Community Health Systems' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb.22.12 | About: Community Health (CYH)

Community Health Systems, Inc. (NYSE:CYH)

Q4 2011 Earnings Call

February 22, 2012 11:00 AM ET

Executives

Lizbeth Schuler – VP, IR

Wayne Smith – Chairman, President and CEO

Larry Cash – EVP and CFO

Analysts

Adam Feinstein – Barclays Capital

A.J Rice – Susquehanna Financial Group

Colleen Lang – Lazard Capital Markets

Kevin Fischbeck – Bank of America Merrill Lynch

Gary Lieberman – Wells Fargo Securities

Ralph Giacobbe – Credit Suisse

Ariel Herman – Goldman Sachs

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' Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

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

Lizbeth R. Schuler

Thank you, Martina. Good morning and welcome to Community Health Systems fourth quarter and year-end 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, should, expect, project, target, estimate, guidance, anticipate, intend, plan, initiative, continue or words and phrases of similar meanings. 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 risks, many of which are beyond our control.

These risks and uncertainties are described in heading 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 intent 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, 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 the Company or Community Health Systems used herein refer to Community Health Systems, Inc. and its affiliate 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 T. Smith

Thank you, Lib. Good morning and thank you for joining Community Health System for the conference call.

Larry Cash, our Executive Vice President and Chief Financial officer is also on the call with me. The purpose of the call is to review our financial and operating results for the quarter and the year ended December 31, 2011. We issued a press release and our 8-K after the market closed yesterday that included our financial statements. A slide presentation accompanies our prepared remarks for those of you listening to the live broadcast of this conference call on our website.

I’d like to begin our call with some comments about our quarterly results and then turn the call over to Larry, who will follow with additional details of our financial results. We are pleased with our consistent financial and operating results for the fourth quarter and the year ended December 31, 2011.

Net revenue for the fourth quarter 2011 increased 3.9% and $3.4 billion versus $3.3 billion in 2010. Adjusted EBITDA for the quarter of 2011 was $464 million, an increase of 2.8%, and income from continuing operations included the loss on early extinguishment of debt was $0.38 per share. Added back the loss of extinguishment of debt of $0.47 and the investigation legal expenses of $0.02, our EPS for the fourth quarter would have been $0.87.

Net operating revenues for the year ended December 31, 2011 increased 7.9% or $13.6 billion. EBITDA was $1.8 billion, an increase of 4.3% income from continuing operations including the loss of earlier extinguishment of debt was $336 million or $2.87 per share for the year ended December 31, 2011. Adding back the loss of earlier extinguishment of debt of $0.46 and the investigation legal expenses of $0.11, our EPS would have been $3.44, an increase of 12%.

Cash flow from operation was $1.262 billion, an increase of 6.2% over 2010.

With that, I’d like to review some of the key operating accomplishments for the year. The company recruited 1,864 new physicians for 2011 compared to 1,852 for 2010. In addition, we had another 15 midlevel practitioners during the year. Our standardized and centralized approach to physician recruiting and practice development identifies physician needs in each of our communities and increases patient access to the services.

We scored a 90% satisfaction level on our recent physician satisfaction survey, and among our almost 90,000 employees and 85% satisfaction on the employee satisfaction survey.

Our CMS in-patient core measures improved for the nineteenth consecutive quarter to 98.6%, among the highest in the healthcare industry. And 14 consecutive quarters for out-patient core measures.

Both in-patient and out-patient core measures continue to be better than the national average. And we continued our compound annual growth rate and revenue and EBITDA over the last 15 years. While we are actively focused on quality, we are also concentrating on our efforts on safety. Last year, we applied for and obtained listing by HHS agency for healthcare research and quality for our component patient safety organization. One of only 76 currently listed PSOs and are using an industry leader healthcare performance improvement to implement behaviors and practice to reduce errors and serious safety events.

As we discussed last quarter, we acquired assets of Tomball Regional Medical Center in Tomball, Texas earlier in the fourth quarter. This 358 bed hospital has trailing revenue of $200 million and a single-digit margin. On January 1, we purchased the assets of Moses Taylor Health System in Scranton, Pennsylvania, a two hospital system. Trailing revenue for this acquisition was $200 million with a lower single-digit margin. We now have 16 hospitals in Pennsylvania. We have a definitive agreement to purchase a 244bed hospital Blue Island, Illinois, with trailing revenue of $160 million at a purchase price of approximately $40 million. Additionally, we have a definitive agreement to purchase 100 bed hospitals in York, Pennsylvania with $115 million in trailing revenue.

We also purchased a large physician practice with 90 physicians in Texas. This is the third physician practice over the last couple of years that we’ve acquired, consistent with our market strategy.

During 2011, we acquired $400 million of revenue. Over the last two years we’ve acquired almost $1 billion in revenue. Our pipeline continues to be very strong and more importantly we continue to be very selective in our acquisitions.

Our 8-K filing includes our expanded guidance for 2012, annual same-store adjusted initial growth is expected to be in the range of a modest 0.5% to 1.5%. Our projected revenue range is expected to be $12.7 billion to $13.1billion. EBITDA is expected to be from $1.920 billion to $1.950 billion, and a projected EPS for 2012 is expected to be in the range of $3.45 to $3.70, and our net cash provided from operations is projected to be $1.2 billion to $1.3 billion. We’ve included four to five acquisitions in our 2012 guidance.

Now I’d like to update on our pending significant litigation and investigation matters. First, New Mexico qui tam case is still pending. The following of our motion for summary judgment has been delayed while the relator replaces one of their disqualified law firms. In addition, the parties are briefing the court a number of threshold questions relating to the government’s proof in the case – in their handling of evidence. Our motion for summary judgment is now due at the end of the first quarter. There’s been a related development that has been in the news and some of you have commented on it. Earlier this month, the State of New Mexico and CMS settled a $53 million dispute over this precise issue. The source of funds used for Federal funding matching payments. They settled it for only $7.9 million. Our New Mexico hospitals were part of the settlement along with four not-for-profit hospitals including St. Vincent’s in Santa Fe. This settlement demonstrates what we said all along about this case. It is an administrative matter to be resolved between the State and CMS and not a Federal false claim act.

There are more developments in the Tenet lawsuit. Our motion to dismiss was already given in September of 2011. We’ll wait in judge ruling, nor are there any notable developments in the related private security class action cases our shareholders derivative suits. We believe all of these cases to be without merit.

We continue to cooperate with the Department of Justice and OIG on the investigations. The Reuille case in Indiana was stayed until April 30, 2012. We continue to produce documents and provided over 85,000 separate documents. Department of Justice is conducting some interviews and we are assisting with those as well. We continue to seek out meetings with the Department of Justice and its representatives to discuss the complex elements of this matter and see if there is a path to resolution. The SEC continues to receive the same documents that we have produced for the Department of Justice. Also, other than continuing to produce documents, there is no development in the Texas Attorney General investigation which was started in November of 2011.

As always our board of directors and audit compliance committee of the board and our senior management continue to be very focused on these matters. I want to make sure that you saw from yesterday’s 8-K, that we received a letter from CTW Investment Group last week. As you recall, in the third quarter of 2010, they had done some short-stay in admission analysis and written to our board about their findings. Their concerns carry over till the 2011 proxy’s season. The most recent leg discusses the inherent limitations in using only public available data and points out as we have done on many occasions that other factors can affect admission and link to state patterns. The letter goes on to conclude that CTW is satisfied that our company, management and board of directors are committed to acting in accordance with our duties and obligations. We are pleased with the letter and believe that we have put this particular shareholder concern behind us.

With that, I would like to turn the call over to Larry, to provide you additional details on the fourth quarter and the 2011 financial results.

Larry Cash

Thank you, Wayne. Consolidation admissions decreased 3.5% in the fourth quarter of 2011. Adjusted admissions increased 1.8% for the same period. Our same-store admissions decreased 6.7%; same-store adjusted admissions declined 1.4%.

The following specifics contribute to the decrease. The lack of flu and respiratory is 120 basis points; weather-related service closures was 20 basis points. Lower admissions from women services, 90 basis points; increased competition for new services in a few hospitals with the current progress second quarter or change in physician relationships at a few of our hospitals, contributed 40 basis points; reduction in one-day medical admissions for the MRSA room of 130 basis points of the corresponding increase in outpatient visits; chest pains admissions accounted for approximately 40% of the decline; lower surgical inpatient admissions of the corresponding increase at outpatient surgery visits of 110 basis points; outpatient surgeries increased over 2% for the quarter, and cardiac surgery procedures represented approximately 35% of the decrease. Now, from the third and fourth quarter of flu and respiratory and women’s services decreased was greater by about 80 basis points. Same-store adjusted admissions decreased 1.4% for the quarter with managed care being better than the average. We continue to have strong outpatient equivalent admissions growth of approximately 5%.

Our net revenues in the quarter were $3.443 billion, an increase of 3.9%. HITECH incentive payments are not included in revenue. On a same-store basis, net revenue increased 1.2%. We had very strong same-store outpatient revenue growth of over 10%. State Medicaid cuts affected our same-store revenue growth by approximately 50 basis points and that we had an increase in charity discounts due to same-store revenue about approximately 200 basis points due to improved recognition.

Same-store net revenue per adjusted admission increased 2% year-over-year, which is affected by both the charity and the Medicaid. Our same-store Medicare case mix increased 1.5% for the quarter and increased 1.4% on a sequential basis. All-payer same-store case mix increased 1.4%; same-store surgery volume increased 0.6% with our outpatient surgery at a very strong 2.2% for the quarter. This increase was driven by the very strong cardiovascular growth; our same-store surgical case mix for all-payers increased 1.9%; our same-store fourth quarter managed care payer mix was the best of the year.

Consolidated EBITDA was $464 million for the fourth quarter versus $451 million for the same period a year ago, increase in approximately 2.8%; consolidated EBITDA within $467 million excluding investigation and legal expenses. On a same-store basis, EBITDA was $477 million for fourth quarter or a 4.9% increase. EBITDA margin for the fourth quarter of consolidated basis was 13.5% versus 13.6% last year. Same-store EBITDA margin increased 50 basis points for the quarter.

Anticipating in accounting change taking effect in 2012 or reporting presentation of bad debts, our same-store margin excluding bad debts for both revenue operating expenses would have been 16.2% versus 15.7%, a 50 basis point improvement for the quarter and a 40 basis point improvement for the year 16.4% versus 16%.

Consolidated operating expenses including the offset from HITECH incentives increased 10 basis points, as for center revenue in the fourth quarter of 2011. Same-store operating expenses for the fourth quarter improved 50 basis points compared to the same period a year ago. Supplies improved by 10 basis points. We had improvements in malpractice and repairs and maintenance. Same-store revenue minus debt increased nine-tenth for the quarter, while same-store operating expenses minus bad debt increased about only two-tenths percent for the quarter, an improvement of 70 basis points demonstrating another quarter of great expense management.

For 2011, consolidated admissions decreased 0.5% and adjusted admissions increased 4.2%. Same-store admissions decreased 5.6%; same-store adjusted admissions decreased 0.07% with our original and most recent 2011 guidance.

The following contributed to the 2011 decrease. Our lack of flu, 60 basis points; weather-related and service closures, 20 basis points; lower admissions for women services, 70 basis points; increased competition from new services or change in physician relationships, 50 basis points; reduction in one-day medical admission from the emergency room of a corresponding increase in outpatient visits, 140 basis points and again approximately 40% related to chest pain admissions. Lower surgical inpatient admissions with a corresponding in outpatient surgery visits, same-store – that was 130 basis points, same-store outpatient surgery increased a very strong 4% for the year. And, as Wayne said, volume for 2012 guidance for adjusted admissions is minus 0.5% to 1.5%.

Net revenue for 2011 was $13.6 billion, an increase of 7.9%. And again, there is no HITECH revenue, HITECH incentives including in revenue. On the same-store basis, net revenue increased 3.7% and net revenue for adjusted admission increased 4.5%. Same-store revenue decreased by approximately 70 basis points due to the recognition of charity and 80 basis points decrease and Medicaid revenue as we previously discussed.

Our outpatient same-store revenue increase over 10% for the year, our same-store surgical volume was up 1.9%, with outpatient surgery of 4%, our same-store Medicare case mix increased 1.5% for the year; same-store all-payer surgery case mix for the year increased a very strong 2.7% and same-store all-payer case mix increase 210 basis points.

Our consolidated EBITDA for the year was $1.837 billion, an increase of 4.3%. Excluding the legal and investigative expenses, EBITDA was $1.852 billion. Same-store EBITDA increased 5.6%, consolidated EBITDA margin for the year ended December 31, 2011 was 13.5%. Same-store margin was 14.3% including the 30 basis points. Our consolidated margins affected by approximately $16 million in acquisition costs and $15 million in investigation and legal expenses.

For 2011, consolidated operating expenses as a percentage of net revenue increased 50 basis points. Same-store operating expenses improved 30 basis points as same-store supplies improved 40 basis points and improvements in malpractice of 20 basis points. On a same-store basis, net revenue minus bad debt increased 2.9% compared to a 2.4% increase in operating expenses minus bad debt, an improvement of 50 basis points showing the 2011 effective expense management.

For the quarter, bad debt was 2.7%, an increase of 30 basis points from the same period a year ago. For the year, consolidated bad debts increased 50 basis points to 12.6% to 12.1%. Same-store self-pay admissions for the quarter did decrease 7%; the same-store self-pay adjusted admissions for the quarter increased 2.5%.

Our combined consolidated bad debt, charity, and administrative self-pay discounts divided by adjusted net revenue was 22.4% for the quarter, 21.3% for the year, an increase of 250 basis points; charity was up 170 basis points of discounts; 80 basis points and an increase was 150 basis points. On a year-to-date basis, again charity was up 60 basis points, the discount was up 60.

Our consolidated cash receipts were 102% of collectible net revenue for the year ended December 31, 2011.

Total AR days were 49, an increase of three days from December 31, 2010. Approximately half of the increases was due to the none payment from Illinois Medicaid program.

The allowance for doubtful accounts was $1.891 at the end of 2011or 50.8% compared to 49% at the end of 2010. The allowance for doubtful accounts and related contractual allowances for self-pay was approximately 84% at a hospital segment self-pay receivables at December 31, 2011 unchanged from December 31, 2010.

Community Health Systems has a favorable payer mix. For the quarter and December 31, 2011 net revenue on consolidated basis was as follows, Medicare 26.7%, Medicaid 9.4%, managed care and other 52.5% and sub pay 11.4% of net revenue. On a year-to-date basis the breakdown was as follows, Medicare 26.8%, Medicaid 9.7%, managed care and other 51.4, sub pay 12%. We’d the year 2012 managed care commercial price an increase 5.7%. The managed care payer mix has improved every quarter, 2010 the fourth quarter being the best full year. Then approximate reduction in Medicaid revenue of 8% in 2011 versus the prior year, the expectations from Medicaid reductions in 2012 over 2011 should be approximately 3%.

Cash flow from operations for the quarter was $442 million. Cash flow from operations 2011 was $1.262 billion compared to $1.189 billion for the same period of 2010, an increase of about 6.2%. Net income adjusted for non-cash expenses and depreciation and amortization of $48 million and terminal hospital was $48 million, loss on earlier extinguishment debt of $66 million and other non-cash charges of $9 million resulted in increase in cash flow from operating activities of $100 million. In addition, an increase in cash flow from accounts payables, accrued liabilities, income taxes, primarily as a result of timing payments, increased cash flows from operating activities of $112 million. These increases were offset by decrease in cash flows since supplies, prepaid expenses, and other current assets of $3 million, a decrease in cash flows generate from the change in other assets and liabilities of $25 million and a decrease in cash generated from accounts receivable of $111 million, primarily result to a three day decline in AR days outstanding in 2011 compared to the improvement in 2010. That is just a three day increase in 2011. 2012 guidance for that cash provided by operating activities will range from $1.2 billion to $1.3 billion.

Total capital expenditures for the quarter just ended with $244 million or 7.1% of net revenue. For 2011, our total capital expenditure was $777 million or 5.9%. Capital expenditures for replacement hospitals was approximately $165 million. Our CapEx guide for 2012 will range from $800 million to $900 million including replacement hospital expenditures of approximately $170 million.

Balance sheet cash at December 31, 2011 was $130 million, and as of December, 31, 2011 the company had available credit from its revolver of $682 million.

Looking at the balance sheet at December of 2011, we had $935 million working capital, $15.2 billion in total assets. Total outstanding debt at December 2011 was $8.8 billion, which approximately 87% is fixed. Our debt to capitalization at quarter end was 79%. In the December we were party to a $4.9 billion interest slot agreements.

During the fourth quarter, we did tender for some of our 8-7/8 coupon bonds. We refinanced approximately $1 billion, lowered the coupon to 8%, and it is still in the maturity from 2015 to 2019. We recorded loss on earlier extinguishment of debt of approximately $6 million or $42 million after tax, representing $0.47 per share in the quarter. $0.46 plus year-to-date.

We recently received the lender consents for proposed amendment post-amendment restatement of our credit agreement dated as of July 25, 2007 and submitted in we stated as in November 2010, which did at approximately $1.6 billion to January 25, 2017 and a price increase of approximately 125 basis points. The price of the remaining nine extended to 2.9 being term loans remains unchanged and matures July of 2014.

As recorded by our ratings agencies, we have proposed to replace our $750 million revolver with a new $700 million within October 16. Mature to date finishing a new $500 million term loan A with the same maturity. Proceeds from term loan A will be used to repay the 2014 term loan B.

In the fourth quarter, we did recognize some additional $23 million in HITECH with expenses being about 40%. Our 2011 HITECH incentives were $63 million; all Medicaid related associated expenses from HITECH were approximately $25 million for the year. In the fourth quarter we did incur an operating loss for at least $0.04 for an acquisition purchased on October 1, 2011.

Our income tax rate in the fourth quarter was low due to a 20% increase in a non-controlling interest versus a year-to-date through September 30. We also recognized income tax benefit from the earlier extinguishment of debt and we also recognized and anticipated state tax benefit that had previously been disclosed and it was included in our guidance.

For 2011, our EPS adjusted for earlier extinguishment of debt, charge in legal and investigation expenses of $15 million was $3.44. This compared favorably to our original guidance in October of 2010 and February of 2011 of $3.15 and $3.35, and has revised guidance for about in October 2011 of $3.30 to $3.39.

As Wayne stated earlier, we provided our full 2012 guidance with a couple of highlights. We’d expect same-store growth for revenue and EBITDA; it should be approximately 3% or 4%. HITECH incentives should range from 0.06% to 0.08% of revenue compared to the $63 million in 2011. HITECH expenses will be 0.03% to 0.05% of revenues compared to the $25 million in 2011. 2012 costs will be higher because of Medicare conversion costs are greater than Medicaid. We will also incur some costs with our physician practices. The HITECH 2012 benefit compared to 2011 would be around 1% at the midpoint of the guidance and there’s no effect of pretax and income.

We included in the February 2012 guidance to interest expense of the $8 million from the $1 billion note financing done in November 2011, an additional interest expense of $20 million from the February 2012 amend-and-extend at $1.6 billion. We’ve also included a benefit anticipated from AR securitization that was not complete in the first quarter. The interest rate effect and any other significant refinancing has not been included in 2012 guidance. The fixed rate of our debt should average from 72% to 77% for calendar of 2012.

The legal and investigative expenses are included in the 2012 guidance. We expect to incur a cost in 2012 of approximately $20 million compared to $15 million in 2011.

Our 2012 midpoint guidance of $3.60 do not include additional interest expense that I just described or include the legal and investigative expenses of 2012 guidance now includes both of these items which will be approximately $0.20 per share.

The EBITDA range for 2012 was $1.910 million to $1.950 million. EPS range for 2012 was $3.45 and $3.70. We believe by including additional interest expense as well as legal investigative expenses we have in fact increased according to midpoint of the guidance provided in October that excluded these two costs.

Wayne will now provide a brief detail.

Wayne Smith

Thanks Larry. As you can see 2011 while economically challenging was still a very strong year for growth. For the year, operating revenue increased a solid 7.9% for a record $13.6 billion. Our ability to increase revenue and prudent expenses demonstrate solid execution of our standardized business strategy. The focus on expense management has been crucial to our success during a very tough year. We continue to work on improving performance at the individual hospital level and all of our markets, especially at our more recently acquired facility.

Now, this is something a little new. As a general practice, we don’t usually discuss volume during the quarter on our conferences. However, with more than half the quarter completed and with such increased interest surrounding our admissions, we’re making exception today. Our same store volume projection for the first quarter is in the negative 3% to 5% range.

As we look ahead in 2012, we see additional opportunities for continued growth for the company. We remain focused on the fundamentals of our business and believe our proven success in recruiting positions in other healthcare practitioners, improving operational efficiencies, enhancing essential healthcare services and careful deployment of our capital will continue to support our long term growth strategies.

With that, we’ll now open the call for questions.

Question-and-Answer Session.

Operator

(Operator instructions). Your first question comes from the line of Adam Feinstein from Barclays Capital. Your line is open.

Adam Feinstein – Barclays Capital

Good morning Wayne, Larry, Liz. Wayne, just to follow up just on that last point. I appreciate you providing the Q1 guidance. So that implies some slight improvement relative to the fourth quarter in terms of admissions. If we look on an adjusted admission basis, should we also think about slight improvement in the first quarter?

Wayne Smith

I would think we’d improve what the fourth quarter was also.

Adam Feinstein – Barclays Capital

Okay. Great.

Wayne Smith

We did provide I think a range of EPS for 2012 in our detailed guidance we sent out.

Adam Feinstein – Barclays Capital

Okay. Great. Just want to follow up on that. Okay. And then – so I guess the question is on the acquisition side, you guys have acquired about $1.4 billion in revenues. So decent size, a lot of opportunities. So just want to get your thoughts in terms of the opportunity there and I don’t know how you would compare the most recent opportunities, but back 2002, 2003, you guys had some really great years in terms of acquisition – integration, pardon me, and just upside from that. So just curious just as you think about acquisitions you guys have done in the past like how you would think about that performance?

Wayne Smith

I think we feel pretty comfortable about what’s going on in terms of acquisitions. There are a lot of properties available, as everyone I think has said primarily around the fact that the economy continues to struggle. Over 8% unemployment. I think HITECH has been another burden that a number of not-for-profits had to overcome in just terms of the dollar amount being difficult for them to do. So there continues to be a lot of opportunities for us. We continue to think about this fairly strategically. As you know we bought four hospitals in Scranton over the last year. We now have eight in that market. We have 16 within the state as we said all along and we bought a large physician practice in the same area. So as we have said all along strategically we’re about infrastructure, trying to develop our markets and infrastructure for the future is one piece of our strategy.

The other piece is demonstrating quality and you can see from our metrics – our quality metrics in terms of core measures, physician satisfaction are unbelievably sound, employee satisfaction. We’re on a good track here in terms of doing that. We have turned down a number along the way by the way. We’re not experiencing any difficulty around acquisitions where they’re competitive as usual. Pricing is a little more than has been I would say. It’s not back to pre-economic difficulty times. But still it’s going up a little bit. But we feel good about the opportunities we see and I think it’s good for the industry. I think everyone in the industry will have opportunities to acquire within this in 2012.

Larry Cash

Adam, I might just add, I think we still believe there’s good opportunities in supplies where we take hospitals on, private and managed care, especially if they’ve been building infrastructure. The other thing would be the HITECH. I think we have demonstrated I think will be able to get money for HITECH. We’ve actually – Wilkesboro, which we bought in 2009 we’ve got to qualify for Medicare because of the accounting change. We’ll recognize that in 2012. But I think there’s still good expense opportunities which will help the first year earnings.

Wayne Smith

And the only other – this is a little bit of a shift in terms of thinking about acquisitions going forward in terms of primary care that you may have noticed in our discussion about physician recruiting. We’re now recruiting a number of extenders, nurse practitioners. That will be an important element going forward in terms of developing primary care networks for new acquisitions.

Adam Feinstein – Barclays Capital

All right. Thank you, guys.

Operator

Your next question comes from the line of A.J Rice from Susquehanna Financial. Your line is open.

A.J Rice – Susquehanna Financial Group

Thanks. Hi everybody. A couple of questions if I might. First of all, just maybe a little more incremental discussion on the discounting, I don’t know whether to call it a charge or what was incurred in the fourth quarter. Is that – it sounds like you went to some facilities and said we’re going to take a more conservative approach relative to discounting. Presumably if you didn’t do that you’d end up with bad debt in subsequent quarters. Is that the way to think about it? That you absorb some expense in the fourth quarter that might otherwise have plugged through in 2012?

Larry Cash

Well, I think what we try to do is accrue to get the correct receivable at the year. But clearly there’s a lot of self-pay dollars which we do reserve for sometimes they become charity. What we did do was give our CFOs the right to say if the work has been done we think something would be charity in the past they had to get tax returns forms filled out. Even if they want to go ahead and recognize it as charity they could do that. We had a few hospitals we also wanted to celebrate the work they had done. Clearly most of your self-pay dollars is 90% reserved for anyway and the co-payments and co-insurance about 50%. So it’s something we’re in self pay and you recognize it as charity you write it all off.

So to some extent the bad debts probably would have been benefited – would have been higher had we not done this and it maybe helps a little bit in the future. But it was probably done just to recognize the charity a little more timely. And we also noticed we’re spending a lot of money on climate collect accounts both at the hospital and our collection company without much results. And the review of those says that probably some of them were other customers who had been classified as charity historically, they just wouldn't cooperate with the paperwork so now we had – just give our CFOs the right to recognize it more timely.

A.J Rice – Susquehanna Financial Group

Okay. And then you referenced the $0.04 impact from an acquisition in the fourth quarter. Is that – I’m assuming that’s sort of one time – one quarter in nature and you’ll get it to at least break even going into 2012. Is that the way to think about that?

Larry Cash

Yeah. Usually all the models we do – we consistently do the same models. There are some pre-tax contribution the first year. This was a larger one that we bought and we were not as successful climbing over the depreciation and interest. And EBITDA was positive but it wasn't enough positive to pay that the first quarter, and we had to recognize also the size of deprecation interest cost, to have a loss. We wanted to point that out. A lot of people look at things that go positive and this is one that we climbed over and still had a pretty good quarter. It will get better throughout 2012 and I think the facility itself should get close to its model. Most of our acquisitions are usually there.

Wayne Smith

This is not anything to be terribly concerned about. We like the facility, we like the market. This is a highly competitive contest for this particular hospital. It’s just a timing issue in terms of – we’ve only had it for a quarter. So as usual we’ve got a pretty decent track record in resolving these problems and make them work.

A.J Rice – Susquehanna Financial Group

Right. Okay. And then the last question was you mentioned obviously the redone back partial bank deal. I think one of the aspects of that bank deal was to give you the flexibility to maybe spin out 10% of assets over time. Is there any further commentary on what you were trying to do or what you were looking for the incremental flexibility to do there?

Larry Cash

Well, what we’re doing there was as you know we both tried it five years ago and you cannot do any type of spin-off as just another building trust. We have the opportunity to do that, just not any approved plan to do something at the time. You need five years to own something to do that. We got ability to do a 10% spin-off and use the proceeds pay off our debt. They also – the value of a spin-off as other companies have demonstrated is to be more focused on those assets and then also you save taxes. So if you were to think about doing something it would be good from we think a shareholder perspective and also save some taxes.

A.J Rice – Susquehanna Financial Group

Okay. Thanks a lot.

Operator

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

Colleen Lang – Lazard Capital Markets

Hi. Good morning. This is Colleen Lang on for Tom. Larry, on the cost side, you guys have done a great job all year of managing the cost structure despite the tough operating environment. What areas within the cost structure do you still think you can see improvement next year?

Larry Cash

I think we’ll still see improvements in the area of supplies. We’ve had a very good success. When we look into 2012 we think we’ll have a center of good improvement that we’ve had so far this year. I think we will probably do a good job of managing payroll. Payroll gets camouflaged a little as a result of the growth for positions. But if you look at our man hours per adjusted admission, adjusted for case mix, they're probably better by about 140 basis points. Our payroll is a lot better if you not consider the cost of important decisions we got. So I think those three categories. Malpractice was better for the year and we’re doing a very good job. Wayne talked about the efforts on patient safety and other stuff we’re doing which will have maybe a longer term payback. But have some in 2012.

Wayne Smith

Colleen, I’ll also add to this is that we’ve been able to accomplish this. I say this all the time, but I think it speaks a lot to our management and our organization that we have not like a number of other organizations, discontinued funding our 401K, frozen payrolls, had major layoffs, stopped retirement plans. We’ve not done any of those things. We may just a bit old fashioned way in terms of trying to project what we think our volumes in business are going to be and work around that. For us that is a pretty major accomplishment.

Larry Cash

And the other thing, I know there’s a lot of concern about HITECH being the driver of a lot of success and we think looking at what we’ve provided here in the mid quarter the guidance for HITECH it could be about a 1% improvement of our EBITDA in 2012 or 2011. But we think there’ll be much more improvements on our day to day operations.

Colleen Lang – Lazard Capital Markets

Okay, great. And then just a follow up on the HITECH. I’m sorry if I missed it. Are the proceeds more heavily weighted towards the second half of the year?

Larry Cash

There’s more expected to be recognized in the second half of the year. The first half of the year will have some Medicaid that we didn’t get done in 2011. So there will be some Medicaid. Physicians will be a little more done in the second half of the year. The Medicare will be the second half of the year.

Colleen Lang – Lazard Capital Markets

Okay, great. Thanks.

Operator

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

Kevin Fischbeck – Bank of America Merrill Lynch

Thank you. Can you talk a little bit about the volume outlook for 2012? It was helpful to get the Q1 admission number. But adjusted admissions were down I guess the most have been this quarter in Q4, even though the headwind from one day stay issue seems to be moderating. So want to get a little bit more color from you about what gives you confidence you’ll see improvement versus your minus 0.7% number in 2011.

Larry Cash

Yeah. I think the minus 0.5% or 1.5%, if you go back and look at the last quarter it was down 6.7%, about 80 basis points. So that decrease compared to the third quarter was less flu and less OB and women’s services. I would think the flu about weak now; you won’t have the kind of challenge throughout all of 2012. I think also the women's we would expect in the second half of the year will be a little bit better. We’ve recruited a lot of doctors, a lot of healthcare practitioners. We got some replacement hospitals we spent a lot of money on this year to open in the third quarter. Most of them – those historically we’ve had very good volume growth, almost helping the company by almost 0.5% to a 1% on overall volume growth as a result of the new hospitals we opened up because they’ve done really well. I think the services we spent money on in the ER and surgery and things like that and equipment we bought will help us. So and our managed-care admissions, especially adjusted admissions, should continue to do better. That would be a good help.

Wayne Smith

Kevin, I would also say that the last six months or so I don’t think we would call that a normal period for us. We had been under intense scrutiny, all the Tenet allegations, the government investigations, all the related quests, all that is a very different scenario than we’ve ever experienced. So we are working our way through all those things as suggested by the CTW letter. But I think going forward we’re starting to see there’s opportunity for improvement.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. I think that all makes sense, but just a follow up on the replacement hospital contribution. In the past you mentioned 0.5% to 1% benefit to volumes when you open up a new hospital. Is that what you would expect in 2012 or is that with the full year of operation of the new hospital that might add…?

Larry Cash

That would be full year of operations.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. And that’s Q3?

Larry Cash

Q3.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. And I guess since you mentioned it in the prepared remarks. The letter from TCW Investment Group, I guess when I first saw that allegation I guess back in 2010, I was a little bit skeptical about it because I think that they run pensions for labor unions. I wasn’t sure whether there was some motivation behind that initial allegation or not. But is there anything I guess on the flipside then, is there anything around the motivation of them doing it now? Has there been any discussion with labor unions and you that may have helped addressed that issue? Or is this just independent analysis by them irrespective of your communication.

Wayne Smith

Well, I think the letter speaks for itself in terms of their own analysis when it is all said and done. We are always in talks with the labor unions and we continue to be in talks with them. What we are actually trying to improve our relative posturing so that we don’t have as many conflicts that we’ve had in the past.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. And then just to clarify. Larry, I wasn’t sure if you said that your commercial outlook for 2012 – did you say it was 5.7 or 5.27?

Larry Cash

5.27%, up 0.27%.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. Perfect. Thank you very much.

Operator

Your next question comes from the line of Gary Lieberman from Wells Fargo Securities. Your line is open.

Gary Lieberman – Wells Fargo Securities

Thanks. Good morning. Wayne, could you just clarify the comments you made about acquisitions? I think you said that prices for acquisitions had increased a little bit but aren’t back to the boom levels. Is that what you were saying?

Wayne Smith

Yes. If you go back to the boom times we were paying about one times revenue. We’re not anywhere close to that now. But we’re not paying $0.30 on the dollar either. It has moved up into the $0.60, $0.70 or to 7% of net revenue. So it’s back into that sort of range and they’re all – I mean you can see from our acquisitions and the couple that we just talked about, they’re all boards deal and some hospitals are more troubled than others. We actually like troubled hospitals as you know because we think there’s a huge opportunity there. But having said that, I think the driver is a little different than it has been in the past. People are either looking for a strategic partner that can be helpful to them because of the fact and they’re putting it in those terms because of the fact the economy continues to be a problem and HITECH money is a problem for a number of them.

Gary Lieberman – Wells Fargo Securities

Okay, great. And then Larry I think you said you have $4.9 billion of the debt swap. Did you give an average rate what it’s swapped at?

Larry Cash

Around 4% I believe. 3.9% I think is what it is.

Gary Lieberman – Wells Fargo Securities

Okay. And then can you just give us an update on the conversion to InterQual or all the hospitals there and so should we think of that impact as being fully baked in or is there still some incremental impact that will come from that?

Larry Cash

I believe we said on our third quarter conference call that all the hospitals have been converted to InterQual and I think we also said that even the hospitals that have been on InterQual had a volume decrease in the third quarter as they did in the fourth quarter and that everybody is on InterQual, unless we just follow a hospital that may not be. But every hospital was completed by the end of the third quarter and we actually decided to do the InterQual conversion, just to refresh everyone’s memory in February of 2011 and signed the contract in March of 2011 before all the other allegations were made.

Gary Lieberman – Wells Fargo Securities

And so is there essentially a learning curve if the hospital’s going InterQual or is the impact pretty discrete and once they’re on it you see the impact that you’re going to have on the admissions and that’s about it?

Wayne Smith

There’s a couple of things. One is that we had already decided to do this, but once we came under attack we made a decision to accelerate it. So we accelerated very rapidly. We put InterQual in pretty quickly and did a lot of intense training around it. As I said earlier, all the intense scrutiny, all the Tenet allegations, all the government investigations, all the related press, all that had an impact on this, not just the fact that we installed InterQual when it was all said and done. Having said that, that’s why we think this is moderating. We understand more about how to manage under that system and all the above. That’s why we think our volumes are improving now. Probably we lost a lot of opportunities over the last couple of quarters because of all the scrutiny.

Larry Cash

And I just would add, the one day medical admissions they were down, a little bit less than the fourth quarter and the surgical admissions were down about 50 basis points from our third to fourth quarter decline in volume which got a little bit better, actually the flu and the respiratory and the women’s services were worse by about 80 basis points.

Gary Lieberman – Wells Fargo Securities

Okay, great. Thanks for the color.

Operator

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Your line is open.

Ralph Giacobbe – Credit Suisse

Thanks. Good morning. Just want to go back to the volume side of things. Obviously it sounds like the year is off to a better start at least. So as we think about moving through the year, is it your estimate or thought that it’s just a matter of camping out some of these difficult quarters and that’s how we’ll get to normalization and then I think in the past you’ve talked about seeing more pressure in some of your smaller markets or smaller facilities. Is that still the case?

Larry Cash

The smaller markets are still declining faster than the – the ones under 50 million are still declining faster. They’re a small percentage of the company, but they are declining faster. I think we’ve also said that we expect the second half of the year from volume will be better. Wayne has already said the first quarter is going to be better and it could be a little bit better in the second quarter. We’re also trying to make sure we’ve handled the criteria change correctly in looking at people going to observation, how long they’re there and the criteria to make sure we’ve interpreted it correctly. So it’s both camping out and also our efforts to make sure that people are treated in the right setting. The small hospitals will continue, probably small hospitals have a lot more OB, a lot more flu and respiratory business and a few of them have a little bit more on one day surgeries because (inaudible) very high case mix. So I think the small hospitals have multiple challenges. As we recruit doctors and do a good job there they’ll get better.

Wayne Smith

But one of the things not to forget about the volume, even though our in-patient the volume is down, we haven’t lost a substantial amount of business since a lot of us moved the outpatient. You can see in our revenue line how fast the outpatient is growing. That is not only – that not necessarily have everything to do with one day stays or observation. It has to do with an actual trend in terms of its moving in that direction for everyone.

Larry Cash

Yeah. Outpatient revenue growth both in the quarter and year-to-date was up over 10%. We’ve had good outpatient growth in diagnostic imaging and the ER and OR and pharmacy. So that has helped us up the good revenue growth Wayne talked about.

Wayne Smith

And I would think the focus in the future would be around adjusted admissions because it’s moving in that direction anyway.

Ralph Giacobbe – Credit Suisse

Okay. And then just on the same store EBITDA growth, I just want to clarify, you had said that you think same store EBITDA growth in the 3% to 4% range for ’12?

Larry Cash

Yes. Revenue and same store EBITDA growth will be somewhere in the 3% to 4% range, of which possibly either a third or 25% of that contributed to HITECH.

Ralph Giacobbe – Credit Suisse

Okay. So a third of that is contributed to HITECH, so it’s sort of less on a truly organic if we exclude HITECH?

Larry Cash

If you want to go to all the accounting to exclude HITECH I might just spend just a second on that when I go talk to Wayne about how we’re doing for the quarter or the month. We don’t do separate accounting. To us it’s a program, it’s a government program. It was done in 2009, but we noticed a lot of effort to understand that separately. But we the company look at the total results and think that's the best way of doing it. But we did decide to provide all the detail that people have asked for about revenue and expenses.

Ralph Giacobbe – Credit Suisse

Okay, that’s fair. And then just lastly on the interest expense side, just want to be clear. The 4.7% to 4.9% is based off the revenue less bad debt number?

Larry Cash

Yes.

Ralph Giacobbe – Credit Suisse

It is. So it means that the midpoint interest expense is down about 25 million year-over-year, 26 million roughly?

Larry Cash

That would be somewhere in that math. Yes.

Ralph Giacobbe – Credit Suisse

Okay. So is that all because of this swap termination savings basically outweighing the bump in the rates from the amendments?

Larry Cash

Well, you’ve got the swaps. You’ve got the bonds we did. You’ve got cash flow benefit, you’ve got LIBOR. It could have been a little bit lower. All those is a combination, the best thing would be the swaps are helping us because we did do a lot of swaps back in 2007, 2008 at 4% to 5%. As they roll off it is beneficial. We think it’s wise to go ahead and let the floating rate to go up a little bit as long as the interest rate predictions are pretty tame as far as going up. So we will – I think we said we’ll be 72% to 77% from that. I thought our interest prediction was a little bit – I think it was 4.6% or 4.8%. I believe that’s correct.

Ralph Giacobbe – Credit Suisse

And just to be clear on the swap rate, did you say it was 3.9%?

Larry Cash

3.99%. It’s in all our detail guidance.

Ralph Giacobbe – Credit Suisse

Okay, that’s fine. Thank you.

Operator

We have time for one final question. Your last question comes from the line of Matthew Borsch from Goldman Sachs. Your line is open.

Ariel Herman – Goldman Sachs

Hi, this is actually Ariel Herman in for Matthew Borsch. I just wanted to ask more detail on the outpatient shift then the volume numbers. So just want to know basically how you’re thinking about the profitability of the volumes with the shift to outpatients. Even though you had slow inpatient admission numbers, you were able to have year-over-year revenue growth. Can you just give a little bit more clarity on that?

Larry Cash

Yeah. You really need to look at it by payer. Clearly the Medicare outpatient is not as profitable as the inpatient. Medicaid is fairly comfortable. From the managed care perspective, fortunately we’re having a very good managed care adjusted admissions which means the outpatient growth is good. In some cases the outpatient growth is and outpatient revenue is a little more profitable. It varies by contract, but there are some contracts that we’ve been paid pretty good on that versus the inpatient. I think the Medicare would be one that where the shift to outpatient is usually is a little less profitable than the inpatient side on an overall basis.

Wayne Smith

And our outpatient versus our inpatient is about 50-50 now.

Larry Cash

Yeah. It might be a little crossed over a little bit.

Wayne Smith

A little more on the outpatient. Yeah. So this continues to be a trend and I think it’s moving in that direction. Most companies have somewhere in that range now I would think. Larry you can comment about this, around 50 range in terms of outpatient, inpatient.

Larry Cash

Yeah. We probably have gone over 50%. It’s been growing by 50% or so a year. This year the revenue is very positive for outpatient, up over 10%. Some of that is clinic related, but it is predominantly on the hospital side.

Wayne Smith

I would say there is a lot of competition for outpatient businesses well in some markets and some facilities and some markets. Physicians that take a lot of the outpatient volume out and into their own facilities. So that would be a little problematic as time goes along. But having said that, for us we don’t really have that issue to amount to anything.

Larry Cash

I think if you’re challenging for a hospital company or a hospital to have something less than 40%.

Ariel Herman – Goldman Sachs

Okay. Great and then just really quickly, can you just touch on the new payroll or docs fix l legislation regarding the Medicare bad debt and what kind of impact you think that would have on your bad debt expenses going forward?

Larry Cash

What we have studied so far, it’s probably going to be around $10 million is probably going to be the effect for us. I think the Medicare – the bad debts probably $3 million or $4 million and we're also going to have a little bit of loss reimbursement from section 508 and our current estimate is something like $10 million. I think we actually lowered our EBITDA before we made public there from 1920 to 1910, which is still above everybody’s range on the EPS which excluded the legal fees. But we did have 1910 and 1950 when we drive the factor about 10 million from that. Bad debts being $3 million, $4 million of it and probably some money for the section 508 which brought itself after March 31st.

Ariel Herman – Goldman Sachs

Okay, great. Thank you.

Operator

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

Wayne Smith

Thank you. Delivering quality healthcare services in our markets requires an executable, predictable and sustainable strategy and we continue to demonstrate that this strategy works. We want to specifically thank our management team and staff, hospital chief executive officers, chief financial officers and chief nursing officers division operators for their continued support and operating efficiencies during this challenging time. We’re convinced that solid performance will propel the company to another level of success, extending our leadership position in the healthcare facility sectors. Once again, if you have a question you can reach us at area code 615-465-7000. Thank you.

Operator

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

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