HCA Holdings' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: HCA Holdings, (HCA)

HCA Holdings Inc (NYSE:HCA)

Q1 2014 Earnings Conference Call

April 29, 2014 10:00 a.m. ET

Executives

Victor Campbell – SVP

Milton Johnson – President and CEO

William Rutherford – EVP and CFO

Sam Hazen – President, Operations

Analysts

Frank Morgan – RBC Capital Markets

Whit Mayo – Robert Baird

Darren Lehrich – Deutsche Bank

Gary Taylor – Citigroup

Sheryl Skolnick – CRT Capital

Justin Lake – JP Morgan

Andrew Schenker – Morgan Stanley

Jason Gurda – KeyBanc Capital Markets, Inc.

Joshua Raskin – Barclays Capital

Joanna Gajuk – Bank of America, Merrill Lynch

Chris Rigg – Susquehanna International Group

Ralph Giacobbe – Credit Suisse

Operator

Welcome to the HCA First 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 Sir.

Victor Campbell

Travis, thank you, 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 who are listening in on the webcast. With me here this morning are President and CEO, Milton Johnson; CFO, Executive VP, Bill Rutherford and Sam Hazen, President of Operations; and we have several other members of the management team are here as well to assist during the Q&A if necessary.

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. And today's call is being recorded. Replay will become available later today.

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

Milton Johnson

Thanks Vic, and good morning to everyone joining us on our first quarter call and broadcast. We were pleased with our performance for the first quarter as we generally saw continuation of recent trends in many key operating metrics. As Sam will describe in a moment, our market share trends remain positive. Of course this quarter reflects the long awaited first coverage period for expanded Medicaid and helped exchange insurance products.

We saw encouraging signs from healthcare reform during the quarter and found them to be consistent with our early expectations. Bill will provide details on healthcare reform in his comments, but as expected healthcare reform had minimal impact on the company's first quarter results. However we remain optimistic regarding the long term benefits of reform.

We remain comfortable with our previous guidance regarding the estimated impact of healthcare reforms on our financial results for 2014.

Now, moving to the quarter's results, revenues increased to $8.832 billion compared to $8.44 billion in the first quarter of 2013. Net income totalled $347 million or $0.76 per diluted share compared to $344 million or $0.74 per diluted share in the first quarter of 2013.

Excluding gains from the sale of facilities and legal claim costs incurred during the quarter, the company would have reported net income per diluted share of $0.84 in the first quarter of 2014.

Adjusted EBITDA of $1.644 billion increased 4.8% in the first quarter of this year over the first quarter of 2013. If you exclude the impact of EHR incentive income and share based compensation expense from both periods, adjusted EBITDA would have increased 6.3%.

Adjusted EBITDA margin of 18.6% was flat compared to the prior year. However if you exclude EHR incentive income and share based compensation expense from the adjusted EBITDA for both periods, adjusted EBITDA margin would have increased 30 basis points.

Volume trends were somewhat soft in the quarter, primarily in our lower acuity service line. In-patient surgical growth along a decrease in lower acuity patients resulted in growth in case mix index of 2.2%.

Net revenue per equivalent machine [ph] was favourably impacted as a result and overall expenses were well managed throughout the quarter. Today we are also reaffirming our previous adjusted EBITDA guidance range of 6.6 billion to 6.85 billion for 2014.

And while we are not providing quarterly earnings guidance, I do want to remind everyone that our EBITDA performance in the first half of last year was somewhat uneven. As you may recall, our EBITDA growth in the first quarter of 2013 was below our expectation due to an unfavourable calendar and very soft volumes in the latter part of the quarter. Then in the second quarter, the combination of improved volumes and cost structure resulted in a very strong quarter getting us back on plan by midyear.

So for 2014, we’ve had an easier comparison in the first quarter and we will have a much tougher comparison in the second quarter.

In addition to our solid financial performance, our patient safety and quality of care agenda continue to perform at a very high level. For example, our reduced Mercer study conducted at 43 HCA hospitals and 74 intensive care units and involved approximately 75,000 patients determined that treating all patients with an antiseptic wash and nasal ointment on admission to intensive care not only reduced all infections by 44% but was selected by the Clinical Research Foundation as one of the top 3 contributions in the US in 2013.

With that, I will turn the call over to Bill.

William Rutherford

Hey, great, thank you, Milton and good morning everybody. I will cover some additional detail around the first quarter, then I will turn over to Sam and he will provide some additional commentary on volume and market share information.

As Milton mentioned, we were pleased with the quarter’s results. The first quarter results were driven by solid revenue growth resulting from relatively stable volume and increase intensity of services as well as strong expense management by our operators.

Milton just mentioned our adjusted EBITDA increased $1.644 billion or an increase of 4.8% from the prior year. However adjusting for the reduction in HITECH incentive income and the increase in share base comp, adjusted EBITDA increased 6.3% over the prior year. In the first quarter, our same facility total admissions declined 0.6% over prior year and equivalent admissions declined 0.3%.

We experienced a 140 basis point reduction in our admissions in the quarter due to declines in pulmonary and one day stays. Adjusting for declines in pulmonary and one day stays, same store admissions grew 0.8%. During the first quarter, same facility Medicare admissions and equivalent admissions declined 1.1% and 0.3% respectively. Same facility Medicare admissions include both traditional and managed Medicare and managed Medicare admissions increased 2% on the same facility basis and represent just under 30% of our total Medicare admissions.

Same facility Medicaid admissions and equivalent admissions increased 1.4% and 2.4% respectively in the first quarter when compared to the prior year. This increase compares to fourth quarter declines of 1.6% in both admissions and adjusted admissions, and this was primarily driven by growth in our four Medicaid expansion states that I will speak to shortly.

Same facility self-pay and charity admissions increased 2.1% in the quarter while equivalent admissions declined 0.7%. This represented 7.6% of our total admissions compared to 7.4% last year. These results do compare favourably to our fourth quarter 2013 when self-pay and charity admissions and adjusted admissions grew 8.3% and 5.2% respectively.

Managed Care and exchange admissions and equivalent admissions declined 1.7% and 2.2% respectively in the first quarter on a same facility basis. And we are combining these two categories until exchange becomes more material.

Same facility emergency room visits were basically unchanged compared to the prior year's first quarter. Self-pay and charity ER visits represent 22.3% compared to 22.4% in the last year's first quarter on a same-facility basis.

Fairly consistent with prior quarters our softer volume was mostly in our lower acuity business and this coupled with continued in-patient surgical growth helped drive stronger revenue intensity. Same facility revenue per equivalent admission in the quarter increased 3.7% compared to the prior year. Same facility Medicare revenue per equivalent admission increased 0.8% in the first quarter, while case mix increased 1.7%.

Same facility managed care revenue per equivalent admission increased 6.1%, fairly consistent with our prior trends. And case mix increased 2.9% in the quarter.

Same facility charity care and uninsured discounts increased $347 million in the first quarter compared to the prior year. Of this same facility charity care discounts totalled $921 million in the first quarter and increased to $17 million from prior year, while same facility uninsured discounts totalled $2.277 billion, an increase of $330 million from the first quarter of 2013.

Now let me turn to expenses. Expense management in the quarter remained strong consistent with our recent trends. Same facility operating expense per equivalent admission increased 3.2%, 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 45.9% from 46.4% in last year's first quarter. Salaries per equivalent admission increased 2.2% on a same facility basis in the quarter.

Same facility supply expense per equivalent admission increased 3.1% in the quarter when compared to the prior year and this primarily reflects the service intensity and increased in-patient surgical volume in the quarter.

Other operating expenses increased to 18.6% of revenues in the quarter compared to 18.1% last year, primarily reflecting an increase in insurance utilities and other operating.

We recognized $30 million in electronic health record income for the first quarter compared to $39 million last year. The company also incurred approximately $43 million in EHR related expenses in the quarter compared to $26 million in last year's first quarter, a $26 million drag on first quarter results, somewhat higher than the previous quarters.

Let me take a moment to address cash flow in the quarter. Our cash flow from operations declined from $740 million in Q1 of 2013 to $443 million in Q1 of 2014. This decline's primarily related to $170 million effect increase on working capital and a $206 million negative impact related to income taxes. Last year we received a $185 million tax refund and this year we had a $32 million tax payment.

On working capital there were two items affecting this. We had an increase in other current assets primarily to a growth in an imaging [ph] program receivable and a growth in patient receivables. That's mostly attributable to a growth in our governmental receivables, mainly due to a changing regulatory environment which extending the collection process and we had some growth in receivables in our Texas waiver program as the state has had some backlogs in processing payments. In addition you will see we invested $400 million in capital expenditures in the quarter.

At March 31st, the company's ratio of debt to adjusted EBITDA was 4.35x compared to 4.32x at December 31st of 2013. At the end of the quarter the company had approximately $4.442 billion of availability under its revolving credit facilities, however on April 2nd, the company paid $2.9 billion to redeem its $1.5 billion, 8.5%, and $1.25 billion of our 7 and 7/8% notes.

You will note a nearly high cash balance on our balance sheet as of March 31st, and this was due to a bond restructuring awaiting to apply to our call provision executed on April 2nd.

Now let me move into a discussion around health reform. As Milton mentioned we saw encouraging signs related to health reform in the first quarter. When we think about health reform, we will discuss the impact from two views. First, what we experience with exchange volume and activity and secondly what we experience in our Medicaid expansion states. As I begin, let me preface these comments that although we did see encouraging signs that I will share with you, as we estimated reform is still unfolding and had a minimal impact on our results for the quarter.

Relative to exchange volume, we saw just over 1700 exchange admissions in the first quarter of 2014. Remember this is on a base of 440,000 admissions for the company, so about 0.4% of our total admissions. We were encouraged with the progression of this volume that we saw throughout the quarter. In general we saw twice the number of exchange admissions in February than we saw in January and we saw twice the exchange volume in March than we did in February.

Although only a small portion of these have completed the collection cycle, we do anticipate clearing these at rate similar to commercial accounts. A key question for this exchange volume has been and is how much is this volume is from previously uninsured patients versus previously insured conversion into an exchange product.

In an attempt to get some insight into this question we performed an analysis on each of these exchange admissions we saw in the quarter to evaluate had they been seen in an HCA system within the last 12 months, and if so what was the coverage status.

We had seen about half of the exchange population previously and one-third of those served were previously uninsured. So far this is the best data point we have in trying to answer this key question for the exchange volume thus far.

Now let me turn to a discussion around Medicaid expansion impact. A quick reminder, that we have four of our states expand Medicaid which represent about 13% of our bed capacity. California, Colorado, Kentucky and Nevada, in our expansion states we saw Medicaid admission growth of 22.3%, as compared to a 1.3% decline in Medicaid admissions in our non-expansion states. Conversely, we saw a 29% decline in uninsured admissions in these four states as compared to a 5.9% growth in uninsured volume in non-expansion states.

We estimate the impact from these trends in our expansion states is just over 1000 admissions previously uninsured now have Medicaid coverage.

In summary, although reform is still unfolding and still a small percentage of our business, we are encouraged by these early trends and we re-affirm our earlier guidance of health reform impact of 1% to 2% of adjusted EBITDA for the full year of 2014.

That concludes my remarks and I'll turn it over the call to Sam for some additional comments.

Sam Hazen

All right, thank you, Bill, good morning. I'll begin my comments this morning with more detail on our same facilities volume for the quarter and then provide an update on market share trends for the company.

As you heard pulmonary related admissions were down 9% or almost 4000 admissions as compared to the first quarter of last year. This decline was similar to what we saw in the fourth quarter of 2013 and reflects the soft flu season across the last two quarters.

We saw the same decline in our emergency rooms. Pulmonary related emergency room volume was down 9% or approximately 23,000 visits in the quarter. In total, emergency room visits were mostly flat with prior year. However adjusted for pulmonary related volume, emergency room visits grew by 1.3%.

In-patient surgeries were up 0.9%. This increase was primarily driven by solid growth in the following areas: orthopaedics, general surgery, cardiovascular and transplant surgery.

Out-patient surgery volumes were down 1.7% in total. Hospital based out-patient surgeries were down 1.3% and inside our ambulatory surgery division, out-patient surgeries were down 2.2%.

Out-patient endoscopic and pain management procedures which are not included in our surgery statistics increased 5% for the quarter.

Other in-patient volume statistics for the company were as follows: obstetric admissions were up 2.1% as part of this growth, managed care of obstetric admissions were up 4%. Behavioural Health admissions grew by 2.4% and rehabilitation admissions grew by 7% and finally average length of stay for in-patient admissions increased 0.9%, reflecting the stronger acuity.

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

The company's in-patient market share for this period grew 31 basis points to 24.1%. HCA gained share in 25 out of 37 markets with gains in 8 of our top 10 markets. We gained share in 12 out of 17 service lines and market share in the commercial segment was flat and also in the in-migration segment we actually increased by 31 basis points.

Overall during this period in-patient demand across HCA markets was essentially flat. However in three of the four quarters in this period demand actually increased, but this growth was entirely offset by the soft demand in the first quarter of 2013. Across all of these market share metrics the company's trends are generally consistent with past periods. We believe this performance reflects both solid execution of our growth and operating agendas by our management team and increased capital investments in capacity, technology and new facilities.

And with that I'll turn the call back to Vic.

Victor Campbell

All right, Sam, thank you. Travis you want to come back on and queue up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question today from Sheryl Skolnick with CRT Capital.

Sheryl Skolnick – CRT Capital

Operator

Being as there is no response, we'll move onto our next question. Frank Morgan with RBC Capital Markets

Frank Morgan – RBC Capital Markets

Good morning. I was hoping if you could give us a little bit of color on the progression of volumes in the quarter and really in the first quarter and really how your stat going into the second quarter given this volatility that you called out. And then secondly, I know Milton had commented in the past that he would never use weather as an excuse. I'm just curious what was the weather impact in the quarter? Thank you.

Victor Campbell

Milton, you want to do weather and do you want Sam to answer that.

Milton Johnson

Yeah, Frank, we're going to stand by my earlier statement. We don't believe, we didn't see, you know weather of course did hit some of the timing of some of our services in certain markets in the quarter, but we believe the timing of the weather issues were such in the quarter that we were able to largely recover, no material identifiable impact from weather in our first quarter.

Victor Campbell

Sam, you want to talk about the progression in the quarter.

Sam Hazen

The admission growth for the company was primarily in February and March. We actually were up in both of those two months. As the quarter progressed all of our pressure points were in the month of January, which was when we compared against the flu volume from last year. And so if you look at the last two months we did have admission growth and adjusted admission growth as the quarter progressed.

Frank Morgan – RBC Capital Markets

All right, thank you.

Operator

Our next question comes from Whit Mayo with Robert Baird.

Whit Mayo – Robert Baird

Hey thanks, maybe just one for Bill or one now that you guys have a better glimpse at a lot of the enrolment data in your markets recognizing that it's a small piece right now. But any unique observations that you think are worth making and my second question would just be around the conversation around premium subsidies and I'm not sure if HCA has just really stated their position at this point. So just any comments there will be helpful.

William Rutherford

Well I can't call out any distinct characteristics with this exchange volume so far in the first quarter. You know it is still early. As I mentioned in my comments we're pleased with the progression of that volume we saw in the first quarter, seems to be fairly even spread among a majority of our states. Really no differentiating characteristics of that exchange volume compared to our other book of business at this stage, so nothing really to call out right now.

Milton Johnson

And on the premium subsidy, I think there we have, we have not really pursued that.

William Rutherford

Yeah, our position is when we have not pursued premium subsidies in a large scale way. We may still reserve the opportunity to do that on a case by case basis. But for the most part we're not pursuing a strategy around premium subsidies.

Operator

(Operator Instructions) We'll take our next question from Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks, good morning everybody. You know I just wanted to follow-up with regard to some of your comments Bill, about the growth in the indigent receivables and I just want to make sure that I understand what really that reflects, and if you could also please remind us what the Medicaid pending policy is for HCA, it would seem that even though you don't have a lot of Medicaid expansion exposure, there has been a decent amount of wood work effect. So curious if that's tying up any receivables and how you think that might play out into the next couple of quarters.

William Rutherford

In my comments around working capital and cash flow we attributed to a couple of items and I did reference in indigent program receivable. That’s in one of our states where we make contributions to a fund and then we receive indigent payments back out. It’s just timing differences and we don’t think that’s really a material factor. We did have a growth in government receivables mainly just through increased complexity of that collection cycle with regulatory environment and we think that will eventually find its course.

Relative to pending Medicaid, we have kept our pending Medicaid policies consistent as uninsured patients come to our facilities, we screen them for pending Medicaid eligibility, and once they get accepted within that Medicaid program, that account is treated as a Medicaid account. They don't get accepted, we then move them through our charity and uninsured discount program and our policies around that have remained consistent.

Sam Hazen

Yes. As you may know, we look at our prior right off history and use that as the basis for our estimates going forward.

Operator

We will take our next question from Gary Taylor with Citi.

Gary Taylor – Citigroup

Just had a question going back to your thoughts on the HCA and I certainly heard what you said about the trends and how you feel about it going forward. When you guys gave your guidance for the year, I think nationally you maybe 1.8 million people had signed up for exchanges and now of course we know the number is 8 million or more than 8 million. Still some question as to what percentage of those were previously uninsured, but I just wondered how much that substantial acceleration enrollment has impacted how you're thinking about the go forward particularly in states like Texas and Florida where exchange enrollment has picked up pretty significantly.

Milton Johnson

Yes, Gary when we ran our models we had – actually the data was more current than 1.8 million, that was probably around 3 million or so when we had projections that it would go higher up. So our assumption was not the 8 million people to be enrolled in this first year. That's a little higher than we thought. And we will see how that plays out in the rest of the year. But again, what we saw here in the first quarter and as Bill said and I will say again, it's too early to take a lot out of the first quarter as an indication of health care reform for the rest of the year and I said on the call last quarter that we probably wouldn't be able to provide a lot or thought about reform until at least the middle of the year when we release second quarter. I think we still reserve that position.

With that being said, the 8 million enrolled is more than we thought in our model, but how we thought about reform and the potential impact it would have in the first quarter, the actual results are fairly consistent with what we expected.

Operator

Our next question comes from Sheryl Skolnick with CRT Capital.

Sheryl Skolnick – CRT Capital

We had a little medical urgency on this end. I apologize for missing my queue at first. Can you comment on the way you approach the accounting for Medicaid pending and whether it’s different with some of the commentary referred, for example, from light point about how they do it? And also can you comment about your expectations for acquisition strategy for this year and the coming years? Thanks.

Victor Campbell

Bill, you want to do the…

William Rutherford

Yeah. Sure. All of yours pending Medicaid moment you want on the acquisition. Sure, we did talk about it briefly. Our policies around pending Medicaid have not changed. It’s consistent with the way we’ve operated that for several years as patients come into our facilities of unsure, we put them on pending Medicaid status and go through an eligibility review screening. When that individual gets accepted into that state’s Medicaid program we would then convert them out of pending Medicaid into Medicaid and told them they attract this pending Medicaid. If they don’t get involved in a Medicaid, they may move through our charity and on into our discount policy. So, no change in how we treat those. Our accounting methodology is to reserve for that pending Medicaid based on our historical experience and again we’ve had no material changes in how we approach that segment of our business.

Victor Campbell

Bill, if you want to add a bit.

Sheryl Skolnick – CRT Capital

You don’t account for the self-pay in the current reported revenues but rather as Medicaid but reduce in terms of less than 100% of what you expect to get up there approved as a member.

William Rutherford

Yeah. If the pending Medicaid attracts in self-pay until which time they get accepted in the Medicaid, so the pending Medicaid is attracting a self-pay. We do not classify them as Medicaid until they’re accepted as a Medicaid alone for that state. So, in this interim revenue period they’re attracting a self-pay receivables into self-pay revenues for us.

Sheryl Skolnick – CRT Capital

That’s important thing. Thank you.

William Rutherford

Okay. Sheryl relative to acquisition strategy remains consistent while we’ve been the last really few years. So I would say many times we would like to be able to grow through more meaningful acquisitions if we can find those opportunities that set our strategy in terms of what the market complexion will look like and our belief of how we could drive shareholder value through those acquisitions. So, that hasn’t changed. If you look over the last few years, our acquisitions have been largely what I called “tuck-in acquisitions.” Those have been successful acquisitions for the company, we’ll continue to pursue that. But given the opportunity to make a more material acquisition in the market, we would look at those opportunities and we do look at those opportunities. Some of the larger transactions that have occurred in last couple of years have largely been raw sort of facilities and really didn’t fit the sort of markets that we looked for. So, those we did not pursue obviously. But I would say it’s a consistent acquisition strategy. We continue to look for opportunities and hope for that we’ll be able to find opportunities to grow inorganic growth through acquisitions that are we have pricing discipline but will also result in creating shareholder value.

Sheryl Skolnick – CRT Capital

Thank you. So…

Victor Campbell

Thank you, Sheryl. I’m sorry.

Sheryl Skolnick – CRT Capital

Yeah. Okay, if I could just follow up on that. When you did Kansas City it was slightly accretive to the first year. I recognize the things in history because it was over 10 years ago, but it was slightly dilutive to the first year but heavily accretive after that, a very important acquisition. Would you consider doing something like that again if that meant meaningful step-up in the company’s growth profile?

Milton Johnson

We would – I think Sheryl that many times when we see acquisitions coming of not for profit sector, not always, but sometimes can be assets that are challenged. That was the case in Kansas City. And so it was a turnaround situation that’s been almost I guess now 14-13 years ago and it was a successful turnaround for us, but we knew that we will walk into a turnaround situation. There could be acquisitions, though that we could see a not for profit sector where it could be a motivation to look for strategic opportunities in the market not because of financial issues but because of the changing market place and these institutions could see the advantage as a being part of a large organization. I get to see what we could bring to the table, and we’re hoping we will find more those opportunities as well.

Operator

Our next question comes from Justin Lake with JP Morgan.

Justin Lake – JP Morgan

Thanks. Good morning. I had a couple of questions just on Medicaid expansion. First, when your peers give an estimate that 80% of their uninsured volumes come from people who are Medicaid eligible, do you have an estimate here for HCA? And then what are your typical approval trends on Medicaid admissions? And has that changed post the implementation of presumed eligibility? Thanks.

Victor Campbell

Bill. Sounds like you..

William Rutherford

Yeah. Justin. Hi, good morning. I honestly don’t have a strong percentage for you on our uninsured that’s Medicaid eligible. My instinct says it’s a higher percentage, but I can quote a percentage for you. We are seeing in our expansion states as we mentioned some really higher that shifts that may re-anticipate in terms of the uninsured to Medicaid so that may support it. It’s a higher percent, but I can’t throw out a percent for you at this point in time relative to the impact on Medicaid conversions. So, when I walk through pending Medicaid and when we go through the screening then that individuals determine to be qualified for that state’s Medicaid. We got a very high percentage of converting them into Medicaid north of the 80% are. When you don’t, it’s generally issues where just obtaining signatures and application process; so very, very high.

Too early to call changes in that with our 4-expansion states. We have seen a growth in our pending Medicaid in those states, which I.V. [ph] was a positive sign as we have more people in the queue. We do have some increased success rate of converting those in this first quarter, and I think we’ll need another quarter or so for that to settle out as we have not only the existing inventory going through pending Medicaid but new service states since January on there. So, we’re all optimistic we’ll see that conversion go even higher in our expansion stage.

Victor Campbell

Thank you, Justin.

Justin Lake – JP Morgan

Thanks.

Operator

Our next questions comes from Andrew Schenker with Morgan Stanley.

Andrew Schenker – Morgan Stanley

Hi, good morning. I’m just curious are you seeing any trends of -- exchange members showing up at ERs? And if you are a kind of rates you’re collecting from managed care for this client? Thanks.

William Rutherford

Yeah. Good morning. The majority of our exchange volume is in network. We do have some out at network and when we do have that out at network it is showing up an EV, but the majority of the exchange volume is in network and it’s too early to call kind of the adjudication rates on either one of -- out of network population.

Victor Campbell

Thanks, Andrew.

Operator

Our next question comes from Jason Gurda with KeyBanc Capital Markets.

Jason Gurda – KeyBanc Capital Markets, Inc.

Hi, good morning. Thank you. Can you talk a little bit about what you’re seeing as far as narrow network contracting what sort of changes year-over-year then also managed care plans in use of tiered hospital networks?

Victor Campbell

Right. Sam, you want to lead with that?

Sam Hazen

Most of the narrow networks are contracts that are visible inside the markets are related to exchange products and exchange products only. 88 participate in about 99% of all commercial contracts across all 42 markets that are participates in and we’ve participated in our governmental Medicare advantage or managed Medicaid products. Generally speaking, we’re not seeing any kind of changes in our contracting configuration with the payors in the cycle that we’re in today and that cycle includes 2014 and 2015 where we have all the revenue for the most part in 2014 contracted at about 70% of our 2015 revenue contracted at similar terms and trends. 2016 is about a third done and again it’s very similar to what we have seen in the earlier part of its cycle. So, no material changes other than we’ve experienced in the past and the only new dynamic is within the exchanges. Jason, thank you.

Operator

Our next question comes from Joshua Raskin with Barclays

Joshua Raskin – Barclays Capital

Hi. Thanks and good morning. Thank you for taking the call. On just want to make sure I understand the admission numbers that you’d talked about with respect to Medicaid, I think you said 22.3% growth in Medicaid in your expansion state with the corresponding decline in uninsured of 29%. So within that does that include Medicaid pendings or if the Medicaid pendings actually do come through then the growth in cat would be higher and uninsured would be lower? Or is there some estimate at that a conversion rate of those…?

Sam Hazen

No. There’s no estimate. The Medicaid would only include those that are actually enrolled in Medicaid and pending Medicaid would be still treated as uninsured. So, there’s no estimate of conversion in pending Medicaid, and I’ll report that the Medicaid admissions in those expansions they show all four individuals that were actually enrolled in Medicaid to the extent they’re still pursuing enrolment, we’re going to the application, those are treated as uninsured in our accounting. So, the odds are overtime that…

William Rutherford

And as I said we’re seeing some increased balances in our pending Medicaid in those conversion states. So, we’re optimistic that we’ll see more come out of that in the future. Good?

Joshua Raskin – Barclays Capital

Right. And is there a way to size the pending Medicaid bucket right now in terms of the total percentage of admits in those states?

William Rutherford

No. It’s still too early to be able to kind of size what we think that changes in our historical experience will be.

Operator

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

Joanna Gajuk – Bank of America, Merrill Lynch

Good morning. Thanks for taking the question. Actually this is Joanna Gajuk in for Kevin today. Thanks a lot for the call in terms of the reform, but I want to just come back quickly on the volume performance in the quarter, which did improve and you guys did find to keep – don’t want to blame weather. You said you expect or you did – the volumes came back to you, but previously you were also talking about impact of 2-Midnight Rules. So, can you talk about that whether there was any impact this quarter and how this compare to Q4 and then going forward and also your fear how sort of company talk about that’s improving economy benefits in the quarter on the while? So, any color you might give on those? I do appreciate. Thanks.

William Rutherford

Yeah. I would try to address pieces of that as the 2-Midnight Rule and we mentioned that in the fourth quarter. We’re still implementing the 2-Midnight Rule and dedicating a lot of resources towards that effort. As mentioned in our commentary, we are experiencing softness of one day stays among all payor classes. And we did have a decline in Medicare 1 stays for the quarter. It’s not as pronounced as we had in the first quarter. We still have many..

In the fourth quarter. Sorry. Then I said last year. So, we did have an impact in the first quarter, but it was not pronounced as we had in the fourth quarter of ’13. We still have accounts going through the review process. We’re working with our external reviewers on probe reviews that are going still refining processes on that. And so we’ll still have our ongoing implementation efforts. We do think it will continue to impact some of our admission statistics going forward but does not have a material financial impact on us as we’ve spoken about before because we’ve been able to eliminate some outside revenue of this and Sam’s going to address the economic side of it.

Sam Hazen

Yeah. I don’t know. But I have a metric per se that indicates a composite view of the company’s economies but I’ll say that in general the unemployment rates across HCA markets is better than the unemployment rate at the nation as a whole. It’s trending favorably also. And then if I would put a proxy [ph] on a particular measure that suggests possible improvement, it would be the managed care delivery for the company, about 4% in the first quarter. And that’s a positive indicator of my opinion about the economy across HCA markets and what it might portend as we move forward.

Victor Campbell

Good. Thank you, Joanna

Operator

Our next question comes from Brian Gimmerman with [indiscernible].

Unidentified Analyst

Hi. Thanks. Good morning. Just as a follow-up to the acquisition question, can you give us an update on how you’re viewing the possibility of further international expansion? And then can you give us an update on the amount of target in repurchases at this point? It looks like you’ve taken measures in last quarter in terms of refinancing to ease the ability to buy back. So, just a general update on your appetite for a larger purchase.

Victor Campbell

Bill, that sounds like one for you.

William Rutherford

You know as far as acquisition opportunists internationally we’ve done our assessment of international markets, which markets do we find to be attractive in the event of… We see any opportunity. We did have that across the U.S. markets as well. So, we obviously operate in the U.K. in London very successful market for us. So, we have some experience there. But other than that, there is really nothing more thing to add to how we do to international markets. It’s we access it much like we do in the U.S. markets. With respect to the – I think referring to restricted payments basket, the restructuring that we went through are debt structuring deed, increase of restricted payments basket.

Victor Campbell

And do you want…?

William Rutherford

Yeah. Right now before we talk our plans we have just about $1 billion of capacity under the restricted balance, restricted payments basket and it will increase once we follow first quarter compliance by a couple $100 million.

Unidentified Analyst

Alright. Thanks a lot.

William Rutherford

Okay.

Operator

Our next question comes from Chris Rigg with Susquehanna International Group.

Victor Campbell

Hi Chris.

Chris Rigg – Susquehanna International Group.

Good morning, guys. Just wanted to better understand the comments around the comparisons getting more difficult in Q2 or just the latter part of the area. Is that just volumes or you’re saying year-to-year growth in EBITDA and EPS as well.

William Rutherford

Well. What I was referring to as we went through the last year we had a really solid performance in the second quarter. And actually if you look back at 2013 in the second quarter, we had the highest admission growth of the year in the second quarter. So it will be a difficult comp I think relative to the growth in volume and in turn, that will also to a difficult comp in the first quarter is what I'm trying to say then as well. So I just wanted to point that out to the market. If you look at our guidance for the year in the first quarter, our growth rate exceeded our guidance for the year and I just wanted to point out that as we think about the second quarter and our performance in the second quarter of last year, that needs to be considered as you're looking at the growth rate. So obviously our guidance does not project that the growth rate we produced in the first quarter will continue throughout the rest of the year. That's the point really I was trying to make.

Operator

Our next question comes from Ralph Giacobbe from Credit Suisse.

Ralph Giacobbe – Credit Suisse

Thanks. Good morning. Can you maybe give us any early read on success you may have had on getting insured covered via the exchange maybe how aggressive you were there? And is there any way to think about sort of a potential kind of pending bucket for that category in terms of kind of coming back into the facility frequent flyers, et cetera.

William Rutherford

So as we spoke about in fourth quarter, we made attempts on outreach to our insured both our certified application account for us in our facilities about 400 of them making contact, we also in early in this quarter, we made outbound kind of contact to what we view the people who have visited our system frequently over the past 12 months. And I would say the result of that on this was fairly marginal, it was more of an education and awareness campaign as much as anything versus how to track the exact number of sign ups or applications that generated. But we are fairly active in that but in terms of the yielded result hard to track exactly in terms of how much, how many exchange enrollments that resulted in, it was more of a community education and awareness effort.

Operator

Our next question comes from HA Rice with UBS.

Unidentified Analyst

Just two quick things. First of all, I guess we’ve got an IPAPS update coming and you are rolling of a sequestration, can you remind us how much you benefit, how much the sequestration is a quarterly drag for you has been and do you have any views on the IPAPS proposals coming out and then – is there any update on some of the initiatives in parallel [ph]?

Milton Johnson

On the sequestration hit in the quarter, I think it’s about 35 million to 40 million drag for us year over year. Of course that normalizes out and we did that sequestration drag of course in our plan but that’s the dollar amount of the drag.

Victor Campbell

Yes, we are sitting there just like you, we expect it one day this week and really can’t anticipate what’s going to include, we’re not getting any signals of surprises but time will tell.

William Rutherford

This is Bill on Parallon, I think we are on plan with Parallon growth, continue to focus with the implementation of the LifePoint account as we have heard about, we got our Catholic Healthcare Partners implementation going on as we speak and so far Parallon is on plan with our expectation. Our health thrust purchasing group inside Parallon is performing very well as well.

Operator

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

Gary Lieberman – Wells Fargo

Thanks. I guess one clarification. Just to be clear based on the analysis that you had done of the exchange based patients, so two thirds of the exchange individuals have not been previously insured, is that the takeaway from that?

William Rutherford

No. It was the opposite. So we look at our exchange volume, went back 12 month and said how we’d seen them before, and we have seen about half of that volume previously. And of that half, one third was previously uninsured, two thirds had some previous coverage. So that number was one third at least of that data point previously had no coverage, but to date they are enrolled in exchange product.

Gary Lieberman – Wells Fargo

So was that in line with your expectations or was that surprising to you?

William Rutherford

It’s pretty close to what our expectations were. I think as we spoke in our earlier call, that was a variable that was floating around as we were completing our model about how much of your exchange volume that you projected will be incremental or not and there were numbers all over from 11% to 50% and we say kind of our numbers were in the middle of that. So that’s really consistent with what our model expectations would be.

Gary Lieberman – Wells Fargo

And just on sort of the progression of the rate of increase of the impact from the exchanges sort of the doubling in February and March, do you expect that kind of rate of increase to continue through say mid May when the impact of those that were signing up on the exchanges had sort of – how would you think about that?

William Rutherford

We are hopeful but my honest answer is we just don’t know yet, so we are continuing to watch that, we think there will be some progression of that, will it be at the same pace we saw in the first couple of months, really I just don’t know, it would be great if it was but we just don’t know yet.

Operator

Our final question today comes from Collin Lange [ph] with FBR Capital Markets.

Unidentified Analyst

Just a quick one following up on a few earlier questions. Are you still comfortable with 1% to 2% equivalent admission growth for the year given the comps do get a bit more difficult in Q2 and Q3?

Milton Johnson

We are starting here just at admissions that down 0.3 here for the first quarter. I wouldn’t take 1% growth off the table yet but so I would say still one to two would be our best guidance based on one quarter.

Victor Campbell

All right. Thank you, Collin, thank everyone for participating on the call. And Mark is here all day and I will be here part of the day.

Operator

That concludes today’s presentation. Thank you for your participation.

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HCA Holdings (HCA): Q1 EPS of $0.84 misses by $0.01. Revenue of $8.83B (+4.6% Y/Y) misses by $70M.