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Lifepoint Hospitals Inc. (NASDAQ:LPNT)

Q3 2008 Earnings Call

November 7, 2008 10:00 am ET

Executives

William F. Carpenter III – President and Chief Executive Officer

David M. Dill – Executive Vice President and Chief Financial Officer

Analysts

Shelley Gnall – Goldman Sachs

John Ransom – Raymond James & Associates

Whit Mayo – Robert W. Baird & Co., Inc.

Adam Feinstein – Lehman Brothers

Tom Gallucci – Merrill Lynch

[Kevin Fishbank] – Lehman Brothers

Justin Lake – UBS

Erik Chiprich – BMO Capital Markets

Operator

Good morning and welcome to Lifepoint Hospital's third quarter earnings conference call. Before I turn the call over to Lifepoint I've been asked by the company to read the following statement.

On today's call Lifepoint will be making forward-looking statements based upon management's current expectations. Numerous factors could cause Lifepoint's results to differ from these expectations and Lifepoint has outlined these factors in its filings with the SEC. The company encourages you to review these filings. Lifepoint also asks that you please review the cautionary language under the caption Important Legal Information in the company's press release issued this morning.

The company undertakes no obligation to update or make any other forward-looking statements whether as a result of new information, future events or otherwise. Also, please visit Lifepoint's website for links to various information and filings.

(Operator Instructions). It's now my pleasure to turn the conference over to Mr. Bill Carpenter, President and Chief Executive Officer of Lifepoint Hospitals. Please go ahead, sir.

William F. Carpenter III

Welcome everyone to the Lifepoint Hospital's third quarter earnings call. By now I expect that you have reviewed the press release that we issued this morning covering our results for the quarter. I'd like to briefly touch upon our results which David will discuss in greater detail and then share with you some of the key elements of our strategy to improve operational and financial performance strategies that we recognize as working.

First, our third quarter results. Revenue is up 5.3%, EBITDA up 1%. EBITDA margins for the quarter were 16.2% and EPS for the quarter up 7%, including an approximately $0.03 negative impact from hurricanes that we experienced in the quarter. Notwithstanding what is clearly a challenging economic time, we have continued to do the things that we believe are needed to properly grow the company. Specifically, we stuck to our strategy of making disciplined investments in our existing assets and, as we'll talk about in a moment, we're continuing to see results from those investments.

We have also of course carefully managed our expenses. At the same time our decision not to unreasonably leverage the company in prior years puts us in an enviable position today with a strong balance sheet, ample liquidity and the ability to continue to make the investments necessary to execute our strategy to drive organic growth within our existing base of assets.

Rather than limiting our flexibility by incurring debt, we recognized that additional strategic investments in our hospitals would provide the greatest opportunities for growth. Our investments have enabled us to continue driving organic growth, further focusing our efforts to capture market share, enhancing corporate resources to better position our company to compete in an increasingly complex operating environment, recruiting and retaining physicians and other clinicians and improving quality metrics across our base of hospitals.

We'll continue these efforts to strengthen the competitive position of the company to enhance long-term shareholder value and to grow market share in each of our hospitals. I've spoken before about steps we've taken and will continue to take in connection with comprehensive and detailed reviews of some of our largest hospitals with respect to strategic opportunities.

These steps were designed to improve and expand the care available in those communities. I said last quarter that we were beginning to see traction from the steps we took as a result of these detailed reviews. We continued this quarter to perform well against our internal targets set for organic growth at these hospitals.

For example, our cardiovascular service lines in these facilities have shown approximately a 15% increase in volume over established baselines. Our imaging service lines, due to our implementation of new technology, have shown a 7% volume increase over initial baselines and we've seen our surgical volumes in these hospitals increase as well.

We're pleased with the initial results from these strategies. At the same time we know that we have more to do. Improving the quality of our hospitals and the care provided while at the same time making our operations more efficient is critical to our success. Doing so is good for our patients, the physicians who practice at our hospitals, our nurses and other clinicians and for the communities in which our hospitals operate. I firmly believe that what's good for our patients and communities is good for shareholder value.

I'd like to spend a few minutes talking about the quality improvements we're making and why a continued focus on this area is important. We've been working closely with the medical staffs at our hospitals, especially in the last year or so since Dr. Lenny Copeland joined as our Chief Medical Officer.

To improve the quality of healthcare provided and to further improve core measure scores at our hospitals, significant strides have been made as is reflected by our scores when compared to joint commission hospitals. Our aggregate scores in the four measure sets are consistently above 90%. This is a tremendous increase for us over the past year and translates into better patient outcomes and quality. This improvement is a result of Lifepoint's ongoing commitment to quality.

To drive even better quality results, we have engaged and involved our physicians in our strategic direction as never before. For example, Dr. Copeland and his team have worked together with our hospital leadership to create a physician leadership council. This important group, consisting of medical staff leaders from 12 of our hospitals, was formed to enhance the direct communication that our medical staffs can have with me and with other company leaders.

The insight hat we've received so far about how we can strengthen our hospitals, our physician relationships and our communities, is invaluable. About two weeks ago the physician leadership council held its first meeting here in Brentwood to develop a common understanding of our shared strategic and operational direction.

This group will continue to work with us in this way and will be a powerful sounding board for ideas meant to improve our physician relationships and ultimately retention. This focus on quality should also enable our hospitals to grow market share.

We expect that our improved performance against score measures will provide an objectively higher standard for many of our hospitals allowing them to compete with larger hospitals in bigger cities, and convincing patients who are leaving our communities to stay closer to home for hospital care. We will as a result continue to do the things that are necessary to drive success in this area.

Another area of significant focus for us is appropriately recruiting and retaining the physicians needed by the communities in which we operate. We have implemented a centralized physician recruiting process here in our Brentwood offices. As I've said before, this dedicated internal team of experienced physician recruiters allows us to better use our available resources and our knowledge of physician needs across our system of hospitals to match candidates with the right opportunities.

We continue to be on track to achieve the physician recruitment targets that we discussed with you earlier in the year. Now, those of you who have followed Lifepoint for a number of years will likely recognize these remarks concerning standardization of our approach to quality improvement and centralizing our physician recruiting process, as a change in philosophy and approach.

We continue to believe that healthcare is a local matter and that hospitals must be community assets. But we also know based on our experience throughout the last couple of years, that we will be a stronger organization through the standardization of processes that should remain invisible to our patients, their families, the physicians on our medical staffs, and our other clinicians.

We are able to pursue these important initiatives because we have the financial flexibility to do so. While we have the strategy and the resources to grow our existing assets, we can also drive supplemental growth through strategic acquisitions and by selling facilities that are a better fit for other systems as we're in the process of doing with a couple of facilities, and David will discuss that more in a few minutes.

As I've said before, we are disciplined with regard to acquisitions. We don't intend to pay up to acquire new facilities. I will remind you that our results across these growth and quality initiatives as opposed to our efforts are not likely to be linear from month-to-month or quarter-to-quarter. Over time, however, we remain confident that these focused and strategic initiatives will enable Lifepoint to maximize our performance and our results.

Before I turn it over to David to review the financial results for the quarter, I do want to take just a minute to recognize the great work of our hospital employees and physicians in Louisiana who performed heroically during two hurricanes that occurred during this quarter. Hurricane Gustav in particular, came ashore on September 1 in Morgan City, Louisiana where our Tesh Regional Medical Center is located.

All six of our Louisiana hospitals were affected by these storms and all six of our hospitals did a remarkable job in planning for the hurricanes and executing on their disaster plans. Thanks to all our operators across the company who worked to overcome the negative impact of these hurricanes during the quarter, and thanks in particular to our Louisiana hospitals for your work in taking care of your patients during what I know was a very trying time.

With that I'll now turn it over to David.

David M. Dill

Thanks Bill and good morning. Earlier this morning we announced our results for the third quarter. I'd like to take a few moments to provide some additional details about our results and the trends we experienced. We suggest that you supplement your understanding of our company by reviewing our SEC filings. In addition we plan to file our 10Q later today.

First our third quarter results. Revenue for the third quarter was $675.1 million, an increase of 5.3% compared to the same period a year ago. Earnings before interest, taxes, depreciation, and amortization from continuing operations were $109.3 million an increase of 1% compared to the same period a year ago. EBITDA margins for the quarter 16.2% compared to 16.9% a year ago.

This translated into fully diluted earnings per share of $0.60 per share, an increase of approximately 7% from the year ago period. During the quarter we recorded an impairment charge of approximately $900,000 related to a building in one of our communities. Excluding this adjustment, our earnings per share from continuing operations would have been $0.61 per share.

During the quarter, we reclassified two hospitals into discontinued operations. The two hospitals being sold represented approximately $12 million of revenue during the quarter. We have signed letters of intent for both hospitals and expect them to close in the next 60 days. As a result, we have recorded an impairment charge of $16.8 million or $0.32 per share related to those hospitals. I'd like to take a moment to reconcile for you the discontinued operations for both the quarter and the first nine months of 2008.

During the quarter, we recorded a loss from discontinued operations of approximately $0.06 per diluted share. Of this amount, about half is related to the loss of operations to the two hospitals that are held for sale, and the other half is related to losses in hospitals that were sold in previous years. The losses on these hospitals are primarily related to the runoff of malpractice claims consistent with what you've seen earlier in the year.

As a result, our operations were positively impacted by approximately $0.03 per share during the quarter as a result of reclassifying these hospitals. This is very consistent with the losses in the previous two quarters on these hospitals, as our EPS for the first half of the year was essentially increased from $1.31 a share to $1.36 a share, or $0.05 during the first half. As Bill mentioned in his opening remarks, the benefit that we received by reclassifying these two hospitals were offset by the $0.03 impact of the Hurricanes Gustav and Ike.

Second, volume and revenues, inpatient admissions decreased by 2.4% and adjusted admissions decreased by 1% for the quarter ended compared to the same quarter a year ago. Self-pay admissions which represent approximately 5.5% of our admissions, declined by approximately 10% this quarter. This is the third consecutive quarter that we have seen a decline in our self-pay admissions ranging from down 7% to down 10% this quarter.

Approximately 30 basis points of the decline in our admissions is a result of the closure of unprofitable service lines and a few hospitals, and about 75 basis points of the decline in volume is a result of shift in low acuity admissions from the inpatient side of the business to the outpatient side.

Surgical volumes increased 2.4% with inpatient surgeries up 0.3%, and outpatient surgeries up 3.3%. We did experience a decrease in our ER volume of approximately 0.7%. Our net revenue per adjusted admission increased 6.4% during the quarter. This increase was driven from pricing across all of our payer classes, and an increase of approximately 1.6% in our case mix index. The effective price increases from Medicare, Medicaid, commercial businesses, remain consistent throughout the first nine months of 2008.

Our DSOs at the end of the quarter were approximately 43 days. We did see a slight increase in our DSOs during the quarter as a result of holding of certain claims at one of our hospitals. These claims have subsequently been submitted and the payments are expected to be received during the fourth quarter.

Third, expenses, our salaries, wages, and benefits represented 39.3% of our revenue. This is a 20 basis point decrease from the same quarter a year ago. We continue to see improvements in contract labor. Contract labor declined by $2.6 million in the quarter compared to the same quarter a year ago. For the nine months ending September 30 we have managed to reduce contract labor by approximately 15% as compared to the first nine months of last year, with half of this decline coming in the most recent quarter.

Other operating expenses represent 19% of our revenue. We continue to see increases in professional fees, hospital and anesthesia co-pay, very consistent with what we've seen earlier in the year. However, we did begin to see a deceleration in the growth rate for our professional fees during the quarter. The growth rate in those fees was 17% in the previous quarter and up only 11% this quarter.

In addition, we continue to make investments in physician recruiting. These costs increased by $3.3 million compared to the same quarter a year ago, and we continue to believe these are the prudent and right long-term investments to make in order to drive the growth in each of our markets that Bill was talking about.

Provision for doubtful accounts for the quarter represented 11.7% of revenue, this increase of approximately 20 basis points from the first half of the year. So, it's been very consistent. We continue to see favorable trends as it relates to our self-pay admissions. Our collection rates have remained relatively stable throughout the year, but we did begin to see a slight slowdown in the collection rates in August and September.

We continue to see improvement in our insurance aging greater than 150 days. This is the second straight quarter that we have seen those improvements and it has benefited our provision by approximately 20 to 30 basis points. The provision for doubtful accounts in charity as a percent of self-pay revenue for the quarter was approximately 83%, and our allowance as a percent of self-pay ER was approximately 89%, which once again is extremely consistent.

Fourth, cash loan balance sheet, our cash flow from operations increased by approximately $7.7 million or 7.3%, compared to the year ago period excluding the impact of interest and tax payments. During the quarter we spent approximately $37.5 million in capital expenditures. We remain on track to spend between $160 million and $175 million for the year, but based on this spending through the first nine months we expect to be towards the bottom end of the range in our guidance.

I'd like to share with you some information concerning our liquidity and capital structure. As of the end of September we had approximately $1.5 billion in debt. We do not have any debt maturities before 2011, with the exception of our revolving credit facility. This facility matures in 2010; however, there are no current amounts outstanding under the facility. Our leverage, as measured by total debt to EBITDA, is approximately 3.2 times, and as Bill mentioned, we feel we have the necessary flexibility in our balance sheet to make the appropriate investments that will drive long-term EPS growth.

Finally, guidance, this morning we reconfirmed our guidance for 2008. Revenue was reduced to a range of $2 billion $690 million to $2 billion $730 million to reflect the reclassification of the two hospitals to discontinued operations. Our EBITDA, EPS, and capital expenditure targets were left unchanged. However, as a result of our operating performance through the first nine months we did lower the bottom end of each of our volume metrics by 100 basis points.

I want to thank the operators, both international and in our communities for all their hard work in a very difficult operating environment. Over the coming months I'll be moving into my new role as Chief Operating Officer. I'm excited about the team we have in place, and together we will be focused on the execution of our strategic initiatives.

There are opportunities for success in each of our hospitals as it relates to physician recruiting and the continued addition of profitable service lines, and I'll look forward to being part of the ongoing efforts to make our communities healthier and make our company even more successful.

With that I'll turn the call back over to Bill.

William F. Carpenter III

Thank you very much. We're ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Shelley Gnall – Goldman Sachs.

Shelley Gnall – Goldman Sachs

You highlighted back at the start of the year that something could make you a little bit nervous about meeting your guidance would be steep unemployment or steep job losses in some of your key markets. It looks like through August you had a couple non-key markets with unemployment greater than 10%. Can you talk a little bit about what you're seeing in those markets on admissions or collections?

William F. Carpenter III

Shelley, sure, thanks for the question. The economy obviously is something that we watch very carefully in every single one of our markets. What we have seen so far really has been sort of choppy. Remember, we're spread across 17 states and we've seen ups and downs as it goes across those states and our markets. We've added some ads in some of our markets we've also had some losses. As I say, consistently, constantly are monitoring that.

We have been seeing some reduction in hours work. We've also been seeing some actual layoffs. I'd rather not get into specific markets because we really are spread across the country and there are as many that are up probably as are down. There are a couple that are impacted by the automobile industry, we've seen that specifically. There a couple that are still being impacted by textiles and furniture that have moved offshore, but for the most part we are maintaining status quo. Our unemployment rates in our markets have increased really consistently with the increase in the national average of unemployment.

David M. Dill

Shelley, the only other thing I would add, there are a couple markets that have unemployment rates that are around 10%. It's not as if those markets have gone from 4% or 5% up to 10%, they have been above national averages from unemployment rates for a long time. We have seen unemployment rates in a couple of those communities that have now kicked up to about 10% increase, very consistent with national averages, up 100, 150 basis points in the unemployment rates from this time a year ago, and we're seeing that accelerate here over the last 90 days.

Shelley Gnall – Goldman Sachs

Then if I could just one quick question, wondering if you can give us some any sort of time, I apologize if I missed this earlier in the call, when we could hear about the deep dive results, the market share opportunity in the profitable service lines, and when we'll hear about your convertible debt, the new accounting rules? You had mentioned on previous calls that, I think, the prior period financials will be restated. Any idea on when we could hear of more on those?

David M. Dill

Yes. I'll start on the convertible debt first then I'll turn it over to Bill. On the convertible debt, it's still our expectation that the impact will be between $0.20 and $0.25 a share. That goes into effect on January 1. We will go back and restate prior period financial statements as a result of it and it will be almost the exact same amount from ’08 to ’09. So it shouldn't impact the growth rates if you will, once we restate the ’08 financials, but still in that 20% to 25% range is our current estimate to what that will be.

William F. Carpenter III

Shelley, with regard to deep dives and the way we talk about those, we’re going to continue to talk about them every time that we talk to you. I still want to take the results that we’ve learned from the deep dive initiatives and spread that across the next couple of years for you.

At the same time, I want to be careful about that in the face of the economic times that we are facing to make sure that we do that in a way that will be meaningful for you. We are absolutely, having said that, we’re absolutely committed to the strategies that we’re implementing. We know that they will grow volume. We know that they will grow revenue and EBITDA. We also know that these strategies take time.

We have always expected to see the primary results of our strategic initiatives that we are implementing in 2009 and 2010. So we’re pleased with what we’ve seen so far because it does give us a glimpse into the future as I've talked about the 15% volume growth in cardiovascular service lines at the deep dive hospital 7% increase in diagnostics. These are the results of investing in technology and service lines that'll drive growth and recruiting the right physicians. So we will continue to talk about those.

One other thing I think that’s meaningful to me, at the deep dive hospitals and also at hospitals at where we have performed operational assessments. Intense reviews of those hospitals but not deep dive kind of hospitals. We’ve seen EBITDA growth at those hospitals that have exceeded our company average by over two times. So we’re seeing good and bad there. I do look forward to talking to you more about our results and what you can expect over the next several quarters.

Operator

Our next question comes from John Ransom – Raymond James & Associates

John Ransom – Raymond James & Associates

David, question for you about bad debt, it’s been remarkable that your volumes have kind of gone the other way. At what point do you think it’s reasonable to expect that the lines cross and the bad debt volumes start moving the other way? Just given with what’s happening with the economy.

David M. Dill

It’s a hard question to answer, John, if it was an easy question to answer I’m certain you’d already have the answer to it. I don’t know it is something that clearly I didn’t anticipate coming into the year. We have seen it now in three straight quarters across many of our hospitals. There’s still not a concentration of activity in one hospital that's driving that down. So I don’t have an answer when those lines may cross, but as unemployment goes up, either State Medicaid roles will stick some of that volume up or we may see our uninsured admission volume go up. We’ll be taking a hard look at that with our operators as we build this 2008 budget and we’ll have that based into our guidance that we’ll give you in February.

John Ransom – Raymond James & Associates

One other thing, as we’re thinking about ’09 other than the convert accounting and the discontinued OPS and whatever assumption is reasonable of bad debt, is there anything else that we need to be thinking about that would be not that intuitive looking at the numbers?

David M. Dill

Yes probably one thing and it’s a number that will go up or down a little bit and you'll just have to take your best snapshot when you build your model, but it relates to the financing structure of the company. If you carve out the convertible debt, that’s half of our capital structure, debt structure. The other half is term loan B debt.

Today we are 100% fixed in that debt structure. It’s fixed at a LIBOR rate that’s at about 5.6% through an interest rate swap. That swap began amortizing off at the end of this month. That will in effect convert a piece of our term loan B debt from fixed rate debt to floating rate debt. So what we will see is about $100 million of our debt beginning next month, or this month November 30 will convert from paying 5.5% to this morning when three month LIBOR were locked in at 2.2%ish, so three’s about a 330 basis point reduction in interest expense on that $100 million.

So I’m expecting if rates stay where they are today, somewhere in the neighborhood of a $3.5 million benefit if they go down clearly the benefit gets a little bit more, if they go up the benefit gets a little bit less, but that’s probably the only other thing that’s moving inside the capital structure that could move EPS by $0.03 to $0.05 a share.

John Ransom – Raymond James & Associates

Lastly and I’ll get off. Right now you can buy your own stock at, even when you roll back the convert end roughly 10 times 2008 earnings. Is there anything out there, in the not for profit consolidation world that even approaches that type of value or are sellers still stuck on eight times EBITDA or some other number like that?

David M. Dill

I’ll let Bill jump in here in a minute. Let me talk about buying our own stock back. We have flexibility within our credit agreement to buy back stock. We have a restricted payment basket, that basket today after completion of $150 million program that we announced about a year ago. We still have remaining flexibility of about $30 million. That goes up at a rate of about $15 million a quarter. There’s the formula at roughly half of our net income. So over the course of the next four quarters that basket will fill back up to roughly $100 million.

So that’s as we think about the free cash flow that we generate whether we buy other assets or we buy our own stock back. That’s clearly an option that we still have. We also perhaps have an option to look at some subordinated debt at discounted prices that are reflective of the dislocations that are going on right now. So that’s something that Bill and I and Paul and the rest of the management team along with the board, will be looking at as we go forward.

As it relates to the M&A environment, I think prices are coming down some, but they clearly don’t come down as fast as the public markets value the for profit guides. So we will remain patient, I do think we’ll see hospitals come up for sale. The prices are not down to the levels that I think they will ultimately go to, and I think that’s the word of caution that Bill put in his prepared comments, we will stay patient, we’re not going to pay up for these, but we also want people to know that if you’re a willing seller of a hospital then we’re a willing buyer at the right price. Bill anything else you want to add?

William F. Carpenter III

I think that’s right. I think we are seeing some movement toward more reasonableness on the part of sellers. We are seeing a lot of activity out there and we’re having a lot of contacts that are being made with us and we are going to be disciplined about that.

I think boards of non-profits that are seeing their own investment portfolios reduce in value are paying attention really in a different way than they have before. As they think about being able to retain doctors in their own communities, so they think about the capital investments that they need to make. They know they need to make just to hold on in their communities.

That’s putting a lot of pressure on them, John, in a different way than they’ve ever felt that. So, there is a sort of sense in these calls that we’re having, in these contacts that we’re having as we’re visiting out in potential communities a sense on the part of the boards, in those communities and actually also on the part of the county commissioners in those communities who are trying to figure out how they’re going to maintain healthcare in those communities. So I think our recognition is growing that this is a time they need to think about things differently.

John Ransom – Raymond James & Associates

As a clarification the $30 million that you have and the $15 million do you have to go get another board authorization or is that within your current board authorization?

David M. Dill

We do not have to go back and get authorization or waivers from the credit from our syndicate, but we do have to go back and get authorization from our board. That we could certainly do in an expedited fashion if we chose that was the right thing to do.

Operator

Our next question comes from Whit Mayo – Robert W. Baird & Co. Inc.

Whit Mayo – Robert W. Baird & Co. Inc.

David if we could just talk about your mix of volumes for a second. You noted the further decline in self-pay, but can you talk about the other book of business?

David M. Dill

Do you mean on a payer specific basis?

Whit Mayo – Robert W. Baird & Co. Inc.

Yes how are your commercial volumes within the quarter, Medicare etc.

David M. Dill

I know there was some discussion earlier this week with some other companies about disclosing commercial volumes. I’ll break it down for you here in just a minute, but I want to caution everyone on the consistency of how companies classify their payers. For example, Medicare versus Medicare Advantage where does that get classified, so I want to caution you a little bit and I always get nervous not knowing that if the industry is consistent in how we report these.

I will break it down for you this way. Roughly 20% of our volume decline is self-pay volumes and that’s been pretty consistent, 15%, 20% here over the course of the last three or four quarters. So that has remained consistent. It accelerated just a little bit this quarter, but the remaining 80% of our volume decline that we saw is about half Medicare Medicaid volumes and half-commercial volumes.

Once again that’s consistent with what we saw in the first and second quarter as well. So the relationship of our volume, we’re not seeing a shift of one book of the business growing at a quicker rate than another. Through the first nine months, it’s been very consistent.

Whit Mayo – Robert W. Baird & Co. Inc.

You like everyone else continue to deemphasize the OB related services that you’re offering. When do we begin to anniversary kind of bulk of some of those service line closures, or will we at all?

David M. Dill

Yes you will, we’ll continue to look at service lines, there may be some more service lines that close down, but there haven’t been any other large service lines to this date that we’ve closed down with the exception of these two OB service lines that we shut down in the fourth quarter of last year. So this will be the last quarter until we comp out so, barring us making any decisions here in the fourth quarter. We have comped out of four straight quarters of that discussion now.

Whit Mayo – Robert W. Baird & Co. Inc.

I sense a little reluctance to disclose what hospitals you’re selling but would you be willing to kind of gives us a spot number for the number of beds?

David M. Dill

I’d be more than happy to tell you which hospitals they were. One hospital in Indiana Stark Memorial Hospital, one hospital in Louisiana that ended up being close to the path of the hurricane, Doctors of Opelousas we have signed letters of intent on those. We are not going to discuss purchase price we have confidentiality agreements but we have made those communications internally and in the local communities. So and you’ll see more of that in our 10Q that will be filed later today.

Whit Mayo – Robert W. Baird & Co. Inc.

One final question, David, this is a question that we get a lot so I just thought I’d throw it out there and maybe as much for Bill as for you, but with Bill Gracey retiring and you taking over the COO role at this point, there’s really no firm CFO that we know about and there’s really still a lack of a treasurer now. So how do you feel about handling all these responsibilities right now?

David M. Dill

I’ll start and then I’ll turn it over to Bill. I feel very good with where we are. I feel very good for one main reason. The strength of the operating team is such that we have the flexibility to take a little time. Don’t read that to we have plenty of time to do this. Bill can share with you the speed that he wants to bring this to an end.

We have an operating team in Jone Koford and Mike Weichart and Scott Raplee three people that most of our investors have seen over time, and underneath them and around them seasoned operators that have been doing this for a long time. Those individuals working closely with Bill still today, Bill Gracey but certainly Bill Carpenter and I have been very involved with them as well to provide a little oversight a little direction as we go through this, but they don’t need a lot right now they’re continuing to do the things that they know they need to do to execute on these strategic initiatives that we’ve talked about.

On my side we’ve got a good accounting team, we’re in the process of replacing our Chief Accounting Officer, Gary Willis who was our Chief Accounting Officer left back in the summer. We are talking to some candidates about filling that role, but I feel like we can continue to do both of these for a period of time, but I’m excited about my new role. I know my job today is to be the Chief Financial Officer of the company we’re not going to lose site of that through this transition.

William F. Carpenter III

David is doing a great job in this and so is Bill and so is the operating team. This is a very seamless very smooth transition. It’s one that I watch very closely and I’m involved very directly with our operators as well, so it’s going very smoothly.

Finding a new CFO is a top priority for the company of course and we are working in a very expeditious manner in order to accomplish that. I want to be able to introduce that new person to you, as soon as possible, but I also want to make sure that we find the right person. I don’t feel any pressure on that because David is doing a great job as our head of Chief Financial Officer. [Scott] and [Mike] and [Joanie] and our operations finance team are very strong.

We’re always talking about a deep bench. It’s truly a deep bench. I’m pleased that our investors have met a number of these people and we'll continue to keep then in front of you. So we’re going to find the most qualified person for the job but given the strength of our team that we have in place we have the luxury of being able to not to rush. And find the right person who is going to be the right fit, and also maintain the kind of transparency that you come to expect from us over the years.

Operator

Your next question comes from Adam Feinstein – Lehman Brothers.

Adam Feinstein – Lehman Brothers

I guess maybe just one quick housekeeping question. Did you give a charity care number David?

David M. Dill

I did not give a charity care number, but it’s about 2% of our revenue. It’s exactly 2% of our revenue consistent with the previous two quarters.

Adam Feinstein – Lehman Brothers

And then just you know, with respect with the markets earlier in the year that you highlighted that you were having some issues with the volumes being below the overall average. It sounded like you were making some progress last quarter, but just curious if you could give us another update in terms of some of those markets? In terms of the status and just any anecdotes about whether the volumes from those markets had a disproportionate impact on the quarter?

David M. Dill

I am glad that you asked that question. We were concerned when we talk about these five separate hospitals a year ago that we would continue to be talking about them. And there is great progress that we made. And I hope the discussion that we are going to have here in the next 30 seconds or minute will show you the progress that we’ve made and the focus of our operating team on these hospitals.

As you remember in the fourth quarter the volume for the company was down about 4%. These hospitals were down about 3.5 to 4 times that rate at about 14%. We began to close the gap a little bit as we went through the first and second quarter but through some improvement in the hospitals, primarily driven through physician recruiting – I’ll give you a specific number here in a minute – we have seen those volume numbers improve.

There, at one of those five hospitals, we believed in the fourth quarter of last year and we even believe more firmly today that it’s a direct result of the economy. And we’ve talked about that hospital in Lake Havasu. It has been-- it has struggled over the course of last year from just an economical standpoint.

Those volumes have begun to improve as well, but all the other hospitals when you look at all five together, even including Havasu, Lifepoint's volumes were down about 2.4% for the quarter, these hospitals were down about 3.4% for the quarter. So we have closed the gap and these hospitals now look like the average Lifepoint Hospital. Still work to be done.

We’re still not happy with the volume in these hospitals being down. But we have seen step measured improvement in those hospitals over the course of the last two or three quarters. We have recruited 33 physicians in these five hospitals over the course of the last nine months.

We have, of those 33 doctors 26, of them have started. The remaining seven will start here during the fourth quarter. So we have seen 33 doctors recruited. We have seen 26 doctors start in these hospitals. It’s disproportionate. If you just ran that map through the portfolio of hospitals you’ll see that the physician recruiting efforts have been a little disproportionate to these hospitals.

There’s still more doctors we need in some of these communities. Danville’s an example of that. We are still recruiting doctors in Danville. We still need more doctors in Danville, but we are excited about the improvement that we’ve seen in these hospitals and now they are starting to move back to more company average-type volumes.

Adam Feinstein – Lehman Brothers

Just one quick follow up here, so you – it sounds like you’ve done a good job at recruiting new doctors. What about turnover? Have things changed there? And now I’m talking about the overall company not just the five hospitals, but just curious if the physician turnover has been stable or whether you’ve seen it change?

William F. Carpenter III

Physician turnover is stable, Adam. It’s something that we’ve always been good at and it’s consistent with that when we we’re good at it. We have had some years when it’s been a little more choppy than others.

Some of the initiatives that we’ve implemented with respect to our physician relationship piece have been designed in order to make sure that we take out that choppiness. Do everyone here is focused on retaining the right doctors in our communities and obviously as David said, recruiting more doctors. So we’re on track we’re on target with respect to our recruiting effort. And when I talk about recruiting I’m talking about net recruiting so that includes our retention rates. We expect retention this year to be in the 95 plus percentage range, so good shape there.

Operator

Your next question comes from Tom Gallucci – Merrill Lynch.

Tom Gallucci – Merrill Lynch

Just a couple of quick ones if I could Dave, you’ve got about a 15% range out there for the year EPS with one quarter to go. So could you comment do you feel more comfortable within a certain part of that range at this point, or are there some variables that we should be thinking about that could cause a big swing?

David M. Dill

One of the reasons that we have elected not to tighten any of these ranges going forward we are going to give you guidance in February of each year when we share fourth quarter earnings. I do not want to get on a cycle of every quarter tightening or adjusting numbers up or down.

These are the broad guidelines that we have set forth for our investors to understand what to expect, most importantly for what our people here at the company they've come to expect. We will update that guidance if things change.

We did a little bit of that in the second quarter because so much of the range was dictated on bad debt. And we felt narrowing the range was prudent. We decided not to narrow the range here because it was wide enough to capture all the outcomes that we expect here in the fourth quarter, outside of just the normal economic activity, Tom. There is really nothing unusual if you call these usual times, but there is really nothing unusual that you should expect in the fourth quarter.

We see as we talked about with John a little bit earlier in the call each of our capital structures starts turning to floating. We get a little bit of the benefit there. In my prepared comments we did talk about there have been the beginnings of collection rates slowing down in A/R.

Now those aren’t going to be big numbers that are going to drive wild swings in our bad debt, but don’t be shocked. I’m not going to be shocked if our bad debt ticks up. We’ve been expecting it all year. We saw it a little bit from Q2 to Q3. I expect we may see a little bit more between Q3 and Q4. Outside of that in just the general economical volume trends that we’re dealing with I expect this quarter to be consistent with what we’ve seen in the past.

Tom Gallucci – Merrill Lynch

And then obviously a big piece of the equation here are volumes and part of that is physician recruiting. You mentioned some success in some of those more troubled hospitals. Are you seeing any, or maybe could you just describe to us sort of the landscape on the physician recruitment front, both availability what it’s costing you, employment things like that?

William F. Carpenter III

I’ll let David talk about what it’s costing us. We are seeing physician recruitment continuing to be a very competitive part of our business. The doctors that we’re looking for are in demand across the country. That’s part of the reason, Tom, that we have added additional recruitment staff. We have beefed up our corporate recruitment expertise.

What we’re doing is we’ve added folks out in the hospital and then we’ve added people to help us find these doctors across the country. And we’re training and educating our hospital CEOs and recruiters like we’ve never done before in order to help improve their success rate as they try to get these doctors into our communities.

We’ve added also, and we’ve talked about this before, recruitment firms that are dedicated, have dedicated people to Lifepoint's account and Lifepoint's account exclusively. So the things that we’re doing have been designed in order to deal with the competitiveness that does exist out there with respect to recruitment.

But when you think about it, when you think about our success in surgery this quarter as outpatient surgeries are up 3.3% in the quarter. That’s a direct result of our success in physician recruitment. We’ve added 90 specialists since Q3 last year. We have added those people and that has helped to drive that outpatient surgery volume, so there’s a direct correlation and we see it.

Most of our surgery increase is in orthopedics. So obviously a very competitive specialty, but one in which we have been successful and through the centralized approach that we're taking now we believe we will be able to achieve further success in that regard. David, do you want to talk about the expense?

David M. Dill

Yes, we have seen our costs go up. We talked about that in the prepared comments. I won't go back and re-cover that ground, but going forward, clearly, Tom, it's going to be more expensive to bring certain doctors in. There may be shorter guarantee periods that we'll amortize those costs over.

We're all looking for these same types of specialists to come to our markets and the competitive nature of that I don't see slowing down. So, the options we have are not to bring the doctors in at all, but we know the communities need them. We know there are service demands that are there and we know these are profitable service lines and to go get those doctors and bring them to town. It's going to cost us money.

That was built into our guidance this year. We expected these to go up. They've probably gone up a little bit quicker than what I had originally thought coming into the year. Part of that is all these new arrangements that we have internally with recruiting firms and building infrastructure here.

But in the whole scheme of things, they're not big dollars and they are very, very important dollars. We'll continue to spend that and it will continue to be expensive to bring these doctors in. We're having to pay a little bit higher up from just the percentile standpoint, if you will. In the past, if we were paying doctors at the 60th percentile, now we're having to pay them in the 75th percentile to bring them into the community.

It's things like that, that add up across the 200 doctors that we're recruiting in. The most important thing, the cheapest way to recruit these doctors is to retain who you have. And all these efforts that we're spending on physician resource initiatives operationally, and all these other initiatives, are getting to know our doctors in a different way so that we can retain them. That's the way we recover the investments.

We don't recover these investments by bringing them in and two years later they leave. We bring these guys in; it's about finding the right doctor, even if we have to pay a little bit more to bring them in, but retaining them, finding the right doctor and retaining them into our local markets, that's what's good for quality and that's what's good for our community.

Tom Gallucci – Merrill Lynch

Dave, maybe I could sneak one more in. As you're thinking about putting your COO hat on, is physician recruitment and retention, I mean there's a lot of priorities, but would that be at the top of the list to drive volumes or is there something else you could be more focused on as you m make that transition to your new role?

David M. Dill

I'm glad you asked that question. As I think about the operational structure, and Bill and I are still spending time with our senior operators talking about that, that is the number one thing for me as I move into this new role.

For me, if I'm going to be successful as the Chief Operating Officer and I am convinced we will be, it's going to be because of physician recruiting and physician retention, and also maintaining the discipline that we have built into this company that Bill Gracey started and all these operators carry forward every day, and that is managing costs in a very difficult environment. We're not going to lose that, but we have got to find a way to grow in these hospitals and a big chunk of that is really the physician recruiting and retention.

Operator

Your next question comes from [Kevin Fishbank] – Lehman Brothers.

[Kevin Fishbank] – Lehman Brothers

I just want to follow up on the physician recruiting issue. You said earlier that you're on target to get to your goal for the year. I think that goal was 200. Did you give a number for what number you were at so far year-to-date?

David M. Dill

We did not give a specific number. We don't plan to give a specific number, [Kevin], but the net add for us is 5%. That's roughly 100 net new doctors. The general roadmap is bring in 200, lose 100. That's what history has told us. That's a minimum of what we need to do this year and that's the number that Bill was referring to when he says we're on target.

[Kevin Fishbank] – Lehman Brothers

The fact that you are on track, the guidance for volumes has come down a couple of quarters now and what's the biggest delta between where the volumes are heading so far this year, and where you thought they would be at the end of the year? Is it just the economy or is there anything else going on?

William F. Carpenter III

Part of it is the economy, but also recognize that it takes time to ramp up new doctors who come into community and we have added new service lines. So it's a little bit of adding service lines, adding technology, recruiting doctors and then there is that ramp up time as that goes into effect.

David M. Dill

The self-pay admissions have factored in there as well. I did not anticipate – coming into the year, I thought we'd see self-pay admissions go up. Now, that means bad debt expense goes up, but from the metric standpoint and that's why we have to be careful when we look at this metric, that would have benefited that metric if you will, even thought it may have hurt the profitability of the company.

So, even though we've seen our volume numbers come down probably 30 basis point or so, maybe more than that, it's a result of these self-pay volumes coming down and that has actually benefited the company, although it hurts this metric that we talk about a lot.

[Kevin Fishbank] – Lehman Brothers

That makes sense and I just need to ask about the asset sales. Clearly, you seem to be underperforming, but I guess if you talk a little bit about what led you to believe that you couldn't turn them around and are there any other assets in your portfolio that you're looking at divesting?

William F. Carpenter III

Well, specifically, these are assets that are more strategic for the buyer and we haven't disclosed anything about that at this point but we will, but these are assets that fit a more strategic picture for the buyer. And so, they see opportunities that exist for them with respect to these hospitals beyond which we thought we would be able to achieve and so that's the reason.

[Kevin Fishbank] – Lehman Brothers

Are there any more assets that you'd be looking to centrally divest over the next year or so?

William F. Carpenter III

We're going to constantly look at the portfolio. We recognize that that's part of the obligation that we have and so we want to be in a position, over time, to upgrade our portfolio. And so you've seen us look at hospitals and when we talk about an acquisition in the future, you should expect us to talk about acquisitions of a little bit larger hospitals and a little bit more growing communities.

That's what we'll be looking at and that's likewise to the extent there are any future hospitals for divestiture that would be on the other end of that spectrum. So that's kind of the approach that we're taking to it.

Operator

Your next question comes from Justin Lake – UBS.

Justin Lake – UBS

First question on hospital pricing, I just want to get an idea of how you're positioning yourselves going into '09. I think you had talked about, especially for '08 on the commercial side, doing some things with out-of-network rates and Chargemaster that got you up towards the high end, if not above it, of kind of your normal commercial pricing. Is this something that you expect to benefit from again into '09 as you set yourself up?

David M. Dill

Yes, I think so. We are in the midst of building our portfolio, if you will, for our pricing next year, and if we go down through the major payers there's some clarity around Medicare pricing on the inpatient side, somewhere in the neighborhood of about 3.25%. On the outpatient side, about 3.5, 3.6% is what we're going to be seeing.

Keep in mind that of our Medicare revenue, about two-thirds is inpatient, one-third outpatient, so as you weight that through. Medicaid is a little bit of a wild card still, Justin. We have seen a little pressure in Florida. We only have one hospital there. There has been quite a bit of noise in Alabama.

Nothing has impacted us yet, but we expect to see a reduction in our Medicaid reimbursement as we go into 2009. To what extent, can't answer that question yet, so we're probably expecting Medicaid pricing to be a little softer in '09 than what we saw in 2008. I just don't have a good number for you on that yet.

As it relates to the commercial pricing, we have probably maybe 75% of our revenue from managed care, some visibility around that. That doesn't mean it's not without risk, but from a contracting standpoint from where we are in negotiations, I feel good about roughly 75% of that portfolio at this point in the year and that will continue to build as we go through the end of the year.

Six, 7% is what we've seen this year. It's my expectation that we're going to need the same 6 or 7% next year. That doesn't just mean that we raise charges 6 or 7% and it gets paid. It's a blend of a lot of different contracts that we have across a lot of the different service lines that we offer. But 6 to 7% once again, is what we will be expecting as we build our guidance for next year. Certainly, if we can find more opportunity than that, then we'll be looking for that.

Justin Lake – UBS

Just to follow up on the Medicaid side, I know there's some issues down in Alabama that haven't been clarified, but can you give us an idea of what your total Medicaid revenue is coming out of Alabama so we can get some flavor for that, and maybe two or three other states where you've got some big Medicaid exposure?

David M. Dill

I don't have that number, Justin, as far as Alabama Medicaid. I can get that number and get it to you.

Justin Lake – UBS

Maybe the two or three other states where we can keep an on?

David M. Dill

Yes, the two or three other states that you need to stay focused on, Tennessee, Kentucky, Virginia. I put those as the three main states. Louisiana, the hospitals down there are larger hospitals but we have quite a few assets in the state. But Virginia’s a biggie with Danville and Martinsville. We have another hospital there as well in Wytheville. Actually a couple other hospitals in the state of Virginia; Kentucky, Tennessee being the three biggies and we don’t see anything on the horizon yet but it's something we’re certainly worried about.

Justin Lake – UBS

Now, just a second question on the volume side, and I apologize if you’ve given us before, but could you run through the admissions by payer mix?

David M. Dill

We did not run through that only because the growth rate in that, I get nervous communicating that number, Justin, because of the inconsistency that you might see with other people in the industry. What we have said is that the components of our volume growth or decline has been very consistent this year; about 40% of our volume decline in the third quarter was government programs, about 40% of the decline was commercial programs and about 20% of the volume decline was true self-pay volumes. That has been consistent with the first half of the year.

Justin Lake – UBS

And what have you seen for October admissions? I know you’re working off a pretty easy comp in the forth quarter.

David M. Dill

Yes, we’re not going to talk about intra-quarter volumes. We’ll be talking about those when we have this same call 90 days from now.

Operator

Your next question comes from Erik Chiprich – BMO Capital Markets.

Erik Chiprich – BMO Capital Markets

I was curious if you could provide some addition nuances on the standardization of the internal doctor recruiting and how would that work with the local CEO and the other sales efforts. It seems like you’ve done a good job of making some improvements. How will this help in addition?

William F. Carpenter III

Yes, absolutely. The local CEO is still the key the recruiting effort. And we have added recruiting staff at the local hospitals in order to assist the local CEO. But the CEO has got to close the deal and that’s one of their main jobs. And that hasn’t changed. What has changed is a more centralized focus on sourcing and finding the pool of doctors across 48 hospitals as opposed to a more individual hospital approach to finding and sourcing those doctors and bringing them in.

So the dedicated recruiters at the corporate office are working better in order to find doctors who are interested in coming to Lifepoint Hospital. What I want is every doctor who’s interested in practicing in a non-urban community to think of Lifepoint Hospital first. We’ve got 48 different opportunities for doctors across the country and rather than be disappointed because somebody doesn’t want to go to one of our towns, there may be another town that works perfectly well for them. So that’s a little bit of the focus that we see on that, more in a centralized approach than just one off recruiting.

Erik Chiprich – BMO Capital Markets

Okay that’s helpful. And then on the physician recruiting, can you talk a little bit about the mix of the employee doctors? Where that number is now and where you expect that you go in the future?

David M. Dill

We continue to expect our number of employee doctors to increase. We were at about 190 doctors coming into the year or just under 10% of the physician base that we have. That number has grown this year to about 220, 230 doctors. So there’s a disproportionate number of our new doctors that we’re bringing in. They’re coming in through an employment status versus a community-based doctor. And we expect the number to continue to go up. That’s the trend that we’re seeing.

Now at the end of the day the financial impact of an employee doctor or community-based doctor shouldn’t be that different. But the reality of how we record those is the employee doctors put a little more pressure on numbers early on because if they build their practice, we’re absorbing all their salaries as they come in as opposed to an income guarantee that's amortized. Over three or four years you get back to about the same answer, but what’s running through our numbers here this year, and you should expect to run through our numbers, you’ll see it in the salary line is where it gets reflected because they're an employee. Those numbers will go up as we employ more of those doctors.

Erik Chiprich – BMO Capital Markets

Great, and if I can sneak in one more before I jump off, you had mentioned the pricing environment on the commercial side looks good, any indications of tightening on the utilization from that perspective?

David M. Dill

We don’t know the exact answer to that Erik, but when we look at the make up of our volume and the consistency of how much our commercial volumes have changed relative to other volumes, we don’t see that accelerating in a way that’s obvious to us right now.

But clearly as some of these plans, not only on the commercial side but as some of these plans move into, our traditional Medicare patients move into managed care plans, that case management, that utilization review will be at a little bit of a different level so we are concerned about it. We don’t see a lot of Medicare Advantage plans in our communities today. It is growing but it’s still just not a meaningful number.

Operator

Thank you gentlemen. And we’ve now reached the allotted timeframe. We’ll turn the conference back to you Mr. Carpenter for your concluding remarks.

William F. Carpenter III

Thanks to all of you for joining us on today's call. We are in a great position because of the financial flexibility that we have to continue to make targeted investments that will improve quality across our hospitals, that will allow to recruit needed doctors to our communities and to add services that will allow residents in our towns to receive care close to home and to drive long-term stockholder value.

We will continue to closely manage our costs but we have opportunities to add market share, grow our base of physicians, improve quality of car and make attractive acquisitions and create value. We’re here. We will continue to be available to you. Feel free to call if you have questions. We’ll look forward to talking to you.

David and I are spending a lot of time on the road these days visiting our hospitals, talking to our doctors. And so, we’ll get back to you very quickly and we’ll be at the conference in Phoenix next week. So we look forward to speaking with you either there or on the call next quarter. Thank you very much for your interest in Lifepoint hospital.

Operator

Thank you, Mr. Carpenter. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you pleas disconnect. Thank you once again and have a fantastic weekend.

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Source: Lifepoint Hospitals Inc. Q3 2008 Earnings Call Transcript
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