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Executives

David M. Dill – President and COO

William F. Carpenter III – Chairman and CEO

Jeffrey S. Sherman – EVP and CFO

Analysts

A.J. Rice – UBS

Justin Lake – JP Morgan

Josh Raskin – Barclays Capital

Ralph Giacobbe – Credit Suisse

Tom Gallucci – Lazard Capital Markets

Andrew Schenker – Morgan Stanley

Darren Lehrich – Deutsche Bank

Chris Rigg – Susquehanna Financial

Kevin Fischbeck – BofA Merrill Lynch

Gary Taylor – Citigroup

Frank Morgan – RBC Capital Markets

Kevin Campbell – Avondale Partners

Whit Mayo – Robert W. Baird

LifePoint Hospitals, Inc. (LPNT) Q4 2012 Earnings Conference Call February 15, 2013 10:00 AM ET

Operator

Before we begin 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.

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospitals’ Fourth Quarter and Year End 2012 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded, Friday, February 15, 2013. I would now like to turn the conference over to Bill Carpenter, Chief Executive Officer. Please go ahead, sir.

William F. Carpenter

Thank you. Welcome everyone to the LifePoint Hospitals’ Fourth Quarter and Full Year 2012 Earnings Call. We hope you’ve had a chance to review the press release we issued earlier this morning. After my initial remarks, Jeff Sherman, our Chief Financial Officer will discuss in detail LifePoint’s results for the fourth quarter and full year, as well as our outlook for 2013. After our prepared remarks, Jeff and I, as well as David Dill, our President and Chief Operating Officer will be available to answer your questions.

I’ll begin by reviewing our results for the fourth quarter in which revenues from continuing operations grew to $893 million, up 14% from the same period last year. EBITDA was $135 million, up 3.8% over last year and EPS was $0.76, exceeding the high end of our adjusted guidance range. And for the year, revenues from continuing operations were up 12% compared to 2011. EBIDTA increased 1.8% over the prior year and EPS was $3.14.

While volumes continue to be a focus for us, respiratory and OB volumes contributed to an improvement in the fourth quarter. We’ll continue to deploy appropriate strategies intended to capture market share and to improve our volume trends.

During 2012, we completed three hospital acquisitions with over $400 million in annualized revenues. As expected, in the fourth quarter we saw a good improvement in the performance of our recent acquisitions. Our acquisition pipeline remains very active. We continue to identify new opportunities to purchase hospitals that we believe will complement our strategy to develop regional integrated health systems.

Effective January 1 2013, we completed our acquisition of Scott Memorial Hospital. This is our first purchase through a new partnership with Norton Healthcare in Louisville, Kentucky, the region’s leading and most comprehensive healthcare system. This acquisition advances our effort to establish a broader healthcare system in a marketplace where we already have an existing network.

Throughout the year, we implemented a number of programs designed to improve quality and long term operating efficiency. We started the transition of certain functions to Parallon that will be completed in 2014. Further resources we’ve added, we continue to improve quality through our hospital engagement network contract with CMS. In addition, we’re focused on improving the patient experience and growing volumes throughout our hospitals and in our emergency departments, with a dedicated service line team.

We had good cost controls in the fourth quarter and improved productivity year over year. We’re also recruiting the right physicians and improving our training and leadership development processes across our network.

Las week we announced that Dr. Russell Holman has been named Chief Medical Officer following the planned retirement of Dr. Lanny Copeland. We’re delighted to welcome Dr. Holman to LifePoint and thank Dr. Copeland for his exceptional leadership and contributions to our organization since 2007. Dr. Holman brings extensive knowledge and experience to the team and a shared passion for quality patient care. He’s led hospital quality efforts and safety initiatives on both local and national levels as well as enterprise wide initiatives to improve clinical performance. We look forward to Russell’s leadership of our ongoing quality efforts. Dr. Holman will further enhance our engagement with physicians to improve quality and performance.

I’d like to comment briefly on healthcare reform. We believe there is bipartisan recognition of the importance of rural hospitals to the communities they serve. And clearly, more coverage for more people is a good thing. While there’s still uncertainty about the overall impact of reform, including how coverage will be achieved, we will continue to advocate in Washington about the negative consequences of further reimbursement cuts for community based hospitals.

Before turning the call over to Jeff, I’d like to highlight a few results that demonstrate our commitment to creating shareholder value. Over the past several years we’ve taken a deliberate approach to investing in growth opportunities and maintaining a balanced capital deployment strategy. This approach has allowed us to continue driving value for shareholders in difficult market conditions. Since 2010, we’ve spent approximately $470 million to acquire nine hospitals with approximately $700 million in annual revenues. The markets we’re targeting through these acquisitions provide us with the opportunity to grow revenue and improve margins.

During the same time, we’ve also invested $600 million in CapEx to support organic growth and quality initiatives. And during this period, we’ve repurchased $400 million in stock, representing approximately 20% of LifePoint’s outstanding common shares. Given our strong cash flow, we’ve been able to invest this capital without increasing leverage and importantly, we’ve grown EBITDA by approximately $80 million over that same period. We expect to continue this balanced approach.

With that, I’d now like to turn the call over to Jeff to discuss our financial results for the fourth quarter in more detail and to provide you with our 2013 guidance. Jeff?

Jeffrey S. Sherman

Thank you, Bill and good morning everyone. The fourth quarter results include improving volumes, good cost controls, strong cash flow from operations and EBIDTA of $135 million, the top end of our revised guidance range.

I will now review the drivers of our results, starting with volumes. On a same-store basis, admissions in the fourth quarter were down 2.1% versus the prior year, an improvement from the third quarter and the year to date trends. One-day stay admissions were down by 5.7%, and represented half of the admission decline. Respiratory and flu admissions were positive in the quarter and were up 8.2% over the prior year.

Total surgical volumes were down by 3% over prior year. Adjusted admissions for the quarter decreased by 0.2% on a same-store basis versus prior year.

Same-store ER visits were up a strong 8.2% over prior year. Same-store gross outpatient revenue was up 10% in the quarter, driven by higher ER and imaging volume and continued growth in oncology and cardiology programs.

Revenues in the fourth quarter were $893 million, an increase of $112 million or 14.3% versus prior year. Revenues include a full quarter of Marquette General Hospital. Same-store revenues increased by $4 million, or 0.5% over the prior year. Revenues for the year were $3.4 billion, an increase of 12.1% over prior year.

Bad debt expense was 19.4% of revenue on same-store basis, up 240 basis points from the prior year and charity care write-offs were 3.8% in the quarter. The allowance as a percentage of self-pay-AR was 85% as yearend.

Same-store self-pay admissions were up 5.2% in the quarter and represented 6.7% of total admissions.

EBITDA from continuing operations for the quarter was $135 million, an increase of $5 million from the prior year. Diluted earnings per share from continuing operations were $0.76 in the quarter, down $0.02 from the prior year. For the full year, EBITDA from continuing operations was $546 million, an increase of 1.8% with earnings per share from continuing operations of $3.14. The same-store EBITDA margin in the quarter was 17%, an increase of 270 basis points from the third quarter and flat versus the fourth quarter of 2011.

Turning to pricing, on a same-store basis, net revenue per adjusted admission was up 0.7%. When normalizing for prior year costs of Rural Floor Settlements in the fourth quarter of 2011, net revenue per adjusted admission was up 2.3% over prior year. For the year, net revenue per adjusted admission was up 3.9% when normalizing for the Rural Floor Settlement recorded in 2012.

Net revenue continues to be negatively impacted by a $2.8 million reduction and sold community funding for New Mexico and net RAC adjustments of $4.6 million in the fourth quarter.

The Medicare case mix index was up by 3.4% in the quarter, reflecting the higher intensity volumes from Marquette. On a same-store basis, the Medicare case mix index was up by 1.4% versus the year.

Same-store SW&B costs as a percent of revenues increased by 130 basis points over prior year, and include increased physician employment costs of $7.9 million and costs of $1.8 million related to our shared services initiative. The fourth quarter SW&B costs also included an incremental $2.9 million cost related to meaningful use initiatives as compared to 2011.

Same-store supply costs as a percentage of revenues for the quarter declined by 50 basis points. Same-store other operating expenses in the quarter declined by 40 basis points.

For the fourth quarter, we recorded $17 million in meaningful use payments and had related operating costs of $8 million. This equates to $9 million in EBITDA and approximately $0.07 in EPS. For the fourth quarter of 2011, meaningful use payments positively impacted EBITDA by $8 million and EPS $0.09.

For the year, we recorded $32 million payments, with $23 million in operating costs, representing $9 million in EBITDA and EPS loss of $0.03. this compares to a positive $0.14 EPS impact from meaningful use payments in 2011.

Cash flow from continuing operations for the quarter was $121 million, an increase of $38 million or 45% from the prior year quarter. Cash flow from operations for the year was $383 million, versus $401 million in 2011.

Income tax payments increased by $40 million over prior year due to the 2011 benefit of accelerated depreciation from the federal stimulus bill. We invested $64 million in capital expenditures in the quarter, including $30 million in IT capital investments.

Depreciation and amortization expense increased by $8.6 million or 19.2% versus the prior year. The increase was driven by higher IT investments and three new hospitals in the quarter versus the prior year. For the year, depreciation and amortization expense increased by $27 million, negatively impacting EPS by $0.35. we expect our depreciation expense to continue given our significant IT investments and hospital acquisitions.

We were active buyers of our stock in the fourth quarter, with total purchases of $90 million at an average price of $36.28. At yearend, we have $95 million remaining on our outstanding authorization for share buybacks. We finished the quarter with $85 million in cash on hand and had available borrowing capacity our revolving credit facility of $235 million.

We also announced this morning the completion of a new term loan in the amount of $325 million, with a rate of LIBOR plus 250 basis points. The proceeds of the loan will be used for general corporate purposes and to repurchase the company’s 3.25% convertible notes due in 2025 that are currently putable back to the company.

Additional information regarding our fourth quarter results is available by reviewing our SEC filings including our 10-Q, which will be filed later today.

To summarize the year, we finished with dividend and EPS in our original guidance range for the year and at the top end of our revised guidance for the fourth quarter. Our shared services initiative is progressing well. Three hospital pilots begin in the fourth quarter for revenue cycle and we expect to roll out an additional 20 hospitals in 2013. In supply procurement and accounts payable, we began four hospital pilots in the fourth quarter and also expect to rollout an additional 20 hospitals in 2013 for this initiative. The initial results have been consistent with our expectations.

Cash flow from operations was again strong in 2012 at $383 million. Free cash flow, defined as cash flow continuing operations less capital investments, was $162 million. We are committed to using our cash flow to drive shareholder value. In 2012 we invested $221 million in capital in our existing facilities, acquired over $400 million in annual hospital revenues and bought back $90 million of stock. We remain focused on enhancing shareholder value by using our financial strength to invest in our facilities, acquire hospitals and opportunistically buying back our stock.

Turning to guidance. In our earnings release today we also provided guidance for 2013 for revenues, EBITDA and EPS. We expect revenues to be in a range of $3.65 billion to $3.75 billion for 2013. The EBITDA range for 2013 is $540 million to $570 million and EPS in a range of $2.73 to $3.11.

We are projecting Medicaid revenues to be down 1% to 2% in 2013. Medicare pricing is expected to be flat, taking into account sequestration starting April 1 and the fiscal cliff MS-DRG reductions and Affordable Care Act DSH reductions starting in the fourth quarter of 2013. Managed care pricing increases are expected to be in a range of 5% to 6% for the year. We’ve not included any share buybacks or acquisitions for 2013 in the guidance range.

As we noted at an investor conference in early January, depreciation expense is projected to increase by $30 million to $35 million over 2012 due to IT investments and the full year impact of Marquette and the other 2012 acquisitions. We expect meaningful use EBITDA of approximately $32 million in 2013 as compared to $9 million in 2012. We anticipate the majority of the payments to occur in the second half of the year. This essentially offsets the benefit recorded in 2012 for the Rural Floor Settlements.

I will now turn it back over to Bill.

William F. Carpenter

Thank you, Jeff. Before we start the question-and-answer period I’d like to share a few closing thoughts. While we continue to experience soft volumes, we’re encouraged by our strong outpatient activity and revenue growth. We had solid quality initiatives underway and our acquisition pipeline remains very active. We will continue to target acquisitions in attractive markets on a standalone basis through our partnerships with Duke and Norton and for new partnerships. I’m extremely proud of all the work that the LifePoint team is doing to continue to improve the quality of care we provide while delivering strong value for our shareholders.

With that operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from the line of A.J. Rice with UBS. Please proceed with your question.

A.J. Rice – UBS

I just had a couple of questions, maybe the specific ones first. On that high tech comment of $32 million to EBITDA, is that – are you having the same roughly expense rate as last year about $8 million and therefore $40 million of incentives? Is it something close to that?

Jeffrey S. Sherman

That’s in the ballpark, A.J.

A.J. Rice – UBS

Okay. And on the volume and pricing assumptions for 2013, can you give us any flavor for what you think those might look like?

Jeffrey S. Sherman

On the adjusted admission side, we’re anticipating being down 1% to up 1% for the range. For pricing, I can’t give the individual product point pricing.

A.J. Rice – UBS

Yeah. You gave us that I guess. And then is there an update on the New Mexico indigent care program?

Jeffrey S. Sherman

At this point the state is still in discussions about the program. So at this point we’re not anticipating any other changes in our guidance other than that the reductions that started in the third quarter will continue. So it will be another roughly $6 million in reductions in 2013.

A.J. Rice – UBS

And then finally, just stepping back and thinking about next year and health reform implementing, are you making any changes now, investments over the next year to better position you? You’ve got ongoing investments to improve efficiency and so forth, but I wondered if there’s anything that you’re specifically doing to prepare for that and maybe any early discussions you’ve had with insurers about contracting for next year, what you’re seeing.

William F. Carpenter

A.J., this is Bill. We are indeed looking at ways to deal with the coming insured population in our markets. And so we are investing in programs today and doing a lot of planning for what that will look like. Our regional strategy that we have invested in with respect to the new acquisitions is really designed around that in order to provide scale. And then in individual markets we are looking at ways to put that scale to use as we really try to use the hospital as a focal point for care in the community to help bring the public along, these newly insured patients along and to a coverage that will be available. So that’s some of the things that we’re doing.

Jeffrey S. Sherman

Yeah. Just think from a capacity standpoint, we have capacity. We won’t be doing anything with staffing really until we see volume changes, but we think we have capacity in our ED departments today to treat the patients. And we have started having early discussions in terms of exchange pricing and it’s too early to comment on that at this point. But we’re early in the process on our discussions with managed care companies regarding the exchange products.

Operator

Our next question comes from the line of Justin Lake with JP Morgan. Please proceed with your question.

Justin Lake – JP Morgan

First question. In terms of the revenue growth, so it looks like your guidance implies low single digit same-store revenue. Is that right?

Jeffrey S. Sherman

That’s correct.

Justin Lake – JP Morgan

So obviously the top line in the total guidance is much higher than that. So can you give us an idea of how much of that topline is coming from revenue that’s already been acquired versus what you’ve got baked in for acquisitions?

Jeffrey S. Sherman

Well, we don’t have any acquisitions that haven’t been included in the revenue base, Justin. If you look at Marquette, we’ve said that’s roughly $320 million of revenue. So there’s a little bit over $200 million of incremental revenue for Marquette and probably another $20 million to $30 million of revenue from other acquisitions that we completed in 2012, earlier in the year. So, you get about $230 million, $240 million of acquisition revenue from the three hospitals acquired in ’12 full year impact in ’13.

Justin Lake – JP Morgan

And so can you walk us through what you think you’re going to generate for cash flow in 2013 and potential uses there then?

Jeffrey S. Sherman

We haven’t given cash flow guidance in the past. You should expect it’s going to be pretty consistent flowing from the EBITDA line today, Justin. So I think free cash flow was $160 million this year. It was $180 million last year. I think that’s a reasonable proxy for looking at ’13 flowing down from the EBITDA line.

Justin Lake – JP Morgan

So CapEx is going to be similar and the…

Jeffrey S. Sherman

CapEx I’m expecting to be in the range of $230 million to $240 million. So we continue to have IT investments. Those are ramping down. 2012 was our peak year pricing capital investments. Those are starting to come down in 2013. We also have some capital commitments related to Marquette that are starting to ramp up in 2013 that will happen for the next several years.

Justin Lake – JP Morgan

So then just last question. Physician recruitment and employment’s been a big push. Can you give us any incremental color in terms of what you’re expecting here for 2013, maybe base line just in terms of what the contribution is versus from a topline perspective and more importantly, a bottom line perspective in terms of these employed physicians and what you expect that number to look like in terms of 2013? I know it’s been a headwind. I’m just trying to get some sizing there and how much more we should think about it being a headwind in ’13.

Jeffrey S. Sherman

I’ll start with probably just the overall financial impact and then I’ll turn it to David to give a little color just on plans for ’13. So physician practice losses have been increasing, but they’ve been increasing very consistent with the number of employed physicians. So our losses have been growing as our employed physicians have grown. The losses were pretty consistent in the fourth quarter from the third quarter and as we said last quarter is typically our largest quarter for bringing new doctors either through employment or through recruiting. So I would expect that the losses will continue in a consistent manner than we’ve been saying with more physicians moving towards employment in 2013. So I think it’s our expectation we’re going to continue to see more physicians employed and the losses will move according with that. But we are seeing improvement in the practices that we’ve operated for over a year and we continue I think to refine our practice management processes to ensure we’re getting good performance out of the ones we are employing.

David M. Dill

Justin, this is David. The only thing that I would follow up to Jeff’s comment, I look at the employment of physicians in two different buckets. One, those physicians that are new to the market that we’re bringing into the market. The employment of those physicians will at least be at the same rate that we’ve seen over the course of last year. So I think that headwind will continue to be there. There will be also be several physicians over the course of 2014 that we’ll employ through transactions, what we’re calling market transactions in our communities. So the actual number of employed physicians will grow. However, those practices are already established in the communities and the way that we’ll structure those you won’t see the same pro rata share of employment losses for those type of doctors. So I expect the combination of those two to significantly continue to ramp up. The number of employed doctors’ financial impact won’t be as dramatic for those that we’re acquiring and partnering with that are already serving patients in our communities.

Justin Lake – JP Morgan

And those doctors you’re acquiring, are you buying out the practices or are they just moving to an employment agreement?

Jeffrey S. Sherman

Typically moving to an employment agreement. There might be a small amount of assets, physical assets, equipment that are purchased, very small though. We’re not paying goodwill typically for any of these acquisitions.

Justin Lake – JP Morgan

Okay. Can you just throw us the numbers and I’ll jump off in terms of the physicians in 2012 and the expectation for 2013 as well as the losses in 2012 and 2013?

David M. Dill

Just in terms of employed physicians, we said and have said consistently that we expect to add around 100 net new physicians into the company over the course of the year. We hit that target. I think it should be a little bit higher than that in 2014 given the current recruiting plans and our retention plans are in place. And a lot of that is just indicative of just the growth of the organization and the new hospitals who are coming into the company. I’ll turn it over to Jeff for some of the financial implications.

Jeffrey S. Sherman

The practices are, the losses are running $14 million, $15 million a quarter, Justin. I would expect that that will increase in 2013 consistent with more doctors being employed. But I don’t expect to see huge growth there, but just growth consistent with the number of employed physicians going up. And that’s a little bit harder for us to predict coming into the year. We know how many physicians we’re targeting, how many of them we’re going to get through employment versus recruitment guarantees. It’s a little bit harder to predict.

William F. Carpenter

But as far as the overall recruitment in general, Justin, we’re operating within the range we need in order to be able to achieve our expected results.

Operator

Our next question comes from the line of Josh Raskin with Barclays Capital. Please proceed with your question.

Josh Raskin – Barclays Capital

Just first question on Hurricane Isaac. I know there was an impact last quarter. I was wondering, did you see any of those volumes come back or is that just a factor where the entire schedule just kind of shifts back?

William F. Carpenter

We didn’t have any impact on the overall volumes for the quarter.

Josh Raskin – Barclays Capital

Okay, so no comeback on that. And then the rack audits, I think you said $4.6 million. It sounds like it was a tick higher than last quarter. I think you guys said around $4 million. Any way to characterize the activity there? Are you seeing more or less activity in your hospitals or no change in trend there?

Jeffrey S. Sherman

I think the activity has been consistent. We expected when we gave guidance in the fourth quarter that we’d have a similar level of rack reductions in the fourth quarter and it was almost the same amount. It was $4.4 million in the third quarter and 44.6 million in the fourth quarter. So very, very consistent with that.

Josh Raskin – Barclays Capital

Okay, got you. And then just the last one on the bad debt reserve, I thought that came down a little bit this quarter. Was there some Marquette impact in there or just anything else that drove that?

Jeffrey S. Sherman

Yeah, two things. The allowance, if you were looking at from the third quarter, the allowance for doubtful accounts came down quite a bit. We did write off a bunch of old self PAR for tax purposes. And so that – you’ll the see the allowance came down. In terms of the actual bad debt percentage, Marquette is definitely impacting that on a continuing operations basis. I said in my prepared remarks, same-store bad debt expense was up about 240 basis points and continuing op is only up about 60 basis points. So Marquette one of the reasons why we like the upper peninsula of the marketplace is there’s just a lot much lower level of uninsured patients up there. So Marquette’s bad expense is significantly below the company average. So when you blend those you’re seeing a lower growth in bad debt on a continuing operations basis in the fourth quarter.

Josh Raskin – Barclays Capital

Okay, because that was – the difference being the full quarter impact?

Jeffrey S. Sherman

Correct.

Josh Raskin – Barclays Capital

And then so you said the write off of the self-pay accounts receivable, is that something you do seasonally? Is that something we should do …

Jeffrey S. Sherman

Generally towards the end of the year for tax purposes old AR accounts to make sure we can realize tax benefits we’ll write them off.

Josh Raskin – Barclays Capital

Got you, okay. But no obsolete…

Jeffrey S. Sherman

Those were all full year reserved aged – the accounts aged over 365 days.

Josh Raskin – Barclays Capital

Right. But, Jeff, no change in your methodology around …

Jeffrey S. Sherman

Correct.

Operator

And our next question comes from the line of Ralph Giacobbe with Credit Suisse. Please proceed.

Ralph Giacobbe – Credit Suisse

Is there any way for you guys to measure out migration in your markets and I guess I'm just specifically looking at the surgery numbers and I certainly understand the inpatient-outpatient shift to some degree. But you know the outpatient number is declining there. So just want to try to understand what's going on from I guess a macro level. Then maybe remind us with all the deals you've done how many surgeons you’ve recruited over the last couple of years and maybe how many you've lost?

Jeffrey S. Sherman

In terms of overall ability to manage – to look at market share, the data is different. We have some good data in some states in terms of the inpatient. Sometimes it’s limited to Medicare. Outpatient data is very limited. So and I think I would say from that same point, our ability to measure it by state varies, but overall I would say I think when we look at our market share data that we haven’t seen big losses in market share.

David M. Dill

The inpatient data is a lot cleaner for us to look at, especially with the med corp data and you made some proxies over some of the commercial data. Outpatient, a little more difficult, although we can measure it in many states with a higher degree of confidence. As it relates to the surgeons specifically coming in out of company, when you look across kind of three big service launch, product launch for us being endoscopy G.I. and then ortho and general surgery and you go back over the last two or three years, the number of physicians that we’ve lost in those services, we’ve replaced them. In fact we’ve added a few more than we have lost over time. But there is this lag between the service line that was built by physicians they retired or left and the ramp up of the new physicians. But to Bill’s point earlier, we got the right doctors and the right number of doctors in the community, but we have seen just overall volume declines as in pockets there might be some loss of market share, but not overall that’s concerning as we look at the data.

Ralph Giacobbe – Credit Suisse

Okay, and then I guess higher level, just when I look at 2012, you had really strong topline growth in that 12% range. Low single digit EBITDA growth and EPS that was slightly down. When I looked at the guidance for 2013, sort of a similar pattern, midpoint of the revenue range shows strong growth of 9%, low to mid-single digit EBITDA growth and declining EPS. So I guess I know you've taken on deals and you’ve had headwinds with employing docs, but is there something with the ramp of the improvement in what you're acquiring that’s simply going a lot slower? Is it the existing asset base that is creating incremental pressure? And I guess help us maybe with the trajectory of that ramp on the deals and when you would expect to see more of that topline translating to greater operating earnings growth.

Jeffrey S. Sherman

I’ll start. In terms of from a margin perspective, we’re adding a lot of revenue. We added a lot of revenue. We said over $400 million in 2012. That’s at very low margins. And so we’re expecting to see improvement on that, but still that’s’ lowering margins for the company overall and even in the hospitals we acquired in ’11 and ’10 as they continue to ramp up are below the company’s average EBITDA margin. So there’s a piece of that related to that. But if you stand back from a moment and just look at our guidance for 2013, we ended the year at about $546 million. You have to normalize that for the Rural Floor in the prior year UPL payments, provider tax payments in North Carolina and West Virginia that don’t repeat, that’s about $36 million there alone of items that won’t repeat. So then you have a normalized EBITDA of about $510 million. We had other pluses and minuses for the year and then you had incremental meaningful use. We had another $6 million in reduction for sold community funding that I talked about in my prepared remarks. And then the remaining two buckets are acquisition EBITDA improvements and we’re seeing I think good improvements there. And then you’ve got the remaining same store.

So if you think about what I said in my prepared remarks, half of our revenue base has a net decline in revenue. Medicare’s revenues are going to be flat and that’s assuming that sequestration does take place this year, assuming the MS-DRG coding reductions in the fourth quarter as the Affordable Care Act DSH reductions in the fourth quarter. A lot of pluses and minuses, but at the end of the day Medicare comes out flat for us. You’ve got half the revenue base that is flat. You have managed care pricing the other half of revenue base growing 5% to 6% and then you just have typical inflationary cost pressures for labor, supply. I think those inflationary pressures have definitely come down, but they’re still increasing.

So I think if you add all that up that’s the balance of our guidance range is the range of outcomes for a few of those things is the range of our guidance. On the EPS side, we have talked about in the past, the main biggest driver below the line is just depreciation expense. And so we’ve made a lot of investments in IT with shorter useful lives and that’s driving deprecation. That will last a few years and that will burn off once all these meaningful use IT capital investments are fully depreciated and then you just had the new hospitals coming online. So I think as we view it, a lot of moving parts in 2013 and some uncertainties regarding the reimbursement front. Will there be any other additional reductions in reimbursement. All those things lead us to give the guidance range we’ve given.

William F. Carpenter

And don't lose sight of the big upside in the acquisitions and the timing of the way that those have come in. we are at very early stages in those acquisitions and we think there’s a lot of potential there.

Ralph Giacobbe – Credit Suisse

Okay, that's helpful. And then just my last one. I think in the prepared remarks you talked about OB volume improvement. Could you just maybe give us some stats around what you're seeing there and if that improvement also suggests improvement within the mix of that category?

Jeffrey S. Sherman

We have been down a couple percent for the first three quarters of the year and we were up slightly in the fourth quarter. So it looks like we’ve seen some improvement there. Hopefully it’s a trend for us, but we definitely saw several quarters of decline ending in the fourth quarter and saw some small growth in the fourth quarter on the OB product line.

William F. Carpenter

Hopefully it’s a trend for improvement in the economy as people are planning their ability to support a young family.

Jeffrey S. Sherman

And as you look at unemployment in our markets, we continue to see improvement in our markets and unemployment on a quarter over quarter basis. I think the more challenging thing for us to figure out is that unemployment coinciding with jobs that are providing healthcare coverage.

Operator

And our next question comes from the line of Tom Gallucci with Lazard Capital Markets. Please proceed.

Tom Gallucci – Lazard Capital Markets

Good morning. Just a couple of follow-ups here, maybe on that last one. You're talking about the timing of some acquisitions and the opportunity to improve the margins on the acquired revenue in the last few years. Can you just remind us again the typical trajectory that you expect and maybe what some of the key drivers are within that acquired revenue on the ramp up? Was it more dependent on volume or are you looking for more efficiencies within what you've acquired? Just maybe a little color there so we can think about how to model it out and what to look for as we go forward.

Jeffrey S. Sherman

Sure Tom. This is Jeff. Generally when we acquire a hospital, we’re acquiring them in the low to single mid-single digit EBITDA margin and we’re anticipating seeing 200 to 300 basis points of margin improvement a year for several years until we get them up to the company’s average margins of mid to high teens. The buckets of opportunity improvement are really different in each acquisition, but generally we have opportunities to drive topline revenue growth. That’s generally for our recruiting physicians by investing in deferred capital needs as a way of driving topline volume. We do do a detailed service line analysis as part of our due diligence. So we have a pretty good idea coming in the door what the opportunities are for volume.

We also generally have managed care pricing opportunities on the pricing side and those may take time to get depending on where the contract status are. And then we have cost opportunities. On the supply side we’ll generally get supply savings in the 4% to 6% range typically day one despite moving to our GPO and then we’ll look for labor efficiency costs over time and we can line up where hospitals stand with similar sized hospitals in LifePoint until we can find labor efficiency opportunities. So those are the big high level buckets. The mix of that is different for each one. But we’re confident in our ability to do our due diligence and implement the plans that we’ve put in place to hit those targets.

David M. Dill

But you have to start generally with as we integrate new hospitals into the organization, GPO, labor efficiencies of standards. All that is impact – in fact just a couple of weeks ago this team was up in Marquette reviewing the upper peninsula the year to date progress or the first five months progress on those tactical transition integration related issues. I’m really excited about the progress that we’re making and that we’ll continue to make good course in 2013. Specifically though Marquette, in addition to those costs type items, we spend a lot of time in the diligence process looking at strategic planning, looking at the data, deciding product lines and investments that we need to make. Three big service lines up there for us and three big strategies for us in 2013 will center around a more robust primary care strategy, cardiology programs and a comprehensive cancer strategy.

So those will be some big investments coming out of the box in addition to the cost saving measures and the integration tactical items will yield we think gains in market share, improving the topline. In addition to those, what’s exciting up in Marquette not just our relationship with Duke there and the expertise that they can bring is some other collaboration models that Marquette, had already put in place that we can tap as pilots in the upper peninsula. Models with other hospitals and BlueCross in fact, looking at curbing out migration. So there’s a lot of exciting things happening in Michigan that will help on the topline as well as the tactical day to day operating items within the integration.

Tom Gallucci – Lazard Capital Markets

Thanks, David. I was actually going to ask you about Marquette next. You beat me to the punch, appreciate it. Last question I guess for me was really just about the acquisition pipeline. There's so many variables remain on reform and everyone's got a little bit of a different view on exactly how the benefits flow through and their magnitude. How is this impacting acquisition and pricing discussions and the attitudes of maybe the sellers that are out there?

William F. Carpenter

Well, first of all the acquisition environment continues to be active and strong and we are well positioned financially and alongside our quality partners to take advantage of the opportunities that come our way. Our balance sheet gives us great flexibility. The resources that we have here at the hospital support center give us the ability to bring these new acquisitions in efficiently and well. David just said and Jeff said we’re very pleased with our recent acquisitions and saw them improve in the fourth quarter. The very things that are facing all hospitals, the very challenges that are facing all hospitals are causing smaller community hospitals to seek the resources of a larger partner, particularly one with a commitment to quality, a commitment to reinvest in their communities in order to allow patients to stay close to home for care. So that’s what we do with our quality partners at Duke and Norton and we will continue to invest those resources. So those very things that we talk about with you on these calls, the challenges that we face are really being felt by smaller community hospitals as they try to deal with it on a one-off basis. So we think the pipeline will continue to be very strong as those pressures continue to be felt.

Jeffrey S. Sherman

Yeah. And Tom, on the pricing side, I think we continue to be aggressive in the number of deals we look at, but have maintained a disciplined approach on the pricing side and I’m not sure we’ve seen a lot of change on that part and each deal is different. Each community board may have different goals in terms of their final outcome. But I don’t think we’ve seen – we haven’t seen any dramatic change in pricing in the deals we’re looking at.

Operator

And our next question comes from the line of Andrew Schenker with Morgan Stanley. Please proceed.

Andrew Schenker – Morgan Stanley

Just real quick, on one-day stays I think you guys said the decline was below last quarter's levels. How has that trend been progressing and what you guys are expecting for 2013?

William F. Carpenter

Yeah. We’re expecting a similar level of one-day stay activity in 2013. Again difficult to predict. We have added a lot of resources at the case management side and are rolling out a computerized [intercall] criteria system across the company to help make sure we’re getting patients in the right setting upon a mission. So I think we would just expect to see a similar trend in one-day stays that we’ve seen in 2012.

Andrew Schenker – Morgan Stanley

And then on Medicaid, you guys obviously gave us our revenue guidance. Is there any opportunity that some of that is going to change around updates to UPL throughout the year?

Jeffrey S. Sherman

Not expecting any at this point. We’ll see what happens in New Mexico. It’s our expectation New Mexico will stay consistent after the reductions that we’re currently taking. But most of the other states we’re looking at, I don’t anticipate any major changes in UPL programs for 2013.

Andrew Schenker – Morgan Stanley

And then, I think you guys said you haven't signed any contracts that include exchanges, but where are you on your 2014 contracting, exchanges aside?

Jeffrey S. Sherman

In 2013 or 2014?

Andrew Schenker – Morgan Stanley

2014.

Jeffrey S. Sherman

Most of our contract negotiations go a year in length. So we’re well along the ’13 line. We don’t have many through to ’14. It’s a small percentage at this point.

Operator

And our next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

William F. Carpenter

Operator and Darren, they tell me we have a number of people in the queue and I know there’s another call coming up after this. If we could leave one question because we want to get to as many people as we can and hit those. So go ahead.

Darren Lehrich – Deutsche Bank

Okay. I did have a question. I just have a couple of numbers ones that I just want to clarify. Jeff, you mentioned DSH impact in Q4 and obviously that will spill over into 2014. I guess, can you just clarify for us what that impact is so we can think about that for you guys as it relates to the full annual impact related to the CMS changes that are coming. And then…

Jeffrey S. Sherman

That’s approximately $5 million for us Darren for the quarter.

Darren Lehrich – Deutsche Bank

Okay, and then I guess my question is just around Parallon. You guys spent a little bit. You invested it in transitioning. What's the expectation now for 2013 in terms of the overall benefit? Will we see much? Can you quantify that for us in just the overall run rate benefit that you expect when it's all said and done looking out I guess to 2014?

Jeffrey S. Sherman

We’ve given a range of around $7 million to $10 million of EBITDA benefit in 2013 for Parallon, Darren. We expect that to ramp up in 2014 into 2015. So keep in mind we’ll have about half of the facility, less than half, 20 facilities in revenue cycle and 20 facilities n AP and supply procurement this year for partial year. So we expect that number is going to ramp up over the next couple of years. We haven’t talked about any dollars past ’13 but in that $7 million to $10 million range for ’13.

Operator

And our next question comes from the line of Chris Rigg with Susquehanna. Please proceed.

Chris Rigg – Susquehanna Financial

Good morning. Thanks for squeezing me in here. I know a lot of questions have been asked on the puts and takes in terms of margins. I guess if we step back, margins have been coming down for a few years here. I know the acquisitions are a big part of that headwind. At what point should the cumulative impact, improvement impact from recently acquired facilities begin to offset the facilities acquired in the closer years? Basically I'm just trying to figure out when is the margin going to stabilize here and start moving higher on a corporate basis?

Jeffrey S. Sherman

Well, I think it depends on the size of acquisitions we do and what the starting margins are of those acquisitions. So we’re continuing to look for good opportunities and we have been margin improvements. That’s a good thing for us long term. And we’ve also had a softer volume environment. So I think seeing volume stabilization and volume growth could help on that as well and just a stable reimbursement environment. There’s been a lot of pluses and minuses on the reimbursement side over the last few years. Hopefully going forward we can get more stability there.

David M. Dill

In addition to the dilution in margins with recent acquisitions we do expect we will continue to improve. There have been some significant investments that we’ve made as an organization to position us for growth. Significant investments over time here at the hospital support center to support growth. A lot of that tied up into three main areas. A big emphasis on quality, a big investment that we’ve made in quality and I think that investment is behind us. A big investment in information technology systems to position ourselves to reap the benefits from meaningful use and also to integrate all the acquisitions that are coming in. and then finally on the physician services side, the management of the practices and then the employment of the physicians that we over the last two or three years that the industry has changed that not only are the losses hitting our EBITDA, by definition margin dilutive and even if they breakeven it’s margin dilute. So those three big areas of investments that we’re making will position us for long term success, coupled with the acquisition dilution and I think most of those big investments are behind us and we have camped out of many of those dollars with the exception of the physician recruiting fees and the physician employment fees.

Operator

And our next question comes from the line of Kevin Fischbeck with Merrill Lynch. Please proceed.

Kevin Fischbeck – BofA Merrill Lynch

I wanted to go back to your prepared comments. You talked about I guess the $1.5 billion of CapEx deals of share repo that you spent since 2010. But I want to get your sense of what kind of returns you're actually generating on those investments because – obviously a lot of things going on from a reimbursement perspective, the economy, bad debt, volumes, etc. over that time period. But if we just compare your results to the other publicly traded companies, I mean, your guidance would imply the lowest EPS growth and the lowest EBITDA growth of all the companies over that time period. And you kept your leverage flat, but your peers probably on average had delevered over that time period while showing better growth. So I guess I want to understand how you guys think about your positioning and what kind of returns you're actually generating when you spend the capital that you outlined?

Jeffrey S. Sherman

Well, I think a lot of the acquisition capital that we’ve made Kevin we expect the returns – we still expect significant returns on the acquisition capital that we’ve made. So Marquette was a big investment that we’re only three months into Marquette. So I think on the acquisition side we’ll expect a very good return over the next couple of years. The share buybacks, we have bought back a considerable amount of our stock I would say in relation to some of our peer companies. And then with regards to the same-store side, almost a third of the CapEx, $200 million has been for IT with the bulk of the earnings from IT not starting to take place over 2013, ’14 and ’15 related to meaningful use. So we’ve had a timing issue with a third of our CapEx spend related to IT investments where we’ll get a lot of that money returned over the next three years as we hit our peak meaningful use payments. So we look at all those individually from a return perspective and how we’re deploying our capital and are confident we have good returns and more active returns in all those buckets.

Kevin Fischbeck – BofA Merrill Lynch

So what you're saying is that a lot of your capital has been deployed recently and the investment will pay off is still kind of coming over the next two or three years?

Jeffrey S. Sherman

Yes. Certainly on the acquisition side and related to the recent IT investments we’ve made, absolutely.

Operator

Our next question comes from the line of Gary Taylor with Citigroup. Please proceed.

Gary Taylor – Citigroup

I'm having a little trouble reconciling revenue and the same-store revenue reported. So kind of a two-part question. One, Jeff, could you give us on a dollar amount of total revenue that's in the same-store? And I believe there's just three hospitals that are not in same-store.

Jeffrey S. Sherman

No. we actually have five hospitals. We have Maria Parham and Person that aren’t in same-store also, Gary. So same-store revenues $764 million after bad debt in the fourth quarter.

Gary Taylor – Citigroup

Okay, I will work on that. Were there any unusual provider tax benefits in the quarter?

Jeffrey S. Sherman

There were not.

Operator

Our next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Frank Morgan – RBC Capital Markets

Follow-up on Gary's question. What about cost report settlements in the quarter from prior period?

Jeffrey S. Sherman

Nothing unusual in the fourth quarter. We did talk about in my prepared remarks we had higher costs report settlements in the fourth quarter of 2011. The timing sometimes is just hard to predict, but I normalize for that in our net revenue growth for AA and that was one of the bigger factors.

Frank Morgan – RBC Capital Markets

Okay, you mentioned $5 million is the EBITDA impact from the DSH rule change in the fourth quarter. Are there any other things that are unique specifically to rural hospitals related to reform that we should start thinking about now for – as we look at our 2014 estimates?

Jeffrey S. Sherman

Related to reform, Frank, I don’t think there’s anything else unique for rural hospitals. There were some differences I think in some of the adjustments that CMS put out. But with regard to reform, from our standpoint and our marketplace being the only provider of the uninsured in our marketplace, we think we’re positioned well to benefit from expanding coverage.

William F. Carpenter

And not really reform exactly, but were pleased to see certain rural extenders continued obviously and that’s a focus for us to continue to advocate for rural and community based hospitals.

Frank Morgan – RBC Capital Markets

And would you just, to get an idea, is the $20 million annualized run rate impact from the DSH rule change, what does that represent as a percentage of the total DSH payments you get and then I'll hop off. Thanks.

Jeffrey S. Sherman

Medicare DSH Frank is $65 million to $70 million. And so 30% roughly. In Medicaid DSH is about $30 million. So our total DSH is about 20% of total Medicare and Medicaid DSH, a little bit higher of Medicare DSH only.

Operator

Our last question comes from the line of Kevin Campbell with Avondale Partners. Please proceed.

Kevin Campbell – Avondale Partners

Thanks for squeezing me in. Just a couple of quick clarifications. You mentioned the DSH cut impact in the fourth quarter. What's the coding recruitment adjustment going to be in the fourth quarter in terms of the impact on revenues or EBITDA?

Jeffrey S. Sherman

It’s going to be small. It wouldn’t be enough for me to point out for the year.

Kevin Campbell – Avondale Partners

Okay. And are there any sort of one time…

Jeffrey S. Sherman

I’m sorry. The MS-DRG adjustments or?

Kevin Campbell – Avondale Partners

Yes.

Jeffrey S. Sherman

Okay, I’m sorry. That adjustment is similar to the DSH reduction in size, approximately $5 million.

Kevin Campbell – Avondale Partners

And that starts in the fourth quarter, is that correct?

Jeffrey S. Sherman

Correct.

Kevin Campbell – Avondale Partners

Okay and are there any other sort of one-time – that's not a one-time item obviously, but are there any one-time benefits in the numbers this year, retroactive adjustments coming from any states that will benefit this year's results that…

Jeffrey S. Sherman

Not that I would expect any at this point. For 2013?

Kevin Campbell – Avondale Partners

Correct.

Jeffrey S. Sherman

Yeah, not that I’m expecting at this point.

Operator

We’re going to take one last question. The last question comes from the line of Whit Mayo with Robert W. Baird. Please proceed.

Whit Mayo – Robert W. Baird

Hey, I'll be real quick. Jeff, are provider taxes a headwind or tailwind for you this year and on the $20 million DSH cut, does that include some consideration for Medicare Advantage? Thanks.

Jeffrey S. Sherman

Medicare advantage for us is pretty small with as a total percentage of our overall population. When you combine the loss in sold community funding with some of the new provider tax programs, it was probably small in that incremental benefit for the year in 2012.

Operator

There are no further questions at this time. I'll turn the call back over to you to continue with the presentation or any closing remarks.

William F. Carpenter

Operator, thank you. In closing, we’re pleased to have ended 2012 in a positive way and continued our track record of creating value for our stockholders. Our outlook for 2013 is positive as we integrate new hospitals into the system and see opportunities to acquire more hospitals. We remain focused on our strategies for improving quality care, growing the business, operating efficiently and developing talent. We believe this focus will lead to our continued success. Thank you for joining the call today. Thank you for your interest in LifePoint Hospitals.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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