Ross W. Comeaux - Community Health Systems, Inc. Wayne T. Smith - Community Health Systems, Inc. W. Larry Cash - Community Health Systems, Inc. Tim L. Hingtgen - Community Health Systems, Inc..

A.J. Rice - UBS Securities LLC Brian Gil Tanquilut - Jefferies LLC Joshua Raskin - Barclays Capital, Inc. Gary Lieberman - Wells Fargo Securities LLC Gary P. Taylor - JPMorgan Securities LLC Stephen Baxter - Wolfe Research LLC Ana A. Gupte - Leerink Partners LLC Kevin Mark Fischbeck - Bank of America Merrill Lynch.

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 Fourth Quarter and Year-End Earnings 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. Ross Comeaux, Senior Director of Investor Relations. You may begin your conference..

Thank you, Mike. Good morning, and welcome to Community Health Systems' fourth quarter and year-end conference call. Before we begin the call, I'd 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 or furnished to 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. Yesterday afternoon, we issued 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. We will be referring to those slides during this earnings call.

As a reminder, our discussion of our results excludes Quorum Health Corporation and the joint venture in Las Vegas that was sold to Universal Health Services.

All calculations we will be discussing also exclude discontinued operations, loss from early extinguishment of debt, expenses incurred related to the company's spin-off of Quorum Health Corporation, impairment of goodwill and gain or loss on the sale of businesses, expenses related to government and other legal settlements and related costs, expenses incurred related to the divestiture of the home care division, the gain on the sale of investments and unconsolidated affiliates, the expense from fair value adjustments on the CVR agreement liability related to the HMA legal proceedings and related legal expenses.

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

Smith?.

Thank you, Ross. Good morning, and welcome to our fourth quarter conference call. Larry Cash, our President, Financial Services and Chief Financial Officer, is with me on the call today, along with Tim Hingtgen, our President and Chief Operating Officer.

Overall, we're pleased with our performance during the fourth quarter, but obviously, we still have a lot of work to do.

As you are aware, during 2016, we began to reshape our portfolio through the spin of Quorum and other divestitures, realigned our divisions, consolidated many of our back office functions, promoted and added a number of new leaders, all of which with the focus on improving our execution and performance.

As we think about 2016, we believe we have made progress across multiple fronts, which positions us well for future growth and improved performance as we move through 2017. During the fourth quarter compared to our third quarter, we did see improvement across a number of areas of our business, and we ended the year with a good quarter.

First, net revenue came in slightly above our expectations for the quarter with revenue up 2% sequentially. Second, we drove better expense management sequentially across our operating expense lines, and a number of expense initiatives that we are working on should help us throughout 2017.

Third, our adjusted EBITDA margin of 12.6% marked an improvement compared to our performance in the second and third quarters. And with additional efforts around growth and expense management ongoing, coupled with our divestiture plan, we expect our adjusted EBITDA margin continue to improve moving forward.

Fourth, adjusted EBITDA of $564 million for the fourth quarter was within our guidance, and our cash flow from operations was $327 million in the fourth quarter, which was up 84% sequentially. Fifth, a number of hospitals and markets had solid quarters, and we saw strong performance in our rehab and psych businesses.

On a year-over-year same-store basis, rehab admissions were up 8%, total psych admissions were up 11%, and psych patient days were up 13% during the fourth quarter. Finally, we continue to make good progress on our divestiture plan. On page 8 of our supplemental slides, you will – we have provided an update on this plan.

It's worth noting that since our third quarter earnings call, we completed the sale and leaseback of 10 medical office buildings for $163 million to HCP. We also completed the sale of 80% interest in our home care division to Almost Family for $128 million. Both of these transactions closed in December of 2016.

We also announced two definitive agreements to sell four hospitals in State of Washington. On November 17, we announced a definitive agreement to sell two hospitals and a physicians clinic in Washington to MultiCare Health System. This divestiture is expected to generate approximately $425 million subject to certain adjustments.

We announced a definitive agreement to sell two hospitals in Washington for approximately $45 million to Sunnyside Community Hospital. And last week, we announced a definitive agreement to divest eight hospitals to Steward Health Care System. Those hospitals included three in Ohio, two in Pennsylvania and three in Florida.

Now, I'd like to provide an update to our divestiture plan. Today, we're working on 10 divestiture transactions that include 25 hospitals. These divestitures and recent closings account for approximately $3 billion of annual revenue and mid-single digit EBITDA margin.

Estimated gross proceeds from these divestitures and recent closures including working capital are projected to generate $1.8 billion of proceeds. We expect the transactions for these 25 hospitals to close during the first nine months of 2017. It's worth noting that we've reached definitive agreements for 15 of these 25 hospitals.

These 15 hospitals account for approximately $1.825 billion of annual revenue and mid-single digit EBITDA margin. Estimated gross proceeds from these 15 including working capital are approximately $915 million. In addition to those 25 hospitals, there are other divestitures we expect could close in the third quarter of 2017.

Those potential divestitures account for approximately 4% to 5% of 2016 net revenue and mid-single digit EBITDA margins. As I reminder, the group of hospitals that we're working to divest has increased – has been increasing each time we've provided an update.

Our basket of planned divestiture proceeds have moved up from $530 million on our first quarter earnings call, $850 million in second quarter, $1.2 billion in third quarter to $1.475 billion early January, and now, $1.8 billion today. The interest level in our assets remains extremely high at attractive prices.

We are receiving enquiries from a number of parties, and some cases, we're being contacted about certain hospitals by potential buyers who have a strategic interest in those facilities. In those cases, we're able to evaluate whether a transaction would advance our portfolio optimization goals.

We will continue to provide updates as we reach definitive agreements and reach the close of those transactions. The proceeds from these transactions will be used for additional debt pay down. As I mentioned in the past, we are working to not only improve our debt to EBTIDA ratio, but also we're working to reduce the overall amount of our debt.

We plan to realize this goal by achieving good multiples on our divestitures and improving our operating performance. During 2016, we reduced our long-term debt from $16.6 billion to $14.8 billion.

We're pleased with the progress we've made on our divestitures, and we're also pleased with the strategy that we're starting to make to improve operations at the facilities that will remain part of our organization.

We said before that we expect one result of our divestiture were to be a stronger, sustainable group of hospitals in markets where we can invest and grow. Tim Hingtgen, our new COO, will comment more on our operations during the latter part of the call.

So, as we move through 2017, we will remain focused on improving the performance of our core hospitals, as well as the divestiture of selected assets, both of which will help us improve our leverage ratios.

This would allow us to direct future investments to our more attractive markets and regional networks where we have an opportunity to improve access points, outpatient services and market density to support our acute care business, recruit the right physicians who can establish successful practices and enhance the quality of care in our communities, improve our cash flow and gain market share over the near- and long-term to help us drive sustainable results.

Our CapEx investments for 2016 and those that are targeted for 2017 and beyond include additional access points such as ASCs, urgent cares and freestanding EDs. Our investments also include emergency department expansion and investment in additional high acuity service levels such as cardio and surgery at select hospitals.

We're seeing strong returns across these capital projects, and we will continue to commit capital for these growth opportunities with a focus on driving incremental EBITDA and future cash flow.

As we look back on 2016, it was a challenging year for our company, during which we made a number of changes to our business with a focus on improving our performance and conditions. Good news is we exited 2016, a stronger company than when we began the year. And we expect to be even a stronger company one year from today.

Now, I'd like to talk about our full-year 2017 guidance, and Larry will provide more details in a minute. Our 2017 guidance includes net operating revenues, expected divestitures or anticipated to be $15.8 billion to $16.2 billion. Same-store hospital adjusted admission growth is anticipated to be flat to up 1.5%.

Adjusted EBITDA is anticipated to be $2 billion to $2.175 billion. Income from continuing operation per share is anticipated to be $0.30 to $1.10 based on weighted average of diluted shares outstanding of 112 million to 113 million. As it relates to our pending HMA legal matters, there has been no material change for several quarters.

We continue to reevaluate the estimated liabilities covered by the CVR on a quarterly basis. Our current estimates, including the probable legal fees, continues to reflect that there will be no payment to CVR holders. With that, Larry will now discuss our results and provide additional detail of our 2017 guidance..

Thank you, Wayne. Overall, we had a solid fourth quarter with a number of items in line with our expectations. First, our same-store revenue increased approximately 2% sequentially, which was slightly ahead of our internal forecast.

The sequential increase relates to increased in-patient admission surgeries, patient days and also, all payer patient mix increased. And we did have the planned Medicaid increase in reimbursement. HITECH incentives of $16 million were in line with our forecast.

Sequential improvements from reimbursement helped Information Management and Community, Community (12:06) reductions were all in line with our projection. For our physician practices, we did achieve about $10 million improvement during the fourth quarter, about half of anticipated improvement, and in terms of seasonality and service line improvement.

In Florida, we made about a $20 million improvement, which was about $10 million less than we expected. On the expense front, we made sequential progress across all payroll benefits and other expenses.

Sequentially, total expenses decreased about $10 million, and in the fourth quarter, our same-store expense increase was 2% versus 5% for the first nine months. Overall, adjusted EBITDA of $564 million was within our guidance.

Fourth quarter revenue did include $8 million which was from a combination of an insurance settlement from a third quarter 2016 flood in Pennsylvania and a small British Petroleum settlement, offset by negative impact from Hurricane Matthews in early October. Now, we discuss results from fourth quarter on a quarter-over-quarter basis.

Remember, calculations exclude the items that we called out earlier on a same-store basis for the quarter. We note the following are fourth quarter 2015 versus 2016. Net revenues increased 0.5% comprised of a 1.9% increase in net revenues per adjusted admission and a 1.4% decrease in volume per adjusted admissions.

Our in-patient admissions declined 1.4%, flu and respiratory drove almost 65% of the decline. Our ER visits were down 0.5%, and our surgeries decreased 0.6%. From an overall volume standpoint, we are – continue to see softer volumes for respiratory, flu, declines in birth and a drop in readmissions in the fourth quarter.

Lower respiratory and flu-related adjusted admissions drove 60 basis points of our 1.4% adjusted admissions decline. I'll describe a few same-store trends between the former HMA facilities and the legacy facilities for the fourth quarter of 2015 versus the fourth quarter of 2016.

The former HMA facilities experienced a 2.3% decrease in admissions compared to 0.9% decline at the CHS legacy facilities, a 2% decrease in adjusted admissions. This compares to 1% decrease in legacy.

A decrease in surgery cases at 3.4%, while legacy facilities experienced a 0.6% growth in total surgeries, and a decrease in net revenue of 0.9% compared to 1.2% increase at the CHS legacy facilities. It's worth noting that we are seeing growth from some of our HMA hospitals.

However, about 20% of our HMA hospitals are continuing to struggle, with these HMA hospitals causing 90% of the net revenue and admissions decline for the HMA portfolio in the calendar 2016. And we are continuing to focus on improving our HMA portfolio. Our net outpatient revenue before provision for bad debts represents 56% of our revenue.

Consolidated revenue payor mix for the fourth quarter of 2016 compared to fourth quarter of 2015, Managed Care increased 60 basis points, Medicare increased 70 basis points, Medicaid decreased 90 basis points, and self-pay decreased 40 basis points.

Consolidated payor mix for the full year, Managed Care was up 100 basis points, Medicare decreased 20 basis points, Medicaid decreased 70 basis points, and self-pay decreased 10 basis points.

Consolidated charity plus self-pay discounts plus bad debt spends for the three months comparative periods have increased from 24.6% to 26.2% of adjusted net revenue, a 160 basis point increase. And our self-pay revenue payor mix did decline in the fourth quarter, year-over-year, and sequentially.

For the full year, consolidated charity plus self-pay discounts plus bad debt expense increased from 25% to 26.5% of adjusted net revenue, a 150 basis point increase. The year-over-year increase for the quarter was driven by the increased self-pay discounts as a percent of total revenue.

And now, I'd like to make a few comments about the Affordable Care Act, what's difficult to speculate, what would change, and our guidance does not assume a material change for 2017 due to Affordable Care Act.

Our hospitals, we have tracked (16:54) change in admissions, we experienced a 2% increase sequentially from the third quarter and fourth quarter for in-patient admissions. In terms of patients on public exchanges in the hospitals, we were able to identify approximately 1% of our total in-patient admissions in 2016 were from exchange patients.

Exchange visits for the quarter were up 3% year-over-year and down 3% sequentially. Looking at our 2016 results, same-store adjusted admissions in all states were up 1.4% for self-pay and up 2.1% for Medicaid.

On same-store adjusted admissions, our 11 states that have expanded Medicaid experienced a 1% increase in self-pay and a 7.3% increase in Medicaid.

Looking back at 2013, before the Affordable Care Act through 2016, in states that expanded Medicaid, we experienced a 33% increase in Medicaid adjusted admissions and a 47% decline in self-pay adjusted admissions.

In states that did not expand Medicaid, our Medicaid adjusted admissions were still up 3%, and our self-pay adjusted admissions were down 4% during that period. Based on our projections, we believe we achieved a cumulative revenue benefit of approximately $270 million for the Affordable Care Act through 2016.

The reimbursement reductions have been estimated to be about $290 million for 2016. Same-store expense items, salaries as a percent of operating revenue increased 90 basis points. The increase was driven primarily by higher physician expense. As we anticipated, our self-insurance healthcare cost moderated in the fourth quarter.

Supplies expense as a percentage of net operating revenue for same-store increased 10 basis points, driven primarily by higher implant costs. I believe this is our best quarter performance in supplies during 2016. Our operating expense as a percentage of net revenue for same-store increased 20 basis points.

Increases in the fourth quarter 2016 versus fourth quarter 2015 were driven by higher medical specialist fees and information systems cost. On page 14 of our supplemental slide presentation, we show our same-store year-over-year basis point increase for each expense category for the fourth quarter of 2016 versus the first three quarters of 2016.

During the fourth quarter of 2016 versus year-to-date September 30, the basis points improved 10 basis points for salaries, wages and benefits; 40 basis points for supplies; and 50 basis points for other operating expenses.

And on a same-store sequential basis, we drove improved expense as a percentage of net revenue on all three main operating expense lines; salaries and benefits increased 40 basis points, suppliers declined 20 basis points, and 100 basis points of better leverage on the other operating expense.

We made progress on our expenses, but we think there are significant opportunities still exist for improvement. Switching to cash flow. Cash flow by operations are $327 million for the fourth quarter, and for the full year, reported was $1.137 billion.

Adjusted to exclude legal settlements-related expenses and other items, cash flows for operations were $1.156 billion during the year 2016 as compares to adjusted cash flow of operations of $1.046 billion. Adjusted cash flow from operations was up 11% and improved about $110 million despite the decline in EBITDA year-over-year.

The timing of payroll was partially offset by the timing of payments for accounts payable. And these two items netted to $115 million improvement, and the slower growth in accounts receivable contributed about $120 million improvement.

Turning to CapEx, our CapEx for the fourth quarter was $183 million or 4.1%, while our full-year CapEx was $744 million or 4% of net revenue, which was lower than the guidance we previously provided in the first part of the year. During the full year 2015, our CapEx was down $153 million or 4.9% of net revenue.

Moving to the balance sheet, as Wayne mentioned earlier, at the end of the fourth quarter, we had approximately $14.8 billion of long-term debt, down from $16.6 billion. And our current 25-hospital divestiture plan could result in approximately $1.5 billion of proceeds including working capital.

We expect this group of transactions to close in the first nine months, and these proceeds will be used for further debt reductions. Additionally, we're working on other divestitures, which we think would close in the third quarter of about 4% to 5% of annual revenue in net single-digit margins.

Proceeds from these divestitures will also be used for debt reduction. At the end of 2017, we expect our long-term debt to be approximately $12.9 billion. And based on our current divestiture plan and current debt, we expect our senior secured net leverage ratio at the end of 2017 to be approximately 3.2 times.

We do expect a small tax payment from our divestiture proceeds to be in the range of 5% or less of the proceeds.

Switching back to our asset-backed securitization receivable facility, we've completed the agreement for an amendment on $700 million in November 2016 and revised receivable performance triggers an extended $450 million through November 2018 and $250 million continues through November 2017. Now, I'd like to comment on our bank covenants.

On December 5, we completed amendment with revolving credit facility term loan Ag lenders of the credit agreement to modify our financial covenants and enhance certain credit features through December 2017.

With the amendment, the maximum security net leverage ratio is 4.5 during the fourth quarter of 2017, and the minimum interest coverage is 2.0 for each of the four quarters of 2017. We were in compliance with both these covenants on December 31 with secured ratio of 3.96 and an interest rate coverage of 2.43.

EBITDA cushion on the senior net leverage ratio was 12%, and the cushion on interest coverage is 18%. Before we move on the guidance on page 10 of our supplemental slide presentation, we've included the 2016 annual pro forma for the 25-hospital divestiture plan.

If you adjust for these divestitures from 2016, calendar same-store results admissions improved 50 basis points, adjusted admissions improved 40 basis points, and surgeries improved 30 basis points.

On an annual pro forma basis, the divestiture of these assets in 2016 and expected divestitures of about 25 hospitals improved the consolidated EBITDA margin by 150 basis points. Now, I will walk you through the 2017 guidance before turning the call over to Tim to provide some more commentary.

First, our guidance assumes divestitures of 25 hospitals we included on page 8 our supplementation presentation. We expect these transactions to close in the first nine months. Our guidance also includes the divestitures in the third quarter of 4% to 5% of revenue, single-digit margins.

Also, as a reminder, we closed the home care divestiture on December 31, and we completed the sale – spin-off of Quorum and the Las Vegas joint venture sale within second quarter 2016.

Based on 2016 net revenue, the closed transactions QHC, home care, and our assumption for the timing of anticipated divestitures, which include the 25 hospitals and the other divestitures, represent 4% to 5% of revenue, will reduce our net revenue by approximately 15% to 16% of our 2016 total net revenue.

We estimate approximately half of that reduction, about 45% or so will be experienced in the first half, and the remaining will occur in the second half of the year.

For 2017, net revenue would be $15.8 billion to $16.2 billion after adjusting for the timing of the divestures; same-store hospital admissions to be flat to 1.5%; EBITDA will be $2 billion to $2.175 billion; cash flow from operations forecast to improve nicely to $1.050 billion to $1.225 billion; and CapEx is expected to be $625 million to $775 million.

Income from continuing operations per share is anticipated to be $0.30 to $1.10. In 2016, our income from operations per share was $0.46, which included the benefit from our Quorum and Las Vegas joint venture of about $0.18 as well as some tax benefits of $0.12 converted to the $0.30 contingent to 2016 EPS. These benefits will not reoccur in 2017.

On page 14 on our supplemental slide presentation, we did a bridge to the midpoint in terms of divestitures, the Quorum and Las Vegas joint venture and home care, of approximately $110 million EBITDA headwind in 2017 based on the 2016 net revenue and adjusting for timing, which includes the 25 hospitals and the 4% to 5% of net revenue, and we reduced our 2017 EBITDA by approximately $100 million.

Acquisitions completed in the first half of 2016 will increase EBITDA by $7 million. HITECH incentives are estimated to be $18 million or about $52 million below our 2016.

Leap Day was roughly about $20 million benefit of EBITDA in the first quarter of 2016, and we got better pricing/volume/acuity are projected to drive about $40 million of incremental benefit.

We expect better physician practice performance to continue and to generate approximately $25 million of EBITDA improvement, and our guidance includes about $70 million expense management reductions.

We expect to see continuing improvement across our payroll benefits in central business office, health information centralization, strategic sourcing initiatives, health insurance, and other expense programs.

And with the changes we put in place in 2016, we believe we already have visibility on over 50% of this expense target and improvement for 2017. While we don't typically provide quarterly guidance, we want to point out a few headwinds in the first quarter which will be a difficult comp.

In 2017, we had about $633 million of EBITDA in the first quarter, and we owned Quorum and Las Vegas during the first four months of the year. Divestitures including Quorum, Las Vegas and home care will be approximately $75 million headwind. In the first quarter, other divestitures may close late in the first quarter 2017.

In 2016, Leap Day was about $20 million. We project about $15 million less HITECH in the first quarter and also less than what was in the fourth quarter. Additionally, in the first quarter of 2017, we expect payroll tax expense reset to be about $30 million reduction on EBITDA on a sequential basis versus the fourth quarter.

And finally, self-pay deductibles and co-payments are higher sequentially in the first quarter than they were in the fourth quarter.

Tim?.

service line development targeting higher-acuity opportunities, improving our physician start-up process and the overall efficiency of our physician practices, consistently delivering a higher level of ED performance, and investments in additional strategic access points.

Through these efforts, we have identified a number of opportunities to drive better volume performance. And while we realized some expense improvement in the fourth quarter, we continue to view more efficient expense management as a significant opportunity for the company.

We continue to work with local market leaders on matching the cost structure of each respective hospital with our hospital networks' revenue outlook. And there are a number of other areas where we are targeting to drive additional efficiency. Last quarter, I highlighted a new framework.

Our key performance team that increase collaboration, prioritization, and accountability by better leveraging our organization's clinical and operational subject matter expertise. This team focuses on key performance indicators that can help move the needle on quality, volumes, and earnings, benefiting our entire hospital portfolio.

While we are still early in this rollout, we are continuing to see progress in areas such as length of stay, ED throughput, and supply expense management. Another initiative that we have introduced in September is our high-opportunity hospitals.

We started this framework in October from which we have identified 15 hospitals or 3 per division that have historically operated at a higher EBITDA margin that have experienced some EBITDA decline in 2016. For each hospital, we conducted an in-depth operational assessment and completed focused strategic planning.

We've coupled this strategic analysis with increased corporate resources and oversight to drive improved EBITDA performance. Through this model, we are seeing some early progress which we expect will drive better execution, accountability, and financial results that these targeted hospitals improve.

I'm looking forward to sustained improved results in the months and years ahead, and I look forward to updating you on our progress on future earnings calls.

Wayne?.

Thank you, Tim. At this point, operator, we're ready to open it up for questions. We ask that you limit your questions to one each so that everybody will have opportunity to speak. And if you don't, (32:28) you know where we are. We're available to talk to you, and you can reach us at area code 615-465-7000..

Your first question is from A.J. Rice from UBS..

Thanks. Hi, everybody. Maybe just one question and then one clarification. On the comments around the divestiture program, every quarter, I think you've stepped up a little bit over the last year what you're looking at doing and had made good progress on that.

I know you don't want to put out a list of hospitals or whatever that you're thinking about divesting, but is there any way to frame sort of what the end game is? Are you trying to get leverage to a certain point? Are you trying to get debt, absolute amount of debt down? Is it more about management breadth and being able to expand and control tighter? Give us a flavor for where you're trying to ultimately take the restructuring of the portfolio..

So, A.J., I think what we've said and we'll continue to work on is that we want a sustainable group of hospitals in sustainable markets where we can deploy our capital. And if you look through our slides, you'll see there is a projection in terms of what it does to our margins, and it even improves our volume a bit.

So, I think when we get to that point, we'll know it. Our intentions are not to sell every hospital we have but to get to this group of hospitals. I don't know what that number is, but I would think that what we've just done and what we'll do in 2017 would be very close to that. And then Larry might want to quantify that a little bit.

By the way, I would again say that we are getting a very good value for the facilities that we're selling, and we're getting about 10 times in a market for single-digit hospitals. If opportunities come along for other hospitals that we'll get 12 times, then we'd be happy to consider that..

Okay..

A.J., I just might add one thing. We are paying attention to the tax basis and making sure we decide to sell something or just maybe a couple better so you can make sure you get a good price and we get most of the proceeds. I think we estimated maybe 5% or less of the proceeds.

The other thing we attempted to do this quarter, we've stepped it up every quarter. We've done it and it's now 25 hospitals, 15 definitive agreements and 10 letter of intents. And we went ahead and we've had some contacts from people for 4% to 5% of revenues, $700 million or $800 million of revenue profitably.

And we think that contact will lead to a transaction. We'll be talking about it probably on our next call. But since we're putting out guidance, we don't want to keep putting out guidance with changing things.

We decided to estimate that and put that out even though we have not gotten ourselves comfortable enough yet to call out one of the working LOIs.

Historically, what we used to do was put out we'd buy two to three or two to four hospitals even thought they might not be named, and we tried to also give people a lot of information about when these would close and how much in the first half of the year and the second half of the year so there can be a better understanding how they would come out.

So....

Okay..

And the other question here is the fact that we're all working on our metrics in terms of our debt metrics, but also, we're working hard on the size of our debt to work our debt down as well, so it's both components..

Makes sense. Just one clarification. Larry, I think in your prepared remarks, you had mentioned the progress in the Florida portfolio that you had – and I know that's been a topic of discussion for a number of quarters. You've seen a $20 million benefit, but there was sort of $10 million that you were hoping to get you didn't get.

Can you tell us what you've seen, where you've had progress, and does that carry over to get some of those savings and efficiencies you've got in the walk forward.

And then the $10 million that you didn't get, what was that primarily around?.

Going from the third quarter and fourth quarter, we would expect some sequential improvements. Some would be seasonality. We achieved some volume improvement and some surgery improvement, but probably, we didn't quite have as much surgery improvement as we anticipated.

We're doing a pretty good job on expenses there, and we'll continue to do a better job on expenses. But I think our surgery growth was a little less than we anticipated.

I know our surgery for the company is a little less than we anticipated and of course the HMA hospitals continue to be negative which a lot of those are in Florida, and I think the industry looked like it had a little bit more of a challenge in the fourth quarter from a surgery perspective that we felt a little short from a surgical contribution to our EBITDA improvement in Florida in the fourth quarter..

Good job at limiting the questions to one, A.J.

Next (37:21)?.

That was a clarification. Thanks..

Good. Good work, A.J. Thank you..

The next question is from Brian Tanquilut from Jefferies..

Hey. Good morning, guys. I'll stick to one question.

Larry, as we think about the guidance, when we think about the volume and the acuity and the pricing assumptions that you have baked in, where are you getting the confidence and then how much visibility do you have right now to the pricing dynamics that you baked into the guidance?.

Yeah. First of all, I think we got pretty good visibility around Medicare, and we've got a pretty good idea where Medicaid is going to go. I think Medicaid reimbursement will be a little bit better from our perspective in 2017 over 2016 than we had 2016 over 2015. Majority of our Managed Care rates are locked up or a high percentage are for 2017.

I think we'll stay close to the range that we expected to get from a volume perspective. We've got good employment growth. The population continues to grow. We got the orthopedic improvements. We've done more markets there. Dr.

Simon is working on installing the physician recruitment that will be there that went there at a full year, and we continue to get better volumes from that. Some of the stuff Tim talked about around ER transfers, behavioral health has done good for us.

That's about 6% of our business and then the access point should continue to do a good job for us and probably effective ED management.

So, all of those collectively, it's a rollup of what the hospitals have predicted in the plans they've done, and we think – and this we pointed out earlier, selling the hospitals we're selling throughout the year will help the overall same-store results because we'll compare ourselves with five of those hospitals on a same-store basis throughout the year, and all key indicators of volume improved in 2016 had those hospitals not been there..

All right. Got it. Thanks..

The next question is from Josh Raskin from Barclays.

Hi. Thanks. Good morning. Just a question on payor mix. I think we saw commercial improve. I think it was 60 bps in the quarter but 100 basis points for the full year. And I just want to make sure I understand the components there.

I guess, how much of that is what we think of as pure commercial versus Medicare Advantage? And then help us understand maybe the economics on some of those shifts.

Was commercial still what we think of as commercial margins and is Medicare Advantage growth I guess better or worse than the overall commercial side?.

Yeah, from an overall perspective, we do include the Medicare Advantage in there since it comes from Managed Care companies. So it's roughly 8% or a little bit more, maybe 8.5% of our payor mix. And actually, it was down a little bit in the fourth quarter, down about 70 or 80 basis points on the Medicare Advantage side. At least that's what we got.

So, that what seems to have contributed to most of the slowdown in the fourth quarter. Usually, the fourth quarter goes up a little bit better because of the end of the year use of deductibles and coinsurance, but our Medicare Advantage was slightly down a little bit on an overall revenue basis.

And on a year-to-date basis, again, it's 8% to 9% of our Medicare Managed Care activity. I'd expect our Managed Care to keep getting a little bit better. I mean, we've done a pretty good job of trying to focus our recruitment and our acuity activities around what could drive Managed Care. We've done a pretty good job of standing contracts.

We're in pretty good coverage as it relates to our contracts as far as the exchange business, and I think we'll continue to see Managed Care move up for us year-over-year..

Larry, if Medicare Advantage comes down, is that good or bad? I just don't know if you're getting slightly better rates even if the utilization is lower.

Would you rather have more Medicare or more Medicare Advantage?.

Well, probably, we'll make a little bit more profitability off of pure Medicare especially on the outpatient side because they do a better job of redirecting some outpatient business. Our inpatient payment rates probably are comparable there.

Now, I'm sure the Managed Care companies do a little bit better job on managing utilization and just straight fee-for-service, but we get a similar rate under both for inpatient business, but we generally see a little bit less outpatient revenue come through Medicare Advantage than we do Medicare fee-for-service..

The next question is from Gary Lieberman from Wells Fargo..

Good morning. Thanks. Maybe one clarification and one question. You made a comment about the flu being weak.

Was that in the fourth quarter or were you commenting on the trends continuing into the first quarter?.

We were commenting about the fourth quarter actual results, and yes, we are seeing some better flu results right now as most everybody is..

Got it. And then the metrics on HMA indicate that those hospitals continue to lag.

Can you talk about that? Is the expectation that they should continue to lag or do you still think there are things you can put in place that will improve the operations at HMA?.

The expectation is that they should improve, and we think we're doing the right things to improve those facilities going forward. As I think Larry mentioned, about 20% of them account for 90% of the problem, so it's not as widespread as it now appears. It's just some bigger hospitals that are problematic..

And I think we did for the most part close the gaps in the fourth quarter versus the year, so hopefully, we'll continue to see that gap. Sometime in 2017, we'll provide a net churn (43:14)..

The next question is from Gary Taylor from JPMorgan..

Hi. Good morning. I just want to clarify just proceeds. I'm a little bit confused because I think the release talks about $1.5 billion of proceeds, but in other places, you talked about $1.8 billion, and so maybe I'm getting confused. I think maybe the $1.8 billion includes home care and MOBs.

Is that the difference?.

Correct, Gary. What we've tried to do since we started this process and I think we've got a slide there that shows the last – all the quarters in time and Wayne talked about it. It shows how it's progressing. And then when we did the guidance and talk about what's to be done in 2017, we did close the MOB sale and leaseback in the fourth quarter.

Now, that debt doesn't go down. It comes out of senior debt and capital lease. So, total debt then changed (44:10). We also closed the home care, and we paid off some debt from those two transactions in the fourth quarter.

And so, the end result is $1.8 billion, which included those, would go down from that when you start thinking about what's available that have happened in 2017. And then of course, we have not put numbers around the transaction or transactions. We expect to get down above the 25 hospitals in the third quarter of 2017, the 4% to 5%.

But the $1.5 billion that's in the 8-K is reconcilable to the $1.8 billion, but that's what we expect to accomplish during 2017..

The next question is from Justin Lake from Wolfe Research..

Hi. This is Steve Baxter on for Justin. I wanted to ask about physician recruitment.

It seems like the 2016 numbers increased a lot with the slides today versus the previous update, and I guess, for the full year, it was only down about 6% and it seemed like earlier in the year, you were talking about a potentially more meaningful decline in activity here.

I guess, can you give us an update on was anything changed there and what you're expecting as you go into 2017?.

Yeah, you can see that we dropped it a little bit this past year. We're much more focused on our physician recruitment now. We're driving it towards (45:34) enhancing our acuity and where we think we can improve our market share by deploying physicians in the market. So, we're a lot more consistent about the way we're thinking about it.

One that – you recall one of the issues that we had at HMA earlier on is that they didn't recruit enough physicians. We recruited too many, so it costs us a lot of money. So, we've gotten very strategic about our thought process about physician recruiting then. And you'll see that continue..

And maybe one clarification just to add to that, when we talk about physicians, we generally talk about employed physicians.

This chart includes physicians that we recruit to become independent, may become ER doctors or hospitalists providing services, are employed and are focused about having more productivity around employed doctors and maybe recruiting less employed doctors, only the numbers stayed relatively the same.

And I think we actually did reduce the number of nurse practitioners, et cetera, from 2015 to 2016. So, a lot of our comments about physicians deals more with the number of employed physicians or however active that we're hiring new doctors..

The other component to physician recruiting is productivity and ability to enhance and improve our practices, and I think we have a great team working on that. We know a lot more about our physician practice today than even we did last year. We've been recruiting physicians forever.

So, I feel good about the direction of our physician recruitment and practice management..

The next question is from Ana Gupte from Leerink Partners..

Thanks. Good morning. So, the question I have is about the guidance. What are you baking in, if you can give me some color on the benefits from the ACA and the payor mix and provisions of doubtful accounts in 2017 and then just....

Yeah. We're probably not going to give specifics about the ACA going forward. I think other companies said that we expect our exchange business to continue to go down a little bit based on how the open enrollment took place, and also, there is a little bit tighter activity in the special enrollment, so that's probably going to go down.

I think our Medicaid will continue to do okay. We're not expecting any large amount of Medicaid expansion to take place over our few locations. Thinking about it and I do think our exchange business will probably go down a little bit. And it seemed to have slowed down in the latter part of the fourth quarter and latter part of this year.

But we probably will not give out any more ACA benefits since we've done it now for 2014, 2015 and 2016, and it did improve nicely. What we are seeing is still somewhat more benefit in both the expansion and non-expansion states for people who are eligible for Medicaid..

The last question is from Kevin Fischbeck from Bank of America..

Great. Thanks. I was just wondering if you could kind of – with this bridge of the EBITDA, if you've got some assets that you're selling during the year.

I was wondering if you could kind of strip those out and say, what would the kind of the core 2017 revenue and EBITDA be as if you had sold everything as of January 1? And then also within this guidance for 2017, because you're selling some more stuff, do you have like a same-store EBITDA growth rate that you're thinking of as far as the core business growing in 2017?.

Yeah, I think we do have here. Like we said, volume would probably be zero to 1.5%. Revenue per adjusted admissions will probably be 2% to 3%. And same-store revenue would probably be 2% to 4% roughly. So, that was what we were thinking.

We will probably as we announced a divestiture, they stay in continuing operations which is different a few years ago that we may as we did with QHC in Las Vegas and home care, we'll move those to non same-store so that the same-store results are only the hospitals that we'll continue to operate, and we think that by showing what we did about how 2016 got better without the 25 hospitals, it gives you a little bit more confidence as the operating results going into 2017 are better than the total 150 plus hospitals for calendar 2016..

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're very focused on our strategies we have outlined over the past several quarters.

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 operating performance. This concludes our call today. We look forward to updating you on all of our projects throughout the year.

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..