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Community Health Systems Inc (CYH) Q4 2018 Earnings Conference Call Transcript

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Community Health Systems Inc  (NYSE: CYH)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 Q4 2018 and Year End 2018 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. (Operator Instructions)

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

Ross W. Comeaux -- Vice President of Investor Relations

Thank you, Mike. Good morning and welcome to Community Health Systems Fourth Quarter and Year End 2018 Conference Call.

Before we begin this call, I'd like to read the following disclosure statement. This conference call may contain certain forward-looking statements including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our Annual Report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements.

Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. For those of you listening to the live broadcast of this conference call, a supplemental slide presentation has been posted to our website. We will refer to those slides during this earnings call.

All calculations we will discuss also exclude gain 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 employee termination benefits and other restructuring charges, expenses related to government and other legal settlements and related costs, expense from settlement and fair value adjustments to CVR agreement liability related to the HMA legal proceedings and related legal expenses, change in estimate for contractual allowances and provision for bad debts during the fourth quarter of 2017 and discontinued operations.

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

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

Thank you, Ross. Good morning. Welcome to our fourth quarter and year-end 2018 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.

On today's call, I'll provide some comments on our Company as well as our performance during 2018. Then I'll turn the call over to Tim, who will give you an update on our operations and Tom will provide some additional color on the fourth quarter financial results and walk through our initial guidance.

Overall, we had a strong finish to 2018, ended the year with good momentum and as we move -- as we move into 2019. You can now see from our strategic initiatives and the hard work across the Company that our positive results are showing up in our metrics now. For the quarter and the full year, our net revenue and adjusted EBITDA came in toward the high end of our guidance and we actually beat consensus.

In terms of the fourth quarter, net revenue of $3.453 billion was driven by improved same-store adjusted admission growth, which was up 0.1% year-over-year as well as from the continuation of strong rates. Our same-store surgeries increased 0.9% and were positive for the second consecutive quarter. The cost side -- on the cost side, we continued to make progress on our expenses, particularly on SWB front and opportunities for further improvement across expense lines in 2019.

Adjusted EBITDA $419 million for the fourth quarter was at the high end of implied guidance, despite our divestitures and increased over year-over-year basis. Our adjusted EBITDA margin of 12.1% was our strongest performance of the year.

In summary, we are pleased with our finish to 2018. Our companies continue to enhance our position to drive additional growth in 2019 and beyond.

Now before I move forward. I'd like to introduce Dr. Simon to provide us an update on our quality initiatives. Lynn?

Lynn T. Simon -- President of Clinical Operations and Chief Medical Officer

Thank you, Wayne. Providing safe patient care has been a focus of our organization for a very long time. Through Q3 2018, we have achieved an 86.2% reduction in serious safety events from our baseline in April 2013 and we have consistently reduced the incidence of serious safety events for more than six consecutive years. This includes significant improvements in CMS focus areas such as hospital-acquired conditions. We have had a 56% reduction in central line infections over a three-year period and a 41% reduction in falls with injury. Just in the last year, we have reduced our medication errors by 37% and 36% of our hospitals have achieved zero serious safety events in the last 12 months.

Continuous improvement in the patient experience is also a priority. We use evidence-based tactics such as hourly rounding and bedside shift reports to improve the patient experience and these behaviors also can improve clinical outcomes. Recent work includes a focus on caregiver communications with patients and their families. Enterprisewide nurse communication scores, a key HCAHPS measure increased by 2 percentage points in the last year and we expect our efforts this year to produce additional improvements.

Finally, we are accelerating our work to connect with patients in a consumer-focused way, providing convenient access through centralized and online scheduling helps with new patient acquisition, patient retention and care navigation. Other touch points, especially digital interactions through mobile technology help keep our health systems connected to our patients before, during and after clinical encounters, which we believe improves the patient experience, clinical results and our ability to develop closer relationships with people who have chosen our health networks for their healthcare services.

These achievements are only possible because of the daily engagement, skill and compassion provided by our physicians, nurses and other caregivers. Clinicians across our organization remain dedicated to continuous improvement, which we believe will continue to produce positive results.

Wayne?

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

Thank you, Lynn. Before I comment on operations, I would first like to talk about our current hospital portfolio. Today, we have a stronger portfolio of hospitals and more sustainable markets than we did four years ago or even a couple quarters ago. 80% of our hospitals today are in (inaudible) of greater than 50,000 residents. And if we back out anticipated future divestitures and smaller markets to support regional networks, 95% of our hospitals are in markets with greater than 50,000 residents. So our Company's hospitals are no longer predominantly in non-urban or rural markets, but instead we have more exposure to suburban and urban markets with better population growth, better economic growth and lower unemployment, all of which provides an opportunity for improved growth potential.

Over the past several quarters, our management team have implemented a number of new operational initiatives across the stronger hospital portfolio that I just mentioned. Recently our market leaders, along with our corporate teams, have made significant progress across areas such as patient safety and connectivity, competitive position in core markets and operational efficiency. We substantially completed some of these initiatives in 2018 and we expect to complete or make additional progress on our initiatives in 2019. And while we have seen some benefits from these initiatives in 2018, we expect to deliver incremental improvements in 2019 and 2020 and we fully -- as we fully implement programs that have not yet been completed, and as we fully leverage all these initiatives over the coming quarters.

Looking at our full-year performance of 2018 compared to the prior year, we drove same-store improvements for volume, net revenue per adjusted admission, net operating revenue and we produced good core EBITDA performance particularly along the last three -- particularly the last three quarters of 2018. So our overall -- our core business delivered improved growth in 2018. As we complete additional divestitures and make additional progress on our operations and our divestiture program, we expect our same-store metrics to further improve. This will also lead not only to additional debt reduction but also lead to better cash flow performance and lower leverage ratios.

Now, I'll briefly talk about our full year 2019 guidance and Tom will provide more details later in the call. Our 2019 guidance includes the following. Net revenues adjusted for expected divestiture timing (ph) are anticipated to be $12.8 billion to $13.1 billion. Adjusted EBITDA is anticipated to be $1.625 billion to $1.725 billion.

Now, I'd like to turn the call over to Tim for some additional comments. Tim?

Tim Hingtgen -- President and Chief Operating Officer

Thank you, Wayne. Overall, we performed well in the fourth quarter and we are focused on delivering incremental growth in 2019 and beyond. As Wayne mentioned, our portfolio is much stronger today than just a few years ago and our current portfolio allows us to implement our strategic initiatives in a higher percentage of our hospitals due to the strengthening of our current portfolio which includes better market demographics.

In terms of our volumes, we were pleased to see the same store adjusted admissions turn positive during the fourth quarter, increasing 0.1%. And for this same group of 112 hospitals, which we've included on slide 7 of our supplemental slide presentation, we experienced sequentially stronger same-store performance for both admissions and surgeries during each quarter of the year. These trends point to not only a stronger group of hospitals but also the progress, we have made across our operational initiatives that accelerate our growth, which I'll talk more about in a minute.

Switching back to our fourth quarter volumes, we estimate the flu had approximately a 50 basis point headwind on our same-store admissions. So excluding the impact of the flu, our admissions would have been roughly flat during the fourth quarter. The flu also negatively impacted our same-store ER visits. We are continuing to see fewer lower acuity patients in our ER, as those patients are generally migrating to lower cost care settings, a transition we have been preparing for with the strategic assets point growth of our own urgent care, walk-in care and primary clinic care networks across our markets. Our admissions to the ER however are strengthening due to our focus on service lines and acuity enhancements, transfer center implementation and other initiatives.

Now I would like to provide some comments on our operations. We've been pleased with our same-store improvement which have included better volume, improved net revenue per adjusted admission and stronger net revenue growth. For full year 2018 our same-store net revenue increased approximately 3% and as Wayne mentioned, as we complete additional divestitures and more fully leverage our focused initiatives, we expect our same-store metrics to further improve. Our ACO strategy has been a very effective element in its first year. We launched this initiative in nearly all of our markets in early 2018, allowing us to better align with our independent and employee physicians.

Moving into 2019, we have experienced increased ACO participation adding approximately 20,000 Medicare fee-for-service lives and have had a very strong 97% renewal rate of our independent primary care physicians and we've added over 150 new independent physicians for the 2019 program year. Our transfer center program is helping to drive sequential volume improvements and providing additional operational visibility into our individual hospitals. It is also allowing for opportunities to better align physician hiring with market demand and to expand our gross service lines where appropriate. We have rolled out the program in approximately 85% of our targeted facilities now supporting 51 hospitals and 14 markets thus far. Implementation for the balance of the hospitals is expected to be completed toward the back half of this year. In terms of physician recruitment, we continue to align our hiring with our multi-year strategic planning process to ensure we are adding physicians that best match each hospitals and markets service line strategies. Through this disciplined approach our 2018 total provider recruitment is up 16% year-over-year and our employed physician retention rates have improved by approximately 300 basis points over two years. Also we broadly implemented online scheduling so more patients have convenient access to our providers with about 80% of our primary care physicians now online and we continue to expand the platform into specialist scheduling.

In our markets, our hospital leadership teams are focused on building stronger healthcare systems and providing high quality care. As such, we are investing capital expenditures across the continuum of care, including high return opportunities on both the acute and non-acute side. Our capital spending was 3.7% of net revenue in 2018 and we expect our capital expenditures to increase to our historical average of approximately 4% during 2019. We are investing in several expansion projects in key markets this year, which will provide the ability to serve growing demand and drive incremental revenue and volume growth. A few examples include acute care bed expansions in Birmingham and Palmer, Alaska, surgery expansions in both Knoxville and Las Cruces, cardiac expansions in Naples and Fort Wayne and among other acute care investments in our other core markets.

In 2020, we plan to open an 18-bed micro hospital in southwest Tucson, Arizona and in 2021, we plan to open a new 70-bed hospital in the eastern part of Tucson. These investments will further strengthen our inpatient presence and growth potential across our Tucson network. On the access point side in 2018 we increased the number of our freestanding emergency departments, urgent care and walk-in clinics by 10% as we had additional breadth and scale to support our existing hospital markets and networks.

Looking at 2019 we will continue our outpatient development focus with a strong pipeline of opportunities. We will add two additional assets in the first half of the year and we'll open a number of additional urgent care walk-in clinics and other access points. We expect all this capital to help drive incremental net revenue and EBITDA growth. We are also continuing to invest in our behavioral health and rehabilitation businesses. For full year 2018 our same-store behavioral patient days increased 7.6% and our same-store rehab patient days increased 11.2% and we have incremental behavioral and rehab expansions coming in 2019 to further this growth trend. So in summary, we delivered improved performance during 2018 as well as during the fourth quarter versus the prior year. We are encouraged by the potential of our hospital portfolio due to our ongoing investments and the focused execution of our strategies. Before turning the call over to Tom, I would like to make a few comments regarding expense management. We've continued to focus on efficiency across all of our three primary expense line items.

In terms of our SWB expense, our hospital department leadership teams have been effective at driving good SWB efficiency throughout 2018 and we expect this performance to continue moving forward. In terms of supply expense in 2018 we changed and reorganized the supply chain leadership structure. Today, we are now utilizing new strategies to drive better results, including the standardization of multiple commodity like products that our hospitals purchase. We also are implementing new initiatives that more fully utilize our size and scale across clinical product categories. And to support all of this we are completing our supply chain technology deployment organization wide this year which will allow for incremental supply expense savings in 2019 and 2020.

For the other expense line, we are utilizing some of the same strategies that we are implementing across our supply chain to reduce our vendor costs. And based on organizational needs and where we can gain the greatest expense efficiency, we are in some cases converting outsourced services in-house or vice versa by outsourcing certain services where that adds greater value. So in summary, we expect to make further improvements across our expense categories in 2019. Tom?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Thank you, Tim. Now, I will provide additional details on our fourth quarter performance. As a reminder, calculations discussed on this call exclude items Ross noted earlier. On a same store basis for the quarter we noted the following. During the fourth quarter of 2018, net revenues increased 1.9% . This was comprised of a 0.1% increase in adjusted admissions and a 1.8% increase in net revenues per adjusted admission. Our inpatient admissions declined 0.5%. As Tim mentioned earlier, excluding our estimate of the impact from the flu, our admissions would have been flat. Our surgeries increased 0.9% and our ER visits were down 3.2% (ph).

Our fourth quarter net revenue was impacted by stock and bond market declines during the quarter. The market declines reduced the value of investments held in deferred compensation plans resulting in lower other revenue and a corresponding reduction in benefit expense which has no impact on EBITDA on a net basis. Excluding this net revenue impact, our fourth quarter net revenue per adjusted admission would have been up 2.9% and our total net revenue up 3%. So our net revenue per adjusted admission continued to be solid.

During the fourth quarter, our net outpatient revenues were over 52% of our net operating revenues. Consolidated revenue payer mix for the fourth quarter of 2018 compared to fourth quarter 2017 shows managed care and other decreased 50 basis points. Medicare fee-for-service decreased 40 basis points. Medicaid increased 90 basis points, self-pay was flat. Consolidated revenue payer mix on a full-year basis shows managed care and other increased 60 basis points, medicare fee-for-service decreased 60 basis points. Medicaid increased 20 basis points and self-pay decreased 20 basis points.

Looking at our same-store adjusted admissions per payer class, our managed care, Medicare Advantage and self-pay volumes were all up while our Medicare fee-for-service and Medicaid volumes were down. For the quarter the sum of consolidated charity care self-pay discounts and bad debt expense for the three months comparable period increased from 30.4% to 31.1% of adjusted net revenue, 70 basis point increase. During the same period same-store increased 60 basis points to 30.9%. For the full year the sum of consolidated charity care self-pay discounts and bad debt expense increased from 29.6% to 31% of adjusted net revenue, a 140 basis point increase. The year-over-year increase for the quarter and full year was driven by higher self-pay discounts as a percentage of total revenue. For the full-year same-store increased 40 basis points to 30.9%.

For the same-store expense items, our salaries and benefits as a percent of net operating revenues for same stores decreased approximately 120 basis points. The decrease was driven primarily by improved FTE management. Supplies expense as a percent of net operating revenues for same stores increased 10 basis points. This higher implant costs from increased surgeries offset lower commodity spend.

Our other operating expense as a percentage of net operating revenues for same stores increased 80 basis points. Increases in fourth quarter 2018 versus prior year were driven primarily by higher medical specialist fees, provider taxes and insurance costs. As Tim mentioned, we see opportunities for further expense management this year and we expect to drive additional supply expense savings in 2019 and 2020.

Switching to cash flow, as we discussed on last quarter's call, we made a $266 million payment in the fourth quarter, which ended the US Department of Justice investigation and settled qui tam lawsuits that were initiated and pending and known to the Company before the Company's acquisition of HMA in January of 2014. While we're pleased with this legal matter behind the Company the payment impacted our cash flow from operations this quarter.

For the fourth quarter of 2018 our cash flows provided by operations were negative $165 million due to the payment of the aforementioned $266 million settlement. For the full year 2018 our reported cash flow from operations was $274 million. This compares to fourth quarter 2017 cash flow from operations of $156 million and full year 2017 cash flow from operations of $773 million. In terms of year-over-year cash flow decreased during 2018. We added slide 11 which highlights a few items worth noting versus prior year. The HMA's legal settlement paid in the fourth quarter of 2018 reduced cash flow from operations by approximately $266 million. Retirement benefit payments for retirees and payments to employees for severance or early retirement were approximately $26 million reduction. CVR expenses, divestiture cost and government settlement and legal costs reduced cash flows by approximately $9 million. Not on the slide, but worth mentioning is that we paid $84 million more on interest in 2018 and cash from divested hospital accounts receivable was $100 million less in 2018. In terms of the year-over-year cash flow decrease during the fourth quarter of 2018, there are a few items worth noting versus prior year as well. The HMA legal settlement reduced cash flow from operations by approximately $266 million. Retirement benefits, plan payments to retirees were approximately $8 million reduction. Government settlement legal costs reduced cash flow by approximately $3 million. Similar to the full year in the fourth quarter of 2018 we paid $77 million more on interest, and cash from divested hospitals accounts receivable was $32 million less in 2018.

Turning to CapEx, our CapEx for the fourth quarter of 2018 was $114 million or 3.3% of net revenue while our full year 2018 CapEx was $527 million or 3.7% of net revenue. During full year 2017 our CapEx was $564 million or 3.5% of net revenue. When comparing full year CapEx to prior year's, our 2018 CapEx is lower due to limited replacement hospital spending and more targeted CapEx focused on our higher return core hospitals. We expect our capital expenditures to increase to our historical average of approximately 4% during 2019. As Tim mentioned in 2019 we'll be investing capital in a number of promising growth opportunities, on both the inpatient and outpatient side.

Moving to the balance sheet, at the end of the fourth quarter we had approximately $13.4 billion of long-term debt, which is down from $13.9 billion at the start of the year. Our current maturities of long-term debt at the end of the year were $204 million versus $33 million at the end of 2017. And at the end of the fourth quarter we had approximately $200 million of cash on the balance sheet compared to roughly $560 million at the end of 2017. Moving forward as we make additional divestiture progress we expect to further reduce our debt.

On February 15th 2019 our credit facility was amended (inaudible) revolving lender approval to amend our first lien net debt to EBITDA ratio of financial covenant and to reduce the extended revolving credit commitments to $385 million from the previous $425 million level. The new financial covenant provides for a maximum first lien to net debt to EBITDA ratio of 5 to 1 from July 1st 2018 through December 31st 2018, 5.25 to 1 from January 1st 2019 to December 31st 2019, 5.0 to 1 from January 1st 2020 through June 30th 2020, 4.5 to 1 from July 1st 2020 through September 30, 2020 and 4.25 to 1 thereafter. So this amendment provides the Company with additional flexibility as we execute our strategic plans. We export expect our first lien debt to EBITDA ratio to move low or over time from a combination of core EBITDA growth coupled with additional divestitures to disburse lien debt.

I'll now walk through our 2019 guidance. For 2019 our full year guidance includes the following. For 2019 net operating revenues are anticipated to be $12.8 billion to $13.1 billion after adjusting for expected divestitures. Same-store adjusted admission growth is expected to be flat to up 1%. Adjusted EBITDA is anticipated to be $1.65 billion to $1.75 billion. Income from continuing operations per share is anticipated to be negative $1.60 to negative $1.25 based on weighted average diluted shares outstanding of 114 million to 114.5 million. Cash flow from operations is forecasted $600 million to $700 million and CapEx is expected to be $475 million to $575 million.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

Thanks, Tom.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

One more thing, Wayne. Finally in terms of 2019 I want to get this out. We did want to point out a few sequential headwinds from the fourth quarter to the first quarter. As a reminder, the payroll tax reset reduces EBITDA in the first quarter versus the fourth quarter. We also point out deductibles and coinsurance reset for patients in the first quarter. And also in the first quarter, we're making core operational investments which we expect to continue to drive solid core growth in the back half of the year. We expect these investments to help drive better volumes and expense savings such as our initiatives on supply expense side. Wayne?

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

That's it for now?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

That's it for now.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

Okay. Great. At this point operator, we're ready to turn it over and open it up for questions. We'd remind everyone to one questions or several you will have time on the call, but as always, we're available to talk to you and you can reach us at area code 615-465-7000.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Brian Tanquilut from Jefferies.

Brian Tanquilut -- Jefferies -- Analyst

Hey, good morning guys. Congrats. I guess the question for Wayne and Tom as I think about your guidance, it's assuming a pretty healthy expansion in margins for 2019 and that's obviously on top of 90 basis points of margin expansion in '18. So if you don't mind just walking us through where the confidence comes from that you can grow margins at that pace and where you can squeeze more costs out of the system, especially with 0% to 1% same store assumption? Thanks.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

So let me just talk just a second about where we are and where we are with leadership within an organization and how well we're doing and how committed our executives are across this Company and we're making great progress. And I think -- we think there is plenty of opportunity left and strategic -- our strategic imperatives have really ignited a lot of energy throughout the organization. So I think we're on the right track and so I'll let Tom get to the fundamentals.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

All right. Brian, so thanks for the question. On the margin expansion we really see two sources. Number one is as we mentioned that we tried to highlight this on slide number 7 that Tim mentioned with what we're getting down to on our core hospitals. These are hospitals with a history volume growth on the adjusted admission side, a history of better rate. And so we feel very comfortable with the rate that we can grow our same store revenues, that's going to lead to margin expansion. And then on top of that some of the expense control initiatives we've got, some of the volume and growth initiatives that we've talked about, so that's going to be one side that we've got core of hospitals that has a history and with the investment we're making, we think a bright future.

The second piece of that is going to be from the additional divestitures. And you could do some math on that if you just take a look at at least $900 million of revenue that we're going to be divesting mid single-digit margins on those and pulling those margins out with proceeds will -- that in effect will have the impact of raising giving us some lift on the margin as well. So we feel very comfortable with -- and from our history, we've seen this in '17 and we've seen in '18 the ability to not only improve margin but improve our free cash flow through the divestiture program and other initiatives. So that's the source of the guidance there.

Operator

Your next question comes from Ana Gupte from SVB Leerink.

Ana Gupte -- SVB Leerink -- Analyst

Hey, thanks, good morning. On the guidance again, as far as the asset sales go, can you break out for us the core growth that you have versus the asset sales that -- and the proceeds and the timing, just give us a sense for your guidance versus what consensus we're baking in?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

So, Ana it's Tom again. We are banking on roughly 3% same-store net revenue growth and we've called out, we think the. growth in adjusted admissions is going to be between flat and up 1%. So as I just mentioned the core hospitals were getting down to good history of growing adjusted admissions, good history of getting rate. So that's the driver of that. And then the other thing I'd point out is, those are the ones with a better history that means some of the divestiture ones that are mid-single digit margins don't have the growth history, don't have the rate history. Again that's panned out when you contrast those to the page 7 slide. So anyway, it's roughly 3% same-store net revenue growth.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

So on an inpatient basis, we had a very strong quarter in terms of the net revenue growth on inpatient. And our case mix index continues to become even stronger. So there's plenty of opportunity there going forward.

Operator

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

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. I guess, being on that subject around the guidance, obviously two sources there, your same-store portfolio. But how much would you attribute to just improvement in that remaining same-store base after divestitures versus the impact of actual divestitures? Thanks.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

So, Frank, we haven't called that out exactly, but we can't tell you the -- we're most excited about opportunities on the supply side. I think through our hospital operators, we've made great progress for several quarters in a row on the SWB side. We think that's sustainable. We're talking about the expense side, we're -- on the supply expense side, we're making investments. Those investments will continue through this year. We think we will continue to improve throughout '19 into '20 on the expense. Some of those initiatives will get into purchased services as well and some opportunities there.

And I'm going to let Tim highlight a few of -- some of the -- on the volume side, some of the initiatives we've had, the investments we've made on physicians that we think are really contributing on the revenue side.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

So Tom you might comment before we go to Tim on the margin at the midpoint and the margin at the upper end of the guidance because I think that sort of gets to Frank's question.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Yeah, right. So we are -- I think it's 12.9% is the midpoint of the margin that we're putting out there. We think that that's very achievable, when you put the combination of the divestitures out there and then these initiatives that Tim will speak to. Some of those were further along, some we will be making and we will see more of the impact later in the year and into 2020.

Tim Hingtgen -- President and Chief Operating Officer

Sure. Thanks, Tom. As the theme is continuing the core markets are strong. We have been investing in those markets and as you can see from slide 7, of the 112 hospitals, our core portfolio, you can see growth emerging from those markets. So I believe that's a key driver of obviously our projections for next year. We've talked in the past about the multi-year strategic planning process, making sure we're recruiting doctors and providers in our markets to drive service lines and acuity and as I said, you see that's shining through in 2017 and 2018 in some of our core markets.

The CapEx investments that we referenced on the inpatient side in Birmingham and Palmer, Alaska, surgical services in Las Cruces, cardiac in Naples. These are all hospitals that on a regular basis have capacity constraints. So we do see upside for our CapEx investments, getting a good return on that capital, but also fueling incremental growth. And then supporting all of these service line initiatives, we continue to see progress on the transfer centers. The deployment is actually ahead of schedule. We had sequential quarter-over-quarter improvement and received transfers across the enterprise, and most importantly, we're seeing a growth of non-CHS hospitals utilizing the service bringing patients into our networks to drive those core service lines that we've been investing in.

Access points, primary care development, making sure that we're fortifying our markets to drive acuity is also a key imperative for us. And as I said, 15% growth year-over-year and sign providers, we have started about 30% more year-over-year with a good pipeline yet to commence in 2019.

Operator

Your next question comes from AJ Rice from Credit Suisse.

AJ Rice -- Credit Suisse -- Analyst

Thanks. Hi, everybody. I wanted to ask a little bit about what you're thinking with respect to the capital structure. I guess it's two parts, one the amendment that you did. Thanks for the comments, Tom. But is the principal reason for that amendment is just to get flexibility to be able to pay down the $155 million (ph), that's coming due this year? And then my longer-term question is business on a good trajectory, initiatives are starting to kick in, at some point you guys think about the rework in the capital structure. I think you sort of take 12, 18 months and let the initiatives play out before you revisit that or is it something that you would do more near term? What is your thinking about how the trajectory of the business is on and how that relates to you thinking about reworking the capital structure?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

All right. Thanks, AJ. So first of all on the amendment. Really with respect to the amendment, we did a major refinancing last year where we set the previous covenant terms and when we were modeling divestitures and so forth and we thought, we were going to have much more divestiture proceeds. At this point in time that we would have used to pay down first lien and to manage that first lien ratio. Now that the divestitures are going to be coming later in 2019, we thought it would be a good idea to give ourselves cushion. We did not need the amendment for our fourth quarter. We were still under the existing covenant. But going forward and given the timing of divestitures, we thought that it would be a good idea and it does help on other fronts as well, AJ, for some of the other stubs that we will be paying down.

With respect to the capital structure, we are very focused right now. The operating initiatives that Tim and Lynn and Wayne talked about and getting those into place because we feel like that's going to drive margin and margin is going to be very important for us when it does come time to address capital structure. We also think it's going to be a good idea to have the exact amount and timing of our divestiture proceeds, understanding how we look post-divestiture and the amount of the proceeds and so forth. I think we will need to get through Q1, we will start assessing those and scoring those based on where we are. Really not -- no set timing but again we'll be in a better position to start assessing it beginning in quarter one and then just keep an eye on that -- that along with the market.

Operator

Your next question comes from Ralph Giacobbe from Citi.

Ralph Giacobbe -- Citi -- Analyst

Thanks, good morning. You mentioned the hospital closures in the release, which I don't think you've talked much about in the past. Are there more potential closures? Are they incremental to the list of hospitals that you've had for sale? And then could you maybe just help frame the economics when you do close a facility? And then separately, can you ultimately sell that land or help us think about that as well? Thanks.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Sure, I'll grab that one Ralph. Thanks for the question. Let me first kind of frame it out to the prior year 2018 divestiture and closure decisions. On the closures, those were the markets, where we had existing assets. So it was as much of a strategic decision as a margin improvement decision, where we could by and large move a good book of that business into existing assets in the market and strengthen our regional networks. And as far as our criteria for a closure or a sale for that matter, we do a top to bottom competitive assessment of each hospital in each market. Make sure that for us to drive improved competitive position and margin expansion in the future, we're in a position with reasonable capital investments to generate a stronger return on that capital and drive margin at the same time and increase the market share.

For the most part where the answers come up as no to that question, we've been able to either through inbound interest find strategic buyer to acquire that facility except that facility (inaudible) for a stronger path into the future with a strategic buyer. And in the rare occasion where we could not find a buyer, it's not a real long list of facilities but we would reevaluate whether a closure makes more sense than maintaining the operations and investing in its future build.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

So this -- just to be clear, this has nothing to do with individuals there, the physicians there, they're all good solid citizens doing great job, doing great work, taking good care of those patients. It's just the economics of making that work in a particular area or TAM. So it really is about the demographics and the economics of it, not about the individuals. We are appreciative for all those people.

Ralph Giacobbe -- Citi -- Analyst

Thank you, Wayne.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

And Ralph, leading at -- you asked about the economics of when we close the hospital. So we do have a process we go through. A lot of that is the playbook from the divestitures as far as, as we adjust services. With the closure, we are -- where we have equipment, especially newer equipment that we can use, we're very active in moving that. We are -- as Tim mentioned, the ones that we've gone through so far, we have other facilities nearby in those markets. So there has been a coordination of services on one of the markets in the east Tennessee. We actually left physicians in that marketplace.

But however, there are cost to close that down. And so those are included in our results for the fourth quarter, especially the two hospitals this year. And then with respect to the properties, the two in East Tennessee that we're still in those markets and very competitive in those markets. So we're likely not going to sell that to a competitor. We will look for alternative uses. We think we've got a non-healthcare provider that's interested in our large campus in Knoxville and we should have some news on that throughout the year, as we progress. And in some cases, we can raise the facility and sell the land. So we have, I guess, different options, depending on the situation there and whether we're still in those markets.

Operator

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

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Great, thanks. Just wanted to see what your view was on the actual kind of free cash flow that you expect to generate, I guess, this year and next year. Obviously, you've given the cash flow and CapEx guidance. But I think that excludes like minority interest payments and as usually other investments that you guys are making that aren't included in the CapEx number. Like when you kind of net all that out, are you able to kind of self-fund the growth that you're looking for this year? And you mentioned some of the growth initiatives you have in this replacement hospitals next year. Do you feel like you are going to be able to self-fund kind of all that over the next two years, I guess?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Yeah, so Kevin, just looking at -- if I look quarterly and at a very high level we've had negative free cash flow, we feel like we're very close to what I call a bounce in that to the point where net in 2019 we will be free cash flow positive and trending in the right direction after that. And it does include investments in some of the projects that we're talking about. So we feel comfortable with that, with the initiatives we have in place. Some of the things that are beyond us where cash flow drains but going forward, we like the direction that we're going.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

That includes some very good projects for us that we're working on pretty hard now, one in Fort Wayne (inaudible) and a few other locations. Venice is where we're thinking about replacement facilities kind of going out. So we're excited about those opportunities and we clearly think we can fund those.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Wayne the last thing I'd add there, we know that if we continue to improve our operations in our margins that that's going to be in a position to refinance it with better interest rates where we are right now. We do have a slight pickup on that with just on the interest rate front with the 2024 (inaudible) have a step down which is going to be about $20 million per year in interest.

Operator

Your next question comes from Sarah James from Piper Jaffray.

Sarah James -- Piper Jaffray -- Analyst

Thank you. You've talked about mid teens EBITDA margins as the goal, so about another 200 basis points further step-up from the '19 full year average. First given the savings ramp through the year do you think -- where do you think margins will be exiting '19? And second, can you talk about how you get to mid teens where the big buckets are for further cost savings or if this is more just a mix and high acuity growth.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Well, I think -- so we've talked about two buckets, one is operating performance and the second is through divestitures and these are divestitures and as a portfolio are going to be lower margin hospitals. Those coming out of the portfolio will give us a lift to our EBITDA margins.

The second piece, I think all the things there that we've talked about. On the one, the core hospitals have a history of adjusted admission growth, better rates and so we think with that that can get us to the point where we get beyond the 3% we're talking about and if we get above 3% rates we know we can grow margin off of that with just static expense management. If we start to make the improvements we anticipate, especially on the supply side and purchase services on the expense and that's going to be another source of margin and you put those together and that's what's getting us to where we intend to be.

Operator

Your next question comes from Gary Taylor from JP Morgan.

Gary Taylor -- JP Morgan -- Analyst

Hi. Good morning. I had one question and two clarifications so hopefully I'll get under the technicality on that. The question is, so when we look at the 2019 guidance you've given a fair amount of detail, but what is the same store margin improvement that's reflected in the guidance, the range?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

So, Gary we have not given the components of that of what's going to be left over on the same store. And like I said, we do think -- I'll tell you what why don't you go through your other two clarifications and then I'll try to hit them all.

Gary Taylor -- JP Morgan -- Analyst

Okay. I want to clarify, you said free cash flow positive in 2019. I wanted to see is that included what's been this recurring investment in other assets and cash distribution to MCI?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Okay. And are those the only two clarifications?

Gary Taylor -- JP Morgan -- Analyst

The other -- (multiple speakers) Oh, the other clarification was you said the 2019 guidance includes the divestitures for what's been under definitive agreement, but we don't -- of that remaining $900 million of revenue to sell we don't know how much is included under those four definitive agreements. So I guess I'm just clarifying that there still is some EBITDA in the guidance from assets that you anticipate selling over the course of the year.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Okay, got it. All right, so the first one on the guidance we have not given a breakout, it's like we said it's going to be a combination of the divestitures. We've seen this in the 2018 and 2017 divestitures when we were selling lower or negative EBITDA hospitals so that that's giving us some lift there. And as I mentioned, some of you have done some math already and shared with us, which I think you're on the right track there of filling out a certain level of mid single-digit EBITDA at certain $900 million-plus (ph) in this math and see how much you're going to get lift out of that and then the rest from the operating metrics we talked about.

Your question Gary on the free cash flow in 2019 and non controlling interest and other investments that is when I'm speaking a positive by the end of '19 and through '19 that is considering those. And the last piece on the guidance, so just to make sure we're on the same page here. We've got one definitive agreement right now. It involves four hospitals in South Carolina. That in addition to the two hospital sale we had in first year, well that's all of our hospitals in South Carolina. That one should be closing sometime in the next several months here. That is the only one under definitive agreement. We've got letters of intent and advanced discussions on the rest of the portfolio that we're counting into our 2019 divestitures.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

I might just comment that we've continued to have strong interest in the portfolio that we have an interest in selling. We still have strong interest in -- if you go through and you look back historically, we've done really well in terms of our divestitures. We see no reason why we shouldn't be able to complete our program within 2019.

Operator

Your next question comes from Whit Mayo from UBS.

Whit Mayo -- UBS -- Analyst

Hey, thanks. Just wanted to go back to Kevin's question for a second. And I'm just trying to think through the cadence of cash flow this year and historically you've had fairly large drain in the first half for all the reasons you cited, payroll taxes, bond payments, et cetera. What percent of the cash flow from ops do you see in the first quarter or maybe in the first half? And if you don't get proceeds in from divestitures, do you see the need to draw on the revolver ABL to fund any working capital in the first half? Thanks.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Thanks Whit. So we are -- I think generally what you will see with the refinancing that we did last year we have a pretty strong interest paid in second and fourth quarter that is going to be a little bit different cadence than what we had before that refinancing. And the -- so that will be something that will change slightly there. As far as the other items, I think the -- I did mention when I was talking about guidance that first quarter is typically a slower quarter from a cash flow standpoint and a couple of things, the resets that we talked about on employee benefits and then also with the -- our patients (inaudible) co-pays deductibles has an impact that changes the payer mix a little bit, the interest that I talked about. And then the last thing I had mentioned is just with respect to some of the initiatives that Tim mentioned, the physicians who we start up quite a bit more in the fourth quarter, they will be ramping up as we go on through the year and especially the supply cost initiatives that we have. We are making progress on those, but we anticipate that we will be making further progress later into 2019 with the rollout of the technology and that will go into 2020, we're pretty certain about that.

Operator

Your next question comes from Patrick Feeley from Barclays.

Patrick Feeley -- Barclays -- Analyst

Hey, good morning. My question is on accounts receivable. You mentioned uncompensated care has ticked up, DSOs has also been up throughout '18, up a few days I guess. I imagine that the divestitures are having some impact on that number. So is there any way to provide DSOs for the recurring hospitals excluding the 2018 divestitures, maybe just apples-to-apples 4Q '18 versus '17 for the 112 same store hospitals? And finally, was there any retained AR from those 2018 divested assets on the books at quarter-end that will be collected in 2019? Thanks.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Okay. Thanks, Patrick. When we look at our days in AR without divestitures on those because that gets really choppy depending when we sell those, but excluding the divestitures, it's been steady throughout the year and it's been steady when we even with the revenue recognition adjustment looking back to 2017 if we push that backwards it's been pretty steady there. We do keep our receivables and we pursue those and so I would say yes we definitely have receivables out there for our 2018 divestitures and we continue to work those down and again, just a remainder as we do the divestitures, the first 30 days after we close the divestiture, we tend to pay off all the accounts payable. We received some of the receivables but we've received most of the receivables in the second month and third month, after divestitures. And then we continue to pursue those, although after several months that nets down to a smaller amount, and it becomes more of a rather than the third-party payers it becomes more of the self-payers on the receivables.

Operator

Your next question comes from Josh Raskin from Nephron.

Mary Shang -- Nephron Research LLC -- Analyst

Good morning. This is Mary on for Josh. I was just wondering if you could provide some more color on the other operating expense increases 80 basis points this quarter and kind of which buckets within this metric are the largest near-term opportunities in 2019 for margin expansion? And what types of services are you converting from outsourced to in-house? Are these investments primarily made in the first half of the year?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Yeah. So the larger increases there are, one would be provider taxes and that's a good thing when those increase, that's probably the biggest increase for the quarter and the year. Those are payments that we make to various states and the return on the monies is very positive. So from a cash flow standpoint, typically the taxes precede the monies that we receive on those. So provider taxes are up.

Our insurance costs, which includes our professional liability has been up for the quarter and for the year. We've had -- in the prior years, we've had really outstanding results on our older accident years and the results on those and that's kind of flattened having better than expected results to maybe just as expected results. So relative to prior years that insurance costs have been higher. We historically have been talking about medical specialist fees, we've been doing a lot better. Tim, I'll let you talk about that maybe contract labors in there as well.

Tim Hingtgen -- President and Chief Operating Officer

Sure. Our medical specialist fees that has been a category on -- particularly on welcome (ph) spend that escalated in 2018. We saw that moderate from the third quarter into the fourth quarter, part and parcel to the strong physician recruiting results that we've been referencing when we bring in a permanent physician. The good news is we have a pipeline of patients from that service line that we can then more firmly grow on what we hope is a more reasonable cost structure for the long run. So reducing welcome spend, we saw that moderate in the fourth quarter and as well as other physician expenses.

In terms of what were -- insourcing to outsourcing and outsourcing and insourcing, hospital-based service contracts are in that category. We've called that out a few times in 2018 in certain markets where an outsourced vendor maybe putting into demand for something that we believe is more costly than what we could do it for ourselves we've converted those services to an in-house function. Same with some housekeeping services dietary, the typical purchase services from a hospital operation standpoint.

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

The last thing I would add to that, our IT platforms were slowly migrating from platforms where we own the software, we maintain it to -- we're looking a lot more and going to do a lot more cloud-based where it's a subscription and that -- so that kind of goes out of our CapEx and depreciation and goes more into purchase services is another factor that we saw the increase.

The last piece I'd make, the broad purchase services Tim mentioned. That's all coming under the new organization and some of the technology that we mentioned on the supply side. And so, that's going to be really the mechanism to help us be better as we manage that.

Operator

Your next question comes from Zack Sopcak from Morgan Stanley.

Zack Sopcak -- Morgan Stanley -- Analyst

Hi, good morning. Thanks for the question. I just wanted to ask about your ER visit, same-store trends and I think you had mentioned that you've been investing in urgent care and you've seen some of the volume go there. I am just wondering if you could remind us of the scale of your urgent care business and maybe how much of that decline you are able to capture right now? Thank you.

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Thanks, Zack for the question. I'll go ahead and field it. I mentioned this briefly in my comments earlier as far as the decline in the outpatient lower-acuity ED visits. We believe we've captured all, if not more, with our access point expansion strategies on the urgent care center, walk-in care center and the new primary care locations. I believe we're up year-over-year in primary care -- traditional primary care practices by more than 25 new locations. So if you add all that together, we're up over 30, 35 on primary care locations across our markets. We've seen good growth on our urgent care and walk-in care center visits in the fourth quarter for instance, up 4%, even without the flu that we had in December of prior year. We're just under 100 total urgent care and walk-in care centers across the Company. We should eclipse that's 100 number next year.

Primary care visits, again absent flu in December of last year, we saw a 2% growth in our primary care visits in the month -- I'm sorry, in the month of December but throughout the fourth quarter.

Operator

And due to time, our last question will be from Steve Tanal of Goldman Sachs.

Stephen Tanal -- Goldman Sachs -- Analyst

Good morning, guys. Thanks for the detail. I guess just one for me. Just on the revenue per adjusted admits (ph) in Q4, a little bit of slowing sequentially kind of excluding that decline in the value of employee deferred comp plans called out the deck. So just wondering what sort of changed versus the first nine months of the year to drive that? And how you see those components of the rate sort of playing out in '19, where the guidance seems to imply some potential slowing, I guess it's the 2% to 3% range of a pretty stable. So just wanted to sort of parse through that a little bit?

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Sure, Steve. So if you go back the Company's history and a lot of this is due to significant decreases in supplemental payments that we had 2016, 2017, we averaged about right around 2%, 1.9% to 2.1%, for several years on net revenue per adjusted admission. We started a lot of initiatives in 2017 where we got traction. In some of the bigger ones, we started driving improved case mix in the fourth quarter of 2017 and that drove fourth quarter 2017's net revenue per adjusted admission of 2.7%. So I -- versus the prior quarters in 2017 were probably 1.9% to 2.1%.

So I think we had a tougher comp in this quarter, and you're right, we think these initiatives we have, they're still going to be impactful, but maybe not to the degree they were in the first three quarters of 2018, the fourth quarter 2017. But we do like the kind of discipline that we have now on that to continue growing that, especially with our focus on specific service lines.

Operator

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

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

Thanks again for joining the call today. As we outlined on today's call, we are encouraged with all the progress we've made in 2018. We're pleased with the strong finish to the year and the fourth quarter. Moving forward we're focused on strategies we discussed on today's call and will be looking forward to a strong 2019. We specifically want to thank our medical staff, physicians, clinicians across the Company, our management teams, our hospital Chief Executive Officers, hospital Chief Financial Officers, the Chief Nursing Officers division and regional operators for their continued focus on quality and operating performance.

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

Operator

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

Duration: 59 minutes

Call participants:

Ross W. Comeaux -- Vice President of Investor Relations

Wayne T. Smith -- Chairman of the Board and Chief Executive Officer

Lynn T. Simon -- President of Clinical Operations and Chief Medical Officer

Tim Hingtgen -- President and Chief Operating Officer

Thomas J. Aaron -- Executive Vice President and Chief Financial Officer

Brian Tanquilut -- Jefferies -- Analyst

Ana Gupte -- SVB Leerink -- Analyst

Frank Morgan -- RBC Capital Markets -- Analyst

AJ Rice -- Credit Suisse -- Analyst

Ralph Giacobbe -- Citi -- Analyst

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Sarah James -- Piper Jaffray -- Analyst

Gary Taylor -- JP Morgan -- Analyst

Whit Mayo -- UBS -- Analyst

Patrick Feeley -- Barclays -- Analyst

Mary Shang -- Nephron Research LLC -- Analyst

Zack Sopcak -- Morgan Stanley -- Analyst

Stephen Tanal -- Goldman Sachs -- Analyst

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