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Health Management Associates Inc. (NYSE:HMA)

Q4 2008 Earnings Call

February 24, 2009 11:30 am ET

Executives

John Merriweather – Vice President of Investor Relations

Gary Newsome – President and Chief Executive Officer

Robert Farnham – Chief Financial Officer

Analysts

Sheryl Skolnick – CRT Capital Group

Shelly Gnall – Goldman Sachs

Adam Feinstein – Barclays Capital

John Ransom – Raymond James

Darren Lehrih – Deutsche Bank Securities

Jason Gurda – Leerink Swan

Albert Rice – Soleil-Pomeroy Research

Operator

Welcome to the HMA fourth quarter and year end 2008 earnings conference call. (Operator Instructions). Mr. Merriweather, you may begin your conference.

John Merriweather

I’m John Merriweather, Vice President of Financial Relations for Health Management Associates. I’d like to welcome you to HMA’s fourth quarter and year end 2008 earnings conference call.

Before we get started with the call, I would like to read our disclosure statement. Certain statements contained in this presentation, including without limitation statements containing the words believes, anticipates, intends, expects, optimistic, objectives and words of similar import constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements may include projections of revenue, income or loss, capital expenditures, capital structure or other financial items, statements regarding the plans and objectives of management for future operations, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements and other statements, which are other then statements of historical facts.

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, EBITDA, as mentioned on this call, is defined as earnings before interest, income taxes, depreciation and amortization, gain on early extinguishment of debt, impairment of assets and minority interests. I will refer you to the HMA’s earnings press release issued on February 23, 2009 for a disclosure statement regarding EBITDA as a non-GAAP financial measure.

On the call with me this morning is Chief Executive Officer, Gary Newsome, and Chief Financial Officer, Bob Farnham. Thank you again for your attention and now I’ll turn the call over to Gary.

Gary Newsome

Thank you all for joining us today to discuss HMA’s fourth quarter and year end 2008 results. Bob Farnham will provide you with additional details on the numbers shortly, but first I would like to update you on the operational initiatives that were implemented during the fourth quarter and some of the initial traction we have seen as a result.

The fourth quarter marked significant improvement for HMA. Admission declined just two-tenths of a percent and adjusted admissions grew 1.1% during the quarter compared to prior year. We believe this is a direct result of the initiatives we began implementing during the fourth quarter.

When we last spoke with you as a group in October, we mentioned that we had identified three broad areas of focus upon which to apply more discipline operational approach. Emergency room operations, physician recruitment and retention and market service development. As I mentioned in October, my philosophy in general is to ensure that the fundamentals of hospital operations are being addressed.

In order to affect the necessary operational changes, the company’s organizational structure needed to be changed. We recently reorganized the division structure reducing the number of divisions from eight to five. Four existing divisional leaders remained as divisional presidents and we added one division president from outside the company.

In addition, we provided additional support infrastructure by assigning a physician recruiter to each division. With the divisions reorganized, we also changed from a once monthly operations meeting to a weekly operations meeting schedule and required the division presidents to work out of the corporate office rather than their divisional offices.

This provides more timely face-to-face opportunities with the division presidents, more accountability and a rapid response to operational issues. With the organizational restructuring in place, the first area at focus to be tackled was the emergency room. Based on what I saw in my initial review, we lacked discipline in the emergency room.

As you know, we see more patients in the emergency room than anywhere in the hospital, and this is true for the industry and not just HMA. We touch more patients’ lives and we affect more family members through the ER process, and we also affect, to a large extent, a broader base of our attending physicians through the emergency room function. It is truly a front door to the hospital.

We now have a greater focused improved quality and better understanding of the ER than we did just 90 days ago and it is beginning to make a difference. We are upgrading our exiting ER patient system called ProMed, which is a tool used to measure every component. We measure presentation to triage, presentation to bed, presentation to see the physician and from presentation to disposition, whether that be an admission, discharge or transfer.

These are critical metrics because we become efficient in that process and drive higher quality and efficiency there. Our length of stay is lower and we become very attractive to both patients and physicians in markets where we have greater competition, and that grows volumes.

We have the ability now to reduce transfers out of HMA hospitals and treat more patients in-house. It’s measurable and it will drive results in the future. This is a quality driven system and the byproduct of this focus is better patient quality, better patient satisfaction and family satisfaction in the process. And quite frankly, will drive volume as well as generate appropriate admissions from the ER as we go forward.

This is a great opportunity for us even though the ProMed tool is not completely updated in all facilities and the training is not complete throughout the company. We would expect to see the software and hardware upgrades completed by the end of the first quarter and the training will be ongoing. We are already seeing tangible results. The renewed focus on ER contributed to the fourth quarter volume improvements.

The second area as we go about reformatting and refocusing the company is physician recruitment. As I mentioned, we now have additional resources in place. Quite simply, we haven’t recruited the number of physicians nor the types and the specialties that we should have over the last few years. So this gives us an opportunity to refocus.

During the fourth quarter, we put a structure in place and a very disciplined approach where we measure every component of a physician recruitment process. We are now able to track key metrics, CVs received, distributed, time to first contact with the physician, time to contract signing and overall information flow.

By utilizing this data we can see how our efforts are improving. We can do a better job of sourcing physicians across the system rather than just in one hospital. Having reviewed the community needs analysis for the hospitals, we have a great opportunity here.

I am also happy to report our results in the fourth quarter 2008 were significantly improved over the prior year’s fourth quarter in terms of physician recruitment, specifically contracts signed, which will drive results in 2009 and 2010.

For the year, we recruited 475 physicians with about 200 of them signed in the fourth quarter alone, double what we recruited during the same quarter last year. We had some great incentives in place during the fourth quarter and we have a goal of recruiting over 600 physicians in 2009. We are on our way to achieving that goal.

The third identified area of focus will provide a great opportunity for taking our hospitals to the next level of service delivery and seeking opportunities to add new services to our facilities. There are the inpatient opportunities, develop centers of excellence, service lines like orthopedics, cardiology and urology.

And taking these facilities and measuring where they are and putting toolkits in place so that we can take them to the next level of service, which will drive volume in our hospitals. Then there are the outpatient opportunities, such as ASC, collaboration with physicians and expanding standalone imaging centers.

And thirdly, the development of occupational medicine and urgent care centers in our markets and outlying areas. As we build our healthcare delivery system at each of these markets, we will reach out to broad and expand our market share opportunity to pull patients into our facilities. It’s a great opportunity for us. A void for us historically over the last several years and we are focused on that.

Not coincidentally, these three areas of focus have been presented in order of importance and timing. By that I mean that we can expect to see traction and tangible results from the ER management first, then the physician recruitment and lastly, market service development. I think that’s exactly what we saw in the fourth quarter.

Volumes improved as a result of the ER focus and that had an impact during the quarter. Physician recruitment improved dramatically, which should begin to impact volumes in 2009 and the development and differentiation of product lines will take the longest to produce results, but will dovetail very nicely with the first two areas of focus in the latter part of 2009 and 2010.

That’s the plan we discussed in October and the plan you’ll hear us discuss through 2009. We are beginning to see some initial results and we expect to continue to improve upon them through 2009. Despite the current economic times, I believe HMA has unique opportunities to grow. That being said no one knows the full extent to which this economy will continue to wallow, worsen, or improve.

To the extent it worsens, we will truly be in unchartered waters and will have to adjust resources accordingly, but if it improves I can envision even more upside for HMA. We have already adjusted our cost structure to benefit 2009, and we are also poised to make additional adjustments as required.

Thanks for your attention, and at this point I’ll turn over the call to Bob Farnham for a review of the fourth quarter and year end financial results. Bob?

Robert Farnham

Last night we announced results for the fourth quarter and year ended December 31, 2008. For the fourth quarter, HMA reported net revenue of $1.1118 billion and EBITDA of $146.7 million. Income from continuing operations was $29 million or $0.12 per diluted share and net income was $14.5 million or $0.06 per diluted share.

Included in diluted EPS from continuing operations is a $26.4 million net gain from the early extinguishment of debt and $6.2 million investment impairment. Excluding this gain and the impairment, diluted EPS from continuing operations was $0.07, as shown in the table accompanying the press release issued yesterday.

For the year ended December 31, 2008, HMA reported net revenue of $4.4516 billion, EBITDA of $633.6 million, income from continuing operations of $223.3 million or $0.91 per diluted share, and net income of $167.2 million or $0.68 per diluted share. Excluding gains on sales of assets and minority interests, impairment of assets and gains on the early extinguishment of debt, income from continuing operations was $94.3 million and diluted EPS from continuing operations was $0.39.

For the fourth quarter, continuing hospital adjusted admissions reflecting admissions adjusted for outpatient volume increased 1.1%, while admissions from continuing operations decreased 0.2% compared to the same period a year ago.

When I exclude uninsured admissions, which were down 50 basis points for the quarter, admissions in the quarter for continuing operations actually increased 0.3%. Continuing hospital emergency room visits declined 2.2% and surgeries declined 2.3% compared to the same quarter a year ago.

Pricing in the fourth quarter showed a 2.1% increase in continuing hospital net revenue per adjusted admission relative to the same period a year ago, which contributed to a continuing hospital net revenue increase of 3.3%. Our EBITDA from continuing operations for the fourth quarter was $175.5 million and the corresponding hospital EBITDA margin from continuing operations was 15.8%.

During the quarter, the company’s earnings were negatively impacted by approximately $6.2 million or approximately $0.02 per diluted share, which represented the recognition of an investment impairment related to a decrease in the market value of our equity investments in our captive insurance company.

In addition, the company benefited during the quarter from a $26.4 million gain associated with the repurchase of $50 million of our 3.75% convertible senior subordinated notes due in 2028 in the open market at a discount. Net revenue by payer source for the year was comprised of the following, 51% from managed care, 32% Medicare, 8% Medicaid, and 9% self pay.

Bad debt expense and the uninsured remain the prominent industry issues affecting operating returns. However, for the fourth quarter our uninsured patient volumes declined again compared to the same period a year ago. Continuing hospital uninsured admissions for the fourth quarter total approximately 6.5% of total admissions, which is down 50 basis points from the same quarter a year ago.

There are three components that comprise how HMA accounts for its uninsured and under insured expenses, bad debt expense, uninsured discounts, and charity and indigent write-offs. Bad debt expense for the fourth quarter was $130.2 million or 11.7% of net revenue compared to $132.7 million or 12.3% of net revenue for the same period a year ago.

Uninsured discounts for the fourth quarter were $144.1 million compared to $149 million for the same quarter a year ago. HMA’s charity and indigent care write-offs for the fourth quarter were $18 million compared to $15.1 million for the same period a year ago.

To accurately compare how HMA accounts for the uninsured, it is necessary to review all three components together. Therefore, the sum of bad debt expense, uninsured discounts, and charity indigent write-offs as a percent of the sum of net revenue, uninsured discounts, and charity and indigent write-offs was 22.9% for the fourth quarter compared to 23.9% for the same quarter a year ago.

We are convinced that our efforts to increase the awareness of our emergency room patients or our expectations, which we began in the third and fourth quarter of 2007, are still having a positive impact on our uninsured volumes. We have begun to anniversary the effects of those initiatives and we are operating in a different economic climate, but we will continue to clearly state our expectations and appropriately manage non-emergent patients to limit the growth of uninsured volume.

Moving over to the balance sheet and cash flow statement, total assets at year end exceeded $4.5 billion. Balance sheet cash at December 31, 2008 was $144 million. The balance in the accounts receivable net as of December 31, 2008 was $631.7 million and the balance in the allowance for [dabble] accounts was $449 million.

HMA’s days sales outstanding our DSO’s as of December 31, 2008 were 50 days, up one day from December 31 of 2007. Cash collections were 103% of net revenue for the year ended December 31, 2008. For the year, cash flow from continuing operating activities was $425.6 million, after cash interest and cash tax payments aggregating $275 million.

For the fourth quarter, cash flow from continuing operating activities was $49.5 million. Capital expenditures for the fourth quarter was $58.7 million as compared to $57.1 million for the fourth quarter of 2007. For the 2008 year, we spent $218.2 million as compared to $267.4 million last year, a reduction of $49.2 million for the year.

The $218.2 million of CapEx for 2008 approximately a 4.9% of 2008’s annual net revenue, which was lower then our original beginning of the year guidance of 5% to 6% of net revenue. For 2009, our objective is 4% to 5% of annual net revenue. During the fourth quarter, HMA repurchased in the open market at a discount $50 million of its 3.75 convertible senior subordinated notes through 2028.

As a result, HMA recorded a $26.4 million net gain on the early extinguishment of debt. HMA has repurchased an additional $50.5 million of its notes in the open market thus far in 2009. HMA expects to continue to purchase the 2028 notes in the open market on an opportunistic basis.

In 2008, HMA reduced its indebtedness by $522.5 million representing approximately 14% of its outstanding debt as of January 1, 2008. As I have stated previously, the company expects to repay a minimum of $150 million of debt during 2009 from free cash flow. Substantially all of HMA’s debt is fixed rate with a total weighted average of approximately 6.4% with no significant debt maturities now incurring until February of 2014.

To review the fourth quarter’s results, compared to the same period last year hospital admissions from continuing operations decreased 0.2%, when adjusted for the decline and uninsured admissions they actually increased 0.3%. Adjusted admission increased 1.1% and ER visits and surgeries declined 2.2% and 2.3% respectively.

Net revenue per adjusted admission for continuing operations increased 2.1% contributing to a net revenue increase of 3.3%. EBITDA margins from continuing operations were 15.8%. Bad debt expense was 11.7% of net revenue.

Uninsured admissions from continuing operations declined compared to the same quarter a year ago with continuing hospital uninsured admissions representing 6.5% of total admissions. And lastly with the open market repurchases of 50 million of our 3.75 convertible notes due 2028 during the fourth quarter, HMA repaid $522.5 million in debt or 14% of our total debt outstanding as of the beginning of 2008.

Thank you for your attention, and I’ll know turn the call back over to Gary.

Gary Newsome

Before we open up the call for Q&A, I would like to reiterate how excited we are with the prospects of 2009. The 2009 objectives we issued early in January have not changed, revenues between $4.550 billion and $4.650 billion, EBITDA between $640 million and $680 million, income from continuing operation per share diluted between $0.37 and $0.45, continuing hospital admissions growth between 0% and 1%, and CapEx spend as a percent of revenue between 4% and 5%.

The mission and vision remain the same as we continue our strides toward our goal to lead the hospital industry in quality and patient satisfaction metrics. And even in just a few short months, we have seen progress and traction as we focus on the three broad areas that are key to our future success. These are the ER operations, physician recruitment and retention, and market development.

Thank you again for your attention this morning. I will now open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) You’re first question comes from Sheryl Skolnic – CRT Capital Group.

Sheryl Skolnick – CRT Capital Group

You’ve done an excellent job in a short period of time grasping all the relative issues I think or many of the important issues Gary, and have articulated well I think some of the initial things. But I’m curious about a couple of perhaps issues that might affect the way in which you approach the turnaround of the company in this environment and how it might be different from turning the company around in a perhaps more forgiving environment with the economy the way it is.

Recognizing that you are targeting the ER, that seems to make sense because that’s also one of your more vulnerable places with uninsured admissions, but are there any other strategies that you might pursue or might chose not to pursue in rising unemployment environment, potentially rising bad debt and rising uninsured admission environment, so pushing off to next year rather than this year.

Gary Newsome

Sheryl, basically the ER truly is the front door to the hospital and what we have in the company, which may be unique for us and may be not, is that we have some real opportunities to improve our performance there and doing the right things will drive volume.

We will have better patient satisfaction, better experience and through that process too will give us an opportunity clinically to do the right things, which will at the end of the day, drive appropriate admissions into our hospital.

We are focused on other things currently. Our physician development and recruitment is a part of the development of our physician network is critical in any time; it’s a fundamental for hospital growth. We’ve seen it year after year where we have great physician development, including the recruitment component of it that will sustain growth in our markets as we go forward.

We still have market share opportunities where we have our hospitals, and with those market share opportunities we can grow as we do this.

Additionally, if you think about the three focuses, the ER, the physician development, which includes the recruitment piece, as well as the market development, and taking our services to the next level, will give patients the choice to use our hospitals where maybe historically they haven’t used it because we haven’t had the types and kinds of services or physicians in those markets.

So there are several things there and additionally we are really focused on expenses in the company. Expenses are critical in this type of environment and we have, I guess be able to react appropriately. So we are anticipating to the extent you can in an economy like this the changes necessary that we need to do to stay ahead of the curve. And I can ensure you that is ever present on our mind here.

Sheryl Skolnick – CRT Capital Group

Okay. That was kind of where I was going with it. That might be more a focus this year because some of the ratios look to be a little bit high on the labor and maybe even the bad debt collections. But it sounds like you are focused on that.

And just moving to one other issue that I do need to ask about and I think this probably would be for Bob would be, you mentioned to me that you cannot repurchase the six and an eighth note in the open markets. And I’m a little bit confused about by why that might be is there some kind of hard call protection in the indenture?

Robert Farnham

Yes. I think there are a certain convents that, at least on advice of counsel, we were advised that we could not buy back those $400 million of notes in the open markets.

Sheryl Skolnick – CRT Capital Group

Okay. And the timing on the next application of the 50% of excess cash flow to the term loan would be next year not this year?

Robert Farnham

Well, at the end of each year we calculate our excess cash flow in accordance with the covenants and then 50% we have to write a check basically to the term B holders. We do get credit for any payments we made during the year.

I think our total obligation is about $100 million, between $90 and $100 million and we paid back about $75 million during the year. So here at the end of February, or within the first few days of March after we file our 10-K and our compliance certificate, we’ll probably have to write a check for $18 or $19 million to the term B holders. And then that will settle up on 2008 for satisfying paying them 50% of our excess cash flow.

Operator

You’re next question comes from Shelly Gnall – Goldman Sachs.

Shelley Gnall – Goldman Sachs

A couple questions on the bond repurchase, you mentioned there was a $150 million of debt repurchase expected during 2009. Can I just clarify does that include the $50 million that was already done during the first quarter?

Robert Farnham

Yes. Yes it would.

Shelley Gnall – Goldman Sachs

So can you update your cash interest expense guidance for the year then? Not on the $150 but on the $100 million that was already done during fourth quarter and first quarter.

Robert Farnham

Yes. In our January release we gave objectives, we said interest expense was going to be $225 to $235 million it’ll obviously come in at the lower end of that number maybe even could be $5 million better. Obviously, from the interest expense saved on what we bought back, because we in effect have bought back to date $100.5 million of the $250 million issue so we have retired 40% of that bond issues.

So we’ll be saving the interest expense on that throughout the year, but additionally the $225 to $235 million of interest expense that we had initially in our guidance included about $5 to $10 million of non-cash interest expense because of APB14 and having to in affect accrue a longer term more equivalent market rate.

That we had estimated was between $5 and $10 million and since we bought back, obviously, 40% of the issue that number is probably more or like $4 or $5 million of the issue. That number’s probably more like $4 million or $5 million. So the interest expense of $225 million to $235 million, it’ll probably come in a little below that guidance.

Shelley Gnall – Goldman Sachs

And then as we’re evaluating the amount of clearance in the interest coverage covenant, what I understand is we take the EBITDA number, so this would be for example, the 640 the 680 EBITDA guidance, we’re going to deduct the minority interest expense and add back stock option expense. I was wondering if you could give us your assumptions for these items, and maybe any other adjustments we need to make to EBITDA to get comparability.

Robert Farnham

That’s pretty close, Shelly. It’s pretty much the add back for the non-cash stock comp accrual is roughly the same as the minority interest deduction, so what you end up is pretty close to the reported GAAP number. There could be a few smaller adjustments.

Now what’s a little confusing probably, if somebody tried to back into it at the end of this year, it’s a little more difficult because we have to take into consideration discontinued operations. So for the year EBITDA was around $634 million, included in disc ops is about $50 million of EBITDA reduction and we have an add back for the stock comp and a couple of smaller items of about $25 million. So the 12 months trailing EBITDA number for covenant calculations is pretty close to $610 million.

And the benefit we’ll have in 2009 is basically there could be a couple of dollars come through in discontinued operations, but we do not plan on having any reductions in EBITDA from discontinued operations in 2009.

Operator

Your next question comes from Adam Feinstein – Barclays.

Adam Feinstein – Barclays Capital

I guess just a couple of things here. Could you just talk a little about mix? Some of the other companies have talked about their commercial volume as being weaker. If you’re not comfortable giving me a point on number could you just talk about the trend? Have you noticed a mix shift with the commercial volumes lagging the overall volumes?

Robert Farnham

Yes. A little bit, Adam. I think our commercial mix as a percent of total was down about a little over 1%, 1.2%, and the shift was largely to Medicare and Medicaid. Medicare and Medicaid was up 1.7%, commercial was down 1.2% and of course uninsured, as we already mentioned, was down 0.5%. That’s basically how it shook out for the quarter.

That was a little more shift than what we had seen the first three quarters, but we’re talking about really less than 1,000 admits on 77,000 for the quarter. Not a big mix shift, but it was there, yes.

Adam Feinstein – Barclays Capital

Gary, you were talking earlier about recruiting new doctors and it sounds like you guys had a really strong quarter in terms of doing that. I was just interested if you could talk about the other piece of that, which would be turnover. Have you done anything to manage the turnover with respect to the doctors?

Gary Newsome

Actually, Adam, that’s part of the whole process, and the structure and the discipline we put into the development process for physicians is to measure attrition in our medical staff and understand that, including exit interviews with these physicians as they leave our markets, to better understand the reasons why they’re leaving the market.

We know that we’ll always have some attrition. There are things we can do and the things we’ve done over the last year in terms of physician relationships, physician satisfaction, which is as strong today as it’s ever been in the company, will also help us in this process as we manage the attrition, as well as the recruitment side. We’re getting results.

Adam Feinstein – Barclays Capital

Just a final question here relates to CapEx. How are you guys going to going about looking at projects for this year? There was a newspaper article about deferring a new hospital you guys were in the process of building. Maybe if you can just comment in terms of how you’re prioritizing things and what we should anticipate.

Gary Newsome

Adam, appropriately we’re managing our resources as you see this year, our guidance for capital is down from our guidance from last year pretty consistent with 2008. But the reality is we’re not starting large projects and we’re looking at it as we go forward in 2009 when to appropriately address those larger projects.

What we will be doing is continue to acquire the equipment necessary as we develop our markets and recruit doctors, which we believe is an appropriate utilization of capital, especially in this environment. But by holding off on larger projects, large expansions or new hospitals, it will give us the ability to be more flexible on how we go about deploying our capital in 2009.

Operator

Your next question comes from John Ransom – Raymond James and Associates.

John Ransom – Raymond James

I had to jump off the call for a minute. Bob did you run through your covenant calculations? I’m sorry if I missed that.

Robert Farnham

No, I didn’t. I mentioned basically covenant EBITDA compared to GAAP EBITDA, but the requirement on our debt to EBITDA was 5.60 at December 31. We were at 5.28 and so that was about the same.

We had about 32 basis points of cushion there, about the same as it was in September. The interest coverage ratio went from 2.40 to 2.45 at December and we were actually at 2.7, which is a 25 basis point spread and the spread at September was 12 basis points, so the spread there on that ratio has improved.

John Ransom – Raymond James

And your debt to EBITDA essentially ratchets down about .05 each quarter is that right? So you would have to be at roughly 5.2 by the end of the year?

Robert Farnham

Ten basis points a quarter, yes.

John Ransom – Raymond James

So you’d have to be at, I’m sorry, so you’d have to be about 5.2 by the end of the year?

Robert Farnham

Yes.

John Ransom – Raymond James

And then secondly, I know this is maybe underscoring the obvious, but the $150 million you mentioned, that’s basically your proxy for free cash flow in 2009?

Robert Farnham

Yes.

John Ransom – Raymond James

And thirdly, could you give me your outlook for minority interest, I’m sorry, discontinued ops losses this year compared to last year and maybe go through that a little bit.

Robert Farnham

Sure. Well, for the year, I’ll just take the year. We had about $56 million you see on the year-to-date in the income statement, that’s an after tax number, and on a pre-tax basis that’s about $90 million. About half of that was the further write-down of one hospital that we closed in Mesquite. We had two hospitals there. We closed down one, so about half the $90 million pre-tax is a non-cash write-down of the book value there.

And we did take about $15 million there in the fourth quarter based on an appraisal we had. We did have some losses on that Mesquite Hospital mostly at the beginning of the year. Those were about $20 million that flowed through that number, and that’s the biggest portion of it.

There were some Novant losses. The physician practices that we sold or transferred to Novant was probably about $20 million there. So that’s pretty much most of the line items that went through there, but that’s pretty much that detail. And of course we don’t expect to have any more losses come through on the Novant physicians because those were transferred.

With regard to Mesquite, that has been written down basically to an appraisal, so I don’t think we’ll have anything else there as well. So as I was saying earlier, we don’t have anything in our 2009 plan for discontinued operations. So that won’t be the drag, at least not for covenant calculation purposes, in 2009 that it was in 2008.

John Ransom – Raymond James

And just lastly maybe we could get an update on North Carolina and that one hospital was it in Statesville that was underwater last year.

Gary Newsome

Actually it was Lewisburg, John, but we are continuing to work through some of the challenge there but from a quality standpoint, it’s doing very, very well. And as we continue to rebuild the volume there, we feel like it’s going to continue to be a successful venture for us in North Carolina.

Carolinas continue to be a strong player for us. Obviously the economy, like everywhere else, continues to be a challenge but I can tell you, even though we have headwind in the economy, we have a very challenged flu comparison to last year, and the fact that we have one less day in the quarter is a challenge for us.

It’s an uphill battle, but I can tell you the initiatives that we’ve put in place throughout the company, including North Carolina and all the other states, are baring results, which is excellent for us. We’re really excited about the prospects as we go forward.

Operator

Your next question comes from Darren Lehrih – Deutsche Bank.

Darren Lehrih – Deutsche Bank

A few things here, I guess starting with the emergency room initiatives that you spent a lot of time discussing. I guess I wanted to hear from you a little bit more about how you will measure your success there and I’m assuming it’s not based just on ER volumes, which were down a bit in the fourth quarter but more from throughput and converting to appropriate admission.

So maybe just help us think about that initiative in the context of some of the metrics you report and should we not expect to see ER room visit growth as you work through this or are you doing certain things that would turn away admissions, just help me think about that please.

Gary Newsome

Actually over time, this is Gary, over time we should see improvement in volumes of actual ER visits as we refine the process in the ER. And the reason for that is we’ve become very efficient, our length of stay will be lower than our competitors, our experience that we provide from the patient standpoint will be excellent and the family standpoint, so that will be a portal to our hospital to be a very positive experience so people will choose us over our competitors.

In the process, the things we measure, and I mentioned some of those, we measure the time components, from presentation and every component of it all the way through discharge, whether it be admission discharge or transfer.

And through that in those components, we also have triggers that from a clinical standpoint assist the clinicians in the process to identify biomarkers, which were askew in the patient process, which will help them in the diagnosis and appropriate treatment protocols for each individual patient.

And it also helps in the timing because as we have triage protocols and the process is started at triage, then it helps the physician and the nurses in the process to get the results back timely, which helps through the process. The bottom line, all of this will help drive appropriate admissions into our ER and that’s key to all of this.

Even with the lethargic possible growth and volume itself, what’s happening is we have patients now that historically in the company that have come to our ER’s, have been discharged prematurely, I might say have been transferred even though we might be able to attend to those patients.

And from that standpoint, we’re capturing those patients because the data gives us the ability to do that and it helps clinicians in the process. So even in a lethargic environment, in terms of volume growth in the ER, we can continue to perform well from an admissions standpoint.

Of course, that’s just one portal into our hospital but it’s clearly a very visible portal and to large extent, patients and family members will base their experience on as they come through the ER. So that gives us an opportunity.

Darren Lehrih – Deutsche Bank

And this is related to the ProMed upgrades. Was there any notable impact as a result of training and taking people offline out of the ER, was that at all a factor this quarter or do you expect it to be in the first quarter?

Gary Newsome

I’m not sure I understand the question.

Darren Lehrih – Deutsche Bank

So you’re upgrading ProMed?

Gary Newsome

Yes.

Darren Lehrih – Deutsche Bank

And you mentioned that there was training related to that upgrade, so I guess the question is will that have any impact on your ER volumes or ability to capture admissions through the ER as you work through that?

Gary Newsome

We have already experienced success in the appropriate admission process in the ER as a result of our focus. Once we begin measuring and putting attention to the measurement, just like anything else, anything you measure, improves and so we’re getting that.

We expect to get additional and continue to sustained performance out of that as we continue to deploy the tool in its full capacity as we continue to train everyone in the process including the nurses and the physicians, which is well underway. And in fact, we’ve had the first wave and we’re continuing to train because it’s a type of service line, especially from the ProMed standpoint where we have to continue to train and educate.

It’s not a one-time event but an ongoing process. So we’re getting results now and as we get the tool completely deployed, the training complete from the new tool and all the aspects and the abilities and capabilities of that tool, we’ll get additional results. But we’re already getting results, which is why we’re so positive about our results in the fourth quarter, why we’re so excited about 2009.

Darren Lehrih – Deutsche Bank

Let me just switch gears here to the cost side of things, and I think you mentioned that there were some adjustments that you did take. You obviously took the number of divisions down since you’re arrival, but I wanted to just hear from you about specific cost reduction actions maybe that you’ve made thus far, if there is a number you can share with us and how that might dovetail into your EBITDA guidance for 09?

Gary Newsome

I will share with you some of the key components of the cost side. First of all, I want to talk about the divisions going from eight to five. Really bringing the divisions back to the home base of the corporate office the division presidents where I have an opportunity to interact with them more frequently and we meet formally on a weekly basis, informally many times, gives me the opportunity to understand better the markets and to really have the face time with them as they continue to grow and develop in their roles.

Secondly, from a cost standpoint just overall, we’ve been really aggressive. We’ve adjusted some benefit components, which are real and measurable savings, which we are currently experiencing, which we did not have in the fourth quarter but we do have now. We’ve basically held merit increases to zero for 2009 and you can do the math based on that to see the impact that would have on us as we go forward. Those are two key components from the cost side.

There is other cost side initiatives as we’re managing compliance from our cost standpoint on our purchasing agreements. We look at all of our outside services, we look for synergies to be able to grow that or be able to stand the growth in the outside services and get savings where we can.

We’ve taken, for example, marketing from a very decentralized approach to a more centralized approach and that’s in its development stages. We had great savings in the fourth quarter from our initiatives in marketing. We are experiencing great savings as we come out strong in 2009.

And we’re going to have better marketing, measurable marketing that will be sustainable and be able to drive our business and be very scientific and organized about how we deploy it and be able to do it with much less cost. So those are some of the examples just in a nutshell.

Darren Lehrih – Deutsche Bank

My last question on the expense side is really just the SWV costs that you’re incurring from recruiting physicians, can you just give us a sense for how many or what portion you’re employing and whether you see that as a factor for SWV preventing it from maybe moving down as a percent in ‘09? And then my last question here, I promise, to Bob is working capital. Can you share with us what improvements you expect to make in working capital and if you could give us a range of cash from operations?

Gary Newsome

Basically from SWV and from a physician’s standpoint, comparative to some of our peers, we really don’t employ the numbers currently that some of our peers do, but as we get aggressive in our recruitment process, we will employ physicians and we will track physicians that are currently in market to an employment status appropriately after growing our market share.

I can tell you from a standpoint the revenues that we will generate and the volumes generated through that process will far outweigh any pressure it puts on SWV for the Company.

Robert Farnham

Our working capital did improve if you look at the end of 2008 versus 2007. I think working capital improved about $40 million. I think that as much as we talk about 2009, generally speaking, when you have an increase in revenue there’s probably about 5% or so, maybe 10% of that increase in revenue could be absorbed in working capital as far as cash flows go.

We did a pretty good job really with managing our working capital in 2008 and a lot of that has to do with our efforts on the receivable side. We were at 50 days at the end of this year, which is pretty good compared to the end of last year. But with regard to cash flow for the year, in 2008, we ended up at $425 million.

I’ve said all along through the year this year was benefited by some refunds in income taxes and we haven’t had to pay in as much this year as well. So there’s probably about $70 million that will not repeat itself in 2009.

I think probably looking at about $350 million of working capital, excuse me of cash flow from operations, $350 maybe $375 with CapEx in the mid-point of 4.5% of revenue would be about $200 million there. That’s basically going back to about $150 to $175 million of pre-cash flow which, as I said before, really would used to repay debt.

Operator

Your next question comes from Jason Gurda – Leerink Swan

Jason Gurda – Leerink Swan

Most of my questions have been addressed already, but, Gary, I was hoping to pick your brain for a moment. Over the last few years, Community Health has been able to grow earnings a little bit better than most of their peers in the industry. Any sense from you of how much of that is related to factors the company can control relative to just being located in good markets?

Gary Newsome

Community over the last several years has been an excellent performer. No question about it. They have a very disciplined process in recruitment. They’ve had, again, another outstanding year in recruitment which drives volumes. They’ve been steeped in the ProMed ER process and so they understand that process and continue to perform well. They probably still have opportunity there as well.

I think they do have some great markets, they had great markets before the Triad acquisition they have even better markets now. They have great properties out there, and probably as much as anything they have a very disciplines approach to the business. So they understand where the opportunities are and they take advantage of them.

Those are some of the things we’re deploying here at HMA as we go forward is a disciplined approach to some of the key fundamental issues of health care that haven’t changed and continue to do those well, then we’ll be successful.

Jason Gurda – Leerink Swan

Putting that in the context of where HMA’s markets are today relative to where they have been a few years ago. Clearly, some areas of the country were impacted a lot earlier from the economic downturn and the decline in the housing market, any sense of whether the rate of deterioration in some of those markets has slowed at all? Because I know it doesn’t line up completely with what’s going on nationally.

Gary Newsome

Are you talking specifically about Florida or?

Jason Gurda – Leerink Swan

I think Florida or any other large markets that may stick out that would be by themselves.

Gary Newsome

We have a large concentration in Florida, as well as Mississippi, and quite honestly those markets continue to perform well for us. As we go forward we continue to see, even though the unemployment is high in Florida and we’ve had the housing market issue, our facilities in Florida in aggregate are doing very, very well.

That’s part of our process and part of our focus in doing the right things and the discipline and the fundamentals of healthcare, and that’s true in Mississippi as well. We have a concentration in the Carolinas with our partner Novant and we’re recovering from some of the earlier challenges there, but we continue to recover and we’re doing well there.

Operator

Our last question comes from Albert Rice – Soleil-Pomeroy Research

Albert Rice – Soleil-Pomeroy Research

Just a couple of clean up questions here, the 600 doctors that you look to add, is that a net add, if not, what is the net add that you expect to have?

Gary Newsome

A.J., our goal is 600 net add for the companies so that means we are going to recruit actually more than that. We can do a better job as well as retaining those physicians we have in our markets.

Albert Rice – Soleil-Pomeroy Research

In the Q4 I guess salaries and benefits was up about 90 basis points year-to-year on a recorded base, I guess I would have thought some of that was physician employment contracts that you’re giving out, but it doesn’t sound like, from your comments earlier, if that’s as much it.

In an environment where the economy is weakening, I guess some of the benefits of some of the initiatives haven’t kicked in yet, but I would have thought you would be showing a little more favorable trend there year-to-year. Is there anything going on in the fourth quarter on that line item that was detracting?

Robert Farnham

I don’t think so, A.J. It was a lot of what we saw in the fourth quarter was the same as what we’d seen in the previous quarters where we had made a conscious decision at the beginning of the year to change our mix with regard to our nurses have more RN’s, which is obviously more expensive.

It’s pretty much a continuation of the trend we saw the first three quarters, but I can tell you that some of the reductions that Gary mentioned on the labor side that most of that came in late in the fourth quarter. That metric will improve you’ll see in the first quarter 2009.

Albert Rice – Soleil-Pomeroy Research

People have talked around what’s happening relative to the economy in your market, do you have a sense overall, do you think the aggregate across the portfolio, the unemployment rate that you’re experiencing is similar to the national average or worse or better?

Robert Farnham

It seems like overall we track about 0.5% higher than the national average for unemployment.

Gary Newsome

We’re about 7%, A.J.

Albert Rice – Soleil-Pomeroy Research

Just lastly here, I don’t think you’ve commented on it and maybe it’s hard to quantify specifically, we had obviously in the SCHIP bill passed and then the stimulus package and that had some provisions related to COBRA, coverage of children, Medicaid grants, estates, and IT, does any of that moved the needle for you in any meaningful way? Does the IT stuff for example also change your thinking on anything you’re doing in that area?

Gary Newsome

A.J., from the stimulus package, I’ll talk about the IT first, there is still a question mark really what that entails and how we take advantage of that going forward. I’m sure there’ll be some clarity on that as we go forward from an IT standpoint. I’m sure it will have some affect on our strategy as we go forward to the extent it makes sense for us as we deploy that.

From a standpoint of the other opportunities, obviously stimulus package to assists states from a Medicaid standpoint is positive for us as far as our outlook for 2009. It stabilizes that component of our business.

SCHIP obviously expanding the number of people that are covered under that program will be helpful for us and from a COBRA standpoint it’s still hard to measure for us really the effect that will have on us as we go forward. But there are some positive components there to stabilize, especially the states, as we go forward.

Operator

This concludes the question and answer portion of today’s call. I’ll not turn the call back to Mr. Merriweather for any additional or closing remarks.

John Merriweather

That’s going to do it for us here in Naples. We hope everybody has a great day and thanks for being on the call.

Operator

This concludes your conference call for today. You may now disconnect.

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Source: Health Management Associates Inc. Q4 2008 Earnings Call Transcript
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