Ross Comeaux - Vice President of Investor Relations Wayne Smith - Chairman and Chief Executive Officer Tim Hingtgen - President and Chief Operating Officer Tom Aaron - Executive Vice President and Chief Financial Officer.

A. J. Rice - Credit Suisse Ralph Giacobbe - Citi Frank Morgan - RBC Capital Markets Brian Tanquilut - Jefferies Josh Raskin - Nephron Research Ana Gupte - Leerink Partners Matthew Gilmore - Robert Baird Gary Taylor - JPMorgan Steve Baxter - Wolfe Research Steve Tanal - Goldman Sachs Kevin Fischbeck - Bank of America Peter Costa - Wells Fargo.

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 2018 Q2 quarterly 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. [indiscernible].

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

Thank you Mike. Good morning and welcome to Community Health Systems second quarter conference call. Before we begin the call, I would like to read the following disclosure statement. This conference call may contain certain forward-looking statements, including all statements that do not relate solely to historically 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 refer to those slides during this earnings call.

All calculations we will discuss also exclude discontinued operations and/or loss from early extinguishment of debt, impairment expense, as well as gains or losses on the sale of businesses, expenses incurred related to divestitures, expenses related to government and other legal settlements and related costs, expenses related to employee termination benefits and other restructuring charges, expense from the fair value adjustments to the CVR agreement liability related to the HMA legal proceedings and related legal 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 Ross. Good morning and welcome to our second quarter conference call. With us on the call today is Tim Hingtgen, our President and Chief Operating Officer, Tom Aaron, our Executive Vice President and Chief Financial Officer and Dr. Lynn Simon, our President of Clinical Operations and Chief Medical Officer.

Let's start the call today with some comments on our company as well as our performance during the quarter. Then I will turn the call over to Tim, who will discuss our operations and additional details and Tom will provide more color on the second quarter financial results.

Overall, we are very pleased with the ongoing progress we have made in the second quarter and are encouraged by the many opportunities that we have.

During the quarter, we drove core operational performance improvements, pushed out our debt maturities multiple years from the refinancing transactions, made progress on our divestiture program and continue to focus on expense management analytics which is helping us manage our operational and corporate costs.

As I said, we still see opportunities for continued improvement. There are a number of positives worth highlighting in terms of the second quarter. Our same-store adjusted admission growth was nearly flat year-over-year driven by improved surgery performance.

On the pricing side, net revenue per adjusted admission was up 3.5% during the second quarter, in line with our performance during the first quarter adding this to our same-store net revenue performance was up 3.3%. Down the P&L, adjusted EBITDA came in at $411 million and adjusted EBITDA margin of 11.5% was up 100 basis points year-over-year.

Looking at the second quarter results, we were pleased with the core same-store operational growth, Tim and our corporate and hospital leadership teams have introduced and executed a number of initiatives that are in various stages of development, from which we expect incremental growth moving forward.

Tim will discuss these programs in more detail later in the call.

As you know, in addition to our core same-store growth strategies, we have also been working on divestitures, which allow us to focus on sustainable markets and shift more of our resources to hospitals and networks with improved market position, higher growth potential and better profitability.

We expect our current divestiture program will incremental benefit to our volumes and EBITDA margin. Our current plans call for divestiture of hospitals that accounted for approximately $2 billion in net revenue in full year 2017.

We expect these divestitures to generate approximately $1.3 billion of gross proceeds which does not include the retention of net working capital. Today, we have completed the divestiture of seven hospitals from our divestiture plan. We expect to close majority of our current plan by the end of 2018.

As we move forward, we will continue to optimize and strengthen our portfolio. Now I would like to talk about quality for a minute. Improvement the quality and safety of care for our patients and communities remains a key component of our strategy.

We remain committed through both investments and resources to deliver the highest level of care to our patients throughout the continuum of care within our healthcare system. One quality metric that we track is serious safety events. We have historically reported serious safety event reductions for our legacy and HMA hospitals separately.

With the HMA hospitals now three years into our program which includes adoption of our safety processes, the HMA results can now be combined with our legacy hospitals. Along these lines, our consolidated legacy and HMA reduction in serious safety events is now 82.4%.

Meanwhile, we continue to advance patient safety and additionally initiatives such as our enhanced focus on medication error reduction in which we have seen over 50% fewer medication administration incidences from January to June 2018.

In addition, we have completed the study phase of our research collaboration with an affiliate of Harvard School of Public Health and Harvard Business School on patient safety, which we believe will further inform the industry on safety culture and the managerial context that supports safe patient care.

In terms of our guidance, our guidance includes the following. Net operating revenues adjusted for expected divesture timing are anticipated to be $13.9 billion to $14.2 billion. Adjusted EBITDA is anticipated to be $1.6 billion to $1.65 billion. With that, I will now turn the call over to Tim..

Thank you Wayne. Our admissions, adjusted admissions and surgery volumes, all improved sequentially. We have been implementing initiatives and programs that are designed to drive improved volume and revenue growth across our core facilities. So we were pleased to see strong volume performance in many of our markets.

As our teams work to fully leverage all of our strategic initiatives, we expect to drive further momentum and additional same-store growth.

Excluding the planned divestitures under definitive agreement or signed letters of intent, we saw stronger metrics across all key volume statistics with adjusted admissions and surgeries both finishing in positive territory.

We believe this reflects favorably on our portfolio rationalization strategy and the stronger underlying performance and future development potential of our core portfolio. We also delivered good pricing performance in the second quarter with net revenue per adjusted admission growth of 3.5%.

Overall, our same-store net revenue performance was up 3.3% during the quarter.

Pricing performance this quarter and on a year-to-date basis has been driven in large part by our focus on advancing higher intensity service lines in selected affiliated hospitals and markets, successful physician recruitment into surgical specialties across the broader portfolio and also from the selected closure of lower acuity services that typically had minimal volume and were margin dilutive in some same-store facilities.

For the quarter, we posted improved case mix index across all payor categories. We are making progress across all of our company's strategic imperatives, which include safety and quality, operational excellence, connected care and competitive position.

Each strategic imperative is supported by specific key initiatives and we have share progress reports on many of them with you in the past. Our highest priority initiatives to enable continuous growth include investments to increase access points and services.

Our capital investments are highly targeted in our core market and include expanding outpatient access, enhancing service lines and improving and expanding hospital facilities. For instance, since the first quarter, we have opened two new freestanding emergency departments, a second location in our Tucson market and one in Petersburg, Virginia.

Our development pipeline for additional freestanding EDs, urgent and walk-in care centers, ASCs and imaging centers remains active with more locations planned for opening in 2018 and 2019.

We remain intently focused on medical staff development, which includes both physician recruitment as well as physician engagement through our structured outreach programs, each geared towards supporting primary care development and targeted specialty service line growth.

Our physician recruitment results have been very strong with nearly 20% increase in physicians commencing practice year-over-year. We are making significant progress in our efforts to facilitate convenient and connected services for our patients or as we call it connected care.

This work encompasses initiatives like our centralized call centers, online scheduling systems, proprietary transfer centers, patient navigation programs and consumer engagement through digital channels to help connect patients with their care providers and help navigate to appropriate services across the continuum of care.

Connected care is closely aligned with physician practice initiatives. We are very focused on improving patient access and convenience, which can ultimately drive incremental volume. We have now expanded our patient access centers that provide centralized scheduling services for phone appointments to almost 1,000 of our employed providers.

And to further meet consumer expectations for convenient scheduling, we now have online scheduling capabilities for nearly two-thirds of our primary care providers.

Practices that have fully implemented centralized and online scheduling have experienced greater than 6% increase in physician clinic visits in the second quarter of 2018 versus the prior year quarter. One initiative that we have been describing to you on our most recent calls is our transfer center development.

This internally operated program manages the inbound referrals to our hospitals and their emergency departments from both affiliated and nonaffiliated hospitals and providers within a particular region. We began the insourcing of transfer centers in select markets in the third quarter of 2017.

We have now expanded this service into seven key markets, which is about 50% of our targeted markets. Implementation of this coordinated access strategy is proceeding ahead of our initiative plan and schedule and our expectations. Based on feedback from many of our markets that utilize the program, we are seeing that benefit that we expected.

Once we have reliable internal same-store data for markets that have been supported by our transfer center, we will be able to fully analyze the results and measure our year-over-year transfer activities and progress. Turning to expense management.

During the quarter, our hospital leaders continued to drive improved efficiency on the SWB line even with year-over-year wage rate increases of approximately 3%. We continue to leverage our labor analytics tools to provide real-time data to safely and appropriately adjust labor utilization to volumes.

We are also using enhanced analytical tools and have been rolling out coordinated companywide expense savings initiatives intended to drive incremental savings on the supplies and other operating expense lines.

Finally, what I find most encouraging in the progress we are seeing across so many of our core market is the commitment, resilience and perseverance coming from local leadership teams.

This year, I and other members of our management team had made it a greater priority to travel to more of our markets to meet with our hospital leaders as well as medical staff and local board members. This direct and open exchange has validated that our key initiatives and investments are working and generally producing the desired results.

As we work together in cultivate even more collaborative relationships across our organization, we will continue to pursue our opportunities and look forward to more progress moving forward. With that, let me turn the call over to Tom..

Thank you Tim. Now I will discuss the second quarter on a quarter-over-quarter basis. As a reminder, calculations discussed on this call exclude items Ross mentioned earlier. On a same-store basis for the quarter, we note the following. On a comparative second quarter 2018 versus 2017 basis, net revenues increased 3.3%.

This was comprised of a 3.5% increase in net revenues per adjusted admissions and a 0.2% decrease in adjusted admissions.

Regarding net revenue per adjusted admissions, in addition to Tim's comments about our service line initiative and the transfer centers, improved revenue cycle technologies and processes reduced our denials and improved our point of service cash collections during the quarter. We also increased our inpatient admissions decline 2.1%.

Our ER visits decreased 2.2% and our surgeries were flat. Similar to last quarter, we delivered solid net revenue per adjusted admission performance. On a year-over-year basis, we benefited from improved acuity, better Medicare rates and a stronger portfolio of hospitals following a number of divestitures.

Our net outpatient revenues after the provision for uncollectible revenue was 53% of our revenues. During the second quarter, our consolidated net operating revenue was down approximately 10 basis points. On a same-store basis, our net outpatient revenue was 53% of our revenue and increased 160 basis points.

Consolidated revenue payor mix for the second quarter of 2018 compared to second quarter of 2017 shows managed care and other, which includes Medicare Advantage, increased 100 basis points, same-store was up 130 basis points, Medicare Fee-for-Service decreased 80 basis points, consolidated same-store down 120 basis points, Medicaid increased 40 basis points, consolidated same-store up 40 basis points and self-pay decreased 60 basis points, consolidated same-store down 40 basis points.

Looking at our adjusted admissions per payor class, our managed care, Medicare Fee-for-Service and Medicaid volumes were all down, while our Medicare Advantage and self-pay volumes were up.

During the second quarter, the sum of consolidated charity care, self-pay discounts and uncollectible revenue for three months comparative periods has increased from 29.0% to 31.0% of adjusted net revenue, a 200 basis point increase. Same-store on uncollectible revenue is down 10 basis points from 31% to 30.9%.

For the same-store expense items, our salaries and benefits as a percent of net operating revenues for our same stores decreased approximately 50 basis points. The decrease was primarily driven by improved FTE management and lower wage inflation.

Supplies expense as a percent of net operating revenues for our same store increased 20 basis points, driven in part by lower pharmaceutical costs. Other operating expenses as a percent of net operating revenues for our same stores increased 60 basis points.

The increase was driven primarily by higher medical specialist fees, certain purchase services and information systems expense. Switching to cash flow. Our cash flows provided by operations year-to-date were $94 million. This compares to cash flow from operations of $503 million during the first half of 2017.

In terms of the year-over-year decrease to June 30, there are few items worth noting. The change in interest paid from last year contributed $80 million to the decrease with approximately $60 million of that due to accelerated interest payments associated with the exchange notes.

Prior year cash flow collections from accounts receivable were approximately $205 million higher last year.

In the first half of 2017, cash flow from patient receivables benefited from lower same-store net revenue growth while patient receivable during the first half of 2018 were negative negatively impacted by strong same-store net revenue growth which was up 3.5%.

While our cash from patient receivables for the first half of 2018 is below 2017, it's above the first half of 2014, 2015 and 2016. We expect improvement in second half of 2018 for our cash flow collections from accounts receivable.

And finally cash flow distributions from accounts payable were approximately $50 million higher than the prior year due to largely to cost reports and provider taxes paid. We expect our cash flow from operations to improve in the second half of the year. Turning to CapEx. Our CapEx year-to-date was $295 million, or 4.1% of net revenue.

During the first half of 2017, our CapEx was $274 million, or 3.2% of net revenue. We are continuing to invest our capital towards high growth opportunities in our markets, such as additional access points as well service line build outs around cardiology, orthopedics and other high acuity areas. Moving to the balance sheet.

At the end of second quarter, we had approximately $13.67 billion of long-term debt with current maturities of long-term debt of $41 million. At the end of second quarter, we had approximately $208 million of cash on the balance sheet. We expect our divestiture plan to further reduce our total debt moving forward.

As it relates to our pending HMA legal matters, there has been no material change for several quarters. We continue to revalue the estimated liabilities covered by the CVRs on a quarterly basis. Our current estimate includes probable legal fees, continues to reflect that there will be no payment to the CVR holders.

In terms of our capital structure during 2018, we completed a number of refinancing transactions that resulted in the extension of $4.7 billion of our debt maturities.

On March 23, we amended our credit agreement to modify our ability to retain asset sale proceeds based on first lien leverage, net leverage grid to increase junior secured debt capacity and to permit an asset based loan that could replace the previously existing asset-backed securitization.

On April 3, 2018, we terminated the $600 million ABS and replaced it with the $1 billion ABL maturing in 2023, transferred the outstanding balance of $538 million to the new ABL and reduced our credit facility revolver to $425 million.

On June 22, 2018, we issued $1.77 billion junior priority secured notes due 2023 in exchange for $1.7 billion of senior unsecured notes due 2019 leaving a manageable stub of $155 million.

We also issued $1.355 billion junior priority secured notes due 2024 in exchange for $1.079 of senior unsecured notes due 2019 leaving a manageable stub of $121 million and $368 million of senior unsecured notes due 2022, transacted at a discount of $92 million off the face value.

On July 6, 2018, we issued $1.033 billion of senior secured notes due 2024 and used the net proceeds of that offering to repay Term Loan G as well as related fees and expenses.

As a result of these comprehensive refinancing activities, we have extended our debt maturities, retained $500 million of incremental senior secured first lien capacity and maintain substantial liquidity. And as Tim walked through earlier, our entire organization is extremely focused on driving operational improvements.

For 2018, we have updated our full-year guidance, which now includes the impact from our recent refinancing transactions. Our guidance includes the following. Same-store adjusted admission growth is anticipated to be down 1% to flat.

For 2018, net operating revenue less provision for doubtful accounts are anticipated to be $13.9 billion to $14.2 billion, which includes the adjustment for the timing of expected divestitures. Adjusted EBITDA is anticipated to be $1.6 billion to $1.65 billion. Cash flow from operations is forecasted at $550 million to $650 million.

CapEx is expected to be $500 million to $575 million. We expect high tech incentives to be close to zero compared to $28 million in 2017. Interest expense is expected to be 7.15 to 7.2% of net revenue for the year.

Income from continuing operations per share is anticipated to be negative $1.85 to negative $1.70 based on weighted average diluted shares outstanding of 113 million to 114 million. Before I turn the call over to Wayne, I want to briefly talk about the third quarter of 2018 as you update your models.

As a reminder, our third quarter is typically our lowest quarter of the year from a revenue and EBITDA standpoint.

Wayne?.

Thanks Tom. Mike, we are ready to open it up for discussions and questions. We will limit everyone to one question, so several of you can have time to get on the call. But as always, we are available to talk. At anytime, you can reach us at area code 615-465-7000..

[Operator Instructions]. Your first question comes from A. J. Rice from Credit Suisse..

Thanks. Hi, everybody. Just maybe a big picture question. So operating trends now stabilized to improving, as you describe on the call and you have worked through the 2019 and 2020 maturities but you still have this big bolus of debt due 2021 through 2023 and probably need to bounce up the capital structure.

Is the experience from the recent exchange offers and reworking the maturities that you had in the last few months, does that tell you that you just focus on operations for the time being and then when you get close to those maturities going current again, that's the time to rework them? Or are there other interim things that you might be able to do try to get the balance sheet and capital structure on a more sustainable basis?.

So, AJ, as you just said, our debt strategy is two or threefold in terms of first thing is performance. As we continue to improve performance, which we believe we are on the right track in terms of doing that now, we will get opportunity to go back to the market if we need to refinance, something hopefully at a lower rate.

We also have our divestitures. We will take advantage of our divestitures in paying down some of our debt along the way. We continually look for opportunities where we can improve our debt to cap as we kind of move out, but the biggest thing we can do is improve our performance.

I don't know, Tom, if you want to add to that?.

No. I think it's right. We think runway, the maturities coming up, the stubs, AJ, are very manageable, given the revolver we have, the ABL, our cash and our anticipated cash flow. So we like our liquidity position. And the 2022s are the first. Those are the first unsecureds that are going to be coming up. So that's laid out.

We are not going to be waiting until 2021 to work on operations. And as Tim mentioned, we are very focused on those, the sooner the better, that we improve the operations. Also, as we have shown and we are anticipating divestitures will improve our financial performance on all measures, volume, cash flows and expense management..

Your next question comes from Ralph Giacobbe from Citi..

Thanks. Good morning. Just wanted to go back on the guidance.

Could you just maybe split out or help us on how much of the revenue and EBITDA guidance were just simply the timing of the asset sales versus the organic improvement or upside that you saw in the quarter? And then just related to the guidance, just the last comment you made before we opened up for Q&A, talked about just the timing, 3Q, lowest revenue and EBITDA, obviously the comp from last year, just given the hurricane impact, just hoping you can just flesh out the comments a little bit, because I would have thought sort of the third quarter, even just the optics of the third quarter would have been significantly better? Thanks..

Yes. Ralph, so the first question. On our guidance, we raised the high and low end of our revenue guidance by $300 million. That's primarily related to the timing of the divestitures. As we have mentioned before, these are mid to low single-digit EBITDA margins on the divestitures and some times you see deteriorating performance up to the close.

So you can do some math on that. And with that, you can tell a portion of the increase of $25 million increased midpoint on the EBITDA. Some of that is going to be related to those divestitures. And then with respect to the third quarter, hurricanes aside, that's the comment we are trying to emphasize there.

That's been the lowest revenue quarter for us historically. There was impact from the hurricane that we called out last year that, on those markets, should be an adjustment to the comp. But I just wanted to emphasize that quarter..

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

Good morning.

I am just curious, I mean you gave a little bit of color around the sequential and the seasonal impact, but just in terms of just cash flow, can you give us a little more specific, maybe to bridge this from second to third to fourth quarter and what would be the contributions of cash flow from ops over the course of the two quarters? And then secondly, how much flexibility do you have in terms of CapEx so that it changes in your cash flow from ops? Do you have really any ability to either ratchet CapEx up or down? Thanks..

Well. So, Frank, on the rest of the year, a big portion of what we are talking about through the first six months was due to the acceleration of interest payment with the notes. We also have for the first year from the closing of the exchange about $100 million of incremental interest expense.

That would go down to $80 million after year one when one of those exchange notes stepdown. So why you can model that on the interest side On the balance sheet side, when we look at the receivables, of the increase of $200 million increase in receivables, about $50 million of that is probably due to the timing of divestitures.

Last year, we closed the store transaction on May 1. That was eight hospitals. This year, we closed six transactions on June 1. Less time to work the receivables. So we think that is going to turn and just depending on exactly when we close at the end of the year will dictate that. We think we can manage that to a degree and turn that around.

We also had, as I mentioned, some provider tax programs and cost reports. That ought to settle out the back half of the year. And then lastly, when we look at last year. Last year this quarter, our same-store net revenue was down 0.7%, which causes you to collect a lot of receivables in the cash flow statement.

When you look at this year, we grew it by 3.3% in the quarter. That tends to build AR and that's reflected in it. As we mentioned, last year was up. It was a very strong quarter on the AR side, but we outperformed 2016, 2015 and 2014 this quarter. So we do expect that from normal course to straighten out the rest of the year.

And then there were some on accounts payable and accrued liabilities that will fluctuate throughout the year. I don't expect that to repeat. We do have some flexibility, although we are committed on our CapEx. We have got great markets that are growing and we want to continue to put CapEx investment there. We know we can get returns on those.

So that's where the CapEx is going, on hospitals identified for divestiture. We are making maintenance CapEx, but we are not making strategic CapEx. And as we have said before, we really don't have any replacement hospital or new hospital spend until 2019.

So it's going to be, we think, a lighter, as we put in our guidance, CapEx year this year, but we do have some ability to manage that up or down..

Your next question comes from Brian Tanquilut from Jefferies..

Hi. Good morning guys. Just a follow-up, Tom, to that last comment that you made and your answer to Frank's question. So status quo, as we look at it, it seems like free cash flow, will just probably be negative through 2019, maybe even 2020, right? And then you just mentioned that you have a replacement hospital due in 2019.

So I guess CapEx will ratchet up again.

So how do you think about free cash flow generation over the next few years? And how much more, either cost cuts or opportunities to bring down the expense side, do you have assuming that volumes remain flattish or slightly negative?.

Yes. I would look at it this way. The divestitures that we spun out last year, our calculation, they were about $250 million negative free cash flow. Those are 2017 divestitures. The ones that we have closed in a definitive agreement this year are almost, they are definitely negative free cash flow, very low to negative EBITDA margin.

And if we get those out of our portfolio and we hold-serve on our remaining portfolio, which is a stronger portfolio that we are pretty comfortable, we can hold serving growth those, then I think that's the difference you are going to see when you look at our historical free cash flow, especially last 18 months.

We are certainly not going to have another refinancing the size of what we did this year for many years. So there is not going to be a drag with any more accelerated interest. A lot of divestitures are going to be out. It's going to improve not only the free cash flow but volumes and everything else.

And we are going to be growing the remaining portfolio. So that's our expectation of our hospitals and what we are managing to. So as we mentioned before, we are in a position with better free cash flow, sooner rather than later..

Your next question comes from Josh Raskin from Nephron Research..

Thanks. Good morning. I wanted to talk again just about the cadence of EBITDA through the rest of the year.

And I guess more specifically, if you could tell us what is in guidance in terms of your expectation around those divestitures? When are they sort of expected to close within the guidance now? And then another question around that, what do you have in terms of Medicare pricing in 4Q now with the prelim regs out at least, not the final rates, but just curious if you have got an uptick in Medicare pricing? And then I guess the last thing is, what's the run rate revenue base exiting 2018? As you think about closing all the divestitures by the end of the year, without any growth assumptions for next year, but is that $13 billion? Is it $13.5 billion? Is it below that? Just curious where the run rate ends up?.

All right. Thanks Josh. So the first one, timing of divestitures. I mentioned before that we increased on the revenue side $300 million, the low and high end. We are trying to have some flexibility on that.

These are several smaller transactions as far as number of hospitals, compared to the prior year where we had eight hospitals in a single transaction with Steward and five hospitals and other transactions. Some of these are newer buyers who have not done transactions and the form of transaction is slightly different.

So it's just taken a little bit longer regulatory and so forth. So we want to give ourselves some flexibility on that. I think we are going to have more insights definitely during this quarter, the third quarter that we will be putting out and we will be able to refine that model a little bit better as we get closer on that.

But we do think what we have talked about the $2 billion in revenue, the majority of that is going to be closed in 2018. And on the Medicare pricing, we don't think that is going to have substantiality, as from our volume stats, you can see Medicare Fee-for-Service continues to climb. We are moving more to Medicare Advantage.

So we don't see that as a move the needle on the scheme of things. The other initiatives we have got going on with volume and service lines and so forth. And then our 2019 run rate.

We have not put that out yet, but I think you could maybe do some math and we would be glad to go out on the phone with you later and talk about some of the math you might be able to come up with on looking what we look like post divestiture..

Your next question comes from Ana Gupte from Leerink Partners..

Yes. Hi. Thanks. Good morning. The question, again following up on your cash flows and the AR receivable.

You talked about that being related to the same-store growth and maybe the timing of divestitures? Is there anything of concern at all around collectibility in this case? There was a change in the accounting on bad debt and that might have been what drove it, but the write-down earlier maybe a few months ago and should we be concerned at all about rise in receivables beyond the growth in same-store?.

Thanks for your question, Ana. So we have been running alternative models and doing testing and it's validating everything we have got in our revenue recognition model.

I think we feel more comfortable that the improvements that we have made with technologies and processes and our revenue cycle that I mentioned, when we look at our denial rate as a percent of revenue, that's improved 20 basis points, just from better compliance, getting authorizations upfront.

Our point of service collections year-over-year are up 12%. That's positive because we are getting the cash upfront, but our analysis on our receivable show that if we collect a portion upfront, we do a better job collecting after the fact, so we like that, to be coming through our experience.

So we are very comfortable with the model that we have and where we are with respect to receivables. And as I mentioned, receivables primarily from timing of divestitures, June 1 for a big bunch of those versus May 1.

And then also with the increase, I think other providers that have had big increases have also shown their cash flow and receivables are negatively impacted by those..

Your next question comes from Matthew Gilmore from Robert Baird..

Hi. Thanks for the question I wanted to ask about future debt repayments. And I think you have got additional flexibility in terms of divestiture proceeds with the recent refinancings.

So how should we think about how those will be applied? Do you have to put those to the Term Loan H? Or can you buy some of the senior notes in the open market?.

So we are required, we had a grid right now that's based on our first lien leverage and until we get below 4.25%, 100% of our asset sale proceeds effectively have to go to paying down Term Loan H. And so that's where we expect we are going to be at least through the rest of this year.

We do have some flexibility depending on our EBITDA performance and the timing of the divestitures. That could come down quickly thereafter and then that would give us, if it's down below 4.25%, we get to keep 50% of the proceeds to use at our discretion.

So that does open up other options for us on what we do with those, how we invest those proceeds, what debt we pay down and other considerations. So we are going to be operating the grid but just to emphasize, this year we expect 100% of the proceeds to be going toward debt repayment of Term Loan H..

Your next question comes from Gary Taylor from JPMorgan..

Hi. Good morning. A two-part question.

First was, I know you said there was no material legal update, but given where we have kind of been talking about the liquidity and refinancing and everything, I wondered if you could give us any sort of thought on when you might have to pay the legal liabilities that you have estimated and accrued for? Is that still potentially years away? And then second part was, I think Tim mentioned stronger outpatient surgeries.

I wondered if we could get a number on that same-store and then a little discussion of what types of procedures and payor mix..

Gary, I will handle the first part and I will give Tim the question on the surgeries. So that is still proceeding. We have it classified as long term right now. And as we mentioned, we are talking with several departments of the federal government on that.

So no real updates on that and we likely would have flexibility on that, we are not to this point yet, but I do know that there is opportunities to either pay upfront or we could use other methods on that. So no real update on that for you. Tim, I will let you on talking to surgeries..

Gary, on the surgery line, we did see improvements on the outpatient side. The biggest driver of outpatient surgeries was actually the migration of total needs from Medicare inpatient to outpatient status with the regulation change. That was a key driver and that pulled through to the adjusted admissions line as well.

So even though it doesn't show up as an admission this year, it's still showing up as an adjusted admission. We have seen core strength in the orthopedic service line overall on inpatient and outpatient, netting of the TKAs.

But on the neurosurgery side going to the inpatients and cardiovascular procedures like TAVR, robotic surgeries, we have seen growth in all of those categories as part of the service line and acuity focus that we have been referencing.

So just in general, we believe we have got a stronger group of surgeries coming in to our hospitals based upon the medical staff development, the service line design, all the things that we put into place as part of our strategic framework for each individual market..

Your next question comes from Justin Lake from Wolfe Research..

Hi. This is Steve Baxter, on for Justin. Thanks for the question. I wanted to ask about payor mix in the quarter. Managed care is up about 100 basis points year-over-year and 180 basis points quarter-over-quarter while self-pay was down pretty significantly. And you mentioned the stuff you are doing around denial rates and point of service collection.

But I was wondering if you could maybe size the things that you see as being driven by your actions versus the underlying trends in your markets or anything unusual in the quarter? And then to that extent, any color on the trends in your market would be helpful. Thanks..

Sure, Steve. So the numbers that I provided, the consolidated and same-store, that's payor mix by net revenue. So when we look at it from a volume standpoint, adjusted admissions, managed care, when we look at that, excluding Medicare Advantage was flat. Medicare advantage was up about 7%. Our Medicare Fee-For-Service was down about 2.5%.

Combined Advantage and Fee-For-Service, it was up about 0.5%, Medicaid was down 2.1% and self-pay was up about 2%.

So one thing we can see on this with the revenue model that we are using now and our self-pay, just the better data that we have and with what you mentioned the point of service collections there, I think we are getting more timely information on being able segregate those on what we can actually collect on and what we should pass on to collection.

But that ought to help. We did have, from a rate standpoint, really with the absence of headwinds from state supplemental programs, our Medicaid reimbursement did improve..

Your next question comes from Steve Tanal from Goldman Sachs..

Thanks a lot guys. I guess sort of related to that question, maybe Ana's as well, I guess I am just trying to understand the connection between patient receivables being negatively impacted with higher same-store net revenue growth.

Is it a payor mix issue? Or is that something else, especially in light of the new accounting rule? And then I guess separately but related as well, I would be curious to understand the higher revenue outlook despite the lower admissions? How should we think about the drivers of that? Thanks..

Well, so the higher revenue is basically, when we look at our net revenue per adjusted admissions, we have had a lot of initiatives, service line focus that we have been emphasizing probably over the last year. We started to get movement. For about the previous four years, our net revenue per adjusted admission was about 1.9% to 2.1%.

We started get some traction in the fourth quarter, I think it was up 2.7%. We have now been at 3.5% for two quarters in a row. So when you have got that much in your rate and we are getting near flat on adjusted admissions, that's going to cause your revenue to grow.

So we are comfortable that the rate we are getting is going to exceed if we go backwards on the volume side. So that's what's driving the revenue side And I forgot the first part of the question there. Okay. The AR stepping up.

So the point I was trying to make is, if you have got declining revenue, we did have that second quarter of last year, declining same-store revenue, one, you are going to be collecting all the receivables. Secondly, you are not going to be adding receivable in the same amount with declining revenue.

When you contrast that with where we are this year, increasing revenue of 3.3%, you are going to be building receivables and that negatively impacts your cash flow on the accounts receivable, especially relative to prior year.

And as I mentioned, I think when you look at other providers who have grown revenue, you will see the same phenomenon on their cash flow statement,.

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

Thanks. You guys talked a bit about on the cost side, making progress on SWB, seeing more opportunity at supply savings. I guess, when the divestitures are done, where do you think the margins can ultimately be? And there has been obviously some conversations so far on this call about operational improvements heading into the next round of financing.

I guess, in three years, where do you think that ultimately the margins of your ultimate portfolio can get to?.

Well, we have got some internal goals. We want to get our overall leverage down and we think some of that is going to be through expense management, but really the primary driver is going to be a volume play and getting rates. And so obviously we are managing that.

Tim, I will let you address and emphasize some of the things on the volume side that we think long-term are going to be driving our revenue and volumes..

Sure. Again, I keep speaking to the service line strategies, but really drives those service line strategies is the most important component and that's the physician recruitment results.

We have reported over the last several quarters, our focused on targeted physician recruitment to drive primary care in our markets, but also attracting the right specialists so that we can reduce out migration and also steal still market share in markets from we may be transferred out or losing it.

We have had strong, strong physician recruitment results. Commencement is up over 20% year-over-year through six months. Our non-same-store practices in our affiliated clinics have a very robust group of doctors. We are up about 100 more than we were the same six months last year.

So those are all physicians and practices that are in the ramp-up phase, which are showing us some sequential opportunities. We just continue to work on building those practices through our transfer centers, our outreach program, making sure that patients know we have qualified physicians in their community to provide care.

So again, we have a strong, strong pipeline of doctors. On top of what we already have commenced, we have signed more doctors this year than we had in previous years. We have a strong class in the pipeline. Almost 200 more doctors ready to commence that have already signed agreements.

So our optimism comes from the fact that we really have built strategic plans, fixed service line strategies and have doctors to fulfill them..

As well as, don't forget our divestitures will give us a lift since those holdings have relatively low margins. So we will get a lift out of that as well..

Our last question comes from Peter Costa from Wells Fargo..

Good morning. Thank you.

I wanted to ask you about, a couple of your large nonurban hospital operator competitors are coming together and with some private capital coming in, do you believe that will impact your ability to any of the divestitures you still have to do or the prices you will get for those divestitures in a positive or negative way? And alternatively, do you think that changes your view of your desire to do another round of divestitures really last rounds or really to lower your free cash flow needs, but perhaps going forward to do more divestitures to pay down debt? Is that something that you would consider at this point?.

So on the first question, in terms of private capital and large markets, we have been working pretty hard to differentiate our markets and get to sustainable markets. So we feel very couple in markets we are in. We are highly competitive in those markets. I don't think that's an issue for us kind of going forward.

On the second question, we have been working on our divestitures over the last couple, two, three years. I think we have refined the process down to the point that we know which facilities will work for us long-term. More importantly, which markets will work for us long-term.

So I think where we think we have a sustainable group of hospitals in sustainable markets, which I have said several times, that work for the future and it will generate growth for us..

Peter, I would just add, when you look at the buyers of our hospitals, most of them had been strategic buyers and trying to build out their market and their bargaining power with payors.

And when you look at what our understanding is more rural hospitals in those two companies in that transaction, I am not sure many of those would fit that and they have not been a buyer, by the way, of our hospitals. So anyway, I don't think that's going to be much of an impact..

The thing I would add to this in terms of comments is that we have a substantial number of markets now that are showing outstanding performance. There are a number markets that we have that will perhaps still have opportunity for growth.

But we are beginning to see all the strategies we have put in place and the operational effort of our executives in place and all the great physicians across the country that work within our facilities, we are seeing good improvement in those facilities as well. So we still have opportunity left.

But we are seeing good performance in a number of our markets..

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

Thank you for spending time with us today. We are very focused on the strategies we have outlined today. We want to specifically thank our management teams and staff, hospital chief executive officers, hospital chief financial officers and chief nursing officers and the division operators for their continued focus on operating performance and quality.

This concludes our call for today. We look forward to updating you on our continued progress throughout the year. Once again, if you have any questions, you can always reach us at 615-465-7000. Thank you..

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