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Executives

Adam Singer – Chairman and Chief Executive Officer

Jeffrey Taylor – President and Chief Operating Officer

Devra Shapiro – Chief Financial Officer

Analysts

Ralph Giacobbe – Credit Suisse

Arthur Henderson – Jefferies & Co.

Ryan Daniels – William Blair

Sudeep Singh – Deutsche Bank

Brooks O'Neil – Dougherty & Co.

IPC The Hospitalist, Inc. (IPCM) Q4 2008 Earnings Call March 2, 2009 5:00 PM ET

Operator

Welcome to the IPC The Hospitalist Company’s fourth quarter 2008 earnings conference call. (Operator Instructions). Now at this time for opening remarks and introductions, I would like to turn the conference over to Ms. Stephanie Carrington.

Stephanie Carrington

With us today from management are Adam Singer, M.D., Chairman and Chief Executive Officer, Jeff Taylor, President and Chief Operating Officer and Devra Shapiro, Chief Financial Officer.

I hope you have seen the press release announcing the earnings of IPC The Hospitalist Company for the fourth quarter of 2008. If you have not received a copy, please call Amy Glynn at 646-536-7023, and she will fax or email you a copy or a copy may be obtained from IPC's web site at www.hospitalist.com.

Certain statements and information in this conference call may be deemed forward-statements within the meaning of the Federal Private Securities and Litigation Reform Act of 1995. Forward-looking statements in this press release and earnings call may include but are not limited to those statements regarding projected operating results, revenues, earnings, and IPC's growth opportunities and strategies.

Forward-looking statements are often characterized by terminologies such as may, anticipate, will, expect, estimate, project, position, strategy and similar expressions. Although IPC believes that the expectations reflected in any of its forward-looking statements are reasonable based upon existing trends and information and IPC judgments as of today, actual results could differ materially from those projected or assumed based on a number of factors including those factors set forth in its annual report on Form 10-K under the heading risk factors and IPC's other filings with the SEC.

IPC's future financial condition and results of operations as well as any forward-looking statements are subject to inherent known and unknown risks and uncertainties. IPC does not intend and undertakes no obligation to update any forward-looking statements to reflect future events or circumstances.

With that, I will now turn the call over to Adam Singer, M.D., Chairman and Chief Executive Officer of IPC.

Adam Singer

Thank you everyone for joining us. We reported our fourth quarter and full year 2008 results today after the close of market. I will start by reviewing our recent highlights, and Devra will follow up with a review the financials, and then we’ll open up the call for questions.

I’d like to begin by saying that I’m very proud to be leading a group of over 650 of the highest quality physicians who care for some of the most seriously ill patients in this country. Our physicians reported approximately 2.8 million patient encounters last year, stretched across 170 practices and 18 states. We ended our first year as a public company continuing to show strong growth in both our revenue and our earnings. We increased revenue for each quarter of 2008 by at least 30% over the comparable prior year quarter and by 32% for the full year.

We are very pleased to once again report record top and bottom line results this quarter. For the fourth quarter of 2008, our hospitalists reported over 753,000 patient encounters, generating net revenue of approximately $68.3 million, which is up 30% from the same period of the prior year, driven largely by a 19% same market revenue growth. For the full year, we recorded $251.2 million in revenue, up 32% from the prior year.

We are very pleased with our ability to continue to grow topline revenue through both same market revenue growth and through acquisitions while at the same time demonstrating significant operating leverage. We continue to reduce our G&A as a percentage of revenue with a 210 basis point reduction. We generated $4.6 million in net income, or $0.28 per diluted share for the quarter, and $13.6 million or $0.88 per diluted share for the entire calendar year.

In 2008, we entered two new markets through acquisitions in New England and Southeast Florida and completed in-market acquisitions in our existing markets in Texas, Florida, Arizona, and Missouri. We continue to see a robust pipeline of deals which are in all stages of development, from early discussions to due diligence and all the way to deal documentation.

We have the cash on hand to continue to fund our acquisitions and are experiencing increased interest from privately owned practices that are attracted by the resources, the financial stability, and infrastructure that we uniquely provide.

We have executed on our 2008 hiring plan and have surpassed every one of our recruiting stats over the prior year including the number of physicians sourced, the number interviewed, and the number hired. We currently have over 1000 physicians working for IPC with a cadre of 659 fully employed physicians and over 400 who work on an as-needed or independent contractor basis.

In spite of the current macroeconomic issues that we all know about, we believe that we are well positioned to continue to grow the company both on a same market basis and by entering new markets through acquisitions. We have a strong balance sheet, with $37 million in cash, positive cash flow, and an untapped $30 million credit line. Less than 5% of our encounters come from elected inpatient stays. Additionally, our self-pay patients decreased to 7% of our business in 2008, down from 10% in 2007. In addition, our acquisition pipeline remains robust, and we continue to see growth potential in our same market areas.

Now looking at the provisions of President Obama’s proposed 2010 budget related to healthcare, we do not see any negative for hospitalist medicine. On the contrary, we believe many of the initiatives can benefit hospitalist medicine. Extension of coverage to uninsured patients will increase our reimbursements. Bonus payments to hospitals for meeting quality measures and efforts to reduce readmission rates will, in our view, create even more need for hospitalists. As a segment of healthcare that provides quality outcomes for reduced cost, we believe any restructuring of the healthcare system will recognize our contribution.

With that, I’d like to turn the call over to Devra.

Devra Shapiro

For the fourth quarter of 2008, total patient encounters increased 27% to 754,000 compared to 594,000 in the same period last year. Net revenue for the quarter was $68.3 million, an increase of $15.7 million or 30% from $52.6 million for the same quarter in 2007. Of this $15.7 million increase, $8.3 or 59% was attributable to same market area growth, and $6.4 million was attributable to revenue generated from completed acquisitions during 2007 and 2008.

Same market net revenue increased 19.4%. The change in same market net revenue was primarily the result of a 14.5% increase in patient encounters. Overall same market net patient revenue per encounter increased by 1.9%, primarily as a result of improvements in our billing processes and collections. The remainder of the increase was in revenue from hospital contracts.

Physician practice salaries, benefits, and other expenses for the quarter were $48.9 million or 71.5% of net revenue, compared to $36.9 million or 70.1% of net revenue for the prior year. Same-market area physician costs increased a total of $7.2 million, of which $5.8 million was from net new hires of required physicians in the same market area. The remained increased cost of $1.4 million was attributable to physician costs associated with new market acquisitions. Physician costs as a percentage of net revenue increased as a result of practices under development.

In each of the fourth quarters of 2008 and 2007, we recorded reductions of $1 million and $800,000 respectively in our clients and professional liability reserve. In each year, our final year-end actuarial loss projections were less than the interim actuarial loss projections for the year due to favorable trends and the ratio of claims to our number of encounters and improvements in the estimates of the ultimate cost per client.

General and administrative expenses increased $700,000 million or 6.3% to $12 million, compared to $11.3 million for the fourth quarter of 2007. The increase was the result of a combination of higher costs associated with being a public company, increased stock-compensation expense, and increased cost to support the continuing growth of our operations and our acquisitions, including addition of new regional offices to support our geographical expansion.

General and administrative expenses as a percentage of revenue declined to 17.5% for the fourth quarter of 2008 compared to 21.4% for the fourth quarter of 2007, as we continued to leverage those costs over a larger revenue base.

Income from operations increased $2.8 million or 69% to $6.9 million as compared to $4.1 million for the same period in the prior year. Our operating margin increased to 10% for the current quarter from 7.7% for the prior year.

The effective tax rate for the fourth quarter of 2008 was 32.2%, compared to 40% for the fourth quarter of 2007, excluding the impact of various tax benefits recorded in that quarter. The fourth quarter 2008 effective tax rate included a new state hiring tax credit of $500,000. Excluding the hiring tax credit, the 2008 effective tax rate would have been approximately 41%. The effective tax rate is different from the statutory US federal rate of 35% due primarily to state income taxes. We expect our future effective income tax rate to be approximately 40%.

Fourth quarter net income was $4.6 million or $0.28 per diluted share, compared to $2.8 million or $0.24 per diluted share for the fourth quarter of 2007. Our net income margins increased to 6.8% from 5.3% for the same period in the prior year.

For the year ended December 31, 2008, we reported net revenue of $251.2 million, an increase of 32%, from $190 million for 2007. Same market net revenue increased 20% year over year. General and administrative expenses decreased to 17.8% of net revenue compared to 19.9% for the prior year. Income from operations was $22.5 million, compared to $13.8 million for 2007, resulting in an operating margin of 9% for 2008 compared to 7.3% for 2007.

Net income for the year was $13.6 million, or $0.88 per diluted share, compared to a net loss of $900,000 or loss of $0.08 per diluted share in 2007. The loss in 2007 was due to the change in the fair value of preferred stock warrant liabilities.

Turning to our balance sheet, we ended the year with $37 million in cash. Our year-end cash position was impacted because we prepaid our entire 2009 malpractice premium in December and because there was a third pay period in December which was paid o the last day of the year.

Our day sales outstanding decreased to 60 as of 2008 year end, compared to 69 as of 2007 year end. This decrease reflects continued improvement in our billing processes and collection results.

Cash flow from operations for 2008 positive $14.4 million. Operating cash flow was approximately $2.1 million less than net income plus depreciation and stock-based compensation expense, primarily reflecting increases in AR and decreases in pre-paid expenses and accrued compensation.

We used $29.9 million to acquire 10 hospitalist practices and make earn-out payments attributable to practices acquired in prior years. Our cash position and positive cash flow form operations combined with our available borrowings under the credit facility of $30 million, which will be available until 2011 gives us sufficient capital to continue to fund our growth and our acquisition strategy.

We issued our 2009 guidance in the earnings release this afternoon. For the fully year 2009, we expect revenue to be in the range of $300 million to $305 million and earnings per diluted share to be in the range of $1.01 to $1.11. Please refer to our earnings release for more information about the various assumptions we used in developing our 2009 guidance.

With that, I will now turn the call back over to Adam.

Adam Singer

In summary, we’re very pleased with our 2008 performance and would like to thank the entire team for their hard work in making our first year as a public company such a success. With that, I’d like to now open the call up for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe – Credit Suisse

Can you maybe help us understanding a little bit more just in terms of the economy how it’s impacting your business maybe from either a patient perspective and also maybe how we should think about recruiting and retention of docs in this environment?

Adam Singer

I’ll try and take the first half of that and maybe have Jeff jump in on the second half. In general, the economy, as we perceive it, can impact us in two ways. One might be that there are less hospital admissions, and another could be increased unemployment and therefore less insured patients, and what we’re saying is, first only 5% of our business is really subjected to this elective admission idea, and most of the patients we take care of are extremely sick, and they’re really not electing to be there or not. In other words, the economy isn’t really going to impact whether they show up in the hospital or not, so we really aren’t seeing as best we can predict or even see once we’re in the hospital that there is a change relative to the economy in the patients that we take care of, and we’re not anticipate much of that going forward either.

In terms of insurance mix, as you can see from the script that we just went through, we actually last year saw a marked improvement in our insurance mix. We went from 10% uninsured patients in 2007 down to 7% in 2008. Now, a large part of that us getting better at the insurance identification of the patients we had, but it also has to do with a lot of effort of shifting our marketing and seeing more of our growth coming from those patients who are admitted to the hospital from other physicians rather than through the emergency rooms, so on either front, whether it’s patient volume or reimbursement, right now we’re not seeing tremendous impact in a negative way from the economy.

In terms of recruiting and physician retention, Jeff, do you want to comment on that?

Jeffrey Taylor

We did record ability to attract doctors this year, and we don’t know whether in a tough economy, a larger company, such as ourselves looks like a safer haven which may have helped us on the front-end. The one thing we did see on our backside on the turnover was an improvement or a reduction in the percentage of people who were relocating as one of the primary reasons for their exit from the company. Now, we’re not 100% certain that that’s related to the economy, but it was a fairly significant drop in relocation as a reason for termination, and we’re speculating that that could have been driven by difficulty in selling a house, etc.

Ralph Giacobbe – Credit Suisse

Do you have the turnover rates at all?

Jeffrey Taylor

We do, and it’s a mixed story. We did see reduction, as I said, from relocation, but we also saw a bit of a spike right at the end of the year, really in the last six weeks of the year, in our turnover which runs counter to that, and the final number at year end ticked up to 24% from the 21% we had experienced in 2007. That was concerning, and the first thing, of course, we did was look at is that a new trend that’s continuing into 2009, and through the first two months of this year, it has not. Our numbers were quite favorable through January and February, but we were tracking flat year to year turnover through roughly 10-1/2 months, and we had that blip, but as I said, it does seem to have been temporary because the first two months of this year have been fine.

Adam Singer

Other circumstances in that last six weeks, we had a couple of practices that we were shutting down, and we had one large hospital turnaround project that we were working on that contributed to the number of doctors leaving and increased that spike. In terms of going forward, we’re still anticipating the lower 20% to 21% as about the right rate for our turnover.

Ralph Giacobbe – Credit Suisse

Do you see anything from docs, like if they don’t have much volume in their office maybe wanting to do more of the hospital rounds? Is that notion even something to consider?

Jeffrey Taylor

I guess if you’re not a very busy primary care physician that would be a notion to consider, but we’re not actually seeing that as any significant trend, so it’s pretty hard once you’re a primary care physician who has given up the hospital to want to go back. You hear anecdotes here and there, but there’s certainly no trend like that that we’re noticing.

Ralph Giacobbe – Credit Suisse

For the ’09 guidance, pretty tight revenue range. 4Q topline came in a little bit light. Can you maybe just talk about the comfort level in that topline and maybe some of the reasons why 4Q maybe was a little bit softer?

Jeffrey Taylor

As Adman mentioned, we did shut down a couple of practices in the fourth quarter that were not profitable, so it didn’t have a negative impact on our bottomline, but it did have some impact to the topline, and we did have this bit of a turnover spike that I referred to, so our headcount was maybe a little bit lower than we had anticipated during that last month or two. It is a fairly tight range for our ’09 guidance, but we’re two months in already to ’09, and we’re feeling quite comfortable with that range.

Operator

Your next question comes from the line of Art Henderson with Jefferies & Co.

Arthur Henderson – Jefferies & Co.

Adam or Jeff, I note that in Q4 you guys characterized that volumes initially had seemed a bit soft, and it seemed like it recovered to what I recall you saying as a better level towards the end of the quarter. How are things looking so far in the first couple of months of 2009?

Jeffrey Taylor

We did pick up in December, which was reassuming, and those volumes have continued nicely thus far through the first two months, so we’re quite pleased with where our volumes have been.

Arthur Henderson – Jefferies & Co.

Adam, thanks for your comments around Obama’s budget. As you look ahead, obviously there’s another fairly dramatic planned physician cut that’s perhaps going to go into effect, I guess, in 2010, but can you give us your thoughts or at least what you’re hearing about ways in which to fix that situation permanently perhaps?

Adam Singer

I don’t know if I can really give much of a strong thought as to how it’s going to ultimately get fixed, but I’m very confident that there’s going to be a fix to that as part of this plan this year. Despite the obvious bad economic news we’re hearing in the macroeconomic level, everything you’re hearing and everything we’re hearing in the development of these plans is to move more money to primary care services, more money into preventative services, more money into quality improvement or pay-for-performance type initiatives. All of those things go right down the middle of what hospitalist medicine has come to symbolize. As you can see even from this year where we saw just over a 4% increase in Medicare reimbursement to our codes, that was a disproportionate increase relative to the total dollars into Medicare, and I think the powers that be politically are continuing to try and move more dollars to primary care services in order to attract more physicians to it, so I don’t know exactly how this is going to come out. I mean we’re hearing things like as part of this plan they’re moving more money to hospitals, particularly for quality improvement projects, and my guess is that part of this fix is going to be to see some of those dollars as part of joint projects that doctors are going to be doing with hospitals to see some of their reimbursement come from that on the quality side, but however this shakes out, I’m very confident we’re not going to see the drop relative to the old plan or law that’s in place and that we’ll probably see a significant improvement in primary care reimbursement going forward. The one thing I’ll say, Art, and I know you know this, is that the reimbursement under the Obama plan when he talked about we need to take more money away from home healthcare services or one area or another, that really doesn’t apply at all to hospitalist medicine. We’re reimbursed exactly the same way as all primary care physicians are in this country, and so there isn’t a sector problem that can happen with a new plan. You would basically have to say we’re not going to be paying for primary care services at the same level we’ve been before, and I just don’t see that happening.

Arthur Henderson – Jefferies & Co.

One last question, more of a housekeeping question. I noticed that the revenue per encounter of $90.59 dropped from the previous quarter. It looked like it was $91.28 in the previous quarter. Devra, is there anything that you could comment there on what might be happening?

Devra Shapiro

Revenue per encounter that we collect from patient has been going up quarter over quarter, so any change in the mix related to hospital contract revenue being part of that equation and being divided by the number of encounters. The hospital contract revenue is pretty much a fixed number, so as the number of encounters goes up, that creates a smaller number.

Operator

We go next to Ryan Daniels with William Blair

Ryan Daniels – William Blair

Just a couple of quick housekeeping questions upfront. First, Devra, do you have the payer mix that you ended up at? I know you gave the self-pay patients at 7%. Do you have the breakdown for the rest of the business?

Devra Shapiro

Yes, I do. For Medicare, it was 45% for the year, Medicaid 6%, insurance 42%, and the self-pay uninsured 7%.

Ryan Daniels – William Blair

A quick followup question if we think of your ’09 guidance, I know in the detailed press release, you indicated it’s somewhat predicated on a 4.6% increase in Medicare rates, do you assume in that that will translate over to your 42% of revenue of derived from other parties, i.e., that they’ll match those type of payments or are you just keeping that flat?

Devra Shapiro

No, we’re not assuming that that will increase. We’re keeping the third party payers flat.

Ryan Daniels – William Blair

What did you see in ’06 when you got the rate boost from Medicare? Were you able to push some of that through to the commercial payers, so you actually got a little bit better revenue per encounter there?

Devra Shapiro

Not really, no. The commercial payers if they do pay as a percentage of Medicare, it’s generally not tied to current year revenue. It’s generally tied to a prior year of Medicare rate, but most of the commercial payers have their own rate schedules, and we’ve not seen increases in those for a number of years.

Ryan Daniels – William Blair

I know in your guidance you also mentioned the FASB 141®. Would that have been significant to your G&A in 2008 given the ten deals you did? That’s obviously something that you guys will be expensing on a current basis as you incur the costs. Is that something that’s going to cause your earnings to deviate much next year or is that pretty small?

Devra Shapiro

Well, we can’t really compare it to prior years because you are required to book these liabilities before, so since we didn’t have to book them, we really didn’t calculate them till the end of the earn-out period, so I can’t really give you an impact. I’ll say that we are spending a lot of time and effort looking at each one of the deals and running different scenarios and trying to get as close as we can to what the ultimate payout will be.

Ryan Daniels – William Blair

Is it something you’d be able to break out in the future if you a larger deal that hits earnings a little bit? Because of that, is that something you can identify?

Devra Shapiro

Yes. It will be broken out in a separate line on the income statement.

Ryan Daniels – William Blair

Perfect. That’s what I was looking for. Adam, upfront you mentioned that the acquisition opportunities remain robust and perhaps are getting a little bit better. Can you talk about, and I think you mentioned some of the stability of a larger player, but maybe some of the other drivers you are hearing is you enter into these M&A conversations, and then a second part really for any of you, are you focusing more on one leg to the growth stool whether it be another health plan centric deal or another private practice deal, etc.? Any color there would be great.

Adam Singer

In terms of the acquisitions, I think that our acquisition pipeline and the amount of activity, I like to think that it’s because of all the reasons you would expect. It’s our infrastructure, the fact that we are well capitalized, our financial stability, our size, our ability to recruit. I think all those things are true, but I think the general economy question and creating some fear out there and their own financial stability, their inability to access credit are all drivers, but I don’t want to lose sight of the fact of why we went public in the first place which was to increase our exposure, to allow people to see transparently what we do, what our stability really is, and to attract a lot of what is the mom and pop industry here of hospitalist medicine to us because of the resources we have, and I think that’s what’s happened. We have increased our exposure. We are financially stable in a very rocky economy. We have an incredible infrastructure. There’s none surpassed in the industry, and we are now recruiting more physicians than anybody in the industry, and I just think that that’s bring more deals to us, one or more of all those variables. In terms of what we are targeting, Jeff, do you want to comment on that?

Jeffrey Taylor

I think our main target, Ryan, is the private practice model, like the core of our business. There simply aren’t that many targets in the health plan centric like the HOA deals because that’s a model that works in certain heavy managed care environments, so I would think that the majority and the sweet spot of the deals we’ll be doing going forward will be private practice model deals.

Adam Singer

On the non-deal side, I’ll tell you that our growth strategies have not changed. We are focused with our foot to the floor on same market growth strategies, the PCP level marketing, more hospital contracting, expanding into new facilities in existing markets with de novo practices. We really don’t differentiate between these buckets in terms of emphasis. We really hit all cylinders here.

Ryan Daniels – William Blair

With in regards to the first quarter, I know last year was a leap year, so you have one less treatment day, and given that you are pretty much for all intents and purposes a per diem biller, should we expect margins to be a little bit lower to start the year because of that? I know it’s not huge, but it is 1% plus in regards to patient days?

Devra Shapiro

Not really because our biggest cost is our payroll in this company, and that’s accrued on a per day basis, so it really matches the number of days in a period. There’s not that much true fixed cost that’s a monthly cost in our business, so I don’t really see that there is going to be an impact on margins from that.

Operator

Your next question comes from the line of Sudeep Singh with Deutsche Bank Securities.

Sudeep Singh – Deutsche Bank Securities

My first question has to do with the insurance reserve adjustment. Just curious as to the guidance that you have for 2009. Is an adjustment already built into those numbers for the full year?

Devra Shapiro

No. I haven’t assumed any adjustment for 2009. Our actuaries re-did the numbers at the end of the year, came up with these favorable results, and 2009 assumes that we will continue to have favorable results, but generally because of the way our bonus plan works, it doesn’t impact us on a go-forward basis.

Sudeep Singh – Deutsche Bank Securities

Just related to that based on your conversations with the actuaries and insurance carriers, can you just maybe comment on where you think we are in the cycle with regard to just malpractice?

Devra Shapiro

I think we continue to see year over year, I mean this is the second year now in a row that we’ve had favorable results. Our third party carrier looking forward to ’09, we have it in our 10-K has given us the first dollar coverage plan at very favorable rate. We see that this is continuing to be favorable with our experience and our risk management program. Looking out past into 2010, I’m not sure that I can really have any comment on what’s going to happen then.

Sudeep Singh – Deutsche Bank Securities

Just going back to the guidance, just curious to get your thoughts as to how much dilution or maybe margin expansion you’re building in from HOA.

Adam Singer

I’m not quite following you, Sudeep, on dilution, but in terms of margins that is an inherently lower margin business because of a higher regional overhead than our average region. Having said that, we do expect this year to have some margin expansion in that business because we are growing the topline of that business on the one hand, and at the same time we are proceeding with plans to utilize IPC link to replace some of those operating costs at the regional level, so I think through topline growth and some expense reduction, we will improve the margins in that business, but it will still be a higher cost business than our traditional business.

Devra Shapiro

I will add that as far as the ’09 guidance is concerned, we do not have a significant amount of margin improvement baked in to those numbers. There are initiatives that we’re working on, but we didn’t bake them into our numbers, so we do have an upside there.

Sudeep Singh – Deutsche Bank Securities

So then the high end of your guidance range doesn’t really contemplate meaningful improvement in malpractice?

Devra Shapiro

Not in the margins.

Sudeep Singh – Deutsche Bank Securities

It sounds like on the organic pricing/mix, in your prepared comments you said that you got about 1.2% from billing and collecting and then the remainder from hospital contracts. Is that right?

Devra Shapiro

1.9%, yes.

Sudeep Singh – Deutsche Bank Securities

That just seems a little high to me on the hospital contract side. Is it just the timing of when you go back to the hospitals to renegotiate payments? If you could just talk about what led to that increase in the quarter.

Devra Shapiro

There were new hospital contract programs that were put into place during the year, not really negotiating existing contracts but entering into new contracts. Jeff spoke about one contract that we have that we are in the process of building a program for a hospital that had their own program, they employ their own physicians, so that’s one example of it.

Sudeep Singh – Deutsche Bank Securities

Can you maybe just talk about what markets they would be in or maybe just give us a little bit of color? Is that something you want to roll out portfolio-wide or are you just trying to test it out in particular areas?

Adam Singer

Sudeep, this is sort of a unique situation for us, and I think it’s more of a one-off than anything else. I think we have done some restructuring with that one contract. As Devra said, we are signing new agreements, and we hope to see some upside in payments on renewals for some things coming up this year, but again that’s not a significant portion of our overall revenue.

Jeffrey Taylor

And I don’t think it’s a change in strategic direction. We’ve always had hospitals that we’ve entered in as members of the medical staff and then we have other hospitals that we have contracts to provide a variety of services too, and I think we will continue to see that going forward.

Sudeep Singh – Deutsche Bank Securities

Devra, is then subsidies still 5% of total revenues?

Devra Shapiro

Yes, for the year of 2008, it was 5%.

Operator

(Operator Instructions). Your next question comes from the line of Brooks O’Neil with Dougherty & Company.

Brooks O’Neil – Dougherty & Company

Usually there is a lot of talk about flu season in your business. Maybe you could talk about the experience you had with the flu in the fourth quarter and what you’ve seen so far in the first quarter.

Jeffery Taylor

What I can say is during the first quarter of this year, Adam and Devra have both been sick the entire quarter, so if we could spread that to the rest of the country, we would be fine. We have seen some apparent flu-related things starting to happen in some of markets, Texas, Arizona, Florida in January and February, but not much happened in 2008. There was a little activity in December, and I don’t know, Adam, if you have a different view, but I don’t think we’ve had anything approaching or robust flu season yet other than right here in this room.

Adam Singer

I agree. I think in our business obviously full hospitals with very sick patients we are going to get busier, but there are very few hospitals that we’re fully penetrated in, so we are always marketing and going deeper in these facilities, and whether they are full with flu patients or even if they are only 80% full, there are still lots of patients for us to go after, so we still at capacity and at the right productivity on a per man basis, and I think that’s what’s driving these numbers more than whether the hospital is more or less full because of flu.

Brooks O’Neil – Dougherty & Company

That’s great. Maybe you guys can just talk a little about what assumption you made about in-market growth for 2009. Clearly you’ve had very strong in-market growth over time. Do you think that will continue, and if so, in round numbers at about what rate?

Jeffery Taylor

We think we still have a lot of upside in our existing markets. We have a portfolio, some are more mature than other, but we think this high teens to 20% range even with the law of big numbers working against us is still sustainable for a while.

Brooks O’Neil – Dougherty & Company

That’s fantastic. You talked a little bit about HOA. Have other recent acquisitions performed about as you hoped and expected they would?

Jeffery Taylor

Yes. They have. We’ve been very lucky in that almost without exception these have performed just like we pro forma’d them.

Brooks O’Neil – Dougherty & Company

Devra, you mentioned the malpractice premium payment in the fourth quarter. It sounded like that might have been a little bit different approach this year relative to years past, and maybe you could just let us know if that is true and how much money you swung out of 2009 into 2008?

Devra Shapiro

No. We have been doing that for a number of years. The reason that I specifically mentioned it this year was the fact that the cash in our balance sheet took a little dip at year end. We had been reporting a higher cash balance throughout the year, so there is about $5 million that we prepaid right at the end of December, and again I just wanted to point out that $37 million is a little low cash position for us.

Operator

(Operator Instructions). We have a followup from Ryan Daniels with William Blair.

Ryan Daniels – William Blair

Devra, I think you highlighted this a minute ago, but the reduction of $1 million for the professional liability claims, that has a pretty muted impact on the bottomline? Is that correct because lot of that just gets passed through to the physicians? Is that a good way to think about that?

Devra Shapiro

No. We start those physician numbers at the beginning of the year, so to the extent that through the year we have positive or negative adjustments to that, there is no way we can go back and retroactively bake that into the physician numbers. As you know, in prior years before we were public, those numbers could have gone the other way, so what I’m saying though is for next year, it’s been baked into the physician numbers already. The physicians have seen a nice decrease in their malpractice premium in ’09.

Ryan Daniels – William Blair

In the fourth quarter, the recorded reduction of $1 million to that line item, does that drop right to the bottomline in the fourth quarter or is that bulk of that captured by physician panels so that IPC’s earnings don’t reflect an extra $1 million in pretext income?

Devra Shapiro

It’s a bottomline number for us. Like I said, there is no way to go back and retroactively give that back to the physicians for the year.

Operator

There appear to be no further questions at this time. I would like to turn the conference back to Mr. Singer for any additional or closing comments.

Adam Singer

Thank you very much everyone for listening in.

Operator

That does conclude today’s conference call. Again, we thank you for your participation, and you may disconnect at this time.

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Source: IPC The Hospitalist, Inc. Q4 2008 Earnings Call Transcript
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