Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John C. Merriwether - Vice President of Financial Relations

Gary D. Newsome - Chief Executive Officer, President and Director

Kelly E. Curry - Chief Financial Officer and Executive Vice President

Robert E. Farnham - Senior Vice President of Finance

Kerrin E. Gillespie - Executive Vice President of Operations Finance

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Colleen Lang - Lazard Capital Markets LLC, Research Division

Kevin Campbell - Avondale Partners, LLC, Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

John W. Ransom - Raymond James & Associates, Inc., Research Division

Health Management Associates Inc. (HMA) Preliminary Q1 2013 Results Conference April 10, 2013 9:00 AM ET

Operator

Good morning. My name is Sally, and I will be your conference operator today. At this time, I would like to welcome everyone to the Health Management Preliminary First Quarter 2013 Results Call. [Operator Instructions] Mr. John Merriwether, you may begin your conference.

John C. Merriwether

Thanks. Good morning, everyone. As Sally said, I'm John Merriwether, Vice President of Financial Relations for Health Management Associates. I'd like to welcome you to the Health Management's First Quarter 2013 Preliminary Results Conference Call.

Before we get started with the call, I'd like to read our disclosure statement, which can be found in its entirety in last night's press release which has been posted on our website at hma.com.

Please note that this call contains forward-looking statements that provide other than historical information, including statements regarding our goals, beliefs, strategies, future operating results and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in our annual report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission. Health Management undertakes no obligation to update or revise any forward-looking statement.

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

On the call with me this morning are President and Chief Executive Officer, Gary Newsome; Chief Financial Officer, Kelly Curry; Senior Vice President of Finance, Bob Farnham.

Gary D. Newsome

Good morning, everybody. This is Gary. As you know, last night we issued a press release reviewing our preliminary results for the first quarter ended March 31. While we are very early in our review of our operating and financial results for the first quarter, our preliminary results reflect a very challenging environment, one that will ultimately present opportunity but makes 2013 very much a transitional year. Since we are so early in our review, there are not many metrics to discuss in detail. I would like to talk to you about our payers and their impact on our observations and admissions, as well as our initiatives in light of the health care reform and a challenging operating environment.

We believe several factors contributed to our volume declines in the first quarter. Uninsured inpatient volume declines had some impact during the first quarter ended March 31, and same hospital uninsured admissions as a percentage of total same hospital admissions were down 70 basis points, at 5.9% as compared to 6.6% for the same period a year ago. However, an increase in observation stays was a significant contributor to the decline in same hospital admissions. Compared to the same quarter a year ago, overall observation stays for the first quarter increased 14.1%, and observation stays greater than 48 hours increased more than 40%. We believe that many of our nonurban hospitals, particularly in Florida, are experiencing increased pressure from all payers to put patients in observation status. The more urban markets began seeing this pressure 24 to 36 months ago as managed care payers sought out higher populations to maximize the impact more quickly. Over time, managed care payers have broadened their approach, and they are now reaching more nonurban markets like ours, especially in the Medicare and Medicaid advantage segments.

Additionally, an increased number of Medicare Advantage Plans are incentivizing physicians to minimize inpatient utilization for their patients. And we believe, since it is very difficult for physicians to change practice patterns based on the insurance coverage of their patients, their tendency to minimize inpatient utilization is more likely to affect all their patients, exaggerating the issue. We believe these trends impacted our observation stays and admissions in late 2012 and have continued to impact us thus far in 2013.

What's more, in our community, there is no doubt that the challenging economy continues to affect patient preference on seeking health care, in general, and hospital care, specifically. Our provision for doubtful accounts for the first quarter ended March 31 is estimated to be between 14% and 14.2% of net revenue before the provisions of doubtful accounts. This compares to 11.9% for the first quarter last year and 13.7% for the fourth quarter ended December 31, 2012.

Employment trends are still not back to prerecession levels in our markets. And those who are employed and ensured are seeing increases in health insurance costs and are continuing to exceed wage increases.

Businesses are also more frequently shifting these costs to employees through the use of high deductible plans, even further increasing out-of-pocket pressures. When these premium and deductible increases are combined with rising gas prices and additional payroll taxes, as happened in the first quarter, disposable income is affected, and health care needs take a backseat to basic living expenses. We expect that unemployment -- as employment improves, health exchanges are developed and implemented and Medicaid expansion occurs, we will see higher hospital utilization.

We believe that as a result of these factors, we did not see the ramp-up in our inpatient business that we historically see in the first quarter of the year, particularly in Florida. We normally prepare our hospitals for volume increases in the first quarter by adding staff, some of which is under contract for a specific time period, and this year was no different. We also invested resources to prepare for health reform and launch of the exchanges in January 2014. In response to the volume challenges we experience, we continue to adjust our expenses, including our staffing levels and skill mix, while continuing to meet the needs of those patients.

Given the continued trend for higher levels of observation stays, we undertook a number of initiatives. As mentioned previously, we have begun to negotiate for increased payment rates for observation stays, including retroactive reclassification from observation to inpatient status, and we haven't received payment in certain circumstances. In addition, we have significantly improved our management of observation patients by giving our medical staff’s additional tools and resources to assist them in their patient evaluation, and we believe this process will create better interaction between the ER physician, the medical staff, case manager, the attending physicians or admitting physicians. We believe the additional resources and tools will moderate the observation trends we have been experiencing by placing patients in the appropriate care status.

As you know, health care reform will continue to evolve. The Department of Health and Human Services anticipates that exchanges will be operating by January 2014. While the industry will likely see increases in utilization through expansion of Medicaid and the launch of the state exchanges, deficit reduction on the federal and state levels will continue to put pressure on payment rates per procedure going forward. In addition, reductions to Medicare DSH payments are scheduled to begin in October 1, 2013. As such, 2013, basically, is a transitional year not only to continue our existing initiatives but also to refine those initiatives, particularly in the areas of costs and expense that support of our clinical departments.

Most recently, in February, I mentioned 5 things under our developing strategies, the first being the development of center-led capabilities. We are moving forward in earnest on this endeavor. We have rightsized certain areas of the home office and added additional resources in the managed care and information technology areas. We believe we have unique opportunities to foster innovation in our IT area that will leverage technology directly to improve patient care. We are also developing regional service centers that will allow us to leverage our talent in a number of business office functions, including the billing and collections, insurance verification and scheduling, as well as other areas such as claims denials and RAC audit management. The regional service center structure will ultimately allow us to centralize a number of functions that will include, obviously, revenue cycle management for hospital and physicians and also, ultimately, certain accounts payable and payroll functions. We believe the expense we are incurring now will enhance revenue and reduce expense for the remainder of the year and beyond.

In addition to the initiatives that we've just mentioned under our new center-led capabilities theme, we are engaged in the following other activities relative to other strategic things that I've discussed in February. We're in the process of expanding our market-based competitive advantage team by partnering with the Ambulatory Surgery Centers of America for the acquisition and operating of ambulatory surgery centers to increase the density of our services in our communities. In addition, we executed a letter of intent to joint venture with SunCrest Health for the operation and future acquisition of home health agencies in our markets. We expect to continue to develop alternative models for products and services congruent with our emerging themes to differentiate our service offerings and ensure a market-based competitive advantage. There will be more to come in the near future on all these programs.

We are presently in discussion and expect to announce soon additional joint ventures and development related to noncore strategic theme. An exciting development to preview is our launch of Health Management-led management services to smaller hospitals in our market areas to assist them with the transition and operation of their hospitals under the Accountable Care Act requirements. We believe we have significant opportunities to develop agreements with, which will strategically benefit both partners. We are also in discussion with our new entities for increasing noncore joint ventures to develop further services to assist additional hospitals under the challenging landscape of reform. We also believe that expanding our footprint and increasing the density of our services we offer in and around our communities will attract additional volume. As such, our partnership and acquisition pipeline offers us another opportunity to continue our growth as we seek to partner with hospitals in and around our existing markets.

A great example of implementing this strategy can be found in our recently launched joint venture partnership with the 480-bed Bayfront Health System at St. Petersburg, Florida. We are very excited to have joined with Bayfront on April 1. Through this joint venture, Health Management now owns an 80% interest in Bayfront Medical Center and its related operations and has introduced the clinical affiliation with Shands HealthCare, part of the UF&Shands, the University of Florida Academic Health Center. The Bayfront Health, Education and Research Organization, an independent not-for-profit created and funded by proceeds from the new partnership, will retain 20% ownership in Bayfront. This partnership helps create a network of Health Management hospitals in West Central Florida. We have several existing hospitals within close proximity to St. Petersburg and Bayfront, and this new partnership will serve not only St. Petersburg area but also a regional hub for patients of our existing adjacent hospitals to receive more tertiary-type services.

Our partnership and acquisition pipeline remains very active, and we have several excellent opportunities currently under review and negotiation. We are hopeful that we'll have additional new development announcements to share with you over the course of the next several months.

As you can tell, there are many exciting opportunities ahead of us, and we are well on our way to being prepared for the implementation of the ACA and the launch of exchanges in January 2014. One thing that will not change while we develop and transition into these new initiatives will be our commitment to patient-focused health care delivery, fiscal discipline and partnership development.

With that, I'll turn the call over to Kelly.

Kelly E. Curry

Thanks, Gary. Good morning, everyone. As Gary mentioned in his comments, our less-than-expected volume for the ordinarily increased first quarter business in Florida left us with seasonal commitment that resulted in approximately $12 million to $13 million in fixed operating costs that cannot not be flexed until the beginning of April. This effect was compounded by the increases in deductibles and co-insurances affected with the start of the calendar year, coupled with the increased taxes and fuel costs. These effects resulted in a higher-than-expected bad debt expense of approximately $8 million to $10 million.

We had also embarked on our strategic plan for implementing necessary operational changes to be fully prepared for the onset of the ACA in January 2014. As a part of our overall strategy, we are implementing significant cost saving measures that were planned for this transitional year. These investments in the future include the development of fully integrated regional service centers that will reduce our back-office costs at the facility level across the company. This consolidation to obtain meaningful, marginal cost reductions is coupled with investments at the corporate level that, while increase cost initially, give us far-reaching economies in the future for the ACA implementation. These operational investments include our RT [ph] and center-led capabilities and our noncore diversification in adjacent health care delivery businesses. These operational investments of approximately $19 million to $22 million were essentially split between these 2 primary enhancements to our operating model. We believe we will reap approximately $90 million to $110 million in operational efficiencies over the remainder of the fiscal year.

In addition, we successfully amended our Term B credit agreement dated as of November 18, 2011. This will result in approximately $9 million to $10 million of interest savings in the remainder of the year. Based on the above, we have refined our objectives, reflecting the benefit of these operational improvements in the first quarter results.

As shown in the press release, the following items have been adjusted: adjusted admissions from minus 1% to plus 1%, to minus 3% to 0%; net revenue before bad debt from $7 billion to $7.2 billion adjusted to $6.8 billion to $7.0 billion; bad debt from 12.5% to 13.5%, to 14% to 15%; adjusted EBITDA from $978 million to $1.38 billion, to $978 million to $1.10 billion; interest expense from $275 million to $290 million, to $265 million to $280 million; and our earnings per share range from $0.86 to $1.01, to $0.86 to $0.95. The other items of our guidance remain unchanged.

With that, I'll turn the call back over to Gary.

Gary D. Newsome

Thanks, Kelly. Throughout the balance of 2013, I will share with you more specifically the plans and progress we are making on the emerging strategic themes, as we spoke about in February. To review, those emerging themes include leveraging our center-led capabilities, differentiating our product and service offerings, enhancing and broadening our superior clinical model, sharpening and sharing our market-based competitive advantage and exploring noncore and organic growth opportunities. These are challenging times, and challenging times require clear vision, leadership and extraordinary effort. I'm confident that our strategic review has narrowed our focus to the emerging strategies that we believe will best position us for success in the future and that we have the right leadership team to successfully navigate into an environment of reform. In fact, as a management team, we are certainly not thrilled with the first quarter results. But as we have the opportunity to speak later in the call, we feel very confident that the things we have in place and the things that are -- we are managing will provide us success in the future.

One thing I would like to mention, I think it's probably the most important, is the extraordinary efforts of our home office and hospital associates and our medical staffs to deliver the best possible care to our patients. I can't overstate how proud I am as I go out and visit these hospitals and rub shoulders with these outstanding associates, these people who are on the front line. They're outstanding in every possible way, and our success is really attributable to them.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Maybe just to drill down a little bit on the numbers and quantification that Kelly provided relative to the cost initiatives in getting ready for the ACA rollout. So the $19 million to $22 million of upfront costs, is that largely in this quarter, or is that over the course of the year?

Kelly E. Curry

No, that's what we expended in this quarter. We had intended to make those investments during our first quarter in order to begin reaping some of the benefits of this throughout this year, and so that was underway.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then the $90 million to $110 million of savings, is that something where those whatever -- I guess, maybe a little color on where that comes from? Is that personnel, is that other things? And have those decisions already been made, so it's a matter of just playing out? Or do you have to have additional things going -- go right for you to realize that? And is it sort of spread evenly over the remainder of the year? Or is it back-end loaded? A little color on that.

Gary D. Newsome

A.J., this is Gary. In fact, decisions have been made. No question about that. We've already implemented a significant portion of that. And yes, there are some staffing initiatives that's part of that. But as we look at that, we've had a significant rethink of our home office, where we strategically placed our resources that positions us for the future and have made some significant changes here at the home office, which have affected that, as well as throughout the hospitals. The key thing to realize is we've looked at the hospitals and we've done reductions. The clinical side will always be managed flex based on volumes. So -- but we've taken the effort, and a lot of this has to do with our, for example, building regional sales -- service centers and things of that nature. And these center-led capabilities have allowed us to, from a nonclinical standpoint, be able to take FTEs out of our hospitals.

Kelly E. Curry

And then it's about having -- partners talk a lot about our IT development. We are bringing more online our IT products for use, which are allowing us to develop efficiencies that we haven't had in the past that contribute to our processes, lowering our cost.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. All right. And then I know you guys have mentioned a number of things, all of which I understand, impacted volumes. The one thing that's striking that you didn't mention is just the natural tendency of people, whether they were doing the right thing or not before, to be more conservative when there's an investigation, 60 Minutes type of article -- media coverage. And your -- do you think that's having any impact on you at this point, and presumably, you'd cycle through that at some point? Just give me any flavor you have for that.

Gary D. Newsome

A.J., it's really difficult to measure the impact of that type of scrutiny. It's really difficult. I can tell you the couple hospitals that were specific in December that were mentioned in the media, we can say, yes, at those facilities, there was -- there were some very direct challenges as a result of that. The remainder is very difficult to tell. I can tell you, with a 14% increase overall in observation rates and the 40% increase in observation rates over 48 hours, we have significant opportunity, and we've recognized that. We saw that wave coming, and that's why we've added additional resources, tools and education, a very aggressive approach to getting the right information to the caregivers so that we can get appropriate disposition. As it stands today, we believe that we can truly enhance the quality of patient experience, the quality of the clinical experience if we get the patient in the right care setting. And we believe that based on these increases, that there are certainly opportunity to get patients in the correct setting because some are not today.

Kelly E. Curry

And it has several components, too. First off, there's an IT component that goes into that. And also, there is -- we've looked at new staffing models that we have tested to -- that improve care and, at the same time, improve efficiencies, which always reduce cost. And we have found some pretty significant ways to enhance our efficiencies through that process. And so all the pieces are coming together, along with building a center-led capability that is much more defined in our case management area by bringing in additional experts to help us refine our systems, which will get the information into the hands of the right people at the right time for the most effective and appropriate decision process.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And maybe I'll just do one last one here. On the health reform, you're doing -- there's a lot of moving parts that you're experiencing this year and things you're doing to position yourself. As you look at that opportunity, are you less optimistic now than you were a few months back? Or are you more optimistic about what it means to you? Any high-level comment that you can offer?

Kelly E. Curry

No, we're not less optimistic at all. We think, number one, first and foremost, A.J., that patients that we have treated in the past, where we have received no payment, will now be insured and we will be receiving payment. That can't be anything but good. What we do think is that there will be opportunities under health care reform for people -- for instance, there's 100% coverage under any of the plans for preventative care. People will go get that. And people, in going and getting preventative care, is going to reveal issues, and you can imagine the situation. I mean, "Doctor, I've had this place [ph] on my arm for 4 years now, and now I want to have it checked out." I mean, that type of situation. The Medicaid in expansion in Florida, which is certainly going to be super helpful to us; and in Mississippi, which, as you know, the status there, I think, that they've been moving in that direction and waiting to see what's fully going to happen in Tennessee. But apparently, these private types of partnerships, like Arkansas came up with, are finding some traction. So all of those things bode well for the 2014 implementation of the ACA.

Gary D. Newsome

A.J., I would just add, in our M&A activity, like the Bayfront acquisition, positions us well because we create density in certain marketplaces. That really helps us to be able to be more in the driver's seat going forward. And that's our strategy as we look at acquisitions going forward.

Operator

Your next question comes from the line of Gary Lieberman with Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Was the Bayfront JV in your initial guidance that you gave for the year?

Kelly E. Curry

Gary, we never -- our guidance is consolidated, but we do not include potential future acquisitions in that guidance. It does include it now because Bayfront is no longer a potential future acquisition.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. Can you give us some sense in terms of what it might add to revenue and EBITDA?

Kelly E. Curry

Well, it's typical Health Management acquisition in the sense that there's things that we have to do there to -- systems-wise and efficiencies-wise that are applicable to all of our hospitals, but it will have a similar ramp-up period. It is about a 2 25, 2 50 net revenue facility, so there is a good revenue base there. And also, it's going to allow us to create a center, as Gary mentioned, where we can treat patients that we were -- would have had to refer outside of our system in the past, particularly in the immediate market area. So there's a lot of synergies like that, that will develop and will benefit our process. But like all of our acquisitions, it takes us 4 years to ramp them up to our same-store type performance.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. Would it be safe to assume that, this year, it might contribute somewhere between $10 million and $20 million of EBITDA?

Kelly E. Curry

Like I said, we expect that over 4 years, it'll come up to our same-store margin.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. And then I guess one thing that you guys didn't specifically mention as being a headwind in the quarter was -- for volumes, was day count. A couple of other operators have stated that, that's a challenge. What are your thoughts there?

Gary D. Newsome

Well, absolutely. There's no question. We felt that, that was a given. That's probably 1%, 1.5% maybe of the volume decline in the quarter. Certainly, the way the holidays fell and the fact, the 1 less day in the quarter, no question that, that had an impact on it. That we -- that was outside of our control and we felt like we wanted to talk about things that we had more influence on in changing going forward.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. And then I guess on that point, you mentioned that you think there are opportunities to get patients into the right -- I guess, the right setting of care. How quickly do you think you can effect that change? Is that something you can get done in the second quarter, or does it take longer than that?

Gary D. Newsome

Just like any other item in a system our size, there are pockets of opportunity that we can think we can concentrate on. There are markets -- certain markets where we can take our resources, deploy them first there, which we're well into the process of doing, and be able to get results, say, the 20% that create 80% of the opportunity type scenario. And that's how we're focused on that today, and so we believe we can make changes.

Operator

Your next question comes the line of Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I just wanted to come back to the $90 million to $110 million of cost savings. Is that -- I just wanted to be clear. Is that in the EBIT -- that's the full amount that will be in the EBITDA for this year, or is that a run rate number that will be annualizing into 2014?

Kelly E. Curry

No, that's for the remaining of the fiscal year, Chris.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just to make sure, so would that have implied that without those savings, sort of apples-to-apples, the EBITDA would have been down roughly 10% relative to 2012 this year?

Kelly E. Curry

Well, whatever, I don't know that -- depending on what you use for your model. I don't know what your model is off the top of my head.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Well, I guess I'm just taking -- if I take the midpoint of your current guidance, roughly 9 94 [ph], and sort of subtract that to -- from last year, it looks like it's about a 10% decline. Is that fair?

Kelly E. Curry

Whatever the mathematics are. I mean, I'm not doing the math right now, but sure, fine.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just on the seasonal staffing, was there any change in sort of the mix of the seasonal staff? Did you move more this year towards travel versus per diem, or is it fairly consistent? And I guess that $12 million to $13 million, is that sort of the normal figure that's in the first quarter?

Kelly E. Curry

It's probably pretty typical. I don't know that I would take any -- whether they're per diem or whether they would happen to be travelers, your commitment is the same because they're not from the area.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then lastly, just on the observation visits, in terms of the actual sort of number, can you give us a sense for how the -- whether you want to give us actual numbers or just how they trended in 2012, just to give us a sense that were -- what the year-to-year trend will be for the balance of 2013, if that makes sense? So you're up 14.1 year-to-year in Q1. Is that sort of the level we should expect across 2013, or you expect that to normalize down to a much more manageable level?

Gary D. Newsome

We believe that, quite frankly, that the efforts that we have in place will moderate that throughout the year and get it more normalized. Obviously, our observation rates are much higher in certain markets than the national average. And we haven't talked specifically about what they are, but you know that we're not managing to a number. What we're managing to is getting the patients in the right care delivery setting from a quality and experience standpoint. And numbers will take care of themselves over time. But when you have outliers based on trends, the national standards, those certainly -- we need to look into that.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Sure. But I guess just to follow up on that. I guess, can you give us a sense for how the actual number would have changed from, call it, Q1 2012 to Q4 2012?

Kelly E. Curry

Well, let's see. Last year, our overall observations were up a little over 12%. In the fourth quarter, they were up 25%. So -- and as you can see, that's accelerated. What we see now is a -- through the clinical improvements that we're making, both in our IT and with our case management, center-led capability, as Gary was mentioning, we think we can bring our numbers more into line with what the averages have been in the past.

Operator

Your next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I just wanted to follow up on these cost savings numbers. I mean, I guess, Gary [ph], to your point, you were talking about some of these things back in February. So just want to understand, I guess, how to think about the investments that were made in Q1, and then the savings number today and why at least some of that wasn't put in the number. Did you accelerate spending? Or why is this now an offset when it wasn't kind of -- why wasn't it part of the original guidance?

Kelly E. Curry

Well, it was a part of the original guidance, but had we had our normal volume numbers, it wouldn't have been an issue. Of course, you know we don't give quarterly guidance.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. So then, as far as the delta in guidance, it sounded to me like you were saying Q1 -- because you missed Q1 expectations, I guess, on the Street, to your point, maybe that's your own internal numbers by about 10% [ph]. You took down the high end of the range by 5%. So I thought that part of this was we're going to offset a lot of this going forward and make it back up with some of these cost savings. You were saying that, that's not actually what's happening. You would assume these cost savings in your original guidance. So then how do we bridge that gap versus the miss in this quarter versus not really changing the annual guidance at more than a couple of cents [ph]? Yes, I mean, you have interest savings, but anything else?

Kelly E. Curry

Yes, I would separate the 2. Number one is, is that, as Gary mentioned, that from our normal operating skill set, I mean, I think we didn't forget how to run a hospital in 60 days, okay? That didn't happen. We had a situation in the quarter because of the expectation of increased volumes, that we were locked in to a certain cost level that became fixed. It's normally a variable and flexible cost. That is a cost which occurred. The things that we're doing, that we're investing, that are operational in nature for us to be able to be prepared for 2014 and beyond, are part of our transition year, which we included with our guidance and we were always planning on investing. And they do. We were expecting to reap financial benefits from them all along. Now some of the things that we've done is that, initially, when we were planning these things, we hadn't seen the kinds of increases then in our observation areas, et cetera, that we have experienced, so we've refined that. So it has additional benefit to us now, yes, but I would look at them separately in that regard.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. And then maybe for Gary. When you first came over to HMA, you put in a lot of these initiatives, you guys were showing better volume growth than the peers for a good couple of years after you joined. If you now look at your metrics versus the peers, you've been underperforming the average, and I think some of that has to do with your uninsured volumes coming down, some of that's a little bit of a urban versus nonurban demographic shifts. But that delta the last several quarters versus your average volume growth versus kind of the peer average volume growth has widened. I mean, when do you expect that inflection point to kind of happen and for your numbers to kind of come back towards what we'd see as kind of the group average volumes?

Gary D. Newsome

I think that's an appropriate question, Kevin. I think one thing I can't really opine on is really where the volumes are in the other peers' group hospitals will be going forward. There's no question that we've had a delta. It has accelerated somewhat over the last few quarters. I can tell you this from our baseline, where we are today, the things we have in place strategically, the resources we've put in the hands of clinical people and it continues to train, continue to develop that. We're going to see our -- this trend that we've experienced to moderate throughout the year. We feel confident about that. We feel confident that we can make those changes and see improvement in our volume, in our organization. Now what happens to the others, I'm not sure. But we are focused on -- laser-focused on getting the volume into our hospitals strategically. We're laser-focused on making sure that patients are getting the disposition in the appropriate care setting from a quality and service standpoint as appropriate. And we know for sure that our numbers are much higher than the national average in terms of, today, as we said, our observation rates. And for many, many years, we were very much at the average. And I'm going back many, many years, we were at the average. And now we're above the average, and we believe that creates opportunity for us to look at these outliers and to affect change there. We believe we can do it, so...

Operator

Your next question comes the line of Tom Gallucci with Lazard Capital Markets.

Colleen Lang - Lazard Capital Markets LLC, Research Division

This is Colleen Lang on for Tom. Kelly, just a quick question. On the Q4 call in mid-February, you guys said that volume for the first 6 weeks of the quarter was similar to Q4. So did the volume issue or observation visit problem just get materially worse as the quarter progressed into the second half of February and into March? And just as it relates to the observation as it's going forward, how quickly do you think you can see a benefit from the initiatives you have put in place to better manage the observation visit issue?

Kelly E. Curry

In reality, January looked very much like the trend we've seen. And in February and March, we're very accelerated on the negative side in terms of this. It was very much unique. January, it was as expected, quite frankly, and then February and March changed. I can tell you this. We feel very confident about it. Nine days does not make a trend in a quarter, but we've had a great improvement in April already in terms of the volumes. We never really haven't historically talked much about current quarter, but I can tell you we can't trend a quarter based on 9 days, but the reality is, is that we're seeing some results. And the other part of that is, Colleen, that we were planning, as we've said before, we've been working on our IT systems, we believe we have some cutting-edge technology in this arena. We are rolling out that technology, and that as we roll it out across our company, it ties in closely with giving the tools to our case management people that they need to deal with these issues. So as we roll that out, we're going to get better and better impacts. So yes, we think we can realize with -- commensurate with our rollouts, some significant change in our management for the appropriateness of the observation patients.

Colleen Lang - Lazard Capital Markets LLC, Research Division

Okay, great. And then just a follow-up. On the $90 million to $110 million of operational savings, is that pure upside from here, or are there additional costs needed? It just seems like if you spend around $20 million this quarter to get to $100 million at the midpoint, it seems like a fairly big return. Did you have any costs incurred in 2012?

Kelly E. Curry

Well, we did our spending to bring things to a place of operational execution in the first quarter, yes. I thought you were going to suggest if we got a 5x return for a $20 million spend, we should spend more. But we've got our investment behind us now operationally.

Operator

Your next question comes from the line of Kevin Campbell with Avondale Partners.

Kevin Campbell - Avondale Partners, LLC, Research Division

So on the $90 million to $110 million, that's obviously for the last 3 quarters of this year. What are the annual savings? Do we just -- is that -- and how is that spread out over the course of the year? I think A.J. asked that, but I'm not sure we got a specific answer for that.

Kelly E. Curry

Okay, he did. It will be -- we'll realize more of it in the – starting in the very end of the second quarter through the third and fourth quarters. But we will pick up some benefit in the second quarter as well.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. And then when we think about next year and sort of the annualized impact, obviously, it sounds like it's more than just dividing that by 75%. It's maybe a little bit higher than that.

Kelly E. Curry

Well, I'm not -- I'm, frankly, not prepared to do anything other than divide by 75%, I guess, but -- right now. But we do believe that these -- that what we're doing -- and this is not -- it's not that we're done. We will be continuing to enhance our efficiencies and processes because that's what's required to continue to successfully respond to health care reform.

Kevin Campbell - Avondale Partners, LLC, Research Division

Can you maybe give us a little bit more specifics about the various costs that are being cut the debt on [ph] and where they're coming from on the operating expenses, the salaries and benefits or other operating expenses and just maybe a little bit more detail after that?

Kelly E. Curry

Kevin, there are -- as you gain efficiencies, it does affect the SWB line, but it's also going to affect other areas as well. We have -- and as we've said in the past, Bob has talked about quite a bit over various times about, we're not done with our initiatives in our supply management area. We have a lot of opportunities there still to pursue. We continue to get better and better information because as we improve our systems, we get better information and know more about what we should be doing. And we're continuing to capitalize on those things. He's done a great job in that area.

Kevin Campbell - Avondale Partners, LLC, Research Division

So it's going to be really across the expense structure?

Kelly E. Curry

Yes.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. And just separately on a couple different issues. I mean, have you guys, at this point, now we're a couple months past your last conference call, any more negotiations with exchange or with insurance companies on exchange rates? I'd be curious to get your view on the Arkansas plan as well.

Kelly E. Curry

Well, we like the -- to the first part of your question, no, there are still no exchanges to negotiate with in any of our existing states. They're still under development. But as we've said in the past, we fully expect to get our managed contract rates. And we do believe also that the Arizona approach is very innovative. We think others -- I'm sorry, Arkansas, momentary senior moment. But there are other states that are looking at similar models. It looks like the government will have a -- is amenable to modifications to that. And that's -- something like that, as opposed to no implementation of the ACA, is definitely more beneficial to us.

Kevin Campbell - Avondale Partners, LLC, Research Division

Is it more beneficial than just having traditional Medicaid expansion to do it the way Arkansas has proposed? Or is it...

Kelly E. Curry

Well, we don't know the answer to that yet. We don't know the answer to that yet.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. And then I'll ask you one last question. I think the President's budget is coming out this morning, and what we've heard is there may be some -- he may bring back the whole bad debt reduction sort of proposal, and I'm curious what your view is on that. And is that meaningful at all for your business if they were to reduce?

Kelly E. Curry

I'm sure you watch all the CNBC programs that I watch. I think that they had representatives of both political parties on TV. They both have said they didn't think it was going anywhere, to summarize, the total budget, in terms of what -- because of the issue concerning cuts versus revenues.

Kevin Campbell - Avondale Partners, LLC, Research Division

Right. Is that proposal, though, in general, ignoring the fact that the budget, in general, is probably dead on arrival? But the idea of cutting the bad debt, obviously, that's a net negative. But I mean, for you, is that material at all?

Kelly E. Curry

Well, until you know what it is, you can't answer that question. But I mean, I think we live in a world where we're going to be constantly facing pressures. As Gary mentioned in his comments, that there's going to be more and more people that are covered under programs, but there's going to be greater pressure on the payment portion of that. And that's all about all the things that we're doing, the investments that we have made that we discussed earlier on this call in terms of preparing for the ACA that will generate benefits for us. And in this environment, when you change the environment, it creates opportunities where you continue to refine because the -- just by virtue, the fact that we're able to improve our efficiencies in preparation to gain a $90 million to $110 million benefit.

Operator

Your next question comes the line of Whit Mayo with Robert Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

On a kind of completely different topic, is there any movement with Mississippi Medicaid? And when do you expect to get your one-time payment adjustment from the state? And just curious if you, in fact, booked that in the first quarter.

Kelly E. Curry

Okay. We expect to get the first quarter -- I mean, the fourth quarter, excuse me, catch-up, which we haven't gotten yet. We would expect to receive that before the end of their fiscal year, which would be June 30. In addition, we expect them to come out with a final rule regarding Medicaid outpatient before June 30 as well. As of right now, I can't tell you precisely what that outcome will be. We still don't know, and we don't know the date. And I'm supposing that they will come to a conclusion by June 30. They have told us that they expect to come to a conclusion by the end of the state's fiscal year.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. Do you have a sense of what that catch-up payment, what it will be, how much?

Kelly E. Curry

Not -- no, not -- I really don't know because it involves the entire state. They have to crunch numbers for every single hospital, and then that's going to be refined. So we're just not in a position to really opine on that at this stage. But as soon as we get some information, we'd be happy to do that.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. I might follow up with you guys on that later. Just I think maybe one other question is I think in the prepared comments, you mentioned several MA plans, incentivizing docs to lower some of the admission rates. Just any color on that, any particular market? I'm just -- I guess I'm really curious, what's different about that behavior today versus a year ago?

Gary D. Newsome

Oh, it's much more aggressive today than it was a year ago with the -- what we're seeing, and it's very market-specific, and it's not across the whole system. It's very market-specific. We've seen significant changes of physicians' patterns and behaviors in terms of admissions because of contractual relationships with payers, and in our opinion, not in the best interest necessarily of the patient. And from that standpoint, that's accelerated. I think in our markets with -- that we're seeing this more aggressively today because I think -- we think it occurred, and we have evidence to suggest it occurred in the more urban markets a year or 2, maybe 3 years back. But as they've looked for a far field with more opportunity to reduce their costs, there's been some -- certainly some -- I think the reality is that the health plans encourage the doctors specifically to put patients to observations. And when they do that, it put dollars directly into the physician's pocket. And somehow, that just doesn't seem right.

Kelly E. Curry

And you get some ridiculous situations, which Gary has mentioned before, but we've had situations where physicians wanted to admit patients to ICU as observation, things like that.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Yes. What percent of your -- not revenue, but what percent of your volume now is Medicare Advantage? And where was it a year or 2 ago? I guess, I'm trying to get a sense of how prevalent MA is in your markets versus 1, 2 or 3 years ago.

Kelly E. Curry

Well, we have seen a transition from traditional fee-for-service, so within payer class, to Medicare Advantage. It's growing, particularly in Florida, rapidly. I don't know the figures right off the top of my head right at this moment though.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And maybe sort of one last one here. Just the $8 million to $10 million of higher bad debt, can you just flush that out for us a little bit? Is that mix shift, collection rates on balance after deteriorating? Just...

Kelly E. Curry

Yes, what it is, it is where it's primarily coming from, and we did have some increased no-pay business in our ERs in the first quarter, okay. We did have some of that. But the primary issue that we're being faced with is that, in the past, we saw -- we collected 50%, 55% of deductibles and cos. I think the more urban providers kind of talked about a 45% to 50% range. We're now dropping back into more along the lines, it looks like, of what they've been seeing, and we think that's attributable, frankly, to -- as Gary mentioned, deductibles and cos increasing faster than wages. Also, the tax increases, et cetera, I mean, those are real to folks that are thinking health care now on the same token too. And as the year goes on and those deductibles get paid down, we think it will have less of an effect, so we don't think it's across the year flat effect. But we did feel that we needed to up our bad debt guidance given what we were seeing.

Robert E. Farnham

This is Bob. What I'd also tell you, while we did see higher incremental self-pay and ER and outpatient, and as Kelly talked about, being impacted by higher -- or changes in plan design and the economy, that the 14% to 14.2% bad debt expense that we previewed, it's higher than it would've been because of the volume and the net revenue increase we didn't see. So I guess in other words, if our same hospital net revenue had been up the 4.5% to 5% that we have seen over the last 6 to 8 quarters, the bad debt expense would have been much closer to what we saw in the fourth quarter. Instead of being up the 30 basis points to 50 basis points we've previewed, it would've been up maybe 10, 20 basis points. So I agree with what Kelly is saying, as volumes improve and we see a higher net revenue through the balance of the year, the bad debt expense should stay at the low end of the 14% to 14% -- or the 14% to 15% objective that we have now.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Darren Lehrich - Deutsche Bank AG, Research Division

A couple things here. I guess the first is just in terms of the volume commentary for the quarter, you spoke a lot about the observations and just the pressure on inpatient. Can you give us any flavor for surgical trends and whether you saw a shift at all in the trajectory of growth for surgeries?

Robert E. Farnham

This is Bob again. We saw an impact both on the inpatient and outpatient side from managed care companies and physicians trying to impact utilization. So I don't have the exact numbers yet, but surgeries were down, both on the inpatient and the outpatient side. So certainly, being down on the inpatient -- or on the outpatient side this quarter is a trend that we hadn't seen in the past. But again, looking at April, as Gary said earlier, 9 days doesn't make the quarter, but we are seeing improvements on the surgery side, as well as overall admissions.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. That's helpful. And then if I could maybe just ask Gary just around the CBO, and obviously, you've got some big savings attached to it. So my question is, in terms of how you've been able to pilot this in markets where you have good concentration, can you just talk about what kind of savings you experienced and I guess how you built up to that number? I'm assuming it's because you've piloted it in some parts of your portfolio.

Gary D. Newsome

Part of the -- I'll let Kelly or Bob talk about the financial side of this. But building these regional service centers, preliminarily billing collection, scheduling, all those type of things and looking further into opportunities in payroll and other functions. There's a couple of byproducts we get that are excellent. We get better execution, higher-quality performance across the board. We get better collection rates. We -- there's a lot of things that are associated that was better. And we do it at lower costs overall. And in reality, this is part of the whole center-led strategy that we have. This is just particularly one area that we're focusing on this. And it truly will, from a standpoint, give us a better product, better execution, better performance. We'll be able to hire and retain higher-level executives at this level of the organization versus having individual people in markets that may not have the training or the background to be able to perform, so...

Kelly E. Curry

It's also -- I would say it's not a -- we've had the CBO concept that we've reaped the savings from. The RSC concept is different in this regard yet because with that type of operation, we're talking about expanding it to areas outside of business office management. And that includes things like how we go about preparing accounts for billing, how we do things like how we process payroll, how we take care of AP. The same kind of synergies that we got in the CBO side, we can get elsewhere. And we needed the systems to be able to translate that to the other areas. So part of our investment has been into getting those systems ready to go so that we could reap the cost benefits of the RSC concept. And so it's sort of like banks back when I used to be an auditor. I used to audit banks, and all banks had -- it didn't matter how many branches they had. Each branch had a proof department, and they did a statement of condition every day or balance the books every day. Well, that hasn't been that way for 25 years. They do that all in a central center now for all the branches. So you can imagine the cost savings that, that would generate. And we have the same opportunity.

Darren Lehrich - Deutsche Bank AG, Research Division

Last thing here. I guess just hoping you could elaborate a little bit more on the reimbursement for these observations and sort of where you stand now. I guess we've been thinking, in terms of the Medicare shortfall, for the shift from short-stay inpatients to observation. Can you just talk about the delta maybe in terms of the dollars that you lose if anything in that shift across your entire business? And just help us think about that.

Kelly E. Curry

Well, I mean, you're talking about a payment that's less than 1/5 or so of what you get of an inpatient stay. So that has a dramatic impact because, essentially, you got to provide the same level of clinical care. The day -- it used to be way back when, that when you talk about an observation stay, you were talking about a patient that was in an ER exam room, okay. But now with the increase in observations and then the condition of these patients, they're essentially going to floors, where they're being treated like any other inpatient, so the cost level is much higher. That's why we've negotiated with our managed care agreements as they come up and increased observation payment in light of that and also retroactivity when that classification changes.

Gary D. Newsome

Darren, this is Gary Newsome. I think one of the things that I just -- what you heard, we've talked about the variation between a short-stay Medicare patient versus an observation. You have to realize here, these are unnecessary short-stay observations. These are 48 hours and beyond, 72 hours, these are not short stays. Some of these observations rival the average length of stay of patients just generally in the hospital. So there truly is -- from a quality and service aspect for the patient, truly not fair to them and not appropriate, in some cases.

Kelly E. Curry

And the other real negative aspect of that is that they're discharged and they -- and because they are, they have been sick. They get discharged to aftercare, and then they find out that because they're an observation, they're not covered by Medicare. And so the families pay for the $10,000 bill or something for the aftercare program. And that is not the way the system was intended to operate, and that, in essence, what's happening is, is that those funds are being taken out of the benefit to the patient and transferred as s cost savings to the insurer.

Darren Lehrich - Deutsche Bank AG, Research Division

Understood. But just to clarify one last thing here, the SunCrest Home Health, I guess, affiliation, can you just confirm, you didn't acquire that entity?

Kelly E. Curry

No.

Darren Lehrich - Deutsche Bank AG, Research Division

You're just partnering with them in your local markets, right?

Kelly E. Curry

Yes, along the same line as the other things that we've done. I mean, we've operated home health agencies, but we're acute care operators. They're experts in home health agency, and we can learn from them.

Operator

Your next question comes from the line of Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

A couple things here. First, what was the internal EBITDA target for Q1 that you embedded in the original 2013 guidance?

Kelly E. Curry

A different number than yours, but that's...

Justin Lake - JP Morgan Chase & Co, Research Division

Yes, that's kind of what I was figuring. I think the Street might have probably been a little more optimistic than the internal numbers. So can you help us bridge that?

Kelly E. Curry

Well actually, we don't talk about specific earnings guidance for a quarter, Justin, so no. I really couldn't talk specific color on that. But the Meaningful Use is one factor that does play in that, and we're still finalizing and I think we're going to end up with a few less dollars in Meaningful Use maybe than what we have projected. But I don't know for sure off the top of my head. That's a difficult number to get your arms around because of the requirements for how your record it. It's different than cash.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. We're trying to figure out, guys, just how far -- I mean, you missed the Street number by $50 million, $60 million in EBITDA on the first quarter, and you changed the midpoint by 14. So we're just -- I'm just trying to get some color and try to -- so that we can understand how much of this is you expect in the back 3 quarters of the year to improve versus just the Street mis-modeling. But it sounds like you're saying the Street mis-modeled. Can you help us...

Kelly E. Curry

Well, I think if you take...

Justin Lake - JP Morgan Chase & Co, Research Division

In terms of understanding?

Kelly E. Curry

Yes, I understand what you're saying. I think if you take the information that we've provided to you and you overlay that on a projection through the end of the year with the modifications that we made to that projections, I think that'll put you in range of -- which is the intent of our objectives, of course -- this will put you in a range of what we expect to take place through the balance of the year.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. So then if I walk through some of the pieces, you said $8 million to $10 million worse bad debt than you expected, right? Then you have the volume?

Kelly E. Curry

Quarter? Yes.

Justin Lake - JP Morgan Chase & Co, Research Division

Can you give us an idea of how much the volume hurt you in the quarter in terms of how far off the EBITDA was on volume?

Kelly E. Curry

Well, that's kind of a -- that's a difficult calculation for anybody to make per se. What we did say was, is that our extraordinary operating cost as a result of our commitments was $12 million to $13 million.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. Maybe I can just go back to the $90 million to $110 million of savings. Was that in the original guidance?

Kelly E. Curry

We had always anticipated making our investments operating-wise and our strategies, as Gary had discussed in the past about how we were preparing for the ACA. So we expected to have benefit from those strategies. We did not know as we've continued to develop those strategies, as I've mentioned earlier, as we continue to develop our IT processes and we continue to experiment with our clinical models of staffing, where we've tested different models with our clinical people, we've gotten better efficiencies than we expected, so yes and no.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. Can you tell us the delta then? So how much was in guidance? So if you say $100 million is in guidance now, how much was in guidance originally? Was it $50 million or $30 million or $70 million? Can you give us some idea there?

Kerrin E. Gillespie

What I can say is -- this is Kerrin -- is that the guidance that we have out there reflects what we think will take place on the year.

Kelly E. Curry

I guess remember, too, that the first quarter, there were a number of cost commitments that we made with regard to staffing that will not continue. There were some cost-saving initiatives that were planned in the original guidance. And I can tell you that based on the results for the first quarter, we've doubled down on some of our initiatives in some areas in the hospitals, as Gary was saying, predominantly in the nonclinical areas, although clinical areas will always be adjusted based on volume and acuity. We talked about being able to better manage our observations. Gary talked about that. And the observation policy and the tools would be rolled out. We do expect some volume pickup from the first quarter levels, and early indications are, in April, we've seen that. And the Bayfront -- Bayfront is an opportunity for us as well, and that will progress through the first year of acquisition, like any other acquisition we've had. So there's some upside on EBITDA that the Bayfront will chip in, probably not on EPS because of fixed costs. But on the EPS line, we did talk about repricing our Term B debt, and that should benefit us by $0.01 each quarter through the balance of the year. So there's just a number of things altogether that we're going to be working on. It's hard to assign a dollar value to some of these individually, but in aggregate, we have a lot of things to work on that are going to continue to benefit us through the balance of the year and certainly, into 2014. And so we very much view 2013 as a transitional year, and we've got a lot of work to do, and we're looking forward to it.

Justin Lake - JP Morgan Chase & Co, Research Division

All right. Let me ask one more question and I'll jump off. And you mentioned these health plans, Medicare Advantage, are moving -- are encouraging doctors or incentivizing doctors to move to observation status. Are these capitated physicians? Or are they just paying them some kind of bonus to do that? What are you hearing in the local market?

Robert E. Farnham

Kerrin is here as well. He can speak to as well that -- but what Gary was trying to say earlier, some of these managed care plans, if you are the carrot or the stick. The stick is that the physicians will get letters from the managed care payers saying that their inpatient utilization is higher than their peer group, and they're evaluating that in terms of the panels that they're on. And the stick is -- the carrot, rather, is what Gary was also referring to earlier. And Kerrin, did you want to say something?

Kerrin E. Gillespie

As they -- what they do is that as they develop their statistics for utilization and they get change in physician behavior, that drops the average, and they use that statistic in order to drive down those that are above the average. So it's a cost management technique that they're engaged in.

Gary D. Newsome

And Justin, you know that the managed care side of the business a lot better than most. But one of the things that you'll know is that there's 2 things the health plans do to affect physician behavior. The first one is that they set them up in risk pools, right. And even if they're not capitated, they do set up risk pools that associate the business that the physician performs or the referrals that the physician makes to various other types of services, whether are other outpatient services, laboratory services, pharmaceutical utilization, as well as hospital inpatient services. One thing we've noticed as we've talked to some of these physicians is, is that the health plans are very, very overt about telling them that if they place the most of their patients in observation status, that hospital inpatient risk pool will not be as high from a cost perspective, and it will give the doctor more money out of that risk pool. So that's the carrot approach they're using. And Bob talked about the stick, where they actually will use utilization stats and tell doctors that they are -- if they are utilizing hospital inpatient services at a higher rate than the -- what their averages are, then they will approach them with a -- they'll send a letter to them telling them that they have the risk of being [indiscernible]. So you have both of those issues ongoing.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. Is there something you're going to do from a contracting perspective? I mean [indiscernible] contracted you to send people to the hospital. I mean, especially when they're going into 2-day stays on observation visits. Is there something you're going to do in the rural markets, for instance, where they have nowhere else to go, to say, look if they're going to be there for more than a day -- if it's more than 24 hours, you're going to have to pay it back, so we're not going to sign a contract with you? What's going to be your response to this?

Robert E. Farnham

We're continuing to sign contracts, but what we are negotiating for is to tell the managed care payer, "Okay, well, if you want to hold this patient in observation, then we expect to get paid some more for that than the traditional 10%, 20% of an inpatient rate. And we have had some success. We did recently have success with one of our larger Florida managed care payers. And so we are making progress on that negotiation as well.

Operator

Your last question comes from the line of John Ransom with Raymond James.

John W. Ransom - Raymond James & Associates, Inc., Research Division

I'm not incredibly optimistic that I'll get an answer here, but I have to try. Let's say x costs, the 1Q "miss" was $30 million, and then just kind of go with me on that number. How much of that would be higher bad debt versus less revenue from more observations, just order of magnitude? And then is there a third bucket like fewer surgeries and fewer ER visits and that sort of thing?

Kelly E. Curry

Well, I'll begin with...

John W. Ransom - Raymond James & Associates, Inc., Research Division

Just some ballpark number. I know you guys won't give the numbers, but I think that's what people are struggling with.

Kelly E. Curry

Yes, well, we can't do the model for you, John. But -- and I'd be guessing because I haven't done that calculation, but I can't tell you what -- how the percentages play out. But I think you probably got the experience that you can make some pretty good estimates of that on your own. But the fact is, is that...

John W. Ransom - Raymond James & Associates, Inc., Research Division

So if we were to take the higher observation that's some say $3,000 less for just admit or admit, is that a starting point, and then assume the rest is all the other stuff?

Kelly E. Curry

I mean, that's probably as good as any other number.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And what's that number if we had to just put an absolute number on it? I know you've given a percentage, but what's that number? Approximately how many observations did you have compared to 1Q a year ago? Do you have that number?

Kelly E. Curry

We're still compiling statistics. We know we had an increase, but we're not prepared to say a precise figure for observations at this point.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And then secondly, I may have missed this. What was your -- did you say a $10 million to $20 million EBITDA number for Bayfront? Did I get that number or did I miss it?

Kelly E. Curry

No, I didn't say that. Somebody else said that.

John W. Ransom - Raymond James & Associates, Inc., Research Division

But is it going to have positive EBITDA? I know it's got negative earnings, but is it going to have -- be a positive EBITDA contributor this year?

Kelly E. Curry

It has a positive EBITDA right now.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay, right. So -- but it's probably de minimis. And then I guess, thirdly, just from an IR standpoint, I don't think anybody, including ourselves, had the $20 million in costs this quarter. Is there a reason you chose not to make -- all else being equal, I assume you probably would have missed the Street number by $20 million this quarter. Is there a reason you wouldn't at least disclose that? I know you don't give guidance per quarter, but wouldn't that have been helpful to disclose as you're rolling out '13 EBITDA?

Gary D. Newsome

Actually, John, I think had we have a normalized first quarter in terms of volume, it would not have appeared in our numbers basically. It's not an issue for us in the quarter, so there would have been no reason to get out ahead of it.

Operator

This concludes today's question-and-answer session. I will now turn the call back over to John Merriwether for closing remarks.

John C. Merriwether

Thanks, everyone, and we appreciate your attention this morning. And we'll be announcing with -- there'll be a press release when we're going to announce full details in the next week or so. All right, have a great day. Thanks.

Operator

Thank you for your participation in today's conference call. This call has concluded. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Health Management Associates' CEO Discusses Preliminary Q1 2013 Results Conference (Transcript)
This Transcript
All Transcripts