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Executives

Gary Newsome - President and CEO

Kelly Curry - EVP and CFO

Robert E. Farnham – SVP Finance

Kerry Gillespie- EVP of Operations Finance

John Merriwether - VP, Financial Relations

Analysts

Kevin Fischbeck - Bank of America Merrill Lynch

Ralph Giacobbe - Credit Suisse

Andrew Schenker - Morgan Stanley

Justin Lake - JPMorgan

Joshua Raskin - Barclays Capital

AJ Rice - UBS

Darren Lehrich - Deutsche Bank

Chris Rigg - Susquehanna Financial Group

Whit Mayo - Robert W. Baird & Company

Health Management Associates Inc. (HMA) Q4 2012 Earnings Conference Call February 15, 2013 11:00 AM ET

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Health Management Fourth Quarter and Year-End 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. John Merriwether, Vice President of Financial Relations, you may begin your conference.

John Merriwether

Thanks, Steve. Good morning, everyone. I'd like to welcome you to the Health Management's fourth quarter and year-end 2012 earnings call. Also, I'd appreciate your patience this morning. We know that we had a preceding call before us. We thought we would give a little extra time even on our call today.

Before we get started with the call, I'd like to read our disclosure statement. This can be found in its entirety in last night's press release which has been posted on our website at hma.com. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are subject to risks, uncertainties and assumptions. And are identified by words such as expects, estimates, projects, anticipates, believes, intends, plans, may, continue, should, could, and other similar words. Statements made throughout this presentation are based on current estimates of future events. And the company has no obligation to update or correct these estimates.

Listeners are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties. And that actual results may differ materially as a result of these various factors.

In addition, this morning adjusted admission, as mentioned on this call, is defined as consolidated net income before discontinued operations, net gains, losses on sale of assets, net interest, and other income, interest expense, income taxes, and depreciation and amortization.

On the call with me this morning are President and Chief Executive Officer, Gary Newsome; Chief Financial Officer, Kelly Curry; Senior Vice President of Finance, Bob Farnham; and Kerry Gillespie, Executive Vice President of Operations Finance. Thank you for your attention.

And now, I'll turn the call over to Gary.

Gary Newsome

Thanks, John. Good morning and thank you for joining us this morning to review the fourth quarter and year-end 2012 results. We've previewed these results about a month ago and we will provide some additional details this morning. As I mentioned in January, despite additional legal and investigation expenses Medicaid reimbursement reductions and a continued pace at reluctance to seek in-patient services, we managed well for a challenging quarter.

From a volume perspective compared to the fourth quarter last year, continuing same hospital surgeries increased 0.9%, same-hospital adjusted admissions were essentially flat, and we did see a significant 9.2% increase in same-hospital ER visits from the fourth quarter as flue volumes were considerably higher compared to the same quarter last year. But those ER visits did not translate into additional admissions.

Same-hospital admissions for the fourth quarter declined to 4.7%. We saw a significant increase in observation business in the fourth quarter, up 24% which is significantly higher than a year-to-date increase of 12%. There are several factors contributing to the increase including flu, air pressure from both managed care and governmental payors, RAC audits and other difficulty there -- although difficult to verify. There may have been some impact in the 60 Minutes reported.

Our RAC audits experiences continue to indicate a denial turnover rate above industry averages of 75%. And the denial turnover process is time-consuming and in many cases can take up to two years and the positions are filling like someone's looking over the shoulder and this could be contributing to the observation increases.

The volumes trends we experienced in the fourth quarter of 2012 have continued into the first six weeks of 2013. ER visits are tracking flat last year and in the early part of the first quarter. We continue to monitor these trends through the remainder of the first quarter, but at the same time we're still very comfortable with our objective ranges provided for 2013.

Revenues for the fourth quarter and ended December 31, 2012 grew 6.6% to $1.48 billion while adjusted EBITDA grew 13.7% to $254 million, resulting in diluted EPS from continuing operations attributable to Health Management Associates of $0.19.

As we pointed out in January, negatively impacting the fourth quarter was approximately $0.04 per diluted share related to legal and investigation expenses and approximately $0.02 cents per diluted share related to Mississippi Medicaid payment reductions which were offset by Medicare and Medicaid HCIT payments.

When you exclude the impact of interest rate swap accounting, mark-to-market adjustments in certain Medicare and Medicaid HCIT incentive payments net of Medicaid rate adjustments, EPS from continuing operations was $0.12 per diluted share for the fourth quarter of 2012 as shown in the table accompanying our and press release.

We shared with you in January that we have been and continue to be in the process of refining the strategies that we believe will continue our success in a post-reform environment. You will hear us speak of these strategies frequently, as we set our course, take the wheel and then navigate the changing quarters. We intend to communicate our progress once we know if the course needs changing as some of these unknowns become more visible.

The five general themes to our emerging strategies include; first, center-led capabilities, where we improve our capabilities at home -- here at the home office and regionally, in some cases, to take advantage of scale and improve overall performance. It is becoming increasingly apparent that scale and centralization of certain contents will become more important as we drive cost down and enhance our position with payors.

Second, differentiated products and services offerings where we are developing products and services that may align us with different payors or improve our competitive advantage in the market; like offering our services in conjunction with a payor on the new exchange markets in 2014. This is an area where some of the unknowns, I mentioned earlier, come into play. For example, we don't know yet what exchange rates will look like, we don't know the exact services that will need to be offered and we don't know how many people will be covered under the exchanges.

Third, we need to ensure a superior clinical model. We've made excellent progress on our core measures, scores and rank among the highest in the nation on the scorecard. And even The Joint Commission has ranked 41 or 64% of our reviewed hospitals as top performers on key quality measures compared to only 18% nationally. We must continue to develop our clinical care model by improving our care redesign, clinical standards and system efficiencies. Reputation awareness matters and we will continue to be focused on this in the future.

Fourth, we must continue to maintain or establish our market-based competitive strategies. We'll improve our market-based competitive strategies through vertical integration to achieve greater density of service offerings within our markets. This theme is backed closely with our second theme of differentiated products and service offerings. I've mentioned we've already begun by acquiring ASCs and imaging centers to increase density in our markets.

Fifth, exploring non-core inorganic growth by investing in non-acute care or non-core but related growth opportunities, such as IT services, ancillary services and analytics. The strategic initiatives supporting these themes are becoming very important for us in the future and being developed and tailored from the enterprise to the region, to the market and even to the individual hospital.

Individuals will have to decide when and what health plans and which to participate. States will have to decide whether they will expand Medicaid under the terms of reform and business communities will have to decide how to balance employee retention with the financial impact that's being required to provide health insurance.

One strategic initiative will not fit all, and with several important unknowns, we plan to be flexible in the implementation and timing the various strategies across the different levels of the organization. One thing that will not change while we develop and transition into these new initiatives, we will be committed to our patient-focused health care delivery, financial discipline and partnership development.

With that, I'll turn the call to Kelly to provide some additional information on our 2012 results.

Kelly Curry

Thanks, Gary. Good morning, everyone. Before we get started, just a quick note. Some of you might have noticed that when John was referring to the definition of EBITDA, he referred to it as adjusted admissions. I think he's having a senior moment this morning.

As Gary mentioned for the fourth quarter from continuing operations and compared to same quarter a year ago, Health Management reported net revenue growth of 6.6% to $1.481 billion and adjusted EBITDA growth of 13.7% to $254 million.

Compared to the same quarter a year ago, diluted EPS from continuing operations with the fourth quarter increased to $0.19. Again, negatively impacting the fourth quarter was approximately $0.04 per diluted share related to this incremental, legal and investigation expenses and approximately $0.03 per diluted share related to Mississippi Medicaid payment reductions, which were offset by Medicare and Medicaid HCIT monies.

Contributing to these results were an adjusted admission increase of 1.4%, emergency room visit increase of 12.2% and a surgery increase of 2%. For continuing operations at hospitals we have owned and operated for one year or more, referred to as same hospital continuing operations compared to the prior year's fourth quarter, net revenue increased 5.1%, net revenue for adjusted admission grew 5.2% and adjusted EBITDA increased 22.2% to $324.9 million resulting in a 320 basis point improvement in EBITDA margin to 22.3%.

Excluding HCIT incentive payments was approximately 52.6 million and 38.2 million for the fourth quarter of 2012 versus 2011, net of the previously referred to Medicaid rate adjustment. Same-hospital adjusted EBITDA increased 19.6% to 272.3 million and same-hospital adjusted EBITDA margins increased 230 basis points to 18.7%. In addition, surgeries and emergency room visits were up 0.9% and 9.2% respectively.

We have continued to see a decline in uninsured patients seeking care at our same-hospital facility. While the unemployment rates in our markets have shown improvement, as we have stated, we feel the improvement has been less about people becoming employed and more about people having left the community and therefore and no longer looking for a job. Continuing same-hospital uninsured admissions for the fourth quarter totaled 6.2% of the total admissions which is a 70 basis point decrease in the same quarter a year ago and represents about 25% of the 4.7% decline experienced in the fourth quarter.

As you know, there are three components that comprise our accounts for uninsured and underinsured patients; provision for doubtful accounts, uninsured discount and charity/indigent care write-off. These figures are consolidated and include our acquisitions. Our provision for doubtful accounts for the fourth quarter was 234.6 million or 13.7% of net revenue compared to 195.1 million or 12.3 of net revenue for the same period a year ago.

Year-to-date, our provision for doubtful accounts as a percentage of net revenue is 12.9% right in the middle of our 2012 objective ranges between 12.1% and 31.5% of net revenue. Uninsured self-pay discounts for the fourth quarter were 334 million compared to 254.5 million a year ago. Health Management's charity and indigent care write-offs for the fourth quarter were 28.4 million compared to 23.1 million for the prior year.

To sum up, the provision for doubtful accounts, uninsured discounts and charity/indigent care write-off as a percent on the sum of net revenue uninsured discounts and charity/indigent write-offs which we call the uncompensated patient care percentage was 28.7% for the fourth quarter compared to 25.4% in the same quarter a year ago, and down slightly a tick from the third quarter at 29%.

The effect of new acquisition, the increase in uninsured volumes which we did experience in the fourth quarter, a lot reflective of the flue and the effective pricing increases contributed to the increase in uncompensated care.

Moving over to the balance sheet and cash flow segment, total asset as of December 31 were just over $6.4 billion. The balance in accounts receivable net as of December 31 was 976.9 million and the balance in the allowance for doubtful accounts was 663.2 million.

Health Management's DSOs or days sales outstanding at December 31 were 50 days or one day less than the prior year's December 31, 2011 at 50. Our cash collections continue to be strong, and we are achieving our internal targets. For the fourth quarter, cash flow from continuing operating activities was 139.2 million after cash interest and tax payments aggregating 99.7 million. For the year ended December 31, cash flow from continuing operating activities was 597.4 million and for cash interest and tax payments aggregating 351.3 million compared to 544 million for the prior year's December 31.

Capital expenditures for the fourth quarter came in at 106.5 million. With regard to our debt covenants at December 31, Health Management's total leverage ratio was 3.54 and our interest coverage ratio was 4.36. These ratios compared to a total leverage ratio maximum of 5.5 and an interest coverage ratio minimum of 3.25. As you can see, we are well within those requirements.

In reviewing the fourth quarter, diluted EPS from continuing operations increased to $0.19. Adjusted EBITDA grew 13.7% to $254 million. Same hospital surgeries were up 0.9% and emergency room visits were up 9.2%. Same hospital net revenue increased 5.1% and same hospital net revenue per adjusted admission increased 5.2%. Same hospital adjusted EBITDA increased 22.2% to 324.9 million, resulting in a 320 basis point improvement in margin to 22.3%.

Excluding HCIT incentive payments of approximately 52.6 million and 38.2 million for the fourth quarter for both years, net of our Medicaid rate adjustments, respectively, same hospital adjusted EBITDA increased 19.6% to 272.3 million and same hospital adjusted EBITDA margin increased 230 basis points to 18.7%. Cash flow from operating activities was 139.2 million.

Thanks for your attention. I'll turn the call back over to you, Gary.

Gary Newsome

Thanks, Kelly. Before we open the call to questions, I wanted to mention our announcement last week regarding the signing of a definitive agreement to partner with the 480-bed Bayfront Health System. We signed the definitive agreement on February 4 for a subsidiary to acquire an 80% interest in Bayfront Health System, and introduce an affiliation with the ShandsHealthCare, part of UF&Shands, the University of Florida Academic Health Center.

The total purchase price for our 80% interest will be approximately $162 million, plus a working capital adjustment. The transaction is subject to the execution of a lease agreement between the partnership and the City of St. Petersburg, as well as customary regulatory approvals and we continue to work closely with Bayfront senior leaders, Board of Trustees and the St. Petersburg City Council to modernize the lease agreement and to create a partnership that will serve the needs of the citizens of St. Petersburg community for generations to come.

This partnership really offers us a tertiary hub for our west central and southwestern Florida hospitals and solidifies a great network of hospitals. Add to that a clinical affiliation with Shands and we have a tremendous opportunity to expand access to health care services and raise the bar even higher on quality. This kind of relationship is just one of the many opportunities we are seeing to leverage our operating expertise and financial resources to align our patient-centered, health care delivery approach to benefit hospitals, communities and the patients who are trying to navigate post-healthcare reform waters.

We will continue to seek to invest in the strategic partnerships like Bayfront to broaden our network of hospitals, increase the density of service as we provide and to build market share. I'd also like to take a moment to thank our family of more than 40,000 nurses and other associates and 10,000 physicians who tirelessly serve our communities and their families. Without them, our success would not be possible.

Thank you again for your attention this morning. I'll now open the call.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Your line is open.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, great. I wanted to follow-up on some of the commentary that you had on the exchanges is I guess, two things. One, you mentioned that you don't yet know where the rates on the exchanges will be, but wanted to see if you had any initial color or had signed any contracts at this point? And then two, it also sounded like you were willing to potentially take risk or align more with managed care companies. So if you could talk a little bit about what you're thinking there, and then how you get comfortable taking risk given some of the questions you had about the services you need to offer, how many people would be on the exchanges, et cetera?

Gary Newsome

Thanks, Kevin. Really the strategy for the exchanges is really going to market specific, and be driven that way. In terms of partnerships with payors and assumption of risk, that's really going to be a reality in certain markets where there's a density competition and we have the position to do that. That's an opportunity. There were other markets that quite frankly that that will not be the case.

So, all of our strategies one and two into the health reform environment really is market specific, Kevin. And we've developed over the last several years an outstanding managed care team and they come with tremendous experience across the industry and we feel very confident in our ability to strategically price, strategically partner in certain cases and that partnership in certain cases also includes physicians.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, that makes sense.

Kerry Gillespie

Kevin, this is Kerry Gillespie. Let me add just one -- you did ask what the -- as part of your question earlier. Regarding our current contracting, we have some -- a few small contracts with local or regional managed care companies where the exchange rates are the same as our commercial rates. We haven't built on any large payors yet in terms of what the exchange rates might be, but we're pressing for close to commercial rates but that remains to be seen and it will be market specific.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, that's very helpful. And then I guess just going through some of the growth strategies that you've outlined recently, I think most of them are pretty apparent and pretty easy to get my head around, but I guess the non-core services that you've mentioned, how do you think about rates of return in those businesses, and whether you invest in incremental dollar in one of those opportunities versus into one of the core businesses?

Kelly Curry

Well, the ancillary services, outpatient margins are quite frankly better than in-patient margins. As you know, the dollars are not quite as large initially but the market continues to grow on the outpatient side. And really our market development approach, it has been for several years now because it's been accelerated. It's really the focus on getting that density in the marketplace and most of our density is developed in the outpatient services which typically has a higher margin.

Gary Newsome

In addition, Kevin, as you've seen from our performance, outpatient business the real keys are in identifying the services and providing the access and then managing to it. And we're continuing to see the development of that outpatient business and we think that marches into 2014 in reform very strongly.

Kevin Fischbeck – Bank of America Merrill Lynch

Yeah, but I guess the outpatient side kind of makes some sense, but I guess the IT and some of the other things are just a little bit farther afield than the core kind of provision of healthcare, I guess, is what I was getting at?

Gary Newsome

Quite frankly our IT investment really is all about connectivity across the compendium and really the focus of digital connectivity and building a seamless, making it easy, is the important thing here for our physicians to be able to navigate the system as the demands put on physicians is getting greater and greater whether they're independent or employed and building our IT strategy around that really leverages us well against all competitors in the marketplace.

And the value of that data, Kevin, is, is that we're going to be able to capture a lot more specifically in the clinical areas which will enable us to be in a really good position when we start talking about transactions involving insurance companies and setting up networks across the country. So, we're really frankly pretty excited about what that represents as an opportunity and we're making sure that we got the database in place to be a full player in the game.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, is this mostly internal that they are focused on or do you sell these externally as well?

Gary Newsome

Well, we haven't really – we're still in the development phases. I do think that there's elements of what we're doing that it could have potential value to others. But we're going to be mainly concentrating on -- particularly this year to next year's transition of 2013 to getting it right so that we can use it to our advantage frankly.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, makes sense. All right, thank you.

Operator

Your next question comes from Ralph Giacobbe with Credit Suisse. Your line is open.

Ralph Giacobbe - Credit Suisse

Thanks. Good morning. You mentioned in the prepared remarks observation visit was up, I guess, 24%. Maybe can you help us parse out different geographies, where you may be seeing sort of a -- if you are seeing sort of disproportionate impact, particularly I guess in Florida?

Kelly Curry

Really in the fourth quarter, that really mapped exclusively where there was high concentrations of flu, that increased. The year run rate was 12%. For the fourth quarter, it is 24%. We had -- as like all providers had a tremendous influx of flu-related visits into our emergency rooms which did not translate to admission. And I think historically several years ago, a lot of those would have.

Ralph Giacobbe - Credit Suisse

Okay. And then I guess on the pricing growth, continues to be strong for the quarter and for the year. I guess one, I may have missed it. Did you give an acuity mix number? What was that up? Second, did payor mix help at all? And maybe can you give those percentages? Then third, again going back to sort of with observation visit up so much, I would have thought there would be maybe a little bit more pressure on that pricing stat, so maybe help reconcile those things?

Kelly Curry

Sure. In fact our case mix index was up, it was up pretty dramatically from the prior year from 1.39 to 1.44, which maps with what we've been saying that when patients are admitted, they're really sick and we're continuing to see that. But that's a very significant increase for our company and the index relative to the acuity of the patients that we're treating.

And then in addition, we did see that and have continued to see that as the services have more acuity, we get a higher -- it's a stronger price because the procedures that are being done are more significant and that's helping to drive that across the board. Payor mix about the same, we'll be putting out our 10-K next week which will give you the figures on the year, but it's pretty consistent with what it's been tracking.

Gary Newsome

The shift in acuity, as Kelly said, is particularly true on the outpatient side as well outpatient surgeries were up a couple of percent. Breaking that down in orthopedics, we had a very good quarter if the knees and shoulders of the group are about 10%. So, while we don't measure acuity on the outpatient side, we simply know it's sort of done good and improved.

Kelly Curry

And that's a big reflection of the shift to outpatient, but that's more and more people are getting those types of procedures on an outpatient basis which is good in terms of health care costs.

Ralph Giacobbe - Credit Suisse

Yes, okay. And then just lastly, any update on Mississippi Medicaid and maybe remind us what's baked into guidance? Thanks.

Gary Newsome

Yeah. The updates are that during a prerelease, we were still awaiting to see what was going to happen with the state because of the magnitude of the cut that they put in as of September 1. But the state ultimately decided was that they're going to have submitted and received approval from CMS and make a one-time adjustment for the period of September 1 through December 31. That will be paid to us sometime between April and June. And then on the -- speaking of outpatient, on the outpatient side going forward from January, they're going to tweak the system to reduce the impact of their transition process.

To-date, I can't give you any parameters on that because we just don't know other than the fact that the indications are presumably going to be less than what it was to begin with. But since we haven't received the payment, we don't even have some measure to really give you kind of the GAAP measure on that. And then also on the in-patient side on Medicaid, it is what it is and that's going to stay, and as we mentioned in the prerelease call that's about a $12 million to $15 million impact for us. So, on the outpatient side we said it would be in the $25 million to $30 million range. It now appears that it maybe south of that number. But again, we just don't know what it is.

Robert E. Farnham

This is Bob. Those are annual. All those $15 million is annual, so is the $25 million to $30 million on the outpatient and those are annual.

Ralph Giacobbe - Credit Suisse

Okay, that's helpful. Thank you.

Operator

Your next question comes from Andrew Schenker with Morgan Stanley. Your line is open.

Andrew Schenker - Morgan Stanley

Hi, thanks. You guys called out RAC audits and that's one of the things that maybe pressuring one-day stays. Have you actually seen any change in RAC audit pressure that's just consistent with where it's been?

Kelly Curry

In certain markets, we've seen certainly an uptick in RAC audits. I think that's pretty consistent throughout the whole nation that there's RAC audits increases. And in reality, I think that's something we expect for the foreseeable future. It goes in waves too. They tend to, with the magnitude and size of our organization, it's kind of geographic. They'll hit and they'll be working really, really hard and then they'll move on and it will pop up somewhere else.

So, we are -- as Gary mentioned in his comments, we are very aggressive in dealing with this. Some of the MACs have decided that they're not even going to hear appeals. They're basically going to deny every appeal requiring us to go to the next level which is one of the reasons why the appeals can track out, which could take up to a couple of years which is ridiculous. They're losing appeals -- nationally they're losing appeals at a 75% rate. Gee, that's okay. They get to keep the money for that length of time.

Andrew Schenker - Morgan Stanley

Okay. And then you guys highlight I think in the preview call, you renegotiated from your legal contracts. Thinking out towards '13, I mean should we expect legalities to decline maybe by how much year-over-year?

Robert E. Farnham

This is Bob. If you look at our prerelease where we laid out objectives for 2013, we had a range of low 35 million and a high of 50 million included in the guidance.

Andrew Schenker - Morgan Stanley

Okay, great. Thank you very much.

Gary Newsome

You're welcome.

Operator

Your next question comes from Darren Lehrich with Deutsche Bank. Your line is open. Hello, Darren Lehrich, your line is open.

Gary Newsome

Would you give us the next?

Operator

No problem. Your next question comes from Justin Lake with JPMorgan. Your line is open.

Justin Lake - JPMorgan

Thanks. First question just on the balance sheet and cash flow, can you remind us where your comparable is from a debt to EBITDA standpoint? Can you walk us through what you expect as sources and uses of cash flow to look like in 2013? And then update us on your thoughts on potentially buying back your own shares? Thanks.

Kelly Curry

As a company, we've had been as high as 5.5 to 1 in recent history, but we're going to continue to manage that number relative to our -- with our kind of two to three transactions a year, depending on the size that could ramp up to 4.5 maybe, but that's about it. Bob is going to give you some additional color.

Robert E. Farnham

We did well on cash flow this year. We came in the year at 597 million versus last year at 544 million. We managed our receivables well if you take a look at the two lines that relate to receivables and net out the provision with the accounts receivable. We had less use in working capital and receivables this year than we did last year. That provided a source for us. But on the negative side, included in the 597 million is basically almost 100 million of swap payments this year that we didn't have last year. So, the 597 million includes that swap payments. I will also tell you we are benefitting -- we benefited last year from bonus depreciation that isn't much of a benefit this year.

You can see that in the deferred income tax line item where last year was a benefit at 79 million, this year's benefit is 7 million. And that's because the bonus depreciation moved from 100% last year to 50% this year. So, all-in-all, it's -- we have our cash flow from ops, it's 597 million versus 544 million last year which was pretty good for the year. Our DSOs at the end of the year was 50. That's a decline of three days sequentially. They're worst than they are tied up with the Integris acquisition at September 30. We've collected on that. And at 50 days at the end of the year it's down one day from where we were at 51 days at the end of last year. So, overall, a good year for cash flow which should mean that cash flow in 2013 should be north of 600 million for sure.

Justin Lake - JPMorgan

And what does CapEx look like?

Robert E. Farnham

Well, we said 4.5% to 5.5%, so that's a range we're still comfortable with. This year, you can see we're at 389 million but I can tell you that probably 130 million of that was finishing up Monroe Hospital in the first quarter. And then what we spent on the Poplar Bluff replacement hospital. So there's probably a 125 million or 130 million of 388 million that will not repeat itself in 2013.

Kelly Curry

There's a little bit of benefit but still probably in the 4.5% to 5.5% range.

Justin Lake - JPMorgan

Okay. And outside of acquisitions, do you have any thoughts on share repurchases and a number of your peers are rather buying back stock than you've seen to have been bent more towards the M&A side, but is there a thought process that given where the stock is trading, there might be a more attractive risk reward?

Gary Newsome

Well, that's always the Board decision for us. But as a company, we're always considering all options and we'll continue to consider all options as we go forward. Nothing's ever off the table.

Justin Lake - JPMorgan

Okay, great. Thanks.

Operator

Your next question comes from Josh Raskin with Barclays. Your line is open.

Joshua Raskin - Barclays Capital

Thanks. Good morning. Just one more quick one on the observation stays. I think you said it mapped well to the flu. I think in your prepared remarks, you mentioned it might have been a 60 Minutes impact. Did that map geographically as well somehow or what sort of gave you that?

Gary Newsome

Well, we can't really determine if any impact in 60 Minutes. There were a couple of markets that were specifically highlighted and I can show you that just because of that heightened sensitivity, there may have been some challenges in those markets. But it's really -- you can't measure it. And it's not evident to us that that's the case.

Joshua Raskin - Barclays Capital

Okay, so just sort of -- and I get it, it's a potential out there. The other question, Gary, just around -- you mentioned your five point strategy and looking at the potential in organic opportunities running ancillary services and maybe if you can just help us understand what types of outpatient services or does it go beyond that, or are you looking at urgent care or just maybe a little bit more color on what you think is the most attractive avenues for these services?

Kerry Gillespie

This is Kerry. The things that we're looking at would go beyond some of our traditional outpatient services are looking at some of the, for example, outpatient physical therapy, home health. Continuing to look at the whole trend of what we're doing in terms of the market that we're in. Like Gary talked about getting market density, we want to be able to take the services to the patient particularly these outpatient services. Another one that's important is hospice obviously and as – obviously that's a very significant part of the overall health care continuum, we want to make sure that we get into that part of the business.

Including urgent care centers, LTACs and other things that makes sense in these markets. So, we're looking at everything and we want to make sure that if we don't have the expertise in house, we're going to get that expertise either through partnerships or through acquiring the expertise ourselves. So it's a large -- like Gary said, it's the large continuum of opportunities out there that will give us the depth or the density in the markets that will allow us to work with the payors and the exchanges to make sure we're providing the right type of care for the patients that we serve in our community.

Joshua Raskin - Barclays Capital

Got you.

Gary Newsome

We also had a tremendous amount of detail on our patients going back a number of years and so we can mind that data through predictive analytics to determine where we have opportunities not just on the outpatient side but on the in-patient side as well for their future needs and then market to that.

Joshua Raskin - Barclays Capital

And it sounded like you'd be open to JV as well as acquisitions as well.

Gary Newsome

Yeah, we view JV as a great opportunity to get expertise and sharing without the full capital risk. And as you can see across our history as we've expanded on our thinking in terms of markets and opportunities that are out there. So we will definitely be pursuing more of that. You can expect that.

Joshua Raskin - Barclays Capital

Okay.

Kerry Gillespie

This is Kerry, again. Just to round this question up, I think it's important to realize that as Gary mentioned, providing the range of services that makes us a meaningful partner in exchanges is very important. But as important with that is have these tied to either we acquire a partner with a post-acute setting from a quality standpoint it's a driver to avoid re-ignitions and mortality. There's a lot of issues around that that are important for improved patient care and then it also affects us financially because readmission is a key indicator going forward.

Joshua Raskin - Barclays Capital

Sure. Okay, thanks guys.

Operator

Your next question comes from AJ Rice with UBS. Your line is open.

AJ Rice - UBS

Thanks. Hi, everybody. Maybe just following up on the 60 Minutes fall out question. Has there been any change in the interaction with the way you guys are interacting with the government? I know you had a couple of outstanding inquiries that have been out there for awhile now. Did anything happen in the aftermath of the 60 Minutes that would have accelerated any kind of activity or discussion with them?

Gary Newsome

AJ, I guess it's really just been business as usual in terms of our interaction.

AJ Rice - UBS

Okay.

Gary Newsome

Yeah, we continue to cooperate, continue to provide documentation. It's really -- I don't think changed at all.

AJ Rice - UBS

Okay. And another area, I guess, people -- I heard some concerns about and there's been some in previous instances, is maybe it had impacts on our acquisition. Obviously you closed Bayfront. I think that was in the works for awhile. Can you comment on the pipeline and whether there's been any change in terms of how you perceive your competitive position is, in deals or not really?

Gary Newsome

No, AJ we have not experienced. Obviously we had to answer some questions surrounding that and that would be an appropriate due diligence issue for any potential partner. But the reality is, is the health care providers understand the complexity and the ambiguity around one-day stays versus observations, they understand that it's – with a lack of clear direction for caregivers and for us as hospitals. So from their standpoint, they understand that this is a bigger issue, quite frankly. It's an industry issue and we actually expect the activity and the interest of the partnership with us to either outright purchase or partnership to increase.

AJ Rice - UBS

Okay. I know there's been some things you've been doing on the supply expense side and you've had some success with initiatives there. Is there anything new or different or an update that's worth mentioning in the supply expense area?

Kelly Curry

Yeah, thanks AJ. We've done very well on our supply expense. We saw, compared to the prior year, I think we were down about 20 to 30 basis points – 30 basis points on a consolidated basis. So we've done a good job in same hospitals as well as the de novo transaction that we've had a little over a year now, actually in same hospital this quarter. So, we are getting benefits from a lot of the price concessions and some of the programs like [capitated] spine program we put in place last year. So we are continuing to get some benefits there. In 2013, we're going to continue to go after some concessions. We've gone to all our cardiac vendors here in the first quarter and we've got concessions on the majority of those and a smaller single digit type concession. But we expect ultimately to have a concession from all of those.

So that's the benefit that we'll have through the rest of 2013 and that's in spite of the device tax which we've made it very clear, so has our GPO that we are not absorbing any of that device tax increase. So, overall we've done a very good job over the last few years on concessions from vendors where we see some opportunities additionally that we haven't worked as hard is on physician preference items and that has to do a lot with the devices on the orthopedic side and cardiac side. And that's going to be a market-by-market opportunity where, for example, if we can get down to using two vendors for 80% of our purchases that's dual-source pricing which is going to be better than some of the pricing we get now. So we're continuing to locate opportunities and work with our physicians to achieve further savings as well.

AJ Rice - UBS

Okay, sounds good. And then one last thing I'll slip in. Sometimes to be geographically clustered, you have some unique insights. Can you give us your latest thinking on Florida Medicaid, and whether they will participate in the expansion, and when we might get a definitive word out of them?

Gary Newsome

We don't want to speak for the leadership in the state, that's – we feel like ultimately the state is inclined to participate, but there's a lot of variables out there but in Florida, I think we're heading in the right direction.

AJ Rice - UBS

Do you have a sense of when they might make a final decision? Is there a timetable over there?

Gary Newsome

Actually, I think there is a stated – or maybe not. There was maybe a stated timeframe that they were going to make a decision, but I'm not 100% sure now. Governor Scott has said a couple of different times, AJ, that they had a couple of waivers pending. One of those has been granted. There's another one out there at that point when they'll be ready to make a decision on this.

AJ Rice - UBS

Okay, all right. Thanks a lot.

Gary Newsome

You're welcome.

Operator

Your next question comes from Darren Lehrich with Deutsche Bank. Your line is open.

Darren Lehrich - Deutsche Bank

Thanks. I'll try that again. Can you hear me?

Gary Newsome

Yes.

Darren Lehrich - Deutsche Bank

Great. Okay, good. Just had a couple of things here, actually I wanted to just go back to the dish impact that we've had a number of the other companies talk about, it will be for the fiscal '14, just the fourth quarter. Wanted to get a sense for how that factors into your numbers and if you could just give us a sense for what the annualized impact of that is, so we can think through that one?

Kelly Curry

Well, Darren, one analyst has put out a report kind of doing an estimate on that which showed us kind of mid-pack or maybe -- a little less than mid-pack on the impact to us which would be in the realm of 20% to 25% on a year to us. So, frankly, I think that's probably in the ballpark. However, there's still a lot of factors in play, there's still a lot of -- the processes that the government's going to undertake, whether they can keep this thing on track or not. So, we'll see when it comes. And in terms of our guidance, yes, we made provision for that in our objectives for the year.

Darren Lehrich - Deutsche Bank

Okay. I'm going from memory here, but is it about 100 million of Medicare dish per annum that you guys have…?

Kelly Curry

Total Medicare and Medicaid dish is about 200 million.

Darren Lehrich - Deutsche Bank

200 million combined, okay. All right.

Kelly Curry

Slightly more than half is Medicare.

Darren Lehrich - Deutsche Bank

Right, okay. That's what I thought. All right. And then as far as the Mississippi issue, there's going to be a retroactive, so I'm assuming that the $0.02 to $0.03 that we got hit by in Q4 here will show up in the second quarter, and that's not in your original guidance range, fair to say?

Kelly Curry

I can't opine on that because I don't know what it's going to be because we don't have any information other than the fact that they're going to do it.

Darren Lehrich - Deutsche Bank

Okay, all right, so we'll see how that comes out, I guess. And is there a specific timeframe for Mississippi in terms of when you expect all those pieces to be communicated to you in the industry?

Kelly Curry

As you know and the government's involved, they are always under a lot of time pressure.

Gary Newsome

On the fourth quarter, it's supposed to be on the lump sum payment to providers, it's supposed to be sometime between April and June.

Kelly Curry

And we get the payment. We still don't know when they're going to respond with respect to the changes and the tweaks that they're going to make with regard to the Medicaid outpatient starting from January 1. That's another piece too. So there is – I will say we have our folks there plugged in. We're talking to the Medicaid programs. We don't know when we know and we're staying on top of it.

Gary Newsome

I can tell you this. The leadership in the state of Mississippi has been excellent. They recognized quickly that there was a challenge with the initial calculations, once that was brought to their attention by not only us but others in the state. The Governor and his staff were very responsive and to tell you that they're (inaudible) and doing the right things.

Darren Lehrich - Deutsche Bank

Yeah. I did have a question, maybe for Kerry or for Bob, perhaps. As it relates to the CMMI bundle, we obviously noticed you've got a number of model four bundles and it's pretty limited in terms of the services being offered. But my question for you guys is just when you think about some of those procedures that you're looking to experiment here with the bundle on, what do you think your cost per case differential is, I guess, compared to averages? Just curious to see how you're thinking about those?

Kerry Gillespie

We're looking at it kind of across of the board and of course it's broken out between orthopedic and cardiac. So the cost for take obviously is going to be different in those two areas. Our opportunities really are to manage the process, the whole process of what happens. And when the physicians are onboard, because we can gain share with them in these bundles, then the opportunity is that we can give Medicare a little bit of a discount and still achieve savings because we can impact the processes here.

Now while we're the low cost provider in most of our markets, it allows us to even impact that process more and talk to some of the things that Bob spoke with on our supplies where we can physician preference items down to a number – two or even one supplier, then we can get significant savings from those cost preference items which will allow us to get even better efficiencies inside of these bundles. Orthopedic, obviously, a significant amount of the cost is in the supplies, particularly the bundles that we're looking at which are total joints. And in the cardiac side, significant amount of the cost is in the supplies as well. Huge supply costs are relative to implantable defibrillators and other things that are included in these bundles.

So, we're looking at – we're obviously looking at the opportunity to work with our doctors, to improve the patient's care experience and to get better outcomes while at the same time reducing costs and that's the overall impact that we're doing. The reason we're not doing a whole bunch of them is we want to make sure that we make the right bets in this space with CMMI to make sure that we have our processes in place, we have all of our systems and our data management in place, and as we get better at its potential that we can expand it.

Darren Lehrich - Deutsche Bank

Makes sense.

Gary Newsome

Yeah, right now we're only looking at seven markets. What I really like about this and what's really exciting is, is that this is an opportunity for us to get our toe wet and learn a ton which we see that we can leverage as we move to 2014 in health insurance networks and the opportunities to partner with others in with the insurance companies in the future. It's a really great opportunity. So right now, it's really a minor issue to it but there's tremendous amount of opportunity for knowledge.

Kerry Gillespie

We obviously did the demonstration project when I was with Arden, the Arden Services out in Hillcrest Health Center out in Tulsa, Oklahoma where we were able to see those kinds of gains. And so I've got a little experience in that and our teams are working around kind of the same format to make sure we experience the same type of gains.

Darren Lehrich - Deutsche Bank

Great. Thank you.

Operator

Your next question comes from Chris Rigg with Susquehanna Financial Group. Your line is open.

Chris Rigg - Susquehanna Financial Group

Good morning. Thanks for squeezing me in here. Most of my questions have been asked, but one bigger-picture question again. When you think about the uncompensated care and the people who make up that cohort, do you think -- how important is the Medicaid expansion versus a functional exchange system? Have you done any analysis on that?

Gary Newsome

Well, we think that there is a tremendous opportunity for take up on health insurance because people are going to be able to get it, they're going to be able to get it in an affordable rate. They're going to move from being uninsured to either Medicaid or with insurance. There's going to be a provision made for them to have access, particularly as the health insurance networks develop. So, we think it's a tremendous opportunity going forward.

Chris Rigg - Susquehanna Financial Group

Sure, but I guess what I'm -- and I appreciate that in sort of the incremental volume potential side, but when you look at your existing business today, would you say that 75% of your current uncompensated problem is solved simply by the Medicaid expansion or you don't have that sort of insight at this point?

Gary Newsome

As you know, there's a lack of detail concerning how this is going to work. So anything I'd say would be pure supposition, other than we've been saying and I think others have said that the idea that people will have some form of pay as opposed to no pay is a really good thing. We agree with that.

Kelly Curry

I think it's important to share with you that as we become more knowledgeable and as we have clarity on how this affects us both from exchanges standpoint pricing as well as expansion, we're going to be able to not only tell you more about that particular area, but we'll be able to share more about our strategies around that.

Gary Newsome

Correct.

Chris Rigg - Susquehanna Financial Group

Okay, fair enough. Thanks.

Operator

Ladies and gentlemen, we have time for one more question. Your last question comes from Whit Mayo with Robert W. Baird. Your line is open.

Whit Mayo - Robert W. Baird & Company

Thanks for squeezing me in. I guess, Kelly, first thanks for the advertisement on my dish note, I appreciate that.

Kelly Curry

I'm just trying to take care of you, Whit.

Whit Mayo - Robert W. Baird & Company

I'll take whatever I can get. The question I have really is, it's a quick one just on a high-tech and you haven't had to spend nearly as much as your peers have to sort of get through stage one, and you have your Pulse system and that's been, I think, particularly helpful. But do you think you're going to have to spend much more in stage two or three? I'm just wondering if there's any software that you need to buy or does Pulse sort of get you what you need?

Gary Newsome

In reality, our systems is a combination of our Pulse System and then we do have best-of-breed systems that we've had. But we do have additional investment moving forward with the additional requirements under meaningful use. In reality, I think we'll see the same type of investment going forward with that, that we've had historically. And I think -- Kelly may have something on this.

Kelly Curry

It's really where we are – I suppose that our development costs to comply with meaningful use through the first two stages will be less than what we will be paid for meaningful use.

Whit Mayo - Robert W. Baird & Company

Got it. But as you look forward, I mean -- and you budget sort of what you're going to be spending, is there going to be any meaningful pick up in those dollars or do those dollars get smaller?

Gary Newsome

It's built into our plan, Whit. We're going to spend our traditional…

Kelly Curry

Yeah, 4.5% to 5%...

Gary Newsome

5%, it will be built into that…

Whit Mayo - Robert W. Baird & Company

Yes, but it's still a relatively small piece of your overall budget?

Kelly Curry

It is indeed.

Whit Mayo - Robert W. Baird & Company

Got it. Okay. Thanks guys.

Gary Newsome

You're welcome.

Kelly Curry

Thank you.

Gary Newsome

All right. Have a great day. We're done.

Kelly Curry

Thank you.

Operator

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

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