HealthSouth's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: HealthSouth Corporation (HLS)

HealthSouth Corporation (NYSE:HLS)

Q1 2014 Earnings Conference Call

April 29, 2014 9:00 AM ET

Executives

Mary Ann Arico – Chief IR Officer

Jay Grinney – President and CEO

Mark Tarr – EVP and COO

Analysts

Whit Mayo – Robert Baird

Sheryl Skolnick – CRT Capital

Frank Morgan – RBC Capital Markets

Darren Lehrich – Deutsche Bank

Robert Mains – Stifel

Chris Rigg – Susquehanna Financial

John Whittington

AJ Rice – UBS

Gary Lieberman – Wells Fargo

Operator

Good morning, everyone, and welcome to HealthSouth First Quarter 2014 Earnings Conference Call. (Operator Instructions) Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mary Ann Arico, Chief Investor Relations Officer.

Mary Ann Arico

[Inaudible] Today for the HealthSouth first quarter 2014 earnings call. With me on the call in Birmingham today are Jay Grinney, President and Chief Executive Officer; Doug Coltharp, Executive Vice President and Chief Financial Officer; Mark Tarr, Executive Vice President and Chief Operating Officer; John Whittington, Executive Vice President, General Counsel and Corporate Secretary; Andy Price, Chief Accounting Officer; Ed Fay, Treasurer; Julie Duck, Senior Vice President, Financial Operations.

Before we begin, if you do not already have a copy, the press release, financial statements, the related 8-K filing with the SEC, and the supplemental slides are available on our website at www.healthsouth.com.

Moving to slide 2, the Safe Harbor, which is also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks, uncertainties and other factors that could cause actual results to differ materially from management’s projection, forecasts, estimates and expectations are discussed in the company’s SEC filings, including in the Form 10-K for 2013 and the Form 10-Q for first quarter 2014 when filed and previous filings with the SEC. We encourage you to read them.

You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented. Statements made throughout the presentation are based on current estimates of future events and speak only as of today. The company does not undertake a duty to update or correct these forward-looking statements. Our slide presentation and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the slide presentation or at the end of the related press release, both of which are available on our website and as part of the Form 8-K filed last night with the SEC.

Before I turn it over to Jay, I would like to remind you that we will strictly adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. And with that, I will turn the call over to Jay.

Jay Grinney

Great. Thank you, Mary Ann, and good morning to everyone joining today’s call. We are very pleased to report that our first quarter results were very good despite the negative effect of sequestration and the disruption to operations resulting from the unusual winter storms. As noted in our release, sequestration which anniversaried on April 1, created a $9 million and an $8 million Adjusted EBITDA headwind in the quarter.

Although the winter storms affected many hospitals across our portfolio, they were specially disrupted to our West Virginia, Virginia, Pennsylvania, and South Carolina markets. While as reported discharge growth for the quarter was 2.4%. We estimate the negative impact these storms had on our discharges was approximately 100 basis points, all of which affected same-store facility. Normalizing to this effect, total discharge growth would have been approximately 3.4% and same-store growth would have been approximately 1.4%.

Adjusted EBITDA for the quarter came in at $144.1 million, a 3.4% increase over Q1 of 2013, despite the $8 million negative effect of sequestration I mentioned earlier. We also continue to return capital to shareholders in the first quarter through the repurchase of 808,880 shares of HealthSouth common stock under our $250 million repurchase authorization and the payment of an $0.18 per share common dividend. Looking at the remainder of the year, we believe our full year results will be at the high end of both, our Adjusted EBITDA guidance range of $555 million to $565 million, and our EPS guidance range of $1.86 to $1.91 per diluted share. Discharges in April are on-track and we expect full year discharge growth to be between 2.5% and 3.5% despite the weather related impact in the first quarter. This full year discharge growth also incorporates discharge growth comps of 6.3% and 5.7% respectively in the second and third quarters.

On the development front, the announcement of our joint venture with Mountain States Health Alliance to own and operate Quillen Rehabilitation Hospital brings forth the number of new hospitals we expect to add to our portfolio this year. Our development pipeline remains quite strong and we anticipate announcing other portfolio additions by year end.

Finally, for those of you who may have missed it, we filed an 8-K after the market closed last Friday, disclosing we received additional soppiness [ph] in connection with a previously disclosed DOJ investigation. We’ve been expecting these new soppiness for months and it seeks substantially similar information as the earlier soppiness from seven additional hospitals. Obviously since this is an ongoing investigation, we can’t provide any commentary beyond what we have disclosed in our reports filed with the SEC. However, what I can say is that we have devoted significant resources including training and education to assist our hospitals in complying with the multitude of rules and regulation in our industry, and we are cooperating fully with this investigation.

I’ll now turn the agenda over to Doug to provide more commentary on the quarter. After Doug’s remarks, we’ll open the lines for Q&A.

Douglas Coltharp

Thank you, Jay, and good morning, everyone. As in the past, during my remarks I’ll be making frequent reference to the supplemental slides accompanying our earnings release, so you may find it helpful to have those available.

Revenue in Q1 increased by 3.2%, driven by inpatient revenue of 3.9%, offset by a 7% or $2.5 million decrease in outpatient and other revenue. Discharge growth for Q1 was 2.4% and as Jay mentioned, we estimate the negative impact attributable to the severe winter storms at approximately 100 basis points, all of which was felt in same-store markets. Same-store growth for the quarter was 0.4%, and new store growth was 2%. Revenue for Q1 was also negatively impacted by approximately $9 million attributable to sequestration, and as Jay stated, as a reminder, sequestration anniversary on April 1 of this year.

The decline in outpatient revenue was primarily attributable to three fewer satellite clinics and fewer hospital based units in operation in Q1 of this year as compared to Q1 of 2013. The revenue for discharge increased by 1.5%, 3.2% prior to the impact of sequestration. In our Q4 2013 earnings, we devoted a fair bit of time discussing the establishment reserves against revenue related to post payment reviews by RAC auditors focused on medical and specific criteria.

During Q1, the successful resolution of certain claims under review together with the CMS mandated substation [ph] for further RAC audits until contract when bidding is completed updated any additions to our previously established reserves. Bad debt as a percent of revenue for Q1 was 1.3%, flat with the comparable period in 2013. Pre payment reviews also focused on medical necessity criteria and conducted by fiscal intermediaries often referred to MACS [ph] have continued and substantial delays in the adjudication process at the administrative law judge hearing level remained unabated. Accordingly, our bad debt outlook for 2014 remains at 1.3% to 1.5% of net revenues.

During Q1 we continue to exhibit disciplined expense management. SWB as a percent of revenue was 48.4%, up 40 basis points from Q1 last year but would have declined by 30 basis points if not for sequestration. In a similar vein, hospital-related expenses as a percent of revenue were 20.5%, an increase of 20 basis points from Q1 ‘13 but have declined by 10 basis points if not for sequestration. We also continued our focus on labor productivity during Q1 as employees per occupied bed or EPOB was essentially flat at 3.32 in spite of challenges presented by the severe winter storms.

Adjusted EBITDA for Q1 of $144.1 million increased 3.4% over the same period last year. Adjusted EBITDA was negatively impacted by approximately $8 million related to sequestration and was also impacted by the lower volumes resulting from the winter storms, although quantifying the weather impact on Adjusted EBITDA is difficult. Adjusted EBITDA for Q1 included approximately $2 million in gains stemming from the sale of two investments. Consistent with our expectations, interest expense for Q1 increased by $3.7 million over the same period last year, the $27.9 million, primarily as a result of the exchange of the 2% convertible senior subordinated notes for shares of our 6.5% convertible perpetual preferred stock completed in Q4 2013. As a reminder, although the exchange results in an increase of reported interest expense, it reduces our preferred dividend, creating an annual cash flow benefit of approximately $10 million.

Also as anticipated, our D&A expense for Q1 increased by $4.3 million from Q1 last year to $26.4 million, primarily due to a recent capital expenditures, including new investments we have been making in our new clinical information systems. Our diluted earnings per share for Q1 was $0.48, flat to last year as the current year included higher stock based compensation expense and an asset impairment charge. The year-over-year EPS comparison can be found on slide 13 of the supplemental slides.

The strength and consistency of our cash flow generation was again evidenced in Q1 with adjusted free cash flow of $65.1 million. As compared to Q1 last year, the benefit of higher Adjusted EBITDA was offset by increases in net working capital and maintenance CapEx. The approximate $16 million increase in working capital had two primarily components; a decline in payroll liabilities attributable to tax withholding payments related to divesting of employee restricted stock grants and year-over-year timing difference in our accounts payable.

As maybe seen on slide 19 of the supplemental slides, we continue to anticipate the full year increase in working capital for 2014 in a range of $15 million to $25 million. Maintenance CapEx for Q1 of $30.2 million increased by $11.3 million over Q1 2013. As discussed in our February earnings call, this was primarily attributable to approximately $12 million in hospital equipment purchases that were made in Q4 2013 but which were paid for in January 2014, and therefore are included as Q1 maintenance CapEx.

We continue to estimate maintenance CapEx for the full year 2014 in a range of $90 million to $100 million. Discretionary CapEx for Q1 was $33.4 million as compared to $30.3 million in Q1 of last year. Our Q1 discretionary CapEx included approximately $17.3 million for the purchase of the real estate of our San Antonio Hospital which had previously been subject to a lease agreement. We now own the property associated with 76 of our 103 hospitals.

Our significant free cash flow continue to provide flexibility to return capital to our shareholders and we did so in Q1 via the payment of the quarterly $0.18 per share dividend on our common stock, as well as by repurchasing approximately 809,000 common shares using $26.3 million under our $250 million share buyback authorization. Substantial investments in our business and returns to our shareholders notwithstanding the end of the quarter with funded debt in our leverage ratio modestly reduced from year end 2013 levels and with just $43 million outstanding under our $600 million revolving credit facility.

And we’ll now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Whit Mayo of Robert Baird.

Whit Mayo – Robert Baird

Hey, thanks. The first question, I just was wondering if you guys could maybe reflect for a minute on the recent denovo’s over the past two years or so, just wondering if you could frame up maybe returns that you’ve achieved versus expectations, margins, occupancy, just anyway to give us a sense of – sort of, what the returns have been versus your internal expectations?

Jay Grinney

Yes, I would say the returns have been quite impressive. We do have a page in our investor reference book that shows all of the recent denovo’s, I think there are, maybe 8 or 9 of them that we’ve highlighted there and we show not only how quickly did each hospital get to certain occupancy levels but we also then indicate when each of them are achieving positive sustained EBITDA. And so as you can see on that page – I’m sorry, I don’t have that reference right away but we will get it to you shortly. So those of you who have the investor reference book can look at that, but it is at page 73 in the IRB. You can see that virtually all of the hospitals achieve positive sustained EBITDA in months [indiscernible] and most of the hospitals achieved the average occupancy of the company which was just under 70% within the first year. As a reminder, all of the hospitals that we’re building are private room facilities, so the expectation would be that maximum occupancy in those hospitals would be much closer to the 95% level because we have much more flexibility in all private rooms. In terms of actual returns that we’ve said – I’d ask Doug to respond.

Douglas Coltharp

Yes, as we’ve stated previously we target for our denovo’s and acquisitions a pretax return of at least 15%, and we’ve been forced to note that the denovo’s that we have added to our portfolio over the last several years have exceeded their return metric.

Whit Mayo – Robert Baird

Great. And this is really segue to my second question too, and this relates to LTACs. And it just seems so clear that CMS is redefining the role of that particular sector and really pointing the industry towards the most medically complex cases out there. And given your JV strategy on the rehab side, the success with the denovo’s which seems like they make a lot of sense that many hospitals could benefit from dedicated ICU’s and facilities, and these seem to be so complimentary to what you’re doing on rehab. So, I’m just kind of curious how you’re thinking about that, maybe over the next two or three years?

Jay Grinney

Thinking about what?

Whit Mayo – Robert Baird

LTACs.

Jay Grinney

As a provider of healthcare services, we recognize the benefit that LTACs provide to patients who need those services. We are familiar with how to own and operate LTACs, we’ve done that previously as most of you know. I will say that the new patient criteria is welcomed because it now creates some certainty with respect to the next several years, but it is a little troubling to us as you look at the transition – we believe that the transition from current state to future state is going to be a little bumpy. We look at – we’ve done a pretty deep dive on LTACs throughout the country, we’ve done a heat map [ph] to show where are the compliant hospitals, where are the non-compliant hospitals, and well over half of the LTACs out there are currently not compliant. The fact that there is going to have to be such a large transformation is concerning – that doesn’t mean that we are not monitoring the LTAC environment, we are – but frankly, we think it’s a little early to be judging whether or not this is going to present huge upside for the LTAC segment. The biggest concern in our mind is the fact that the non-compliant patients will be paid at the lower – the IPPS monitoring to see how this transition is going to play out.

Operator

Our next question comes from the line of Sheryl Skolnick of CRT Capital.

Sheryl Skolnick – CRT Capital

Hi, thank you very much. I know you can’t comment terribly much about the situation with the OIT and the soppiness [ph] but I’m wondering if you could update us on your levels of compliance with the 60% rule as you have done in the past and your thoughts around the process that you’ve gone through to ensure that you have compliance with the updated parameters in 2009. And any other descriptions of your current operations and posture with respect to the lower acute patients specifically targeted and those that meet the criteria or excluded from normal patient criteria?

Jay Grinney

You’ve stated little bit at the end trouble, I think I caught the question. I’ll take the last part of the question first and then I’ll ask Mark to respond to where we are with respect to overall compliance. But I think as everybody knows, all of us who operate in the healthcare environment are subject to a lot of regulations, many of which come out with certain rules and regulations associated with it. It requires a fair amount of analysis to understand exactly what the new rules mean, then establishing training material, utilizing outside parties when necessary, going to CMS for clarification when necessary, and then attempting to get those new regulations out across the entire portfolio. I think we’ve done a pretty good job with that, we feel very confident that we’re on top of the regulations. At the proposed stage, we’re on top of it once they are actually promulgated, we pay a lot of attention to that and want to make sure that those rules and regulations are complied with and we put training materials together, we have onsite training, we have online training, and we really try to do the very best we can to ensure compliance. In terms of our overall, 60% compliance, and we’d ask Mark to address that.

Mark Tarr

Yes, sure. Our overall compliance of the company is 76%, that is, as you can imagine, a number of that we monitor very closely at each individual hospital to make sure that each hospital is in full compliance with the 60% guidelines and to the extent that hospital gets closer to the 60% then they will closely monitor those patients coming in and make sure that we had a higher percentage of compliant cases to make sure that we have a little bit of a buffer there.

Sheryl Skolnick – CRT Capital

Can you just clarify on that, the 76% overall, meaning that overall for the company as a whole you’re at 76% versus the 60% total rate or does it mean that 76% of your facilities are compliant with the 60%?

Mark Tarr

That 76% overall on the compliance percentage.

Sheryl Skolnick – CRT Capital

Okay.

Mark Tarr

All in.

Sheryl Skolnick – CRT Capital

Okay, that’s great. Thank you very much. And…

Mark Tarr

Sheryl?

Sheryl Skolnick – CRT Capital

Yes, I just wanted to say thank you for releasing that disclosure as soon as you got it, that’s really a best practice and it’s very much appreciated.

Mark Tarr

You’re welcome. Sorry there, it was on a Friday but we got it on Friday so we wanted to make sure that – today we wanted to make sure that everybody saw that.

Sheryl Skolnick – CRT Capital

Thank you.

Operator

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

Frank Morgan – RBC Capital Markets

Good morning.

Jay Grinney

Good morning.

Frank Morgan – RBC Capital Markets

Within your guidance on the volume side, the 2.5% to 3.5%, how much of that would you say is implied to be same-store?

Jay Grinney

No, we haven’t broken that out but historically there has been a roughly 40%, 50% somewhere in that range new store and same-store, but that fluctuates Frank. And that – so it’s very hard for us to precisely say every single quarter same-store is going to be X percent and the new store is going to be Y percent. As you know, when we bring on new hospitals, and for instance this year we’re going to be bringing on new hospitals – three new hospitals in the fourth quarter. But clearly that will have a disproportionate impact on overall discharge growth as we go into 2015, and there will be a disproportionate impact on new stores. Similarly, in years gone by we’ve added hospitals more spread out throughout the year and so the impact is a little bit less. But if you think about it historically and again, we provide this information in the investor reference book on page 12, if you look at it overall, you can see there is a lot of variation in the new store, a new store can be as low as 0.4%, it can be as high as 2.5% or 2.8%, and same-store can be as low as 0.6% as it was in Q3 of 2010, as high as 5% in Q1 of 2012. So I think if you could look at the page 12 in our investor reference book, you’ll see that it’s very hard to say with any certainty or I shouldn’t – with any precision in some sort of formulaic way. If you look at the overall growth, it will consist of X percent same-store and Y percent new store, there is a lot of variability in those numbers.

Frank Morgan – RBC Capital Markets

I got you. Thanks. And in terms of just – in forth of generalization, I understand you’re having – you’re coming up against difficult times, 2.5% to 3%, would you say that’s a good – kind of normalized sustainable run rate on the company? And then – or is there anything else that you’re seeing out there, either new capacity coming around, a new competitor, any other shift that you’re seeing that might influence volume or do you think this 2.5% to 3.5% is a good long-term number that we should model off? Thanks.

Jay Grinney

Yes, we think that that’s a good long-term number that you can model off for the planning horizon that we outline in our business outlook which is found on page 22 of the supplemental slide and would take us out through 2016.

Frank Morgan – RBC Capital Markets

Okay, thanks.

Operator

Our next question comes from Josh Raskins of Barclays.

Unidentified Analyst

Jack, it’s Roth [ph]. So first question just – the update on the guidance where we touched the high end. I understand there was a couple of million dollar gain, I think the $2 million, but my guess is whether there was probably $1.5 million or $2 million as well. So maybe what’s driving the comfort towards the higher end of the range relative to what you guys knew a little more due two months ago?

Jay Grinney

No, just the fact that we’re two and a half months down the road and even though we did see the disruption to discharges in Q1 as a result of the winter storms, as I mentioned, we’re feeling pretty good about the discharge growth in April, it’s one month out of the quarter but we’re back on-track, and so we feel that now we have a little more visibility, little more confidence in the overall numbers and feel that guiding to the high end is the appropriate thing to do.

Unidentified Analyst

Got you. And hi guys, it’s Jack. I just wanted to follow-up operationally with the weather, how does that directly affect the business? Is it more on the admission side bringing people in because you’re downstream from acute care providers or is it more – have a length of stay issued, we can’t necessarily discharge someone with a weather [ph]. I’d imagine that the acute – just the type of population that you’re seeing, that’s not going to change much, you’re going to still – obviously, have the same sort of dramatic injury at each quarter, right?

Jay Grinney

Yes, let me begin, and I’m going to ask Mark to give you a little more color commentary. I mean that the easiest way to think about this because this is the way it happened is – these storms literally locked down on communities that they hit. It did made getting out on the roads virtually impossible. So in those communities and the markets that were hit by these storms and as I think all of us know, there were multiple storms, sometimes days apart. During the build up to and certainly during those storms, these communities shutdown, roads were closed, people couldn’t get in or out of their homes, they couldn’t get in or out of hospitals, be it acute cares and going in terms of admissions, acute cares in terms of discharges, we couldn’t get our lays on instead of the acute care hospitals, and we couldn’t get patients into our hospitals, there were facilities that had to keep patients longer than we would have otherwise wanted to or certainly longer than the patients would have wanted to. So the impact was multifaceted, there wasn’t any just one specific thing that happened, but what we did see was that it occurred in those hospitals, those markets that I mentioned, multiple times, particularly in late January and into February.

Mark Tarr

Yes, this is Mark. Operationally the biggest challenge is just getting the patients in, we can handle referral from acute care hospital but then the storm hit, and then having the ability to actually move to the patient from acute care hospital into our hospital is where the challenges really came into play. And as Jay alluded, it shuts down the entire marketplace, so we couldn’t discharge patients out although we didn’t see a huge increase and overall length of stay for the company as a whole, and those hospitals impacted – there was a bit of an impact there but the greatest challenge was getting patients into the hospital and get that conversion, we call it from the point of having a patient referral to the point of a patient admission.

Unidentified Analyst

Got it. Okay, thanks guys.

Operator

Our next question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody.

Jay Grinney

Good morning.

Darren Lehrich – Deutsche Bank

I just wanted to ask a little bit more about the Mountain States JV and just the overall JV opportunity. It looks like based in your comments this was a freestanding facility and I guess I’d be curious to see your thoughts on the end market and the overall market opportunities for hospitals that are on these kind of freestanding [ph] or if this is something different that you’ll be converting it to that? And then just more broadly get your thoughts on other JVs with hospital based units of – or interested in your comments on the JV potential here.

Jay Grinney

I’m going to ask Mark in a minute to comment on the Mountain States opportunity which we do think is a terrific opportunity for us to partner with, an outstanding organization, and to enhance the overall rehabilitative services in that market. To answer the broader question, we do see that there are increased opportunities to joint venture with acute care hospitals that are providing rehab services today. Some of those services offered by the acute care hospitals are in the form of freestanding hospitals like Quillen. Most however are services that are offered in an HIH. What we are seeing is that many acute care hospitals are acknowledging that in today’s reimbursement environment of reduced Medicare, Medicaid and commercial payments, it’s hard for them to offer a consistently high quality level of rehab services, and at the same time meet all of their medical, surgical and core business needs. Accordingly, we’re seeing more increase and more responses to our increase about joint venturing those services to provide the full continuum of care but now doing it on a partnership basis. And so as I mentioned in my comments, that we were very pleased to announce this joint venture and we are looking forward to announcing additional additions to our portfolio in the balance of the year.

Mark Tarr

Yes, Darren, it’s Mark. We’re very excited about the Quillen opportunity, that kick off our hospital, the building itself was built to be a freestanding rehab hospital, over the years it has had couple of different transitions, it currently houses both, our inpatient rehab, hospital beds as low sniff-beds. The long-term prognosis is to continue to grow the rehab and sniff-beds will be transferred out but needless to say we’re very excited about working with the team there, working with Mountain States, and continuing to grow in that marketplace.

Darren Lehrich – Deutsche Bank

That’s great. And then, if I could just – I wanted to follow-up – Jay, you made a mention of the rule making process, and I’d be curious to know if the rule is coming soon. Are there any expectations for the upcoming PPS we’re making, anything that we should be on the lookout for – that’s any different this year? Thanks.

Jay Grinney

Darren, we are not hearing anything about the proposed rule, we’re not hearing positive, we’re not hearing anything negative. So – but we’re not expecting anything that would be coming from left field. But we’re going to be waiting expectedly just like everybody else to get the proposed rule, probably sometime in May.

Darren Lehrich – Deutsche Bank

Got it. Thank you very much.

Operator

Our next question comes from Robert Mains of Stifel.

Robert Mains – Stifel

Thanks, good morning.

Jay Grinney

Good morning.

Robert Mains – Stifel

The question on the outpatient – I know we’re talking 6% – even though that there are 10 fewer clinics than last year, was there a decline from the fourth quarter or the first quarter or some of that decline also weather related?

Jay Grinney

Well the weather related hit in this first quarter for sure. I mean, that was not something we’d put a number on Rob but it was certainly impacted a significant number of our outpatient business itself is located in those states of which Pennsylvania is one of the higher states that we definitely saw an impact there.

Robert Mains – Stifel

Okay, fair enough. And second, a follow-up to Darren’s question. We’ve got the latest Medicare [ph] behind us, in your mind what is that’s kind of legislative priorities that you’re looking at both for HealthSouth and for the industry?

Jay Grinney

The legislative priorities really are – the sustainable growth rate in 2015 and the debt-ceiling debate that will go along with that. Our assessment is that legislatively there is not going to be anything else occurring in 2014 because everybody’s focus is on the mid-term elections and each party wants to enhance their position in both, the House and the Senate, in terms of the number of representatives and centers that they have. So the next real priority is going to be – what happens to SGR in Q1 of 2015, and how does that fit within the overall debate of the debt-ceiling. That – those I should say will be informed by what kind of – what the House in the Senate looks like in terms of leadership, and which will be dictated by the mid-terms. So that’s the next sort of marker for us, and right now we’re just – when we go to Washington and we meet with members, we are trying to underscore the value proposition that inpatient rehabilitation services offers to their constituent, primarily the Medicare constituents. And we’re very pleased that that message is very well received. I think the members who represent our hospitals, many of whom come to our hospitals, they visit our hospitals, they see the services that we provide, they see the value that we’re offering to the patients who need and deserve inpatient rehabilitative care, and so they get that we’re an important part of the continuum. But to answer your question again, I think the next real milestone legislatively will be next year with SGR and debt-ceiling.

Robert Mains – Stifel

Right, thank you.

Operator

Our next question comes from Chris Rigg of Susquehanna Financial.

Chris Rigg – Susquehanna Financial

Thanks for taking my questions. Just hoping to get a quick refresher on the NOLs and whether there has been any change, quarter-to-quarter I know sometimes the changes at year end and whether – just updated from the timing of when you think you’ll be a full cash tax payer again. Thanks a lot.

Douglas Coltharp

It’s Doug. And the – obviously the NOL does change from quarter-to-quarter as we’re utilizing that to offset what otherwise would be the federal taxes due on our earnings. So we’ve included in the supplemental slides on page 18 with the balance clause at the end of the first quarter, and that was at $866 million. Again, you can then utilize the effective tax rate assumption of roughly 40% and then that will give you a sense as to how long we’ll continue to have the benefit of those NOLs. And as we’ve stated here on page 18 as well, for the near term, we continue to estimate that our annual cash taxes will be in that $10 million to $15 million range.

Chris Rigg – Susquehanna Financial

Okay. And then just one other question, I know you can’t say a lot about the DOJ investigations, but I just want to make sure I understand exactly what happens here and they just be legally if they want but it was OIG-HHS for a number of quarters in your disclosures, and then in the 10-Q it took the change to the DOJ and the disclosures from last week, the DOJ was in there. Has the DOJ always been involved, or did they get inserted into the process at some later date?

John Whittington

Good morning, this is John Whittington. They’ve always been involved and we’ve always disclosed their involvement from the beginning.

Chris Rigg – Susquehanna Financial

Okay. It just looked like it’s in the 10-K and OIG-HHS and then the DOJ came into the disclosures later, but we can follow-up offline. Thanks.

John Whittington

They represent the government, they represent the healthcare administration.

Jay Grinney

Yes, so it’s been in there.

Chris Rigg – Susquehanna Financial

Okay.

Jay Grinney

And Chris, what we’ll do is, we’ll send the excerpts from the Q’s and the 8-K’s just so you can confirm that.

Chris Rigg – Susquehanna Financial

Yes.

Operator

Our next question comes from the line of AJ Rice of UBS.

AJ Rice – UBS

Hello, everybody. Good morning. Two quick questions, first of all, maybe just – is there any further color on what you’re seeing with respect to your labor, particularly your therapist, I know you said EPOB was flat year-to-year but how about turnover rates, availability of people as it tightened it all with the economy getting a little better or not really?

Jay Grinney

The answer is not really. We are very pleased with our ability to recruit and importantly, retain really top talent, both in the nursing side as well as the therapy side. And our turnover in the therapy area has remained consistently in the single digits for – as long as I’ve been here. I mean it’s really been one of the things that I think makes this company unique, and we haven’t seen any volatility in that. On the nursing side, we also have very good retention rates, and part of that has been a push to ensure that as many of our registered nurses has possible seek and apply to become certified as a rehabilitation RN [ph] and that’s been a very successful program for us.

AJ Rice – UBS

Okay. And then the other follow-up I guess would be the – I think last quarter you guys mentioned that you were sort of waiting to see how the doc showcased [ph] and so forth, maybe with respect to in case of share buybacks and obviously, you’ve bought some in the first quarter, do you see that now that we have some clarity around the launch and it seems at least until next spring, do you see an acceleration in your pace on share repurchases or any commentary along there will be helpful.

Douglas Coltharp

AJ, its Doug. Obviously we continue to have capacity for further share repurchases, both in terms of the authorization that is in place from our Board of Directors, and in terms of our balance sheet capacity and specifically the amount of availability that we have on our revolving credit facility. And as we have stated I think pretty consistently here over the course of the last two years, shareholder distributions, both in the form of the dividends that we’re paying on our common stock and incremental share repurchase are going to continue to be an important component of our business model.

AJ Rice – UBS

Okay, thanks a lot.

Operator

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

Gary Lieberman – Wells Fargo

Good morning, thanks for taking my question.

Jay Grinney

Good morning.

Gary Lieberman – Wells Fargo

Just a follow-up on your conversations that you had in DC, did the idea or the concept of slight neutral payments corrupt when you’re having your discussions and sort of where are we on that front?

Jay Grinney

They have not come up on a regular basis, they do come up from time to time. I think as most everybody knows there was a bipartisan-bicameral discussion draft if you will that was issued earlier this year, the impact act, and that was to – really it was an effort by the finance committee on the Senate side ways and means on house side to begin looking at post acute payment reform and some options that might be part of that, side neutral payments would be included in that construct. But if you go in and you analyze what was said, basically the conclusion was, this was very complicated, there are a lot of additional steps that need to be followed, there needs to be the adoption of a common patient assessment tool. And in the impact outline, the draft goes outline, the work that it would have to be done on this occurs from now until I think 2020 or 2022. So, does it get some attention, yes; is it acknowledged that it is a very complicated transition to make, yes; are there any proposals that have been put on the table that say these would be the services or the CMGs that would be paid on a slight neutral, these would be the services that our CMG – that would not be, and the answer is no. So I think it’s very much in the – in its infancy, but it’s certainly a concept that’s out there and as we’ve said in the past, we don’t necessarily believe that moving to side neutral would be negative for HealthSouth because presumably in that calculation of what that side neutral payment would be, especially if the comparison is between a rehabilitation payment and a nursing home payment, factors beyond just what is the per day payment would be included, and those factors would include items such as length of stay, return rates or reignition rates to acute care hospitals, and more importantly outcomes. So it is something that gets talked about, it’s not something that is ready for prime time in our space. And as I’ve said, we’re not looking at it necessarily a big negative, it could be a real positive for us.

Gary Lieberman – Wells Fargo

Okay. And then as a follow-up, you said that you were expecting soppiness [ph] that you received – are there any other soppiness [ph] that you’re anticipating regarding investigation?

John Whittington

Again, this is John Whittington. At this time we don’t have any reason to expect any additional soppiness [ph] but as you know, the government is free to investigate in the way it deems appropriate but right now we’re not aware of any reason to expect new soppiness [ph] but I wouldn’t rule anything out.

Gary Lieberman – Wells Fargo

Thanks very much,

Operator

Thank you. Our final question comes from the line of Kevin Fischbeck of Bank of America.

Unidentified Analyst

Hey, this is Feebeck [ph] for Kevin. Just a question on the pay-mix. Our fee for service Medicare continue to tick up in managed care which includes Medicare advantage, continues to trend down a little bit. Given the growth in the MA program and the improving economy and the potential impact on commercial, that seems a little bit surprising to me. So any color you could give – just volume dynamic or is there something going on what pricing on the managed care side that we should be thinking about, any kind of uptick [ph]? Thanks.

Jay Grinney

Yes, sure. So if you look at Q1 of 2013 versus Q1 of 2014, there was about a 1.8% decline in the number of Medicare advantage discharges treated in our hospitals, and maybe that’s kind of the numbers that you’re focusing on. If you break that down however, there are two buckets underneath managed Medicare; one would be the traditional fee for service payment, the other would be on a contract that where we go out and we negotiate with an MA plan to be an inpatient rehabilitation provider. The fee for service is a very small component of the overall Medicare advantage numbers but that bucket has actually gone down 29% year-over-year, now it’s a small number to begin with, so from 375 discharges down to 265 discharges. On the other hand, the contracted bucket actually went up, 2.5%.

Unidentified Analyst

I appreciate the color.

Operator

And thank you, that was our final question. I will now turn the floor back over to Mary Ann Arico for any additional or closing remarks.

Mary Ann Arico

Thank you. As a reminder, we will be filing the updated Investor Reference Book next week. If you have additional questions, I will be available later today. You can reach me at (205) 969-6175. Thank you.

Jay Grinney

Thanks, everyone.

Operator

Thank you. This concludes today’s HealthSouth first quarter 2014 earnings conference call. You may now disconnect. And have a wonderful day.

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