Lifepoint Hospitals Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: LifePoint Hospitals, (LPNT)

Lifepoint Hospitals (NASDAQ:LPNT)

Q1 2013 Earnings Call

April 26, 2013 10:00 am ET

Executives

William F. Carpenter - Chairman, Chief Executive Officer and Chairman of Quality Committee

Jeffrey S. Sherman - Chief Financial Officer and Executive Vice President

David M. Dill - President and Chief Operating Officer

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Andrew Schenker - Morgan Stanley, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Kevin Campbell - Avondale Partners, LLC, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

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

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospital's First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, April 26, 2013.

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

I would now like to turn the conference over to Bill Carpenter, Chairman and Chief Executive Officer. Please go ahead, sir.

William F. Carpenter

Thank you very much. Welcome, everyone, to LifePoint Hospital's First Quarter 2013 Earnings Call. We hope you've had a chance to review the press release we issued earlier this morning. After my initial remarks, Jeff Sherman, our Chief Financial Officer, will discuss LifePoint's results for the first quarter in detail. After our prepared remarks, Jeff and I, as well as David Dill, our President and Chief Operating Officer, will be available to answer your questions.

Let me begin by summarizing our results for the quarter. Revenues from continuing operations grew to $931 million. EBITDA was $137 million, and EPS for the quarter was $0.69. As outlined in the press release we issued earlier, there were 2 items we highlighted that impacted our Q1 results. Jeff will discuss those in more detail later on the call.

The first quarter results reflect volume softness in both inpatient and outpatient activity. As we move through 2013, we anticipate that our industry will continue to face challenges, which include regulatory and reimbursement challenges. That said, we are executing on our strategies to grow existing market share, as well as to acquire hospitals while focusing on building regional networks. In addition, we're positioning LifePoint to capitalize on the anticipated benefits of health care reform.

As an example of our growth strategy, last September, LifePoint entered the Upper Peninsula of Michigan with the acquisition of Marquette General Health System by Duke LifePoint Healthcare. Marquette is an ideal fit for Duke LifePoint as it is a tertiary hospital and regional referral center that benefits from Duke's clinical programs and LifePoint's operational expertise and resources. Since the completion of the Marquette acquisition, LifePoint has executed 2 letters of intent to acquire Portage Health in Hancock, Michigan and Bell Hospital in Ishpeming, Michigan.

Together, these hospitals would strengthen the health care delivery system in the Upper Peninsula, enhance patient care and ensure that health care services continue to be available locally to people in those communities. Either through ownership or simply through collaboration, we expect to partner with health care providers throughout the region to enhance the services provided and the coordination of care in the Upper Peninsula.

In March, LifePoint signed a letter of intent to form a new joint venture with Fauquier Health in Warrenton, Virginia. Fauquier would be LifePoint's sixth hospital in Virginia and would continue to enhance our statewide presence with a new footprint in Northern Virginia.

We're confident that facilities like these in attractive markets will provide us with significant upside potential. These partnerships expand our network strategy and represent new ways to enhance health care services and strengthen the health care delivery system throughout our regions. We expect to identify additional opportunities not only through LifePoint but also through Duke LifePoint and other collaborations. As always, we will maintain a disciplined approach to our acquisition program.

An important part of our strategy includes a continuing focus to improve operations. We have been and will continue to be vigilant in controlling costs and operating efficiently, both at the hospital support center and local hospital levels. One example is our transition of certain back office services to Parallon Business Solutions. This transition is on track to be completed in 2014, and we have accelerated the pace at which we're adding our hospitals to the program. Additionally, we have reorganized our hospital support center to provide services to our hospitals more efficiently, resulting in severance costs, which impacted the quarter.

As you are aware, we have been a part of the CMS Hospital Engagement Network since the beginning of 2012. I'm pleased with the progress that we have made as a result of our participation in this program. We feel confident that we will achieve the goals we have set in the Hospital Engagement Network program by the end of 2013, and we have made measurable improvements in the culture of safety within our hospitals over the last year.

While the outcome of health care reform is evolving, we believe it will be a net positive for LifePoint as more people will have coverage and seek hospital services. We are also closely monitoring Medicaid expansion and will continue to support efforts to expand coverage. Our hospitals are well-positioned to be an important part of exchange networks in states in which we operate. The pace of exchange contract negotiations has ramped up considerably, with active negotiations occurring in most of our markets. We expect to conclude some exchange contract negotiations in the next month with additional contract completed during the remainder of the second quarter.

Before I turn the call over to Jeff, I want to thank the LifePoint team for the tremendous efforts that they are making as we navigate through a tough environment. Our talented team is working hard to improve the quality of care we provide while delivering strong value for our shareholders.

With that, I'd like to turn the call over to Jeff to review our financial results. Jeff?

Jeffrey S. Sherman

Thank you, Bill, and good morning, everyone. As Bill outlined, the first quarter results reflect a challenging volume environment. It is also important to note that the first quarter of 2012 included the Medicare workforce element, which represent $31 million in additional revenue, $26 million in EBITDA and EPS of $0.33 in the quarter. This additional revenue will impact comparisons as we review costs as a percentage of net revenue year to year.

As Bill noted, we had 2 items in the first quarter of 2013 that negatively impacted earnings, specifically severance costs of $3.2 million and $4.4 million in debt retirement costs related to the refinancing of our 2025 convertible notes. The combined EPS impact of these items was $0.10.

I will now review the drivers of our results, starting with volumes. On a same-store basis, admissions in the first quarter were down 5.9% versus the prior year. The first quarter 2013 had 1 less day, which was estimated to represent 130 basis points, or approximately 1/4 of the decline. One-day stay admissions were down by 10.6% and represented 1/3 of the admission decline. Deliveries were down 5.5% and represented 11% of the admission decline.

Total surgical volumes were down by 7.7% over prior year. Adjusted admissions for the quarter decreased by 4.9% on a same-store basis versus prior year and were down by 2.8% after adjusting for the calendar impact of 1 less day. Same-store ER visits were up by 0.4% versus the first quarter of last year. Slower emergency visit growth and declining surgical volumes contributed to reduced outpatient revenue growth versus historical trends in the first quarter.

Revenues in the first quarter were $931 million, an increase of $80 million, or 9.4%, versus prior year. Revenues in the first quarter of 2012 included $31 million in Rural Floor Settlement dollars, normalizing for this yield's revenue growth of 13.5%, primarily driven by recent acquisitions. Same-store revenues increased by 1.3% after normalizing for the Rural Floor Settlement.

Bad debt expense was 19.4% of revenue on a same-store basis, up 210 basis points from the prior year. And charity care write-offs were 3.8% in the quarter. After adjusting for the Rural Floor Settlement, bad debt expense was up 150 basis points over the prior year quarter on a same-store basis.

Self-care revenue was up by $15.6 million on a same-store basis, with bad debt expense up by $13.7 million. Same-store self-pay admissions were up 4.7% in the quarter and represented 7% of total admissions.

EBITDA from continuing operations for the quarter was $137 million versus $165 million in the prior year. Diluted earnings per share from continuing operations were $0.69 in the quarter as compared to $1.16 in the prior year. As previously noted, prior year EPS includes $0.33 related to the Rural Floor Settlement.

Turning to pricing on a same-store basis, net revenue per adjusted admission was up 2.6%. After normalizing for the Rural Floor Settlement, net revenue per adjusted admission was up by 6.5% over prior year. The Medicare case mix was up by 3.8% on a same-store basis and increased 5.4% in continuing operations. The revenue mix was consistent with the first quarter of 2012 on a normalized basis.

With respect to cost, the following calculations were normalized to reduce the Rural Floor Revenue recorded in the first quarter of 2012. Same-store SMB cost as a percent of revenues increased by 50 basis points over prior year and include higher position employment costs and severance and retention related to the shared services initiative.

SWB also includes $3.2 million in severance costs related to a reorganization on our Hospital Support Center in the first quarter. This was part of our plan to keep the Hospital Support Center costs flat in 2013 while continuing to invest in quality initiatives, information technology and physician management capabilities.

Same-store supply cost as a percent of revenues for the quarter declined by 70 basis points. Same-store other operating expenses in the quarter increased by 90 basis points and include incremental provider taxes as compared to the first quarter of 2012.

We recorded $5.7 million in meaningful use payments and have related operating costs of $4.6 million. This equates to $1.1 million in EBITDA as compared to negative EBITDA of $2.4 million in the first quarter of 2012.

Cash flow from continuing operations for the quarter was $92 million, an increase of $18 million, or 24%, from the prior year quarter. We invested $39 million in capital expenditures in the quarter, including $17 million in IT capital investments.

Depreciation and amortization expense increased by $11 million, or 24%, versus the prior year. The increase was driven by higher IT investments and 3 new hospitals in the quarter versus the prior year.

During the quarter, we extended our outstanding share buyback authorization and added an additional $100 million to the plan. We did not buy any stock back in the quarter and have a $195 million remaining authorization on the current plan.

We finished the quarter with $160 million cash on hand. We completed the new $325 million term loan in the quarter and used the proceeds to retire the outstanding 2025 convertible notes that were puttable back to the company and for general corporate purposes.

Additional information regarding our first quarter results is available by reviewing our SEC filings, including our 10-Q, which will be filed later today.

To summarize the quarter, volume trends were weak and were further negatively impacted by the calendar. Revenue from our recent acquisitions totaled $100 million, or 11% of total revenue in the quarter. Our shared services initiative continues to progress well. Three hospital pilots transitioned to Parallon in the fourth quarter for revenue cycle, and an additional 4 hospitals moved into the shared service centers in the first quarter. As we move forward, we expect the pace to increase with 20 additional hospitals transitioning in the next 3 quarters. Due to the success of our initial supply procurement pilots, we have accelerated our schedule and now expect to transition 25 to 30 additional hospitals into the shared service centers in the next 3 quarters.

Cash flow from operations was strong in the first quarter at $92 million. Free cash flow, defined as cash flow from operations less capital investment, was $53 million in the quarter as compared to $13 million in the prior year quarter.

We acquired Scott Memorial Hospital in the quarter and a new partnership with Norton Healthcare. We have solid liquidity that continue to add to our portfolio of hospitals. Three letters of intent were announced in the quarter, 2 hospitals in the Upper Peninsula of Michigan and an additional hospital in Virginia. We are excited about the potential of these opportunities to complement our existing hospitals in these 2 states. The acquisition pipeline remains very active with many opportunities in attractive markets. We will maintain our disciplined approach and what we are willing to pay and the capital investments required for new acquisitions. We remain focused on improving the performance of our existing hospitals, including our most recent acquisitions, and we are well positioned to benefit from health care reform.

I will now turn it back over to Bill.

William F. Carpenter

Thank you, Jeff. Before we start the question-and-answer period, I'd like to share a few closing thoughts.

We're executing the right strategies to address both current market conditions and position us for health care reform. We have solid cash flows, and our acquisition pipeline is robust and active. We're also executing our organic growth initiatives, and we're becoming more efficient while improving quality and service. We expect enhanced shareholder value through the continued execution of our strategic plan.

With that, operator, we'll now take questions.

Question-and-Answer Session

Operator

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

Albert J. Rice - UBS Investment Bank, Research Division

Just a couple of quick questions. You mentioned that the pace of negotiations for potential exchange contracts has picked up. Can you just maybe expand a little bit on that? Obviously, there's been a lot of attention on what the pricing -- where that sort of falls out relative to historic pricing levels. And any other unique or interesting factors that you're seeing as you embark on those negotiations?

William F. Carpenter

A.J., we continue to think our hospitals are well positioned with respect to the exchanges in each one of the states where we're located. We think we'll be an important part of the exchange networks there. At this point, all we're ready to say is that we are in active negotiations across the company with regard to exchange contracts. We do expect that within the next month to enter into several, and we expect to conclude a number of additional contracts over the course of the second quarter. I don't want to get ahead of our negotiations on that, but we continue to be optimistic about our ability to achieve our goals with respect to exchange pricing and negotiations.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then the other one I was going to ask relates to the pickup of the pace on the Parallon conversions. Will we see more -- first of all, I guess, on the expense side, will we see more severance costs in subsequent quarters as you accelerate that? And can you give us an order of magnitude on what that might look like? And then second, obviously, this is being done with an expectation of operating savings on an ongoing basis. Can you talk about that? And you must be seeing something positive if it's causing you to accelerate the pace. Give us some flavor for that.

Jeffrey S. Sherman

A.J., this is Jeff. Yes, the severance and retention costs are starting to trail off for the shared services initiative. So the acceleration will not have any meaningful impact on that. We gave a range of $7 million to $10 million for the year. That range contemplated some potential acceleration depending on our initial success. So we're not changing the range of potential benefit. And keep in mind, most of the acceleration is going to be into the third and fourth quarters. So a lot of the acceleration will be moving additional hospitals in the back end of the third quarter and into the fourth quarter. But we do believe that the initial results have been promising, and we're optimistic about our ability to achieve further savings. So as you think about 2013, you'll have 25-plus revenue cycle and 25 to 30 on supply procurement. And for some level of time during the year, obviously moving into '14, the estimated benefit will accelerate quite a bit from those facilities as we migrate all of them into the shared service center environment and as we get fully up and functioning with those centers.

David M. Dill

And so I'll -- A.J., this David. In addition to the savings that Jeff was talking about through our supply chain initiatives and revenue cycle initiatives, I think you'll see most of the benefit come over time on the top line as it relates to our revenue cycle initiatives. In addition to accelerating those initiatives, it does give us confidence, and we continue to look at other areas of our back office businesses that we can use our size and scale to standard out and centralize.

Operator

Our next question comes from the line of Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Just on the volume side, obviously, trends have been weak across the board, but it seems like the rural markets or non-urban markets have been under a little bit more pressure. Any thoughts from your end in terms of why that would or could be the case, whether it's the specific dynamics of the markets, acuity, along those lines? And then secondly, last couple of years you've been employing more physicians. So I guess the question is any reconsideration around that strategy, and maybe just an update of what percentage of your physician base you employ at this point?

David M. Dill

This is David. I'll start on the volume side and then turn it over to Jeff on the physician employment side, although the conversations may cross each other just a little bit. Jeff has walked through the impact during his prepared comments. The calendar adjusted for not just leap year but the way Easter fell and the way some of the weekends fell. If you look at surgical volumes, surgical volumes are down 7.7%. About 1/4 of that decline in surgical volumes is tied to the calendar impact that Jeff talked about. A big piece to the rest of the surgical decline is on the endoscopy side, on the GI side. So when you carve out what we're seeing on the GI, endoscopy side and the calendar impact, our trends look very consistent to what we've seen over the last several quarters. There are a few specific position issues that we have back filled, but there's just general softness. I can't isolate it into any specific region of the country or geography, and it looks like just a lot of our existing physicians remain a little soft. It's important to remember that about half our business is on the outpatient side, and it continues to grow. We've seen it grow over time with advancements in technology. We've talked about our service development initiatives -- service line development initiatives, and we're going to continue that even in the face of these weak economic conditions and high unemployment rates in our communities. That strategy of recruiting the right doctors, investing into profitable service lines and improving operational performance, we think, will drive business into our hospitals. In addition, the focus on quality and patient safety that Bill talked about is a must if we're going to create a place where patients and physicians choose to practice. We're meeting our physician recruiting targets, we have processes in place to ensure that our newly recruited physicians are being on-boarded right and we're developing capabilities in the midst of this to take advantage of the coverage expansion that will occur over the next several years. This includes additional access points, whether it's through freestanding EDs, urgent care centers, but primarily additional primary care locations to take care of patients in a lower capital intensity environment. As it relates to our communities relative to others, I think it's safe to say that everybody's feeling volume pressure. And when that happens, they keep coming to our markets. So we've got to put up better defensible borders around our market to protect the market share that we have.

Jeffrey S. Sherman

And I would add just a couple of comments on that and then talk about physician employment. I think on balance, unemployment rates have been higher in the rural markets versus the urban markets. So as we have talked about over time, part of our acquisition strategy is moving into faster-growing markets. And in fact, as we have looked at our acquisition volume performance dating back from 2009 through the acquisition through 2012, our volume metrics are considerably better for those recent acquisitions, I think lending some validity to our strategy in acquiring hospitals in faster-growing markets to position the company for better long-term growth. Regards to physician employment, it is clear to us that in order to continue to recruit physicians, we're going to have to offer employment as an option. It continues to be an important part of providing needed services in our markets and expanding services, and it's both an offensive and defensive strategy for us. We have individual P&Ls for each employed practice, with both upside and downside risk. And we've seen our practices that we've operated for over a year -- performance of those practices continue to improve. But I think the nature of the business is migrating towards more physician employment, and we think it's the right long-term decision to continue to do that, to ensure we have the necessary physician coverage in our markets.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay, that's helpful. And maybe, just what percentage of your physician base do you employ?

Jeffrey S. Sherman

It's approaching -- when you add Marquette, it's approaching the 18% to 20% range, with adding the Marquette now, which had a large employee base.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay, that's helpful. And then one more, if I could, and you sort of touched on this in the last question. But the same facility revenue declined, but overall revenue came in ahead of expectation. Maybe, can you talk a little bit about the improvement of growth you've seen at the newly acquired hospitals? Are they running ahead of expectation? Maybe help us understand your -- the steps you take and the ramp of improvement, sort of as you first acquire the hospitals and as we should see them sort of run through as we move through this year and into '14?

Jeffrey S. Sherman

Sure. First, I would say, on a same-store basis, after normalizing for the Rural Floor Settlement, we did see same-store revenue growth in the quarter. In terms of our acquisitions, we have a detailed plan for each hospital we acquire to improve its performance. The pace of improvement will be different for each hospital. And as -- we also looked at volumes. We've looked at the hospitals that we've acquired from 2009 to 2011, and those hospitals have margins in the mid-teens. So our acquisitions from 2009 to 2011 that are maturing, we're seeing good solid performance on. So we're confident we have the right strategies in place that improve the performance of our recent acquisitions, but the pace of that improvement is going to be different for each hospital. So I would say we saw better performance in the fourth quarter, and our first quarter performance is a little bit slower and our recent acquisitions. But nothing has changed our view that we have significant upside from those acquisitions and are executing on plan in each one of those recent acquisitions to improve performance.

David M. Dill

This is David. We take the same playbook that Jeff talked about in the class of 2009 through 2012 acquisitions and apply those consistently. Keep in mind that we look at our performance and our performance improvement over a 3- to 4-year period. I think it's fair to assume that the volume pressures that we saw across all of our hospitals, we also saw in the recently acquired acquisitions as well. Up at Marquette specifically, we have a new President Chief Operating Officer that just started this week. We're excited to have a new person on the ground. We've completed our strategic analysis, really focused in on primary care; a comprehensive cancer program; comprehensive cardiology program, working closely with Duke on those programs; a thorough facility analysis and assessment. We will be beginning to allocate capital to Marquette in the second half this year, driven -- focused on driving growth into the hospital. One other program that we have in Marquette that we -- I don't think we've talked much about, but there's a collaboration that was entered into, prior to us acquiring the hospital with a lot of hospitals in the Upper Peninsula, including a payer in the Upper Peninsula aimed at keeping business in the market, keeping business in the state of Michigan. And you just know the geography of where we are in the Upper Peninsula, that means our Marquette hospital will benefit from that out-migration that's leaving, keeping it close to home. So we're excited about those initiatives, and I feel confident that over time, through this 3- or 4-year window that we've talked about, that we'll be able to achieve the same level of performance in Marquette that we've seen in the class of acquisitions that Jeff talked about.

Operator

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

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Not sure if I heard you address this earlier, but I saw -- acuity was up, surgeries were down, length of stay was up. Can you maybe give us a little bit more color behind what's driving the acuity and within the mix there?

Jeffrey S. Sherman

Yes, this is Jeff. I'll start. Well, certainly, volume was down. We have seen reduction in the lower-intensity 1-day stays. So that impacts acuity, but also just continuing to add higher acuity services on a same-store basis as we expand into cardiology and oncology programs. That's going to drive intensity. And on a continuing ops basis, Marquette has a much higher intensity than a typical LifePoint hospital. So those things are driving intensity. On the surgical side, particularly in the outpatient side where we were down, was -- we were down -- a considerable amount of that was just lower-intensity endoscopy-type cases. So on the outpatient side, we saw higher intensity in the remaining cases as well.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay, that's helpful. And then obviously, a lot of talk about acquisitions. You've been very active there. I was wondering if we could just take a step back and help us understand sort of how you're managing the business in the regions and sort of your capacity to do deals and manage those deals? And I know some of them are through some of the partnerships, too. So just remind us of the oversight there versus your outright owned facilities.

William F. Carpenter

Well, you're right. The acquisition environment continues to be active and strong. We are very well positioned financially and alongside our colleague partners to take advantage of the opportunities that come our way. Our balance sheet really gives us great flexibility. We're actually looking for deals, and we remain a very disciplined buyer. I think we're on a great pace, and we expect to keep up the pace. There are a lot of great opportunities in the market today. We think we're a compelling buyer for many of the hospitals out there that are looking for buyers. As far as our shift, I don't know if it's a shift or just a little bit of an evolution to the network strategy that we've begun to employ. And you've seen us do that in North Carolina as we've added scale there. And you've seen it -- us do it certainly in the Upper Peninsula of Michigan, where we are partnering with tertiary facilities in order to make sure that we have the ability to serve the needs of patients in the lowest-cost care setting. As we moved into North Carolina with Duke and added hospitals in communities around Duke, including in southern Virginia, it's been an important part of the strategy. As we moved into the Upper Peninsula, and you saw us acquire Marquette General in this quarter, as we have spoken about, it's important to know that we are working to fulfill the strategic objectives that we have. Adding Bell Hospital -- letters of intent with Bell Hospital and Portage Health will allow those hospitals to network well together and with Marquette, making all of this an ideal way to make sure that patients have access to the lowest-cost setting, but the full continuum of care to do that. I believe that the reorganization that we've done here at the Hospital Support Center also helps us to manage more hospitals in a better way. And maybe, David, you want to -- you may want to speak to that a bit.

David M. Dill

Yes, many of our changes that we made here are organization structure-oriented. Two things. One, to give us the ability over time to move more dedicated resources closer to our market. So as we build out these markets, this network strategy that Bill was talking about, having a structure in place that gives us the ability to move resources closer to the market, to be more responsive to the market in the market. In addition, we'll be adding some resources -- even more resources in our integration structure to ensure that we have not just people here to do the work to -- from a diligence standpoint and from an integration standpoint, but dedicated resources on the ground and the markets post closing to draw the results that we're looking for, to take that playbook and ensure that it's consistently being applied in the local hospital and the local market that we've recently acquired and not from a distance.

Jeffrey S. Sherman

So I would just conclude to say we think we have both organizational capacity and structure, as well as financial capability to continue to acquire hospitals at a similar level that we have made over the last 2 years.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

And then guidance, I think you had talked about down 1 to up 1 adjusted admissions. Was expecting a little weaker first quarter because of calendar, but is that still sort of an achievable target in your minds?

Jeffrey S. Sherman

Well, it's still early in the year. We have historically reviewed guidance at midyear. So we haven't changed anything from our original guidance but at this point in time, we'll continue to look at that as we move into the second quarter.

Operator

Our next question comes from the line of Joshua Raskin with Barclays Capital.

Joshua R. Raskin - Barclays Capital, Research Division

A question around volumes. Just as you sort of move through the quarter, it sounds like there was obviously an impact from calendar. I'm curious, did you see that more in March? Was March sort of the worst of the months within the quarter? And maybe any color on a rebound potential in April if some of that was calendar-related.

Jeffrey S. Sherman

Yes. We saw -- and I think similar to what others have said, January was better. Towards the back half of February and into March, volumes deteriorated in the quarter, Josh. I'd say our pattern was pretty similar to what others have discussed so far. With regards to current month, we haven't commented on activity intra-quarter, and we'll continue that practice.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. All right, that's fair. And then the second question around HCIT reimbursement, I think you came in a little bit higher than I was looking at, but I know the EBITDA impact was still $1 million or so. I think you guys have commented previously that $32 million would be the full year high-tech impact on EBITDA. Is that still a good number? I know you're not reviewing guidance in general, but I'm just curious on that line item.

Jeffrey S. Sherman

Yes, that is still a good number for the year. And again, from an EBITDA perspective, what we said was it would be back-end loaded, majority of it would be back-end loaded. And we still expect that to be the case as well.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. So 2Q similar to 1Q, but then a big ramp in the second half?

Jeffrey S. Sherman

Well, just -- ramping up towards the back half of the year, with much more in the back half of the year, without commenting specifically on the second quarter.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. And then if I could just sneak one more in, RAC audits, I didn't hear any updates. So does that mean there's been no discernible change in trend?

Jeffrey S. Sherman

Well, we still expect a similar level of RAC revenue reductions in 2013 versus 2012. The quarter-to-quarter amounts will vary depending on many variables. We did not see a discernible trend quarter-to-quarter in 2012. But overall, RAC activity was lower in the first quarter of 2013. In 2012, the first quarter had the highest level of RAC activity. So I think it's still our expectation that for the year, we'll have a similar level of RAC reductions as we saw in 2012.

Operator

Our next question comes from the line of Chris Rigg with Susquehanna Financial Group.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Just want to come back to the $7 million to $10 million of EBITDA benefit from the shared services agreement. Can you give us a sense for what -- how should we think about the run rate of EBITDA benefit when we exit 2013?

Jeffrey S. Sherman

Well, we've got $7 million to $10 million, and we have over half of our facilities fully into the service centers in 2013. We will expect that to ramp up in 2014. So just a full -- if you think about most of those facilities being in for less in a partial year, you can get some extrapolation from that moving into 2014, as well as just improved performance as those facilities come online and get all the systems and processes in place. As David mentioned, we expect to see improved revenue cycle from a denial compliance perspective. We also look to see streamlined purchasing in terms of non-GPO types of items that we can consolidate our purchasing in a more streamlined manner with non-supply GPO purchases. And so we see a lot of those benefits will start accruing as we move into 2014.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. But not to beat this horse to death, but just to understand. So $7 million to $10 million -- did you see any benefit in the first quarter? Or are you expecting benefiting in the first half? Is it almost all in the back half of the year?

Jeffrey S. Sherman

We saw a little bit, but I would expect more of it to be weighted as we move further into the year.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just more generally on the M&A environment, I mean, you guys have been pretty active in the last few years, and it seems like accelerating the activity of late. And I guess is that sort of, in your mind -- a bit of a landgrab ahead of the expected benefits from the ACA next year? Or just an overall, more aggressive strategy, absent the regulatory environment?

William F. Carpenter

Well, it's both a -- it's a strategy that really reflects what the market is. And we are seeing a number of opportunities that are, I think, directly related to the economy and directly related to the types of regulatory reform, whether or not it's the ACA regulatory reform that is coming out of Washington. So more and more community-based hospitals are trying to figure out how they are going to be relevant in the face of all the change that's coming at them. In order to accomplish that, they are looking for the resources, the system that can bring stability and -- not only financial, but operational resources. When you layer on top of that the quality resources that we bring through our Duke LifePoint partnership, not only in hospitals that we acquire with Duke or with Norton but hospitals that are benefiting from the quality initiatives of our work on the Hospital Engagement Network and our work with Duke to bring quality inside all LifePoint Hospitals, it's just a compelling mix that allows us to be able to do that. And that's why we have made the changes that we've made, that David described with respect to the Hospital Support Center and other changes to be able to respond and be there to take advantage of this opportunity that exists. We're excited about that. I'm pleased that we have always been conservatively financed. And therefore, we have the flexibility to take advantage of these opportunities.

Operator

Our next question comes from the line of Frank Morgan with RBC Capital Markets.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

A couple on modeling. I was just curious, were there any prior-period cost report settlements in the quarter, either positive or negative?

Jeffrey S. Sherman

There was not, Frank. There was -- if you recall, in the second quarter of 2012, we did have retroactive provider tax revenues for North Carolina and West Virginia. So you do have -- versus -- in comparison to the first quarter of last year, you have another quarter of provider tax revenue versus the first quarter of last year. So that did help, on a comparative basis, some of the net revenue on a PAPD basis.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay. And then I think you called out provider tax payments in the other operating expense line. I was just curious, was there anything else in there that was -- it looked like relative to what we were looking for, it was a little higher. Was there med mal or any other kind of expenses that was embedded in other ops?

Jeffrey S. Sherman

We did have some increased legal costs in other ops related to some legal matters that did drive other operating expenses higher. But the provider tax increase that I noted relates back to those states. So it's not new on a sequential basis but new in comparison to the first quarter. We continue to see contract services costs increase from an IT perspective, both at the Hospital Support Center as we continue to roll out meaningful use. So that's driving some incremental costs there and is part of the cost number I gave for IT.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay. And then one final -- a last question for Dave. I think he mentioned a callout on some doctor issues in a couple of markets or a bit somewhere. I was just curious, could you comment on that? Was that in recent -- more recently acquired hospitals, or some of your legacy hospitals? And whatever caused that? Has that been solved now? Could that potentially help volumes in the near term?

David M. Dill

It's in our legacy hospitals. It's just spread out in a couple of places. And we have backfilled those positions.

Operator

Our next question comes from the line of Andrew Schenker with Morgan Stanley.

Andrew Schenker - Morgan Stanley, Research Division

So your revenue per adjusted admission for same-store was up, right, 6.5%, which was pretty good after normalizing for the Rural Floor. I was wondering if you could give us a little more color on what maybe drove some of the increase on that, and some was acuity. But if you could kind of talk about the individual pieces driving that?

Jeffrey S. Sherman

Yes. As I noted, there was a couple of things. Medicare intensity was up, up over 3% on a same-store basis, 5% on a continuing operations basis. That is a part of it. The provider tax revenues that I just talked about were new revenues in the first quarter versus the prior year. So you'll see a higher revenue than the EBITDA impact because there's provider tax, as we just talked about. Those were the main drivers. The overall revenue mix was consistent. So we haven't seen a deterioration. So you're seeing just some typical commercial pricing increases driving that as well.

Andrew Schenker - Morgan Stanley, Research Division

Okay, great. And you highlighted 1-day stays were down, I guess, 10.6%. I think last quarter you said 5.7%. Was there anything that maybe drove the increase? Are you seeing any increased pressure from any specific types of payers?

Jeffrey S. Sherman

No, we're not seeing any increased payer -- pressure from any particular payers. We have seen managed Medicare increase slightly. It still represents a relatively small percentage of our total Medicare admits. But Medicare -- managed Medicare is roughly 16% of our admits versus roughly 14% of our Medicare admissions in the first quarter. So we're seeing a little bit of increase there, but we haven't seen any change from utilization there. We are seeing -- on the managed Medicaid side, we are seeing more migration to managed Medicaid. And that managed Medicaid admissions represent over 50% of our total Medicaid admissions now. We saw Kentucky move into managed Medicaid in November of 2011. We saw Virginia move in mid-2012. Kansas has moved in the first quarter of 2013, and we are seeing some utilization changes there, still trying to qualify the impact of that. And finally, it is more difficult to get paid. It's more bureaucratic, and we have more denial issues and qualification issues than we have with traditional Medicare or Medicaid. So it's a little more burdensome to get paid with the managed plans. But other than that, we haven't seen any other major changes. We are continuing to do what we've talked about in prior quarter calls. We have continued to beef up our case management staffing at the hospital level. We're continuing to use external physician resources to review, to make sure -- to help make sure we're getting the proper patient placement. We're making sure we're documenting correctly, and all those things continue today. So we haven't seen any other change from an external perspective.

William F. Carpenter

But that's important to remember regardless of patient class. This is about quality patient care and creating hospitals where people want to come for care and where physicians want to practice. So it is important for us to make sure that we are treating people in the right setting of care. And it has been a focus for us.

Operator

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

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Just wanted to go back to your commentary around health care reform. The commentary that it's going to be a net positive, I guess, in some ways, feels like a little bit of an understatement. Just trying to understand, as you think about the puts and the takes, is there anything that you're kind of really focused on right now as kind of the key unknowns before you might feel more comfortable talking about the benefits? Or that commentary, is that -- over a long period of time, you see maybe a more modest benefit, but the short period of time there'd be more accelerated benefit? Just wanted to kind of understand your comment. How much of that is just conservatism? And if it is conservatism, what is it that are the key variables in your mind?

William F. Carpenter

Well, Kevin, there are a number of unknowns that remain. And while things are becoming more clear, there are still a number of unknowns. We are monitoring very closely the question of Medicaid expansion, and we will continue to support with our advocacy efforts to expand coverage. We are working diligently with regard to the exchange contract negotiations. And as we said, we believe that we are well positioned to be an important part of those exchanges. But we aren't ready to speak about that yet. We do think that we are well positioned in order to see rates in a commercial range, as we've said before. So I don't know whether I would say it's conservatism or not. But as we typically do -- and you would expect us to have some certainty around where we are before we speak definitively on these issues. Jeff, do you...

Jeffrey S. Sherman

Yes. I would just add a couple of things as we think about the impact of health care reform. Certainly, in the short term, a lot of moving variables, Kevin. Bill mentioned Medicaid expansion. At the pace at which states decide to expand and how they expand, it's going to impact how it impacts us. If a state decides to expand Medicaid, we believe that it'll be a rather seamless transition, and that will happen immediately. We're already doing Medicaid eligibility screening for patients that don't have insurance in our markets. And again, keep in mind, in our markets, there really is no other source of care for patients without insurance. So when we say we think it's going to be a net positive, an important starting point is we are treating all the uninsured patients in our markets today. So getting coverage through either Medicaid expansion or through an exchange, we believe will be beneficial. So the pace of states expanding is one variable. With regards to exchanges, there's a question of narrow networks. That may impact some of our markets, a lot of our markets that will not have an impact. But how that plays out in the next 3 to 6 months will have an impact. We've talked about exchange pricing. How that ultimately plays out will have an impact. And then what do employers do and what's the pace of enrollment in the exchanges. So there's a lot of variables. As we think about providing clarity, as we have looked at it running many different scenarios, we believe it'll be a net positive versus the cost that we're incurring through lower market basket increases, as well as DSH reductions. So our vantage point is we think it's going to be a net positive. As we get more clarity on those individual variables and have more confidence in our ability to predict, then we'll provide more guidance/clarity. I think the piece I didn't mention was just volumes, what happens with volume when patients have coverage? We expect we'll see some uptick in volume. I think we're well positioned, as we've said, to take advantage of that and really not have to add a lot of incremental cost in our hospitals to service incremental volume.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Yes. It sounds like a lot of these things, I guess maybe half of the things you mentioned, we'll get clarity on maybe in the next 6 months. But the other half, we may not really know until Q1 starts to develop as far as exchange take-up rates, impact on volumes and things like that. When do you think that you guys will start to feel comfortable really talking about and quantifying the impact of reform in 2014?

Jeffrey S. Sherman

Well, we'll certainly have to make some assumptions as we complete our budgets and give guidance for 2014. So we'll have to provide some color around the impact at that point. And I think we'll have at least some clarity on Medicaid expansion in our key states by that time. I think the -- one other point is just what happens with the exchanges? Will the exchanges be ready at both the federal and the state level? So all those things are going to be impact the rollout in terms of 2014 impact. As we have looked at it over a period of time though, we think our analysis leads us to conclude that's going to be a net positive.

William F. Carpenter

And you could expect that as we have clarity about material issues, as we always do, we will get that information out to you just as quickly as we can.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Great. And so when you -- you've been pretty active on the acquisition front. When you have your conversations with these hospitals, how are they thinking about health care reform? And would you expect pace or timing of deals to change meaningfully after health care reform is implemented?

William F. Carpenter

We are thinking about health care reform at a much more detailed way, in a much more detailed way than many of the acquisition opportunities that we're seeing. And we are bringing to them in the analysis a deeper look at it than they may have had previously. So that's important. But we don't see acquisition volume being driven by health care reform. Rather, we see it being driven by factors that we've talked about, including regulatory change that is existing at a much accelerated pace and their ability to recruit physicians to their markets and their ability to access the capital markets in order to provide the technology that physicians need in order to achieve good outcomes for their patients. So all of those things are the types of things that they're considering, more than just the impact of health care reform. We, along with our partners, our clinical partners at Duke and Norton, have the ability to bring those resources to the table to help these hospitals sustain themselves and be very relevant in the future.

Operator

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

Kevin Campbell - Avondale Partners, LLC, Research Division

Just really 2 quick ones. The guidance that you have, should we be using the adjusted EPS number from the quarter, the -- or the GAAP EPS number as we think about what's included in your current EPS guidance?

Jeffrey S. Sherman

No, I would -- it would continue with the GAAP EPS number, Kevin.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay, so the $0.69. Okay. And the current debt, obviously, that jumped up this quarter. Is that the convertible notes? Is that something else? And what are the plans for [indiscernible]?

Jeffrey S. Sherman

Yes. We have another tranche, a $575 million tranche of convertible notes, that actually come due in this -- early in the second quarter. But for some accounting technical reasons, we have to show those as current now. So all of the capital markets remain wide open for us for that. The high-yield market, the term loan market and the convert market are all options for us. So as we get closer, we'll decide what the best instrument is to refinance that. But we have access to all of those markets at, I would say, very attractive rates and are confident we'll have the ability to do that quickly when we're ready.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. And that's due second quarter of '14?

Jeffrey S. Sherman

Correct.

Operator

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

Darren Lehrich - Deutsche Bank AG, Research Division

Just a few things. First, I wanted to clarify something, Jeff. You mentioned in your prepared remarks just the same-store SWB, and that number was up 50 basis points adjusted. Is that including the severance? Or is that excluding the severance?

Jeffrey S. Sherman

That's including. So that was just normalizing, Darren, for the Rural Floor.

Darren Lehrich - Deutsche Bank AG, Research Division

Got it. And so excluding the severance...

Jeffrey S. Sherman

A little bit -- yes, a little bit better.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. And then in terms of the incremental provider taxes in this quarter, can you help us think about that? Or maybe just quantify the amount that changed year-over-year?

Jeffrey S. Sherman

Yes. It was a couple of million dollars.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. And then just in terms of the practice losses, I know, Jeff, you've been updating us on that. Was there any change in underlying trend this quarter? And can you just shed some light on the amounts there?

Jeffrey S. Sherman

Yes. As I looked at that, Darren, in terms of providing detailed practice loss information, it has become increasingly difficult to accurately break this out with the ancillary services moving to the hospitals, with specialists and the increasing use of hospitalists. So I'm going to move away from providing detailed physician practice loss information. The losses were consistent with the increase that we saw in employee practices in the quarter. But as all of these practices roll off into acquisitions, and as the acquisitions we are acquiring have more employee practices, it's just become increasingly difficult to get a clear practice-only picture. But we are continuing to monitor practice losses very closely each month as we review our operations.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. And my understanding is the oversight of the practice management role in the company's changes. Maybe, Bill, can you just update us on how that transition is going in that organization overall?

William F. Carpenter

Yes. We're looking very carefully at our Hospital Support Center organization in order to make sure that we're providing the right services to our hospitals, including the physician practice management function of Leif Murphy, who joined us about a year ago, I guess, and has been a great addition to the executive team here at Lifepoint. He is conducting a very thorough review of our practice management function, and he's going to be leading us through that. So I think there's a great deal of opportunity, and we look forward to providing that resource even better than we have in the past.

Darren Lehrich - Deutsche Bank AG, Research Division

That's great. And just last thing here, Medicare-dependent hospitals, I'm just wondering if you can remind us or update us on the number of those that you have, just as we get ready for IPPS?

Jeffrey S. Sherman

It's about 5 or 6, Darren.

Operator

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

Justin Lake - JP Morgan Chase & Co, Research Division

My question is on physician employment. So I think you mentioned previously -- you said 18% to 20% of physicians are employed?

Jeffrey S. Sherman

That's correct.

Justin Lake - JP Morgan Chase & Co, Research Division

Is that correct?

Jeffrey S. Sherman

Yes.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. So is that a percentage of physicians that have privileges? Or percentage of volumes coming from employed doctors?

Jeffrey S. Sherman

That's a percentage of physicians that have admitting privileges in our hospitals. So we're not counting house-based physicians that did not have admitting privileges. So that number has been 14%, 15% as we have added acquisitions, in particular, Marquette. There are more employee physicians in those hospitals. That number is increasing from acquisitions, as well as just the migration towards more physician employment.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And can you tell us what percentage of volumes come from employed doctors?

David M. Dill

We don’t disclose that number, Justin. So we just look at the percent of total admitting physicians.

Jeffrey S. Sherman

And as I said, Justin, the reality is with the movement towards hospitalists, most of whom are not employed, a lot of the primary care volume is going through hospitalists. So it wouldn't be a meaningful number, anyway.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And can you tell us where you see that number going over the next 3 to 5 years?

David M. Dill

It's hard to say. I think on our existing book of business, it will continue to grow, but grow at a very moderate pace. I don't think you'll see anything that moves it dramatically on our existing book of business. Where you will see that number grow as a percent of our total numbers is as we continue to acquire hospitals, just like Marquette that had a significant portion of their admitting physicians that were employed. We're seeing that more and more on the acquisition trail, and that's what will continue to move that number north.

William F. Carpenter

Yes. And that's true to the extent that we acquire hospital in geographies that have traditionally been heavier employers of physicians.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And then just lastly, is there -- so David, if I'm hearing you correctly, it should take up maybe 1% to 2% a year, not dramatically? How do we think about the impact on margins there? Is there some rule of thumb? I mean, it seems like this is a drag on margins. I'm just trying to think about is if -- for every 1% of physicians that are employed, does it increase there? Is there a 20, 30, 50 basis point drag on EBITDA margins from that?

Jeffrey S. Sherman

I don't -- I'm not sure there's a rule of thumb, Justin. This is Jeff. I think it also goes down to the mix. The mix of the primary care versus specialists has an impact on it as well. And as we have seen, primary care volumes migrate to hospitalists. It becomes increasingly difficult to make that direct connection. And then as I also said, just other volumes, as we roll those into the hospital, it just becomes harder to break out.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. But is it fair to say that it is a drag on volumes?

David M. Dill

Drag on volume or drag on margins?

Justin Lake - JP Morgan Chase & Co, Research Division

I'm sorry, drag on margins.

David M. Dill

It has been a drag on margins. Yes. Yes.

Operator

Our next question comes from the line of Whit Mayo with Robert Baird & Company.

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

I guess I'll give my one question to David. Just curious kind of where you guys are on some local market proactive outreach program to educate a lot of the uninsured in your market about the coming coverage options they have.

David M. Dill

Yes, we haven't done anything in a meaningful way yet. We are designing those programs as we speak, but nothing that's been rolled out in any of our markets at this point.

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

Okay. Maybe just elaborate or any color on kind of how you would look about potentially designing something like that and just what you see the opportunity?

David M. Dill

Well, we're still looking at what are those things we can do? And then once we know and rules get a little more clearer on what we can do, then we can make decisions on what we want to do after that. And that will then influence our decisions on not just the education of those patients but, as I talked about on an earlier question around other access points, to help take care of the patients that will be newly insured and some, in fact, new to the health market. And so we do feel like we have an obligation, but we may be a little tied on things that we can do, and we'll just have to wait for some clarity on that.

William F. Carpenter

So this is Bill. With respect to Medicaid patients who come into the market if there's a Medicaid expansion, those are patients that we're already seeing, and we have systems in place in order to help them become qualified. And we'll continue to do that. That's something that we're already geared up to do. I do think, and I agree with David, we have to continue to study the rules and make sure that we're doing it within the -- in a compliant way. But our hospitals, being the only hospitals located in the community, really have an opportunity to be a resource in our communities for understanding what change is. And I think this is an opportunity for the hospital to have an increased visibility in the community as a leader in the community. And so we want to take advantage of that opportunity as it exists along the lines that he mentioned in educating the community about what reform means. So that is something that we are looking at very, very carefully. And we expect our hospital CEOs and our leadership teams in the communities to be -- to take that role, and we will give them resources in order to accomplish that.

Operator

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

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

It's good to be last. I know the answer to this is probably no, but I was curious if you guys had thought about, in some of your markets, experimenting with the idea of maybe offering an insurance product yourself or participating in some meaningful risk-based products?

Jeffrey S. Sherman

Yes. In terms of the risk-based product, John, we still think that full risk for the vast majority of our markets is many years off, if ever, in some of our markets. So I think the full risk spectrum continues to be a challenge for us with regards to how our physicians are currently organized, with regards to the services provided in hospitals. But I think as we look at some of our larger markets over time, we do see some opportunities to work with our physicians in a different way. And certainly, as we're employing more physicians, we -- that gives us flexibility in terms of whatever the models come, in terms of how we're going to react of those.

William F. Carpenter

Great. Thanks, everyone. Thanks for hanging in there with us this morning. We want to make sure that we stay around to answer as many questions as possible.

In closing, let me say that we are confident that we will continue to drive shareholder value by executing on the strategies that we've shared with you: delivering high-quality patient care and service, growing organically and through a disciplined approach to acquisitions, improving our operating efficiency across the system and developing high-performing talent. Additionally, our balance sheet remains strong, and we are well positioned to realize the benefits of health care reform.

Thank you for joining our call today. Thank you for your interest in LifePoint Hospitals.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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