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Community Health Systems Inc (CYH) Q2 2019 Earnings Call Transcript

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Community Health Systems Inc (NYSE: CYH)
Q2 2019 Earnings Call
Aug 6, 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 2019 Q2 Conference Call. [Operator Instructions]

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

Ross Comeaux -- Vice President of Investor Relations

Thank you, Mike. Good morning and welcome to Community Health Systems Second Quarter 2019 Conference Call.

Before we begin the call, I'd like to read the following disclosure statement. This conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our Annual Report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of those 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 from government and other legal settlements and related cost; expense from settlement and fair value adjustments to legal expenses related to cases covered by the CVR, expense to record valuation allowance recorded for promissory note with the sale of hospitals in 2017; an expense recorded change in estimate for our professional liability claims accrual.

With that said, I'd like to turn the call over to Mr. Wayne T. Smith, Chairman and Chief Executive Officer.

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

Thank you, Ross. Good morning and welcome to our second quarter 2019 conference call. With us on the call today is Tim Hingtgen, President and Chief Operating Officer; Tom Aaron, Executive Vice President and Chief Financial Officer; and Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer. On the call today, I will provide some comments across the organization as well as on our performance during the quarter. Then I'll turn the call over to Tim, who will provide an update on operations and then Tom will provide some details on the financial results.

Looking to the second quarter, we are pleased with the progress we made and the performance. We are continuing to strengthen the Company across multiple fronts. Our strategic initiatives, which we have been rolling out over the past couple of quarters are working and helping to drive improved performance. And the Company is making positive strides across all of our strategic imperatives including safety and quality, operational excellence, connected care and our competitive position. We're also seeing great execution by market leaders across the portfolio as they deliver on their strategic plans, capitalize on their specific market opportunities and advance and improve their market position.

Looking at our same-store volumes and our net revenue, we continue to see sequential improvements. And it's worth noting that our second quarter volume and net revenue growth marked our strongest performance since the first quarter of 2015. Let me say that again, it's worth noting that our second quarter volume and net revenue growth marked our strongest performance since the first quarter of 2015.

During the second quarter on a year-over-year basis, our same-store admissions increased 2.3%, our adjusted admissions grew 1.8%, our surgeries were up 3.4% and finally, our same-store net revenue was up 4.9%. So we're pleased to see our same-store volumes continue to improve and we expect to continue to deliver strong volume and net revenue performance going forward.

Tim will provide some additional thoughts on our inpatient volumes in a minute. Our adjusted EBITDA came in at $402 million. We are pleased to see that our adjusted EBITDA increased sequentially despite the second quarter being a lighter volumes than the first quarter. And our EBITDA margin 12.2% improved 70 basis points year-over-year and 60 basis points sequentially.

During the quarter, we also made a number of improvements across our expenses. We have identified substantial expense opportunities for the back half of 2019 and into 2020, which will continue to help us improve our margins and our EBITDA. Tim will talk more about how -- more about this and how we will leverage the expense opportunities and improve our margins and cash flow.

Overall, we are confident about our outlook and our opportunities as we move through the second half of 2019. Following the number of divestitures over the past two years, the Company now has a stronger portfolio of assets. Today our hospitals are in more substantial markets with better population growth, better economic growth and lower unemployment, providing an opportunity for improved growth potential and with a greater portion of our resources and investments focused on the smaller and stronger portfolio coupled with the continued execution across our initiatives, we expect to drive improved results in the back half of 2019 and beyond. We also believe the stronger portfolio will help the Company deliver both improved cash flow performance and lower our leverage ratio.

Our current divestiture plan anticipates the completion of divestitures of at least $2 billion of net revenue with single -- with mid-single-digit EBITDA margins. Total estimated gross proceeds, excluding working capital is expected to be approximately $1.3 billion. Through the end of the second quarter of 2019, it's part of the plan, we closed divestitures accounting for approximately $1.5 billion of net revenue generating $550 million of gross proceeds. These divestitures consisted of low single-digit margin EBITDA hospitals.

During the third quarter, we closed divestitures for Tennova in Lebanon, Tennessee; College Station in Texas. We announced a definitive agreement to sell Bluefield Regional Medical Center, West Virginia; Heart of Florida Regional Medical Center in Davenport, Florida; Lake Wales Medical Center in Florida, all of which are expected to close during the third quarter and we expect our third quarter divestitures to generate approximately $200 million proceeds. Tom will provide more details on our full year 2019 guidance on the call. But our EBITDA guidance remains unchanged. 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 additional comments.

Tim Hingtgen -- President and Chief Operating Officer

Thank you, Wayne. We were pleased with our same-store volume and net revenue performance, which continues to show solid year-over-year growth as well as sequential improvements. As Wayne mentioned earlier, we have a stronger group of hospitals today and these more sustainable hospitals and markets are benefiting from the strategic initiatives, we have invested in over the past several quarters. Growth capex in our key market, medical staff investments consistent with the advanced strategic planning, the leveraging of data analytics across the organization, the shift to our regional management model to the majority of our markets and other factors, which have positioned the Company for enhanced EBITDA growth and margin improvement going forward.

Specifically, our operating initiatives, including the transfer program, Accountable Care Organizations or ACO's, inpatient investments, access points, patient connectivity, our service line enhancements and others are helping to drive improved performance. On today's call, I will talk about our volumes in more detail, share the latest on a few of our strategic initiatives that are helping to drive volume growth and then I will walk through a number of expense management opportunities, we expect to realize in the near-term.

First, starting with our volumes. Our same-store admissions increased 2.3%. The increase in volumes were seen across a number of different geographies and markets. In terms of individual service lines, we drove growth across cardiovascular, neurology, orthopedics and spine and other targeted specialties. Surgeries grew 3.4% due to an increased across orthopedics, GI and other categories. After a couple of negative growth quarters ER visits were up 2.4%. We believe this strength is due in part to our targeted service line development, which is supported by our transfer center enhanced clinical and EMS outreach programs and our freestanding emergency department growth. We continue to invest both in our hospital-based ER as well as alternative settings of care such as urgent care and walking care centers and freestanding EDs.

During the second quarter, we opened our 13th free standing ED iin our Santa Rosa Florida market, North of Pensacola. We've also been pleased with the development and growth of our primary care provider base and practice locations, posting double-digit growth in traditional primary care visits during the quarter.

Looking forward, we have a strong pipeline of additional on-demand care access points in development, which are designed to provide consumers with conveniently located health services and connecting with our healthcare systems providers and services. Same-store net revenue increased 4.9% with comparable growth in both the inpatient and outpatient side. So overall, we were pleased with our volume performance and remain focused on driving this momentum going forward due to leveraging of our initiatives and the continued execution by our local market leadership teams.

In terms of our transfer program, as I mentioned in the past, the program helps to manage the inbound referrals to CHS hospitals from both CHS affiliated and non-affiliated hospitals in a particular area.The program has provided a number of benefits including one, more real-time visibility into daily emergency department, bed management and case management operational performance; and two, improve data capture, allowing for more targeted service line development strategies and the line physician hiring in each particular market.

Looking at our same-store hospitals that have utilized our transfer and access program for more than a year, CHS inbound transfers increased 17% year-over-year and also picked up momentum sequentially, despite the second quarter historically being a lighter volume quarter. The payer mix across CHS inbound transfers has also been favorable as commercial mix grew faster than total Medicare and other payer categories. During the second quarter, we completed the planned rollout of our transfer and access program in our 56th hospital, which now includes hospitals in 18 distinct markets. Due to the success we are seeing from this initiative, we now plan to leverage this capability in additional markets with plans to expand the program into another nine hospitals by the end of 2019, which we expect will help drive incremental growth going forward. While today I wanted to highlight the success we're seeing from the transfer program, we are also experiencing continued progress across all of our strategic volume growth initiatives.

Now I would like to provide an update on our supply chain and purchase service initiatives. As a reminder, we have reorganized our supply chain organizational structure and added experienced supply chain executives to lead this focus and drive expense savings. Through these efforts, we are enhancing our technology across the company to more efficiently procure supplies and services and our new strategy focused on stronger national contracting is providing good results. In terms of commodity supply products, our clinicians lead teams have launched more than 50 supply categories designed to identify products that offer the best quality, safety and overall value. We are seeing quick adoption from this program and we'll continue to launch new categories to drive incremental savings.

On the physician preference side, we have deployed physician led advisory committee to assist with the selection of clinical physician preference items. We've implemented the first category late in the first quarter, which will lead to approximately 30% savings on that particular implant. And we executed two additional physician preference item categories that started providing savings in July. Combined, these three categories will lead to over $40 million of estimated annual savings and we expect to implement the same strategy with other specialty categories throughout the remainder of 2019. We deployed a similar strategy across certain purchase service categories and we expect these focused efforts to drive meaningful savings over the coming quarters.

In addition to our ongoing supply chain transformation, our management team initiated a strategic cost reduction program during the quarter focused on corporate shared services and hospital administrative costs. The program will include ongoing expansion of the vendor spend reduction initiatives, which I just mentioned along with reorganizations of certain non-clinical areas, technology-led process improvements and real estate and other cost reduction efforts.

Many program activities are under way and are expected to produce savings over the next several quarters. Adding all this together, as we look forward, we expect to deliver improved same-store EBITDA growth and improved EBITDA margin performance. Tom?

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

Thank you, Tim and good morning everyone. Now we will discuss second 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 second quarter of 2019, net revenues increased 4.9%. This was comprised of an 1.8% increase in adjusted admissions, 3.1% increase in net revenues per adjusted admission.

During the second quarter, our net outpatient revenues were 53% of our net operating revenues and as Tim mentioned earlier, we drove similar mid-single digit same-store net revenue growth on both the inpatient and outpatient side. Consolidated revenue payer mix for the second quarter of 2019 compared to second quarter of 2018 shows managed care and other which includes Medicare Advantage increased 120 basis points. Medicare fee-for-service decreased 170 basis points, Medicaid increased 20 basis points and self-pay increased 30 basis points.

Looking at our same-store adjusted admissions by payer, our managed care Medicare Advantage and self-pay volumes were up, while our Medicare fee-for-service and Medicaid volume decrease. During the second quarter of 2019 the sum of consolidated charity care, self-pay discounts and uncollected revenue increased from 31% to 31.8% of adjusted net revenue year-over-year, an 80 basis point increase. For the same-store expense items, our salaries and benefits as a percent of net operating revenue was flat. Supplies expense as a percent of net operating revenue for our same stores decreased 20 basis points is lower commodity spend more than offset increased implant volume related to surgery growth.

Other operating expenses as a percent of net operating revenues for same-stores increased 80 basis points due to higher IT subscription fees, vendor-related expenses and insurance costs. Malpractice expense incurred in the second quarter was higher, even after excluding the increased expense from the change in estimate for our professional liability claims accrual.

Looking at the P&L on a consolidated basis, other operating expense decreased 30 basis points on an adjusted basis. While we expect to drive improvements on other operating expense line going forward, we have experienced increased IT subscription fees as we have utilized more cloud computing technology across the Company. This shift lowers ongoing IT capital expenditures and SWB expense, but the technology fees for the cloud increases other operating expenses. That said, we're focused on driving expense improvements across our three primary expense lines. As Tim mentioned, we have now completed national contracting for three physician preference categories with more to follow later in the year. This contracting effort will include both supply chain and purchase service opportunities. Through all of these initiatives, we expect to see incremental improvements going forward.

Switching to cash flow, our cash flows provided by operations were $265 million for first half of 2019. This compares to cash flow from operations of $94 million in the first half of 2018. Looking at the year-over-year increase there are few items worth noting versus the prior period. We had lower interest payments from timing due to our recent refinancing activity, contributing approximately $176 million more this year. This was offset from higher cash outflow for malpractice claims payment of approximately $72 million. Other year-over-year increases and decreases including working capital changes contributed approximately $67 million during the first half of the year.

Turning to capex, our capex for the first half of 2019 was $212 million or 3.2% of net revenue. During the first half of 2018, our capex was $295 million or 4.1% of net revenue. We continue to make investment toward high growth opportunities in key markets, and we remain focused on generating good returns on our capital spend.

Moving to the balance sheet, at the end of the second quarter, we had approximately $13.4 billion of long term debt with current maturities of long term debt of $206 million. From a liquidity perspective, at the end of the second quarter, we had approximately $207 million of cash on the balance sheet, approximately $235 million in undrawn revolver capacity, ABL borrowing capacity, $500 million of first lien borrowing capacity and approximately $200 million in anticipated Q3 divestiture proceeds.

Our first lien net debt leverage ratio, financial covenant under our credit facility is currently 5.25:1. As of June 30, 2019 our first lien net debt leverage ratio is approximately 4.96:1. We expect the first lien net debt leverage ratio to decrease going forward from a combination of additional debt pay down in EBITDA growth. In terms of the capital structure, we're focused on the execution of our strategic initiatives, which we expect to drive improved same-store EBITDA growth allowing the Company to deleverage and drive better cash flow.

Before I move to guidance, I want to reiterate some of Wayne and Tim's earlier comments on the business. Overall, we had a good start to 2019. We had a stronger second quarter compared to our first quarter. We're pleased with our continuous line improvements and many of our initiatives are on track and expanding. As we think about the second half of the year, we expect to deliver a stronger second half of the year than the first. As Tim mentioned, we expect to drive additional supplies, costs and other expense savings across the Company. In the final 2020, inpatient -- Medicare inpatient rates will benefit our Medicare and Medicare Advantage inpatient revenue starting in the fourth quarter.

Now I will walk through our full year 2019 guides. As reminder 2019, our guidance contemplates future divestitures and does not reflect refinancing activities. Our updated guidance includes the following, same-store adjusted admission growth is anticipated to be up 0.5% to up 1.5%. We increased our full year range by 50 basis points due to strong volume start to the year. For 2019, net operating revenues anticipate to be $12.9 billion to $13.2 billion after adjusting for expected divestitures. Adjusted EBITDA is anticipated to be $1.625 billion to $1.725 billion. Net income per shares anticipate to be negative $2 to negative $1.65, based on weighted average diluted shares outstanding of $114 million to $114.5 million. Cash flow from operations is forecast at $550 million to $650 million. Capex is expected to be at $450 million to $550 million. Wayne, I'll return the call back to you.

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

Thanks, Tom. And at this point, operator, we're ready to open up for questions. We limit everyone to one question, so several of you can have a chance [Indecipherable]. But as always, we're available to talk to you and you can reach us at (615) 465-7000.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Frank Morgan from RBC Capital Markets.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. That was good color in terms of the volume side, but I just want to go back to the pricing. One more time in your outlook for the second half of the year, any incremental impacts from state government programs that you can think of, that might affect that? And then also just you mentioned the final PPA as well, but just curious about the rural wage adjustments. How much of an impact that would be for you? Thanks.

Tim Hingtgen -- President and Chief Operating Officer

Yeah, Frank. So in the second quarter, we had a couple of that kind of recur in the second quarter in various states. So we had expected that to be recurring in the second quarter. We had -- on the supplemental programs we had just a few that were outside, but not significant dollars involved with those. With -- on your question about the finalized Medicare rates, so, we benefited from that. Especially on the wage index, we have approximately 40 hospitals that we were able to benefit of being in the lower quartile and stepping up. So overall we handicapped that, when you look at the Medicare fee-for-service and the Medicare Advantage impact to that at approximately $80 million per year run rate that will start on October 1.

Also the proposed outpatient rules came out and one thing that looks like for certain in that is that the wage index calculation, our benefit from that will be in the outpatient as well when that's finalized, but just looking at what is proposed right now, that's about $40 million benefit on Medicare and Medicare Advantage, that would be starting on January 1, that's a pretty strong payment environment. Just looking at the horizon on other supplemental programs, I think the main when we called out this year was New Mexico Medicaid, which we're dealing with, there has been a new program put in there, that should offset that. And then, we don't see any other dramatic changes in the market. One other item to call out, I think we talked about this before, Virginia did a Medicaid expansion and we are clearly seeing the impact of that movement from self-pay to Medicaid in that state and so that has been a benefit for us from that standpoint.

Operator

Your next question comes from Albert Rice from Credit Suisse.

Albert Rice -- Credit Suisse -- Analyst

It's AJ. Anyway, you guys have to spend a lot of time talking about the initiatives that are driving the volume growth and obviously you've probably got some help as well from the divestitures, I would think on the same-store numbers, but the strength you're seeing, any thought about what the underlying market trends are? Are you seeing any underlying strengthening in your markets, either on the medical, surgical or in any payer class particularly that will be worth highlighting or is it mostly just you grabbing share or keeping share within your portfolio, given your transfer initiative and so forth.

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

AJ, it's Wayne. I think -- we think based on our -- all of our initiatives that, and I think we can begin to demonstrate this, we are gaining market share across the board in our markets. It's working, obviously getting some of those facilities that we're not performing as well has been helpful to us, but part of it is market share. Tim might address some of the initiatives we have, they are absolutely working.

Tim Hingtgen -- President and Chief Operating Officer

Right. As far as the sector itself obviously -- we want to grow commensurate with the sector, but we believe the volume growth in the markets were due to -- again a stronger core, strong strategic plans. We've talked about this for the last several years, in terms of multi-year strategic plans, recruiting the right doctors. Normally we have visibility into opportunities through our transfer center data. In other words, where we weren't able to accept transfers because we didn't have the specialist of the service line or the capital of the equipment. We've invested in that and really have seen strong growth as I pointed out on a same-store and a sequential basis to that initiative in those investments. The EDs were strong performer for us this quarter. We've called out the last couple of quarters, some macro trends. With some of our lower acuity business was moving into our urgent care, walking care and primary care practices.

This quarter we did see -- we think that through our Director of Physician Outreach programs including EMS ways on, perhaps better partnership with the EMS providers. I'm showing some preference for our networks in the markets driving that market share improvement that Wayne just reference. We still saw growth in our urgent care, walking care centers and primary care practices even with that ED growth. So in general, we believe the strategic initiatives and the -- really the day-to-day focus, the Regional President model, where we have Regional Presidents working more closely with hospital CEOs on a daily basis is expediting the execution on those investments we made in the strategies .

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

And I would end this with one of the things I've said earlier that, our second quarter volume and net revenue is as strong as we've had since 2015. So I think we're making really good progress. This is not just a blip here, it's strong progress. And AJ, just going back to the previous question. Strong payer mix also helped on our net revenue per adjusted admission in the quarter.

Operator

Your next question comes from Josh Raskin from Nephron Research.

Josh Raskin -- Nephron Research -- Analyst

Hi, thanks. Good morning. Question around capex as you kind of think into 2020 and I know you guys aren't giving guidance, but just directionally vis-a-vis the $500 million or so that you will spend in 2019. How should we think about that number? And then within the sort of the totality of that number, the mix between outpatient development and then maybe some of the inpatient initiatives that you guys are making would be helpful?

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

All right. So, Josh, thanks for the question. When we look at our capex and where we are this year, a couple of things to call out. One, we do have with the divestitures going on with to be divested hospitals at slightly lower. We have a savings there that's been reflected in our year-to-date spend. Going forward as we discontinue the divestiture program. We're going to see that go back up to -- I'd say traditional levels, which have been around 4%. We've also mentioned, we've got three kind of hospital replacement projects or newer hospital. We got a new hospital, replacement hospital in La Porte, Indiana, that's under way. We've got a community hospital going in the Tucson [Phonetic] market and we just broke ground in Fort Wayne with a replacement hospital for St. Joseph.

That's not going to be as much spend in '19, but that should start picking up in 2020 and so some of the years where we've had and we put this in our slide more replacement hospital spend, I think you'll get closer to those trends. One other item, we're noticing in our IT spend and I mentioned the cloud that we're using more IT services on the cloud. When we do that we spend generally less on IT SWB and we -- the cost of purchasing additional servers, maintaining that with patches and so forth and software decreases. So IT spend for IT capex has been down little bit. But I think those are probably going to be the major drivers as we look to 2020. [Speech Overlap] inpatient and outpatient and where our spend has historically been and might be going.

Tim Hingtgen -- President and Chief Operating Officer

And that's a good point, Tom, Now Josh to follow-up on that. The outpatient capex spend is certainly ongoing. We like the access point deployment strategy as I've referenced a few moments ago. Obviously, in most cases that's the lower investment expense versus some of the larger acute care on investment. We've also had good investments in service line strategy, when we recruit the neuro surgeons, orthopedic surgeon, robotic technology all those items are coming out of that capex spend. We do have great facilities, a lot of capacity to truly take advantage of across the markets we serve. But we don't have that capacity. We have expanded operating rooms, we've put on new beds. We're still really focused on making sure, where there's a demand, we have the investments going into those markets to further grow our market share, our competitive position in our earnings.

Operator

Your next question comes from Brian Tanquilut from Jefferies.

Brian Tanquilut -- Jefferies -- Analyst

Hey, good morning guys, congratulations on the quarter. My question for Tom, as I think about what Wayne was talking about $200 million of expected divestiture procedures come up -- proceeds coming, I'm sorry, how are we thinking about redeploying of that? Is that all going to go toward debt pay down and then what's the margin profile or EBITDA profile of those assets to be divested? Thanks.

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

So what we're looking at Brian, as we look at this program we're underwriter now. We're talking about mid-single digit overall. The hospitals that we completed in 2018 and so far in 2019, have been in the lower single digits, many of those not -- maybe not many, but several of those have been negative EBITDA even. So the -- when you look at the proceeds to revenue that's been fairly low on these. Some of the ones that we have to round out the program, what we're going to be more in the single digits, closer to the mid or just above mid and the proceeds as a relative to revenue should be increasing with those.

So I'd say that's been the profile, so far that it's very much to our advantage when we divest those we save on our free cash flow. Our EBITDA margins typically pick up and as you've seen that we have had some benefit on our volume growth as well with struggling hospitals now sold with -- in many cases strategic buyers, where they have other opportunities.

So that has been -- what we've done up to this point, what we plan to do with the rest of the year? On the proceeds, I mean it's really all fungible. We've got a lot of liquidity. We've got $200 million of cash on the balance sheet. We've got about $235 million in untapped revolver. We've got ABL capacity $500 million of first lien capacity and the divestiture proceeds. So we put that together. We do see a better free cash flow, second half of the year compared to the first. And so I think we'll just as these come in, we'll just have to look at the most appropriate used to determine exactly what we do with those.

Operator

Your next question comes from Ralph Giacobbe from Citigroup.

Ralph Giacobbe -- Citigroup -- Analyst

Thanks. Good morning. You had consolidated margin up 70 basis points, but same facility margin down 60 bps on a strong 4.9% revenue. So I was hoping you can reconcile that for us? And then you did talk about sort of a better second half, I was hoping you could just help on the visibility there. You certainly called out the the savings around. I think the supply expense, maybe a little bit more in terms of actual numbers around those savings, around national contracting? Thanks.

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

All right, thanks, Ralph. So on the same-store versus consolidated, I think on the same-store, I think the SWB and the supplies are pretty straightforward that same store, I think works pretty well looking at that as well as consolidated. The other operating expenses sometimes gets clunky with allocations that we have to recreate the allocations from especially when we're in a divestiture mode.

We also look at consolidated on that, we think that matters quite a bit. With that being said, we still think we have lots of opportunities in that area to improve other operating expenses. Just one of few things that are moving in that space with especially look at this quarter, we had the malpractice charge that's included. We also had a note write-off that's included in those. We have had as we called out more IT subscription fees as we've gone to cloud, but again consolidate is still an appropriate way to look at those as well and we do feel like we're improving our building to start taking that down.

As we look toward the second half of the year, so just some of the items that Tim raised on the supply chain. He mentioned that three of those categories going into the third quarter, now fully in place with physician preference items, that's really important, especially with our service line focus, we expand procedures. They are high cost procedures and we've got better contracting. Tim also mentioned, we're going to roll that out to purchase service category, so we're already under way with that. We've contracted some, but there is a lot of work to do on those two, not only get the benefit of national contracting, but also get arrangements where we can adjust the arrangement through the divestiture program is really important for us.

And then just more broadly looking, we think on the -- from our benefits standpoint without really impacting the impact on our employees, but things like dependent verification other sorts of things, looking at PBM strategies and new PBM strategies that we can have improvements there, that will likely be first of 2020, but we think those are going to be consequential. And then more broadly, we've talked in prior quarters about -- we've gone from a division structure to more of a regional. I think, Tim can speak to how we have opportunities to expand that.

Tim Hingtgen -- President and Chief Operating Officer

Sure, thanks Tom. In terms of our opportunities on the regional model, looking at how we build out stronger networks, where we have hospitals in closer geography, we believe there is an opportunity to put targeted resources, gain those efficiencies on those targeted resources, whether it'd be on the top line or the expense line improvement opportunities we see out there. Again, putting at the same standardized centralized playbook to work, but on more of a regional model for the Company. The other thing I would point out, I mean, In terms of improving our leverage on the improved volumes. We've invested heavily on a year-to-date basis on medical staff development, physician recruitment, physician practices and we do see the contribution of those investments, having some some room left to move to improve margin as we move forward, get more efficient on those practice ramp-ups. I'm also looking at opportunities where we can gain synergies across our physician practices, leveraging some of the same resources within the market to drive better efficiencies. So all those things together, we believe will help us drive improved leverage going forward.

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

And then Ralph, I'll just add that, for the second half of 2019, like we said, we're locked in on a few supply categories that are going to be helping. We're going to be adding more of those. A lot of the items, a lot of the supplies will be still showing up as improvements in Q1 and Q2 of 2020 and I think a lot of the other purchase services and regionalization opportunities, Tim mentioned, I think it will be fully in place by then. So this is something that it's going to be a continuous practice for us, but we do think we have a lot of opportunities with what's been identified.

Operator

Your next question comes from Gary Taylor from JPMorgan.

Anthony McDuffie -- JPMorgan Chase Bank -- Analyst

Good, guys. Thanks for taking my question. This is Anthony McDuffie on for Gary. One quick clarification, looking about the $70 million add back for the MedNow. I know you guys are excited, most of it is related to prior years part divested hospitals. Anything to the breakdown of that $70 million would be helpful? And then a real question is kind of how are you guys thinking about the 2022 unsecured at this point? I know it's still a ways away, but it's definitely a big payments that's coming up? Thanks.

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

So Anthony on the malpractice, we regularly -- it's a major estimate that we had and other peer companies have on the malpractice accrual. So we look at activity with respect to paid losses in individual case reserves that we're setting up on those. So based on the observations that we had -- that occurred during 2019 and we study that with actuarial help, we identified areas. These are primarily for data loss prior to 2016. So these are older claims in the development and they just happened to be many of those that are divested hospitals and there are also many of those relate to the more difficult venues that we are in many cases were out of [Phonetic] or we have significantly limited our exposure and then certain service lines in that as well are ones that we've also trimmed down our exposures to those.

So again, those are primarily in over years and you might have picked up on the comment I made, it made if you exclude that charge that we carved out, our malpractice outside of that, we still increased similar to how we've done in the first couple of quarters here, just based on experience and be reflective of some of our more recent years. With respect to the 2022, as you can tell from our comments today and our responses, we are laser focused on getting the operational improvements in place, finishing the divestitures surrounding our business and our same-store, and we think that that is the best way to put ourselves in optimal position when it's the appropriate time to deal with the 2022.

Operator

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

Bradley Bowers -- Bank of America Merrill Lynch -- Analyst

Yeah hi. This is Brad Bowers on for Kevin. I appreciate the color on the Q3 divestitures of about $200 million, that still leaves you about $500 million, $550 million left in the divestiture program. So I was wondering if you could get some color on the timing of that and if that's where you think your portfolio would shake out after that $500 million, $550 million or if you think that there will be opportunities to divest even more after that? Thanks.

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

So just in terms of where we think we are in terms of divestitures, we are coming to an end in terms of our divestiture program. We've done really well. We've got great prices, as you can tell, it has been very helpful to our operations and our volume, but that program is coming to an end and we will announce the end of it in the relatively near future.

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

And then just spread on the timing as I mentioned before, these are likely going to be better margin hospitals in what we've divested before. It's going to -- that will drive better proceeds and I think this is probably looking like we should see some activity in the third quarter as far as announcing definitive agreements likely closing sometime maybe later in the fourth quarter by the time we wrap up.

Operator

Your next question comes from Stephen Tanal from Goldman Sachs.

Stephen Tanal -- Goldman Sachs -- Analyst

Good morning guys. Maybe just a follow-up on that. So it sounds like Wayne, you're pretty clear about having divested hospitals of about $1.5 billion of revenue through 2Q and then hospitals that you guys expect to close in 3Q, since the Medicare cost support that suggest it's north of $500 million. So it seems like the program is probably done with this quarter at least the $2 billion. And I guess you framed gross proceeds being $750 million, so just trying to really understand that versus the [Indecipherable], maybe there are more hospitals that you just mentioned sort of closing in 4Q, that'll gets you there, could understand that? And then just one question on sort of the operating numbers. I guess I'm just not clear why you lowered cash flow guidance. In the first half [Indecipherable] OK, I get -- there are some favorable items that maybe were a little unusual, but anything to note on the back half just from a cash generation perspective? Thanks.

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

Yeah. So Steve, just on that later question there, the cash flow, it's really with respect to the increased activities on payments on professional liability claims that we've seen so far in 2019 and adjusting for that, there is not really other material changes other than that. So that's the -- on that question, the other piece on the -- with respect to the divestitures, as we get into the higher margin hospitals of those kind of drive higher proceeds from us. Generally, this we saw this in 2017 and '18 and '19, so far the hospitals with the lower margins, especially with strategic buyers were getting astronomical multiples on -- imagine negative EBITDA hospital that we're getting proceeds on, the math on that.

So in generally what we see is, as you increase the EBITDA margins on the sold assets those -- those EBITDA multiples come down to what you normally might see around the 10 times plus or minus. And so when we talk about the remaining portfolio, I think we're going to see more assets that are slightly higher margins, that's going to drive the multiples that are more in the reasonable range of what we've seen in the last year and a half.

Operator

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

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

Thank you for spending time with us this morning. We -- as we outlined on today's call, we are very encouraged with all the progress during the first -- 2019 first half. Moving forward we're focused on continued execution of the strategies we discuss in today's call and we're looking forward to a strong back half of 2019. We want to specifically thank our management team and staff, hospital chief executive officers, hospital chief financial officers, chief nursing officers, division operators for their continued focus on operating performance and quality. This concludes our call today. We look forward to updating you on all of our progress later in the year. And once again, if you have any questions you can always reach us at area code (615) 465-7000. Thank you.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Ross Comeaux -- Vice President of Investor Relations

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

Tim Hingtgen -- President and Chief Operating Officer

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

Frank Morgan -- RBC Capital Markets -- Analyst

Albert Rice -- Credit Suisse -- Analyst

Josh Raskin -- Nephron Research -- Analyst

Brian Tanquilut -- Jefferies -- Analyst

Ralph Giacobbe -- Citigroup -- Analyst

Anthony McDuffie -- JPMorgan Chase Bank -- Analyst

Bradley Bowers -- Bank of America Merrill Lynch -- Analyst

Stephen Tanal -- Goldman Sachs -- Analyst

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