Michael J. Culotta - Wayne T. Smith - Chairman and Chief Executive Officer W. Larry Cash - Chief Financial Officer, President of Financial Services and Director David L. Miller - President and Chief Operating Officer.

Albert J. Rice - UBS Investment Bank, Research Division Justin Lake - JP Morgan Chase & Co, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division Joshua R.

Raskin - Barclays Capital, Research Division Darren Perkin Lehrich - Deutsche Bank AG, Research Division Brian Tanquilut - Jefferies LLC, Research Division Frank G. Morgan - RBC Capital Markets, LLC, Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Ana Gupte - Leerink Swann LLC, Research Division.

Good morning. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems Third Quarter 2014 Conference Call [Operator Instructions] Thank you. I will now turn the call over to Mr. Mike Culotta, Vice President, Investor Relations. Please go ahead, sir..

Thank you, Jeremy. 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 statements. This conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts.

These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with the Securities and Exchange Commission.

As a consequence, actual results may differ significantly from those expressed in any forward-looking statement in today's discussion. We do not intend to update any of these forward-looking statements. With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr.

Smith?.

Our volume trends on adjusted admissions have also shown significant improvement from a decline of 5.3% for the first quarter to flat this quarter. This reflects a 530 basis point improvement since the first quarter.

In addition, we saw a sequential pure volume increase of 25 basis points from the second quarter, which is, as you know, is more difficult in going to the seasonally low third quarter. We're through 9 months at a negative 2.1% in adjusted admissions, and are changing our guidance from 0 flat to a negative 2.5.

Our ER visits were up 2.7% on a quarter-over-quarter basis, and was actually 2.1% on a sequential quarter. We're extremely pleased with improvements in our volumes that we're achieving. We're receiving numerous questions regarding our preparation of potential Ebola patients. Dr.

Lynn Simon and our medical teams are very focused on our processes for handling patients with Ebola Viral Disease, or EVD. We have prepared our affiliated facilities and clinics to identify and properly isolate a suspect case, to inform their local health care authorities and the CDC to determine if the patient should be tested.

In an unusual event of a confirmed case, we will work with local health care authorities and the CDC to transport the patient to a facility that will provide definitive care. As you know, today is Election Day and we're hoping governors and state legislatures in non-expansion states will strongly consider the positive impacts of expanding Medicaid.

As quoted from the Kaiser study, "Expanding Medicaid provides the opportunity for states to access federal funds for providing health coverage to meet the needs -- the health and long-term care needs of low-income residents, and absence of this coverage, millions of individuals would not have any affordable coverage available to them and would face health and financial consequences of being uninsured." Federal funds will flow to the states and not only enable states to expand coverage, but also play an integral role in state economies.

Medicaid funding plays a substantial role in health care spending, providing a revenue stream for hospitals and other providers and helping to reduce the burden of uncompensated care costs on employees and localities.

Analysts suggest that the federal Medicaid matching dollars have broader multiplier effects on the state economy and positive impacts on jobs and revenue. There are even broader economic impacts on jobs and business.

The Affordable Care Act Medicaid expansion provides for significantly higher share of federal funding than available for previous Medicaid and CHIP coverage, with a 100% federal funding for the first 3 years and almost 9% federal funding thereafter. As I've stated before, expansion is simply just the right thing to do.

So now let's discuss what we believe we could see in expansion states in 2015. Of course, this is always evolving, and percentages I'll refer to are based on Enroll America data. Pennsylvania, as you know, has received a waiver from CMS and will be expanding effective January 1, 2015.

Pennsylvania represents 5.4% of our uninsured population eligible for Medicaid expansion. Indiana remains committed, but still needs some resolution on its waiver application with CMS. And we recently confirmed our understanding that we will -- we still believe expansion could happen.

Indiana represents 2.5% of our uninsured population eligible for Medicaid expansion. Utah has just announced that it will expand, and we believe Wyoming will be considering expansion in the 2015 legislative session. Wyoming and Utah combined represent 1% of our uninsured eligible population.

Missouri, we believe, could also expand, but at the earliest, it would be August of 2015. Missouri represents about 2% of our uninsured population eligible for Medicaid expansion. Tennessee is starting to move in the right direction. Governor Haslam and TennCare officials are holding regular and substantive talks with CMS.

Actually our uninsured population in Tennessee is the third highest of the states in which we do business. Tennessee represents 8.2% of our uninsured population eligible for Medicaid expansion. We hope to see more information in early 2015.

The 12 states that expanded in 2014 represent 22.9% of our population eligible for Medicaid expansion in our markets. So we have good opportunities ahead. If you take the others mentioned above that we believe could expand in 2015, this represents another 19.1%. Florida is an interesting situation.

Governor Scott did support expansion early on, but could not get enough votes to pass expansion in the state legislature. Former Governor Crist is very vocal in support of the expansion, and the various polls of the population showed there's support from the citizens of Florida.

Having said that, the Florida legislature is Republican-controlled, and indications are that it's uncertain that we will see an expansion to the Medicaid program in the near term. This state represents about 15.4% of our uninsured population eligible for Medicaid expansion. It's actually our largest state in this regard.

Texas is a state in which neither candidate is spending much time on discussions of expanding, but we understand that there is support from certain localities and hospital industry is very active and supportive. This is a situation where we'll monitor it closely.

Texas is our second largest state in terms of population eligible for Medicaid expansion at 11.6%. Virginia has repeatedly rejected efforts to expand, so we do not see much happening there. Virginia represents 1.1% of the population eligible for Medicaid expansion.

North Carolina, approximately 1.7% of our uninsured, has no formal discussions about expanding at this time. Larry will give you some more insight on our historical trends later in the call. Now turning our attention to the HMA integration.

David Miller continues doing a great job of focusing our resources on getting the acquisition fully integrated, and working with Dr. Lynn Simon on our quality and clinical initiatives.

We continue to believe that we will achieve $125 million in synergies in 2014 and we will be reviewing our overall estimates of synergies of $250 million when we release our fourth quarter earnings and giving the 2015 guidance in mid-February.

We have estimated -- we have achieved $40 million in synergies for this quarter, and now $87 million cumulative.

The majority of these synergies have come or will come from reducing duplicative functions at the corporate level, renegotiating or canceling redundant contracts, quality and case management initiatives, renegotiation of some managed care contracts, and supplies and purchasing compliance with our group purchasing organization.

Let me now -- let us now discuss our physician recruiting efforts. As always, we're very focused on physician recruiting. There were over 1,400 physicians that were recruited to our active medical staff this quarter. On a year-to-date basis, over 2,800 physicians have been recruited to our active medical staff.

As you know, the third quarter is the largest quarter for physician recruiting. In addition, we have previously discussed there was a slowdown of recruiting in HMA during the latter half of 2013 and prior to our completion of the acquisition.

We're now seeing an increase in physician staffing at our former HMA hospitals, and we've recruited over 360 physicians this quarter at those facilities. Regarding high reliability and safety focus through 2014, we achieved a reduction in our Serious Safety Event rate for our legacy hospitals of 34% from our baseline.

We're actively implementing similar processes in all of the CHS '14 hospitals. On October 1, we completed the acquisition of Natchez Regional Medical Center in Natchez, Mississippi, a 179 licensed bed facility. Net revenues from Natchez Regional approximate $40 million. We're excited to be able to further our admission in this community.

In addition, we just announced the acquisition of Upstate Carolina Medical Center in Gaffney, South Carolina. This is a 125 licensed bed facility, with net revenues also in the $40 million range.

We also announced the signing of a definitive agreement to sell Carolina Pines, one of the HMA facilities we were required to sell as determined by the FTC for approximately $70 million. We expect the sale to be completed around December 1. In addition, we also sold the former HMA headquarters for approximately $34 million.

The MetroHealth acquisition in Grand Rapids, Michigan will probably be more like the first half of 2015 acquisition. Also, we have concentrated efforts to expand our presence in 9 acute care areas, such as outpatient surgery, diagnostic imaging through affiliations and joint ventures, as well as other new revenue initiatives.

We've developed collaborative arrangements in the retail clinic area, and are currently in discussion with several urgent care providers regarding affiliations and/or partnerships. We've also focused our efforts to develop and expand our network approach in our markets to include both acute and non-acute sites of care.

David and Lynn and our operations executives continue to work on our service line enhancement initiatives. We're beginning to see the impact in various areas, including orthopedics, emergency service and our physician practices. As an example, 40 hospitals initiated our standardized orthopedic program by the end of the year.

We're seeing a trend improvement in total joints year-to-date. In the area of emergency care, we've initiated several transfer centers that are currently operational in 4 states involving 32 hospitals and have facilitated over 1,300 transfers to our facilities in the third quarter.

Our physician practices are engaging in outreach programs to increase patient access for preventive health services and to help eliminate care gaps for chronic disease states. The Medicare wellness initiatives have resulted in additional visits to our physicians' clinics year-to-date.

We continue to enhance and expand on these and other clinical initiatives throughout the remainder of 2014 and 2015. We anticipate further favorable results of these initiatives. Next to update you on our pending legal matters, starting with the oldest item first.

We have recently reached an agreement with the Department of Justice to resolve the False Claim Act case in New Mexico.

This case began in 2006 as an investigation of 3 hospitals in New Mexico related to the way in which the New Mexico Medicaid program applied to the federal government for matching or supplemental funds that are ultimately used to pay for services provided to Medicaid and indigent patients.

We also -- we have always ultimately used -- we have always believed that our conduct was appropriate and in fact consistent with what our hospitals in the state were doing at the time, which is why we vigorously defended this case.

On the other hand, we also recognize it is in our best interest of our company and shareholders to put this matter behind us and avoid risk of a trial. We have reserved $77 million to resolve the claims in this matter, which does not include the relator's claims for attorneys' fees.

I'm also pleased to report that the SEC has closed its investigation in the company's disclosure practices. This investigation was opened in 2011 shortly after Tenet filed its lawsuit against us.

Filing with respect to HMA matters covered by the CVR, our efforts to work to bring this to conclusion are continuing, and we've seen good progress, as reported by both the government and our lawyers, the judge and multidistrict litigation has extended the stay of formal discovery to the end of February, 2015.

We are continuing to make presentations to the government on various cases and otherwise cooperate with them to provide documents and make witnesses available. You will see in the Form 10-Q that we have settled the state court wrongful termination case brought by former HMA compliance executive, Paul Meyer.

While we believe that case was totally defensible, we elected to avoid the inefficiency and the distraction of a trial and its cost, and focus our efforts on addressing larger issues. We're adjusting our 2014 guidance.

We're adjusting the ranges for net operating revenues less provision for bad debt, as a result of the delayed timing of acquisitions, from a range of $19 billion to $19.8 billion, to the new range of $18.7 billion to $19.1 billion. Our expected adjusted EBITDA range will now be a range from $2.825 billion to $2.9 billion, respectively.

Larry will now discuss the future -- discuss future our results -- further our results, the effects of the Affordable Care Act and provide you with other information on our 2014 guidance..

Targeted direct mail to uninsured patients we've seen in recent months, focused on those who frequently visit our facilities; [indiscernible] mailings among our facilities; panel cards placed throughout the community; pharmacy or care plan physician offices, which contain educational information on the Affordable Care Act and contact number for our local enrollment specialist; banners in hospital lobbies and entry points telling the public about our resources for assistance; local press releases to run in local paper to contain educational information and numbers to call for help in enrollment; live television news stories at our hospitals with numbers to call; free screening events prior to open enrollment and setting up appointments during open enrollment; all patient statements to contain information, phone numbers to call for assistance and enrollment; more emphasis on individual penalties for failure to enroll this coming year through town hall meetings.

We'll now be able to assist individuals with enrollment over the phone by our call center. In all cases, our on-site representatives will inquire about the life qualifying events that allow individuals to enroll outside the enrollment period.

Remember, we're unable to work with this process at the former HMA facilities until after we close on January 27 for this year. We have certified application counselors at all hospitals, and we place more local management focus on this than in the past and provided targets and amounts of opportunities we estimate within those markets.

On a long-term perspective, 2016, we believe that we could experience approximately net $400 million to $500 million of EBITDA benefit. Just briefly on the sequential quarter basis. As Wayne said, adjusted EBITDA was up $52 million, offsetting the third quarter negative seasonality, and our margins improved 110 basis points.

Net revenue improved 230 basis points over the same sequential period from 2013, as did adjusted admissions 120 basis points, net revenue per adjusted admissions 100 basis points and ER visits 140. ER visits increased 2% on a same-facility basis.

Our same -- our salaries and benefits as percentage of net revenue improved 70 basis points, and our EPS improved 35% to $1 and our synergies continue to exceed expectations. Now for guidance as Wayne mentioned earlier, we're predominantly tightening our guidance for the year.

Other items we just want to call to your attention, the current expectations for acquisitions benefit in 2014, versus what we thought earlier in the year, will have about a shortfall of $250 million and lower revenue of $30 million in EBITDA benefit from the acquired facilities in 2014.

The share count in the fourth quarter will be approximately 115 million shares. We still believe the continued rollout of the Affordable Care Act will show continued improvement. We will have a reduction in DSH in the fourth quarter, it will be about approximately $12 million.

We now have a signed agreement as of October 29 of 2014 for the net BNA reimbursement of $36 million, the $25 million related to the California hospital provider fee program, and the $14 million related to a partial collection of the BP settlement we estimate we'll receive in the fourth quarter.

Our combined depreciation and amortization was lower in the third quarter due to the acceleration of amortization expense on software that we abandoned through June 30. This was previously discussed in our last quarter and disclosed in our footnotes. The fourth quarter depreciation and amortization should increase slightly from the third quarter.

We can have further upside from further improvements in the Affordable Care Act, synergies, further volume growth, other operation initiatives and cost savings. One last item to note is our long-term leverage. By the end of the year, should be at 6x. Remember when we acquired Triad, we went from 3x to 6.5x and reduced it to below 5 within 2 years.

We will have strong cash flow in the coming years, with a tailwind of some synergies, HMA margin improvements, the Affordable Care Act to achieve a mid-4s debt leverage by 2016 and this should provide improvement in our free cash flow. We're very pleased with these results and Wayne will now provide a brief recap..

one, continuation of the rollout of Affordable Care Act; two, the opportunity for growth in the former HMA assets, including synergies that we're achieving; and third, opportunities to delever our balance sheet; fourth, operational and clinical initiatives.

We continue to believe we can increase our EBITDA margin in the former HMA hospitals exclusive of the synergies we will achieve. We described some of the growth initiatives, but there are other initiatives that will help us achieve organic growth and growth in -- and grow our market share.

You should start seeing our company with positive volume growth. As always, we continue to focus on enhancing quality and building stronger physician relationships, including increasing physician recruiting and doing what's right for our patients.

I'd like to thank all of our physicians, nurses and support staff for all their tremendous support during this quarter as we continue to move the company forward as one. With that, we'd like to open up the call for comments. In an effort to get more calls in, we will limit to one question and one follow-up question, so others will have time.

If you have further questions -- if you have further follow-up questions, as always, we're available here to talk to you. You can reach us at area code (615) 465-7000..

[Operator Instructions] And your first question comes from A.J. Rice with UBS..

ACA sequential benefit, synergies sequential benefit, core growth and seasonality.

Any -- would you care to give us any flavor for those 4? Do you think you'll step up in the synergies and the ACA benefit from third quarter? And how much should be a normal seasonal pickup for you guys from third to fourth quarter? And then I guess the rest would be core to wherever you get within the range..

Yes, A.J., it's Larry. Good question. You're correct, we've got -- the BNA is done, we expect to get the BP, about $14 million, the California provider tax. If you start at 751, that gets you to 826, there's going to be a little bit of a decline in HITECH in this quarter.

We were able to get some of the work done in the third quarter, so that HITECH could drop $20 million or $25 million, that range or so. So -- excuse me, it's about $30 million to $35 million in incentives, but also expect to cut our expenses again, so that would offset some of that. And the -- well, everyone knew the DSH was going to come along.

I think we'll continue to see the Affordable Care Act get a little bit better, maybe not quite as much from third to second, as you're done, but still get a little bit better than it got there. The synergies were probably around $125 million, we get another $40 million for stuff we're working on, that should help a little bit there.

I think we've got 4 or 5 different things we're working on. One is the productivity, we'll probably continue to get better. We've got about $10 million, $11 million of benefit from some CapEx that we spent throughout the year that will not -- was not there in the third quarter and should help the fourth quarter.

We've got the benefit -- physician practice is getting better, and I think our volume improvements, volume will probably be better year-over-year, which would help us. And I think we've also got the opportunities as it relates to the discontinued work on the basic organic of the company.

If you look back the last couple of quarters, while we're not giving out same-store improvements or same-store specifically, we probably, in the second quarter, were better organically 5% to 7% and probably another 5% or so in this last quarter year-over-year. So I think we're continuing there.

We feel like we can get it at a range, but there's a couple of headwinds, but there's plenty of tailwinds that should help us..

And just as a follow-up, as you think ahead to next year, I know, Dave, you've been working on a lot of things to grow the volumes.

Can you give us an update on how much of that we've seen this year? How much is still ahead of the company in terms of these volume improvement initiatives?.

Well, the -- we've been working on this now for a couple of quarters. We're seeing improvement. It's a little early, first, to certainly talk about in 2015, because when we get through the fourth quarter, we'll obviously do, give our guidance for 2015. But we're making progress and I think we'll continue to make progress.

Assimilating HMA was a little bit of a distraction to start with, so I think we're back on track in terms of fundamentals and doing all the right things we need to do to grow the business..

Most of the things that took place started in the second quarter or the third quarter, and so, clearly, there'd be a full year benefit to that. But if you look at the other sort of appropriate tailwinds, the synergies probably has an opportunity to get a little bit better. The Affordable Care Act will still continue to grow.

Wayne outlined a lot of states to expand, the expansion's going to be more, the penalty's going to be more. We're better prepared. The HMA hospitals would be better prepared. There's more managed care companies. We've got more contracts than we had before, and I think we're in good shape with our contracts.

The organic improvement should be there for a full year. We've got a lot of expense improvements we're working on in service centers and central business offices and payroll and supply centers. So we will provide all the detail of that in February, but there's a lot of good things in that.

And Wayne mentioned you've got the opportunity of the HMA margins. It probably is going to be a little bit better. At the end of the year, over 2013, but there's still more opportunity to work on that over and above the synergies..

Even if the Republicans take the Senate, there seems to be good opportunity for us in 2015..

Your next question comes from Justin Lake with JPMorgan..

You laid out a lot of the 2014 moving parts. I wanted to think about '15 and just if you could -- I know it's early, but maybe just talk to the known headwinds and tailwinds so that we've got a solid list there. And maybe just some color on how we should think about the incremental benefits from reform next year, as well as kind of core growth..

We'll just give some general commentary, because I mentioned a little bit, right, on the previous question. But the headwind is probably -- the HITECH's probably going to decrease a bit, but we're doing a pretty good job of offsetting expenses. So that's going to be a headwind. The BNA $36 million will not be there in 2015.

The British Petroleum, I think would be another chance to recover some more money on that activity. The California provider tax should be there again in '15. A slight decrease in government updates overall. I mean -- and again, the tailwinds, the synergies, we had $275 million of synergies for Triad.

Triad had 20 less hospitals than HMA and about $800 million less revenue and a smaller corporate office. So we're targeting $250 million right now, and as Wayne said, we'll revisit that in February. I think the ACA -- I think one of the maybe misconceptions is once you expand, you get your business early on.

If you think about exchange, people will probably come to the hospital for admission once over 7 or 8 years, so there's clearly an upside to continue having this enrollment activity go on both in exchanges and similarly on Medicaid, so that should probably grow again over and above where we are now.

You've got the organic improvements in volume that should take place, and I think we have a good shot of having positive volume in the fourth quarter. And then all the expense performance activities built around the service center initiatives and the sourcing supply chain initiatives.

And also, we just completed centralizing all the payroll for the legacy hospitals. And then finally, you've probably got the opportunity of acquisitions. I mean, we bought a few hospitals midyear, a couple of small ones at the end of the year. We've got one in the first part of the year.

Usually we improve the margins the first full year of 400 basis points, another couple of hundred basis points off that. So that will help. And then you've got the continue to get HMA back up to the 15% margin that we think we can get to..

And Larry, on the HMA, how much do you think you'd get next year that -- I think you said it's 200 basis points?.

It's a little early, but I would think it would probably take just until '16 to get all that. So we'll probably, by the end of 2015, we'd be halfway there..

Okay. And then just a quick follow-up on the leverage comment you made.

The 6x going to 4.5, and you said that's by 2016, right?.

Yes, the end of 2016..

And so can you give us a breakdown in terms of -- obviously, that's a pretty significant decline in leverage.

How should we think about that in terms of how much comes from EBITDA growth versus debt paydown?.

Yes, we clearly have historically used EBITDA growth, but we'll have the ability, late in '15 and '16, to pay out some of the bonds that have become callable, and so that's probably something we'll look to. We probably will not pay any bank debt off of -- prior to that date, although we could change our mind about it.

So I think it will be a combination of both. The majority of it has been pretty much all EBITDA growth. We've slowed down acquisitions, we're focused on HMA and I think we'll continue to see the EBITDA grow nicely.

I mean, the $400 million, $500 million benefit of health care reform weren't there when we did the Triad deal, when we did a 1.5% over 1.5% improvement in a couple of years. I think we can easily get to the 2 with this, with both the opportunities from margin and the opportunities of the Affordable Care Act..

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

I just wanted to -- you mentioned the elections being a basically kind of a tailwind as far as your view, because it kind of feels like it's something that might open up Republican or even Democratic governors to have a freer hand to expand Medicaid.

But the markets seems to be focusing on the potential for Republicans to gain control of the Senate and maybe a Supreme Court decision to come down the pike.

Just wanted to get your thoughts about what you thought -- you made a comment, Wayne about -- it didn't sound like you thought it'd be a headwind, but what you thought might happen around, legislatively, if Republicans take control.

And then what you think a logical outcome from the Supreme Court might be if it was to somehow be a negative outcome if the states were kind of already prepared to find a workaround and keep things going. So just your thoughts there..

Yes, Kevin. I think in talking to people, I think there's a -- if Republicans take the Senate, I think they'll do 2 or 3 things fairly quickly. I think they want to demonstrate that they can govern. So things like the Keystone Pipeline, trade agreements, they'll do those couple of things pretty quick.

Then you get into the budget -- and probably the President would pass those first couple of things. Then you get into the budget and reconciliation, that's probably a veto item, when it's all said and done. I think there's a couple of things here at play that may be different than what we've been thinking.

We have a presidential election coming up relatively soon. Mitch McConnell is going to want to be -- is going to want to have a leadership job for a long time instead of for only a couple of years. So Republicans have to think of a way to be kind and generous and helpful as it relates to health care reform, I think, is a big item.

If you ever want to pass an immigration bill, you've got to figure out a way to work with people to do that. I think those things are different and I think the dynamics are different today because it's a short time to get to a presidential election.

And if you're going to elect a Republican president, which all Republicans are going to want to do, they're going to have to compromise.

Even the really difficult hardliners are going to have the figure out a way to compromise some so that we get some good legislation passed, but also so that the Republicans build up credibility with the minority base.

So I don't think -- and by the way, I don't think -- I think Mitch McConnell has said this publicly, he now is not in favor of any kind of appeal process for the accountable care act -- Affordable Care Act..

Okay. And the Supreme Court, do you view that as a threat or....

I'm sorry.

What?.

The Supreme Court subsidy issue?.

Yes, I don't really have much of an opinion about that, but other than the fact that the -- what I read is, in terms of what people are saying, that it's probably highly unlikely. But if that happens, I think most people think there's some kind of workaround in every state, some kind of conversion you can do that will be helpful..

There's going to be 8 million people in the areas already in the exchanges, a high percentage of those are going to be in non-expansion states. We've seen good success in Florida and Texas, I'm sure other people have also. It's going to be hard to think those states wouldn't want to continue to let these people have access to care.

So it seems like even if it were to come down, you'd find some way to work around it, like some other state did an exchange for them or contract it out with somebody else..

David [ph], since you're asking for political opinions, the last think I'd say is about Medicaid expansion. I think we think there's a good opportunity for Medicaid expansion in a lot of states kind of going forward, even in some of the states that have been most difficult.

Again, I think it has to do with the presidential election, governors getting reelected. One of the reasons Rick Scott is having such a difficult time in Florida is because Charlie Crist is beating him up pretty bad over Medicaid expansion. So I think that's moving -- that will move forward after we get over these midterms..

And I guess, Larry, real quick. You mentioned that your reform estimate for the quarter is like $80 million to $90 million. And I think in the past, you've talked about this $400 million to $500 million benefit from reform, kind of being 1/3, 1/3, 1/3, in '14, '15 and '16, but you're already at a run rate that's more than half the way there.

So just wanted to get your thoughts about how you're thinking about the timing of reform..

Well, 1/3 of $500 million will be $160 million. We're probably a little bit lower than that, based on where we are today.

I think if you look at the states -- just go through them, Pennsylvania, there's probably about 1% benefit of consolidated EBITDA from expanding, Indiana is about 0.5%, and Utah and Missouri are probably -- and Wyoming are probably about 0.5%, Tennessee is probably 1.5% of our EBITDA.

So I think you -- with those coming in, we should see another good year there. I do think that you will continue to see benefit from the exchange patients as they get coverage and use it, and it's not just the first year, so it's going to be build up. We're about 15% below our decrease in adjusted admissions. We're well on our way to get to the 50%.

Hopefully we'll be a little bit above [ph] 15% by the end of the year and I think we'll see another good reduction next year of a similar amount. We'll outline how we're going to do the reform in February of 2015. Of course, our reform benefit is net of some reductions. Some people talk about a gross, so ours is a net number..

Your next question comes from the line of Whit Mayo from Robert Baird..

Larry, just first question, just on cash flow. It was a little soft in the quarter and your full year guidance would imply a fairly significant jump to get within your range. I know you called out a number of items that was a negative swing factor this quarter.

But anything to consider going into the fourth quarter that gives you a lift and maybe just remind us when you fund your bond payments?.

Yes, it's using $833 million, there's probably about -- I said over $100 million, there's probably about $125 million of HITECH incentives you're trying to get. There's an $85 million tax refund we'll get this quarter. Our A/R base went up a little bit.

As you spend all this time and effort on conversions, they go up, they'll come back down, which is probably $75 million. We do have the benefit of the way the accrued payroll works, which is $140 million or so, the way we expect it to happen in the fourth quarter versus the third quarter.

The interest accrual will be -- and interest payments is about $125 million. We'll probably get a little less money from some Texas supplemental programs. And then the normal cash flow would drive it somewhere in the neighborhood of $300 million to $400 million, which puts you nicely inside the $1.6 billion, $1.8 billion.

I'd just point people to last year, we had -- we were $450 million or so in the third quarter. We got to $1.089 billion, so we had a really strong $700 million in the fourth quarter and I think we've got a good shot at doing that again..

And second question for Wayne. Maybe if you could go back and talk about some of the regional network affiliations you've made with various retail pharmacy chains. We've seen a few things in the press. And what do you expect to get out of that? Is there any capital that gets exchanged in these partnerships? Just any color would be helpful..

Yes, you've seen probably that we signed a deal with CVS. And our view of the world is changing a little bit in terms of access in these -- in our network markets in particular, and actually in all of our markets.

We're either -- in the markets where we're the sole provider and we -- that hospital is the network or the basis for a network, which is a good thing for us, it's worked well for us through the years in terms of contract and all of the above.

Having said that, access is becoming more and more important, primarily around the fact that we're going to have 25 million or so people insured that have not been insured before.

Our perception is that's a group of people that are not going to spend a lot of time calling physician's offices, making appointments, waiting 2 hours in an office to see a physician. They're going to access care wherever they can, whether it's at Target or CVS or Walmart or wherever it might be. So we're pretty busy.

That's -- one component of our market strategy is trying to figure out ways that we can develop opportunities in terms of access.

Historically, when we looked at this before, the people that were doing that, the drugstores and the Walmart, they wanted us to put up capital, rent the space, provide the employees, do all of the above and they would take whatever the scripts or whatever else happens.

And now it's really more about the fact that they're just looking for referrals from -- in terms of can they get access to a physician through us from those. So they don't require us to do anything much other than provide our availability of our network.

It's building relationships with the patients long term and making sure those patients have good experiences. And we think that's one of the keys. And you add to that, the digital age and all the other things that we're working on is just one component of that..

Your next question comes from the line of Josh Raskin from Barclays..

I just wanted to follow up on the efforts around the HMA facilities and make sure I got what you were saying right, Larry, that you guys didn't really have a chance, obviously, you closed that a little bit later. Did they have much of an outreach? I mean, obviously there was a lot going on at the end of the year last year.

And would you expect the impact on the HMA legacy facilities to be higher in '15 on a relative basis than legacy CHS facilities?.

They did not -- when we did due diligence, it was apparent that they weren't as focused. They had a lot of distractions going on. And of course, there's a lot of management turnover in the second, third quarter.

I think we've got -- we've converted about 20 of their hospitals to our internal eligibility activity, and I think we've done the right hospitals, so that would be a good source, and I think, both on the Medicaid side.

And clearly, there's the woodwork effect, which you get a little bit of benefit from that now so -- in the non-expansion states, and I think the exchange business could be very beneficial there. And we also probably helped them on some of the contracting.

They had a few states that they were struggling with, with the exchange contract and I think we've done a better job, and we'll be more prepared for that. So I'm hopeful that most of it will be coming on exchange side. But there's also an opportunity, they've got some good hospitals. If Tennessee expands, they've got some good sites there.

And if some of these other states expand, they would benefit from that. But I do think they were probably very, very underprepared for it, so it should be a benefit for us..

Okay. And then just any commentary on October volumes. I think you mentioned you'd expect a little bit of increase as we go into the fourth quarter.

Do you have any color on admits or adjusted admits for October?.

Well, we don't usually get into month-to-month, but we feel -- we believe it will be positive volume for the fourth quarter based on what we're seeing in the initiatives, and the work that David and Lynn are doing. I think we'll see some positive volume in the fourth quarter, but we won't go month-to-month..

Your next question comes from the line of Darren Lehrich with Deutsche Bank..

Two things I wanted to ask. Just first, as it relates to surgical trends, it looks like the year-over-year was just a little worse than in the second quarter.

I'm just wondering if you can give us some flavor for inpatient/outpatient surgeries, how that looked in Q3? And whether you think some of the physician recruiting that you're catching up on with HMA or maybe some other investments might impact the rate of growth in surgeries going forward?.

Yes, I think our volume is getting better little by little. Some of this has to do with the economy in our markets. Unlike some of the larger markets, we have so many nonurban markets, it's taken a little while for them to recover. But it looks like they're stabilizing now.

We had about a 1.3% growth in employment, unemployment is about 6.2% or something like that now. So it looks like it's being stabilized and we're beginning to see an improvement in terms of our surgical volumes. So hopefully we're own the right track there and it will continue to move forward.

Our split, and Larry can speak to this, in terms of inpatient/outpatient revenue-wise is still relatively close. It's....

Yes, we were probably -- the inpatient surgery is down a little bit more than the outpatient. And as I said on the previous question, I think our adjusted admissions should be -- have a good chance staying positive for the fourth quarter, of what we know.

As it relates to the second to the third quarter, I'll just remind people we did have a lot of bad weather in the first quarter and we did anticipate getting some recovery in the second quarter. Some of those surgeries, I feel about 25% of our volume dropped in the first quarter we thought was recoverable.

So some of that, I think that's $3 million to $5 million of benefit that we thought we got in the second quarter from surgeries. So in essence, we were down 2%. Had it not been for the pickup from the first quarter, it actually had been sequential improvement in surgeries from the second to the third quarter..

Right. And then just the last thing I wanted to ask, it's been some time since you originally announced the Cleveland Clinic relationship.

Is there any progress to note here? And where do you stand with that particular initiative?.

Well, we've done a little work with the Cleveland Clinic, but not a lot of work. And we still have a relationship, but it's not as big or as large a relationship as we once anticipated..

Your next question comes from the line of Brian Tanquilut with Jefferies..

Wayne, just a question on the volume trends. You guys clearly are expecting continued improvement, and you succeeded in driving that higher over the course of the year.

As we look at the initiatives that you laid out and the comps that you're going to bump up against as we think about 2015, I mean, how do you look at that today without thinking about guidance, just from a more qualitative perspective?.

Let me take that first, then Wayne can add to it. We've made progress every quarter. There's lots of activities around orthopedics, physician practices and other activities. We've got a project going on about telemedicine to help us that I've talked about on the road. So I think we'll continue to get better. Our employment has gotten better.

It's probably averaged about 1% over the last 3 years, other markets maybe at 2%. We think there's more commercial business in our markets. Our managed care utilization was up, which is helpful. We're doing a good job on the physician recruiting, it takes a while to get them here.

So I think we're pretty positive about it, without speaking specifically, seeing positive volume growth, adjusted admissions in 2015..

Okay. And then, Larry, on the M&A timing, you mentioned that part of the reason you're adjusting the guidance was just delayed M&A.

So should we think of that as just merely shifting over to 2015?.

There was one of them that we were going to acquire, there was an HMA down in Florida that we decided it wasn't a good fit. And we're truly trying to buy stuff that makes good sense for us and our markets. So that would -- it was about $75 million and probably $10 million of EBITDA, that's gone, the rest of it is just timing.

And the other thing in addition to hospitals, we've been doing a few outpatient deals and they got delayed a little bit, so we've got a big opportunity to continue to do outpatient physician deals. But the big one in Grand Rapids should be some time in the first half the year..

Your next question comes from the line of Frank Morgan with RBC Capital Markets..

I think one of your big states, Texas, you called out.

But I'm curious, being a non-expansion state, you mentioned the woodwork effect earlier, how much woodwork effect are you seeing there in terms of the decline in the uninsured volumes or a reduction in the increase? And then as you look toward 2015, a lot of insurers will be going into some of these states, like United.

Have you negotiated with the Uniteds of the world? Are you in contract with them in all of those markets in places like Texas?.

The woodwork effect, which we originally estimated at about $10 million, it's partly the flak [ph] on the run rate that may be a little bit less than there, but that's still going to be meaningful. Actually, I think what we've seen both in Texas and Florida a little bit more, it's change benefit.

And of course, that's at a higher payment rate, so that's a good point, too. We do have about 30-some-odd contracts with United, we're not going to be in every location with them, but we are, have got 30 contracts in the exchange business. Of course, they didn't many last year.

They're focused on larger markets, which in a lot of cases, we're not there. But we're pretty pleased with our relationship with them, they're a good managed care company..

Okay. And then I think LifePoint called out issues surrounding collection rates on co-pays and deductibles, I think mainly on the commercial insurance side.

But are you seeing any different trends in terms of collection rates because of higher out-of-pocket and co-pays?.

If you go back and looked at it over the last couple of years, last year's, it looks like it's up about $40 on the average there. When you start out trying to collect it, maybe $70 from 2 years ago. I still think we're getting closer to 15%. I think 70%-plus of the exchange business is in the silver plan and there are subsidies there for those people.

Most of the people buying it, 80-some-odd percent, 75%, have already got some form of subsidies. Clearly, it's a little harder to collect, but we've got our own collection company that do a good job under Mike Lynd and Jim Clark, and I think we'll continue to feel like we can collect most of it. But it has grown, but hadn't grown substantially..

Okay. One final one, just RAC audit settlement payments.

Are you -- were you inclined to participate in the settlement? If so, how much will that be? And then how much exposure do you have to the Texas Medicaid waiver programs that are now in dispute with CMS?.

Somehow you got 4 questions in one there, Frank. Yes, we will participate. We'll probably -- it's probably a couple of A/R days. I don't think it's going to have a material effect on the income statement, on the -- see the other 2 questions..

Just one on Texas Medicaid waiver..

Texas Medicaid. Yes, we've got a small amount of money in there, a few million dollars. So -- that we have got -- we don't have that reserved for our earnings, $2 million or $3 million, so I think we will ultimately collect that..

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

I guess at this point, do you guys have a good estimate of what your success rate is, has been, at signing up people for Medicaid that have come through your doors and were eligible?.

Yes, we're running 60%. I think we're somewhere over 80% right now. And I think we'll continue to see us get better at that. And it's probably a little bit better in the expansion states than it is in the non-expansion states, because more and more people are sort of taking it.

So on a company-wide basis, I think we're up about 20%, probably better in the expansion states. And there's just some people that just don't want to participate. They don't want to fill out forms. The government's making it easier. We're getting better at it. I think we'll continue to do that.

I think our statistics on our slide show some substantial progress with Medicaid volume growing faster than the drop in adjusted admissions. So we're pretty pleased with what effort we got. We think we'll have a good success going into 2015..

Okay. And then HITECH, you mentioned the headwind for next year.

Can you help in terms of quantifying what the dollar amount of that would be?.

It's somewhere in the neighborhood of $75 million to $100 million of incentives and then there's some offset of expenses that will eat up a lot of that, so it is a headwind. And over time, HITECH will wind down. The spending that we spend on HITECH, on capitalized software will wind down.

And we think there's a great opportunity in this company outside of HITECH, but it's something that -- we've got 200 hospitals, so we're going to have a lot of HITECH and not spend money on them, like electronic health record, so we've got a lot of incentives out of.

But it will probably be a little bit of a headwind next year, and it will be built into our guidance..

And your last question comes from the line of Ana Gupte from Leerink Partners..

I wanted to follow up on the acuity commentary you made earlier about Medicaid. I think you said the inpatient case mix is up 10% and you said the exchange is up 20%.

What types of surgeries and procedures are these new members undertaking? So is this likely to show a continuous tailwind to 2015 and '16 for the same membership?.

It's a good question. We early on -- as pointed out, that the Medicare case mix for Medicaid is very, very low, it's below 1. A lot of your Medicaid business that you have today is women and children. Now you're going to be seeing a bit -- a lot of adult males left out.

A lot of it is your general surgery activity in the other care, which is a much higher case mix than the existing people. We estimated it would be up about 5% for the year. We weren't there in the second quarter, we're now up to 10% on the expansion states, so I think that will continue to be there.

And I think I'd be surprised if we don't continue to see that stay at that level, maybe get a little better as more and more adult males take care of general surgery and other activity going on.

As it relates to the exchange business, we're comparing it to what self-pay business was, because now they're coming in and taking -- adding more procedures, and this splits the self-pay business in itself. So we're glad to see the case mix of the Medicaid was up..

And then just following up on the same point from -- for the exchange membership that you saw in the second quarter compared to -- or maybe in the first quarter compared to the second quarter, was there any difference in acuity in terms of those with more pre-existing conditions coming in earlier on and now as we're potentially getting to a less acute case mix?.

The one thing I would comment is that we are seeing probably over 40% of our charges are inpatient exchange, and it probably was less than that through the first 6 months, so we are starting to see a little bit more inpatient admissions, and inpatient admissions did improve nicely over the second -- third quarter over second quarter.

Although still a small number, so we are starting to see a bit more inpatient business. And I think as people who follow managed care understand, it's 70 or 80 admissions per thousand, this can take a while for 7 million or 8 million people to sort of generate themselves through the system as far as inpatient admissions.

But outpatient is still 55%, 60%. But we did see a growth in inpatient charges, which also helped contribute to the case mix above the prior self-pay case mix..

And one final one, again, just not on risk pools so much, but on the willingness of these exchange members, who don't have the kind of cost-sharing subsidies perhaps to undertake procedures and services.

Are you seeing a reluctance and maybe some of them get to deductibles by the end of the year? And to what extent would you be willing, given exchange pricing looks pretty attractive, to just waive the deductible or deal with it as non-collectible?.

Well, we do expect to collect deductible, that's something we do, We do give discounts for prompt payment. We do, do a little bit of outreach to try to let people know we're there. And then 5 months and a quarter and we do generally have an uptick in utilization. I don't know, this would be the first time we've had exchange business, we'll have to see.

It's still a relatively small percentage of insured people. You've got 7 million, 8 million people out of 150 million people throughout the country, so it's not a meaningful percentage of the business throughout. But I would expect they would -- some of those will be there and we'd give them a prompt payment.

I don't know if we're going to be waiving deductibles, per se, right now to get business..

Thank you, again, for spending -- I'm sorry? Thank you, again, for spending time with us this morning. Our standardized and centralized operating platform, are helping moving the company forward as one and is achieving our goals.

I want to specifically thank our management team and staff, hospital chief executive officers, hospital chief financial officers and chief nursing officers and division operators for their focus on operating performance for this challenging quarter. Once again, if you have any questions, you can always reach us at area code (615) 465-7000. Thank you..

And this concludes today's conference call. You may now disconnect..