Community Health Systems Inc (CYH) 2016 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 investor call. (Operator Instructions)

I will now turn the call over to Mr. Ross Cuomo, Director 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 risk which is 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 a reminder, our results exclude Quorum Health Corporation and our joint venture in Las Vegas that was sold to Universal Health Services.

All calculations we will be discussing exclude discontinued operations; loss from early distinction of debt; impairment of long-lived assets; expenses incurred related to the Company's spinoff of Quorum Health Corporation; impairment of goodwill; expenses related to government and other legal settlements and related cost; expenses incurred related to the divestiture of the home health division; the gain on the sale of investments and unconsolidated affiliates; expense from fair value adjustments related to the HMA legal proceedings, accounted for at fair value underlying the CVR agreement; and related legal 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, Ross. Good morning. Welcome to our third-quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer, is with me on the call today, along with Tim Hingtgen, our President and Chief Operating Officer.

First, it goes without saying that we are not pleased with our performance during the third quarter. Over the years, we've seen some variability, but our inconsistent performance recently and in the third quarter simply has not been good enough.

Operationally, we've experienced a great deal of change over the past few quarters. Assimilation of the HMA hospitals has been more difficult than anticipated. Our recent spinoff of Quorum Health, a realignment of our divisions, a number of new division presidents and vice presidents, the promotion of our new Chief Operating Officer, consolidation of many of our back-office functions, and IT conversions.

While we believe all these changes will ultimately help to strengthen the Company for the better -- for our better long-term success, some of these changes have created challenges in the near term. And while we're confident in the outlook for our business and the new leadership team that we put in place, we have not been satisfied with our performance over the past few quarters. Execution of our initiatives and strategies coupled with our infrastructure changes and refinement of our portfolio should well position us for the future.

Our EBITDA margin was 10.6% in the third quarter, well below our expectations. We believe our continued focus on operational enhancements and portfolio rationalization will yield positive margins and leverage improvements in the fourth quarter and into 2017.

With regard to the third quarter, we did not achieve the net revenue growth that we had expected. A number of our expense items were higher than we projected. Both of these factors impacted our EBITDA for the quarter. Larry will go through the results from the third quarter in more detail in a minute.

Turning to our physician practices, we saw progress in the third quarter on both the top line and EBITDA line on a year-over-year basis. As a reminder, we hired a record number of employed physicians in 2015 and the first half of 2016. While we have slowed the rate in which we are hiring new physicians following that record growth last year, we are still hiring new doctors in critical areas with a focus on high acuity and inpatient services and growth opportunity hospitals.

In terms of physicians starting practice -- starting employment with CHS, we experienced a 22% decrease in the third quarter of 2016 versus the third quarter of 2015. That said, we hired a record number of physicians in the third quarter of 2015, where physicians started employment was up 48%.

We are seeing increased physician productivity across the portfolio of employee providers, and we have improved a newly hired physician startup process. For the back half of 2016, we expect physicians starting employment will be approximately 30% below the second half of 2015, which is below our prior forecast of approximately 40%.

As we think about our physician practice performance, we expect to see an additional improvements in the fourth quarter of 2016 and we expect to drive continued incremental improvement in 2017 and 2018. I will ask Tim, our new President and Chief Operating Officer, to provide some additional comments on our operations later in the call.

Moving to portfolio rationalization, we are working to move a more substantial group of hospitals in markets -- move to a more substantial group of hospitals and markets. Along these lines, we announced two definitive agreements to divest assets, which -- since our second-quarter earnings call in early August. And we expect additional announcements prior to the fourth-quarter earnings call.

First, on September 29, we disclosed that we had signed a definitive agreement for the sale of four hospitals and their associated assets to subsidiaries of Curae Health. Those facilities are located in Amory, Mississippi; Batesville, Mississippi; Clarksdale, Mississippi, and Sebring, Florida. We are pleased to see these assets join Curae, which is a hospital operator focused on nonurban facilities.

Second, on October 17, we announced a definitive agreement to sell 80% -- an 80% ownership interest in our home health division to a subsidiary of Almost Family for $128 million, including working capital. Our home health business accounts for approximately $200 million of annual revenues.

We are excited to now partner with Almost Family in the home health space. It's worth noting that we are maintaining an interest in our home health business to help ensure that our patients receive quality of post-acute care coordination.

Now I would like to update you on the assets that we plan to divest. Today we are working on 7 divestiture transactions that include 17 hospitals, home care, and nonhospital real estate transaction. These assets account for $2 billion of annual revenue and mid-single-digit EBITDA margins.

Estimated proceeds from these transactions include working capital are projected to generate $1.2 billion of proceeds. The nonhospital real estate assets, including the transaction, do not generate EBITDA and the proceeds from the transaction are estimated to be 10% to 15% of the $1.2 billion.

We expect closing dates for these seven divestiture transactions to be between the fourth quarter of 2016 and the second quarter of 2017. And a substantial portion of these proceeds will be used for further debt reduction.

It's also worth noting that the interest level in our assets is extremely high. We are receiving interest from a number of parties and we will provide updates as we receive definitive agreements and reach the close of the transactions.

Before we get into the quarter and our updated guidance, we also wanted to briefly mention the preliminary discussions we're having with advisers. As a reminder, we disclosed on September 19 that with the assistance of advisers, we are exploring a variety of strategic options with financial sponsors as well as other potential alternatives.

The discussions are in a preliminary stage and there's no set timeline established for the review. There can be no certainty that the exploration will result in any kind of transaction. The Company does not expect to make further public comment regarding these transactions while our exploration process takes place.

Now moving back to the quarter and the full-year guidance, here are some of the third-quarter key metrics. Adjusted to exclude legal settlements and related expenses as well as other items, cash flow from operations were $824 million during the first 9 months of 2016. That compares to adjusted cash flow from operations of $721 million during the first 9 months of 2015. Larry will provide more detail on our cash flow performance.

On a same-store basis, adjusted admissions decreased 1.5% and surgeries were down 0.4%. Adjusted EBITDA was $465 million, and Larry again will provide more facts impacting our results in just a minute. Adjusted EPS was a negative $0.35.

We are revising our 2016 guidance as follows. Net revenues less provision for doubtful accounts are anticipated to be $18.3 billion to $18.5 billion. Same-store hospital adjusted admissions is anticipated to be 0.3% up to -- to be down 0.3% up to 0.3%.

Adjusted EBITDA is anticipated to be $2.2 billion to $2.275 billion. Income from continuing operations per share is anticipated to be $0.30 to $0.50 based on weighted average diluted shares outstanding of 111.5 million to 112.5 million.

As it relates to our pending HMA legal matters, there is no material changes since our last earnings call. We continue to reevaluate the estimated liabilities covered by the CVRs on a quarterly basis. Our current estimate including probable legal fees continue to reflect there will be no payment to the CVR holders.

I'm pleased to announce that an agreement and principle has been reached that resolves the shareholder derivative case action. The derivative case -- the case arose from allegations leveled by Tenet against our Company and our directors as we tried to buy them in 2011. The terms of the settlement remain confidential until presented to the court for approval. The monetary portion of the settlement will be funded by our D&O insurance carriers.

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

Thank you, Wayne. Before we discuss the specifics of our third quarter, we would like to talk about our third-quarter adjusted [EBITA] performance compared to the 2016 adjusted EBITDA guidance that we discussed at second quarter conference call.

As a reminder, our guidance for second half of the year contemplated EBITDA improvement from payer mix, volume improvement, physician practice, expense reduction, and other factors. And we would expect to achieve about 30% of these benefits in the third quarter with the balance in the fourth quarter.

Overall, there are a number of items that weighed on our third-quarter actual results versus unknown expectations, which we will walk through below. First, our acquisitions in LaPorte, Indiana, and Fayetteville, Arkansas, are performing well and are tracking relatively in line with our projections.

For third quarter, HITECH was a $5 million benefit, which was approximately $8 million less than expected due to timing, but this should be recorded in the fourth quarter. We now expect the HITECH to come in around $70 million from the full year.

We had $10 million less than expected due to Medicaid reimbursement reductions, primarily in Texas. On a payer mix of volume improvement, volumes came in below our forecast by approximately 1.7% compared to our prior guidance. This decline was approximately $35 million EBITDA reduction in our third quarter compared to our EBITDA expectation.

In terms of physician practice, we did make about a $10 million improvement during the third quarter, but the performance was about $10 million less than we anticipated. On the HIM expenses as well as our Central Business Office supply chain, our third-quarter experience was in line with our projections.

Finally, on the expense front, we did not meet our forecast, as operating expenses were about $40 million greater than our estimate due primarily to higher-than-forecasted payroll expenses, including health insurance costs. Combined, these items contributed about $103 million to the shortfall from the third-quarter adjusted EBITDA performance expectations.

Before discussing the year-to-year change in our third-quarter results, it's worth noting a same-quarter sequential change from the second quarter of 2016 and third quarter of 2016. In terms of differences in the calendar, we estimate the July 4 holiday occurring on a Monday versus a Saturday in 2015 was approximately a $20 million reduction in our revenue.

And again, we had 92 calendar days in the second quarter versus 91 calendar days. This means an extra calendar day to help offset the July 4 revenue headwind. But the additional calendar day contributed some additional expenses in the third quarter versus the second quarter.

Now I will talk about essential same-store change in our results. As a reminder, calculations discussed in the call exclude the items noted earlier.

On a same-store basis for the quarter, we note the following. During our third quarter 2016 versus second quarter, net revenue declined 4/10 of a percent. Admissions were down 1.1%, and adjusted admissions decreased 0.6 sequentially. Our ER business were up 4%, while our surgeries decreased 1.8%.

On a same-store basis, HITECH was $24 million, a reduction in our third-quarter EBITDA performance sequentially. Overall on a same-store operating expenses, ex-HITECH, it increased 0.6/10 a percent for the third quarter versus the second quarter, while we had anticipated a much larger reduction.

Now we discuss the results of the third quarter on a quarter-over-quarter basis. As a reminder, calculations exclude the items noted earlier. The same-store basis for the quarter -- the third quarter of 2015 versus 2016, debt revenues increased 1.2%, which is comprised of a 2.8% increase in net revenue per adjusted admission and a 1.5% decrease in volume or adjusted admissions.

Inpatient admissions declined 2.1%. [Part about] 100 basis points that relates to fluid respiratory and about 60 basis points relates to OB deliveries and about 50 basis points relates to the profit readmissions. Our ER visits were up 4/10 of a percent. Our surgeries decreased 4/10 of a percent, primarily due to the drop in outpatient growth.

Let me describe a few same-store trends between our former HMA facilities and our legacy CHS facilities. For the third quarter of 2015 versus the third quarter 2016, the former HMA facilities had a 3.6% decrease in admissions. This compares to 1.2% decline in legacy, a 2.4% decrease in adjusted admissions for HMA compared to 1% decrease in legacy. A decrease in surgery cases of 3.9%, while legacy experienced a 1.1% growth. A decrease in net revenue of 0.6% for HMA, which is an improvement over the previous trends compared to a 2.1% increase in legacy facilities.

Our net outpatient revenue before bad debts currently represent about 57% of our revenue, which is in line with the second quarter. Consolidated revenue payer mix for the third-quarter 2016 compared to the third quarter of 2015. Managed care and other increased 250 basis points.

Medicare decreased 90 basis points, Medicaid decreased 140 basis points, and self-pay decreased 20 basis points. On a year-to-date basis, consolidated revenue payer mix to managed care increased 120 basis points and Medicare decreased 40 basis points. Medicaid decreased 70 basis points and self-pay decreased 10 basis points.

Consolidated charity plus self-pay discounts plus bad debts for the 3-months comparative periods has increased from 25.4% to 27.4% of adjusted revenue, a 200 basis point increase. This increase is driven primarily by higher self-pay discounts as a percentage of total revenue. Exchange visits for the third quarter of 2016 increased 6% over the third quarter 2015.

On same-store expense items, our salaries and benefits as a percentage of net revenue increased 110 basis points, and the biggest increases were in health insurance costs, which is up 30 basis points quarter over quarter. Physician salaries and expenses were up about 10 basis points. And our salaries for the transition services contributed about 10 basis points.

Supply expense as a percentage of net revenue for same-store increased 20 basis points, driven primarily by higher in-plan costs. And we continue to increase our inpatient surgical case mix and having some growth in outpatient procedures with higher supply costs.

Other operating expense as a percentage of net revenue in a same-store increased 90 basis points. The increases in the third quarter of 2016 versus the third quarter of 2015 were driven by higher medical specialist fees, expenses related to community commitments, information system expense, and dedicated supplement or program costs.

Now going to cash flow, our cash flow provided by operations for the quarter was $178 million compared to $111 million for the prior-year quarter for the first 9 months of 2016. However, reported cash flow from operations was $810 million has increased 32% over the prior year of $615 million. Adjusted include legal settlements and related expenses, cash flows from operations was $824 million for the first 9 months of 2016. This compares to adjusted cash flow from operations of $721 million for the first 9 months of 2015.

During the first 9 months, adjusted cash from operations was up 14% and improved over $100 million. And in terms of year-over-year increase during the first 9 months, a couple items to note. The timing of payments for payroll was partially offset for payments of accounts payable. Those contributed about $40 million, and the slower growth from accounts receivable contributed approximately $90 million. Our cash flow from operations guidance for 2016 is $1.2 billion to $1.375 billion.

Moving to the balance sheet. At the end of the third quarter, we had approximately $15.1 billion of long-term debt, which is down from $16.6 billion. Since the start of the year, as Wayne mentioned earlier, we're now working on seven divestiture transactions plus the non-real estate -- hospital real estate transactions, which could result in $1.2 billion of incremental proceeds, including working capital. We expect these begin to close sometime in the fourth quarter through the second quarter of 2017 and we'll expect to use most of these proceeds for further debt reduction.

I would now like to comment on our bank covenants, our main two tests under the credit [ruining] of secured net leverage ratio, and the interest coverage ratio. The secured net leverage ratio is calculated as a ratio of total secured debt, less unrestricted cash and cash equivalent to a consolidated EBITDA, while the interest rate coverage is a ratio of consolidated EBITDA as defined -- compared with consolidated interest expense for the period.

Under the EBITDA calculations and above ratios, it's a trailing 12-month calculation against the net income of certain pro forma adjustments that account for the impact of material acquisitions for divestitures, adjustments for interest or taxes or depreciation and amortization, and net income attributable to noncontrolling interest, stock compensation, restructuring costs, and the financial impact of other non-cash or nonrecurring items during a 12-month period.

For the 12-month period ending September 30, 2016, the secured net leverage ratio of financial covenant other than the ratios of secured debt is defined to less than 4.25 to 1. And for the 12-month period ending September 30, the interest ratio financial covenant in the credit facility limited to ratio of consolidated EBITDA or consolidated interest to greater than or equal to 2.0.

The Company was in compliance with all such covenants as September 30, 2016, with a secured net leverage ratio of 3.95 and an interest rate coverage of 2.55. Our interest rate cushion on our secured leverage ratio is about 7% and our EBITDA cushion on interest coverage is about 27%.

Turning to CapEx, our CapEx for the third quarter was $151 million or 3.5%. Our year-to-date CapEx is 561 or 4% of net revenue. During the 9 months, our CapEx was 696. Our (technical difficulty) of 2015 was 4.8% of revenue. As a reminder, we spent about $100 million last year on our good-performing facility in Birmingham, Alabama. Our CapEx guidance for 2016 will be a range of $725 million to $800 million.

I will now walk through our 2016 adjusted EBITDA bridge. Year to date, our adjusted EBITDA was $1.66 billion. When we start with adjusted EBITDA, our current run rate without HITECH for the third quarter, $460 million. And I will walk through some of the changes expected in the balance of the year. We expect HITECH incentives of $15 million for the fourth quarter of 2016, which implies about $6 million to $9 million for the full year.

We expect an increase in Medicaid reimbursement, primarily in Texas, to improve $10 million during the fourth quarter. Physician practice performance is expected to improve $20 million. Health management centralization should drive EBITDA improvement of approximately $5 million.

Seasonal and service line improvements in Florida are expected to contribute $30 million of EBITDA in the fourth quarter. Productions and expenses related to some community commitments is $10 million. And other improvements are expected to deliver $25 million as it relate to payroll management, supply management, and the normal improvement in payer mix for the fourth quarter.

I will now turn it back over to Wayne.

Thank you, Larry. Since our last earnings call in early August, we announced (technical difficulty) Tim Hingtgen as our new President and Chief Operating Officer. Tim was serving as our Executive Vice President of Operations at the time, and he is now moved into the new role as our President and Chief Operating Officer starting on September 1.

Tim had joined CHS back in 2008 from another public hospital company and has been one of the most successful division presidents with a track record of driving solid same-store net revenue growth, expense management, and EBITDA margin expansion. We are confident that his proven effectiveness and leadership capabilities will help to drive better execution across our divisions at CHS. Tim has now been in his new role for the past two months.

We have asked Tim to make some additional comments on our business this morning.

Thank you, Wayne. Before I comment on our operations, I wanted to first take a step back and share some of the thoughts I have gathered about the Company during my last eight years.

For starters, we have a strong foundation on which to build upon, with over 150 hospitals, strong access points, a number of key regional networks, as well as a solid track record in terms of quality and producing excellent patient outcomes. We also have great people throughout our organization, including high-performance physicians, healthcare practitioners, hospital operators, and management executives.

While we have some hospitals that are not performing at our level of expectations, we have a large number in our portfolio that are performing exceptionally well, generating solid volume and revenue growth as well as improved EBITDA margin. We are also achieving solid results across both a number of service lines and in many of our geographic markets.

As we think about the fourth quarter and moving into 2017, we are focused on a number of initiatives to strengthen our base business and improve our overall efficiency. While there are certainly a number of other areas where I am concentrating, including more medium- to long-term strategic goals, the two areas receiving the most attention in the near term are both volume and revenue initiatives and expense management.

First on volumes. Clearly, we were not satisfied with our volume performance during the third quarter. July was weak, and we simply did not perform well enough during the final two months of the quarter to offset the slow start.

We have a number of revenue initiatives that we are either rolling out or strengthening. These efforts are focused around service line improvement targeting higher acuity, physician practice improvement, ED volume development, and a number of others.

In terms of ED volume development, we recently opened a new freestanding ED in the Lutheran Health Network in Fort Wayne, Indiana, the ninth in our Company. By the end of the fourth quarter, we will have also introduced consumer-focused online scheduling options for EDs and urgent cares in a number of our most competitive markets. And hospital executives and ED clinicians at each facility remain intently focused on delivering the highest level of ER throughput intended to enhance the safety and service to their patients.

Looking at our portfolio from a geographical standpoint, Florida remains a key market with our Company. During the fourth quarter and into 2017, we're expecting to see improved revenue performance in Florida from a combination of seasonality, service line improvement, and incremental investments into that market.

In terms of the broader potential for future revenue growth, we still see high opportunity in the ongoing development of the former HMA portfolio to reflect -- to a level that reflect the more favorable trends of our CHS legacy hospitals, as called out in slide 9 of the supplemental slide presentation.

Second, expense management is a high priority for the Company and especially for me. Operating expenses came in above our forecast during the third quarter. By facility, we have examined our cost structure and are actively driving expense reduction on the salary, wage, and benefits line from better FTE management or by implementing more contemporary staffing plans that better match the volumes and reimbursement at some facilities.

The achievement of identified improvement opportunities is being closely monitored. We also see opportunities to reduce cost in our supplies and other operating expense lines through various market-specific initiatives and a heightened focus on purchasing compliance within our GPO.

To facilitate local medical staff support for these opportunities, we are working closer with hospital Chief Medical Officers in our largest markets and are offering the support of our corporate physician and clinical leaders to the entire portfolio. We believe this approach is driving more rapid implementation that will Q4 benefit and beyond.

In terms of both our volume initiatives and expense management, we did not meet our own expectations in the third quarter. We are working to achieve improved execution, visibility and accountability, and prioritization of high-value statistics across the organization to drive better EBITDA margin performance and increase shareholder value.

Finally, I would like to highlight a new framework that we introduced across the Company in September to coordinate and prioritize the resources available to our hospitals via CHS's various clinical, operational, and gross subject matter experts.

Through this new model, we are able to more quickly target and deploy resources to markets that could show the quickest return in terms of care delivery, volumes, or earnings. We have also seen earning results with length-of-stay improvement, ED throughput, and nurse recruitment and staffing. I expect sustained improved results in the months and years ahead.

Wayne?

Thank you, Tim. We're pleased to have Tim in this new role and look forward to seeing the operational improvements we expect him to deliver.

At this point, Mike, we are ready to open up for questions. We will limit everyone to one question, so you have time on this call. But as always, we are available if you need to get in touch with us at 615-465-7000.

(Operator Instructions) AJ Rice, UBS.

Just maybe to talk about a little further what you're trying to do with the divestiture program. I know when you started way back when the spinout of Quorum and some early divestitures, it seemed to be a focus was primarily on getting rid of nonstrategic assets and focusing on the network hospital portfolio in particular.

It seems like it's involved a little bit over time, where an element of it is certainly paying down debt as well. Is there an objective for how much debt you would like to pay down, say, by the end of next year or whatever point from the divestiture program? And I guess you added this quarter to the properties that you are potentially selling? Is that an ongoing process that we could see more additions in the next few quarters?

Look, this process -- we knew when we bought HMA, just as we acquired Triad, that we would have to rationalize our portfolio, that we had facilities that did not fit. So that's one of the reasons that we had so many facilities -- the reason we did the spin to start with.

And then as we look to the future, we want to make sure that we are in sustainable markets where we have good opportunity to deploy our resources and our capital so that we can expand in those markets going forward.

So we will continue to look at properties; we will continue to evaluate our properties in terms of ones that we think are beneficial. It's not just network locations. We have a lot of hospitals that are in -- are competitive.

We talked about Birmingham a lot. Birmingham has done extremely well. There is not -- we have a number of hospitals in Alabama, but nothing close to -- that close to Birmingham in terms of the network. But we have a lot of stand-alone facilities, too, out across the country that are very good facilities performing extremely well.

So we will continue to look at this process and we will do it by the ones. We have identified this group that we are working on now. As you said, we have added a few to it, but we are -- we think we are on the right track here.

We haven't set any specific target number in terms of debt paydown. We are more concerned about having improved margins and making sure that our operations work efficiently and our performance improves as well.

So we do have -- as Larry said, we have a lot of interest in people and we are selling these hospitals at a good multiple. So it should be very helpful as we move forward.

Larry, you want to add to it?

I would just say that one of the things that we are focused on is we're trying to get somewhere in the 8 times to 10 times EBITDA for these transactions. Fortunately, we've got some in NOL, which will help on the taxes for some of these facilities.

We do look at the tax basis of what we're trying to sell, and we also try to make sure if something gets started, we try to get it done. There will be some facilities that we may start a process that -- don't go and get done, we will find something else. But we have increased at each quarter that we have made the conference call from May to August to now.

And we think this is a pretty good price for the facilities, most on a percentage of revenue and on a multiple EBITDA, which will have delever the Company. And more importantly, help the margins going forward, as Wayne said.

So AJ, I would add to this: these are good facilities. There is good physicians and employees working in these facilities. We are highly sensitive. As we think about this, we think about facilities and where they are located and who they might work with. It might be more productive than being part of our system when it's all said and done. So this is a well-thought-out and a careful process as we move forward.

Brian Tanquilut, Jefferies.

Larry, as I think about the leverage cap, it drops to 4 times in 2017. So how do we think about -- I think you laid it out that you're trying to get the divestitures done by mid next year at the latest. So how should we think about that as we do the lookback?

And then the other component of the question is just as HMA's assets continue to deteriorate from a same-store perspective, how does that come into play, obviously with EBITDA being the denominator in the leverage computation? Thanks.

We laid out the cushion we got here. The cushion did come down in the third quarter on the senior secured debt. It's in pretty good shape on the interest test. Selling the assets at a pretty good multiple like this will be helpful. We expect have some sales done before that stepdown.

The other thing is -- and we generally like to have a bit more of a cushion, and we may consider trying to change that stepdown sometime next year or sometime before next year. And when it applies. But we're in good shape now, expect to be in good shape at the end of December, but we will consider doing that and think about that with our financial advisors.

But as it relates to the senior secured, selling these type of assets at the multiple we are selling at is very, very helpful to the senior secured test.

Chris Rigg, Susquehanna.

Good morning, guys. Just to think about the HMA facilities, kind of looks like they are starting -- their performance is starting to flatten out at least a little bit. I was wondering if you could just give us some details around whether -- just to compare this legacy CHS versus HMA, physician attrition, CEO of a turnover.

And just generally speaking, do you think we are near an inflection point in the next quarter or two where things could start to get better? Or is it still too early to call. Thanks a lot.

Let me make one comment and then maybe the others want to add. We did highlight that the revenue, which is been running roughly 2% down, is down 0.6%. That's probably one of the better quarters they've had.

We did comment on the last call, if you went back and looked at the hospitals they've owned since 2012, and they were down 7% or 8%, admissions 4%. They have gotten better through this nine-month period. And they got better in 2014, when we owned it, 2015, and a bit better now.

They are struggling a little bit with surgeries, which is something we are very focused on, and a little bit with volume. But the revenue -- and some of that is because of the work we've done on managed care, trying to get a bit more managed care business. I think they will continue to improve. I think we're getting close to that [70].

And clearly they will not be at the legacy this year. But we think sometime next year that the HMA facilities, as Tim said. And Wayne just referred, I think we will see them close the gap and do quite well that with some of the assets we sell will be HMA and some will be legacy, that will help the performance.

So just in terms of process, as you know, we had to change a number of executives in the HMA facilities. We are doing IT conversions. We've had a lot of work to do. We've recruited a lot of physicians and maybe too aggressively. But I think we're beginning to see that there is a real opportunity here in those facilities.

And again, we continue to think about these facilities the same way we do any facility that we've acquired. Long term how it is going to work. Is it going to be sustainable for us and is it in a sustainable market. And we like Florida a lot obviously for -- because of the fact the demographics were so good.

Just one other point. The physician satisfaction -- the employee satisfaction has improved since we got it. And it's closing in on [or sooner], where legacy is, which is a good thing. The other is we have started our safety program that we talk about where we reduced severe safety events by roughly 75% or so. We are making similar progress in the HMA hospitals, which will help the relationship with the physicians. And that's well underway there.

Frank Morgan, RBC Capital.

Larry, and maybe Tim could have some comments here, is I looked through your walk-through from the third quarter to the balance of the year. I was hoping you could prioritize the big three items to get to fourth-quarter guidance. It seemed like it's more on the seasonality side and the service line adds along with physician practices and other. So I was hoping you could go through those categories, maybe a little more detail on exactly what you see as the most likely drivers to get to those numbers for improvement.

And then the follow-up would just be if you take the third-quarter number at your walk-through guidance, is that a good number to annualize off of as we start thinking about 2017, understanding that that is probably independent of any divestitures. Thanks.

Yes, the HITECH is in pretty good shape. The government just approved a 90-day test, which is helpful. The Medicaid reimbursement should be good. The physician health information management, we've been making progress on that.

About two-thirds of the $30 million is seasonality, which we believe it will be similar to what it has been historically for Florida. Some of the service lines would be -- takes a little bit more work. The reduction expenses here outlined at a $10 million is a pretty good number.

The other improvements around the payroll and supplies and payer mix. Payer mix should improve -- a lot of you all follow managed care companies. We follow also. Usually, the managed care mix gets a better in the fourth quarter versus the third, so that will be helpful. Plus, we've gotten some increases in the fourth quarter that weren't there in the third quarter, so that would be there.

The physician practices -- it takes some good work. We got a lot of talented people working on it, but I think that's probably one that will take some pretty good execution to get done. That's probably the one that would be -- and probably the service line in Florida takes a little bit of execution.

Gary Lieberman, Wells Fargo.

Maybe just to stick with that -- the roll forward. As you look back to the prior quarters, you have had a number of disappointing quarters. What can you do differently or what do you plan to do differently so that you are able to achieve the improvement in the walk forward that you have outlined here?

There's probably more detailed support around the physician practice. There's been more -- the team has been together a little bit longer. They did make a little progress in the third quarter. Not as much as we wanted, and it's outlined on numbers of issues in both to do with some of the less starting physicians, getting the ones better, a bit of attrition activity, some of the volume activity. And it will be monitored a lot more effectively.

I think Tim also said one of his number-one priorities is on the expense management. I think that will help in the other improvement category around the payroll and supplies activity.

The payer mix -- we didn't make a big change in the volume. The ranges were down 0.2% right now year to date. We've got a range of negative 0.3% to positive 1.3%. And there's a lot of effort there, but we didn't count volume being the big driver here in the fourth quarter. We do think the other improvements are achievable [in the ER prep].

The problem last quarter, clearly on the expense side, the payroll was not managed as well. Generally, we improve man-hours for adjusted admission. They stayed flat or went slightly in the wrong way. And then the health insurance, we got some efforts underway on the health insurance. Made a little progress in the third quarter, but not near what we needed to be.

And I think we did make some progress in supplies. They were up 20 basis points in the third quarter versus I think 90 basis points the quarter before that. There's a lot of efforts in different programs on supplies in both implants and other activities. We did make some progress in the third quarter on drugs and we continue to do that. So it's a very focused effort.

I don't know, Tim, you want to add anything to that?

Yes, just a minute before we get there. I just want to -- I think we are better today than we have been in the past in terms of our capability to analyze and get to and solve problems quickly. Tim has done a great job in terms of organizationally making sure that we follow through.

We have a lot more discipline today that we had in the last three or four quarters or so. We have a -- and Tim might talk just a bit about a few of the initiatives that we have, both on the revenue side and expense side. But we have enhanced initiatives and a lot of discipline behind that. So that's the reason I feel confident that we're going to make good progress here in the next quarter and 2017.

Sure. I would like to add that our division presidents have had more time to work with these hospitals. Some of them new to their portfolio of assets they are managing. And that has entailed some more one-to-one deep dives and reconciliation of their performance to whether volumes are materializing as expected or not. And where volumes don't materialize, we are able to shift our cost structure much more quickly this quarter.

We have gone through a very, very extensive bridge plan process for Q3 to Q4. And as Wayne said, each division has upped their reviews and monitoring of achievement of the supply line. We have also rolled out a considerable amount of near-term expense reduction items related to supplies.

As I mentioned in my comments, we are working closely with the medical staffs to make sure that we get the best pricing with the best product and with the buy-in of those medical staffs to help us accelerate on that.

One other item that we did that I would like to comment on is we have identified a grouping of our hospitals who are high opportunity that have not had the earnings performance that they historically have had. Those are a group of hospitals that the division leadership and the hospital executives have come together on, built a very, very detailed action plan to make sure that we get the resources in play to help restore them to their prior levels of earnings and growth. And we're starting to see some of the early impact of that as well.

One thing, just -- I know a lot of people have been talking about Hurricane Matthew. And we didn't show it as a go-backwards here, but we also had about a similar amount of issues in one of our Pennsylvania hospitals. It went the other way in the third quarter, so those two offset. So some people have made a reference to Hurricane Matthew and that's how we handled it.

Josh Raskin, Barclays.

I guess I just want to juxtapose all the physician additions. I think Wayne mentioned it was a record level of recruitment last year in the third quarter. And then when you look at surgery volumes, I think you mentioned HMA ran about 500 basis points behind the legacy assets.

And so I'm just curious with all the physician recruitment why -- I understand why you are seeing a little bit more losses on the salaried physicians. But why are we not seeing an uptick in volumes? Or is it just maybe these are not surgeons that are getting recruited, etc. Just any color there.

Tim, you want to talk about it?

Sure. We are tracking the ramp-up of our new providers. And where we are not seeing that improvement, we have added extra resources in the terms of directors of physician outreach to help integrate those new surgeons or procedure lists into the communities. Every one of our new providers in Florida, for instance, we have a very specific plan as to how we can help them grow their clinic encounters and ultimately grow the network and the hospitals' growth in the future.

We've also gone back and looked at acuity in our facilities and to determine whether or not we did get enough surgeons and how we might enhance our acuity. And so we are working now to focus our recruiting on those kinds of physicians more than primary care.

Yes, I think probably last year, there's a fair amount of recruitment within the primary care section. And it's targeted a little bit better this year.

Gary Taylor, JPMorgan.

Two-part question. One, given the pretty substantial increase in your public markets borrowing costs, wondered if you could comment on your view of the relative attractiveness of REIT financing. And then the second question is given the really substantial loss of shareholder value, could you just comment on the rationale for putting the poison pill in place?

Let me do the first one about the public market, as far as debt. There's no real immediate refinancings that we got to do right now. I think the next one is sometime August of 2018. And I think still that the senior secured debt that we could do would be reasonably attractive, especially if we perform as we've outlined here in the fourth quarter.

The REIT activity we did do -- we call that a real estate REIT transaction that we hope to get done in the next couple of months. And we will disclose it when we close and it will be -- either it's a nonhospital asset. So it's either a medical office building or office building or radiology diagnostic center or something like that.

We're not opposed -- we got a lot of physician joint ventures and partnerships, which can become problematic for doing a lot of REIT activity. There may be some smaller hospitals that could work for us in a REIT. We haven't gone down that path yet, but we are looking at it from the MOB perspective.

So the primary reason that we put in the pill really was to give our process that we have going on an opportunity to work. And to sort of prevent somebody from buying so many shares that they end up controlling the process instead of our Board controlling the process.

So I think -- and it's a short-term pill. It's over with in April. And I think it will give us time to work through this. I don't know what will come out of this, but it will give us an opportunity to work through the process. So it's really more about that than it is -- it certainly was not directed. We have talked to our large shareholder; this was not directed in trying to do anything different other than to let the process work.

Ralph Giacobbe, Citi.

Thanks. Any way to get a sense of how much the volume pressures is maybe just related to your markets in general versus market share losses you are seeing? And then you mentioned some of the revenue improvement. Any thoughts on expectation of when you would see that come through?

And to the extent that revenue trends or organic revenue trends remain 1% to 2%, do you have enough on the cost side essentially to offset the negative leverage of that type of revenue? Thanks.

Let me take the latter part of that first. We clearly have a lot of cost opportunity; the cost has been going up too much. And I think the efforts are here to try to improve the cost. We do believe that the payer mix will continue to improve, that we seeing right now a pretty good managed care payer mix and decent increases in that. And looking both for this year and next year from that perspective.

On the revenue trend, I think CHS is fairly in good shape for the year. The HMA facilities are not. I think we are continuing to make a lot of progress trying to get the volume. And a lot of the volume losses are probably more predominantly in the HMA facility, so they go hand-in-hand there. So if we improve the HMA facilities.

From a volume perspective, if the revenue got a little better, more from mix, the revenue will get better. And that will help the overall Company get better.

Justin Lake, Wolfe.

So just wanted to -- the -- just in terms of volumes, one of the things that we keep hearing from the urban-based hospitals is just look, it's a tough market in terms of volume in general. And therefore, they are going and spending more time and dollars investing in rural and suburban outreach, trying to take share especially on the higher-acuity side.

I'm just curious, is there some way that you have to measure your market share in terms of what you are keeping? I know stemming outmigration has always been part of the model in terms of hiring physicians and all that, but are you seeing any impact from that? And is there anything you can do to stop it if you are?

Well, we've done a couple of things in terms of -- we have established transfer centers over the past year around the country so that we -- even facilities that we don't own have one place to call. And there are a number of other people who have done this as well. But we've seen a lot of success in our transfer centers.

We also have worked really hard in the last quarter or so to make sure that we don't have any people that will leave us, that -- or don't get seen so that we are -- our throughput in terms of our EDs and our physicians' offices has been greatly enhanced. We are putting in centralized scheduling in our physicians' offices across the country, which is another way that we can help that as well.

So I think we are addressing the issue. Look, there's a lot of competition and we are fully aware of competition. And we are competitive and we will -- we are happy to being where we have an opportunity to gain market share ourselves doing a number of things.

I don't know if, Tim, do you want to add to that or not?

I want to echo the focus on our access points, whether that be depreciating EDs, the emergency department throughput, urgent cares, anything that is more consumer focused, we certainly have put more energy and attention to achieving best-in-class metrics for those.

Justin, if you look at the categories where we are losing volume, fluid and respiratory, and I think that's got a lot to with the practice of medicine. We were down 100 basis points or about half the volume in patient volume growth.

Our OBN delivery -- I think other people have called that out as just as not as much OB newborn activity. That's probably about 60. And then readmissions has a lot to do with the practice of medicine changing.

So while we probably are losing -- maybe losing some market share, when you look at the absolute drop in the admissions and where it's occurring, it is generally in those three categories. And that's predominantly tied to a lot of the type of markets we operate in.

Kevin Fischbeck, Merrill Lynch.

Just wanted to see if we could get a sense of what you think the real kind of 2016 EBITDA base is if we break out all of the deals that you've done throughout 2016, subtract out the EBITDA for Quorum at the beginning of the year, UHS, etc. And then also take out -- I guess it sounds like you are saying about $100 million of EBITDA from what you are going to sell next year.

What is the starting point 2016 adjusted number that we could think of? And then how do you think about growing that base into 2017?

You know, Kevin, you're right. If we finish out the year somewhere in a [2238] range, there's probably $75 million tied up for the QHC and $20 million or $25 million for Las Vegas. And we don't expect any of the transactions to close. There is roughly $100 million thereabouts that would come out.

The issue is when it's going to come out. Majority of it will come out probably the first half of the year. There could be -- some of these transactions could be more transactions there, so that would be the starting point there. When you look at 2017, there would be less HITECH. Probably at least half of HITECH would probably go away.

We've got a lot of initiatives around supply chain sourcing, Central Business Office activity. Some of the improvements that the physician practices are doing will be there again. So most of the activity you see in the fourth quarter around physician practices and other improvements would be there for the whole year to next year.

And then we got another year of some of the consolidation effort on the business office and the HIM activity. So that's some of the things we're thinking about that will help. And I think some of the volume initiatives that Tim talked about would cause a little bit better volume in revenue in 2017 than we'd have in 2016.

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 earlier. You'll see us improve, as we have always done historically.

We want to specifically thank our management team, staff, hospital Chief Executive Officers, hospital Chief Financial Officers, and Chief Nursing Officers, and division operators for their continued focus on operations. Once again, if you have a question, you can always reach us at 615-465-7000.

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