Michael Culotta - Vice President - Investor Relations, Community Health Systems, Inc. Wayne T. Smith - Chairman & Chief Executive Officer W. Larry Cash - CFO, Director & President-Financial Services David Lewis Miller - President & Chief Operating Officer.

A.J. Rice - UBS Securities LLC Kevin M. Fischbeck - Bank of America Merrill Lynch Frank G. Morgan - RBC Capital Markets LLC Ralph Giacobbe - Credit Suisse Securities (USA) LLC (Broker) Brian Gil Tanquilut - Jefferies LLC Gary Lieberman - Wells Fargo Securities LLC Jason W. Gurda - KeyBanc Capital Markets, Inc. Andy Schenker - Morgan Stanley & Co.

LLC Joshua R. Raskin - Barclays Capital, Inc. Chris D. Rigg - Susquehanna Financial Group LLLP.

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 First Quarter 2015 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. Thank you.

I would now like to turn the call over to Mr. Michael Culotta, Vice President, Investor Relations. Please go ahead, sir..

Thank you, Jeremy. Good morning, and welcome to Community Health Systems' first quarter conference call. Before we begin the call, I would like to read the following disclosure statement. This conference call may contain certain forward-looking statements including all statements that do not relate solely to historical or current facts.

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

As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements.

After the market closed yesterday, we issued an 8-K, including a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website.

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

Further our same-store does not include the other 2014 acquisitions. All calculations we will be discussing exclude the costs associated with the HMA acquisition, integration, government settlements and related cost, and the CVR legal expenses and liability that is more detailed on our earnings presentation on slide five.

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

Smith?.

Thank you, Mike. Good morning and welcome to our first quarter conference call. Larry Cash, our President, Financial Services and Chief Financial Officer is on the call today, as well as David Miller, our President and Chief Operating Officer; and Dr. Lynn Simon, our President of Clinical Services and Chief Quality Officer.

I'd like to take a quick second to recognize Lynn for her inclusion in Modern Healthcare's list of Top 25 Women in Healthcare and one of the 50 Most Influential Physician Executives and Leaders. We're extremely proud of Lynn and all of her accomplishments.

With that said; I'm extremely pleased with our financial and operating results we were able to achieve this quarter. I think you will agree that are results continue to improve and we continue to see volume improvements. Let me give you a quick overview of the quarter.

Our same-store adjusted admissions grew 2.5%, this compares to the decline of 5.3% last year's first quarter. On a same-store basis our ER visits increased 7.8%. Our same-store net operating revenue grew 5.2% from a year ago and grew 17.6% on a consolidated basis. Our net operating revenues for adjusted admission grew 2.6% on the same-store basis.

Our adjusted EBITDA was approximately $715 million, a 32% increase from the prior year. Our adjusted EBITDA margin improved 160 basis points to 14.6% from 13% from a year ago. Our adjusted earnings per share was $0.85 compared to $0.29 or a growth of over 190%. As always, we're focused on physician recruiting.

Physician recruiting is a very important to our expansion of our services that are provided. There over 877 physicians that were recruited to our active medical staffs across our facilities this quarter. This compares to 613 physicians recruited in the first quarter a year ago, or a 43% increase.

In addition, we've recently assigned operational oversight of our employed physician practices to Dr. Simon and her team. This will enable a more centralized and standardized approach to physician practice management by physicians and operators with the experience in managing these entities. Now turning to our attention to HMA integration.

David Miller continues to do a great job of focusing our resources on getting this acquisition fully integrated as well as Dr. Simon on our quality and clinical initiatives. We achieved $125 million in synergies this past year and $50 million in synergies this quarter.

We estimate that we will still achieve an additional $125 million to $150 million in synergies this year. We continue to advance our Access Points strategy by expanding our outpatient services within our markets.

Our current approach is to expand services in our existing markets versus a capital-heavy, high-multiple, large scale acquisition that would include a significant number of assets in our non-market areas. That being said, we continue to evaluate a variety of outpatient opportunities with different capital and strategic approaches.

In the meantime, our outpatient Access strategy will continue with several of our current partners to deploy additional surgery centers, urgent care centers, freestanding EDs and diagnostic imaging centers along with the provision of telemedicine services.

We presently have in our portfolio 59 surgery centers, 41 urgent care, six freestanding EDs, 148 diagnostic centers and 1,600 physician clinics. As always, we're focused on delivering patient care to the lowest possible cost setting and the highest possible quality of standards.

We will also continue to make selected acquisitions where it would make sense. We're still in the process with Metro Health in Wyoming, Michigan. We expect this to close sometime in the third quarter. There's been a couple of letters of intent that have been disclosed by the sellers.

As you can tell, we're looking to larger markets predominantly in mid-sized metropolitan areas, or in markets that would complement our network strategy. We also sold four facilities this quarter.

We received $74 million in cash at the end of the fourth quarter and as one facility closed effective January 1, we received $63 million this quarter on the other three.

Let's now update on – let me now update you on the Affordable Care Act, but before I do that, we continue to hope that governors and state legislators in non-expansion states will strongly consider the positive impact of expanding Medicaid.

They have some key decisions to make with shortfalls in state budgets and the decision before the Supreme Court.

I'm sure they don't want their citizens to lose their subsidy that helps with the cost of being insured and we hope they understand that there are citizens that are not eligible – these are citizens that are not eligible for healthcare with existing specific state Medicaid programs.

Expanding their Medicaid program will open this up to those that also deserve to be covered. Research published in The New England Journal of Medicine found a 6.1% reduction in mortality among low income adults in states that had previously covered – had previously covered – coverage in Medicaid programs.

This is consistent with their previous analysis that found 8.5% reduction in infant mortality and a 5.1% drop in child mortality as a result of Medicaid expansion in the 1980s. We continued to be remain very active in our states and with the respective hospital association and trade groups including active lobbyists.

We presently have 14 states that expanded, with Pennsylvania and Indiana being the most recent. These 14 states represent approximately 30.9% of the uninsured population in our markets eligible for expansion. These percentages are based on information from Enroll America data.

You're aware that the current outcomes in the states, we still believe that states will ultimately expand. Larry will give you a lot more detailed insight on this in his first quarter analysis. Next, to update you on pending legal matters.

We have been working with the Department of Justice to resolve a number of pending investigations and expect there will be announcements in the coming weeks and months. With respect to the HMA matters, we're continuing to have discussions with the Department of Justice in an effort to resolve the open qui tam cases.

We have recently been told that the criminal division is continuing to investigate former executive level HMA employees, as well as considering whether any HMA entities should be held criminally liable for the acts of the former HMA employees. We are voluntarily cooperating with these inquiries and have not been served with any subpoena or the like.

As you may know, beginning last fall the Department of Justice has spoken several times on their intention to have Main Justice review all several qui tam cases to determine whether a criminal case should be pursued or not. We continue to reevaluate the estimated liabilities covered by the CVR on a quarterly basis.

Our current estimate including probable legal fees continues to reflect, there will be no payment – there will be no payment to the CVR holders. As it relates to our 2015 guidance, we are reiterating the guidance we set in February.

Larry will now discuss our results, the effects of Affordable Care Act and provide you with other information on our 2015 guidance.

Larry?.

Thank you, Wayne. We believe our same-store information, we are providing is more meaningful and thus we'll predominantly discuss same-store results for the quarter.

Of course the information we'll be discussing excludes the integration and merger costs of HMA transaction, the government settlement and related costs and the reduction in estimated liability expenses associated with the HMA government litigation related to the contingent value rights.

The first quarter's net operating revenues increased 17.6% on a consolidated basis and were relatively flat with the sequential fourth quarter of 2014. Our same-store net operating revenues increased 5.2% and operating revenues per adjusted admission increased 2.6%. And our volumes of our adjusted admissions increased 2.5%.

The flu did positively impact our adjusted admissions approximately 40 basis points in the quarter. We also experienced a 2.2% increase in surgeries. We noted our actual revenues were below consensus and we believe this could be due to the following.

Last year, we did record five days of January 2014 HMA activities, we closed the transaction on January 27, 2014. It appears some of the estimates may have included an entire month of January 2014 revenue in developing the first quarter's 2015's results.

Divestitures or discontinued operations after March 31 may have been omitted from the first quarter 2015 estimates. And also the bad debts had increased slightly from the fourth quarter. We should note that the Medicaid adjusted admissions increased 7.5% and self-pay admissions declined 12% on a total same-store revenue basis.

Before bad debt expense Medicaid increased 14.8% and while self-pay declined 10.4%. On a same-store, payer mix continues to improve as we saw a 220 basis point improvement at managed care, 100 basis point improvement in Medicaid and a reduction in self-pay of 180 basis points.

Total Medicaid revenue per adjusted admission, prior to bad debts and incurred expense, grew 6.7%. The Medicaid case mix grew 1.3% and 4.1% in expansion states. Our all-payer case mix increased 20 basis points and our Medicare case mix increased 40 basis points. We continue and we'll continue to see the shift to the outpatient setting.

Our outpatient revenues represent 56% of our total patient revenue compared to 54% in the first quarter of 2014. Our salaries and benefits as a percentage of net operating revenue declined approximately 170 basis points as a percent of net operating revenue to 45.7%. The decline was the result of a 3% productivity improvement.

Supplies expense increased approximately 10 basis points to 15.4% and we continue to increase our overall compliance in our group purchasing organization and decrease our overall pricing. Other operating expenses declined 110 basis points to 22.4% of net operating revenue.

As it relates to HITECH incentives on a consolidated basis, we recognized $26 million in 2015 compared to $40 million in 2014. And the March 2015 impact on adjusted EBITDA was $21 million. This compares to $24 million in the first quarter of 2014.

Just a note that the sequential impact on HITECH in the fourth quarter, we recognized $47 million in HITECH incentives and $38 million on adjusted EBITDA. So we had a $17 million to $18 million headwind from the sequential fourth quarter.

Our cash flows used in operations was a negative $61 million, this compares to cash flows from operations last year of $65 million. There is a slide 13, that sort of looks at the various moments in cash flow.

This year the debt was outstanding for the full period and the impact on the cash flow and related specifically to interest payments was approximately $25 million more, this quarter than last year's first quarter. This is due to the two debt instruments that did not have a first quarter interest payment in 2014, but did in 2015.

And just to remember our payments and interest are higher in each of the first and third quarters by approximately $140 million. We received a tax refund of $80 million in last year's first quarter. We did state on the earnings call in February that we'd be impacted in 2015 from our tax refunds in 2014, to our tax payments in 2015.

We also received refunds in 2014 in third quarter of $15 million, and in the fourth quarter of $86 million. We had a negative impact of HMA integration costs and legal expenses associated with the CVR of $2 million. This compares to $53 million in the first quarter of last year.

We had cash outflows on certain government settlements and related costs of $87 million, and a year ago we had HMA banking fees and other liabilities right at $50 million. Adding these add-ons back after estimated tax benefits for a comparable number for this year would be $200 million, this compares to approximately $148 million last year.

As Wayne said, we reconfirmed our 2015 cash flow from operations guidance of $1.650 billion to $1.850 billion. And the last 12 months, adjusted cash flow was approximately $1.7 million. Our CapEx was $241 million or 4.9% of revenue compared to 4.3% for 2014.

Approximately $34 million was spent on our Birmingham, Alabama replacement facility compared to only $2 million in the first quarter of last year. Our cash flows used in investments at our assets were down approximately $60 million compared to the year ago. As we stated earlier, we should see this number decline approximately $150 million this year.

Let me speak just a second to non-controlling interests, and other items below EBITDA, that this amount was comparable to last year as a percentage of revenue.

And the non-controlling interests is lowered in the fourth quarter due to one lower earnings, a different distribution of earnings and we also bought out a syndication in the fourth quarter that had non-controlling interests.

On interest and depreciation, we have future planned acquisitions and opened a new hospital that need to be considered when you think about interest and depreciation going forward. Additionally, some of our forward-looking swaps become effective later in 2015, as disclosed in our public filings.

Now, let's turn our attention to the Affordable Care Act. The following information is hospital data only. Self-pay admissions as a percentage of total adjusted admissions declined 100 basis points or 6.2%, self-pay adjusted admissions decreased 11.9% and in expansion states the decline was 15.1%.

Medicaid adjusted admissions as a percentage of total adjusted admissions increased 110 basis points to 19.6%. Medicaid adjusted admissions increased 8.3%, with some of this increase coming from facilities in non-expansion states. The expansion states increase was 7.7%.

Sequentially expansion states saw an increase of 28% in Medicaid adjusted admissions, while non-expansion states experienced a decline of 14%. As it relates to monitoring the exchanges, we have sufficient information. We've noted an increase in patient visits over 200% this quarter compared to the first quarter a year ago.

January and February were relatively flat, with March experiencing a 27% increase in visits over January and February. Self-pay emergency department visits decreased 22% in expansion states, and 1.2% in non-expansion states.

Over the last five quarters, the decline in self-pay admits and adjusted admits and increase in Medicaid in expansion states has grown quarter-over-quarter.

Taking a look over the last five quarters, at the trend of charity care plus self-pay discounts plus bad debts it has continued to decline and it's gone from 27.2% to 23.7% or about a 350 basis points decline.

Based on various data points on Medicaid and exchange business, we believe we've recognized some accumulated benefit in the amount of approximately $60 million from the Affordable Care Act for the quarter, which is in line for our overall 2015 guidance. We should continue to see higher benefits as the years progresses.

For 2015, we continue to estimate we'll receive incremental benefits between $100 million to $175 million before the government deductions. And this compares to an increase of $165 million in 2014.

Briefly on a sequential quarter basis, the best approach would be to describe our bridge in the fourth quarter adjusted EBITDA it was $785 million and an adjusted margin of 16% to adjusted EBITDA of $715 million and 14.6% margin. As we previously said the effect from the HITECH was approximately $20 million on HITECH incentives.

We previously stated in the year end call, we'd see a spike in bad debt as a percentage of operating revenue related to resetting of copayments and deductibles that takes place in each first quarter. This impacted EBITDA and margins by approximately $20 million.

We've previously mentioned that the benefits would be higher as we had the reset of employer payroll taxes and raises to take effect January 1. We did have an increase of approximately $25 million.

We did receive an annual payment – or did recognize a California provider tax for the year in the fourth quarter of 2014, and the sequential difference was approximately $20 million less in the first quarter. And these four items we previously discussed and noted accounted for the majority of EBITDA and margin decline.

We were also impacted by the weather, as we stated in previous earnings calls, the weather impacted about 80 facilities and had an estimated reduction of about 2,300 adjusted admissions and about $25 million in revenue and approximately $10 million in adjusted EBITDA. This is significantly less than the severe weather impact we experienced in 2014.

Wayne?.

Thanks, Larry. We are very pleased with what we've accomplished this year and what we hope to accomplish throughout 2015 and beyond.

We have many opportunities with the continuation of rollout of the Affordable Care Act, opportunities for growth in the former HMA assets and other recent acquisitions including the synergies that we expect to achieve and our opportunities to de-lever our balance sheet and our operational and clinical initiatives.

We expect to continue to increase the EBITDA margin in the former HMA facilities exclusive of synergies. We'll continue to work on volume initiatives that should help achieve organic growth in market share. We've laid a great foundation for our platform.

And as always, we continue to focus on enhancing quality, building stronger physician relationships including increasing physician recruiting and doing what's right for our patients. I'd like to thank all the physicians, nurses, and support staff for all their tremendous support during this quarter.

With that, we would like to open the call up for comments. In an effort to get more calls in, we will limit to one question, so others can have time. If you have further follow-up questions, as always, we are here to take your calls. You can reach us at area code 615-465-7000..

Your first question comes from the line of A.J. Rice with UBS. Your line is open..

Hello, everybody. Maybe I'll just ask you for about the ACA benefit. I think sequentially, you're saying it was a $5 million incremental benefit. I know you had Pennsylvania go live in January, a Medicaid expansion in Indiana in February go live and obviously there is some exchange pick up.

Give us your thoughts on – do you think you haven't seen the full benefit of that for some reason? I know you mentioned in January and February, it seemed a little modest build up in the New Year.

Any thoughts about what was behind that?.

Yeah. Pennsylvania did not get off to as good a start as we'd hoped. You remember last year even though Medicaid expanded in the first part of the year, it was a big uptick.

In the 10 states we had at the time, Pennsylvania, we saw a minimal benefit, we saw a little bit more in March, we're seeing some more through April, I just looked at April's statistics today. Indiana got off and had a decent March, it's got presumptive eligibility, which helps it a little bit and we had a little bit better in Indiana.

I think both will be much stronger similar to last year in the second quarter, so much more better recognition of the Medicaid activity.

From the exchange enrollment, we were up about probably 35%, I believe due to our information it was around January 2015, we ended up being about 65% or 70% in our enrollment, in our markets and we saw that recently, I commented during script that January and February were not up that much, a lot.

A lot of that came through in March, which would say that the second quarter should see a bit better benefit than we saw for a whole quarter..

Is that order of magnitude of increase on the exchanges more than you were thinking? It sounds like a big number..

Those are the ones in our county. Of course, we can't service all those and some, we can ....

Right..

It turned out a little bit better than we initially anticipated from it; we'll just see how that plays out. We got a pretty wide range of $100 million to $175 million; I'd say at the low-end, it is definitely better. At the high-end, that's probably somewhere we thought could happen.

We were very careful to try to take the, in the estimating of the ACA, we tried to take where we were in the fourth quarter, add Indiana and Pennsylvania and add I think about a 40% to 50% growth in exchange, so it came out a little bit better..

Okay. Great. Thanks a lot..

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

Okay. Great. Thanks. Just wanted to talk a little bit about volumes, because the admission growth was I think the first time positive in a number of years. I was wondering if you could give a little more color about what's really driving the overall admission, adjusted admission growth.

First off, break out between reform and other factors? And then, I guess secondly, the comps start to get more difficult as the year goes on. Do you think that you'll be able to show positive volume growth each quarter or do the comps just get too tough in the backend? Thanks..

Kevin, let me kind of just on top before Larry breaks all this down for you. I think, all the initiatives that we talked about in the last couple of quarters are beginning to work for us. We've got initiatives in orthopedics, we've got transfer centers, we've got a lot of marketing going and you see, our ED visits are up, our surgeries were up.

So, I think, this is just hard work, it just takes time to do this, but I think we're making very good progress. I don't know, David, if you want to comment.

David Miller?.

Thanks, Wayne. Maybe just a comment or two. All of our operators, Kevin, are committed to increasing market share and have embraced one or more of these growth strategies that we have initiated. As Wayne mentioned, the ER service line has demonstrated nice growth this year first quarter versus last year, nearly 8%.

We have some targeted marketing campaigns going on. We have stronger EMS relationships. We've obtained stroke and cardiac certifications and we're ensuring that we have capacity in our ERs.

The transfer centers, which we started last year, we now have seven that are operational, and again that's to help us enhance our referral capture within our networks, and we've seen very strong growth there. The physician recruiting emphasis that we've placed especially on the former HMA facilities has paid great dividends for us.

I believe we've added something like 870-odd physicians this year to our medical staffs versus slightly over 600 last year. We have a professional outreach initiative going on and we now have over 100 liaison type folks in our markets that are working with physicians, employers and payers helping to tell our story.

You've seen that the surgical growth was 2.2% up quarter over – last year's quarter. The orthopedic initiative is helping there, and of course we continue to expand our Access Points, including partnerships with other vendors, and we think these things combined with Medicaid expansion have really begun to pay off for us..

Thank you, David. Kevin, that's more than you ever wanted to know, but good job.

Larry?.

Yeah, just on trend. We clearly had an easier comp this quarter and were positive. We're also 2.7% up in the fourth quarter and 2.5%, and I think the flu helped the fourth quarter a little bit. We are negative in the second quarter and around 1% in (27:23) so we should do okay in the second quarter and the third quarter.

And we'll have a little bit of tougher comp because of the flu in the fourth quarter but with the initiatives that we've got, I think, we'll continue to hopefully see a positive volume growth. That's what we're trying to get done and we're also doing a good job on expenses.

We've put a lot of efforts on supply chain and revenue cycle management and staffing. So, that's also equally as important..

Okay. Thanks..

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

Good morning. I wanted to go back to the exchange discussion. I know HMA got off to a really slow start and you weren't able to really influence it that much in the 2014 season.

But do you have any color specific to that market? Did you see a little bit of a catch-up activity in 2015 open enrollment? And has that translated into incremental volume on those set of assets? And then, the other one was just on EBITDA margins, you specifically mentioned that you think, you think you got upside in the HMA portfolio, just curious maybe percentage wise what – how much upside do you see in that book in terms of margin expansion? Thanks..

Yeah. As it relates, I think, we did a little bit better in the HMA markets as the year went on. Florida is the state with most exchange business. There's not that many of the – we had a pretty good overlap in states, but HMA didn't have in states we weren't in or weren't as large, some of the expansion didn't go from their size of Medicaid expansion.

But, we are seeing good benefit this year, in Florida, we saw it at the end of the year. And we did a good job on the outreach effort for HMA this year. So, on both – where it's been expansion of Medicaid. As far as the HMA margin, I think, we made a small progress last year.

We'll make hopefully 50 basis points improvement this year, off the run rate revenue and hopefully 100 basis points next year. You have to be careful how you account synergies and margins and AC and all of it.

But, I think, the underlying because we can improve the HMA margins, which are about 12% when we got it and there we've been running 15% to 16%. We're targeting on a comparable basis to get it back up to about 15%..

Okay. Thank you..

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

Thanks. Good morning. Just want to understand on the volume side of things. Can you help on volume trends maybe by geography if you're seeing anything spike out there, and maybe if you're willing to, I know you talked about a little bit about HMA and their markets within the exchange.

But more broadly, can you sort of compare the trends within sort of the HMA markets versus the legacy Community markets? Thanks..

Yeah. If you go back to January and February, we did have a little adverse weather in a number of our markets and lot of people missed that. But when it's iced over in North Alabama, you know you've got a problem. But generally speaking, I would say our volume trends are pretty good.

And look as everybody knows in our smaller communities, the volumes are little slower in terms of returning, it's generally population growth and jobs, all the above. But I think we're on the right track and we're getting good improvements general across the board.

Larry, do you want to add anything to it?.

Yeah. I'd say the majority of our divisions all had positive adjusted admissions, one was close to that. We're not going to get into absolute specifics, but HMA did have positive adjusted admissions, which that's a question people ask.

From a revenue per adjusted admission, we closed the gap some, I mean it was about $1,000 and you know now it's down to maybe $600 or $700 in the first quarter. And that's important to continue to try to get the revenue per unit up. We'll never quite get it for our revenue per unit is because of all the Medicare business, they've got in Florida.

But we're making progress on and both for positive revenue per adjusted admission and we closed the gap a little bit there. And one of our synergies this year is to improve some of the managed care pricing at HMA..

We have high expectations for the HMA facilities since they did a relatively poor job of recruiting physicians last year. So we have a great opportunity in terms of continue to improve the numbers of physicians in those markets..

But last year, I think, Wayne means 2013, we made some progress in 2014, just to clarify that..

Okay. Thank you..

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

Hey. Good morning. Larry, just a question on the divestitures. So, you highlighted that as one of the reasons on the miss on the revenue line.

So, how should we think about divestitures going forward? And then, if I may just add another question on your exchange exposure, I know you've mentioned that in the past the SCOTUS, if you don't mind just giving us that number again. Thanks..

Yeah. The divestitures – last year's reported revenue was about $20 million higher than their restated revenue. So there shouldn't be that issue going into the first – second quarter. There is no new divestitures, that have been come up that weren't there in the second quarter, I believe. And then I think as it relates to the SCOTUS exposure.

I think we've said taken the 29 states we operate in, the majority of them are in the federal exchange. We pick some, we think that may not find a work around, although I think most people believe the Republicans are going to help find a work around on a national basis.

But if these states didn't go through, we would probably have a 2% to 3% effect on the 2016 EBITDA effect, because we've got so much federal exchange business..

Got it. Thank you, Larry..

Thanks..

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

Good morning. Thanks for taking the question.

Can you just talk about your focus on the outpatient business and where you see the most opportunity and where you might be the most acquisitive?.

We – over the last year or so, we continue to look for opportunities in terms of everything from outpatient surgery centers, diagnostic centers. Our physician locations, I think we have 1,600 physician locations now across the country.

The other thing that's important to us is what's going on in terms of CVS and Walmart and all the rest of them entering the – bringing in nurse practitioners and opening up mini clinics. So we have a number of those relationships.

So, I guess our view is, is that as things continue, we need to have relationships in just about every different sector of this in terms of who is doing what on any of the outpatient expansion areas.

We're going slow, not as fast as some people, but we want to make sure we are careful in that we not only are acquiring in terms of the properties we're acquiring, but also probably more importantly, the relationships we have in joint ventures that they are the right relationships going forward.

And in mobile devices, all those kinds of things are important now in terms of the access. So, we'll continue to do that and you'll hear more and more about that as time goes along..

So, how do you view the mini clinics? Are they competitors, are you trying to use them and develop relationships for referral sources?.

The mini clinics are just a quick tutorial, but if you go back a few years what they wanted from us, they wanted us to hire the employees, rent the space, all of the above and whomever it might be that get the scripts there. Now, all they want from us is a referral and like a 24-hour referral.

So it's a pretty interesting dynamic that has changed that kind of going forward. And I guess our view is, is that whether this is right or not, but we need to have that relationship going forward, because we believe that access through many clinics is going to dramatically increase.

The more people you have insured, the more opportunity in terms of people getting quick access to a medical practitioner, and getting their problem at least half way diagnosed or diagnosed, so that they get to the right person.

Once that starts even more, I think you're going to see a greater portion of the population doing that, even instead of maybe even calling up a physician and waiting a week or two weeks for an appointment and, waiting an hour or two for an appointment in physician's office.

So, that trend is clearly here, it's moving forward, we think it's got momentum and this is not going to happen overnight, but over the next four years or five years. I think this is one of the things that you'll see they will have more momentum to it than some of the other initiatives..

Okay.

And then, maybe just an update in terms of where you see your primary uses or the priorities for free cash flow?.

I think your questions are over. You only get one. You're going for three now..

We've got an acquisition pending. That'd be one of them for the free cash flow activity and we'll be putting, we got some CapEx that we'll spend it on. And probably in 2016, we'll be thinking about some pay down of debt and we may have some this year, but more than likely we'll be spending the money on our acquisitions..

Great. Thanks for taking the questions..

Your next question comes from the line of Jason Gurda with KeyBanc. Your line is open..

Thank you. I wanted to ask about a comment you made in your prepared remarks about consolidating or centralizing and putting your physician practices under a single management.

I was hoping what you're, what are you looking to improve or what are you looking to get from that approach?.

What we historically have managed our practices and our physician practices in the markets and as we've gone through the EHR conversions and start to – we've started to get sort of centralized approach to a lot of parts and pieces of practices and working on centralized appointments, all those kinds of things.

It occurred to us that we probably ought to think about this in a more consolidated way and since we get more synergies a lot, there is a lot of – as you probably know, there is a lot of IT going in physician practices now. There is a lot of requirements – reporting requirements all of the above.

So, instead of doing it individually in the markets, we think we can get a fair amount of synergies, productivity, even an improved product, better patient experience, all that by sort of bringing that in-house and managing that in-house..

Thank you..

Your next question comes from the line of Andrew Schenker from Morgan Stanley. Your line is open..

Hey. Thanks. Just going back to the bad debt there. You mentioned the reset of deductibles as one of the headwinds impacting that seasonality.

Can you talk about maybe how that trends in the first quarter, different maybe year-over-year, I mean the similar reset are you seeing more pressure as more people move into higher deductible plans? And maybe related to that, are you still seeing any changes between your exchange population and the general commercial population on kind of payment of deductibles and collection rates? Thanks..

Our hospitals the deductibles and co-payments were probably up 12% to 15%. I know some other people disclosed some higher percentages but that's what we saw for ourself. Importantly, our point of service for the first quarter was up about 180 basis points. So we did do a little bit better job on point of service.

I would think the deductibles are up, probably more from the managed care component than they are from the exchange business we've got. The exchange business is important, but we still got a whole lot of managed care business that's been putting in higher deductibles. They've been growing every year.

Our percentage of payments probably versus a year ago were roughly close to about 12.9% and 13% for the quarter this year versus last year. By the end of the year, you get down to about 10% or 11%, so that's just the way the math works.

From a collectability perspective, because a lot of the people are in the silver plan, we do expect to collect a reasonable amount of the deductibles from the Affordable Care Act people. The ones in the bronze plan, we probably will not. But overall, we should have close collection percentages and we monitor it.

And we may be running a little bit higher bad debts, but not substantially considering what type of volume it is.

But it was up and it'll get better in the second quarter and third quarter, then it drops in the fourth quarter and perhaps you'll see a little bit of business in the fourth quarter from people who have reached their deductibles and copayments..

Thanks..

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

Thanks. Good morning. I appreciate you taking the question. I want to get back to the outpatient and sort of maybe juxtapose that with the physician recruitment and see if those strategies are aligned. And then, I wanted to make sure I understood you talked about selective acquisitions.

Should we think about that as all sort of in-market strategy or would you be open to a larger acquisition of whatever sort of centers you guys are looking at?.

Yeah. I would, as it relates to the outpatient, our outpatient revenues now is up to about 56% or so. So, we continue to move and look for opportunities. There is a lot of, there is a lot of initiatives to try to move business to an outpatient. So, we are working down that road to make sure that we can accommodate that in our markets.

So, we continue to grow and enhance our market share. Physician recruiting obviously is, our physician recruiting is around all that as we continue to look for locations to expand our physicians' office practices. We have – as I said we've got about 1,600, that's very helpful in terms of being able to accommodate the outpatient business as well.

In terms of acquisitions there are a lot of opportunities still there. We have a couple of letter of intents. We have one that we mentioned in Wyoming, Michigan that will close in the third quarter. We have a couple of more – we're looking for facilities that generally are synergistic, that work within our markets.

But as you know, we also every now and then will decide, look we think Michigan is a pretty good market. And so we'll go to Michigan. We were the first in Pennsylvania now. We're clearly by a long shot the largest in Pennsylvania in terms of for-profits. We're the first go through a conversion. So we just look at them by the ones.

We're looking for – we're looking – really our first priority is to enhance the markets that we currently have. But in addition to that, if we find a really good opportunity in a good market, then we'll take advantage of that. But we're not – the pace is slower than it has been in terms of our acquisitions..

Josh, we have about eight physicians for every 10,000 people in our collective markets, which are around 30 million population. Nationally, it's over 20, so there is lots of room in our markets, now clearly we're not going to go to 20.

But we've got a lot of room to continue to add doctors, and we do a lot of analytics so it's something that we've done and we think we'll get a return off of that activity.

I just would add to one, in Michigan, when we're looking at HMA, we had four markets, one in Wisconsin, they had one in Ohio and Michigan, three of them we decided not to do or not to pursue. We did stick with the Michigan one and it would be the first one real-sized that we've done since we bought HMA.

Most of the others were either very small or in town, where we already located or something that was working when we did the deal..

Okay, great. Thanks..

And we have time for just one more call and that question comes from the line of Chris Rigg with Susquehanna Financial. Your line is open..

Hi. Good morning. Just wanted to talk about some of the information on slide 14.

The 7.7% increase in the quarter, is that comparable to the 30% increase that you had cited for all of 2014? And if that is, how should we think about that 7.7% increase sort of trending in the latter three quarters of the year, assuming no new states expand? Thanks a lot..

Yeah. That's a good question. I think I mentioned earlier, Pennsylvania didn't generate that kind of growth in the first quarter, Indiana a little bit in the last month. So that's why it was 7.7%.

They are relatively comparable and we had a state that has sort of changed its processing, a big state for us in the south, and that's probably cost us to be couple of percent lower, that activity.

In the first quarter, often the recognition of Medicaid is a little different, because the way the self-pay tending works and how you start the year over and a lot of efforts into the year.

I will think it would probably go up in the second quarter and third quarter because of both Pennsylvania, Indiana and then also the state that sort of caused us not to have as good, we'll get fixed hopefully in the second quarter..

Great. Thank you..

And that concludes our Q&A session for today. I'd like to turn the call back over to Mr. Smith for closing remarks..

Thank you again for spending time with us this morning. Our standardized and centralized operating platform continues to help us move forward. We're excited about the opportunities for this year and beyond.

We 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. Once again, if you have a question, you can always reach us at area code 615-465-7000..

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