HCA Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: HCA Holdings, (HCA)

HCA Holdings (NYSE:HCA)

Q4 2013 Earnings Call

February 04, 2014 10:00 am ET

Executives

Victor L. Campbell - Senior Vice President

R. Milton Johnson - Chief Executive Officer, President and Director

William B. Rutherford - Chief Financial Officer and Executive Vice President

Samuel N. Hazen - President of Operations

Juan Vallarino - Senior Vice President of Employer & Payer Engagement

Analysts

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

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

Gary P. Taylor - Citigroup Inc, Research Division

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

Darren P. Lehrich - Deutsche Bank AG, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Thomas Gallucci - FBR Capital Markets & Co., Research Division

Joanna Gajuk - BofA Merrill Lynch, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Operator

Welcome to the HCA Fourth Quarter 2013 Earnings and Year End Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Mr. Vic Campbell. Please go ahead.

Victor L. Campbell

Casey, thank you, and good morning, everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome all of you on today's call, including those of you listening to the webcast. With me here this morning are President and CEO, Milton Johnson; our CFO, Executive VP, Bill Rutherford, his maiden voyage for the call, and welcome, Bill; Sam Hazen, our President of Operations; and several other members of HCA's senior management team are here as well.

Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. Many of these factors are listed in today's press release and in our various SEC filings.

Many of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information or future events. This morning's call is being recorded. As you heard, a replay will be available later today.

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

R. Milton Johnson

Thanks, Vic. And good morning to everyone joining us on our call this morning. Let me start by welcoming Bill Rutherford to the earnings call. As most of you know, Bill was named Chief Financial Officer effective January 1 and you'll hear from Bill later this morning.

I will start today by providing a few general thoughts on our fourth quarter performance, as well as some observations for the entire year. And then, following this, I have a few comments on health care reform, as well as 2014 guidance.

First, the fourth quarter. We were very pleased with our overall performance for the quarter. Due to the exceptional volume we experienced in last year's fourth quarter and the implementation of the 2-Midnight Rule in the fourth quarter of this year, we expected softer volume growth rates in the quarter. We were able to deliver EBITDA growth in excess of our internal expectations due to better than expected service mix that resulted in higher revenue rate per equivalent admission. This, along with solid performance in managing expenses in the quarter, resulted in adjusted EBITDA growth of 6.7%.

Much of my commentary for the quarter can be said for the year. The year 2013 was a year that we experienced softer volume growth trends compared to recent years for HCA. Softer volume trends were offset by higher acuity patients and focused expense management. Our operating team has done an excellent job of making appropriate adjustments to our cost structure to reflect the change in volume trends.

Adjusted EBITDA for 2013 of $6.574 billion increased 0.7% over 2012 adjusted EBITDA of $6.531 billion on a reported basis. However, adjusting for the $170 million net favorable Medicare settlement and recorded in the first quarter of 2012 and $120 million last HITECH incentive income in 2013 and an increase in noncash share-based compensation expense in 2013 of $57 million, adjusted EBITDA growth in 2013 would have increased by an additional 570 basis points.

In addition to our financial success in 2013, I want to highlight our continuing clinical quality improvement as well. HCA's aggregate performance on CMS core measures is above the 90th percentile. 110 HCA hospitals or 80% were recognized in 2013 by Joint Commission as top performers versus 33% of U.S. hospitals. And in 2014, we will continue to build our programs in patient safety, infection prevention and the use of electronic health records and clinical data for the highest quality and most efficient health care.

Before moving to 2014 guidance, I have a few general thoughts to share. I believe we are well positioned in our key markets as we start 2014. Our operating agendas are structured appropriately. They are focused and they are effective. Operationally, we are focused on patient volume growth, quality outcomes, improving patient service and efficiency in service delivery. We believe these are the key ingredients for success. In a moment, Bill will provide details on our 2014 guidance, including health care reform. But first, I will provide a few thoughts.

In this morning's earnings release, we provided guidance estimates for certain financial metrics, including the expected financial impact from the Affordable Care Act. Our adjusted EBITDA range is $6.6 billion to $6.85 billion for 2014. Included in our adjusted EBITDA guidance is a benefit from the Affordable Care Act in the range of 1% to 2% of adjusted EBITDA.

Let me make a few comments about our guidance for health care reform. Number one, many of us at HCA have worked diligently over many months in an attempt to model the adjusted EBITDA impact of health care reform for 2014 and beyond. Number two, which should come as no surprise, there continues to be many uncertainties for the key variables which will drive the financial impact of reform. Number three, the Medicare rate reductions we have been incurring since 2010 and that we will continue to incur as reform pay-fors are built into our core business run rate and are not included in the calculation of our 1% to 2% benefit range. And finally, let me just say that while I'd always hoped we could provide annual reform guidance for multiple years, there remained too many uncertainties for many of the key variables to do so. However, we remain optimistic that reform should contribute to additional growth rate for HCA over the longer term. And as we reflect upon all this, we believe we are well positioned to succeed in the health care reform environment.

Before turning the call over to Bill, as you may know, yesterday, we announced the appointment of 3 new independent directors to our board. Also, as a result of the company's transition from a controlled company, 2 directors from each of our private equity sponsors stepped down from the board, leaving one director from each firm on the board. This transition is the result of the reduction in share ownership by our sponsors that occurred in 2013. I am looking forward to working with our new independent directors, as well as existing board members in the years ahead.

Now I'll turn the call over to Bill for additional details regarding the fourth quarter and 2013.

William B. Rutherford

Thank you, Milton, and good morning, everybody. I will cover some additional detail around the fourth quarter results, then I'll turn it over to Sam and he will provide commentary on our growth agenda and some market share information. I'll then come back and conclude with some remarks on our approach to health reform modeling and some additional detail on our 2014 guidance.

As Milton mentioned, we were very pleased with the quarter's results, especially given the strength of last year's fourth quarter. The fourth quarter results were driven by solid revenue growth, resulting from relatively stable volume trends and increased intensity of service, as well as excellent expense management by our operators.

Revenues in the fourth quarter increased 4.8% to $8.836 billion, driven primarily by revenue per equivalent admission growth of 4.6%. Case mix, or the level of acuity of patients served in our facilities, increased 3% in the quarter compared to the prior year. We saw solid surgical volume in the quarter, while also seeing a reduction in lower acuity cases, such as pulmonary. And Sam will share some additional details on this.

In the fourth quarter, adjusted EBITDA increased to $1.714 billion, an increase of 6.7% from the prior year. EBITDA margin increased 40 basis points to 19.4%. Volume trends in the quarter were below our recent trends. However, this was not surprising given the strength of last year's fourth quarter where same facility admissions grew 4.3% and equivalent admissions grew 5%. So this quarter did provide a difficult comp.

In the fourth quarter of this year, our same facility total admissions declined 1.8% over prior year and equivalent admissions declined 1%. During the fourth quarter, same facility Medicare admissions and equivalent admissions declined 2.4% and 0.9%, respectively. Same facility Medicare admissions include both traditional and managed Medicare. Managed Medicare admissions increased 4.4% on a same facility basis and now represent 29.5% of our total Medicare admissions.

Let me take a moment here to comment on the 2-Midnight Rule. As you would expect, we have spent a considerable amount of time and effort on the implementation of this new rule, which became effective October 1, 2013. In addition to a significant amount of training, education and process redesign, we've implemented a new Medicare order form, worked diligently with our physicians and implemented tracking and monitoring processes. This new rule did have an impact on our reported Medicare and total admissions for the quarter.

Our decline in Medicare 1-day stays accounted for about 50 basis points of our total admission decline for the quarter. We'll continue to implement and monitor the impact of this new rule. And while it did and will likely continue to have an impact on our reported admission metrics, we do not believe it will have a material financial impact, as we were also able to eliminate some operating expenses associated with outside reviewer costs that have previously been incurred related to reviewing our short stay Medicare admissions.

Same facility Medicaid admissions and equivalent admissions declined 1.6% in the fourth quarter when compared to the prior year. Managed care admissions and equivalent admissions declined 3.8% and 3%, respectively, in the quarter on a same facility basis. And same facility emergency room visits declined 2.4% in the quarter. This was also against a difficult comp, as emergency room visits increased 12.7% in last year's fourth quarter.

Our softer volume was mostly in our lower acuity business. And this, coupled with continued surgical growth, helped drive stronger revenue intensity. Same facility revenue per equivalent admissions in the quarter increased a solid 4.8% compared to the prior year. Same facility Medicare revenue per equivalent admission increased 1.3% in the fourth quarter, while Medicare case mix increased 3.3%. Same facility Medicaid revenue per equivalent admission declined 0.6%, excluding the Medicaid waiver programs, while case mix increased 3.1% over the prior year. And same facility managed and other revenue per equivalent admission increased 7.7 -- 7.1%, a slight increase from our year-to-date trends.

Case mix increased 3.6% in the quarter. And same facility charity care and uninsured discounts increased $498 million in the fourth quarter compared to the prior year. Of this, same facility charity care discounts totaled $916 million in the fourth quarter, an increase of $165 million from the prior year. While same facility uninsured discounts totaled $2.139 billion, an increase of $333 million from the fourth quarter of 2012.

Now turning to expenses. Expense management in the quarter remained strong, consistent with our previous quarters in 2013. Same facility operating expense per equivalent admission increased 3.5%, reflecting increased acuity and surgical volume in our patient population.

As you see on a reported basis, salaries and benefits as a percentage of revenue improved to 44.9% from 45.8% in the fourth quarter of last year. Salaries per equivalent admission increased 1.5% on a same facility basis in the quarter.

Same facility supply expense per equivalent admission increased 4.5% in the quarter when compared to last year. This primarily reflects the service intensity and increased surgical volume we saw in the quarter.

We recognized $50 million in electronic health record income in the fourth quarter compared to $80 million last year. The company also incurred approximately $28 million in EHR-related expenses in the quarter compared to $19 million in last year's fourth quarter and both of these are consistent with our expectations.

Cash flows from operating activities totaled $1.226 billion compared to $1.263 billion in last year's fourth quarter. We spent $596 million in capital expenditures in the quarter, bringing our full year CapEx spend to $1.943 billion. Days and AR increased slightly to 54 days at the end of the quarter.

At December 31, the company's ratio of debt to adjusted EBITDA was 4.32x compared to 4.39x at September 30. And at the end of the quarter, the company had approximately $2 billion of availability under its revolving credit facilities.

That concludes my remarks in 2013. Now I'll turn it over to Sam for some additional comments.

Samuel N. Hazen

Good morning. I want to provide some detail on both fourth quarter volumes and market share performance for the company. Same facility inpatient admissions in the fourth quarter were down approximately 8,000. Three factors explain this decline. First, pulmonary admissions were down 9%, almost 3,500 admissions. We believe the lighter flu season is the reason. Second, Medicare short stay inpatient admissions, though staying less than 2 midnights, were down 12%, almost 2,500 admissions. And third, we believe the implementation of the CMS 2-Midnight Rule spilled over into other payors as short stay inpatient admissions and other payor categories declined by another 2,100 admissions, or 4%.

Outpatient observation visits, the alternative category for many short stay inpatient admissions, increased by almost 11,000, or 8.5%.

Pulmonary-related emergency room visits were down in the quarter by over 9%, or approximately 23,000 visits. This decline represents approximately 53% of the overall reduction in emergency room visits.

The positive story inside our volume analysis is the increased acuity. As you heard, our case mix index for the quarter was strong. This increase was driven by a number of factors. First, inpatient surgery volume grew by 1%. And as a result, surgical admissions were a larger percentage of total admissions in the fourth quarter as compared to the prior year.

Secondly, across our surgical business, service lines with higher acuity, such as orthopedics, neurosciences and cardiovascular, grew at a faster rate.

And third, within our medical and surgical service lines, the overall acuity was higher within many individual service lines this quarter. We believe declines in short stay admissions explain some of this change.

Average length of stay increased by 1.4% in the quarter, reflecting the increased acuity of our inpatient visits.

Other inpatient statistics for the company are as follows: obstetric admissions grew by 1%, behavioral services admissions grew by 1.6%, rehabilitation admissions grew by 9%, and census levels inside our intensive care units were slightly up.

Same-facility outpatient surgical cases grew 1.6% in the quarter. We saw growth in both our hospital outpatient surgical departments and our ambulatory surgery division. We believe our program to become the O.R. of choice for our physicians and patients is driving this growth and our inpatient surgical growth.

In the quarter, 8 out of 14 divisions had growth in inpatient surgical volume and 10 out of 14 divisions had growth in outpatient surgical volumes. Our international division also had solid growth in total surgical volumes.

Now let me transition to some market share highlights for the 12 months ended June 2013. Once again, this data is the most current data available for the company and it represents almost 90% of the company's markets.

The company's inpatient market share for this period increased by 44 basis points to 23.8%. Inpatient demand in these markets during the 12-month period was essentially flat. For the 3 months ended June 2013, however, inpatient demand increased by 0.3%, which is a rebound from the decline in demand experienced in the first quarter of 2013.

We gained share in 13 out of 17 service lines. We gained share in 27 of 37 markets. Our market share in both the commercial and in migration segments of our business continue to grow in this period. Across all these metrics, the company's market share trends are generally consistent with past reports.

HCA continues to invest in its growth agenda. As you saw in our press release, we are going to increase capital spending in 2014 to around $2.2 billion, which is approximately $200 million greater than 2013. This increase will go to expanding our operating capacity in existing facilities and to expanding the number of facilities, both inpatient and outpatient, in our existing markets.

As part of our capital spending for 2013 and 2014, the company will add approximately 770 new inpatient beds and 270 emergency room beds. Included in these additions are 5 new hospitals, 2 of which have already begun operations; 15 new emergency rooms in outreach markets; and 3 replacement surgery centers.

Additionally, we are investing in more technology and organizational resources to improve our quality and service offering, which should make our facilities more competitive and responsive to the needs of our patients and physicians.

And with that, let me turn the call back to Bill.

William B. Rutherford

Thank you, Sam. So now let me conclude with the discussion about health reform and some additional commentary on 2014 guidance.

As Milton mentioned and I think we all know, much uncertainty remains around health reform. So we want to walk you through the approach we used in developing our guidance range. We remain optimistic on the long-term benefits of health reform. But given the slower-than-expected rollout, discussion around the percentage of enrollment that are newly insured, the reported disruption in the individual and small group marketplace and lack of specific market level enrollment data, our outlook and evaluation of health reform will remain fluid during the year. As mentioned in our release, we are currently estimating a positive impact of health reform on our adjusted EBITDA between 1% and 2%.

While there are multiple assumptions around health reform, there are really 4 key variables that drive the majority of our estimated impact. First, are the assumptions around the final enrollment and exchanges and newly covered Medicaid lives due to expansion. We operate in 4 states that elected to expand Medicaid as of this time: California, Nevada, Colorado and Kentucky. So Medicaid expansion has only a moderate impact within our estimate versus the exchange enrollment.

On the exchange enrollment, your information is as current as ours. Knowing that there are roughly 2 million people enrolled in exchanges at the end of 2013 and that was updated last week to now just under 3 million enrolled. And our model builds from this base.

The second variable to the model is the estimate for the percentage of enrollment that was previously uninsured versus previously insured. I believe we've all read a variety of ranges on this issue over the past couple of weeks and our model makes some broad estimates for this variable.

The third variable is our participation in exchange networks, the related revenue clearance of this exchange network volume and assumptions around metal tier selection. Currently, 97% of our facilities participate in exchange product. 64% of our facilities have access to the lowest-priced bronze and 54% have an access to the lowest-priced silver.

The last variable relates to assumptions around out-of-network treatment and reimbursement.

Over the past several months, our team, with the assistance of outside resources, have performed exhaustive market evaluation, data analysis and updated our market-by-market assumptions on each of these and other variables. It is the product of this work and our updated assumptions that have led to the guidance we're sharing with you today.

In summary, our estimate is the net effect of the upside remodel for our share of newly insured individuals, offset by lower revenue clearance for the migration of previously insured moving into an exchange or exchange-like product. The summation of our work can be characterized that we're estimating 7% to 9% of our uninsured business will gain some new coverage. And this will provide a positive benefit in new reimbursement. However, this will be partially offset with some revenue clearance decline from previously insured exchange enrollment. The net effect being an increase in our adjusted EBITDA between 1% and 2%.

So to conclude my health reform comments, we know all of this is still unfolding and there remain many unknowns. Clearly, it is important to share with you some insight into how we're thinking about reform.

All right. So let's move on to 2014 guidance. As highlighted in our earnings release this morning, we estimated our 2014 consolidated revenues should range from $35.5 billion to $36.5 billion. This does not include the impact from any acquisitions not yet completed.

We also expect adjusted EBITDA to be between $6.6 billion and $6.85 billion. Within our revenue estimate, we estimate equivalent admission growth to range from 1% to 2% for the year and revenue per equivalent admission growth to range from 2% to 3% for 2014.

Medicare revenues in 2014 reflect the composite growth rate of approximately 1%, factoring the market basket changes, OCA [ph] reduction and the annualizing effect to sequestration.

Medicaid revenue per equivalent admission is estimated to be flat year-over-year. And for 2014, we have virtually all of our managed care revenue under contract, with rates averaging between 4.5% and 5.5%.

Operating expenses are anticipated to continue to benefit from a continued low inflationary environment in 2014. And our operating expense guidance is built on maintaining margins, while we continued to invest into our clinical and EHR development initiatives.

HITECH revenues for 2014 are estimated to range from $110 million to $130 million, a reduction of approximately $100 million from 2013. HITECH expenses should also range from $110 million to $130 million for the year, comparable to last year.

2014 guidance also incorporates the third year of our post-IPO share-based awards and noncash share-based compensation expense, which is expected to increase to approximately $168 million for the year, or an increase of $55 million from 2013. Depreciation and amortization is expected to be approximately $1.8 billion.

Interest expense is projected to be about $1.8 billion as well. And our effective tax rates will be approximately 38.5%. We're estimating our outstanding share count would average just over 461 million shares. And lastly, our earnings per diluted share guidance for 2014 is $3.45 to $3.75.

So with that, I conclude my remarks, turn it over to Vic for some Q&A.

Victor L. Campbell

All right. Bill, thank you. Sam and Milton, as well. All right. Casey, you want to come back on? We're going to poll for questions. [Operator Instructions] All yours, Casey.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Sheryl Skolnick with CRT Capital Group.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Obviously, reform is a huge task to model into the business. But I was wondering if you could help us further -- the explanation was great, Bill -- I was wondering if you can help us further. There's still some lingering focus on the provisions for doubtful accounts and either using that as a proxy for how much reform might add, or I think more materially, trying to understand how it's going to change with at least some of your uninsured volumes being covered. Could you walk through your thoughts on that, please, with us? And also any timing that you might be able to help us out with in terms of understanding when you think you might have enough data to update us again on reform?

Victor L. Campbell

All right. Who wants that? Bill?

William B. Rutherford

I'll take the first stab and then Milton or Sam add in as necessary. Sheryl, thank you for the question. So we believe by laying out our expectation of 7% to 9% of uninsured gaining some coverage give some insight in how we're thinking about that. We know that will leave 92%, 94% of our current uninsured business that will still flow through on to bad debt. And we know that book has been growing 6% to 8% a year. So maybe hard to see the impact to that on our provision at least on our reported statements. As part of our deduct that we say partially offsets the upside of the uninsured is the conversion of insured into an exchange product. A subset of that population will move into a product that is comparable revenue clearance. There's a subset of that population that will move into exchange product, with perhaps some reduced revenue clearance, either through a discount for participating on exchange product or higher bad debt because of deductible and coinsurance. So that offsets some of that movement on the previously uninsured. And some of that may move into a restricted network. And we'll either see that in an out-of-network position or it be directed around us. So I think it's hard for us to kind of see that exactly show up on our provision of uninsured. There will be some relief with the uninsured gaining coverage. But we'll see some continued growth with the business that remains. And there'll be some offset to that with increased bad debts with the higher deductible and co-pays for exchange-like products. That's my best answer...

Victor L. Campbell

Milton, do you want to add?

R. Milton Johnson

Yes. Allow me to maybe help frame a little bit. If you think about this year, 2013, when you look at our self-pay or uninsured revenue, increased by roughly $100 million over '12. When you look at our provision for doubtful accounts, roughly about 70% of that amount in 2013 was used to reserve for self-pay revenue or uninsured revenue, leaving about 30% for co-pay and deductibles for insured patients. So that kind of maybe helps frame how it's growing most recently coming into reform. When I think about reform as well into 2014, I think it's going to be, the benefits will probably be more back-end loaded. There would be probably some small benefit we'll see in the first quarter, growing maybe into the second. But really, we see it as more a third and fourth quarter opportunity for us, quite frankly. So as you think about modeling that 1% to 2%, I see it more of a back-end loaded number for us rather than early here in 2014. And as far as when we think we'll have more clarity about some of these variables, at the very earliest, and this again is the earliest that I would expect and I'm not sure we'll have it then, is midyear. So when we give our -- into the -- in the third quarter of '14, where we're giving second quarter earnings analysis, we might have some more clarity around some of these variables as we see the first 6 months of reform. But again, because I think it's going to be largely back-end loaded, it may be even later into the year. But I'd say, midyear would be the earliest. I don't think we'll have much color based on the first quarter results, frankly.

Operator

We'll take our next question from Frank Morgan with RBC Capital Markets.

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

I appreciate your description on the pending acquisitions not being included in the guidance, but I was hoping you could give us a little color surrounding those pending deals, when you think those might close and how much those might contribute? And then also, just the development activity in the CapEx that you've outlined, how much of that is implied in the guidance that actually comes online in 2014?

Victor L. Campbell

Milton?

R. Milton Johnson

Yes, Frank. As far as acquisition impact, based on the pipeline today, I don't think it would be material impact in 2014. You may have read yesterday, or may have been released late last week, that our hospital transaction with Ascension in Kansas City for a 2-hospital transaction, is not going to happen, could not get the FTC clearance. So that deal is off. Of course, we are integrating our 3 hospitals in the Tampa market that we acquired from IASIS in 2013. I don't expect those -- those are built in to our guidance since we did have those -- acquired those by the end of the year. Those are built in. So right now, I don't expect -- hopefully, something will come up here in 2014 that will be attractive for us. But nothing in the pipeline that I think will be material as of today.

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

And on the development?

Samuel N. Hazen

Yes. And Frank, this is Sam. Let me add to the answer Milton just gave you around the capital. A couple of things. One, for any large capital expenditures that we do inside of HCA, we have a very specific process that we hold to, to ensure that the expectations around those capital projects are included in our budgets and plans as laid out in those approvals. So there's a natural flow of those expectations in our guidance. The second thing is, on new capital, there is a natural ramp-up. These are long-lived assets and we have a natural ramp-up that occurs on new capital that goes into the market. And some of that is fed into the guidance for 2014, but it's not that material as it relates to the overall performance of the company.

Operator

We'll take our next question from Gary Taylor with Citigroup.

Gary P. Taylor - Citigroup Inc, Research Division

I just wanted to clarify 2 things, I think it was Bill that was talking. The first is, when you went through some of the detailed metrics behind the 2014 guidance, did you give same-store admissions or just admissions outlook? Did I miss that?

William B. Rutherford

Yes, Gary. So we said, admissions -- equivalent admissions would range 1% to 2% and revenue per equivalent admissions would run 2% to 3%.

Gary P. Taylor - Citigroup Inc, Research Division

Okay. Sorry I missed that. And then, just my second clarification. When you said for 2014 you expect 7% to 9% of uninsured to gain coverage, you're saying 7% to 9% of your uninsured adjusted admissions volume, right, not 7% to 9% of the uninsured population in your market. I'm just trying to...

William B. Rutherford

Correct. That would be 7 -- as we step down enrollment, enrollment in our markets, our share kind of equates to 7% to 9% of our current uninsured volume.

Gary P. Taylor - Citigroup Inc, Research Division

Okay. Are you assuming a pro rata, so 9% get covered, that's a 9% impact -- I'm just trying to understand if you've baked in this concept of some of those folks are disproportionate utilizers or you just kind of pro rata the enrollment to your uninsured volume.

R. Milton Johnson

Yes. Gary, this is Milton. I mean, so the stat that Bill gave you is just the coverage statistic and we have other assumptions in the model around utilization from the population that gains coverage. So that's an independent variable from the overall coverage variable.

Operator

We'll go next to Whit Mayo with Robert Baird.

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

Sam, I just wanted to go back to the comment around outpatient observation. I think you said in your prepared remarks that they were up 8%, maybe 11,000 cases in the quarter. Was that all traditional Medicare? Was it across other payors? Just any color would be helpful.

Samuel N. Hazen

I don't have the exact payor mix of all of our observation visits in front of me. I'll say that the short stay admission decline was fairly broad-based across all of our payors. So I would infer from that, that as a result of our increase in observation visits, we saw natural growth in all the different payor classes for observations. I've got it in my office, I just didn't bring it in here with me. And I can get that information to Mark and he can get it back to you. But I think it's reasonable to assume that.

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

Okay. That's helpful. And maybe just one other one. Just, Bill, can you remind us on the restricted basket and where you are now?

William B. Rutherford

Yes. We're -- about $750 million we anticipate by the end of the year.

Operator

We'll go to Darren Lehrich with Deutsche Bank.

Darren P. Lehrich - Deutsche Bank AG, Research Division

So I want to ask about your surgery trends. When we look at the ratio of your inpatient surgeries to that of your inpatient admissions, it's really moved up. And I recall it being much higher. Before the downturn, probably 32% to 33%, we're now back up to 29%, 30%. So I guess, I'm just wondering if you can comment a little bit more about what you guys are seeing, whether this is some kind of comeback? Have you based out in CRM and some of the other things that cause the pressure on surgery and just broader thoughts on how surgeries play into your outlook for 2014?

Victor L. Campbell

All right. Sam, do you want that one?

Samuel N. Hazen

Yes. When I think about surgery as a percent of our total business, I think there's 2 components that affect it as you look at that ratio. First, I mean, we are intentionally investing heavily in our surgical growth across the company. We've been doing that now for over 2 years and I think it's having an impact. It's all embedded in what we call our O.R. of choice initiative where we are intentionally detailing each of our surgical departments to ensure that they have the necessary equipment to meet our physician needs and patient needs, that they have the right process, improvement efforts in place to ensure efficiency. And then, we are very specific with our physician liaisons to respond to the individual physician's needs as it relates to scheduling and so forth. And I think, in addition to the capital that we've committed to that, those elements are driving improved performance for the company. And we continue to believe that there is capacity in that effort and opportunities for continued improvement in growth along the lines of what we've seen over the last couple of years. The second thing that affects the ratio that you're referring to is the fact that our emergency room volume has slowed a little bit and we haven't seen the emergency room admissions that we had seen in previous years. And a lot of the emergency room admission activity is medicine-oriented business. And when you put that into the mix, it affects that ratio that you were referring to as well. But when you look inside our market share and look specifically inside a surgical service line, we're seeing solid growth in orthopedics. We're seeing solid growth in neurosciences. We're gaining ground in general surgery categories. And so, I feel very good about that metric bumping up against the effort that I just mentioned to you. And again, I think 2014 is a year where we're still pretty optimistic around what we're doing on the surgical front.

Operator

We'll go next to Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

On the guidance, I'm trying to back into what you're implying for kind of core EBITDA growth. And I think we've talked previously and you mentioned 3% to 5% as kind of your core target. I'm getting closer to 2% to 4% within that guidance after making the adjustments for the stock comp and the health care IP. Just wondering if I'm missing anything, or if there's some reason for maybe some increased conservatism?

Victor L. Campbell

Milton, you want that one?

R. Milton Johnson

Sure. Justin, if you walk down the low end and the high end of our guidance, adjusting for the 3 items that we've identified, HITECH revenue, if you back out $120 million out of both sides of our guidance there for 2014, you back out the share -- or add back the share-based comp expense of $168 million to each side. And then, if you use the 1% to 2% of EBITDA, you'll get a range of $65 million to $130 million for health care reform. And so, if you adjust the high and the low for that, what I get -- we do that math and compare it to the adjusted number for '13, is at the low end we've got a growth rate implied of 1.75%; and on the high end, a growth rate implied, about 4.6%. So our -- that would be -- and that would be our core range there. So this year, we've guided ranging from our guidance from 1.75% to 4.6%. Clearly, when you think about the point estimate in that range, it would be in the 3% to 5% zone.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay, great. And if I could just ask, what are you assuming for the percentage of people that are newly covered within that guidance assumption? You mentioned that as one of the core -- percentage of enrollment previously uninsured, is one of the 4 key issues. Just to make sure what you're assuming there.

R. Milton Johnson

Yes, Justin. We're not going to disclose the detailed assumptions. What we wanted to do this morning was to give you, obviously, the projected impact on 2014 EBITDA. Bill walked through the 4 main variables of reform, one of which being the percentage in the exchange enrollment that's newly insured. But we're not going to disclose that level of our model. And we want some experience to see how it plays out over time, of course. But we're not going to disclose the detailed assumptions of those key variables at this point in time.

Victor L. Campbell

And obviously, as we build our model, we put ranges in for that and other items to get some comfort with it. But we start dwelling on single points and it lead you to the next one and the next one. So as the year goes, we'll provide a little more color on that. Thanks, Justin.

Operator

Our next question from Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Wanted to go back to the offset of the previously insured, getting coverage and moving to the exchanges. Is there an assumption that you'll just flat-out loose volume versus the added network, I would assume if you capture, would actually be sort of incrementally beneficial to you. So I guess, one is, what that assumption is, just straight-up loss volume. Or does it largely just reflect lower pricing on the exchange and collection? And maybe just remind us of your pricing on the exchange relative to your commercial book.

William B. Rutherford

Ralph, Bill. So I'll walk you through and kind of do it before answering [indiscernible]. There's kind of 4 subsets of those previously uninsured. I think as Milton said, we're going to resist giving you our exact assumptions under each one of those, knowing that it's fluid and there's offsets and there's different points. But we know there's a subset of that population that is moving into a comparable product with really comparable revenues, so set that aside. There's a subset of that population that's moving into an exchange product. And there's a discount associated with that relative to participation. And there's likely some higher bad debts associated with that, salary deductibles and co-pays. There's a subset of that population to your question that moves into a restricted network. And a portion of those we may see in and out of network basis, given our footprint in the marketplace. And yes, there's an assumption for a portion of those that we lose because they get directed away from our network. But again, I think we're going to resist giving you the exact assumptions as we break that out, knowing that it becomes fluid. And it's part and parcel of a multiple other assumptions we're using in our estimate.

R. Milton Johnson

Yes. I think, too, one thing to think about here as health care reform is being implemented across the nation and, of course, we all read about and saw the disruption in the individual market. And so we have factored that in, into our guidance. The question I would have is, is that disruption a onetime event? So it may be an event that may have more impact here in 2014 than in later years. But again, you have to see that play out.

Operator

We'll go to Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

A question also on the impact of reform. I think you said that the 1% to 2% positive is obviously exclusive of the Medicare cuts that you've seen now for a couple of years. So is it safe to assume net, net the ACA is still a negative for you guys in '14? And then, I'm also curious, the 1% to 2%, how does that vary by state? I know you've got 4 states you're spending Medicaid. So I'm just curious, is it a much bigger positive impact in those states and, obviously -- or and is it actually not positive in the other states?

Victor L. Campbell

All right. Josh, this is Vic. If you go back and look at -- and these are percentage points cuts to market basket of productivity, we started seeing hits in 2011. There was a 0.25 reduction. Then in '12, it was 1.1. In '13, it was 80 basis points. In '14, it's another 80 basis points. So you can kind of run those numbers through and you can see that they're bigger than the upside range we just gave you for '14. So obviously, we've been incurring these cuts to get there. And so, it'll take a little while for that to offset it. The second piece of it, I think, we're not going to go into state-by-state. So obviously, there's still not a lot of data. We've obviously made assumptions. There are not many of our states with Medicaid expansion, but we do get some benefits a little bit in California and Colorado. We're really small in Kentucky. And in Nevada, we would pick up some as well through Medicaid. We're also continuing to be hopeful that we'll see some states step up and expand their Medicaid in out years. But at this point, we're going to kind of hold back in terms of any specific state information.

Joshua R. Raskin - Barclays Capital, Research Division

I guess not necessarily quantifying the states, but I'm thinking about what if Florida does go, et cetera, this year, just what's the incremental delta in your average state that has expanded Medicaid versus the average delta...

Victor L. Campbell

Yes. We're not going to that detail at this point. We'll see as we get later in the year. If we learn and have some real-time data that's worth sharing, we'll go there. But right now, those are the assumptions we're willing to put out on the table.

Operator

We'll take our next question from Gary Lieberman with Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Can you talk a little bit about what your experience has been like with the use of Certified Application Counselors in hospitals? Has that gone smoothly? Has it improved as the technology on the exchanges has gotten better? And then also, if you can maybe talk about any benefit from presumptive eligibility that you're seeing?

Victor L. Campbell

All right. Bill, do you want those...

William B. Rutherford

Yes. Gary, this is Bill. Thanks for the question. So we have about 400 Certified Application Counselors throughout our system that continue to screen and counsel patients in our facilities. We definitely have seen that activity ramp up compared to October and November when there were issues with the website. And that continues to be an active part of our reform effort. We continue to evaluate some other outreach efforts for -- within our marketplace for uninsured as well. But the Certified Application Counselor activity continues to counsel a lot of people. And we have seen the assistance in the application increase here in December and January and hoped to see that continue to grow in February and March. It did have a slow start, just given the website piece of that. On presumptive eligibility, we're still working with our states on there. You know some of our states already have presumptive eligibility. There is a certification process and application process that you go through. We think that, ultimately, will just allow us to accelerate some Medicaid applications versus necessarily increase our net-net yield. And so, we're still optimistic on the presumptive eligibility piece.

Operator

We'll go next to Tom Gallucci with FBR.

Thomas Gallucci - FBR Capital Markets & Co., Research Division

First, I just wanted to clarify. Did you have -- outline the margin expectation for EBITDA for 2014? And then, from a bigger picture standpoint, we're sort of seeing the impact of the exchanges and deductibles rising there in the private sector traditionally. How are you sort of thinking about the seasonality of the business these days? Is it materially different as you think to the future compared to the past?

R. Milton Johnson

With respect to margin, I think in the comments, we said margin maintenance, so we're trying to manage our cost to match our revenue and would be margin maintenance would be the target for 2014. Sam, do you want to respond to the seasonality?

Samuel N. Hazen

I think if you look back over the past few years, we started to see more outpatient demand occur in the last half of the year, especially in surgical areas and some other outpatient service lines. That has been a shift. We've heard it from our physicians and we've seen it in our data and so forth. And I think it's natural to assume that, that's coming from hard deductibles and co-pay requirements that get exhausted as the year progresses and people decide to go ahead and get their procedures done in the latter part of the year. So on the outpatient side, I do see more seasonality toward the end of the year than what we've seen in the past. And actually, in this fourth quarter compared to the third quarter, on a sequential basis, our outpatient surgical activity, I think, grew somewhere around 6.5% to 7%. Last year, it grew about 6%. So it really wasn't changed materially from the previous year as far as the sequential performance on that particular metric. Obviously, the first quarter has variation from 1 year to the next as it relates to flu season activity, I think, primarily. But that would be the only thing that drives uniqueness from 1 year to the next. But clearly, on the outpatient side, we have seen a seasonality shift that is more in the back half of the year as opposed to the first half of the year.

Operator

We'll go next to Kevin Fischbeck with Bank of America Merrill Lynch.

Joanna Gajuk - BofA Merrill Lynch, Research Division

This is actually Joanna Gajuk, filling in for Kevin today. I would just -- I'd like to ask a little bit more about the reform assumptions there and also what you are doing around that. First, as a follow-up to the comment you made about what you include in terms of utilization assumption for the people getting insurance, we are thinking that it's probably sicker people that are buying insurance. So if you can comment how you feel about that. And also around the outreach for '14, your markets around reform and if you can maybe shed some light in terms of are you having more success signing up people for Medicaid for those in the Medicaid expansion stage and how that compared to your success rates in signing up people for core Medicaid, so to speak?

Victor L. Campbell

Bill, you want to...

William B. Rutherford

Yes. So on utilization, I think as Milton mentioned before, we do have a utilization factor built into our model for the newly insured. That's just one of many variables that's in our model, so I'm hesitant to really kind of talk about what that actual utilization factor is. I think we've all read reports about some increased activity. And so we do have a utilization factor in on that piece as we look at that 7% to 9%. But it's one of many variables that's included in our model. Regarding the outreach, principally, our efforts have been around our CACs, our Certified Application Counselors, as people visit our facilities. We have an effort underway in several -- in a couple of markets to do outreach for uninsured patients that have visited our facilities over the past 12 to 18 months. And that includes both outbound calls and other outreach efforts. So I think it's too early to kind of report on the net effect of that. You also may know that we have fairly robust Medicaid eligibility processes already in place at our facilities. So if an individual shows up, we assist them with evaluating coverage options. And if they turn out to be eligible for Medicaid within our states already, we go through a Medicaid eligibility process to assist them to gain coverage. So all of that is part of not only our ongoing operations effort, but some increased activity relative to reform adoption.

Operator

We'll go next to A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

I'm going to have a 2-part here. First of all, you didn't really provide much update on Parallon. Is there anything to say there? And then second, on the exchange area itself, thanks for the comments about where you're at with respect to the bronze and silver. When you think about your market share in the markets where you're at and how you're positioned on the exchanges, do you think you're sort of in a position to maintain your current share? I know there were some discussions about out-of-network strategies and so forth. Give us some flavor for a little bit more how you're positioned with the payors on the exchanges if possible?

Victor L. Campbell

All right...

R. Milton Johnson

Let me make couple of comments on Parallon. Bill, I'll ask you to maybe comment, as well, before we go to the exchange positioning. First of all, I think that Parallon, actually, is moving very well, going very well. We think about 2014, we've got The Outsource Group, our acquisition to complete the integration into Parallon and we see some upside there of course with that. With respect to LifePoint implementation, it continues to move on schedule and we should be fully implemented with LifePoint in 2014. And then of course, we are starting to build out of our service center for CHP in Cincinnati and that is on schedule and underway. And looking forward to starting that transition into the consolidated environment for CHP. So things at Parallon are moving very well and on track with our expectations.

William B. Rutherford

Yes. We're still bullish on Parallon. We're seeing our opportunities in our pipeline continue to be out there and the team is really performing well.

Victor L. Campbell

All right. Do you want to talk about the metal position on the exchange?

R. Milton Johnson

I think, again, we've -- we've added, I think, again, the number of hospitals we have in each level at the lowest or second lowest tier. But Juan, any other comments you have about or knowledge you have about...

Juan Vallarino

Sure. AJ, it's still evolving. It's a relatively small part of the business. [indiscernible] There are some markets, very few, where we're not positioned correctly. There are lot more markets, the major markets where we are very well positioned. And until we get enrollment data, I think, it's too early to tell how poorly positioned or how well positioned we really are.

Victor L. Campbell

And Milton?

R. Milton Johnson

Yes. Let me just add with respect to reform. Obviously, over the coming year, we're going to continue to monitor the actual exchange volume, understand utilization, the bad debt, the capture of the other network share. And also with respect to Parallon, monitoring our revenue cycle capabilities to make sure that we can be effective in collecting the patient portions of any out-of-pocket that is due from this newly insured group. And again, we'll continue to look at opportunities to be in more networks in the exchange as we go through 2014. And then, as we see how our strategy is playing out, we'll be evaluating our strategy market-by-market and could make changes if we feel like that we would be better positioned in the network. So there's a number of moving parts with respect to our reform strategy as we enter in 2014. And I'm sure those strategies will be considered and be constantly reviewed, as well, throughout the year.

Victor L. Campbell

All right. Thank you, team. Thanks all of you for being on the call and Mark is here all day and I may be. So have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation.

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