Michael J. Culotta - Vice-President-Investor Relations Wayne T. Smith - Chairman & Chief Executive Officer W. Larry Cash - CFO, Director & President-Financial Services.

A.J. Rice - UBS Securities LLC Brian Gil Tanquilut - Jefferies LLC Gary Lieberman - Wells Fargo Securities LLC Frank G. Morgan - RBC Capital Markets LLC Andrew Schenker - Morgan Stanley & Co. LLC Matthew Richard Borsch - Goldman Sachs & Co. Joshua R. Raskin - Barclays Capital, Inc.

Chris Rigg - Susquehanna Financial Group LLLP Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker) Gary P. Taylor - JPMorgan Securities LLC Joanna S. Gajuk - Bank of America.

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

I will now turn the call over to Mr. Michael Culotta, Vice President, Investor Relations. You may begin your conference..

discontinued operations, loss from early extinguishment of debt, impairment of long-lived assets, net income attributable to non-controlling interests, acquisition and integration expenses from the acquisition of HMA, expenses incurred related the company's planned spin-off of Quorum Health Corporation, expenses related to the HMA legal settlements and related cost, and expense from fair value adjustments related to HMA legal proceedings accounted for at fair value underlying the CVR agreement and related expenses.

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

Smith?.

Thank you, Mike. Good morning and welcome to our third quarter conference call. Larry Cash, our President of our Financial Services and Chief Financial Officer, is on the call today, as well as David Miller, President and Chief Operating Officer. We'd like to make it very clear that we are disappointed in our results for this quarter.

We're immediately taking action and steps to address this decline. First, with the planned spin-out of Quorum Health, we've made internal decisions on the re-alignment of our divisions and personnel. This includes a series of forthcoming announcements about new leadership for some of our operating divisions.

Second, we're going to continue to review our portfolio rationalization. We have already sold six hospitals in 2015 and have two more under contractual agreements to sell. Third, we have identified immediate opportunities to control costs through better expense management for the remainder of the year.

We are monitoring progress and feel confident we can achieve our projected reductions.

Fourth, we continue to move forward with the spin-out of Quorum Health Corporation so that we can achieve the upside potential of a refined portfolio, and so that Quorum can pursue growth strategies that will meaningful to the new company that would not be advantageous to CHS.

As we have stated before, we believe this transaction should provide shareholder value. Fifth, we believe our network strategy is sound, but it is taking longer than we expected for some of the business development activities to materialize, especially in some of the previous HMA markets.

We are working through action plans to address the underlying causes, and deploying additional resources so that we can accelerate toward our performance objectives. We continue to believe there is a good opportunity to grow clinical capabilities, outpatient infrastructure and market share in these networks.

This is a top priority for us moving forward. And sixth, we presently have $150 million of existing authorization from our Board of Directors on a share repurchase program, and we will increase that authorization as necessary, and we can increase that authorization by over $300 million under our bank credit facility.

We will start repurchasing shares as soon as we can do so legally. I do believe, as our Board does, with the lower share price, that this is the most appropriate use of cash and cash availability. I believe in our strategy of portfolio alignment and developing and growing our network systems.

I also believe growing our physician base is also the correct strategy, as I further believe in our acquisition strategy of seeking opportunities in midsized markets. We will also continue to develop and acquire outpatient assets in our existing markets.

Year-to-date, we have acquired one surgery center, four diagnostic centers, six physician's practices, and several other service-related entities. As it relates to the quarter, we will continue to work on the integration of the former HMA facilities, but we took some steps backwards in certain markets, such as Florida and Tennessee.

These issues are now being addressed. We continue to see improvements in our legacy facilities and actually experienced good growth, but there still remains challenges in the former HMA facilities. But let me make it clear, we expect to see improvements in those facilities and markets. These are good assets in good markets and will be successful.

Larry will provide a little more color in his presentation. So let me give you a quick overview of the quarter. Our adjusted EBITDA was $661 million, our adjusted EBITDA margin was 13.6%, adjusted earnings per share was $0.56.

We're still in the process with our Form 10 registration statement, and we'll be filing an amendment with updated information for the third quarter. We are still on target to be completed sometime in the first quarter of 2016. Remember, this is a tax-free spin-out of 38 hospitals, representing 3,587 beds in 16 states.

Quorum Health Resources, a leading hospital management and consulting service company, is included in the new company. These facilities will be predominantly non-urban. In addition to the shares of QHC that will be distributed to our shareholders, there will be a cash distribution to CHS, and a portion will be used to pay down senior secured debt.

For the nine months, we expect that net revenues will be approximately $1.6 billion and adjusted EBITDA will be $186 million for QHC. We are in the process of updating the Form 10 filing, and you should refer to it once we have filed the amendment. As always, we are focused on physician recruiting.

Physician recruiting is very important to the expansion of our services that are provided at our facilities. There were 3,200 physicians that were recruited to our active medical staff across all of our facilities for the first nine months of the year. This compares to 2,800 recruited in the first nine months of 2014, or a 14% increase.

So you can see we're still working very hard to improve the number of physicians to the active medical staffs. Remember that we have 3,340 employed physicians and about 22,400 active physicians. We achieved $30 million in incremental synergies this quarter and $130 million in incremental synergies for the year.

We estimate that we will still achieve our revised cumulative guidance for at least $275 million of incremental synergies for the year. A quick update on pending legal matters.

Regarding our pending legal matters, we continue to proceed with our discussions in cooperation with the Civil division and Criminal division of the Department of Justice in an effort to resolve the open HMA matters. We continue to reevaluate the estimated liabilities covered by the CVRs on a quarterly basis.

I remind you that these expenses and accruals have different financial statement treatment under the CVR agreement. Our current estimate, including probable legal fees, continues to reflect there will be no payment to the CVR holders.

As it relates to 2015 guidance, we are adjusting certain components, net operating revenues, less the provision for doubtful accounts, is anticipated to be $19.6 billion to $19.8 billion. Adjusted EBITDA is now anticipated to be $2.9 billion to $3.025 billion.

Income from continuing operations per share is anticipated to be $3.40 to $3.75, based on weighted average diluted shares outstanding of 115.5 million to 116.5 million. Larry will now discuss further our results, the effects of the Affordable Care Act, and will provide you other information.

Larry?.

change in payer mix, $50 million; change in volumes, $45 million; and change in case mix, $10 million. Let me also describe for a moment the trends in revenue payer mix between our legacy facilities and the former HMA facilities.

For the third quarter, the former HMA facilities' Medicare declined 100 basis points, the Managed Care declined 10 basis points, while the legacy Medicare was flat and Managed Care increased 40 basis points.

The declines in Managed Care, Medicare and Medicaid revenues and the increase in self-pay revenues highlights the payer shifts we experienced at the former HMA facilities. The trends were just opposite at the legacy facilities.

Our overall inpatient case mix increased 1.9%, while the Medicaid case mix increased 2.8% and Medicare case mix increased 2.7%. We continue to see and will continue to see a shift to outpatient setting. Our outpatient revenues represent 58.3% of total patient revenue compared to 56.7% in third quarter 2014, a 160 basis point shift.

Our salaries and benefits as a percentage of net operating revenue increased 40 basis points, as a percentage of revenue to 46.2%. Our increase as a percentage of revenue is due to the higher costs associated with employed physicians and our lower shift in our payer mix.

Our productivity declined 100 basis points in the third quarter compared to the first six months. Our number of employed physicians increased the most in the Florida markets. Salaries and benefits in physician practice increased about $25 million. In the prior year, it only increased about half that amount.

Supply expense as a percentage of net operating revenue increased 50 basis points to 15.8%. The increase was predominantly caused by increased drug cost. This has been very much publicized in the press as it relates to significant increases in drug pricing that we've not been able to shift to payers. This increase was about $23 million.

Our other operating expense as a percentage of net operating revenue increased 40 basis points to 23.2%. Of particular note is our contract labor increased $10 million, and ICD-10 represented $5 million of that $10 million increase.

As it relates to HITECH incentives, on a consolidated basis, we recognized $54 million in this quarter compared to $88 million in the last year's third quarter. On a year-to-date to basis, we've recognized $135 million of HITECH incentives, compared to $212 million last year for the same period.

Our cash flows from product operations were $111 million for the quarter and $615 million for nine months. Our adjusted cash flows were $721 million.

The adjusted cash flows provided by operations has been adjusted for government settlements and related to expenses of $130 million, acquisition and integration expense, and a payment of an old HMA government liability of $29 million, and $9 million related to the QHC spin-out. We did tax-affect these amounts.

This compares to adjusted cash flow by operations of $833 million for September year-to-date last year. We have a slide on our adjusted cash flow calculations to give you the detail. There are a couple of items to note regarding some very large differences between the two nine-month periods.

This year, debt outstanding for the period and impact on cash flow related specifically to interest payments of approximately $125 million. The interest payment expense relates to the HMA acquisition late in January last year and was built into our guidance.

Remember, our payments on interest are higher in each of the first and third quarters by approximately $140 million. We did receive a tax refund of $80 million in last year's first quarter. We also received refunds in the third quarter of about $16 million and in the fourth quarter of about $92 million.

We have not received, nor will we receive – expect to receive any significant tax refunds this year. We are adjusting our year-end cash flow guidance generated by operations. We estimate our cash flow from operations will be $1.5 billion to $1.65 billion, and we expect reductions in our accounts receivable days in the fourth quarter.

Our CapEx was $696 million or 4.8% of revenue. Approximately $100 million was spent this year on the Birmingham, Alabama replacement facility which we opened early October. Another item we need to discuss relates to our various credit agreement covenants since we have a number of questions on this subject.

As Wayne mentioned, we have approximately $450 million available for share repurchases. Our interest coverage ratio cannot fall below two, and we currently are at 3.14 with $1 billion of cushion on EBITDA. Now let's turn to the Affordable Care Act. The following information is hospital data only for comparative third quarters.

Self-pay admissions as a percentage of total admissions remained flat at 5.8%. Self-pay adjusted admissions decreased 0.7%. In expansion states the decline was 13%, with the biggest declines in Indiana and Pennsylvania of 34%. Medicaid-adjusted admissions as a percentage of total adjusted admissions increased 50 basis points to 19.9%.

Medicaid-adjusted admissions increased 2.7%, with the majority of the increase coming from the facilities in expansion states. In the expansion states, the increase was 8.5%. Again, the largest increase was in Indiana and Pennsylvania at 22%.

As it relates to monitoring the exchanges, where we have sufficient information, we note an increase in patient visits of approximately 33% this quarter compared to the third quarter a year ago. Sequentially, the patient visits were down approximately 3% in the second quarter, with our biggest decrease in Florida.

Consolidated charity plus self-paid discounts and bad debts at three months period has increased from 25.1% to 25.3%, or 60 basis – or a 20-basis point increase. And for the year-to-date, the percentage has actually declined 60 basis points to 24.5%.

Based on various data points on Medicaid and its changed business, we believe we have recognized a cumulative benefit for the nine months ended September 30, 2015 of approximately $215 million from the Affordable Care Act, which is in line with our overall guidance. We should get continue to see higher benefits as the year progresses.

This compares to approximately $165 million for all of 2014. For 2015, we continue to estimate we'll receive incremental benefits with our guidance range now $115 million to $150 million in incremental for 2015.

Now, as it relates to our adjusted EBITDA guidance, and especially in bridging the third quarter to the fourth quarter from $661 million, and we've used $775 million as the bridge point. Volume and seasonality improvements should be approximately $50 million.

Pricing for both government reimbursement of managed care, payer mix and then government reimbursements should be approximately $45 million. Expense reduction initiatives should account for approximately $44 million, which is about 1% of our expenses. And reduction in HITECH reimbursement of approximately $25 million.

It just should be noted, for the nine months ended August, EBITDA margins were 14.6%. This compares with a lower margin that we had about 13% for our calendar 2013 on a combined basis for CHS and HMA.

Wayne?.

the continuation of the roll-out of the Affordable Care Act, especially the Medicaid expansion; the opportunities for growth in former HMA assets; the opening of the Grandview and its opportunities for growth in the very vibrant area of Birmingham; our opportunities to de-lever our balance sheet; our continual operational and clinical initiatives, including the growth and recruiting more physicians; our focus on strategy going forward, with emphasis on large markets and further developing our networks.

We will continue to work on volume initiatives that should help achieve organic growth and grow market share. We will 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 our physicians and nurses and support staff for all of their tremendous support during this quarter. With that, we'd like to open up the call for comments. In an effort to get more calls in, we would limit to one question and one follow-up question, so others have time.

If you'd like further follow-up questions, or if you have questions, as always, we're here to take your calls. You can reach us at area code 615-465-7000..

We'll pause for a few moments to compile the Q&A roster. Your first question is from A.J. Rice, with UBS..

Thanks. Hello, everybody. First off, maybe just ask about the comments around Florida and Tennessee and the legacy HMA facilities.

Can you just give us what you're hearing from the field? Has there been a change those markets somehow? Is it, people just took their eye off the ball? Have you had some issues with physicians? Can you give a little more flavor of what's going on there?.

It's a combination of a lot of things, A.J. This HMA has turned out to be a little more challenging, clearly, than Triad. Triad was a very well-run company with good facilities, good systems, all of the above. HMA had none of those kinds of things.

We've had to work our way through a lot of contractual relationship issues with physicians, make a lot of management changes, all of the above. They've been more prominent in Florida and in the Tennessee markets than they have in the other markets. So it's just been a combination of a lot of different things that's created this issue.

All these things are fixable. As you know, we have a lot of experience in terms of doing this. We pride ourselves on the fact that we've bought a lot of facilities through the years that were troubled facilities that we were able to fix and improve. We'll get there. And we're confident we'll get there.

And we think that as we do this over the next – by January 1 of the year, we will have owned these facilities for two years. So we will get these problems solved..

Okay.

And then real quick, maybe as a follow-up, if you think about the Affordable Care As compared to – thanks Larry, for the comments on where you are today versus two years ago – but can you give us some flavor for how much of the opportunity you think you've realized at this point, and how much is still in front of you? And how that might roll through over the next few years?.

Yeah. I'm going to speak to Medicaid expansion. Clearly, we probably got a $125 million to $150 million benefit of Medicaid expansion through the end of this year. And I think if you look out into the future, there's another $200 million to $250 million of benefit in 2016 and beyond.

I know that clearly there's articles out today about how challenging Texas is and trying to get it done, but over time. It took a while to get the original Medicaid done, and this is a benefit. A lot of these states that are not expanding continue to have a very high percentage of uninsured.

It seems to be working well in other states, and as you bring it down, uninsured, the government is paying its share of it and it's a good activity. And you also got the issue about the supplemental payments that the CMS looks at when they're trying to think about expanding Medicaid. So that's a really good benefit.

We're probably one-third of the way through what the total benefit is. We're about 41% done on our Medicaid right now, and it's still growing and we've probably got about 60% or 59% of our states there, and so we think that's a good opportunity. We don't own any hospitals in Montana, but another state just came out. We do own some in Alaska.

Next year, we would hope to maybe – Alabama, Louisiana, and a couple of other states, continue to work on it, and then hopefully Tennessee revisits it..

So I think this will be up to 30 states, if I'm correct, that would expand Medicaid. We've said this all along and we continue to believe sooner or later, over an extended period of time, all states will expand Medicaid..

And if you look at the exchange business, instead of getting to absolute numbers, we had a good year last year. We're up about 16% in enrollment. We've still got a fair number of people in our counties, in our markets, that have an opportunity to take advantage of it.

We've got a lot of outreach efforts, a lot of certified application counselors, some new connectivity with Enroll America to try to do a better job, and so I think we'll have a good year there. But I'll just speak to – we still – and also the penalty goes up, which will make it advantageous. But Medicaid is clearly something over time (24:49)..

Okay. All right. Thanks a lot..

Your next question is from Brian Tanquilut with Jefferies..

Hey, good morning, guys. Larry, thank you for providing slide 19, where you bridge Q3 to Q4. So if you don't mind just walking us through where your confidence comes from, there were three key parts here.

Obviously volume growth, which we did not see in Q3; that's a $50 million contributor; payer mix; obviously an issue in Q3 as well, it's a meaningful amount.

So if you don't mind just giving us some color on how we can gain more confidence in these numbers?.

Yeah. Let me work up. The HITECH, we're comfortable we should be at or near the high of the guidance, so that's $165 million or $160 million versus the $135 million, so we should be there. It dropped down from last quarter of $55 million to $30 million, and that would be the high end there.

Expense reductions, we clearly will not have as many employed physicians. Back to the comment about Florida, that's where most of the employed physicians were. They weren't that productive. Our study showed they get more productive the first six months there, someone else will be in the fourth or fifth month now.

We also have some improvements in productivity. That's probably another $15 million to $20 million that we didn't accomplish last quarter that we'll get done there. We've started some processes around the drug increases, and while we won't eliminate all of it, I think it's a good opportunity to do that.

The supplies, we've got some good supply-chain initiatives going on, which we looked at about a month ago and that will help out; travel, other operating repairs, things of that nature. In the pricing, you've got the Medicare increase that went in on October 1. We've got Managed Care increases that went in in August and September and October.

The August and September will be there the whole quarter and October will be there whole quarter, and then a few increases throughout. If you go back to look historically, we've had a pretty good increase from the third to the fourth quarter. We calculated that out and we used less this year in this bridge than we saw in the fourth quarter.

Volume and seasonality. Generally, we do – we think we had an effect on Labor Day, maybe our markets – say we didn't, and again, we looked at the week before Labor Day, the week after Labor Day, and we're confident our revenue dropped, so we shouldn't have that issue.

Looking how the holidays fall and the calendar falls, we should have some benefit from that perspective, and I think our initiatives here, while we've done a decent job on the legacy hospitals, we're continuing to work on the HMA hospitals and we think we can see an improvement in the volume and seasonality from the third quarter into the fourth quarter..

And then, Larry, just to clarify on the buy-back commentary or from Wayne's comments earlier, so you are saying that you are probably or most likely going to be in the market buying back stock with $150 million limit under the current authorization? Is that the right way of thinking about that?.

Yes, that is. And by the way, in terms of confidence here, I personally just bought 50,000 shares, so I believe we're on the right track, and yes, we will be in the market..

Got it. All right. Thanks, guys..

Your next question is from Gary Lieberman with Wells Fargo..

Good morning, thanks for taking the question. Just in terms of the Quorum spin, there's been some – a little bit of turmoil in the debt markets.

Is there any impact or potential impact from changes in the debt market on the upcoming Quorum spin?.

Well, we've talked to our advisors about it. You know, it's still a couple months off. It is going to be a challenge. I think the high yield market is coming back a little bit. I think we'll be okay. There may be some effect on interest rate; we'll have to wait and see.

They're having an okay – they had an okay quarter, and looked pretty good year-to-date, and I think that the team that goes out, and Tom Miller and Mike Culotta go out and talk about the company, there will be some excitement. I think we'll find some debt holders to be interested in it. It is a pretty good size, but you are right.

But I think that with the banks that we've got supporting us and the good bondholders we've had over the years, we should be able to find appropriate financing and decent interest rates..

And then in terms of the guidance for HMA, you left it the same.

Just in terms of what's going on at the HMA assets, is there any concern that you might not be able to achieve the $275 million or timing of doing that?.

No. You know, when you look at synergies and you think about it, we've done a good job. I mean, the volume and the revenue of HMA has not been where we'd expected, but we've raised the synergies several times already. We're $30 million this quarter, $50 million last quarter, we clearly don't count something after 12 months. There were some July.

We've still got some synergies that we're working through, primarily around contracts. I would think we're going to have some synergies next year. In the first part of the year it'll be a carryover, we're going to (29:37) Managed Care. I think we'll get it at least to $275 million, and we're pretty close to that right now..

And, Gary, don't forget, if you go back a couple years when we first acquired HMA, the volumes for the third quarter were down about 8%. So we're moving in the right direction; we're not getting there as fast as we want to, but we are moving in the right direction..

Yeah. And I'd just add, the margin for that quarter was like 8% or 9%, and the revenue per unit was down 3%, and the revenue was down. So clearly, it was a tough two years ago for them. But we think we've done a good job with the synergies and we'll continue to work to try to get the revenue and volume headed in the right direction..

Okay, great. Thank you..

Your next question is from Frank Morgan with RBC Capital..

Good morning.

I think you started touching on this on one of the earlier questions, but I'm curious, with all the physician hiring that you've done, given what's happened at HMA, do you really – are you changing your strategy there? It sounds like you might even be reducing some of that physician practices? But any changes there in terms of aggregate numbers of physicians you will be hiring, and any change or shift in the specialties that you'll focus on?.

No, Frank. The issue there has been that if you go back, HMA did not recruit for about a year before we acquired them. So we have been catching up in terms of recruiting. I've forgotten the number, something like 900 physicians for HMA facilities over the last couple of years.

What happened is, part of what happened was the fact that we had a huge recruiting group, which happens every year in the third quarter because all of the residency programs end in July. So we brought on a lot of physicians and we just didn't get the productivity out of them, and we had the expenses associated with it.

And we've replaced a number of physicians who were higher performers than the new physicians, that's the way to think about it in terms of volume..

Yeah. Frank, it has to do with the fact that more come in in the third quarter, which has historically been the case, there won't be as many coming in in the fourth quarter, which will help the challenge in improving expenses from where we were in the third quarter..

Okay, and then my follow-up question. You talked about evaluating a potential additional hospital divestitures beyond the two that you have pending. I'm just curious, do you have any kind of targeted level of proceeds that you would want to fetch on that? Or is that just an ongoing process? Thanks..

No. We've been doing this for a very long time. And we talked about it publicly, that we're continuing to look into our portfolio and rationalize, if we think that there's a facility that doesn't work or doesn't fit our strategy. So we will continue to do that the rest of this year and next year as we kind of go forward.

We haven't set a target, or any – and we haven't picked any particular facility. We just look for facilities that we think don't quite fit our future. And so if it works, it works; if it doesn't....

Okay. Thanks..

Your next question is from Andrew Schenker with Morgan Stanley..

Thanks. Good morning. I appreciate your commentary here on HMA and your ability to get the synergies.

But maybe just remind us, where are we actually on HMA margin, year-to-date? And do you still think you can get them to company average eventually? Or as this has been playing out, do you think some of these are just in lower margin markets over time? Thanks..

Yeah. It gets a little difficult with all the overhead changes. So if you sort of just look at the company margin, that's what the company comment was, if we go back and add HMA in 2013 to CHS, you get about a 13% or a low 13% margin. It was 15% there at the end of June; it dropped down as a result of the disappointing third quarter to 14.6%.

I think there's still margin opportunities, because we've been operating with less revenue growth and less volume growth in HMA for a couple of quarters. It looked a little better in the fourth quarter and first quarter. Those are easy comps.

I think there's still margin opportunity there, and there's probably another 50 basis points improvement on the HMA margins again next year. But we are up 160 basis points, which come from synergies and Affordable Care Act and other stuff. And I think we'll still end up with the HMA margins close to 15%.

But it takes a lot of work to sort of figure out how to allocate the overhead now, because it's not – the HMA overhead's gone..

I like that. That makes sense. And then you mentioned MCR rate increases earlier. Where are you on 2016 contracting and where are rates coming in for next year? And then related to that, it sounds like there's still a discrepancy between HMA rates and Community rates.

I guess it sounds like you're hoping to close those, so any more color on that would be helpful as well? Thank you..

Yeah. We're close to done. Of course for 2015, probably 98%, 99%. We've got a – we believe we'll be in the 4% to 6% range when the year's done. We're hoping to stay in that range for next year; we're 75% done now. You are correct, the revenue per unit is lower.

It's probably $1,000 lower, and we've probably cut that in half over the last year and three-quarters. We probably continue to make some progress on the HMA managed care renegotiations. That's starting to come to an end, because we've probably renegotiated most of that by now.

There will always be a little bit of difference because they've got more Medicare, but we've made some progress on it. It wasn't as good on a per-unit basis because of index this quarter that we talked about earlier. But I think, other than the Medicare, we hope to finish out the year what we expect to be for HMA net revenue per adjusted admission..

Okay. Thank you..

Your next question is from Matthew Borsch with Goldman Sachs..

Yeah. Sorry if this is beating a dead horse, I'm sure it is for you, but just back to HMA a little bit more.

Can you bucket the shortfall, relative to what you hope to achieve in terms of how much was from revenue resulting from payer contracting not meeting your objectives, versus from cost management? And if you have other ways of dividing that bucket, fine..

Matthew, I will assure you this horse is not dead..

Got it. Got it..

It may not be American Pharaoh, but it's still running the race..

Right. Right. Right. Right..

I would just start out to say that if you look at the revenues, down 2%. That's about $30 million, probably $30 million, $35 million.

There's a good component of this, and then had it increased as well as HMA did, that's another $30 million to $35 million, so if we can get the – so that's $50 million to $60 million of difference in the two entities, just taking how well the CYH did there on the revenue, versus how that.

And I think on expenses, you know, I would say that probably some of the expenses on the physicians were more on the HMA side. We don't keep totally separate books.

We actually treat them all as CHS, and the only time we do any discussions are when we're getting ready for these kinds of calls, because it's an interest to investors, and there are some differences in the operating performance.

It's not up to this speed, but clearly a lot of the miss in the third quarter would be in the HMA facilities, when your revenue is 450 basis points lower in one group of assets versus another..

All right. Thank you..

Your next question is from Josh Raskin with Barclays..

Thanks. I just had a question on Quorum, just based on year-to-date EBITDA, it looks like you're sort of trending for, let's call it something in the ballpark of $260 million.

So just want to make sure we're sort of thinking about a flat EBITDA number year-over-year, and were there any unusual items, either last year or this year, both, either positive or negative, in the Quorum numbers?.

Yeah. One big one would be end of last year, because I think we had a California provider tax pick-up that was more than a 12-month number. Other companies had a similar situation. I think we called out $26 million in all three hospitals, so the hospitals operating today are in that number.

Not quite all of $26 million, because one of them's been closed or sold.

But – so that would be your big difference, and then I would probably say that relates to it, and there was a couple of changes around Illinois that was some benefits in the fourth quarter of a few million bucks that sort of will not be there for a full year, but the main thing would be the big fourth quarter benefit that you had for the California provider tax..

So – all right.

So I guess, just sort of thinking about that, then the Quorum EBITDA is running as much as 10% higher this year than last year? Is that possible?.

Well, I think that the – no, I don't think it's 10% – well, it's a little bit better than it was last year, when you look at – you don't take all of it out, because you got it this year also. So what you basically had last year was $26 million for the three hospitals; there's two today.

Some of that related to 2013, so now you've got a year benefit compared to a year and a half benefit a year ago..

Oh, I see. So take out a couple – all right. So maybe it's running mid-single digit growth, or something like that..

Yes. Yes..

And then so, Larry, as you think about the debt capacity – and I understand you want to maintain the tax free spin-off – should we think about Quorum maintaining lower debt leverage than the overall CYH leverage? I know it's a small impact; would be a tiny bit higher after the spin?.

You know, we had sort of said it would be somewhere around five times, and that time the 2014 EBITDA, including the California, was $275 million, so that's sort of the thought process right now. And then of course we'll continue to refine that as we file the next activity, but I would be somewhere in $1.375 billion (39:32)..

A billion three – okay. Okay. All right. So it's probably slightly leveraging..

And then based on a run rate – you got the data, it might be a little more than five, and we're a little bit more than five. But you're correct in that it's about 8% or 9% of the company, so it's not going to change overall.

The margin does get better, the profile gets better, the growth rate gets better from the – unemployment (39:51) gets a little bit better for the remaining CHS company, but from a debt perspective, it won't change that much..

Perfect. Okay. Thanks..

Thanks..

Your next question is from Chris Rigg with Susquehanna Financial..

Hi, good morning. And maybe you mentioned this, but if I did my math correctly, it looks like you adjusted the operating cash flow target a little more than the EBITDA outlook.

Is there – what's causing the difference?.

We had a pretty big uptick in receivables, and maybe a little bit more than others in the way we handled ICD-10 and got ready for it. Keep in mind, we've Meditech systems, Siemens systems, Cerner systems, HMS, Medhost systems and the HMA system, so it was a pretty big undertaking, and our staff did a good job on it, but our receivables went up.

I think we'll bring it back down, but I think it will probably still be ahead of a year ago. Last year in the fourth quarter, we had a really big pick-up from the electronic health records. We'll get some this year, not as much.

There's one of our states that owes us some money on Medicaid, and they've informed us they're probably not going to pay us in the fourth quarter. It's a good percent of the receivable, and that's probably going to slow it down. We'll get it in the first part of January.

We think we can do a good job of improving the collections and some other activity and I think there was some movement around some of the accrued compensation that affects the fourth quarter. Last year we had a tax refund, which we won't have this year..

Okay. And then on the CapEx side it's a pretty wide range for the fourth quarter, $150 million.

What would cause you to be sort of at the low end versus the upper end? And can you give us a sense for sort of how we should think about the right level, the right run-rate level going forward?.

We generally target spending about 5% of revenue. This year we're going to be able to get that done with the new facility that – there'll be a little bit of spending next year on a new facility probably, in Pennsylvania. But we generally target around 5% of revenue; have been running a little bit less than that.

We generally do have a pretty big uplift in the fourth quarter, the way we manage it and sort of think about the year we spend there. But I would think it would be somewhere in the range, probably in the midpoint of the range is probably a good thought. But I would assume next year we'll be somewhere close to 5%, maybe 5% or slightly less of revenue.

And then I would just also comment that we did have a pretty good quarter, a pretty good year-to-date. Our cash flow from other investments dropped about $250 million from a year ago..

Thanks a lot..

Your next question is from Ralph Giacobbe with Citi..

Thanks, good morning. The payer mix actually improved on a year-over-year basis, and then when we look at same-facility stats we're also looking at that year-over-year. So can you help on sort of the pricing being up 1.1% if the payer mix sort of improved? I think you mentioned acuity mix was up as well.

It would sort of suggest something on either the peer pricing side, or maybe it's mix, meaning that the dollar per volume and maybe HMA is higher and you're getting more pressure because the volume is lower? Can you just maybe help reconcile the year-over-year benefit to payer mix versus the pricing stat?.

Yeah. Keep in mind payer mix is in-patient and 58% of our revenue is outpatient, so that's probably something – our ER volume was less than we've been running, I think it was like 2%, which is substantially less than we ran the first six months, and ER revenue was down 4% or 5%, so it slowed.

We also had a little slowing versus where we've been running in OR and radiology and diagnostic and lab, all a percent or so. So we simply didn't have as much outpatient revenue per adjusted admission growth in the third quarter, although we did have some case mix increase.

The payer mix got better but it wasn't quite as good as it's been running for a year both the first six months versus the third quarter, and the first six months versus the six months a year ago. And the HMA facilities did have a negative revenue per adjusted admission, although it had been positive, and that had a lot to do with the payer mix..

Okay.

And just to clarify, you said the payer mix stats that we're looking at is just in-patient revenue, not total revenue?.

No. That's total revenue. But when you talk about case mix being up, that's only in-patient, naturally....

Got it..

...and of course the outpatient is 58% of our revenue. So the movement of outpatient will have a bigger impact on the company when you have so much outpatient revenue..

Yeah. Okay. That makes sense.

And then, did you say something about Managed Care pricing benefits sequentially? Is there like a disproportionate amount of contracting that's going on as we head into kind of the fourth quarter, relative to what we've seen thus far?.

No. Most of it's in the first part of the year, but there are some increases around October, and there some every month. And so we simply took what we saw in August, and we'll get a whole month – a whole quarter of that in the fourth quarter, September, and we also took October and some estimate in November.

And if you're doing a good job of getting your pricing up and you're controlling your expenses, it should all go (45:01)..

Okay. All right, thank you very much..

The next question is from Gary Taylor with JPMorgan..

Hi, good morning. Just a couple of questions. Usually, I guess, I wouldn't ask this, but, Wayne, you had mentioned it. When you had mentioned buying 50,000 shares, I know we saw an option exercise about a week or so ago..

That's what I'm talking about. Yes. Yes..

Okay..

Yes. I exercised 50,000 options, and kept all the shares and paid the taxes and kept it all..

Okay. Just wanted to make sure there wasn't another filing coming out..

And by the way, a number of people on this management team did the same thing..

Okay. And then, Larry, sequentially on Medicare, I know when we broadly look at final IPPS for October start, for rural hospitals, that was up 20 bps, but obviously you're individual count could be different than that.

Are you anticipating a materially different uptick in terms of your IPPS rate?.

Yeah, I think we'll be about double that. I mean, we have a much more -better mix when you look at the rural, maybe even as much as 50 basis points..

Okay. And last question if I could, I mean, so much of the story historically has been acquisition driven. And I know with the QHR spin, the focus is moving up-market somewhat.

I just wondered, could you maybe talk about, when you do kind of a middle market acquisition, or however you might describe it, versus that historic sole community provider acquisition, what differences are you seeing when you do those? Are there different sources of success in terms of competing for docs versus just outright recruiting for docs? Just interested in kind of your thoughts on how you execute in that type of market..

Yeah. Gary, it's virtually the same, when it's all said and done. The difference is now, is that we have 11 networks, and we have opportunities within those networks, and generally speaking we're looking for acquisitions that are helpful and are additive to those networks.

And everything you can think of, including hospitals – I mean, hospitals is one thing, but rehab, anything else that we can add to the market to help enhance the market share. Generally speaking, they're a little bit larger, their problems are virtually the same as the smaller hospitals.

We haven't really been buying any smaller hospitals for quite a while. That's one of the reasons we think the QHC spin-out is good, because there's clearly an opportunity, a market for a smaller hospital. LifePoint has demonstrated that. As a matter of fact, LifePoint bought a facility or two from QHR in the past year or so.

So that opportunity exists there, and we think that will bring great value to that company. But from our perspective, we think the future for us is buying larger facilities. But as you can see, we have not bought, and we are being very selective in terms of what we buy right now.

We also are committed to the future, in terms of making sure that we enhance our cash flow and pay down our debt and all of the things that we need to do to enhance our shareholder value..

Okay. Thanks guys..

We have time for one more question. The last question is from Kevin Fischbeck with Bank of America..

Good morning. This is Joanna Gajuk filling in for Kevin today. Thanks for taking the last question. So just coming back with this question around the bridge in guidance, the question, I guess here, is that this bridge is to the lower end of the guidance.

So the question that I have is, what needs to happen, or what do you need to do to get to the high end of your guidance range for the year?.

Yeah, I believe the low end was $756 million, and this is to $775 million, just to clarify the discussion, and that's where we felt really comfortable was the $775 million. If the volume and seasonality does better, that would be a benefit.

Clearly, last year we had a pretty strong flu season, we were down 80 basis points in adjusted admissions this last quarter on flu. So if that comes back a little bit that'd be helpful. I think the pricing and the mix, we did not use to the entire benefit of the third and fourth quarter in the bridge, so it could be better than that.

We've historically, as everyone is aware, there's a big uptick in the managed care utilization. If that continues to be or even a little bit more, then that would be more helpful. The expense reduction, you know, it could be a 2% instead of 1%, which would be a good opportunity.

And activity, I don't think the HITECH could be any worse than $25 million, it could be part of it there. So I think all three categories there would drive the higher end of the guidance, but we felt comfortable with the $775 million comparison, and that's just how we decided to present..

We have a tremendous amount of resources focused on the fourth quarter, making sure that we do the things that we need to do to get to this bridge and to this range. But I can tell you, the future is in 2016; we think there's great opportunity here going forward based on the assets that we acquired from HMA and some other things that are happening..

Great. Thank you..

Thank you again for spending time with us this morning. We are very focused on our strategies we have outlined earlier, and that we will – you will see us improve, as we've done historically.

We want to specifically thank our management team and staff, hospital executive officers, hospital chief financial officers, chief nursing officers and division operators for their continued focus on operating performance. And once again, if you have questions you can always reach us at area code 615-465-7000. Thank you..

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