Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to community Health systems third quarter 2019 earnings Conference call.

At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

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I would now like Dan the conference over to your Speaker today, Mr. Roscomos Vice President of Investor Relations. Thank you. Please go ahead Sir.

Thank you Mike Good morning, and welcome to community Health systems third quarter 20, I'd seen conference call before we begin the call I'd like to read the following disclosure statement. This conference call may contain certain forward looking statements, including all statements that do not relates solely to historical or current bucks. The forward looking statements are subject to a number of known and unknown risk.

You're describing heading such as risk factors in our annual report on Form 10-K , and other reports filed with or furnace to make sure 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. We also issued a separate press release regarding the company's intention to commence in exchange offering.

Those of you listening to the lot broadcast of this conference call supplemental slide presentation has been posted for web site, we will refer to those slides during this earnings call.

All calculations, we will discuss also exclude gain or loss early extinguishment of debt impairment expense as well as gains or losses on sale of businesses.

Expenses incurred related to divestitures expenses related to employee termination benefits and other restructuring charges expenses from government and other legal settlements related costs expenses from settlement in fair value adjustment to legal expenses related to cases covered by the CVR change evaluation allowance reported for for mercenary notes and change in <unk>.

Estimate for professional liability claims accrual with that said I'd like to turn the call over to Wayne Smith, Chairman and Chief Executive Officer Mr. Smith. Thank you Ross Good morning, welcome to the third quarter 2019 conference call with Us on the call today as Jim interim President and Chief Operating Officer, Tom and Executive Vice President Chief Financial Officer.

Dr. Lynn Simon present, clinical operations and Chief Medical Officer.

First some comments on the company as well as our performance then Tim will provide an update on operations and then Tom will provide some details on financial results in terms of the third quarter. We made significant progress again, we continue to leverage our investments in strategic growth initiatives organize and execute additional cost saving opportunities.

Complete additional divestitures our strategies are working and are currently continues to emerge as a stronger organization and what that means better position for future success.

In early October we hosted our hospital Ceos and regional presence at our corporate headquarters at ASCO strategic growth opportunities into share best practices come out of these meetings I'm impressed with the commitment and leadership skills of our hospital in market executives.

We are developing stable tenured and experienced group with local leaders, who are making it positive difference in their markets I'm, particularly pleased with initiatives. These Ceos are tightening to improve performance encouraged to see how they're driving progress and results across all of our strategic imperatives safety and quality operational excellence connected care and competitive position.

[noise] drug operations, our same store volume growth remained strong as we continue to drive sequential improvements.

We're different company today that were a few years ago smaller much stronger portfolio year to date same store net revenue growth is the strongest it's been since 2012.

Year to date or admissions adjusted admissions and surgery growth is the strongest it's been since 2000 Tina Turner.

Turning to the third quarter's performance or number of items worth highlighting during the third quarterly year over year basis, our same store admissions increased 2.4%. Our adjusted admissions grew 3.6% surgeries were up 4.6% on the topline same store net revenue growth was 4.1%.

Down the piano, we made progress across its WB supplies and other operating expense categories and more expensive savings and more expensive savings expected in the fourth quarter and throughout 2020.

Our adjusted EBITDA was 388.

With increased 16 million compared to prior year, and our EBITDA margin was 12% improved 120 basis points year over year.

During the third quarter year to date, we have also made a number of strategic capital investments to increase access points in district strength in hospital based inpatient and outpatient services on the quality side, we remain committed through investments in resources deliver safe quality compassionate care for our patients.

We've made considerable and substantial progress in our efforts to reduce the serious safety that right over the past several years.

And through the middle of this year, we reduce hospital acquired conditions by 17.7% over the trailing [noise].

12 months.

Switching to our divestiture program over the last two years, we've executed our divestiture plant, which was designed to create a stronger portfolio of assets enable opportunities where improve potential improved growth potential or same store results. During the past couple of quarters demonstrate this expected improvement and we believe our core markets continue to have more.

Trinity moving forward.

Our current Divesture plan anticipates that the completion of divestitures of at least two.

Yes.

Of annual net revenue with the mid single digit EBITDA margin.

No estimated gross proceeds excluding working capital is expected to be about 1.3 days through the ended the third quarter 2019 as part of this plan, we closed Divestures accounting for approximately 2 billion for net revenue generating approximately 750 million in gross proceeds. These divestitures consisted of.

No single digit EBITDA margin hospitals.

The transaction multiples, we expect the remainder of our divestiture plan to close by mid 2020.

Through our quality growth in operating efficiency programs combined with the completion of our dystrophy divestitures or focus on growing margins and free cash flow and we believe we're well positioned to drive enhanced growth moving forward also.

In a press release last night, the company announced that we intend to commence a tender offer to address near term debt maturities.

Tom will provide more details on this later now I'd like to turn the call over to Tim for additional comments. Thank you Wayne I also know quickly highlight our annual hospitals CEO in regional President meeting that took place a few weeks ago. Many ever hospital leader shared specific measurable initiatives that are driving better performance in their respective markets and it was very gratifying to.

See how they are executing on the strategic plans and improving our competitive position across the organization. Our leaders are aligned to our strategic imperatives and they are highly motivated to continuously improve and to deliver strong results.

On today's call I will walk through our volumes and share the latest in a few of our strategic focus areas.

On the volume side, our same store initiatives improved 2.4% similar to last for the increase in volumes was seen across a number of different geographies and markets surgeries grew 4.6% due to both physician and capital investments in orthopedics Cardiology Gee I another service lines.

Our visits were up 2.4%, which was in line with our second quarter performance. This growth continued it continues to be driven by our transfer center model enhanced clinical on M.S. outreach programs and freestanding ASV growth.

Same store net revenue increased 4.1% and our adjusted admissions were up 3.6% net revenue per admission was impacted this quarter due to our toughest comp for the year as well as stronger outpatient revenue growth this quarter.

Overall, we were pleased with our volume performance and remain focused on all of our opportunities to continue these trends.

We're making solid strides across our operating initiatives, including physician practices. The transfer program accountable care organizations are agios inpatient investments access point development as well as others.

Key drivers of our same store volume improvements include targeted access point investments as well as heightened emphasis on primary care development.

We continue to invest an access strategies by adding freestanding eightys urgent care and walking clinics to expand our scale and to offer more patient entry points into our markets. We've been very effective and our efforts to expand our primary care base, we know that the primary care provider and patient relationship is the core foundation for overall growth and critically important to work.

We are doing to strategically advanced key service lines.

Our emphasis has been on recruiting and placing primary care in the right locations supporting these providers with the resources they need to be successful and continuously advancing patient experience and convenience at the primary care level.

In addition to more convenient care locations, we have placed an emphasis on creating a consumer focused patient experience. This includes offerings same day and walk in appointments in most markets, providing online and centralized scheduling options and improving our digital marketing and consumer engagement platforms.

As a result at these development efforts, we saw nearly 47000, new patient appointments from our online and Skechers centralized scheduling initiatives in the third quarter and we had more than 1.1 billion primary care access visits in the third quarter. This is up double digits from the prior year and also contributed to our strong 7% outpatient that revenue growth.

In addition, net revenue was up 2%. This quarter. In addition to our continued allocation investments. We are also deploying hospital specific strategic capital with recent recent investments focused on adding beds surgical Angie I capacity.

Expansions and service line development across a number of markets year to date, new bed additions have come online in Birmingham, Alabama, Palmer, Alaska, and Victoria, Texas, and surgical giant cardiac capacity has been expanded in several markets and putting Knoxville, Tennessee, Cedar part, Texas, and Wilkes Barre, Pennsylvania, and we have a solid.

I have line of projects underway and plan for completion over the next few quarters. We're also in the midst of comprehensive in depth development and expansion planning and a number of our core markets and networks, which will result in additional facility expansions and additions incremental access points and new services to further opportunities for sustainable market share and volume growth.

Switching to our in house CHS transfer program last quarter, I mentioned that we were expanding this offering to more hospitals and markets due to our rollout success. Today. We now expect this program to be implemented an over 75% of our hospitals by the end of 2020 during the third quarter comparable hospitals that have utilized our transfer and access program.

For more than a year have increased our inbound transfers by 17%.

In summary, we are pleased with the improvements we are making and the momentum we are trending generating across many markets. In addition to our growth priorities, we remain committed to delivering high quality healthcare in every market. We serve and we are focused on managing expenses across the entire organization, including corporate functions as well as achieving the most efficient use of resources in our markets.

As we move forward, we expect our strategies to lead to brought operational improvements, including improved same store net revenue and EBITDA performance.

Thanks, Tim and good morning, everyone now, we'll discuss third quarter on a same store in quarter over quarter basis. As a reminder, calculations discussed on this call exclude items Ross mentioned earlier during the third quarter net revenues increased 4.1%. This is comprised of a 3.6% increase in adjusted admissions and as your point.

5% increase in net revenue per adjusted admission excluding non patient revenue such as TSH fees, our third quarter net revenue per adjusted admission would've been up 90 basis points and net revenue up 4.5%.

During the third quarter, our net outpatient revenues increased to 53.9% of our net operating revenues as growth on the outpatient side outpaced growth on the inpatient side.

Saldate revenue payer mix for the third quarter of 2019 compared to third quarter of 2018 shows managed care and other which includes Medicare advantage increased 80 basis points Medicare fee for service decreased 30 basis points Medicaid decreased 10 basis points in self pay decreased 40 basis points.

Looking at our adjusted admissions by payer our managed care Medicare advantage in self pay volumes were all up while our Medicare fee for service and Medicaid volumes each increased.

During the third quarter 2019, the summit consolidate a charity care separately discounts and uncollectible revenue increased from 32.3% of 32.8% of adjusted net revenue year over year, a 50 basis point increase.

For the same store expense items, our salaries and benefits as a percent of net operating revenues decreased 30 basis points driven by Ft management supplies expense as a percentage of net operating revenue for our same stores increased 20 basis points from higher implant spend related to surgery growth.

Other operating expenses as a percent of net operating revenues for our same stores increased 40 basis point due to higher IP embedded related expenses and insurance costs.

Our management team is currently executing a strategic cost reduction program. This plan include a detailed analysis of corporate shared services and hospital administrative costs. The program included the continued expansion of our supply chain and vendor spend reduction initiatives, along with reorganization to certain nonclinical areas technology led process.

Improvement and real estate and other cost reduction efforts. Many program activities are underway and we expect to achieve incremental savings in the fourth quarter, an incremental savings and those as those savings plans are executed as we move.

Money.

Switching to cash flow for the third quarter of 2019, our cash flows provided by operations for negative 75 million. This compares to cash flow from operations of $346 million during the third quarter of 2018 looking at the quarter over quarter decreased cash interest payments were approximately 350 million higher during the time due to the timing of payments.

Due to the June 30 occurring on a Sunday to notes accounting for approximately 150 million of cash interest were paid on July 1st or in the third quarter. Our cash flows provided by operations were 191 million for the first nine months of 2019. This compares to cash flow from operations of $440 million during the.

First nine months of 2018 looking at the year to date decrease our interest payments from timing due to recent refinancing activities contributed to a cash outflow of approximately 173 million more this year, our cash outflow from malpractice claims payments of approximately $68 million and other year over year increases in detail.

Creases, including tax refunds in working capital changes create a cash outflow of approximately $8 million. During the first nine months as we think about recent cash flow performance. The company paid approximately 492 million of cash interest in the third quarter and it's worth noting that current currently scheduled cash interest payments will be approximately.

160 million during the fourth quarter as such we expect free cash flow to be positive during the fourth quarter and we expect improved free cash flow performance in 24.

Turning to Capex, our Capex for the first nine months of 29 team was 322 million or 3.2% of net revenue. During the first nine months of 2018, our Capex was 413 million or 3.9% a net revenue as Tim mentioned, we're allocating capital towards high growth opportunities in a number of key markets with growth potential.

Moving to the balance sheet at the end of third quarter, we had approximately $13.3 billion of long term debt with current maturities of $318 million and at the end of third quarter. We had approximately 157 million of cash on the balance sheet in terms of capital structure as Ross and Wayne mentioned yesterday evening, we announced our intention to commence.

Tender offer.

Change near term debt maturities were pursuing several transactions to address near term maturities and strengthen liquidity.

As contemplated refinancing transactions would significantly improve the company's maturity profile, whereby we will be using liquidity to pay the 2019 and 2020 unsecured Stubbs a significant portion of the 2020 twos will be participating and extended through our intended exchange in our revolver, which expires.

January 2021 will be terminated in addition, the exchange notes will contain covenants restricting our ability to incur any additional secured debt moving forward. We're focused on the execution of our strategic initiatives, which we expect will drive improved same store EBITDA growth allow the company to de leverage and drive better cash flow.

Now I'll walk through our updated full year guidance. Thanks to our adjusted admission growth is anticipated to be up 1.5% to up 2.5%.

We increased our full year range by 100 basis points due to volume strength in the first nine months of the year net operating revenues are anticipated to be 12.9 billion to through 13.2 billion adjusted EBITDA as anticipated to be 1.6 billion to 1.65 billion.

Net income per share is anticipated to be negative $1.85 to negative $1.75 based on weighted average diluted shares outstanding of 114 million to 114.5 billion cash flow from operations is forecast to that 500 million to $550 million Capex is expected to be $425 million.

475 million.

Ill turn call back to you. Thanks.

At this point operator, we're ready to open up for questions.

Limited one question. So several you'll have a chance calling in but as always were available to talk to you and you can reach us at area code 615, or six 7000.

As a reminder to ask a question you will need to press star one on your telephone.

Withdraw your question press, the pound or hash key please standby will be compiled acuity roster.

Your first question comes from 80 race from credit Suisse.

Hi, everybody.

Congratulations on the continued.

Gradual improvement in your admissions trends on your volume trends I'm going to use my question, though to ask and try to understand make sure I fully understand which trying to do with the.

Debt exchange and I guess I've got three aspects to it that I'm trying to figure out is I see that you know you're obviously taking out the big.

Maturity of 2022, there is still.

Some.

Secured stuff at 2021, and then obviously, you've got 2023, which I guess you can deal with later and there could be a stub of the 2020 twos. So can you tell me is this just opportunistic that the big holder of the 2020 twos came forward instead, let's do this or is this part of several pieces that.

We'll see unfold over the next few months that you're trying to do to deal with these near to intermediate term maturities and I guess I would ask us well on the covenants I think you step down in March to five times debt to EBITDA. How are you comfortable with that is there anything about this exchange offer that's going to change that.

Covenant and then finally, you're giving up the revolver I wondered whether if you recently been use that revolver in any way or is that.

Not does that not something you need access to those great. One question Jay.

I think I've got all that so I'm going to talk about the exchange first and now I get into some of the of the maturities you mentioned so on the exchange, we think it's an opportunity to.

Deal with the 2020 twos as you mentioned and we at least 83% of those are going to be including the exchange. So those will.

Our tenant exchange would push those to 2027 secured in 2028 unsecured notes the interest on the unsecured don't change in that the interest on the securities at 8% Thats going to be $700 million, regardless of participation. So it addresses that we hope we have a very successful excel.

And with participation that goes higher.

It's also going too is we get into that so that's going to extend 2020 twos. It's also going to enable us to by issuing a 500 million. Firstly note, we're going to take out our revolver, which includes the cabinet.

First lien covenant that youre referencing so we intend to take that out with a first lien offering used the proceeds to we were already on track to pay off the 2019 Stubbs about 150 million will also be paying off the 2020 stub of 120 million. So and then what whatever is left over there we'll pay down our ABL and.

That will become our our liquidity tool. So looking after the exchange we will have addressed the 19 steps at 20 studs and substantial portion of the 2020 twos and we'd be out the revolver on the 2020 ones I think we're focused on this transaction right now we are watching the markets and.

Sequentially, that's really the next big maturity up so, we'll we'll pay some attention to that and then.

We will just get focused on liquidity and executing a lot of the initiatives that we've been talking about being in a position to be cash flow positive getting our lagat leverage down.

Your next question comes from Josh Raskin from net foreign research.

Hi, Thanks, good morning.

First question just around the portfolio sort of optimization process as a kind of winds down for smell next year, you mentioned I should think about your remaining portfolio. It may be exclude the three that have already been announced this week as well.

What percentage of those are operating at sort of target margins or where you want them to be and then maybe help us with the timing in terms of what's what's that path to reasonable margins for the remainder and then second question around Capex.

Cutting that say 50 million at the at the midpoint is that just pushing back discretionary projects due to the timing of your cash flow. This year or were there specific delays or projects that were cancelled just want to understand the capex cuts as well.

Sure so.

Josh on the divestiture program I think I'd look at the this program that we're in the 2 billion of revenue 1.3 billion of proceeds the divestitures up to this point have been in an aggregate very low single digit.

EBITDA margins and so when we look at it and we allocate capex and interest cost to that those are negative cash flow hospitals, and so we had a nice amount of proceeds from those sales today.

So thats roughly 750 million of proceeds the other 550 million that were we announced one transaction on Monday.

Bobby three hospitals, the hospitals that have remaining on the divestitures for the most part are higher single digit than what we've executed so far so the dynamic that we've seen through 2017 18 and 19 divestitures are these ones with slightly higher EBITDA margins. The we're getting as a percentage of revenue.

Better proceeds when you look at the multi EBITDA multiples that those are more in the typical range you might see nine have to 11 times and.

So we that's what we're into right now on the on the divestitures I think if you look back historically, we believe from many of the operating initiatives that we've already implemented with labor, we're getting into supplies right now.

Some of 120 basis points improvement you see quarter over quarter. Some of that is from those initiatives, but some of it.

As was helped by the divestitures and getting the lower margin hospitals out.

When we look at the rest of our portfolio. We do think we'll have some lift as we wrap up the divestment program because they will still be averaging the remaining divestitures will be below our average and we should be getting lift from that as well I think when we look back to Wayne's comments, we are different company now when we look at our demographics are more.

Markets, we've got growing demographics, the job performance in our markets is better and we rank nexstar peers better than we used to rank in those spaces and I think thats one of the things. In addition to the revenue the volume initiatives. Tim mentioned, that's driving that so we do believe that we've got a portfolio were worried.

We're going to be able to grow margin going forward on Capex I wouldn't say theres any big projects out of that we still have some.

Replacement hospital going on we've got a community or micro Hospital project, that's going on right now I'll, let him talk about how we go through and assess our capex projects. One other comment I'd make that we've been talking about we are moving much of our IP from where we host to cloud based.

And so we're not having to purchase as many server software subscriptions.

Cyber protection.

Personnel, that's moving that spend is moving from that and it's going into the other operating expense line. So that that accounts for a little bit the decrease in capital and Tim I'll, Let you Bill in on how we go about assessing sure on good morning, Josh in terms of margin profile and opportunities obviously were very speculative in terms of our opportunities in so many.

Of the remaining portfolio markets as I mentioned, we're really focused on where can we invest our capital dollars going forward to augment the recent bed and surgical expansions that have come online in that are driving some really solid growth in those markets at our reference I'm as part of our strategic planning process. We always look I'm at the market data on where theres operate.

Duties weather's out migration.

We look at where we can invest for access points.

As I said, new bed expansions in the access point all those things continue in those markets that are going to remain in the portfolio at the three to four year capital planning program, we have our capital our capital cost plan kind of rolled off that same type of a timeframe. So were pretty good view as to where we have ongoing portfolio expansion.

And opportunities.

Your next question comes from Ralph Giacobbe from Citi.

Thanks. Good morning, just wanted to ask about guidance I know, it's always tough to based things on the consensus numbers, but it looks like you missed EBITDA by 6 million the took down the guidance at the midpoint by about 50 million, but kept revenue. So just hoping you can reconcile that and sort of the lower implied Fourq you and then you mentioned the cost reduction initiatives.

Is this just sort of a new.

New program and then any help on sort of sizing the savings at this point in particular as it relates more to thanks.

Yes. Thanks route so on the guidance as we looked at this we've been.

Our looking at our volume trends and since second quarter 18, we've been improving our volume trends and Thats continued we're very happy with where we are on that when we look at our net revenue per adjusted admission I'm going to exclude other revenue through the second quarter that had grown about 2.7% with second quarter.

Actually performing better than that and so we were not only really.

Performing well in the volume, but on rate, we had very strong through the second quarter. The rate. If you exclude other revenue was zero.

0.9% in this quarter, which is lower than we would expect that's lower than even some of the historical years, we've had and when we look at this quarter that was the primary driver when you look at.

Revenue was driven mostly by volume the revenue could have been bigger and that would have VIX helped our expense profile as well and so.

Because of that we just want to be careful and without when we look at these trends that we're seeing movement to outpatient and that the dynamics that has on our rates.

We just wanted to be mindful of the most recent trend that we've had on rate and so we put that in we're still holding up pretty ambitious volume growth and and we're going to pick apart the pieces on the on the rate that we can we can manage I mean, I think on the payment denials downgrades are important area. There we saw on.

Uptick in the third quarter that we'll look at out specifically, what's happening there and address what we are.

Our processes and so we can do to improve that on the cost reductions Ralph we did mention for the first time in the second quarter that we had expanded that beyond the supply chain.

So we were getting into now purchase services.

And really trying to go with the same national contracting strategy that we have with art supplies and have done very well with on the supply. So that's a piece of that we're also looking at other components of how were structured how we use technology now the need that how we structure at our shared services at our corporate.

Offices and also non patient facing.

Ministry to.

Positions and management at hospitals and really this is up it's some cost but we also think from an operational excellence. We can improve there as we look at these processes. So that this up this other program expanding beyond supplies, we will have some benefit of that in the fourth quarter. We do expect a large portion of.

That benefit will incept on January Onest 2020.

The other thing I want to call out is the.

That that we are going to get the benefit Upstarting started October 1st was the new Medicare inpatient rights.

That affects a substantial portion of our Medicare Medicare advantage admissions that we have and we were benefited by the wage index on that that was over a 3% increase which is substantially better than we've had many recent years. The proposed outpatient rates are over 4% for us again, we benefit from.

The wage index on that that ought to be finalized within the next eight to 10 days and that will be effective on January onest again for Medicare Medicare advantage. So we do think there are some really coming on the right side, but I think the the guidance there was just caution for that.

Your next question comes from Sarah James from Piper Jaffray.

And this is Chris name on the phone for Sarah My questions around outpatient investments you mentioned that spend is ongoing and just given the pace of growth. There I'm wondering if you guys could call any sort of evolution, where those dollars are being spent specifically and you're seeing any narrowing of the spending gap that we've traditionally seen between.

Some of the outpatient and some of the acute care investments that you guys amid thanks.

Sure. Chris This is Tim I'll I'll take that one I'm in terms of outpatient best investments still looking at our pipeline for freestanding Mds, we have three that are under construction.

As we speak on we have others that were in the process of sourcing land.

And planning out the profile for that expansion of that important access point. It served us very well on that certainly it's been a contributor to our EDI volume growth for the last couple quarters in particular I am other areas of investment have been in the inventory surgery space.

Well give you any specifics because some of those deals are still in the and the formative stages. If you will where we have documents with doctors, but we haven't announced them publicly but we're looking forward to making some announcements the investments in growth in the space in the near future I, we continue to invest and the urgent care walking care or what we call on demand care platforms.

We've done some refinements of those access points strategies over the last several quarters and as I noted, we put more energy and emphasis on primary care practice development and also referenced the incredible growth we've seen in our primary care visits year over year. Those are historically lower dollar capex investments I'm thinking for the second part of your question how is that migrating to the.

Inpatient side as Tom mentioned, we have a micro hospital, that's under construction in our Tucson market. It will be our first I'm in the company, we look forward to bringing that online on in 2020. We're also pursuing further bed expansions beyond those that I just mentioned in markets that we anticipate will be having some capacity crunch as we want to try to.

Stay ahead of this so deploy more doctors to inpatient capacity I'm surgical capacity, we have a large project in Las Cruces, New Mexico that comes online in the fourth quarter I'm really a large scale of our expansion to keep up with demand in that market. So I think overall, we've been very balanced a little bit more heavily weighted to the outpatient and 2018.

Part of 29 team I think you'll see more of a go into the acute side of the business in the in the upcoming quarters.

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

Great. Thanks.

I guess, maybe that answer might address a little bit, but I guess.

When we look at the revenue per adjusted admission some of the trends that youre seeing whether it.

Commercial growing a little bit slower than the other payers or this growth in outpatient that you're talking about I appreciate that the Medicare rates going to be better.

Next year, but these other things seem like they're more kind of structural that we'll continue to see commercial growth less than government, just demographically that outpatient going to continue to grow faster than inpatient just the way the trends are going so.

What.

What is the real kind of reason to think that this pricing trend is going to be.

Significantly better than than where it is right now and what pricing do you really need to be able to see that.

Conversion on the volume growth into actual EBITDA growth.

So I couple things.

We've been kind of underway for many years with this move to outpatient. So we think this is an existing headwind it might be little heavier in certain quarters, you might recall, we had a quarter earlier. This year that we had actually art admission growth was in excess of our adjusted admission growth for this.

This happened to be just a pretty cute quarter, where the outpatient grew so quickly we think with the.

On the volume side, there that yes, we will continue to see that we think's certain procedures can be perform more on an outpatient basis and so on the right. Some of the other things that we're getting into I mentioned the revenue cycle, making sure. We're paid for everything were entitled work that we minimize denials and downgrades.

The other pieces on this where we think there are opportunities are on the pay for performance and in so arrangements with the commercial payers and other payers that we earn incentive in the in our revenue cycle for quality and other measures that we negotiated with them as an opportunity for us as well and I'd say more.

More broadly outside of the revenue side.

When we've shared examples of this Tucson is a great example, where we've moved a substantial portion of their business quickly from inpatient to outpatient and actually improved our EBITDA margin I think thats one of the areas and one of the areas on our cost initiatives is in the outpatient clinic setting to improve our cost profile there. So.

We agree with you that that trend is here for a that's a long term trend that ramp to deal with and we think on the expense side is an important way, but also there are a few pieces on the revenue side, where we can enhance I think acuity of services. It Tim you might want talk about service lines, and how that impacts not only impatient, but outpatient can.

Drive revenue as well sure I'll add on to your comments regarding the inpatient profile as well in terms of where we're putting the capital spending and the planning for the future obviously, we're targeting.

You are commercial mix for the reasons you noted in terms of it really driving our net revenue per admission at a rate that's greater than the government payers in particular, so with that being said that is a key component of all of our pro forma modeling for where we invest our capital dollars. So we think levering up in terms of those investments in those markets should help us improve our net revenue.

Per admission in addition to ongoing rate negotiations I'm getting prominence and market share in a market to improve our profile. So I think all that is underway in terms of service lines.

Let me first point out I think everyone is faced with the migration of total needs to outpace that we've become so proficient at managing the length of stay at these patient to less than two minute to midnight that they now are moving to outpatient status. So obviously, we're getting paid less for that the same cost on the implants et cetera, historically or fixed.

Got it right now on working with our vendors with our doctors to make sure that we can create a value proposition on that particular implant category as it migrates more to the outpatient setting other service lines out where we're investing neurosciences for neurosurgery transfer centers, bringing a more patients for that service line.

Again, all the EDI and the Dms liaison programs that we have been placed bringing a higher acuity patient to our hospitals should drive that case mix index and also improve our net revenue per admission.

Your next question comes from Gary Taylor from JP Morgan.

Hi, guys.

Thanks, guys, maybe a follow up on that and then one other topic just a follow up on as you have covered a lot of grounds I was doing some math on the same sort of angle and.

Nine and have to 11 times EBITDA.

With total Medicare patients Medicare and Medicare advantage does obviously are growing the Medicare advantage for us this quarter was a higher growth rate, where we've been tracking the national averages and were up above the national averages and the third quarter on the growth Medicare advantage, that's a one.

We look at what we yield off that that slightly below Medicare and so that just that shift from traditional Medicare to Medicare advantage that impacts our net revenue per adjusted admission.

As we mentioned Medicaid was down slightly self pay is a small amount of our admissions and our adjusted but that is growing and thats been accelerating growth late second quarter and during the third quarter, but again not a not a significant portion. So those dynamics, we by the way we are getting growth in our our commercial volumes.

And our revenue, it's just that not quite the clip that we see a Medicare advantage and in the self pay so thats one of the dynamics the.

The other dynamic you see and this is just to calculate of adjusted admissions, but as you get into case mix changes and linked the state stay changes those drive up the calculation of adjusted admissions and has the impact of driving down the net revenue per adjusted admission and again and I think what second quarter, where the admin.

Recent exceeded adjusted and we.

Lo and Behold, we had a very high net revenue per adjusted admission that quarter. So.

I think those are the primary dynamics that that we would call out for the third quarter. The payer mix and also that length of stay there are few other minor items in there, but those are the bigger what they tend to average out overtime. We are still net revenue per adjusted admission, we're still over 2% year to date and.

And so but this this was a weaker quarter on that that stat.

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

Thank you again for your time this morning.

As we've outlined on the call today, we're encouraged with all the progress we made so far this year moving forward, we're focused on continuous execution strategies, we discussed on todays call and we'll look forward to a strong finished 2019 strong performance in 2020, we want to specifically, thank our management team and staff Hospital Chief Executive officers.

Hospital Chief financial officers.

Chief Nursing officers and division operators for their continued focus on operating performance and quality.

This concludes our call today once again, if you have any questions you can reach a series of six point.

Four Centsfive 7000.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.