going to have a significant effect on the Quorum facilities. We think they'd be close to the EBITDA what we thought but we are -- and the audit actually got done on February 12 late in afternoon. That's why we went out when we did since we wanted the market to know about this change.

They will begin to do more detailed work on the separation of that and have that audit done. It will come out in the Form 10. We don't think it's going to have a significant effect on the Quorum assets but we'll review that with our auditors who only have known on Friday of last week was the total allowance adjustment.

Okay, great. And just a quick follow-up, can you share a little more detail on that change in estimate for the medical malpractice as well?

Yes, we as you can see that our factory was ahead of a year ago and we talk a lot about our serious safety events being down 65% to 70% and that's a great contributor to our less claims cost and then we had that situation last year. We had anticipated our actuary to be about $25 million lower in the quarter.

Based on some discussions we had with him he got a little bit more conservative than where we thought he was. So that information became available in the first part of this calendar year. And so we ended having to book another -- have a $25 million expense higher than we thought.

We'll get that back next year we're pretty sure based on the reviews we've done and some comments --

And our trends are definitely improving.

And if you look at the first three quarters we're in good shape on that. But we were up over a year ago and a little bit higher than we had estimated.

Okay, thanks very much.

Frank Morgan, RBC Capital Markets.

Good morning. With regard to the decline in the collections on co-pays and deductibles and the increase in bankruptcies were there any particular geographic areas or was it within either one of the particular portfolios either legacy Community or HMA?

There wasn't -- we didn't separate the adjustment between the two but this would be a little bit more of a legacy adjustment probably than HMA. HMA did go through a pretty good size adjustment when we bought them at the beginning of 2014.

I would say that probably on the self-pay component clearly Texas is growing a little bit more there and probably Texas would be a little bit higher than the other states. There's not many HMA hospitals in Texas, so Texas was a little bit more of a challenge.

Got you. And any additional color on the incremental $20 million run rate of the higher levels of bad debts going forward?

Is that just based on current experience or did you literally make any kind of change in your underlying assumptions? Thanks.

The way we've done that, and again we've bought a lot of hospitals over the years, both large hospitals, Triad and HMA, and also individual hospitals and you often have to go make an estimate of what you think the collectibility of receivables are. And in this case I think we're up about 160 basis points more reserve we're going to have to take going forward. And we took that percent times what the expected growth in self-pay is which is probably $800 million to $1 billion of gross dollars.

And that could drive something like a $16 million to $20 million change in estimate, similar to what we've done on all the acquisitions we've done. I understand it seems like a small number but the way you do this you sort of think about what we were reserving at, what we're reserving now, that change is what you've got to apply to your growth in self-pay dollars.

And I think that's where the $20 million historically we had the same situation with Triad, we had $166 million. And if you go back and look at bad debts and charity and everything between us and Triad in December of 2007 and it came right back down the very next quarter.

And so I would expect the same thing to happen here as it relates to this change.

Okay and I guess just one final as it relates to the $169 million, is that all related to -- are there any prior-year periods in there or is that purely just 2015? Thanks.

Yes, clearly I think we've said here you're starting to look at the receivables on the books at September 30, 2014 you're looking at what happens the next 12 months. So your base is the receivables on the books in 2014 and the way a change in estimate looks you go through and you look at that, it's a hindsight analysis and then you determine in this case the write-offs were greater and the cash collections were less than anticipated so you make a change in estimate.

That change in estimate is all run through the current period even though the analysis is based off of historical information, in this case receivables from 2014 and the prior. And then you try to factor that in how much that would apply to -- but you are booking it all in 2015 and we'd said here going forward it's about a $20 million estimate and that may be a decent way to think about what effect it has on 2015 also.

Thank you.

Chris Rigg, Susquehanna Financial.

Good morning. I just wanted to come back to the cash flow items that you spiked out at about $340 million. I guess it sounds like some of the supplemental monies are going to come in but on sort of the pure AR side where you fell short, are you expecting some catch-up payments in the first quarter or are most of those just written off and viewed as uncollectible?

We do expect to continue to improve. I think are adjusted AR days are somewhere in the 60s and we should be somewhere in the 50s. I don't think we will get there in the very first quarter.

But I think that by end of the year I would expect our AR days to be lower than they are today. We did make a change to sort of segregate our supplemental dollars similar to the way other people have done from state agencies but I do expect our AR days to improve going forward.

Okay. And then with regard to cash flow but more forward-looking, obviously you cited the investments in other assets on sort of a legacy basis.

Can you give us what's that number should be approximately in 2016? And then is there anything, not unusual but that's worth highlighting with regard to other uses of cash that might not be apparent just looking at the CapEx number? Thanks.

You know, I don't think there's anything unusual there as it relates to the CapEx activity. From an overall perspective I think that we've got $1.5 billion to $1.7 billion, that's in the range of 55% or so of our EBITDA which if we go back we generally run that perspective.

I'll follow-up off-line. Thanks anyway.

Andrew Schenker, Morgan Stanley.

Hi, this is Vikram on for Andy. Can you give us some color around the physician productivity trends for the hiring you made at HMA this year and then what might be impeding the ramp of productivity and what do you think will drive the increases next year?

Yes, I think we had to replace so many physicians, so a lot of it is new startups. And as we said earlier it takes 18 to 24 months to do that to get them in place.

What we have done over the last year is that we've consolidated all our practice management. And so we have one group here corporately that now is a pretty large group that does all the practice management. So we've standardized a lot of processes and procedures within those practices trying to standardize scheduling and follow-ups, all the other kinds of things that we did not have standardized before.

So we feel pretty good about where we are and how those will work kind of going forward. It's working in some of our other markets but this is Florida it turns out it's a start up for a fairly large number of physicians so it's taken a little while to get them online.

Thanks. And then can you give us some more detail on how HMA margins have moved throughout the year and what kind of improvement you're targeting by the end of 2015?

Yes, the margins were better in the first half of the year and the Company performance was a little bit better. They've come down a little bit. We expect next year between synergies and margins to achieve an extra $50 million of EBITDA probably evenly split between margins and activity.

We clearly have targeted to get HMA back up to about a 15% margin which we're going to have to work hard to get that done probably either latter part of this year or next year. As Wayne said earlier we think they are pretty good assets and I think we've got a pretty good chance of continuing to improve those, especially with a recruitment, the capital we spent in some of the other projects that we talked about around orthopedics and ER activity. And I do think we will have some success as it relates to the cash flow of HMA.

Thanks.

Whit Mayo, Robert Baird.

Hey, thanks for sliding me in. Wayne, just besides recruiting which HMA did do but what operational changes have you made in Florida?

Are you still running Florida out of Nashville? Have you moved the divisional support to the local? I guess I'm just trying to figure out like what you need to do to fix some of the medical staff issues and then if you could just comment on hospital CEO/CNO turnover.

Yes, we have changed division of presidents in Florida and we've added two new people in addition to the division president. We run everything, I mean we don't run, these Division Presidents work, we have CEOs in all the markets we have, in a number of markets in Florida where they are go-larger markets we will have a market manager there.

So it's very similar to the stuff that we've been doing for a long long time except for the fact that we probably didn't respond quick enough and fast enough. HMA went for a period that they did not recruit any physicians and we've not only had to fill the slots they didn't recruit, we also had a number of physicians that we had to work through issues with and some of those worked out and some of those didn't work out.

So I think we're on the right track now. And I think our success record has been very strong through the years in terms of doing this. And I think we're doing all the right things.

And the biggest thing that we have changed in terms of practice management is consolidating it here and putting all these standards in and making sure that we're doing all the right things in the practice to grow the practices now and to reduce expenses as you might expect.

This is Larry. And you know HMA in general the volume is down 1.5% this year which is much lower legacy, it was positive 1.1%, if we go back to when we bought it it was down 5%.

Revenue per adjusted admission was declining, revenue was declining. The revenue this year is actually positive, 1.1%.

We've moved the managed care rates up some. One of the things that will help Florida is we've done a little bit more better contracting. We've had pretty good synergies out of contracting for managed care and in surgeries we're probably a negative 3% of 4%, or down 1%.

It's heading in the right direction. When you look at 2013, 2014, 2015 it's not as fast as we wanted to but the HMA assets are at least heading in the right direction if you look at the year versus the last two years.

There was a year, before we acquired HMA there was a lot of uncertainty in terms of HMA's future and what was happening. And that was very disruptive to the physicians as well.

Okay, thanks a lot.

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

Thank you again for spending time with us this morning. We are very focused on our strategies that we've outlined today. You will see us improve as we have always done historically.

I want to specifically thank our management team and staff, hospital chief executive officers, hospital chief financial officers and chief nursing officer and division operators for their continued focus on our operating performance. Once again if you have a question 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.