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Executives

Lizbeth Schuler – VP, IR

Wayne Smith – Chairman, President and CEO

Larry Cash – EVP and CFO

Analysts

AJ Rice – Susquehanna Financial Group

Adam Feinstein – Barclays Capital

John Rex – JP Morgan

Tom Galluci – Lazard Capital Markets

Kevin Fischbeck – Bank of America

Gary Taylor – Citi Group

Community Health Systems (CYH) Q3 2011 Earnings Call October 27, 2011 11:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is Martina and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems Third Quarter Conference Call.

(Operator Instructions)

I would now like to turn the call over to Lizbeth Schuler, Vice President of Investor Relations for Community Health Systems. You may begin your conference.

Lizbeth Schuler

Thank you, Martina. 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 presentation may contain certain forward-looking statements provided by company management. These statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, including statements regarding future operations, financial results, cash flows, cost and cost management initiatives and can also be identified by the use of words like may, believe , will, would, expect, project, target, estimates, guidance, anticipate, intend, plan, initiative, continue, or words and phrases of similar meaning.

These forward-looking statements speak only as of the date hereof and are based on our current plans and expectations, and are subject to a number of known and unknown uncertainties and risk, many of which are beyond our control. These risks and uncertainties are described in headings such as risk factors in our Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission.

As a consequence, current plans, anticipated actions and future financial positions and results of operations may differ significantly from those expressed in any forward-looking statements in today’s presentation. You are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented, and we do not have any obligation to and do not intend to update any of these forward-looking statements.

The presentation also contains certain non-GAAP financial measures. This presentation and the company’s earnings releases for the quarter and year ended December 31, 2010, and the quarter and the year-to-date ended September 30, 2011, located on the company’s Investor Relations page at www.chs.net, include a reconciliation of the difference between certain non-GAAP financial measures with the most directly comparable financial measures calculated in accordance with GAAP.

These non-GAAP financial measures should not be considered an alternative to the GAAP financial measures. References to company or Community Health Systems used herein refer to Community Health Systems, Inc. and its affiliates, unless otherwise stated or indicated by context.

With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman, President and Chief Executive Officer. Mr. Smith?

Wayne Smith

Thank you, Liz. Good morning and welcome to our quarterly conference call to review our financial and operating results for the third quarter and the nine months ended September 30, 2011. Larry Cash, our Executive Vice President and Chief Financial Officer, is with me on the call today.

After the market closed yesterday, we issued an 8-K, including a press release of our financial statements. For those of you listening to the live broadcast of this conference call on our website, a slide presentation accompanies our remarks. I’d like to begin the call with some comments about the quarter and then turn the call over to Larry who will provide additional comments on our financial results.

Community Health Systems has delivered another quarter of solid financial and operating results. These results are in spite of the continuing weakness in inpatient volumes and the challenges in the economy. We believe that the natural reaction to all of the adverse publicity and criticism during the past six months has contributed to some of our decline in inpatient volumes, particularly in smaller facilities that have twice the decline as our larger facilities.

Net operating revenues for the quarter, September 30, 2011, total $3.4 billion compared to $3.2 billion for the same period last year, an increase is 8.7%. Consolidated EBITDA increased 2.7% from $441 million to $554 million. Earnings per share from continuing operations was $0.86 versus $0.80 for the same period a year ago, an increase of 7.5%. Excluding the after-tax expense related to the Tenet lawsuit, shareholder losses and governmental investigations, our EPS for the quarter would have been $0.90.

Net operating revenue for the nine months ended September 30, 2011 was $10.2 billion, EBITDA was $1.4 billion. Earnings per share from continuing operations for the nine months ended September 30, 2011 was $2.49 compared to $2.31 for the same period a year ago, an increase of almost 8%.

With that, I would like to highlight a few significant recent accomplishments. Effective October 1, we acquired assets of Tomball Regional Medical Center in Tomball, Texas. This 358 bed hospital is located approximately 30 miles north-west of Houston and provides comprehensive healthcare services on a large campus that also includes a cancer center, heart center, women’s health center, outpatient surgery center and a sports medicine complex. The hospital has earned numerous clinical quality awards.

We have a definitive agreement to purchase assets of Moses Taylor Health Care System in Scranton, Pennsylvania, a two hospital system. This acquisition is still subject to regulatory approval. Our acquisition of the assets of Mercy Health Partners also was accomplished on May 1, 2011. This was a two hospital system plus long-term care facilities as well as other outpatient and ancillary services.

As has been disclosed in the press, we have entered in two exclusive discussions for acquisitions, one is in Roseville, New Mexico and the other one is in Reno, Nevada. We continue to look for strategic opportunities and have a very active pipeline.

As previously disclosed, effective September 1 we sold two hospitals in Oklahoma to Ardent Health Services. Ardent already had four facilities present in the market. Additional on October 22, we divested Cleveland Regional Center in Cleveland, Texas. The buyer was New Directions Health Systems.

Physician recruiting has been one of our operating strengths and we are proud of our success in this area. The company recruited 1362 new physicians for the first nine months compared with 1440 recruited for the same period a year ago. While recruitment is slightly behind last year’s level, we have also added an additional 81 mid-level practitioners. Our recruitment target remains 1900 physicians for 2011.

Company is updating guidance. We have increased our 2011 EPS guidance to $3.30 to $3.39, excluding items described in the third quarter 8-K filing. We’re also providing mid-point guidance for EPS for 2012 of $3.60.

I’d like to spend just a second elaborating some of our quality of initiatives. We have had 18 consecutive quarters of inpatient and 13 consecutive quarters of outpatient for major improvements. The results were both above and financial average. 41 hospitals received top performance on Key Quality Measures from The Joint Commission. Of approximately 10% of those that were recognized, Community Health Systems hospitals represented about 2.5% hospitals universe in the United States. We have implemented proven methodology to reduce re-admission rates, these procedures includes post-discharge call and medication reconciliations.

We’ve completed a trial on the section surveillance software systems that we rolled out to most of our hospitals in 2012. The system is currently installed, it will be rolled out in 2012 in systems currently installed in our Pennsylvania hospitals. And we have also partnered with a national center for evidence-based order sets that would represent over 200 standard groups – standardized groups of orders for specific conditions.

I would like to give you a brief update on significant litigation and investigation matters that we have been working on. Additional detail will be found in legal proceeding section of Form 10-Q for the third quarter. First the New Mexico qui tam case is ramping up the discovery phase this fall. This is the lawsuit in which the government intervened and involves state Medicaid of repayment limit program. We will file a motion for summary judgment later this fall. The Tenet lawsuit is still in existence. However a motion to dismiss has been on file since the end of June and the judge held a hearing on September 8. We continue to believe that there is no reasonable basis for this lawsuit and that it is contrary to the interest of stockholders for a company that is subject of shareholder proposals to be able to sue and recover against those proponents.

There are no notable developments in the securities class actions case or the stock action derivative cases and we have not yet been presented with a consolidated complaint by either of those group of cases. The cases limit the allegations made in Tenet suit and we believe it to be without merit.

We continue to work cooperatively with the Department of Justice and the OIG on their investigation. There was some activity last week regarding a motion filed by the government in the. This is a case that in April, shortly after the filing of Tenet lawsuit, the government which had previously decided it would not intervene in saw about 180 days stay and the filing last week saw to either transfer the case to the middle district of Tennessee, also an additional 180 days stay. We told the government that we did not object an additional 90 days stay but could not consent with the transferred case because we didn’t have enough information about the reason for transfer.

The real case involves only patients at Lutheran Hospital in Fort Wayne, Indiana. While some of the allegations in the complaint speak to time periods after our acquisition of Triad, the case also addresses Triad’s conduct prior to our acquisition including the use of observation and important decisions about (inaudible). Our objection was sought to delay the investigation, we sought it early meeting – we sought early meetings with Department of Justice and have been seeking to work with them to investigate any theories of liability against our hospital. To date, we’ve provided a large number of documents. Although we would like to see this resolve quickly as possible, these things do take time, similarly we have been providing documents to the SEC in connection with their investigation.

Texas attorney general’s investigation was commenced in November 2010, remains focused on documents related to Pro-MED emergency department software tool. Our Board of Directors and the Audit Compliance Committee of the Board as well as our management team continue to be very focused on these investigations.

At this point, I would like to turn the call over to Larry Cash to provide you with a summary of our financial results.

Larry Cash

Thank you, Wayne. Our third quarter consolidated admissions decreased seven-tenths of a percent compared to the same period of last year of adjusted admissions, which factors in an outpatient business increase of 4.9%, our same-store admissions decreased 7% compared to the third quarter 2010 and soft inpatient volumes continued in the third quarter.

Our sole community providers were down over 200 basis points more than our non-sole providers, consistent with previous quarters. Same-store admissions for hospitals of any revenue less than $50 million or less double the decrease or have a double decrease of those hospitals compared to the hospitals above $50 million.

The following specifics contributed to the decrease. While the related service closures and lack of flu, 100 basis points. Low admissions in women’s services that includes obstetrics and gynecology, 60 basis points. Increased competition for new services in a few hospitals that occurred progress second quarter changes in physician relationships as well as physician practice acquisitions than few of our competitors in several markets, about 50 basis points. Reduction in one day for 50 basis points, chest pain admissions accounted for 40% of the decline, lower surgical inpatient admissions for the corresponding increase in outpatient surgical visits of 160 basis points and cardiac surgical procedures represented approximately 45% of the decrease. The same-store adjusted admissions decreased 1.1% for the quarter. In the third quarter we continue to have good outpatient equivalent admissions growth of approximately 5%.

Net revenues in the quarter increased 8.7% from $3.160 billion last year to $3.436 billion, some consensus estimates did not adjust last year’s revenue of $3.052 billion for divestiture in 2011 that we’ve announced.

On a same-store basis, net revenue increased to 2.8% for the quarter, our revenue growth in the third quarter slowed in the first six months of 2011 due to decline in the third quarter Medicaid reimbursement of 130 basis point, a slowing of the growth rate in Medicare case makes a 10 basis points, although, we still have growth and increasing ourself by discounts of 20 basis points. Our revenue also reflects a slowing of our sub pay revenue, physician practice, revenue of approximately 80 basis points.

For the third quarter, same-store revenue for just admission increased 5%, versus the same period of 2010. In the third quarter 2010, same-store revenue for just admission grew 5.2%, compared with the six months of that year of 3.9% or a 130 basis point increase.

Same-store surgery volume increased 2.8% for the third quarter, approximately $40 million of government health care information’s technology incidents for Medicaid and Medicare are included in the third quarter revenue. And we did proceed about a third of the cash was today – discovering a revenue helps also challenge us in Medicare and Medicaid reimbursement and is part of the four-year program that we are changing for 2014.

Our same store Medicare case mix improved 1.1% versus last year or all payor same-store surgery increased 3.1%.

Our consolidated EBITDA was $454 million for the quarter versus 441% a year ago, the increase of 2.7% on a same-store basis, reported EBITDA was $460 million for the third quarter, increasing of 3.8%, our consolidated EBITDA would have been about $460 million excluding the $6 million of expenses related to the tenant lawsuit $460 million if it’s going to tend a lawsuit to share the lawsuit in government investigations or an increase of 5.7%

For third quarter EBITDA margin on a consolidated basis was 13.2% versus 14%. For the prior quarter, the decrease of 80 basis points is primarily due to low margin to original acquired facilities to grow from bad debt expense and expenses related to the lawsuit general lawsuit of government investigations. Same store EBITDA margin is unchanged over the year 14% for the third quarter, our non same store margin was minus 4.3%.

Non same store margin inputs or hospital or acquisition caused as well expenses related to the investigations.

Our consolidated EBITDA margin would have been 13.4% excluding the 6 million of litigation, anticipating the change that we are taking with effect 2012 reporting presentation of bad debt, our same-store margins excluding bad debt from both revenue operating expenses would have been 16.2% versus 16%, a 20 basis points improvement for the third quarter and a 30 basis improvement on a year-to-date basis, 16.4% versus 16.1.

Consolidated operating expenses as a percentage of net revenue increased to 80 basis points in the third quarter of 2011, primarily due to our recent acquisition from bad debt a decrease in supply is 30 basis points and a decrease of 10 basis points on our operating expenses and ramp and have to offset increase of 40 basis points in payroll and benefits and 80 basis points in bad debt, our consolidated operating expenses include the $6 million of investigating expenses.

On a same-store basis, total operating expenses were flat year-over-year, the increase in the bad debt was offset by decrease of supply of 60 basis points, and other operating decreases in the areas of now practiced issued to general leasing and marketing. Reduction in supply has been to so for improving our drug expenses as well as various other improved pricing.

On a year-to-date basis, consolidated admissions increased to 5% to 10%, consolidated adjusted admissions increased 5%. Same-store admissions decreased 5.2% and our hospitals with less revenue of about 15 million head into time about twice what the hospitals on a year-to-date basis over 50 million.

In the filing contribute to the decrease service closures whether and lack of low 60 basis points lower admissions from 75 basis points. Increased competition as described earlier in few markets, 50 basis points reduction and medical admissions – 40 basis driven by a decrease in chest pain admissions of approximately 40% and lower surgical admissions for corresponding increase of outpatient surgical visit of 150 basis points approximately 40% accretive to a decrease of inpatient cardiac surgeons. Thanks to our missions plan 5% to 10% and outpatient admissions increased to strong 4.8%. Consolidated net revenue year-to-date was $10.2 billion, a 9.8% on same-store basis, net revenue increased to 5% from first nine months. On a consolidated basis net revenue for just admission increased 4.6%, on a same-store basis net revenue for just admission increased 5.6%, same-store surgeries increased 2.3%, a very strong increase in outpatient part of – procedures.

Our same-store Medicare case for nine months September 30, 2011 increased 1.5% on a same-store all per year. Year-to-date increased 3%. Consolidated EBITDA was $1.372 billion for the nine months ended September 30, 2011, on a same-store basis increased EBITDA increased to a solid 5.8% and consolidated EBITDA margin for the nine months ended September 30 was 13.4% and same-store margin for the same period was 14.3% an increase of 10 basis points compared to 2010 non-same store margin for the 9 months was a negative 4.8%. And again the consolidated EBITDA would have been $1.385 million, an increase to 5.7% with before the investigation expenses.

For the first nine months, consolidated operating expense as a percentage of net revenue increased 70 basis points from the prior year. Increases in payroll 50 basis points, bad debts 60 basis points was partially offset by 40 basis points improvement in supplies and same-store operating expenses declined 10 basis points, decreases in supplies were 50 basis points and decreases in our operating increase in bad debt.

For the third quarter, consolidated bad debt was 13.1% versus 12.3% for the same period a year ago an increase of 80 basis points. On a sequential basis bad debt increased 50 basis points. While same-store decreased 6%, same-store sub pay adjusted admissions increased 3.6%.

Year-to-date consolidated bad debt increased 60 basis points from 12% to 12.6%. Our consolidated bad debt maturity administrative subpay discounts divided by just in that revenue was 24.5% year-to-date through September 30, 2011.

Our combined consolidated bad debt maturity in administrative discounts as a percentage of adjusted revenue were up 140 basis points year-to-date, year-to-date increases consist of 60 basis points in bad debt, 80 basis points increase in discounts. Our consolidated cash recedes were 102% for the 12 months ended September 30, 2011. And our bad debt guidance range has been increased to 12.6% to 12.8%.

Total AR days were 47 at September 30, 2011 increased one day from one day from 2010 and unchanged in the second quarter. Allowance for doubtful accounts is $1.840 billion or 50.9% at September 30, 2011. The allowance for doubtful accounts related to contractual announces for sub pay was approximately 84%, sub pay receivables at September 30, 2011.

Community Health Systems continues to have a favorable payor mix recorded in the September 30 consolidated net revenue by payor source was Medicare was 26%, Medicaid 9.5% managed care and other 2.2, sub pay 12.3% of revenue on a year-to-date basis. Medicare is 26.8, Medicaid 9.7, and managed care and other 51.3 and sub pay 12.2. Please note that the Medicaid steps have already and will continue to affect the second half of the years as Liz talked about, cash flow from operations was to $236 million for the quarter on a year-to-date basis, cash flow from operation of just $820 million, versus $898 million for 2010. The change is primarily due to the increase in the continued to $16 million. The depreciation, amortization $34 million offsetting these increases were $65 million increase in receivables and approximately $100 million due to handling of payroll in the third quarter 2011.

The yearend of cash full impact and payroll will be minimum, cash flow got it’s some range from $1.150 billion to $1 billion and $250 million. Capital expenditures for the quarter just ended $181 million of capital 3%. Year-to-date capital expenditures are $533 million of 5.2% replenished hospitals were approximately $44 million for the quarter and $126 million year-to-date and we have lowered and high end of our CapEx guidance for $25 million.

The guidance now were in just concerned of just 5300. On balance sheet cash as of September 30, 2011 is $266 million, it is in the quarter which only had available credit of from the revolve of $700 million after at staying orders of credit. I was looking at the balance sheet as of September 30, 2011 we had about $1.133 billion in working capital 14 from eight paying in total assets. Total asset and debt of September 30, 2011 was $8.830 billion of which approximate 91% as mix in our debt to capitalization in the quarter and was just approximately 79% attended on quarter were probably $5.150 million interest rates of earnings down $200 million from the end of second quarter and again 91% of debt as fixed.

The company repurchased 36 million or 1.706 million shares back in the third quarter 2011 for all of 2011 we repurchased 3.47 million shares with approximately $85 million. With the vast off-balance as follows increased EPS guidance, 3% in the low range from 320 to 330 and just not that it’s up 5% when we talked it for a year ago $3.15 now. The expenses related to tenant loss of shareholder loss to investigation are excluded from our 2011 balances. It is also excluded from the midpoint of our 2000 EPS guidance of 360. We get increased our bad debt guidance to reflect the slides pull down corrections to 12.6% to 12.8%.

Can see this from meaningful use of currently projected be at least 35 basis points of revenue we did recognize about $40 million in the quarter. Previously the guidance was about 30 basis points of revenue but we can express guidance minimum for use in less expenses of 15 basis points of revenue in high end. Spinning on the assets to date was about 100 million, was about 150 million during the year, probably spent something they had 300, 400 million by the end of 2012.

And looking being able to use incentive revenues consider, operating expenses we had over 2,000 people working on for use. And now we have capitalized that’s been described, but you’ve got to consider like interest and depreciation, amortization looking at earnings per share.

We pursue this quarter better than some other resource reports indicate. Also we provided two patients detailed information for 2011, they should be less and we consistently information for several years. Wayne, we have (inaudible).

Wayne Smith

Okay, Larry, thanks. Our results for the third quarter of 2011 of Community Health Systems consistent record of earnings growth in spite of challenging markets, while our volumes have been constrained by the macroeconomic environment the way these results continue to demonstrate the underlying strength of our operating model.

With that I will now open the call for questions. If you would like to talk to us after the call, as you know you can reach us at 615 465 7000.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of A.J. Rice from Susquehanna Financial Group. Your line is open.

AJ Rice – Susquehanna Financial Group

Thanks. And hello everybody. Just maybe to pro first of all a little bit on this, I guess one of the biggest pressure points on your admissions number, inpatient admission is this pressure one day admission in the move and outpatients pickup. I guess, a couple of ways to ask the question, you sort of alluded to you think that maybe some of the people in the field are reacting to some of the publicity, have you, as you discuss with them do you think that’s a permanent change in behavior or do you think that’s a short-term thing. And you also believe that maybe the switch away from to interfalls having some impact there and what are the prospects about anniversarying sort of starting at some point to see a moderation the impact of that.

Wayne Smith

A.J., I think certainly when you have as much criticism that we receive from our detractors that we are going to get some response in the marketplace and some of our employees and we are seeing some of that. Some of this by the way you when you break it down to do with just the movement from inpatient to outpatient, I think other companies are experiencing the same thing when it comes to around cardiology and PCS and there is a lot of movement there going on anyway.

But there is no question that we’ve had some adverse impact related to the issues that are around the tenant law suit. Having said that, I think this will moderate, I think it will over the next couple of quarters things will look different than they do today. But I think we have to manage what we have to manage and you can see that we’ve done a good job managing through this in terms of our expenses were in line cash flow, we are doing great job in terms of physician recruiting.

And by the way, we are not having difficulty under marketplace in terms of acquisitions. So even though we have these detractors they continue to say that the things that they are saying which we don’t believe have a lot of myriad. We continue to perform I think extremely well in this environment. Larry?

Larry Cash

Year, when we speak to Intercall a fair amount in the second quarter, finished in the third quarter. In the last quarter the Intercall probably had a – cost was inside that group about 60% of those hospitals ahead of the plan and the hospitals that we can parting about 75% decline versus a lot of variations in two groups. And so you got up and some down, some bigs some still drilling and it also probably had an easier comp in 2010. So it should have had some analysis when its target their number on and we think a lot of those reactions have a lot of actions.

Wayne Smith

It’s hard to conclude, any specific thing is at issue here is more of the combination of all the big...

AJ Rice – Susquehanna Financial Group

Okay. And then just maybe I will ask about the guidance. I know you threw out a number for 2012, I think you probably may be only one that will do that. And I understand that traditionally you have been somewhat conservative. I guess is there any high-level input that you can give us about what you are assuming about the economic backdrop, maybe high-tech revenues next year versus this year similar amount or not. Any flavor in a high-level on what’s embedded in that initial 360 number?

Wayne Smith

Well, let me just start in terms of the so-called economic backdrop. I don’t see things improving greatly in terms of the economy any time in the relative near future. Unemployment rate doesn’t seem to be coming down that rapidly, we’ve said all along that until we see a meaningful in unemployment it’s pretty hard to see a lot of growth in commercial business across the country, I think that applies to everyone.

So I think we still face pretty difficult economic times, we have all the uncertainty around the super committee which no one knows whether they are going to act or not act when it’s all said and all the other issues going with Medicaid cuts. I think it’s a challenging opportunity – challenging time for us having said that, I think we are a still very strong operator and are doing all that we apply on good properties or recruiting a lot of physicians for managing our expenses. I think we will continue to be successful. Larry?

Larry Cash

Yeah, yeah couple of things it was to be a Medicare update here, in October which will help 2012, start in October. I think the Medicaid challenges that we’re seeing today will be better in 2012, as we know that those that’s you want to be in many diversities in the those you got some carryover in Florida and Texas. But allow them, Medicaid reductions that took place affecting this part of one obvious large in 2012. Second I think you guide us and you provide our tax programs coming in some states, Oklahoma in the end of May be California which is thankful coming in the first part of 2012 and I think that we better this year and we all is we got about $1 billion of acquired revenue with low margins which we took to continue improve based on history.

I guess the question today is about is hi tech, we’ve got about 35 basis point revenues built in this year’s guidance and that isn’t a least number. We got 40 million we’re very focused on our program or trying to prove that program and trying to give as much revenue, as we can’t trying to as fast as we can. If we get more revenue in 2011 and it could be less than ‘12. Outside of revenue would be at least this much and probably a little more.

In 2012, when you think about earnings per share, you got to consider the operating expenses which there’s a lot of expenses out there use 20% of your chance to have some type of what it is but you also got to consider the depreciation, interest and amortization out quickly you are going to understand. So I wouldn’t now think that the 360 is greatly infected by how much Hi-Tech revenue we’re going to have on the earnings per share level. It would ask some 2012 we could have put out because with our balance with we do give you a range for Hi- Tech dollar some.

Wayne Smith

(Inaudible) just one more comment on Hi-Tech since we seem to be getting a lot of questions and there may be some confusions around this. I think a number of companies have already Hi-Tech in their earnings number one. Secondly I think company’s going forward with clearly have Hi-Tech in their earnings in the future and if asked to think about as you look at the environment we’re operating it, we’ve had a 130 basis points decline in terms of Medicaid in this quarter which is a $42 million of whatever this is going to offset. I think in the future this is just Wayne Smith’s view, of this but I think in the future Hi- Tech will be the bridge to health care reform it is going to be three or four years out because they have such tough operating environments and Hi-Tech can train to a very positive frame for this industry. I would think going forward.

AJ Rice – Susquehanna Financial Group

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Adam Feinstein from Barclays Capital. Your line is open.

Adam Feinstein – Barclays Capital

Thank you, good morning guys. Just, I guess it just the follow up since you just mentioned Hi-tech just, so you guys broke out the impact. I guess, how should we think about Q4, I guess most of the impact as most of the numbers you broke out that’s impact for the third quarter. So will there be some in the fourth quarter also, Larry?

Larry Cash

Yes, if you take 35 basis points revenue, you get close to $50 million and then we’re 40 million and we embedded $10 million uptick revenue, you got some operating expenses, some fixed cost. But I would tell you that, we have got a lot of people working on this and if we can go get more revenue and get it done December fourth quarter we will do that when it is closed where it is expenses probably, we will be actually taking revenue away from 2012. This is a program which I know you are aware, it’s going to be there for 4 years, so everyone wants to talk about this, we will be disclosing the revenue in the fourth quarter, we will tell what we expect for 2012 when we talk about it and it also will be broken down out in Q going forward.

Adam Feinstein – Barclays Capital

Okay, great. And then you guys did a good job on the cost management, the other operating costs in some of other cost line items. Can you just talk a little bit about what’s going on there and just in some of the initiatives you have in place?

Larry Cash

Yes, first of all our if you look at our cost and sort of supply as part we have done the best job and we have lot of various reductions in the quarter on other operating expenses. But overall if you take our operating expenses less bad debt, we had a good increase of 2.2% and revenue was 2.5%. So we really did a good job of holding for the year.

If you look at it in the case of, we have some improvements in cardiac contracts, pacemakers, drug alluded stands and we have few orthopedic contracts we really go negotiate, got a benefit. We have done a good job of moving some cost down on these procedures span cost and trauma are cheaper, absolute real good job as goal are here, contributing to our success, operating expenses were also. The man hours for adjusted admission when you consider the rough – we have done good job on man hours for adjustment admission. Payroll doesn’t look like it’s quite as good is really it is those are time when we have a lot of growth and employ physicians are around 2% which is probably as good as anybody we have done a good job of controlling our health insurance. Workers comp I think all end in 2% that we have got to 2.2 is really a good contribution from expenses.

Wayne Smith

This is not – little bit, one of the things as we said all along we have not cut our following case, we had not major layoffs around the country. Having said that we had an employee’s satisfaction survey in the last couple of months and we had 67,000 employees respond to, we got 85% positive satisfaction, I think that speaks to the strength of this company.

Adam Feinstein – Barclays Capital

Okay. Great. And let me just follow-up question. So Wayne, maybe just give us your thoughts in terms of Washington, how you see things playing out and just any update about the process continuous through?

Wayne Smith

Yeah, I have launch this week, I was at the launch in New York with Senator McConnell and I ask some specifically, what do your things going to happen in terms of super committee? He believes there is a good chance that they’re going to report something out, what that might be? He doesn’t know, of course, but I suspect if they report something out, it probably will be more than $1.3 trillion threshold. I actually don’t – and I said them, I don’t see how that happen when republic and small entire market reform and democrats want tax increases, I think that’s a conflict, it is very hard to resolve.

I personally think there’s much more probability that it will go to sequester. Having said that, there are couple of other things that have happened recently in terms of yesterday or whenever the discussion was in terms of Moody’s and S&P relating to the government again. And if that could be pressured up to get this committee to respond.

Other than that I think we are ancillary very choppy, difficult period until post-election. After post-election, you tell me who’s going to be the President and who’s going to have the Senate and I can give you a better idea in terms of how it’s going to fall out.

Larry Cash

And I will make one comment, I know that the sequester credit 2% put in place, you’ve read about it others out, at least – just right now, the market basket update and we consider all the factors should be close to about 3%. Next October, itself we’re doing 2% reduction in rational and closed, probably January of the 2013 in that perspective. So if that happens you – because of the 3% increase and back to somewhere around 1% which I spoke about we have this quarter, so what we had last October.

Adam Feinstein – Barclays Capital

All right. Thank you very much.

Operator

Your next question comes from the line of John Rex from JP Morgan. Your line is open.

John Rex – JP Morgan

Thanks. And I just wanted to go back to your commentary that you had in the call. You talked about the variations you were seeing in some of the markets and as it pertains to volume and look every way’s kind of very difficult to get precession into this, but you did talk to kind of the overhang of the investigation and such, would there be any reason why that particularly impact will be having more affect on the small hospital zone or larger hospitals or would you see that as totally separate that that’s kind of more consistent across the whole system and the smaller hospitals are varying for other reasons.

Larry Cash

Well, I think when you think about small hospitals, we have a higher percentage of non-intense admissions probably I think that causes hit on this, they were higher percentage on the volume. They also have a little bit more flu and generally have more business which is probably unrelated to the investigation that I would think that the smaller hospitals with smaller volume probably have less intense business. So the effect on them can be a little bit greater then out of places especially in the area.

John Rex – JP Morgan

Okay. So in particular as that comes out, but as it related is your view here in terms of just that there is an impact also from just avoidance because of the issues created by the investigation I think of a full community Hospital and get the only guy in the market there were just few places to go, and I’m just little surprised kind of the see more and more impact on that first to avoid or –?

Larry Cash

I think we don’t have as possibly more people – and the inpatient surgical mission are going over that’s probably all throughout the country, that’s probably set to drop in one day medical missions for the person who are little higher percentage than we thought to seen throughout the company.

Wayne Smith

John, having said – saying this all differently, I think there is a – I want to acknowledge there is a general trend in our outpatient. I think what is happen in terms of our situation based on the fact that we’ve got most negative publicity, that’s got to be accelerated bit because of that’s already a trend that is happening, but I think it’s been accelerated because of height of the awareness around this because of the negative publicity.

John Rex – JP Morgan

That makes sense. So your view would be that the behavioral change had been more apparent in the smaller hospitals perhaps because of their mix and not necessarily just a higher avoidance of kind of patients coming or physicians referring?

Larry Cash

I think our mix is differently that you have it across in all it’s just – we probably got more and some of the other categories. I think probably on the surgical more of higher mix in the larger hospitals.

John Rex – JP Morgan

And anecdotally have you been able to see whether this it sounds like this is kind of mostly behavioral change and particular in terms of how things change when they present, but have you seen more avoidance, have you been able to pick up kind of just avoidance in terms of shifting share to other facilities or it’s been more just how that particular admin is classified?

Larry Cash

So I don’t think the (inaudible) we have had some little more competition we called about 50 basis points quarter year to date that’s only handful of hospitals there, but obviously we’ve been talking about one day admission and licenses in the first part of 2009. And now it’s accelerated little bit. This year, but it’s the plan that we’ve been talked about for some time.

And I would say John, there is not a lot consistency here our facilities are different ups and downs and rounds and everything else across the country, there is a lot of differences here.

Larry Cash

And I’m aware at least three dollar public companies talked by that for a while the but now that I think other people have probably, having some assign when they.

John Rex – JP Morgan

Okay.

Larry Cash

The specialists know how to manage care – they lack efforts in all of that.

John Rex – JP Morgan

Right, okay. That’s helpful. And then did your 12 sensitized is a kind of initial view that you kind of persist these, with these kind of level of pressure through 12 and your initially just view?

Larry Cash

Well, I think Smith gave a specific answer, we’re operating around the bottom. Try to minus one to plus one. Adjacent and initials of range are sort of close that middle that out. I think we would generally part of billing to thinking but it being close to that, and it’s been admissions grow a little bit, we part of loose some of the operational growth. But clearly we have a lot of moment in last three years from inpatient to outpatient as part of the continued better, I do think we would have less challenges from the inpatient right, we may have also less outpatient growth initiative.

John Rex – JP Morgan

Great, thank you.

Operator

Your next question comes from the line of Tom Galluci from Lazard Capital Markets. Your line is open.

Tom Galluci – Lazard Capital Markets

Thanks good morning. Maybe just following on, some of these volume questions. You breakout some of these other pressure points, the obey area and your competition from other hospitals and some changes in physician relationship through acquisitions of physician. Can you speak, to it maybe when you see some of those things and the worst things. We will get a better understanding of where we are in that curve?

Larry Cash

Well, unfortunately that we are related in service closures, they come and go. As we know, we think we can close the services you have to disclose the head effects. The well related should happen for all on floods and tornado affects in the past quarter. The women’s is – a year ago, we were down about 10%, we were down about 4% now, so that is about probably look better hopefully, I mean well, I don’t well to dis loose season be like be like we lost 39% of our fluids volume in the quarter. And we will see how this niche goes and I think the computational anniversary itself in the first quarter of 2011 and this is also the other one day stage and surgically inpatients are shifted to begin to anniversary from the first part of the first half of 2012.

Tom Galluci – Lazard Capital Markets

Computation anniversary in 2012 is just to be clear there?

Larry Cash

Yes.

Tom Galluci – Lazard Capital Markets

Okay.

Larry Cash

Just want through the anniversary itself for first quarter for these locations.

Tom Galluci – Lazard Capital Markets

Okay, that’s helpful. And then on the collection side the bad debt side, its sounds like the more, the increased outpatient brings a little bit difficulty in collecting. Is it a bigger in the inductables there or what’s the dynamic and what can you do to sort of come about it.

Larry Cash

We actually cover all – so quite after an insurance, our deductibles and co payments for the quarter to date about 12.7% of our payments in last year to 12.4 for all last year the (inaudible) about 12. I would hope that our self play, pure self play collections get a little better. We were running close to 8% the last couple of years, we were running a bit less than that in this last quarter and we got a lot of efforts to try to get that to a little bit better result in the fourth quarter than we had in the third quarter.

Tom Galluci – Lazard Capital Markets

Okay, it is final one. So just recruiting just curious, you’ve talked about increased recruitment over time. Just wonder what’s driving that and if you could speak to on the vision side the present of that’s employed, if that’s rising or not? Thank you.

Larry Cash

The number of physicians is increasing, a growth about 2300 physicians out of our longer 16,000 number of physicians probably and I would sense – everyone, they’re available, but they work while they’ll do all things doctors could do and we see that as a good way to have doctors, so it’s about – cost of for the physicians. Wayne, you want anything to that?

Wayne Smith

No I think it’s a trend for the future and I think we’re trying to get ahead of the curve here. When you end up with 32 million more people in the system, you have got to find the alternative ways of providing levels of services and I think that’s one way that you do it. And I think that will continue to grow as time goes along. We’re doing fine in terms of recruiting side of it. Like everybody else, we wish we didn’t have to employ quite as many as we do, but it’s economy related, so we will continue to be both offensive and defensive as it relates to physician employment, but I think we are on a good track and we’re doing well.

Tom Galluci – Lazard Capital Markets

Okay. Thanks.

Operator

Your next question comes from the line of Kevin Fischbeck from Bank of America. Your line is open.

Kevin Fischbeck – Bank of America

Okay. Thank you. I appreciate the comments about these headwinds on the one-day stage the view is that they’ll start to moderate over the next few quarters. Are you seeing any indication of that already, because it looks like that headwind has increased over the last couple of quarters. Are you starting to see a change in that or is it just a matter of anniversarying and the comps getting easier?

Larry Cash

Well, I think we did make some internal changes to our criteria about a year ago this time, that anniversary is now. And we probably had about 200 plus basis point reduction in the first quarter of 2011 only and we are running on that now, something we get in the first quarter, we’ll have a little easier comps in that. I do think the first half we will hopefully see the comp reductions we are seeing today.

Wayne Smith

Also, Kevin, keep in mind that we had been under attack since April is pretty strong and this is a tack for the first couple of two, three months. So this is not like it’s been extended issue, we did we were down 5.5% last quarter and down 7% this quarter. I think a couple of you all said, we should expect this we didn’t think we should have, but it clearly is unintended on our part, but intended in someone else part to adversely affect our business. But having said all that I think it will as Larry said next year will be a different year.

Kevin Fischbeck – Bank of America

But I guess is the view that Q4 will be similar issue to Q3 or will it be you think it will be better or worse or is it really next year that you’ll start to see things improve?

Larry Cash

I would imagine our initial challenge will continue into the fourth quarter.

Kevin Fischbeck – Bank of America

Okay. And then just trying to just understand a little bit about the economics of lot of this volume because 7% decline in admissions, is just a really big number, obviously you’re picking up out from class converting into outpatient. But how do we think about the profitability of the volumes that you have lost and at what point and what types of volumes do you get more concerned about but because you’ve growing EBITDA up pretty well with this headwind just want to understand a little bit about the economics what you lost and when you might get worried about the volumes really having the headwind.

Larry Cash

We do call it out just trying to just change probably from a Medicare perspective in layer of couple of $1,000 per admission a little less than on outpatient or the inpatient. The managed care to Medicaid varies by state, varies by contract but it clearly under the situation we are losing some.

If you look at our fourth quarter, third quarter surgical components, clearly our inpatient gross revenue decreased, outpatient increased pretty good. The outpatient revenue increased about twice what the inpatient increased on a gross basis units.

If you look at the inpatient per case, it’s about 30% more than the outpatient per case from a gross perspective and similar statistics. The quarter is actually a little bit better from a outpatient perspective. If you look at how much revenue we’re losing in inpatient revenue, but we are up over 10% outpatient revenue growth – hospital business. I think we have done a good job other than the Medicare differences and there’s a little difference in Medicare, I think there is not as much difference in the payment inpatient surgery and outpatient surgery are just paying this.

I wouldn’t comment its one of our profit in surgeries or probably related I believe other people have talked about it and had some challenges on cases result for we’ve actually had a growth in case or case mix for cardiology even with the drops that we had on Medicare case mix are probably for cardiologist about 4%, for all payers about 2% from Medicare –. Now we good case control for cardiology because the excess – done pretty good.

Wayne Smith

Yeah. The other thing I would say is, from an inpatient to outpatient piece of this, in terms of this, our fundamentals are very strong, and the outpatient growth is twice or three times now in terms of inpatient side, that’s a trend for the future, obviously. But the underlying fundamentals in terms of expense management, physician recruiting and all the opportunities that we have in our markets are very sound for us for the future.

Kevin Fischbeck – Bank of America

Okay. Then a last question here on the payor mix side of things. I guess the self pay up, I can understand that, but the government volumes based on our surveys and what’s all the companies have said seems to be growing faster than commercial, but it looks like from payor mix perspective commercial increase in government dropped, any color on that trend?

Wayne Smith

The Medicare revenue, I think you’re looking at our revenue payor mix, I believe, and we were at 26% versus 27% last year and 26.8% year to date. The revenue per unit was roughly flat or slightly down the quarter for Medicare and actually the Medicaid reimbursement was off quite a bit. So when you look at the payor initially, the revenue data Medicaid payment for admission dropped, as result of some of the reductions we got in Medicaid. The Medicare is – now the Medicare is in managed care.

We don’t pull it back in the Medicare, we also negotiated with the payors, managed care payors. We probably hasn’t removed them from there through the managed care.

On a revenue payors, it’s constructive. I think the bigger problems in the Medicaid, Medicaid is 9.5% this quarter versus ‘11. And I think that was result of the rate we got from overall admission perspective, Medicaid stays about 18% of our initiatives.

Kevin Fischbeck – Bank of America

Okay, great. Thanks.

Operator

Your final question comes from the line of Gary Taylor from Citi Group. Your line is open.

Gary Taylor – Citi Group

Hi, good morning. A couple of questions, I guess just come back to the high-tech thing, today obviously it’s an issue where it sounds like your view and maybe the streets view is different on how to understand that. And I guess one, question and one suggestion, and I guess the suggestion is if we had some more detailed disclosure of revenue expense D&A interest capital, I guess it would be a little easier to kind of carve out what kind of the recurring impact is and I know, no one else has done that. So just drawing that out there, but my one question IT, is there some IT expense that actually goes away, so we get a time you achieve all the targets to hit meaningful use when you get out into 14 or 15. Is there a material piece of recurring IT spend that goes away because talking to some other companies have kind felt like the answer was, we’ll never spend less in the future on IT than we do now and so it’s just going to be a growing part. So certainly the revenue once we get three or four years out, that was a way. But is there an expense fees that you think falls away as well?

Wayne Smith

One of things I would say Gary is, number one, we think this problem is going to run for about four years. So we’re going to talk this about for a long time in the future. Having said that, the idea here is productivity and efficiency within the system. So theoretically, you should add to new spend and all of us are going to spend a lot of money on this and all of us are get a lot of money back from the government on this. But you should get some productivity out of it in the future, which should reduce some expenses. I don’t – in terms of capital spending, that’s a different matter. But I would think that we would get some clear improvement trying to – certainly, we would hope we would based on how much we’re spending. Larry?

Larry Cash

Regarding principles of the group work analysis to get both the efficiencies in healthcare delivery and productivity so that’s in the guiding principles that meeting were kind of setup. I think the current expenses that goes away is all your trainings and interview, read anything about that doctors who went through this, they’ll lose 20% to 30% productivity, we got training, we got to nurses and other –

Wayne Smith

They lose that productivity on the front end.

Larry Cash

Yeah. They will lose that when that goes out and push you also out of the training experience as you deal. That’s what drives some of the expenses that was training that to goes on here. First step it’s travel and stuff like that. You won’t have that – implementation cost is not capitalized. I went back to your first comment, I did try to say we’re still about $150 million by the end of the year or next year is somewhat $300 million to $400 million. Gary, that’s probably a flat to seven year and the – and you can make assumptions, you can spend $150 million next year (inaudible) you can make some assumptions on how much depreciation and amortization and interest cost will be added and that we had said earlier then we did say effectively, we thought we’d probably spend over $100 million this year for and probably a relevant amount for software and across that are capitalized on in that didn’t rush through correct, because –

Gary Taylor – Citi Group

Was that – is that all capital cost or is that?

Larry Cash

That’s capital cost and I think that’s people someone ask the government couldn’t give you a payment and they know there are some – not some much offerings and our capitals and investment we – next three or four year we’re setting up to do that and there is some interest, that why I don’t it’s been reflected on earnings per share. (Inaudible) is just because of the interest of the per shares you got and all the training cost you got – obviously, I think over 2000 people spread about working on the program and then they were in all kinds of different area. So I’m here in corporate office, I’m going to deal some positions in some contracts. I can tell you the – the growth of people in this corporate office, it is IT, it is not lawyers, it is not accountants, it is not people working on – operations people.

Wayne Smith

(Inaudible).

Gary Taylor – Citi Group

So on the operating expense piece, the capital piece, I hear you and I do recall you talking about that before in the operating speech. I mean, can you say in 2011 on labor and other expenses an extra X million dollars versus 2010 and that partially offset.

Wayne Smith

Well, obviously. Looking for 2012, I would expect operating expenses to be something, because you got a full year there instead of just a partial year. I think our analysis is that operating expenses will be at least 50% of incentive (inaudible) we give for 2012 with that if you consider.

Gary Taylor – Citi Group

And so other people have used that.

Wayne Smith

Yeah, a lot of people are used to it, it might be a little less estimate for us this year will just account some of the early dollars in Medicaid, but I think that’s a general good rule of some of talents here – we’re comfortable with it.

Gary Taylor – Citi Group

Okay.

Wayne Smith

And – I think that – hope your hold. I really don’t think it’s in our best interest to try to take a project and think about the people you’re training and trying to say, well, let’s put you cost over here, not just getting this cost over somewhere else. There is a lot of estimates that go in that will add in. And I think that it clearly was of some help in the quarter, it weren’t near as much of a lot of people, we try to eliminate $14 million in revenue that’s just absolutely wrong.

Gary Taylor – Citi Group

And so it sounds like the answer to my – I appreciate that the answer to the question to the long-term question it sounds like is maybe you’ll never have a smaller IT department or spend less on IT but the clinical efficiency that comes out of all this hopefully is going to be positive in terms of (inaudible).

Wayne Smith

We will try to reduce the spending on IT – we are fortunate to have a good IT department, has done a lot of good conversions, prior conversions, we’ve done other stuffs, we got to – brought a lot of people in we will be brining a lot people in during now and at the end of the year to get ready for 2012, because you got the safe one, you got to get done for Medicaid that occasionally user to get done, but the stage one so we did have some stage one Medicare this quarter, we will have some next quarter.

Wayne Smith

Garry, if all of the headwinds we have gone on in this industry, this is one of the few things like its relatively positive to get us through the next three years or four years to get the health care reform, we will get more volumes.

Gary Taylor – Citi Group

Well I certainly don’t – I don’t disagree that, it’s real cash and it’s a positive. Can I ask one more small question and I would appreciate it. New Mexico, we think it’s roughly 4% a year and if we just assume kind of Medicaid is 10% which is – as you know your general average would employ. Roughly 15 million a quarter of New Mexico Medicaid and so the question is sequentially was there a big change in UPL or how that’s getting paid and I guess I’m trying to think about was there a large or sequential New Mexico Medicaid impact then we might be thinking of just kind of using the back on the envelope numbers are making with?

Larry Cash

The Medicaid percentage in Mexico is that at least twice to come the average negative two and half times from a revenue perspective, so that would change your answer. There were some changes throughout the year, we had some changes last year in the fourth quarter they changed – the state changed away managed care would work as it relates to outpatient and that caused some money and it’s affected the first couple of quarters this year, they come out this quarter. There were some reductions, it’s appropriate and it starts on July 1st and there were some reductions on July 1 and probably some payments which were not been received for 2011 that we got last year. So a lot of portion of our $40 million reduction is in New Mexico and that will – once October those reductions hopefully won’t continue to be reductions and it will be a headwind for 2012 when we started to get continue to get what we get into – New Mexico was a pretty hard component, but it is a lot more Medicaid business in Mexico than you estimate it.

Gary Taylor – Citi Group

Right. Okay, great. Thank you.

Operator

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

Wayne Smith

Thanks again for spending time this morning. Our consistent abilities drive revenue between cost effectives in environment demonstrates solid execution of our central operating strategy. We want to specifically thank our management team, staff, hospital Chief Executive Officer, Chief Financial Officer, Chief Nursing Officer and our division operators for their excellent operating performance for the second quarter. We remain focused on our business strategy and improving our results. Once again, if you have any questions you can reach us at area code 615-465-7000.

Operator

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

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