LifePoint Hospitals, Inc. Q4 2008 Earnings Call Transcript

| About: LifePoint Hospitals, (LPNT)

Lifepoint Hospitals Inc. (NASDAQ:LPNT)

Q4 2008 Earnings Call

February 20, 2009 10:00 am ET


William F. Carpenter III – President and Chief Executive Officer

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


Shelley Gnall – Goldman Sachs

John Ransom - Raymond James & Associates

Whit Mayo - Robert Baird

Adam Feinstein - Barclays Capital

Jason Gurda - Leerink Swann

Albert Rice - Soleil - Pomeroy Research LLC

[Ann Wareheim - Van Campen]

Frank Morgan - RBC Capital Markets

Ralph Giacobbe - Credit Suisse

John Rex - J.P. Morgan

Darren Lehrich - Deutsche Bank

Pito Chickering - Deutsche Bank


Thank you for standing by and welcome to the LifePoint Hospitals fourth quarter and year end earnings conference call. (Operator Instructions)

Before I turn the call over to LifePoint, I've been asked by the company to read the following statement:

On today's call, LifePoint will be making forward-looking statements based upon management's current expectations. Numerous factors could cause LifePoint's results to differ from these expectations, and LifePoint has outlined these factors in its filings with the SEC. The company encourages you to review these filings. LifePoint also asks that you please review the cautionary language under the caption Important Legal Information in the company's press release issued this morning. The company undertakes no obligation to update or make any other forward-looking statements whether as a result of new information, future events, or otherwise. Also, please visit LifePoint's website for links to various information and filings.

(Operator Instructions)

I now have the pleasure of turning the conference over to Bill Carpenter, President and Chief Executive Officer of LifePoint Hospitals. Please go ahead, Mr. Carpenter.

William F. Carpenter III

Thank you, [Pamela], and welcome, everyone, to LifePoint Hospitals' fourth quarter and full year 2008 earnings call.

By now I'm sure you've seen the press release that we issued earlier this morning. We'll file our 10K this afternoon or on Monday.

After I make some opening remarks about our progress during the quarter and the year, David Dill, our Chief Financial Officer, will provide more detailed comments regarding the fourth quarter and the year ended December 31, 2008 as well as discuss guidance for 2009. After David's remarks, we will, as always, have some time for your questions.

First, the highlights of our fourth quarter and fiscal 2008 results: Revenue for the fourth quarter up 4.9%, EBITDA was up 3.5%, and EPS for the quarter was up 14.5%. For the year, revenues were up 5.2%, EBITDA was up 2.4%, and EPS was up 15.7%. The results that we posted this morning were driven in large part by the implementation and successful execution of the strategic goals that we outlined at the end of 2007 despite an economic environment that continues to be challenging. We're proud of this.

Now, we certainly see the same trends that others are seeing. In the fourth quarter and particularly throughout the second half of 2008, we saw volumes decline due to softer overall economic conditions. Although the impact of the economy on volumes is difficult to quantify, we know that it has and will have an impact. The increase in unemployment levels in our communities is consistent with the increase in communities throughout the country. We expect that volume is going to be more affected by patients' need to control out-of-pocket expenses and their tendency to delay treatment for as long as possible. We've seen a shift from in-patient admissions to outpatient visits, a decline in self-pay volumes, lower than expected bad debt, and fewer ER visits.

Against these trends, we're looking to maintain and improve metrics across the board. Fortunately, we have a strong balance sheet, ample liquidity and the ability to continue to make investments necessary to drive organic growth. We believe that our decision not to overleverage our business and careful management of our balance sheet has afforded us a unique strategic position within the industry.

As we told in 2008, we would be keenly focused on several strategic initiatives - improving quality of care that's provided at our hospitals, recruiting new physicians where needed and growing our existing assets by adding service lines or making other targeted investments, and also capitalizing on the best opportunities to grow through acquisitions, managing our expenses, maximizing operational efficiencies, and enhancing the strong bench of leaders across the company.

What this really means is that we have an intense focus on the parts of our business that really matter and we're taking a fresh look at what we can do better. I remain confident that we have the correct strategies in place to maintain our forward momentum into 2009 and beyond, even in the face of dramatic economic conditions.

Let me take just a few minutes to mention some examples of our progress. Improving the quality of care is something for which we always strive. You may have seen that LifePoint Hospitals was recently recognized in Modern Healthcare for having the highest [HCAF] scores among all investor-owned hospital companies. For the reported period, LifePoint was the only investor-owned company with an overall score above the national average in this important measure of patient satisfaction. I am very proud of the staff and physicians at each of our hospitals and am gratified that our patients have reported such positive experiences because it is caring for patients that is at the very heart of our business.

Regarding our growth efforts, in 2008 we added the number of physicians to our medical staffs that we said we would. We believe that we have retooled our physician recruiting efforts in a way that will continue to serve our hospitals and communities well going forward. We're off to a strong start in 2009 and recruiting results to date are well ahead of our past efforts.

We also continue to work on our physician relationships by frequently seeking their input on a range of matters and by encouraging them to come to us at any time with ideas regarding how we can improve. This enhanced dialogue has been helpful to us and I believe has improved the satisfaction of physicians on our medical staffs.

We will continue to invest resources in superior technologies to increase available service lines. This will allow us to expand our market share, improve the quality of care provided at our hospitals, and enhance our physician recruitment efforts. We're doing all this to meet the existing needs of our hospitals and their communities and to also grow admissions and drive sustainable and profitable growth.

Going forward, as a supplement to our organic growth strategy, we will continue with an opportunistic and disciplined acquisition strategy. As we announced earlier this month, we completed the acquisition of Rockdale Medical Center for approximately $80 million. Our stated intention was to fund this transaction out of cash so that we would not increase the company's leverage and that's exactly what we did. The hospital, located in Conyers, Georgia, a community that is growing faster than the average LifePoint community, has 138 licensed beds and about $120 million in annual revenue. Rockdale is a good fit, with considerable untapped potential.

Regarding operations, we have a long-standing record of managing expenses and being efficient. We are continuing to improve even in this area by standardizing certain functions to help achieve cost savings. For example, our upfront collections in the fourth quarter were up 10% versus the prior year. We continue to work with our uninsured patients as appropriate to qualify them for funding from state, federal and other local programs, and we're pleased that we have seen increases in Medicaid qualifications as a result of our efforts.

Regarding our bench of talent, we have a great group of people at the corporate office and at the hospitals, and we're excited that David will soon move over to become our Chief Operating Officer. We continue to focus on growing our pool of talented people with the capabilities and skills to lead our hospitals and our company in the future.

With respect to identifying the right CFO in light of David's planned transition, we are on track. We have conducted a national search and met with several very strong candidates. We look forward to sharing a decision with you with regard to our new CFO in the very near future.

Our work on these strategic initiatives allowed us to accomplish our goals for the year and we remain committed to these strategies going forward. We're confident that these strategies are the correct ones and that they will enable LifePoint to maximize its performance and results.

In hard times like these, the benefits become clear of having put a platform and strategic plan in place that has the flexibility and strength to respond quickly and appropriately as local market conditions change, all without compromising the quality of care we're so proud of.

Before turning it over to David to review the financial results, I want to take just a minute to recognize the great work of our hospital employees and physicians in Kentucky who had to cope with a serious ice storm that hit during the last week of January. We have 8 hospitals in Kentucky, all of which were impacted in some way by these storms, some more than others, and there will obviously be some limited financial impact in the first quarter from the disruption of operations there.

Despite very limited warning and very difficult conditions, our staff remained focused on taking care of our patients safely. I visited a couple of the hardest hit hospitals since the storm and have spoken to many of the employees there. Many of our people stayed in the hospital night after night in order to continue caring for our patients and members of our communities. I'm proud to say that their efforts reflect the very best of LifePoint's mission.

To summarize, in 2007 we set goals for the next three to four years. In 2008, we began execution on these goals and we're seeing clear and positive results from our efforts. These results in turn give us confidence that we're focused on the right strategies and we have the right systems and tools in place to continue our success. We look forward to doing just that in 2009 and beyond.

With that, I'll now turn the call over to David, who will discuss our fourth quarter and full year 2008 results in more detail, as well as our guidance for 2009.

David M. Dill

Thanks, Bill, and good morning. I'd like to take a few moments to provide some additional details about our results and information related to our recent acquisition and, of course, guidance. You can find more information about the company by reviewing our SEC filings, including our 10-K.

Revenues for the fourth quarter were $674.9 million, an increase of 4.9% when compared to the same period a year ago. EBITDA from continuing operations was $107.6 million or an increase of 3.5%. EBITDA margins for the quarter were 15.9% compared to 16.2% in the same period a year ago. This resulted in fully diluted earnings per share from continuing operations of $0.63 a share, an increase of approximately 14.5%.

During the quarter we recorded an additional $3 million or $0.03 per share as a result of lowering the discount rate on both our medical malpractice and workmen's compensation reserves. The discount rate was lowered to give effect to the general decline in the interest rate environment.

In-patient admissions decreased by 2.3%. Adjusted admissions decreased by 0.7%. Selfpay admissions, which represent approximately 5.5% of our admissions, declined by approximately 9%. For the year, our self-pay admissions declined 8% compared to a 1.6% decline in overall admissions for the year. The decline in self-pay admissions accounted for approximately 20% of our overall decline in admissions.

For the quarter, our surgical volumes were essentially flat, with in-patient surgeries down 4.8%, outpatient surgeries up 1.5%. We did experience a decrease in our ER volume of approximately 2.3%.

Our net revenue per adjusted admission increased 5.7% during the quarter and 5.8% for the year. This increase was primarily driven from pricing and service mix across all of our payer classes. During the quarter, our case mix index was flat, but increased 2.4% for the year. The effective price increases from Medicare, Medicaid and the commercial business have remained consistent throughout the year. Importantly, our DSOs at the end of the quarter were approximately 42 days.

Let's talk about expenses for a minute. Our salaries, wages and benefits represented 39.7% of our revenue. This is a 30 basis point increase from the same quarter a year ago. In addition to the continued investment in our physician recruiting and medical staff development initiatives, we are seeing the effect of more physicians being employed as compared to the year ago period. On a positive note, we continue to see improvements in contract labor. For the year, we have reduced our contract labor spend by approximately 14% as compared to 2007.

During the quarter, our supply cost remained relatively consistent. It's just under 14% of our revenues. Our other operating expenses increased to 19% of our revenue compared to 18.3% in the year ago period. As discussed earlier, approximately half of this increase or 35 basis points relates to the lowering of the discount rate of medical malpractice reserves. The remaining increase relates to the cost associated with professional fees and physician recruiting.

Our provision for doubtful accounts for the quarter and year represented 11.6% of our revenue. For the year this represented a 40 basis point [inaudible] compared to 2007. As discussed earlier, we continue to see favorable trends as it relates to self-pay admissions. Our collection trends have remained relatively stable with the exception of self-pay collection trends that have slowed down during the second half of the year.

We continue to see improvement in our insurance aging greater than 150 days. This is the third straight quarter we have seen improvements, and that has benefited our provision by approximately 10 to 20 basis points throughout the year. The provision for doubtful accounts and charity as a percent of self-pay revenue for the quarter was approximately 82%, and our allowance as a percent of self-pay AR was approximately 89%, which is consistent with recent quarters.

Cash flow and capital structure. Our cash flow from operations for the year excluding the impact of interest and tax payments increased by approximately 11%. During the year, we spent approximately $160 million in capital expenditures. This is slightly lower than expected due to the timing of certain projects that will be completed during the first half of 2009. In addition, we made investments of approximately $20 million related to end market development transactions.

I'd like to share with you some information concerning our liquidity and capital structure. As of the end of the year we had approximately $1.5 billion in debt. There are no maturities due before 2011 with the exception of our revolving credit facility. This facility matures in 2010; however, there are no current amounts outstanding.

During the fourth quarter our interest rate swap amortized down to a level that now exposes us to floating rate debt, and as a result we now have about $100 million or 7% of our debt structure floating, with the remainder fixed. With the rates that we have seen during the first couple of months of this year, moving from fixed rate to floating rate should generate approximately $4 million in annualized interest savings. Our leverage as measured by total debt to last 12 months' EBITDA is slightly below 3.2 times. As Bill mentioned we continue to have the necessary flexibility in our balance sheet to make the appropriate investments that we think will help drive long-term EPS growth.

Let's talk about Rockdale Medical Center. Effective February 1st, we closed our transaction with Rockdale Medical Center. We paid $80 million in cash with a capital commitment of $30 million over the next six years. It is our expectation that the hospital will generate approximately $120 million in annualized net revenue during 2009. As a result, our guidance that we issued this morning includes 11 months of operations or approximately $110 million in net revenue.

In addition, it is our expectation that we will generate low to mid single-digit EBITDA margins during the first year of operations. The EBITDA generated during the first 11 months of operation will be offset by depreciation and amortization, and as a result we expect our earnings before interest and taxes or EBIT to be neutral during 2009.

Our plan in Conyers includes additional physician recruiting, additions of technology, and managing the hospital the way that we know how to manage hospitals. It is our expectation that as a result of our actions over the next three years we should see EBITDA margins begin to steadily increase from the mid to low single digits to mid double-digit margins during that time period.

Guidance. We're providing guidance this year for revenue, EBITDA and EPS. This guidance gives effect to the recent acquisition, but does not give effect to any other future acquisition. In addition, we have assumed that cash generated from operations, less our investments in CapEx, will simply held in Treasury and invested. Said differently, there are no assumptions related to future share repurchases or other uses of cash.

Our EPS guidance includes the addition of non-cash interest expense of $20 to $21 million or $0.23 to $0.24 per share. That results in net revenue in the range of $2.9 to $3 billion, EBITDA from $440 to $470 million, and fully diluted EPS of $2.25 to $2.55 per share.

I want to thank the operators here in Nashville and each of our communities for all their work in a very difficult operating environment. I continue to be excited about the team we have in place. This environment requires us to be even more focused on the execution of our strategic initiatives.

Clearly, the operating environment is difficult and these times allow for very little margin of error. We will be focused on those things that are within our control and I am convinced that when we do that we will be successful as an organization.

And with that, I'll turn the call back over to Bill.

William F. Carpenter III

David, thanks very much. Pamela, we are ready to take questions.

Question-and-Answer Session


Absolutely, Mr. Carpenter. (Operator Instructions) Your first question comes from Shelley Gnall – Goldman Sachs.

Shelley Gnall – Goldman Sachs

I guess my question will be on how we think about bad debt for next year given the unemployment scenario, but I'd like to start with just one clarification question on the lowering the discount rate for the med mal reserves. Am I correct in understanding that that was a $0.03 charge to the quarter and absent that charge you would have reported $0.66 for the quarter?

David M. Dill

That's right.

Shelley Gnall - Goldman Sachs

And then just on the unemployment situation, I think we're all pretty comfortable with where LifePoint was as of December with unemployment. I guess first of all can you tell us anecdotally are you seeing any deterioration in some of those key markets from December levels? And secondarily, have you looked at some of your key markets that have really gotten hit with unemployment, maybe historically done sort of a case study and seen what bad debt expenses has done per a 1% increase in unemployment in some specific markets?

William F. Carpenter III

We have been seeing more companies in our markets reduce staff, either through cuts in hours or through actual layoffs, in some communities more than others. This has had a direct impact on unemployment rates as we have seen those steadily increase in many of our markets, really consistent with the national average increase of a little over 2% over prior year. In some of our markets - specifically, Virginia, Alabama, some of the others, Tennessee even  we're seeing unemployment rates rise a little bit faster than in others.

David, why don't you address the second half of Shelley's question? I know you and the operators have stayed very, very close to the unemployment situation in specific key markets.

David M. Dill

Okay. This may be a little longwinded answer, but I think it's extremely, extremely important in a couple of contexts.

One is you think about our guidance. We have assumed in our guidance bad debt creeping up. We ended 2008 with bad debt at 11.6% of revenue. The high end of our EBITDA range assumes that bad debt creeps up about 60 basis points, which is about a 100 to 125 basis point increase in unemployment going up in our communities from call it right at 7% to 8% or slightly more than 8%. It also includes the impact of chargemaster increases that just will have about a 20 or 30 basis point effect on provision for doubtful accounts.

So we have assumed in this guidance, at the high end of guidance, that unemployment will tick up to somewhere in the neighborhood of 8% to 8.5% for the year. We may start there a little bit slower, we may end a little bit higher, but for the year average 8% to 8.5%.

We have looked, Shelley, at a couple of markets where we have seen larger than average increases in unemployment, and here's some of the things that we see. We see a shift of business from discounted payers or commercial business to Medicaid or self-pay. We also see volume shortfalls.

And so as we have looked at a couple of these communities where unemployment has increased and I look at that and try to extrapolate across the company, it's our expectation that every 1% change in unemployment - now keep in mind we have about 8% to 8.5% in the high end of our guidance range and our range of guidance is $30 million - but it's our expectation that every 1% change in unemployment may result in approximately $10 to $12 million in lost EBITDA. It's not an exact science. There's a lot of art to this. There's a lot of assumptions that we have to make. But we expect it to be somewhere in the neighborhood of $10 to $12 million.

We expect this to come with about 60% of that being a mix shift from discounted payers over to selfpay or Medicaid, so that will impact revenue and clearly could impact bad debt to the extent that it shifts to self-pay. The remaining 40% - 35% to 40% - we think could translate into just lost volume - individuals, patients not using health care.

So that is what we think we have, so if you think about the $10 to $12 million, we have unemployment creeping up to 8% to 8.5% in our current guidance at the high end and we have a $30 million range and every 1% is somewhere in the neighborhood of $10 to $12 million. So in effect we've got about $20 million of room in this guidance to account for unemployment going up to somewhere in the neighborhood of 10% for the year.

So when we built the guidance we knew that unemployment will continue to tick up. Nobody knows where it will end up, but we felt it was very prudent in this environment to go ahead and assume that unemployment could creep up to 10% plus. And if it does, I feel confident based on the factors we see today we have that incorporated into our guidance.


Your next question comes from John Ransom - Raymond James & Associates.

John Ransom - Raymond James & Associates

Is there any help at all that you see from the reversal in the not-for-profits? Do you have any particular markets where you've got some market share opportunities?

William F. Carpenter III

John, we believe that there will be some benefit. Really, there are some tailwinds that we expect to get from this market. To the extent that we have the ability to continue to make investments in our communities, to the extent we have the ability to continue to recruit doctors to our communities and others in nearby markets maybe cutting back on some of those expenditures in a significant way because their investment portfolios have been hit so hard or other reasons that factor into more of a nonprofit perspective, we think there are benefits that we have and that we may be able to obtain from that.

Our business plan has built into it financial flexibility that will allow us to operate and to continue to make those kinds of investments in profitable service lines and physician recruitment, frankly, in potential acquisitions if they make sense in a particularly market and we can get them for a reasonable price, both acquisitions of hospitals. And we're also seeing the opportunity to acquire other businesses, related businesses within the continuum of care in our markets, whether they be a surgery center or some other type of service.

So I hope that answers your question. We feel that the investments will flow down and we have some opportunity that may present some opportunity for us as we move through this year.


Your next question comes from Whit Mayo - Robert Baird.

Whit Mayo - Robert Baird

David, you mentioned in your prepared remarks that you had completed some end market development transactions, I think within just the fourth quarter. Can you expand a little bit more on that, what specific projects or any specific markets and were these more defensive type of investments like the Havasu ASC JV or were these more offensive type of deals?

David M. Dill

There were a couple of smaller ones in the fourth quarter. The main ones that we did  there were two big ones - that were an endoscopy center, there was a diagnostic imaging clinic in one of our Alabama communities. The main one was the ASC that we bought out in western plains - Dodge City, Kansas - back on June 1st. So that $20 million I gave you was spread throughout the year, not just what we spent in the fourth quarter.

The final thing that we did do in the fourth quarter was we acquired a home health agency over in one of our markets in Virginia during the fourth quarter, and so that was, to the extent that we spent money in the fourth quarter on our cash flow statement, that was where the money was spent.

Whit Mayo - Robert Baird

So you'd characterize all those as more offensive in nature?

David M. Dill

Absolutely. No doubt about it. Not defensive. We see this as a core piece of our strategy, looking at expanding the footprint in each of these communities.

I think this slowdown, when we think about tailwinds of the credit market slowing down, this will give us chances to expand market share. We don't have to buy these. We can build these as well. So we will be looking at opportunities to build out new services lines, but if opportunities present themselves to us at the right price, we don't mind buying those opportunities either. But we'll be very prudent when we do it.

William F. Carpenter III

Whit, clearly it is within our strategic plan to own more businesses within the continuum of care in our communities, businesses that make sense, businesses that are profitable, businesses that we can acquire at a reasonable price. So that is very much a part of our strategy, very much offensive rather than defensive.


Your next question comes from Adam Feinstein - Barclays Capital.

Adam Feinstein - Barclays Capital

Just a couple of questions here. I guess I just wanted to see if you had a number in terms of the net number of doctors you added in 2008? I know you had a goal of 100. I just wanted to see if you met that goal and I don't know if you outlined a goal for 2009. And then at the same time, in terms of that recruiting, I know that was one of the areas you guys were focused on in a handful of markets where you were having some problems earlier in 2008, so just wanted to get a quick update in terms of how those markets have progressed throughout the year.

David M. Dill

Sure, Adam. Coming off of 2007, where we had recruited about 40 net new doctors, in 2008 we have hit our target of recruiting approximately 200 doctors, retaining 95% of our doctors for a net add of the 100 that we have talked about. So we absolutely hit our target there.

When you zero in, though, on where those physician adds were, we recruited - if you remember back three or four quarters ago when we talked about this group of five hospitals, their volume in the fourth quarter of last year was down some 13% - 14%. The volume in those same five hospitals are flat in the fourth quarter compared to an overall company average of down 2.3%. A big chunk of that was physician recruiting. Another piece of it was there's an economy out in Arizona like Havasu, which we have talked about, I think we've comped out of the worst part of that economic decline, and so that helped us.

But physician recruiting, we recruited in those five hospitals roughly 40 - 45 doctors during the course of the year, so you can clearly see the benefit from our recruiting efforts in those communities. And our retention was pretty much in line with company averages in those communities.

As it relates to 2009 real quick, Adam, it's our expectation that it will take at least as much as we did this year to keep doing what we need to be doing. So those are the goals and the initiatives that we have in place for 2009.

William F. Carpenter III

And so, Adam, if I can just add one thing there, we have started off 2009 really at the pace that we ended '08 with respect to physician recruitment - a very strong start for us. I called it a record pace previously. And our efforts and our focus on physician recruitment has never been stronger. We have added recruiters, both at our hospitals and in our corporate staff. We've added recruitment expertise to manage, train, educate our local hospital CEOs and recruiters in order to intensify our effort there, and I believe we are seeing the results of our very strong focus on recruitment.


Your next question comes from Jason Gurda - Leerink Swann.

Jason Gurda - Leerink Swann

Could you maybe provide an update on how your deep dive initiative is going and how satisfied you are with the results so far?

William F. Carpenter III

Sure, Jason. We, as you know, conducted deep dives at seven of our large hospitals. In those deep dives we focused on specific areas or product lines where we believe we have the ability to gain market share.

Some of the positive results that we've seen in those hospitals include a 12% volume increase in cardiovascular service line in those hospitals. We've seen increases in our imaging services lines. So we have had a great deal of improvement.

And you remember that we came out of the deep dives and we said cardiovascular, imaging, cancer services, orthopedics, these are service lines that we believe we have the ability to grow in those markets, and so we've done that.

David already talked about the end market development opportunities, and so we've had several that we have closed and a few more that we expect to close earlier in the year.

Another key component of our growth initiative really, too, has been a new physician sales and detailing program that we've established in every single hospital, not just the deep dive hospitals. These are programs designed to improve our retention, improve hospital services, and grow targeted product lines in each and every single one of our communities. And we've really seen some positive results there. Physician satisfaction scores across the company have climbed at a rate of about 5% in the last year, and we're now above the national average on those.

Those are some of the types of efforts that we see in our growth initiatives and specifically with respect to our deep dives.

Jason Gurda - Leerink Swann

So do you think that we've seen most of the improvement to date or it'll continue to improve from here?

William F. Carpenter III

You know, these deep dives and our entirely strategic focus that we began in 2007 have always been a three to four-year sort of ramp up, and I believe that we are beginning to see the results of these efforts. And I expect to see improvement this year as well as next.

Remember, a lot of these projects involve new capital spend. In some cases they involve the obtaining of a CON. In one of the deep dive hospitals, we're still working on the CON. And the construction project that will go after that CON is obtained is waiting to get going. It's one of the things that David talked about where we have a project where we had allocated the money but we haven't yet spent it in '08.

So there is definitely room to go as we think about further implementing the programs that we have designed for these deep dive hospitals.


Your next question comes from Albert Rice - Soleil - Pomeroy Research LLC.

Albert Rice - Soleil - Pomeroy Research LLC

A technical point of clarification and then the main question. First of all, on the tax rate, David, can you just comment on the fact that the tax rate was a little low and what your expectation is for '09?

And then more broadly on the physician recruitment, how's the economy affecting both the availability of supply as well as is it making you change your terms on guarantees in any way and also the specialties you're going for in any way?

David M. Dill

Let me start with the tax rate question first, and then Bill and I will handle the question on employment or recruiting of doctors.

As it relates to the tax rate, in the fourth quarter of this year our tax rate was slightly below 35% for the quarter. That's 39% for the year. I have expected in our guidance the tax rate to be between 39.5% and 40.5%, so right at 40% for the year.

It was a little bit better than what we had expected but, if you go back and look at the last two or three years for LifePoint, the fourth quarter we typically see a tax rate that's in the 35%, 36%, 37% range. So this quarter was benefited by $1 million or so, which would be a couple of pennies a share, from a tax adjustment. That benefit unfortunately was mostly offset by the lowering of the discount rate in medical malpractice and workmen's comp. But going forward, A.J., I think you should assume somewhere around 40%, which is a little higher than what we did this year, but not much.

William F. Carpenter III

A.J., I'll start on the question about physician recruitment. It is a good thing that we started sooner than later on the retooling of our physician services and medical staff development efforts. We are going after more difficult types of recruits, the kinds of recruits who are being sought across the country. As a result of that, we have seen an increase in the financial packages that these physicians are requiring in order for us to stay competitive. We're seeing an escalation in salary requirements, sign-on bonuses, loan repayments, more so specifically related to specialists that we have recruited.

We're employing more physicians than we have previously. In that case, we have, I think, been consistent with trends that you're seeing across the country. We have started to have to reduce some of the forgiveness period, not just some of the contracts, and this reduces the amount of time that we have in order to spread the costs of some of these contracts out over the years.

So there are a number of things going on. I'll probably get more detailed than you need or than you'd want, but I think that is -

Albert Rice - Soleil - Pomeroy Research LLC

The weak economy is not offsetting any of that or the lack of availability?

David M. Dill

I was going to summarize for you, A.J., I think a weak economy helps us on a couple of fronts. There was a question earlier in the call about these not-for-profits that John Ransom asked. I think a slowdown in the economy, their access to credit may actually slow down the aggressiveness of their physician recruiting relationships. It works in our favor.

Some of the pressure that we're seeing on the packages that Bill talked about I think could lessen. We're not seeing it yet, but it could lessen a little bit as this economy continues to deteriorate.

And then finally, the retirement of doctors. Although we're not seeing it yet, I have to believe that there are physicians out there in the last four or five years of their earnings power who are looking at this and saying now I may have to work for another five years. And, as you know, physicians working longer and working harder, as long as we keep a careful eye on compliance and doing the right thing - which we will do - those are good things for us.

So those are some potential benefits of a slowdown in the economy, although we just haven't seen them yet. But I have to think we will as we go through the course of this year.


Your next question comes from [Ann Wareheim - Van Campen].

Ann Wareheim - Van Campen

I was wondering if you could just talk a little bit about the relationship between increases in your uninsured patients and what effect that has on bad debt. Like if you see a 1% increase in your uninsured, is it comparable to an increase in your bad debt expense, and then also the same kind of information for your underinsured patients?

David M. Dill

Generally speaking when we went back and did our analysis, Ann, as I shared, it's a little bit of an art and a little bit of a science, but you should expect that for every 1% increase in unemployment, the effect on bad debt - and it comes two ways. One is a managed care-type patient flips over to self-pay that we reserve for in bad debt; another way it shows up is they flip over to Medicaid and we just get lower amounts of net revenue. The dollars don't show up in bad debt, but when you look at it as a percent of revenue it starts to show up because our revenue per adjusted admission comes under a little pressure when that happens. But for every 1% increase you should expect something in the neighborhood of about 30 basis points for an increase in the provision for doubtful accounts as a percent of revenue.

So when we go back to the earlier discussion, we have about a 60 basis point increase in our plan for next year, at least at the high end of the plan. About half of that is the chargemaster increase, the other half is unemployment ticking up 100 plus basis points from where we ended 2008 through the course of 2009. And then our range would even give us more room if it got even worse than that.

Ann Wareheim - Van Campen

And I guess does that then account for the fact that companies may be increasing deductibles or copays and people can't afford to pay those when they come in or how does it take that into account?

David M. Dill

It does. There's about $100 million or so of money each year we have to collect from copay and deductibles. The collection percentages on that have remained relatively constant. So it's something we are concerned about. It's not a huge driver to the number. I mean, if you think about $100 million of co-pay and deductibles and we collect $4 or $5 million less across $2.8  $2.9 billion of revenue, it's tenths of a percent. That's not going to be the biggest driver.

The biggest driver on our bad debt will be unemployment and the acuity of the patient when they show up. And then obviously just the mechanics of us raising charges has an impact on it.


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

Frank Morgan - RBC Capital Markets

You've commented about some of the improvement in those five hospitals. I'm curious if you could elaborate just a little bit more about how much upside you see left there and is it really enough to kind of move the needle on the aggregate volume numbers for the company?

And then the second part of the question is in your assumptions you talked about free cash flow, that you would basically not be buying back any stock, that you'd let that accumulate. Are you not going to reduce debt with that? Is that built into your assumptions as well?

And then how many [unemployed] doctors do you have in total?

David M. Dill

I think I've got all three. I'll try to answer them in the order that you asked. I think I've got them all.

The first one is opportunity to grow market share. I don't see necessarily just because of where they were and where they've come from that there's an ability to grow volumes other than just our general plans that we have in place across all of our hospitals to grow volumes. So in every market there's opportunities for us to grow volumes. I don't think there's anything specifically set aside separate and apart for these group of hospitals.

As it relates to our assumption in the budget for share repurchase, if you think about the midpoint of our range on EBITDA, we will spend about $80 million or so of cash interest, $80 million or so of cash taxes. If you assume the same amount of CapEx spend of $160 million, you're left with about $130 million or so of free cash flow. The assumption in the guidance is not to really pay off any debt. It's just, in this environment, just hold onto it on the balance sheet.

Then over the course of the year if we make a decision to do something different with that capital to drive returns like a potential M&A opportunity or buying back stock or buying back convertible debt, you know, there's different opportunities for us to deploy capital. We'll be looking at what do we think makes the most long-term sense.

That's the assumption we have in. It's probably the most conservative assumption we can have in here. We have not assumed paying off term loan B debt at LIBOR plus our credit spread.

As it relates to employed doctors, we came into the year with about 200 doctors, 10% of our doctors being employed. We left the year with about 250 doctors being employed; 30% of those are specialists. So we added about 50 new employed doctors, and we recruited a couple hundred doctors.

So you can see the momentum that's happening and the shift that's happening where a disproportionate number of our doctors this year, especially relative to the past, are coming in through an employment model. This may be, going back to A.J.'s question, where we see a little bit of benefit in a softening economy. We want to be competitive. We have to be competitive to bring doctors in. We are going to bring doctors into these communities, and at least over the last 12 or 18 months it's forced us to employ more than what we've seen in the past.


Your next question comes from Ralph Giacobbe - Credit Suisse.

Ralph Giacobbe - Credit Suisse

Anymore details around guidance assumptions just in terms of volume and pricing built into sort of the top line?

David M. Dill

Yes, let me walk through some of the main assumptions. As you know, we just gave revenue, EBITDA and EPS. We had to base our budget and our guidance on something as it relates to volume, so let me let you inside our head a little bit.

We have assumed that our volume in '09 is pretty consistent with what we saw in '08, which showed adjusted admissions down about six-tenths of a percent. Our pricing this year has been in the neighborhood of 5.7% or 5.8%. So if you go to the midpoint of our range of revenue and strip out the $110 million for Rockdale, that implies that revenue goes up about 5% a year, which means that similar pricing, similar volume.

Now, of course, if volume is a little bit better - and I'm optimistic that it will be; all the service line initiatives that Bill's talked about, the physician recruiting momentum in 2008, and the start that we're off to in 2009, I'm optimistic that it will be a little bit better, but if it's not and it's the same, I think you can get comfortable with the midpoint of our range. If it slows down some because it is a difficult environment out there, then we have additional levers that we can pull.

That's why we felt it was important not to really give volume guidance because this year. When you look at revenue, we got to our revenue target. We just got there a slightly different way  volume a little bit softer, pricing a little bit better, and service mix and acuity and some other things. That could happen again.

So that's where we are on volume. That's something to think about for volume. Pricing about the same. Provision for doubtful accounts, up about 60 basis points from where we left the year. So somewhere in the neighborhood of 12.2% up to about 13% depending on where unemployment falls out.

Interest expense in the neighborhood of $100 to $105 million. Depreciation very consistent with what we saw this year, 4.5% to 5% of our revenue. Tax rate, we've already talked about that, 39.5% to 40.5% of revenue. CapEx very consistent, and our share count, too, will creep us just a little bit as we use stock to compensate our employees, so I expect the share count to creep up some. And of course all this includes the impact at $20 - $21 million of new interest expense as it relates to the convertible debt.

Ralph Giacobbe - Credit Suisse

Can you tell us the average increase in your gross chargemaster for 2009?

David M. Dill

Pretty consistent with the overall increase we're expecting from commercial payers. You should expect somewhere in the neighborhood of 6% - 7%, and that's what we're expecting from our commercial pricing as well. And that's been consistent for the last year to year and a half.


Your next question comes from John Rex - J.P. Morgan.

John Rex - J.P. Morgan

Back on the volume expectations first and then I have a follow up. Can you bracket for us a little more in terms of what's encompassed in your guidance on the low end what kind of volume and trend you'd expect at that end? You said down 0.6% on the midpoint. Kind of how far do you go on the low end of your guidance?

David M. Dill

Well, there's going to be a lot of moving parts here, so if you have bad debt creeping up and volume coming down, some of that's already accounted for in that $10 to $12 million shift in a 1% rise in unemployment.

I think you could get there probably with volume down. Adjusted admissions, let's talk about that as opposed to in-patient admissions, down 2%, maybe 2.5%. If those volumes are down that much you could probably still get there.

Keep in mind that if volume is down over the course of the year there are action plans that we have in place in every one of our hospitals. This is no different than the action plans that we have in place today. Our operators respond when that happens.

And so if we see volume - and this market by market, local hospital by local hospital  you should assume that we have plans in place in each of these hospitals. If we see volume coming down, our actions won't be that much different.

Now our response time may need to be a little bit quicker, and it will be. But our actions will remain consistent. That's what our operators do. And I expect this to be no different.

We don't see that type of decline. I'm not expecting that at all given the physician recruiting, the service line initiative work, all the things that we have in place. But if it does, we have plans in place to flex down and look at our cost structure and look at our service line structures that we support in each of our communities.

John Rex - J.P. Morgan

And then just kind of thinking of tying that into kind of [inaudible] seeming December trends were a lot better than November. Can you give us a little color commentary in terms of did that kind of continue into January or was there any meaningful change as you got into January in terms of the volumes?

David M. Dill

We're not going to comment, John, on first quarter volumes. There will be a lot of analysts out there doing their own surveys. You'll get some pretty real-time glimpses based on these surveys. I think what we found in the fourth quarter was the surveys were not that far off. October not too bad, November was very soft for everybody, December came back. I don't think we were any different than perhaps anyone else. But we will not comment on first quarter.

John Rex - J.P. Morgan

You don't have a view on January yet or you just don't want to talk about January?

David M. Dill

I have a view on yesterday, so we have clearly a view on a day-to-day basis on what's going on in our communities. It's just I don't think it's important for us to go into that kind of detail on this call.

John Rex - J.P. Morgan

Maybe just a little color commentary, then, on the 4Q if you can kind of tee up for us a little bit how the commercial volumes stacked up versus the others in terms of were those trends a little better, a little worse than the average?

David M. Dill

We may be a little different than most companies. I'm not sure who all reports commercial changes and other payer changes. I'm not sure we're all consistent in how we account for certain things like commercial Medicare-type patients. But over the course of the year our mix hasn't changed a whole lot quarter to quarter. It's been relatively consistent for each of the four quarters.


Your last question comes from Pito Chickering - Deutsche Bank.

Pito Chickering - Deutsche Bank

I guess the last question of the day is going back to the pricing for 2009 expectations. Can you give a little more detail on [inaudible] are built in there? You mentioned commercial rates of 6% to 7%. [inaudible] Medicaid decreases in there? What percent of the increase is coming from improved mix?

David M. Dill

Not a lot. I'm assuming mix stays relatively constant. I think we might see a little bit of a pickup there when it comes to all the service line work that we're doing. But if we go through our big payers, Medicare up 3% - 3%, what we're expecting; that's pretty much locked in for the most part of '09. We may have a little fourth quarter exposure as we see what comes out of the inpatient rates, although the MedPAC recommendation currently on the table is promising.

Medicaid, we've seen some Medicaid price increases this year. I'm assuming Medicaid pricing is flat to down a little bit. Now, having said that, Pito, I think maybe looking back a year from now, with the stimulus that will end up hitting these states, Medicaid pricing might be a little bit better than what we think today. But until we see how these states plan to use this money, I think caution is the best course to take.

And I'm worried about each of the states that we operate in. We've talked publicly about a couple of the states - Virginia and Alabama specifically - but I'm worried about every state that we operate in. But as this new money gets down there, I think we're doing to see Medicaid pricing better than what we're currently contemplating today, but only because of the new stimulus money that's coming. If not, as I was thinking about this guidance over the course of the last month before the stimulus came, I was worried that we may even see more downward pressure in this, that we needed some room in our guidance to help accommodate for that. I'm not so sure we need so much of that anymore.

And then finally commercial pricing in that 6% to 7% range.

Pito Chickering - Deutsche Bank

A quick follow up on the commercial pricing side, is there any feeling as to what percent of your contracts have been signed at this point? I assume the majority of them. Just sort of confirmation of that?

David M. Dill

Yes, a large degree of visibility for 2009. Very little visibility at this point on 2010, although our managed care teams are building the book, if you will, for 2010. But sitting here today, I have a lot of visibility for '09 and feel comfortable with this assumption.


Thank you for having taken that question, Mr. Carpenter. I'll now return the conference back to you for your concluding remarks.

William F. Carpenter III

Thanks, Pamela, and thanks to everyone who's been on the call today, especially our investors. We appreciate your interest in LifePoint. We understand what you want us to be focused on and we're focusing on that.

As we said, we have maintained our financial flexibility and our financial strength. Our balance sheet is solid. As a result of this financial strength and our long-standing demonstrated ability to operate hospitals efficiently and effectively, especially in difficult market environments, we are well positioned to survive in this environment and to grow our business. The work that we've done through physician recruitment is paying off and we are growing market share in existing communities by being really, as was mentioned on the call, on the offense with respect to opportunities that we've seen and we believe that we will continue to see. We're excited about where we are, how we're positioned and where we can go this year.

So thanks again for your participation on this call, for your interest in our company, and we look forward to talking with you throughout the course of the year.


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

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