Community Health Systems, Inc.
Q2 2014 Earnings Call Transcript

Published: 2 Aug 2014

[Operator:]

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Community Health Systems Second Quarter 2014 Conference Call. (Operator Instructions) Thank you. Mr. Michael Culotta, Vice President, Investor Relations. You may begin your conference.

[Michael J. Culotta:]

Thank you, Sharon. 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 historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussions. We do not intend to update any of these forward-looking statements. With that said, I would like to turn the call over to Mr. Wayne Smith, Chairman and Chief Executive Officer. Mr. Smith?

[Wayne T. Smith:]

Thank you, Mike. Good morning, and welcome to our second quarter conference call. Larry Cash, our President of Financial Services and Chief Financial Officer is on the call today, as well as David Miller, our President and Chief Operating Officer; and Lynn Simon, our President of Clinical Services and Chief Quality Officer After the market closed yesterday, we issued an 8-K including a press release with our financial statements. For those of you who are listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. I’m extremely pleased with our financial operational performance results, we are able to achieve this quarter. This is the first quarter that we have reported our combined operations with HMA for a full quarter. I think you all agree that our results have much improved over the first quarter. We are accomplishing our goals as the year progresses. Our year-to-date results consolidate the results of Community Health Systems and the CHS 14 facilities from and after January 27, 2014. Prior year second quarter and the year-to-date historical financial information includes that of CHS only. Same-store results reflect HMA’s performance for the second quarter of 2013 and for the year-to-date performance from February 1 forward for both 2013 and 2014 as well as for CHS for all three months and six months respectively. For the second quarter our net operating revenues increased 50% on historical comparison $4.8 billion, adjusted EBITDA increased approximately 66% to $699 million, on a sequential basis our adjusted EBITDA grew 29%. The year-to-date comparison and our net operating revenues increased 39%, on historical basis to $9 billion, while our adjusted EBITDA increased approximately 36% to $1.2 billion. Our adjusted earnings per share from continuing operations for the quarter was $0.74, all calculations exclude the costs associated with HMA acquisition and transition cost the amortization of abandoned software cost and the CVR legal expenses. First, let me discuss what we have been focused on as it relates to the various reports about the Veterans Administration Health System. As a former veteran of the armed service, I’m personally pleased that we are committing our resources to help those who have served this nation. All of our hospitals and physicians are expected to be in network for the patient-centered community program. There are approximately $3.1 million veterans in our service areas of which about 45% of these veterans are located in locations that are over 40 miles from a VA hospital. We have identified direct outreach programs of these veterans to inform them that we are in their communities to meet any medical needs that they may have. In addition to our local CEOs have reached out to their periods of the local VA facilities to offer any systems that we can give. 63% of our hospitals are located 40 miles or greater from VA hospitals. Moving on to the political arena, I just want to make quick observation going into the busy election season and impact on the states enacting legislation under the Affordable Care Act. As many hospital systems have reported, hospitals are seeing an important expansion in terms of reduction in the percentage of self-pay admissions and ER visits in those states that have expanded Medicaid versus those states that have not expanded. Of the 29 states that we have in hospital we have hospitals and 12 states have taken action to expand Medicaid and several are seeking to implement expansion in the near future. These 12 states only represent about 23% of our revenue. Our hope and expectation is that as these states that have expanded Medicaid continue to see the benefit of their most vulnerable citizens having access to care as well as economic benefit of $1 billion in new federal funding. They are moving on expansion states will come around and seeing the importance of benefits of the expanded coverage. And I believe the likelihood of seeing movement by political leaders in these states will improve significantly after the election cycle once they are able to focus more fully on the changes facing their states. Simply stated expansion is the right thing to do for these less fortunate. Now turning our attention to HMA integration, David Miller continues to do a great job of focusing on our resources, on getting the acquisition fully integrated and working with Dr. Lynn Simon on our quality and clinical initiatives. We believe we will now achieve $100 million to $125 million synergies in 2014 and $250 million in total over a two year period. We have estimated that we have achieved $35 million in synergies at this quarter and now $47 million (indiscernible). The majority of these synergies have come from reducing duplicative functions at the corporate level, renegotiating or canceling redundant contracts, quality case management initiatives and supplies and purchasing in compliance with our purchasing organization, a good purchasing organization. Let’s now discuss our physician recruiting efforts, as always we are very focused on physician recruiting. We have over 22,000 physicians on our medical staffs which approximately 3,300 are employed. There were 790 positions that were recruited to our active medical staffs this quarter. On a year-to-date basis over 1,400 physicians have been recruited to our active medical staffs. We are extremely focused on further expanding our physician base. This will be widely important as we the Affordable Care Act is further rolled out and accepted. Dr. Lynn Simon and her team are focused on patient safety and quality and we are seeing continual improvement in these areas. We began our high reliability and safety focus in 2012, by the end of 2013, we have reduced our serious safety events by 15%. This has improved over 23% reduction through the first quarter of 2014. In addition and according to the CMS preliminary data released on the hospital-acquired condition payment penalty program, CHS will have a similar percentage of hospitals penalized under the program will have a smaller percentage of hospitals penalized under the program than other investor-owned hospitals. As we’ve previously stated on our earnings call, we’ve completed two acquisitions on April 1, Sharon Regional Health System, a 158-bed licensed facility located in Sharon, Pennsylvania, and with 22 satellite centers and Munroe Regional Medical Center, a 421 licensed bed facility located in the California, with outpatient ambulatory center located approximately 10 miles west of Ocala. Two of other acquisition opportunities have been made public, our Natchez Regional Medical Center, a 179 licensed bed facility located in Natchez, Mississippi and MetroHealth Corporation, a 204 licensed bed facility located in Grand Rapids, Michigan. These two facilities have combined revenues of approximately $350 million. We’re estimating that these transactions could be completed latter part of 2014, which is later than previously anticipated. In addition, we’re working on acquiring a small hospital in one of our facilities. Also we’ve concentrated on our efforts to expand our presence in non-acute areas through affiliation and joint ventures as well as other new revenue initiatives, we’ve developed collaborative arrangements in the retail clinic area, and are currently in discussion with several urgent care providers regarding affiliations and partnerships. David and Lynn our operations executives are working on our service line enhancement initiatives, we’re focusing on clinical services such as orthopedics, emergency care, cardiology and neurology along with acquisition practices within each we’re standardizing specific programs, and the clinical approach to care we’re utilizing quality bench measures marks to monitor performance and measuring operational efficiencies to reduce cost, enhancement of a specific clinical service line is tailored to each hospital market or practice focusing on particular opportunity for growth and core strengths of local organization. Physician recruitment efforts are aligned with this process. While most are hospital-centric at this point, the structure of this initiative is to purposely position to extend each service line to connect to other care settings, telemedicine will also be utilized our strategically support our service line enhancement initiatives. As an example, 14 hospitals have initiated our standard orthopedic program and approximately another 20 will do so by the end of the year. In the area of emergency care, we are initiating transfer centers and have developed processes-enabled enhanced access for specific patient populations and for EMS providers. Our physician practices are engaging in outreach programs to increase patient access for preventative health services and to help eliminate care gaps for chronic disease states. We anticipate favorable results from these initiatives as the year progresses. We believe we are very close to reaching a complete resolution of the Department of Justice investigation of CHS hospitals that began in 2011 with respect to short-stay admissions of ED patients. We’re comfortable with the reserve of $102 million that was previously established and believe affordable announcement could be made in the next few weeks or maybe even a little sooner. While we continue to believe that our conduct was appropriate and the submission of claims was defensible, we also recognize it is in the best interest of our Company and shareholders to put this matter behind us and are pleased that we could resolve the matter without the expense and uncertainty of formal litigation. With respect to the HMA cases, our legal teams are continuing to work with government lawyers on many areas. While some of the smaller cases have been resolved, there’s still much work to be done to understand the claims in the key TAM cases that were unsealed in December of last year. There is a stay in effect in the multiple district litigation until October to give parties time to try to work through an informal discovery process. While we believe that good progress could be made during the next several months, we do not believe we’ll reach a final resolution of these cases within that time frame. Larry will review the reserves and accruals with respect to these cases and the impact to the CPR. We are adjusting our 2014 guidance in a few places. We are maintaining our ranges for net revenue, less provision for bad debts and adjusted EBITDA. Those will remain at $19 billion to $19.8 billion and $2.825 billion to $2.975 billion. Larry will now discuss further our results, the effects of Affordable Care Act, and provide you with other information on our 2014 guidance. Larry?

[W. Larry Cash:]

Thank you, Mike. We believe our same-store information for the second quarter are providing us more meaningful and thus we’ll predominantly discuss same-store results for the second quarter only. The same-store numbers for 2014 reflects the synergies previously discussed. All the comparisons will be to the second quarter of 2013 unless stated. And of course, information will be discussed and excludes integration and merger costs of approximately $12 million, the amortization of the software we’ve abandoned of $33 million and legal fees with the HMA government investigation related to the contention value rights of approximately $10 million. The accelerated amortization of software to be abandoned relates to our corporate integrated decision to replace CHS legacy IT systems with Cerner we began use in 2013. Just on an informational basis, year-to-date basis, these adjustments are integration merger costs of approximately $65 million in legal fees with the HMA government investigation of about $30 million and the accelerated amortization is another number. It’s about $75 million. Our same-store admissions declined approximately 4.8% or approximately 11,600 admissions. The second quarter same-store admissions improved by 330 basis points from the first quarter. Some of the reasons why we have declined

[Wayne T. Smith:]

We are very pleased with what we’ve accomplished this quarter as you can tell from my earlier comments we are focused on expanding our markets (indiscernible) volumes. We have so many opportunities within, with continuation to rollout the Affordable Care Act, opportunities to grow former HMA assets including synergies that we are achieving, our opportunities to de-lever our balance sheet and our operational and clinical initiatives, As always we continue to focus on enhancing quality, building stronger physician relationships and including the increase in physician recruiting and doing what’s right for our patients. I’d like to thank all the physicians and nurses and support staff for tremendous support in this growth. With that we’ll open the call up for comments and have to get more calls in, we would like to limit one question and one follow up question, so others can have time and have further follow question is always and we are here to take a calls and you can reach us at Eric 0615-465–7.

[Operator:]

(Operator Instructions) Your first question comes from A.J. Rice from UBS; your line is open,

[A.J. Rice:]

First, on the Medicaid experience you're seeing, is – in the expansion state so does it step up and then sort of plateau? Are you seeing continued progression as the year goes on and you made the comment about ER visits, I'm wondering on that Medicaid expansion, can you see anything that suggests there's an uptick in volume among those people that adapt the benefit?

[Wayne T. Smith:]

We will continue to see each month in a quarter Medicaid improvement of both admissions and suggestion should each month got better over the preceding months, now we do have a little bit of a phenomenon about the Medicaid pending from the first quarter, some of that probably got processed as Medicaid and was in self-paid before. From an ER business we saw continue improvement much more on the Medicaid side, throughout the period and continues to get better and our ER admissions were up a great amount more in the markets where we have Medicaid expansion than they were, I think they were up about 5% versus the – company average of 1.3% expansion states, and I would expect the Medicaid, you can continue to enroll people. Clearly I think we will continue to see some benefit happening in the – we continue to see the growth throughout the quarter.

[A.J. Rice:]

Okay. And then real quick, my follow up would be around the walk forward. I appreciate that. The one item there at the bottom, the $85 million, can you give us maybe just a little flavor on what that represents? Is that snapbacks from the under-performance in the businesses last year that you are trying to capture there? And I guess the walk forward works up to the low end of the guidance range. I think you alluded to it in the prepared remarks, but what will be some of the things that could get you to the higher end of that range or even – you even alluded to some upside maybe. What would be the swing factors in your mind?

[David L. Miller:]

Yes, let me do the swing factors first and I will probably give you four categories, maybe Dave will want to speak a little bit more volume and the initiatives. The swing factors of the Affordable Care Act – we had about, little $10 billion to $15 billion in the first quarter, and now you got an increase of $30 million or so to $35 million in the second quarter, I think it’s going to continue. I think you also got to keep in mind, it’s changed enrollment group, it was about 10% or 15% higher end of the quarter than it was on average so that's going to probably be beneficial there and probably that will slowdown and shouldn’t go any higher after the third quarter, but the length mitigate will the second item would be, we got the benefit of the synergies, we’ve already done, I think we actually started in $80 million, correctly a year ago and we went to $100 million now up to $125 million we continue to focus on that. The HITECH, we didn’t go out with the high end of the guidance there, just on the fair amount of expenses, we didn’t quite get the benefit in the second quarter as a result of expenses, we think we can manage the expenses little better and also continue to work on that area. The other category on the bridge of $85 million, we’ve actually got four categories, we are working on one of the productivity which did a good job and we think we still got more opportunities on a combined basis there. One is the improvement on physician practices, the Wayne refer to about getting more volume and productivity there. The volume and the activity we got a lot more physicians that were recruited over the year which Wayne just referred to. And then we also get the normal benefit of the managed care increase which runs 4% to 6%, when you think about that and we’d also got some good progress start to be made on some of the generic contracts.

[Wayne T. Smith:]

Yes, let me just before David jumps in here. There is other couple of other things as I think we are pleased with what we acquired in terms of HMA, we think we got a good facilities in good locations and great opportunities in those facilities so, that will as time goes along and hopefully sooner than later we’ll see an uplift from that. But I can tell you that we’ve been very focused in terms of our volume initiatives and tying our quality initiatives and volume initiatives together so that we made great progress in both and doing a better job of delivering the services improving our physician relationships which is already very good as well as looking for opportunities in each one of our markets and thinking about who we work on our networks and expand our networks which we’ve been talking about for long time. I asked David, just to quickly list a summary of our volume initiatives because things important to understand. These are the things that we are working on and these are the things that we think will make a difference over this next, this risk this year and into next year and into the future.

[David L. Miller:]

Thank you, Wayne. Our volume initiatives really fall into two categories in the near-term what we’ve done is identify several priority hospitals in each division where the performance has been less than one would have expected and with folks retention we are already seeing improved results from those facilities. Under longer term, we are pursuing several different initiatives one would be service line enhancements, we are working to strengthen our physician practices, we are working additionally with new technology and telemedicine and the network development that Wayne just mentioned. One example might be in orthopedics we referred earlier in the call to the fact that we have 14 programs in place and we have 26 more programs that will come online by the end of the year. In those programs that have been in place for more than a year, we’re seeing our case volume increase anywhere from 10% to 23% in those facilities. We also have a pretty comprehensive initiative in emergency care, we are partnering with our EMS providers, those folks are key to our success that EMS calls result into patients coming in our ER or about 14% of our ER visits and we have just completed a survey with 3300 EMS providers, and we’ll be responding to their request for improvement and we think by strengthening that relationship the EMS business our facilities will be enhanced. We have also as was noted established four transfer centers in our system in the last quarter, those have been in Pennsylvania, Texas, Florida and Oklahoma. With those centers you have better coordination of care, you’ll make sure that the patient gets in the appropriate setting and it will help to further set up our support to networks, we set up in these respective markets. We also have a marketing campaign that just completed in the ER. We had two different simultaneous plans being promoted and in those markets where the programs ran we saw increases in ER volumes of 3% to 5%, and again as Larry pointed out there are other things like Medicare expansion and probably has helped facilitate that growth in ER, visits. We’re strengthening with our physician relations and physician practices Dr. Simon is employed, two new key physician, Dr. Pete Powell, who came to us from the Vanderbilt system, and Dr. F.J. Campbell, who came to us to us HCA. Those gentlemen have been on board an already we are seeing progress in the initiatives there introducing to our company. We have new technology that we have introduced in 300 of our precision practices, while this technology helps us identify care gaps and assist with employments and we have other systems as well they are there are automated and what we are seeing is great completion rate when we contact patients and schedule of business in our clinics. Additional emphasis into our physicians liaison program, we have 80 of those existing programs right now and we will have 20 more additional programs in place by the end of this quarter. So those are just a few of the items we are working on.

[Wayne T. Smith:]

Thank you, and David. Sorry A.J. this has taken so long for us this answer but we just wanted to get out all the initiatives that are in place here to demonstrate that we are singly focused on making sure that we improved the core operations of this company going forward and it’s a good time for us to do all these things particularly since we are integrating HMA.

[Operator:]

Your next question comes from Gary your line is open.

[Gary Lieberman:]

There's been a fair amount of discussion by some of the other companies that have reported about the impact of the economy on the quarter. What's your take on how significant the impact from an improving economy was on the quarter?

[Wayne T. Smith:]

One of things I think you, I don’t know what. I don’t really what [Lipoint] (ph) said about the economy business, it certainly is more robust than it did in the smaller markets. I still think that even though the unemployment rate today I think was 6.2%. They are still not the real unemployment rate. Yes, I think there is improvement but I think clearly there is a long way to see substantial improvement and to see a larger increase in terms and I don’t know that we will now cause dynamic change in terms of commercial side of it, which is one of the indicators. Larry, you want to….

[W. Larry Cash:]

Yes, I went back and look from May of 11 through 14 actually the employment growth was between 4.5% and 5% and we are about 3.5%, so we are seeing some employment growth over that period of time. I think another element is it appears to managed care companies commercial enrollment start to grow over and above just Affordable Care Act and our historical process is sand is the commercial enrollment growth we’ll see some managed care utilization, we are not going to get into all the specifics but if you look at our legacy hospitals they clearly had a good pair and growth managed care this quarter and I do think we probably had a little bit of uptick from that. But then of course lot of that is existing our self-pay business that sound we already head of business getting is either Medicaid or just change the systems problem there is some uptick in the utilization from that. But I still don’t think it’s – I think a lot of them has to just to (indiscernible) company.

[Gary Lieberman:]

Okay. And then maybe you could talk a little bit about the impact of Medicaid pending in the quarter. There was a fair amount of focus on it last quarter. How did that change sequentially?

[W. Larry Cash:]

Medicaid penny did come down in expansion state and it also came down in non-expansion states. It didn’t come down as much as it’s gone up the since the beginning of 2013, we think we thought of non-expansion state sort of stabilize expansion state, it’s just still up. That does have a tendency to maybe overstate one quarters worth of Medicaid growth and decline in self-pay and we’d probably see similar activity going forward. And I think we took a backlog I think in the low (indiscernible) we the processing has gone a little slower, so it did improved but it’s still not back at the level where it was at the beginning of the year.

[Operator:]

Your next question comes from Brian Tanquilut from Jefferies, you line is open.

[Brian Tanquilut:]

Wayne, just a first question for you, as you look at the HMA portfolio versus the legacy CHS portfolio, is there any color that you can share with us in terms of differentiation in the performance, I know you’ve rated your synergy guidance but, you can also like pass through what you’re seeing that prompted you to raise the guidance at this point?

[Wayne T. Smith:]

I think one of the things depends on, you view this but our philosophy in terms of where we operating so standardized and centralized and work through process is one of the things obviously we found that HMA, had a number of issues related to processes, had number of issues related to physician relations. There is a lot opportunity, but generally speaking, they’re good markets. And clearly they’re good people, they’re working hard every day. And they are very cooperative and want help in terms how we can improve and enhance the quality and patient experience and improve the productivity and performance of the facility. So, I think we are pretty positive about where we are with this acquisition we are further here today, than we were with Triad. And you know Triad was a not as problematic, but of course because it came out of HCA. Those were well run facilities, so it’s little bit easier than this. But we found lots of issues, but lots of issues create lots of opportunities.

[Brian Tanquilut:]

Then just comparing your legacy assets versus HMA?

[Wayne T. Smith:]

I would say that our legacy facilities are – we’ve been running those facilities for a long time. It’s totally different operation mentality, but it hasn’t taken very long to get HMA into that mentality. HMA is very independent individual, facilities were very independent. We work as a system together. That’s going to change to try to develop that and work through that. So that’s probably the biggest issue. There’s a lot of little things, but most of which – facilities are good facilities. The main thing that we needed to do, which we did very quickly was eliminate that couple office buildings in South Florida and that happened real quickly as you all know and I think we’re on the right track.

[Operator:]

Your next question comes from Kevin Fischbeck from Bank of America Merrill Lynch. Your line is open.

[Kevin Fischbeck:]

Okay, great. Thanks. I guess, Larry, you mentioned that pricing was 1.7%, it sounded to me like you were saying that it was huge because last year it was core Community, and this year it was pro forma HMA. Is that right or were you saying that HMA’s pricing is lower than the community spend?

[W. Larry Cash:]

The 1.7% would have been higher, it had been CHS legacy by itself. We’re not going to get acknowledge individual statistics, but it had been close to 2.5%, 3% on the legacy. The HMA revenue per adjusted admission, I think, we’ve said this on conference calls before, it’s about $1,000 last what we thought CHS was. We did due diligence, probably $800 or $900 a day. And I think that’s an opportunity. If you go back and look at HMA’s revenue for adjusted admission, it was up 5% or so, I don’t know, 11% or 10% – 6%, 12% over 11% and it was a negative last year and that sort of has continued. This is one of the opportunities, I think, we’ll make some good progress on managed care and also payor mix and the physician improvement. HMA sort of lost a lot of its physician recruitment momentum that Wayne talked about earlier. They recruited about a third of what they did in 2010 and 2013, but we’re trying used to say I think it’s going to take us a while we get back up to the 3% to 4% which we expect to achieve

[Kevin Fischbeck:]

Okay. And then just as far as volumes go, you did a good job explaining all the initiatives that you have going on there, but just as a big sequential ramp from Q1 to Q2. Can you talk a little bit about what types of volumes? Kind of explain the acceleration. And why you feel like it might be more sustainable.

[W. Larry Cash:]

Well, a couple of things. One, the was the biggest hit in the first quarter and it was a smaller hit this quarter. We also had the issue. Readmissions were a bigger hit in the first quarter, they dropped back down in the second quarter. And weather was a challenge from remission perspective more importantly outpatient surgeries improved nicely, outpatient revenue improved nicely, outpatient revenue improved nicely in the quarter and most of all our operating units physicians had improvements in the second quarter, first quarter, but we did benefit from those categories. But I’d say outpatient was a bigger improvement than the impact of inpatient component of it. I think orthopedics was one of the categories we saw some improvement in the second quarter.

[Operator:]

Your next question comes from Darren Lehrich from Deutsche Bank. Your line is open.

[Darren Perkin Lehrich:]

Good morning everybody, so I wanted to just ask about the synergy numbers, they look very good. You’re describing I guess, it’s an area where you’re, clearly you are going to be exceeding the first year of guidance there. I guess could you expand a little bit more on what areas you down a little bit more success from a synergy perspective. And I guess at this point you’re still keeping to the 250 numbers, so is there any sense that you might want to change that?

[W. Larry Cash:]

Well, clearly 250 comparison 275 for, you’re right that there’s more hospitals, there’s 20 more hospitals, and seven years later, the larger corporate office, so that’s something we’ll think about as we think about 2014. But the 250 when compared to Triad looks like there’s some upside, and we’ve already moved to that $45 million what we originally said. About 40% were probably payroll, and 20% would be in a category of suppliers, and probably 30% the contract and case management categories I’d split like that. I think Wayne has already referred to the fact that the corporate office there which was probably a pretty good size corporate office, 250 people or so, and now it’s down to a limited number of people. So, that’s part of where some of that opportunities come. And we still continue to work on the supplies and contracts and things of that nature.

[Wayne T. Smith:]

Yes and one of things that’s helped us is the fact that the HMA, all the HMA employees and physicians very receptive and enthusiastic about working with us on our initiatives. So that’s why I say we’re moving faster than we have been doing with Triad on this, because they are so corporate and they’re so anxious to have our help to work through these issues. So that’s a big positive that’s coming out of all of this.

[Darren Perkin Lehrich:]

Yes, that’s great. One Paul, if had just Larry you can talked about HITECH, you’re seeing 260 in terms of meaningful use payments. Can you just remind us how you’re thinking about the EBITDA impact for the balance of the year and then just stepping back on how should we thinking about the next few years, given that the program winds down. And do you think you’re getting productivity or margin offsets from all this investment? Are you seeing any evidence of that?

[Wayne T. Smith:]

Two things one I think we have about $65million or so in the first half of the year without comp. And we improved about $20 million which (indiscernible) they were for the year. We will drop down in incentives, but also there is a tremendous amount of money being spent on training and consulting help us try to do it. I think that will help offset some of the drop into the dark. I do think there will be the opportunity once the convergence are done, once you’re passed and once people use it. We should be able to improve the supply usage delay up testing, and radiology testing and hopefully some of the productivity. We have not proven that yet, nor is there any more embedded that was our state ago, we started about three years ago, was to put these systems in and also get some productivity. And I still think that can happen, but it has not happened yet.

[Operator:]

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

[Ralph Giacobbe:]

Thanks, morning. Just want to go back to sort of the managed care contracting, may be even outside of the exchange. Can you give us a sense what percentage of the contract I guess are negotiated for next year, the rate? And then whether that’s combined kind of community HMA at that point. Or there is further opportunity I guess to capture those top line synergies?

[Wayne T. Smith:]

Yes all the contracting efforts are combined now. They were combined pretty quickly, we’re about 70% done for 2015. I think we will be inside of range for what we said in 4% to 6%. We have got some specific contracts around HMA. We are working on to try to do better, to try to get the revenue by just putting submission up, but we are about 70% done right now for 2015.

[Ralph Giacobbe:]

Okay, and then just a follow up obviously you have a broader footprint, largest number of hospitals versus peers. I guess first can you give us sense of whether there are hospitals right now that are running at negative margins. May be what percentage of the portfolio that makes up to extent that you have them? The trajectory of improving those and may be early at this point, but just given the integration with HMA, but any thoughts on may be paring down the portfolio and how we should be think about timing around that? Thanks.

[Wayne T. Smith:]

I think you should think about we just acquired this company in January. So it’s a little early for us to think about any other strategy right now. Other than the fact that we’re always evaluating where we are, what we’ve got, what works best for us, what works best for the future, what works best for our shareholders. So, as you know, we’ve been optimistic in terms of acquiring facilities and after we brought Triad, we had a few facilities that we sold. So, I think it’s too early for us to make any of those kinds of determinations, but I think we’re pleased with that we have and I think we will try to maximize the opportunity here in terms of networks and how we utilize the size of its portfolio to enhance and improve our productivity across the country and our delivery system. But, you know, as usual, we’re always thoughtful about this and it’s just too early to tell for us to make any determination about that now.

[W. Larry Cash:]

There are about 10 facilities discontinued right now, so that (indiscernible) start to make some progress on that, because several of those are low margins or no margins.

[Operator:]

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

[Frank Morgan:]

When you think about the legacy community versus the HMA assets, clearly it appears that the HMA assets were underperforming. I’m curious, would that have in any way affected their benefits from the early stage of the Affordable Care Act? Were they in a position to go out and do the outreach as soon? So is there potential for more impact from the Affordable Care Act out there that still remains for HMA relative to where community is?

[W. Larry Cash:]

They did not do the outreach efforts in the fall of 2013, had a lot of things going on then and that was not one of the things that we’re working on. And during their diligence, we brought it up and thought what we’re going to do, but they clearly out on that opportunity. We have made conversions at our hospitals to some of our eligibility screening service vendors internally. We’ll be much more prepared in 2014 than they were in 2013 and I think we’ll get perhaps a little better result. Notwithstanding looks like Florida, has had some benefits, is one of the states we would see stuff on, but I do think we’ll have a better result and hopefully we’ll continued to work on, try and get some other states expanded. They’ve got a smaller number of states percentage-wise than CHS legacy have. But, clearly, we did send out some letters in January when we owned it, but it was probably too late in the process to get much benefit from.

[Frank Morgan:]

Did they see a slower ramp on the Medicaid expansion states than you did?

[W. Larry Cash:]

They had much lower ramp, yes. The Medicaid, you get some of the effort by people coming into the hospital, which you can do, but you also can do some outreach and they’ve got a little bit slower ramp. We do track it and we are having a much more success with CHS legacy, which we’d just say next year around hopefully we’ll see a better result out of those locations.

[Operator:]

Your next question comes from Justin Lake from JPMorgan. Your line is open.

[Justin Lake:]

Thanks Good Morning. First question just on the VA. A lot of us just trying to figure out what the potential impact might be from greater VA spending on private facilities. Anything you can do to help us there in terms of proportion and potential benefit there in 2015?

[Wayne T. Smith:]

Well, we seem to be pretty well-positioned for this in terms – I’m trying look for my numbers here. We are pretty well-positioned in terms of this. Larry, help me out here.

[W. Larry Cash:]

Yes.

[Wayne T. Smith:]

There’s about 3.1 million veterans in our areas. And about 63% of our facilities are located outside the 40-mile area. So there is certainly an opportunity for us and we’ve been working at this pretty hard now. From the first time that we heard this, and Larry, some reason, I think there’s about $60 million or so…

[W. Larry Cash:]

$63 of revenue and about 175 were hospitals. We went back and identified, and as Wayne just said that, based on the statistics he gave, it could be a decent opportunity here.

[Wayne T. Smith:]

Not only have we visited all the VA facilities, we’re working with it. We’ve relationships with them before. So we’re working on those relationships. We had to force to try to enhance our ability to make appointments in all the above. So hopefully we will see something out of this, but it’s yet to be determined.

[W. Larry Cash:]

We do consider ourselves pretty much going to be in that work from their previous program or what the VA would offer us referrals. That should help you as I look for ways to speed up the care and get it done, if you happen to be a network provider, although you don’t necessarily need to be a network provider on the outside of 40 miles.

[Justin Lake:]

Got it. So you said $63 million of revenue currently in the VA?

[W. Larry Cash:]

Yes, right.

[Justin Lake:]

And so it takes double the amount of spending they do out there with outside facilities. Is it reasonable to think your VA revenue might double or is there some other proportion?

[W. Larry Cash:]

It’s reasonable, but it’s real early to say how they all authorize and how they do it. I mean currently there’s lots of effort from an outreach effort as one I just said. We’ll try to do that. So we do see there’s an opportunity.

[Wayne T. Smith:]

We don’t have high hopes based on past experience that the government will administer this all that well either.

[Operator:]

We will take one last question. Your last question comes from Whit Mayo from Robert Baird. Your line is open.

[Whit Mayo:]

Thanks for squeezing me in. I might strike out on this, but I’m going to give it a shot, Larry. If I take the second quarter from last year and take HMA’s second quarter, it looks to me like pro forma, you had roughly $600 million of combined EBITDA. If I then back out the two divestitures from HMA that – let’s just round it down to $550 million, and that compares to the $699 million you reported this quarter and it seems like maybe you had roughly $120 million in synergies and HIT and ACA benefit, which still implies another $30 million of growth versus the prior year. Where is that coming from? Is that core growth, just acquisitions? I guess I’m just trying to get a sense of…

[Wayne T. Smith:]

It’s coming from good management.

[W. Larry Cash:]

I think the salaries would be your first line that I would say we did a pretty good job on supplies. The outpatient revenue growth bounced back nicely in the quarter. I mean that’s up 5/10 percent. We are held back a little bit back for HMA. You’re right, I mean, we’ve elected not to give same-store data out, but I think we clearly did, as we said in our conference call, the first quarter was a negative. This is pretty good positive on a same-store basis and all that comes from both companies. If we look at it both together, but David talked about the improvements he’s making in HMA, because there’s opportunities on both sides. So we had pretty good same-store EBITDA growth this quarter, did not have it that quarter. But I would say salaries is a good driver and operating expenses and supplies. And I think we’ve got this – one of the bridges is we can continue to do that, I mean we probably averaged 3% then for the first couple of quarters and here we’re down 1.2% in the quarter. You just heard all the outline of the issues we got going on, which if they work we ought to get better from this point going forward and we’ve got an $85 million approval, need to make. We’ve got plans way in excess of that that we’re working on. Hopefully they’ll all come through, but the second quarter was a nice step up from not having same-store demand growth.

[Whit Mayo:]

Are there any other obvious buckets of growth beyond just the acquisitions and HIT synergies, the ACA, anything when we compare to the prior year that would have contributed to the…

[Wayne T. Smith:]

Operating improvements.

[W. Larry Cash:]

I think as Wayne, there was a great distraction going on from the end of 2012 through 2013 by that management. It’s capital spending. There’s probably about a $20 million benefit getting the return on the capital spend in the second half of the year – some CHS on that. We’ve got that outlined. We re-communicated to people. The physician recruitment, it will be much stronger in the second half – first half of this year than it was for them and they’ve pretty much have done physician improvement. So those things should all be benefitting the second half.

[Operator:]

We have no further questions at this time. Mr. Smith, I’ll turn the call over to you.

[Wayne T. Smith:]

Thank you again for spending time with us this morning. Our standardized and centralized operating platform is helping building this Company forward as one and in achieving our goals. We want to specifically thank our management team, staff, hospital chief executive officers, hospital chief financial officers and chief nursing officers and division operators for their focus on operating performance for this challenging quarter. Once again, if you have any questions you can always reach us at area code 615 465 7000.

[Operator:]

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