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 Frank Morgan - RBC Capital Markets LLC Chris Rigg - Susquehanna Financial Group LLLP Whit Mayo - Robert W. Baird & Co., Inc. (Broker).

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 2015 Fourth Quarter and Year-End 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 will now turn the call over to Mr. Michael Culotta, Vice President, Investor Relations. You may begin your conference..

Natchez Regional Medical Center that was completed on October 1, 2014, in Natchez, Mississippi; and Upstate Carolina Medical Center that was completed on November 1, 2014, in Gaffney, South Carolina. This acquisition is in the same-store for only two months.

All calculations we will be discussing exclude discontinued operations, loss from early extinguishment of debt, impairment of long-lived assets, acquisition and integration expenses from the acquisition of HMA, expenses incurred related to the company's planned spin-out of Quorum Health Corporation, expenses related to the HMA legal settlements and related costs, expense from fair value adjustments related to the HMA legal proceedings accounted for at fair value, underlying CVR agreement and related legal expenses, and the $169 million increase in the provision for bad debts reflecting a change in estimate in our allowance calculation.

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

Smith?.

we're disappointed in the quarter's results and in where we ended the year. Clearly, we expected to deliver a better performance. Our entire management team is dedicated to achieving sustainable improvements and to demonstrating progress as we move forward in 2016.

We did experience some sequential improvements in the quarter that we'll outline during the call. (3:41) window we have opportunities to improve further, and we are fully focused on achieving better operational and financial results.

Let me start with a few comments about volume and other key metrics, and Larry will provide more detail for you in a few minutes. Our volumes, including emergency room visits, were lower than expected in the quarter as compared to a year ago, mainly attributable to the lack of flu and respiratory illness which we historically see during this period.

On a same-store basis, if you factor out the flu-related volume decline, we would have had reported slightly positive growth in adjusted admissions. Slower than anticipated growth in some former HMA markets also affected volume during the second half of the year, especially in Florida.

We continue to believe we have growth opportunities in many of these markets and we're working aggressively to accelerate a positive turnaround. We did experience growth in surgery in the fourth quarter, predominantly on the outpatient side.

We saw higher net revenues in the quarter and continued to see a positive impact from our expense management practices. We have a disciplined approach to expense management, a daily endeavor at every level in the organization.

Touching on some of our strategic initiatives, as you know, we continue to pursue the planned spin-out of Quorum Health Corporation which will ultimately create two companies with distinct growth opportunities and a potential to deliver enhanced shareholder value.

We're filing an amendment to our Form 10 Registration Statement with updated information for 2015 soon. And we're on target at this time to be completed sometime in the first quarter of 2016. The decision to delay the spin, as we have previously stated, is the sudden disruption in the debt markets. This is a market-driven decision.

We understand that the debt markets have not been like this since 2008. We expect to complete the spin once market conditions are favorable. Transaction is designed to be a tax-free spin-out of 38 hospitals, representing 3,592 beds in 16 states.

Home Health Resources, a leading hospital management consulting services company, will also be included in the new company. We continue to reshape our portfolio in other ways by adding more outpatient locations and also divesting of operations that are not complementary to our long-term plans.

We have sold or terminated leases in 10 hospitals since 2014, including one hospital divested in January and one more under contractual agreement to sell later this year. Over two years, we have gained approximately $250 million in cash proceeds from the disposition of these hospitals.

We believe our strategy to build regional networks is a keystone to our future success, and we have prioritized these key markets by deploying resources to grow clinical capabilities, outpatient infrastructure and market share.

This is a top priority for us, and as we refine our portfolio, we're able to commit more of our resources to this important initiative. Continue to develop and acquire outpatient assets in our existing markets.

During 2015, we acquired three surgery centers, six diagnostic centers, seven physician practices and nine other health services-related entities. These represent about $80 million in annualized revenues.

We opened our newest facility, Grandview Medical Center, in Birmingham on October 10 and successfully transferred patients from Trinity Medical Center that day. We're very pleased with early results of Birmingham. Just a few points on Grandview's fourth-quarter financial results when compared to a year ago. Net revenues increased 16.5%.

Admissions were up 8.6% while self-pay admissions were down 7.5%. Adjusted admissions were up 6.1%. Medicaid or case mix was up 6.8%. I want to take just a second to discuss debt. Once excess cash is generated later this year or we sell a facility, we intend to pay down debt in order to decrease our leverage.

We know we can bring value to both our shareholders and our debtholders by doing this. Let's give a quick overview of the quarter. The following information and calculations have excluded the $169 million increase in provision for bad debt which reflects a change in the estimate of our allowance calculations.

Our adjusted EBITDA excluding bad debt adjustment was $696 million, a sequential 5.3% growth. Our adjusted EBITDA margins including bad debt adjustments were 14% -- or sequential 14 basis point improvement. Our adjusted earnings per share excluding the bad debt adjustment was $0.69 or a sequential increase of 23%.

As it relates to quality, we're very proud that 118 of our facilities out of 193 eligible facilities, or 61%, have been designated Joint Commission Top Performers in key quality measures. Once a Quorum spin-out occurs, they will have 76% of their eligible hospitals designated in Joint Commission Top Performers on key quality measures.

As you know, only 31.5% of all hospitals get this designation. As always, we're very focused on physician recruiting. Physician recruiting is important to the expansion of services that are provided at our facilities. There were over 4,100 physicians that were recruited to our active medical staffs across our facilities this year.

This compares to 3,700 physicians recruited in 2014, or a 10% increase. But also remember, it takes 18 months to 24 months for physician practice to get to full utilization. We have over 3,380 employed physicians out of our 22,000 active physicians. Our turnover rate on all our physician medical staff has been about 10%.

On the HMA acquisition synergies, we achieved $25 million in incremental synergies this quarter and $155 million in incremental synergies this year. We have achieved $280 million of incremental synergies, primarily expense improvements, culminating over the last two years.

As it relates to our pending HMA legal matters, there has been no material change since our last earning release call. We continue to proceed with discussions in cooperation with the Civil and Criminal Division of Department of Justice in an effort to resolve open HMA matters.

We continue to revalue the estimated liabilities covered by the CVRs on a quarterly basis. I remind you that these expenses and accruals have different financial statement treatment than under the CVR agreement. Our current estimate including probable legal fees continued to reflect there will be no payment to the CVR holders.

Our guidance is as follows.

Net operating revenues less provision for doubtful accounts anticipated to be $20 billion to $20.6 billion; same-store hospital adjusted admission growth is anticipated to be 0.5% to 2.5%; adjusted EBITDA is anticipated to be $2.9 billion to $3.050 billion; income from continuing operations per share is anticipated to be $3.40 to $3.80 based on weighted average diluted shares outstanding of 111 million to 113 million.

Larry will now discuss further our results and provide you other information.

Larry?.

managed care as a percent of total revenue increased 20 basis points. Medicare declined 80 basis points and Medicaid declined 30 basis points. Self-pay increased 90 basis points.

At the legacy facilities, managed care as a percentage of total revenue increased 80 basis points, Medicare declined 90 basis points, Medicaid increased 30 basis points and self-pay declined 20 basis points. For the year, adjusted admissions legacy was up 1.1%, while the former HMA was down 1.5%.

And revenue was up 3% at legacy facilities versus 1.1% for HMA. And surgeries were positive at legacy for the year at 2.2% compared to minus 1%. On a sequential consolidated quarter basis, these same HMA facilities saw improvements as they experienced a 1% decrease in adjusted admissions, although Florida hospitals sequentially improved.

This compares to 1.9% decline at legacy. A 3.7% increase in net revenue per adjusted admission; this compares to 4.4% in legacy. An increase of surgeries of 0.3%, while the legacy experienced a 1.9%. Net revenues actually grew 2.6% compared to 2.4% at legacy.

Managed care's percentage of total revenue increased 200 basis points while Medicare was flat, and self-pay declined 140 basis points. And Medicaid declined 50 basis points. This compares to 190 basis points increase in managed care, 100 basis points decline in Medicare, and Medicaid was flat.

And self-pay declined 80 basis points at the legacy facilities. For the fourth quarter compared to the 2014 fourth quarter, overall our in-patient case mix increased 4.5%, while Medicaid was up 6.5%. Medicare increased 4.4% and managed care increased 4.6%. The decline in flu and respiratory contributed to this increase.

We continue to see and will continue to see a shift to outpatient setting as our net revenue – outpatient revenues before provision for bad debts represent 57% compared to 56.4% in the fourth quarter 2014, a 60 basis point increase.

For expenses that we'll now discuss, and again, the calculations exclude the $169 million change in estimate for allowance calculation. Our salaries as a benefit of net operating revenue for same-stores increased approximately 70 basis points as a percent of net operating revenue. Of the 2.7% increase, approximately 30% was from physician clinics.

I just point out for the year 2015 same-store salaries and benefits declined 40 basis points. On a sequential consolidated basis, salaries and benefits decreased as a percentage of revenue 30 basis points.

Of the absolute $38 million increase in the third quarter, approximately $19 million was the result of a sequential change in market value as it relates to elections (23:07) in the deferred compensations plan. The offset in this is in other income and the adjusted EBITDA impact is non-material.

Our manhours per adjusted admission improved 1.5% sequentially from the third quarter. Last year, sequentially it was relative flat. Supplies expense as a percentage of net operating revenue for the same-store remained flat at 15.6% but improved sequentially 10 basis points from 15.7%.

On a consolidated basis, cost of drugs as a percentage of net revenue increased 30 basis points from a year ago and declined about 20 basis points sequentially.

Other operating expenses as a percent of net operating revenue for the same stores increased 40 basis points to 22.7%, of the $46 million absolute (23:59) increase to change in the medical malpractice reserve estimated increased our operating expenses $29 million.

On a consolidated sequential quarter basis, other operating expenses as a percent of net revenue declined 50 basis points. The actual dollar increase is only $10 million.

As it relates to HITECH Incentives on a consolidated basis, we recognized $25 million this quarter compared to $47 million in last year's fourth quarter, and sequentially we recognized $54 million in the last quarter. For the year, we recognized $160 million of HITECH Incentives compared to $259 million prior year.

I spend just a minute on adjusted EBITDA reconciliation. Fourth quarter a year ago, $785 million, to this quarter, $696 million. The $696 million does exclude the $169 million increase in provision for bad debts that reflects a change in our estimate in our allowance calculation.

This list does not intend to be a complete, comprehensive itemized list but to just give you some color on certain points. If you recall, we had a large adjustment for our California provider tax in the fourth quarter last year in the amount of $24 million. The net change in adjusted EBITDA was approximately $19 million.

We had lower volume from a year ago, but offset somewhat by revenue per adjusted admission increases. We estimate the net adjusted EBITDA to be approximately $12 million. The estimated increase in drugs to be about $12 million. The decrease in HITECH Incentives represent approximately $22 million.

The difference in the medical malpractice has been approximately $28 million, and the impact of $7 million to the settlements related to expected bankruptcies at co-op plans, a bankrupt homecare healthcare payer, and some net overpayments-underpayments with a payer.

Our cash flow provided by operations was $306 million for the quarter and $921 million for the year. Our tax-affected cash flow for the year was $1.046 billion.

The adjusted cash flows provided by operations has been adjusted for government settlements and related expenses of $153 million, acquisition, integration expense and payment of old HMA settlement liability of $29 million, and $16 million related to expenses incurred in connection to QHC spin-out.

This compares to a tax-affected adjusted cash flow by operations of $1.8 billion for last year. We have included a slide on our adjusted cash flow calculations in the presentation on our website. There are a few significant items to note related to the differences between the two years.

This year, the debt was outstanding for a full period, and impact on cash flow specifically, the interest payments, is $125 million. This interest expense related to the HMA acquisition late January last year, and was built into our guidance.

Remember, our payments on interest are higher each of the first and third quarters by approximately $132 million. We received tax refunds of approximately $180 million last year and paid $12 million net of refunds and taxes this year. Our HITECH cash incentives received $110 million less this year.

We had a timing effect of accrued payroll this year amounting to approximately $100 million. Our third-party cost settlements paid increased $55 million, and the timing of payment on our payables increased approximately $93 million.

Our cash flow from operations were $454 million less than the lower end of our guidance that we'd estimated in the third quarter. The difference is less estimated collections from accounts receivable and supplemental programs and lower fourth quarter volumes which we believe represent about $340 million.

We estimated the remaining difference to be an increase in the timing of payables we mentioned above. Our 2016 net cash flow from operations will be $1.5 billion and $1.7 billion which includes the term amount on our receivable performance for 2015.

Our cash flows used in investments on other assets are down approximately $300 million compared to a year ago with the majority of this reduction related to our information systems. This relates to the timing of our rollout of electronic health records. Our CapEx was down $153 million or 4.9% of revenue.

Approximately $124 million was spent this year on replacement facilities of which at Birmingham, Alabama, replacement opened in early October and was a significant component of the amount. Factoring out replacement facilities, our CapEx was 4.3%. Our CapEx guidance range will be $800 million to $950 million for 2016.

Now, let's turn our attention to the Affordable Care Act. The following information is hospital data only for the comparative fourth quarters. Self-pay adjusted admission as a percentage of total admissions remained flat at 5.1% for both periods. Self-pay adjusted admissions decreased to 2.5%, and expansion states decline was 22%.

The biggest percentage declines were Indiana, Pennsylvania at 33%. Medicaid adjusted admissions percentage of total adjusted admissions increased 20 basis points to 18.7%. Medicaid adjusted admissions decreased 0.2%, with majority of the increase coming from facilities in expansion states.

Expansion states increased to 7.8%, largest percentage of increase again were from Indiana, Pennsylvania at approximately 22%.

As it relates to monitoring the exchanges, where we have sufficient information, we noted an increase in patient visits approximately 32% this quarter over the fourth quarter a year ago and the patient visits were down 0.3% in this quarter versus last quarter sequentially.

Consolidated charity and self-pay discounts plus bad debts for the three months comparative periods increased from 23.9% to 25%, 110 basis points, and this comparative amount excludes the $169 million increase in provision for bad debts, reflecting the change in our allowance calculation. I refer you to slide 23 on this subject.

Based on our various data points on Medicaid and exchange business, we believe we recognized a fourth-quarter benefit of $75 million and a cumulative benefit for 2015 in the amount of approximately $290 million from the Affordable Care Act, which is in line with our overall 2015 guidance. This compares to approximately $165 million for all of 2014.

As it relates to our guidance for 2016 adjusted, there are several items we'd like to note and these are not all-inclusive. We believe we'll still experience a $50 million to $75 million incremental improvement in the Affordable Care Act. We believe there'll be approximately $50 million in synergies and margin improvements at the HMA facilities.

Our payer mix and volume improvements are estimated to be approximately $50 million to $100 million. We get improvement in physician practice performance and improvement from centralizing our payroll processes and our health information management consolidation of approximately $60 million to $70 million.

Other items such as supply chain and purchasing and revenue cycle improvements related to our various centralizations should be approximately $70 million to $80 million. The contribution from acquisitions of approximately $30 million to $40 million. We believe we will have a decline in HITECH incentives of approximately $80 million to $90 million.

Reimbursement reductions, including DSH and Medicaid reductions, of approximately $75 million to $80 million.

Wayne?.

Thanks, Larry. Let me go back and correct something I said earlier. I was talking about filing the amendment to our Form 10 Registration. I think I said we'd be completed sometime in the first quarter of 2016. I meant to say it would be finished in the first half of 2016. 2015 was a difficult year for us, not the year we expected.

But we remain convinced that many of the right long-term strategies are in place and that we will see the results from these initiatives in 2016 and beyond.

We'll be diligent in our work to improve operations, continue to recruit physicians to our medical staffs, and we continue to prioritize our investments to create the right portfolio for long-term success. We come out of the past year determined to be a stronger and more profitable company.

Before we open up for questions, I'd like to highlight some promising trends coming off of 2015 including an increase in inpatient orthopedic volumes with 5.2% with further program expansion planned in 2016.

For our emergency department, we saw 65% larger increases in our ER volumes with marketing campaigns and EMS Affinity programs and an increase of over 8,000 successful transfers and 66 hospitals affiliated with our 12 transfer centers.

In addition, we're always working to make ED throughput more efficient to ensure patients can be seen quickly with good patient satisfaction, so we'll continue to emphasize these programs. Other service line programs such as neurology, especially stroke, behavioral health and rehab, should begin to drive volumes in 2016.

Our professional outreach program now includes 100 directors of professional outreach across the enterprise, which thus far has shown improvement in outpatient and surgery trends. Expansion of our urgent care centers and ambulatory surgery centers and a focus on improving our physician practice productivity remain key drivers of growth.

In addition, we're investing in some mid- to long-term strategies that will position us well for the future, including the development of several clinically integrated networks, enabling our new opportunities to partner with physicians, our bundled payment initiatives, and our virtual health programs for telemedicine.

And as Larry has stated earlier, we're seeing improvements in the HMA assets and had encouraging trends from the third quarter sequentially. I'd like to thank all the physicians, nurses and support staff for all their tremendous support this quarter. With that, we'd like to open the call for comments.

In an effort to get more calls in, we'll limit to one question and one follow-up question so others can have time. If you have further question – follow-up question, as always, we're here to take your call as you can reach us at area code 615-465-7000..

And your first question is from A.J. Rice from UBS..

Thanks. Hi, everybody. Maybe just first to drill down a little bit on the cash flow comments, this year you had thought that you would see this big pickup in the fourth quarter. And I think a lot of the shortfall, the $454 million you talked about, was largely a fourth quarter shortfall.

And it's hard to delineate the things you're highlighting there in the AR, the timing on payables, as to whether that's also part of the HMA ongoing issues or whether that's more broadly at the company.

Can you give us some flavor for that and some flavor for how you think you'll lay out the cash flow as you look at 2016? Would it be back-end loaded to the fourth quarter again or is it more evenly spread? Maybe I'll stop with that..

fourth quarter, which we should work off in the first quarter and second quarter..

Okay. And then maybe just for the follow-up, to think about the guidance for 2016 and this is more of a big picture question than in any specific line item, clearly as we got to the back half of 2015, there was quite a bit of variance from the original guidance.

Is there anything different about the way you have approached guidance this year? I know your range is much narrower. It's only about $100 million versus $300 million last year.

Anything otherwise we can point to that says, hey, we're taking a little bit more conservative approach for 2016 versus 2015? And specifically, I might ask about the first quarter outlook since trying to get back on track with expectations aligning with what you guys feel comfortable you can do.

Is there anything you can say about the first quarter outlook specifically?.

Yeah. Clearly, we were in 2014, I think that 7-7-7 (39:11) and we went out to $3 billion, $3.2 billion, we had a drop in HITECH there a little bit than we expected and we got another drop in HITECH, actually a bit less this year.

I think we finished out, excluding the bad debt adjustment of $2.8 billion, $3.9 billion if you use the run rate that we've said going forward of $20 million, use that – some benchmark maybe what – that could be the 2015 effect. They're somewhere in the low $2.80 billion range, $2.82 billion roughly.

So, we've gone out with $2.9 billion to $3.050 billion which we think is a lot more realistic. We've finished out the year somewhere around $700 million. We called out the malpractice adjustment which we think – we thought we'd get it this year; we should get that next year. So, I think that's sort of the starting point you got there.

I would expect the first quarter to be similar to where the fourth quarter was, maybe a little better. You clearly don't have the flu in the first part of January that we had a year ago. From that perspective, we're making some progress on things.

A lot of these (40:17) will kick into place a little bit this year, a little bit in the first quarter or throughout the year. So I think we also – I know there's some question about the volume guidance of 0.5% to 2.5%. Spend just a second on that activity, if I would.

We don't usually get into all the detail about our CapEx projects, but I know we've got a lot of CapEx projects which we think will help us from a growth perspective, and we've got activities which I think will probably drive about $65 million to $70 million of CapEx going forward. And I think from that perspective, we feel good.

I believe we've spent $520 million in the last couple years, which should probably give us about another $40 million of EBITDA in 2016. We've got another $200 million that's locked and loaded that we'll get done which should give us another $30 million EBITDA. So, that will be very helpful when it relates to our 2016 guidance.

A lot of the supply chain, centralization of purchase, and revenue stock (41:27) improvements are all underway and they should be helpful. Health information is underway as is the physician practice improvements. So these are all things that are sort of underway right now..

Okay. Thanks a lot..

Your next question is from Brian Tanquilut from Jefferies..

Hey, good morning, guys. Wayne, you mentioned something in your prepared remarks about Florida being 50% of the weakness in volumes.

Do you mind giving us some more color on that issue and also how you think that will correct itself over the course of the year as it relates to Larry's comments about volume improvement?.

Yeah. I think we said this on the last call when we talk about Florida before in terms of physician recruiting. I think we recruited about three times more physicians in Florida than we have for our legacy facilities. We had a lot of cleanup work to do in Florida to start with. It took us a while to work through the issues there.

As we said, incrementally and from the third quarter to fourth quarter, we're beginning to see progress in Florida. Florida is a good state. Population-wise, it's great. It's growing. Other companies are doing well. We will do well in Florida.

It's just taken us a little while to get there, but we're beginning to see progress and we have gotten everything in place now in terms of number of doctors. So we feel pretty comfortable that we'll make even more progress going forward..

Okay. And then as a follow-up, capital deployment. In your prepared remarks you talked about paying down debt.

So how should we think about balancing debt pay-down versus share buybacks? And also given the outlook you have for divestitures of hospitals, is that an area of opportunity where we could also see more hospitals get sold to fund either debt pay-down --.

Let me talk about divestitures in terms of – and then Larry can talk about our debt – our opportunities in terms of debt pay-down and going out a little bit. We continue – as we said, we have – over the last two years, we've divested about 10 facilities, terminated leases in about 10 facilities.

We continue to look for rationalizations and what we're doing now is focusing on our strategies in our big larger markets to make sure that the hospitals fit. Our priority obviously is to get the spin done. That takes out 38 hospitals.

And then for us to continue to look at performance of the hospitals that are not performing the way that we'd like them to perform or do not fit in terms of our portfolio going forward.

So it's an ongoing process, and I think there is good opportunity for us and a good opportunity for us to monetize a number of facilities that will help us pay down some debt..

Yeah. I think, Brian, what we're looking to at the end of the year, when you think about a little extra generating cash flow, first of all, let me mention that we are in good shape on our covenants. Our interest rate calculation and our secured debt calculation, we got plenty of cushion there and we don't have any future maturities.

So while the leverage is still higher than we expected to finish out at the end of the year as the EBITDA dropped, we're also doing very few acquisitions. We've got one that will close here this quarter, maybe one either this quarter, next quarter, real small one in the $20 million range.

So we're selling (44:43) a lot of acquisition activity going on. And as we generate excess cash either through operations, or Larry will use it to pay down debt.

We do have the opportunity to buy stock and this is something that's there, but I think our focus right now is to sort of generate cash and continue to operate the company and think about what's the best thing to do..

Got it. All right. Thanks, guys..

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

Hi. This is (45:09) on for Matthew Borsch.

With regards to the $169 million increase in provision for bad debt and just your total allowance in general, can you give us a rough sense of how that would break out, percentage wise, between the contemplated and Quorum spin-off assets versus the hospitals that would remain?.

We've done the consolidated audit there, and we don't think it's going to have a significant effect on the Quorum facilities.

We think it'll be close to EBITDA, what we thought, but we are after – and the audit actually got done on February 12, late in the afternoon, that's why we went out when we did since we wanted the market to know about this change.

They will begin to do more detailed work on the separation of that which – have that audit done, it'll come out in the Form-10. We don't think it's going to have a significant effect on the Quorum assets, but we'll review that with our auditors who all they opined on on Friday of last week was the total allowance adjustment..

Okay. Great. And just quick follow-up.

Can you share a little more detail on that change in estimate for the medical malpractice as well?.

Yeah. We, as you can see that our factory (46:18) was ahead of a year ago. And we talked a lot about our serious safety events being down 65% to 70%, and that's a great contributor to our less claims cost. And we had that situation last year. We'd anticipated our actuarial to be about $25 million lower in the quarter.

Based on some discussions we had with him, he got a little bit more conservative than what we thought he was. And so, that information came available in the first part of this calendar year. And so we ended up having to book another – have a $25 million expense higher than we thought.

We'll get that back next year, we're pretty sure, based on the reviews we've done and some comments....

And our trends are definitely improving..

And if you looked at the first three quarters, we're in good shape on that, but we were up over a year ago and a little bit higher than we had estimated..

Okay. Thanks very much..

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

Good morning.

With regard to the decline in the collections on co-pays and deductibles and the increase in bankruptcies, were there any particular geographic areas, or was it within either one of the particular portfolios either legacy community or HMA?.

There wasn't. We didn't separate the adjustment between the two, but this would be a little bit more of a legacy adjustment probably than HMA. The HMA did go through a pretty good size adjustment when we bought them at the beginning of 2014.

I would say that probably on the self-pay component, clearly Texas is growing a little bit more there and probably Texas would be a little bit higher than other states. There's not many HMA hospitals in Texas. So Texas was a little bit more of a challenge..

Got you. And any additional color on the incremental $20 million run rate of the higher levels of bad debts going forward? Is that just based on current experience or did you literally make any kind of change in your underlying assumptions? Thanks..

The way we've done that – and again, we bought a lot of hospitals over the years, both large hospitals, Triad and HMA, and also individual hospitals, and you often have to go make an estimate of what you think the collectability of receivables are.

And in this case, I think we're up 160 basis points more reserve we're going to have to take going forward. And we took that percent times what the expected growth in self-pay is, which is probably $800 million to $1 billion of gross dollars, and that could drive something like a $16 million to $20 million change in estimate.

Similar to what we've done on all the acquisitions we've done. Understand it seems like a small number, but the way you do this, you sort of take about -- what were we reserving at, what are reserving now, that change is what you got to apply to your growth in self-pay dollars, and I think that's where the $20 million.

Historically, we had the same situation with Triad. We had $166 million, and if you go back and look at bad debts and charity and everything between us and Triad in December of 2007 and it came right back down the very next quarter. And so, I would expect the same thing to happen here as it relates to this change..

Okay. And I guess just one final as it relates to the $169 million. Is that all related to – are there any prior year periods in there or is that purely just 2015? Thanks..

Yeah. Clearly, I think we've said here you're starting looking at the receivables on the books at September 30, 2014.

You're looking what happens the next 12 months, so your base is the receivables on the books at 2014, and the way our change in estimate looks, if you go through it and you look at that, it's a hindsight analysis, and then you determine that in this case the write-offs were greater and the cash collections are less than anticipated, so you make a change in estimate.

That change in estimate is all run through the current period even though the analysis is based off of historical information, in this case receivables from 2014 and prior.

And then you try to factor that in, how much that would apply to – but your booking it all in 2015 and we said here going forward it's about a $20 million estimate and that may be a decent way to think about what effect it has on 2015 also..

Thank you..

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

Good morning. I just wanted to come back to the cash flow items that you spiked out at about $340 million.

I guess it sounds like some of the supplemental monies are going to come in, but on sort of the pure AR side where you fell short, are you expecting some catch-up payments in the first quarter or are most of those just written off and viewed as uncollectible?.

We do expect to continue to improve. I think our adjusted AR days are somewhere in the 60s, and we should be somewhere in the 50s. I don't think we'll get there in the very first quarter, but I think by the end of the year, I would expect our AR days to be lower than they are today.

We did make a change to sort of segregate our supplemental dollars similar to the way other people have done from state agencies. But I do expect our AR days to improve going forward..

Okay. And then just with regard to, again, cash flow but more forward-looking, obviously you cited the investments and other assets on a legacy basis.

Can you give us what's that number should be approximately in 2016? And then is there anything, not unusual but that's worth highlighting with regard to other uses of cash that might not be apparent just looking at the CapEx number? Thanks..

I don't think there's anything unusual there as it relates to the CapEx activity. From an overall perspective, I think that we've got $1.5 billion to $1.7 billion. That's in the range of 55% or so of our EBITDA which if we go back we generally run that perspective..

I'll follow up offline. Thanks anyway..

Okay..

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

Hi. This is Vikram (52:40) on for Andy.

Can you give us some color around the physician productivity trends for the hiring you made at HMA this year and then what might be impeding the ramp of productivity and what do you think will drive the increases next year?.

Yeah. I think we had to replace so many physicians, so a lot of it is new startup. And as we've said earlier, takes 18 months to 24 months to do that, to get them in place. What we have done over the last year is we've consolidated all our practice management.

And so we have one group here corporately that now is a pretty large group that does all the practice management. So we standardized a lot of processes and procedures within those practices, trying to standardize scheduling and follow-ups, all the other kinds of things that we did not have standardized before.

So we feel pretty good about where we are and how those will work kind of going forward. It's working in some of our other markets, but this is a – Florida turns out it's a startup for a fairly large number of physicians. So it's taking a little while to get them on line..

Thanks.

And then can you give us some more detail on how HMA margins have moved throughout the year and what kind of improvement you're targeting by the end of 2016?.

Yeah. The margins were better in the first half of the year and the company performance a little bit better. They come down a little bit. We expect next year between synergies and margins to achieve an extra $50 million of EBITDA probably evenly split between margins and activity.

We clearly had targeted to get HMA back up to about a 15% margin, which we're going to have to work hard to get that done, probably either latter part of this year or next year.

As Wayne said earlier, we think they're pretty good assets and I think we got a pretty chance of continuing to improve those, especially with the improvement, the capital we spend and some of the other projects that we talked about around orthopedics and ER activity. And I do think we'll have some success as it relates to the cash flow of HMA..

Thanks..

And we have time for one more caller. The last question is from Whit Mayo from Robert Baird..

Hey, thanks for sliding me in.

Wayne, just besides recruiting which HMA did do but what operational changes have you made in Florida? Are you still running Florida out of Nashville? Have you moved the divisional support to the local? I guess I'm just trying to figure out like what you need to do to fix some of the medical staff issues and then if you could just comment on hospital CEO/CNO turnover..

Yeah. We have changed division presidents. In Florida, we've added two new people in addition to the division president. We run everything. I mean, we don't run. I mean, this division presidents work. We have CEOs in all the markets. We have in a number of markets in Florida where they've got larger markets, we'll have a market manager there.

So, it's very similar to the stuff that we've been doing for a long, long time except for the fact that we probably didn't respond quick enough and fast enough.

HMA went for a period that they did not recruit any physicians and we've not only had to fill the slots that they didn't recruit; we also had a number of physicians that we had worked through issues with and some of those worked out and some of those didn't work out.

So, I think we're on the right track now, and I think our success record has been very strong through the years in terms of doing this, and I think we're doing all the right things.

And the biggest thing that we have changed in terms of practice management is consolidating it here now and putting all these standards in and making sure that we're doing all the right things in the practice to grow the practices now, and to reduce the expenses as you might expect..

Okay..

Whit, this is Larry. HMA, in general, the volume was down 1.5% this year, which is much lower, like I said, it was a positive 1.1%. We go back to when we bought it, it was down 5%, revenue per adjusted admission was declining, revenue was declining, the revenue this year is actually a positive 1.1%. We've moved the managed care rates up some.

One of the things that will help Florida is we've done a little bit more -- better contracting; we've had pretty good synergies out of contracting for managed care, and in surgeries we're probably a negative 3% or 4%; now they're down 1%. It's heading in the right direction when you look at 2013, 2014, 2015.

It's not as fast we wanted to, but the HMA assets are at least heading in the right direction -- you look at the year versus the last two years..

And there was a year before we acquired HMA, there was a lot of uncertainty in terms of HMA's future and what was happening, and that was very disruptive to the physicians as well..

Okay. Thanks a lot..

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

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

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 continued focus on our operating performance. Once again, if you have a question, you can always reach us at area code 615-465-7000. Thank you very much..

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