LifePoint Hospitals' (LPNT) CEO Bill Carpenter on Q2 2014 Results - Earnings Call Transcript

| About: LifePoint Hospitals, (LPNT)

LifePoint Hospitals, Inc. (NASDAQ:LPNT)

Q2 2014 Results Earnings Conference Call

July 25, 2014 10:00 AM ET

Executives

Bill Carpenter - Chairman and CEO

Leif Murphy - Chief Financial Officer

David Dill - President and COO

Analysts

Justin Lake - JP Morgan

Darren Lehrich - Deutsche Bank

A.J. Rice - UBS

Kevin Fischbeck - Banc of America Merrill Lynch

Ralph Giacobbe - Credit Suisse

Frank Morgan - RBC

Whit Mayo - Robert W. Baird & Company

Gary Lieberman - Wells Fargo

Gary Taylor - Citi

Operator

Ladies and gentlemen. Thank you all for standing by and welcome to LifePoint Hospitals’ Second Quarter 2014 Earnings Conference Call.

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

During this presentation participants are in a listen-only mode after which we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded on Friday, July 25, 2014.

It's now my pleasure to turn the conference over to Mr. Bill Carpenter, Chairman and Chief Executive Officer at LifePoint Hospitals. Please go ahead sir.

Bill Carpenter

Thank you, and welcome, everyone, to LifePoint Hospitals' second quarter 2014 earnings call. We hope you've had a chance to review the press release we issued earlier this morning. I’ll begin as usual by taking you through some of the highlights from the second quarter and then I’ll hand the call over to Leif Murphy, our Chief Financial Officer for a closer look at our financial results. Following our prepared remarks, Leif and I, as well as David Dill, our President and Chief Operating Officer will be available to answer your questions.

We are pleased to report very strong financial results this morning. For the second quarter of 2014, revenues from continuing operations grew to more than $1 billion, an increase of 17% over last year. Adjusted EBITDA was $158.7 million up by 35.8% from a year ago. And diluted EPS for the second quarter was $0.84, which was up by almost 50%.

We also raised our full year guidance today, primarily to reflect the incremental benefits of healthcare reform as well as the positive impact of our recent acquisitions. Leif will review our revised guidance with you later in the call.

Our strong performance this quarter was driven by several items including the following. Volume showed meaningful growth with equivalent admissions up 2%, and increases year-over-year in both emergency department visits and total surgeries.

Our teams once again did a great job of managing costs. Our integration of recent acquisitions continues to go well. And the impact of healthcare reform exceeded our expectations. We’re now half way through the first year of expanded coverage under the Affordable Care Act and so far our experience has been very positive.

Notably, we ended the quarter with approximately $12 million to $13 million in EBITDA contributions associated with coverage expansion compared to the approximately $7 million to $8 million we had forecasted in our initial guidance. Volumes under both Medicaid expansion and the healthcare exchanges have been consistent with our expectations but acuity levels and reimbursement rates have been higher than expected. Looking forward, we expect additional states to expand Medicaid once participating states begin to publish their results.

On the acquisition front, we continue to build on our considerable momentum, both independently and through Duke LifePoint. Our integration processes are moving forward smoothly and the facilities that we acquired in the fourth quarter of 2013 Fauquier Health System, Bell Memorial Hospital and Portage Health are collectively meeting performance targets.

In addition, Wilson Medical Center which we acquired in the first quarter of 2014 has begun an effective transition and is delivering positive results. In North Carolina, we’re making excellent progress on several acquisitions under our Duke LifePoint partnership.

In the second quarter, we closed on our acquisition of Rutherford Regional Health System. Effective August 1, we expect to close on the acquisition of three hospitals in the (inaudible) system, Haywood Regional Hospital and the two Westcare Health System hospitals. The pending Midwest transaction is expected to deliver approximately $200 million in revenue and we’re incorporating the contributions of these hospitals into our revised guidance model.

We’re also working to finalize our pending affiliation with Conemaugh Health System, a three hospital system in Western Central Pennsylvania. We believe the addition of this regional referral center will be very meaningful for Duke LifePoint and for LifePoint shareholders. We’re targeting completion of this project in the third quarter.

The strong performance of our recent acquisitions is a testament to the value of our acquisition strategy which leverages our extensive resources to provide care across a robust and growing network. Moving forward, we have numerous attractive prospects in our pipeline for both LifePoint and Duke LifePoint as hospitals continue to seek out partnerships with larger systems like ours.

Throughout all our hospitals, we’re building on our track record of patient safety. As of June 2014, we had already achieved important CMS targets under the hospital engagement network including a 40% reduction in hospital acquired conditions. This makes us a leader in meeting the ambitious goals set by CMS and puts us well ahead of schedule.

In summary, we’re very pleased with our results for the first half of the year. We finished with revenue, EBITDA and diluted EPS ahead of plan for the second quarter and the first half of the year.

In addition to benefiting from strong volumes and the favorable impact of healthcare reform, we continued our disciplined approach to managing costs. We've also made solid progress on the integration of our recent acquisitions and continue to drive their margins towards the high single-digits. We've now completed all of our originally planned revenue cycle and supply chain conversions with Parallon.

With that I'll turn the call over the Leif for an indebt review of our quarterly results and our expectations for the balance of the year. Leif?

Leif Murphy

Thank you, Bill and good morning everyone. As Bill said, we had a very strong quarter ahead of our plan. I will start with an overview of the main drivers of our results for the quarter, followed by additional color on healthcare reform and then finish with an update to our guidance for the year.

Starting with volume, while same-store admissions were down 2.1% for the quarter, the second quarter of 2014 as compared to the same quarter of the prior year, equivalent admissions were up 2%. This increase in same-store equivalent admissions was driven primarily by a 3.7% increase in emergency room visits and a 3.3% increase in total surgical volumes.

Same-store one day stay admissions declined during the second quarter, but at a more moderate rate of 6.7% when compared to previous periods. We continue to believe that the reduction in one day stays is generally reflective of industry trends toward outpatient services and not primarily the result of the two-midnight growth.

Turning to pricing. During the current quarter as compared to last year, net revenue per equivalent admission was up 2.5% on a same-store basis and up 4.8% on a continuing operations basis. This increase is predominantly the result of higher contracted rates from commercial payers as well as the favorable impact of healthcare reform.

During the three months ended June 30, 2014 we saw an increase in both Medicaid and health insurance exchange revenue primarily as a result of exchange enrollment (audio gap) and the impact of Medicaid expansion in certain of our states.

We estimate that the favorable impact of reform contributed approximately $12 million to $13 million to second quarter EBITDA well above our anticipated range for the quarter. I will address our expectations for reform in the second half of the year in just a few minutes. Our revenues from continuing operations in the quarter were up $152.1 million or 17% to $1 billion, compared to $894.9 million in the prior year. Same-store revenues in the quarter compared with the second quarter of the prior year were up $41 million or 4.6%, reflecting strong same-store volumes, improvements in commercial rates and the favorable impact of healthcare reform.

Same-store self-pay admissions were down approximately 34% and represented 4.8% of total admissions, down from 7.1% of total admissions in the second quarter of 2013, same-store self-pay ED visits were down 19.3% and represented 16.6% of total ED visits down from 21.4% in the second quarter of last year.

We remained focused on effective cost management in the quarter. As a percentage of revenues, same-store salary, wage and benefit cost declined by 120 basis points to 46% when compared to the same quarter of the prior year. Same-store supply costs also declined as a percentage of revenue dropping by 70 basis points to 15.4% when compared to the second quarter of 2013.

Other same store operating expenses increase by 50 basis points from the second quarter 2013, primarily due to higher contract services associated with our now completed conversions to Parallon.

For the three months ended June 30, 2014, we recognized $21 million in meaningful use payments and had related operating expenses of $5.8 million. This is in comparison to $11 million in meaningful use payments and $5 million from related operating expenses recognized during the same quarter of the prior year.

With regard to our adjusted EBITDA and diluted EPS. Our second quarter 2014 adjusted EBITDA increased 35.8% to $158.7 million, an increase of $41.9 million from the same quarter last year. Our increase in EBITDA translates to a 210 basis point improvement in our EBITDA margin to 15.2% in the quarter. Adjusted EBITDA was positively impacted by our solid operating performance including results of our recent acquisitions with the favorable impact of healthcare reform and the contribution of approximately $9.2 million in additional EBITDA for meaningful use.

Additionally our results for the second quarter 2014 benefited from a favorable comparison under the New Mexico sole community provider program. In the second quarter of 2014, we recognized $2.5 million in revenue, an increase of $7.3 million when compared to the second quarter of 2013.

You may recall that we saw a net reduction in revenues of approximately $4.8 million due to changes in the program last year. Diluted earnings per share was $0.84 in the quarter compared to $0.57 in the prior year. Our diluted EPS was favorably impacted by our strong operating performance during the quarter as well as the completion of our 2011 board approved repurchase program under which we repurchased 3 million shares of our common stock for approximately $165 million during the year.

Cash flow from continuing operations for the quarter was $68 million an increase of $10.5 million or 18.3% from the same quarter last year. We invested $31.2 million in capital expenditures in the quarter and through our strategic partnership with Duke completed the acquisition of Rutherford Regional Medical Center in Rutherford in North Carolina for $27.2 million.

Depreciation and amortization expense increased by $5 million or 8.8% compared to the prior year driven by our recent acquisitions of [Fakir], Bell, Portage, Wilson and Rutherford. As a result of an increase in our total indebtedness interest expense increased by $8.7 million or 38.5% to $31.3 million.

During the quarter we issued an additional $400 million under our 5.5% unsecured senior notes due December 21, 2021. We were pleased that this issuance priced at 103% of PAR increasing our proceeds to $412 million and representing an effective rate of 4.9%. Proceeds of this issuance combined with available cash on hand were used to repay our outstanding 3.5% subordinated convertible notes upon maturity and conversion. In addition to the $574.2 million cash repayment we also delivered approximately 600,000 shares of our common stock previously held in treasury to our convertible note holders.

During the second quarter we completed our 2011 Board approved repurchase program with the repurchase of our remaining authorization of $36.1 million. This repurchase represented approximately 600,000 shares of our common stock and included the settlements of $17.8 million of repurchases which carried over from the first quarter plus an additional $18.3 million in repurchases in the second quarter. Today we have $150 million authorized under our 2014 repurchase program.

A little more on reform. At the end of last year we estimated that health care reform would contribute between 4% and 5% of our 2014 EBITDA guidance, equating to a range of between $22 million and $30 million. Our experience in the first half for the year indicates that we will be above the high end of that estimate with reform contributing an estimated $7 million to $8 million to EBITDA in the first quarter and approximately $12 million to $13 million in the second quarter. We are increasing our guidance on the impact of reform to approximately $40 million to $50 million for the year including $10 million to $15 million per quarter for the second half impact of $20 million to $30 million.

Let me provide some more insight into our second quarter experience. First, seven of our 20 states have expanded Medicaid, Michigan went live on April 1st it is the seventh state. Recall that approximately 35% of our self-pay volume was generated in these seven states in 2013.

Second, in our seven states with expanded coverage, we estimated that roughly 80% of current self-pay patients qualify from Medicaid under the new rules. In the second quarter, approximately 80% of our newly covered admission volume was Medicaid and approximately 90% of our newly covered ED volume was Medicaid, very consistent with our expectations.

Third, we originally estimated that we would get approximately 60% to 80% of our estimated Medicaid population actually enrolled in Medicaid. Although we reported saying approximately 80% of our Medicaid population enroll in the first quarter, our experience in the second quarter improved that figure to 90%, slightly increasing our estimate of coverage under Medicaid.

Fourth, we estimated that we would see approximately 10% of our exchange eligible population enroll in exchanges across all 20 of our states. In the second quarter, we estimate that approximately 25% to 30% of that population has actually enrolled.

Fifth, with regard to volume within our newly covered patient population, we have seen utilization trends that have been very consistent with our historical experience with no meaningful increase in either the first or second quarter.

And last, we were pleased that on a blended basis, reimbursement rates under both Medicaid and exchanges came in as approximately 50% higher than our forecast. We believe that the rates collected and acuity levels of experienced are consistent and sustainable and represent the primary driver for our increased guidance on the impact of reform in the third and fourth quarters.

We are excited about our experience under reform so far and we expect that as more states expand coverage, it will become a more meaningful part of our results.

Finally and consistent with our historical practice of updating guidance midway through the year, we have revised our guidance for full year 2014 as detailed in our press release. Our updated guidance incorporates our revised expectations for healthcare reform and our recent acquisitions in Wilson and Rutherford counties in North Carolina as well as the pending Haywood and Westcare transactions where we anticipate all state regulatory approvals this month.

Our guidance does not include our estimates for Conemaugh Health System. Annually, we expect Conemaugh to contribute approximately $510 million to revenue, post close. We are increasing our revenue guidance to a range of $4.25 billion to $4.35 billion for the year. We expect EBITDA to be in the range of $605 million to $620 million. We now expect depreciation to be up $30 million and we expect interest expense to increase by approximately $25 million both as compared to our 2013 results.

Finally, we expect earnings per share to fall in a range of $2.99 to $3.19 for the year. With regard to volume, we are confirming our same-store equivalent admissions guidance to be in a range of negative 0.5% to positive 1.5%. We are focused on making the right strategic moves to improve quality, grow organically and through acquisitions, become more efficient operators, and use our strong balance sheet to drive shareholder value. Additional information regarding our second quarter results is available by reviewing our SEC filings, including our 10-Q, which we will file later today.

With that, I will turn it over to Bill for his closing remarks.

Bill Carpenter

Thanks, Leif. Before we open up the call for questions, I just want to reiterate that we are proud of our results this quarter and excited about what’s to come. We’ve worked hard to position ourselves for the benefits of healthcare reform. And those efforts are already paying off beyond our initial expectations. We believe there is more value on the horizon as additional states embrace reform, and we are well positioned to capture that value. At the same time, we’ve been achieving strong results with our positive volume numbers, our ongoing commitment to cost discipline and our successful integration of the right acquisitions.

We continue to focus on enhancing our processes while at the same time improving patient safety and quality of care. I want to commend our physician leaders and the thousands of LifePoint employees who work hard every day to make this success possible.

With that, we’ll now take your questions.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, we'll now proceed to the question-and-answer session. (Operator Instructions). Our first question comes from the line of Justin Lake with JP Morgan. Please proceed sir.

Justin Lake - JP Morgan

Thanks good morning. Couple of questions just to go through some of the numbers you laid out there. First you mentioned the pricing on the newly ensured being much better than expected can you stretch out a little bit in terms of what's driving that agreements in security there is being a lot of them but any details you can give us there and how sustainable that is kind of looking forward?

Bill Carpenter

Yes, I can do that. As we look at into coverage Justin for a whole new population we had to make a lot of assumptions around it. We've been pleased with the actual results compared to the assumptions. When we look at Medicaid, which is as you can see in the numbers the large part of the population in terms of numbers based on the acuity that we saw in the patient populations as well as the variance in Medicaid rates that we see across our different states.

We round up with favorable pricing on the Medicaid side that approximated almost 50%. And so looking at that numbers if those numbers aren’t extrapolated across the full base that's translated to a very favorable impact on the pricing side.

On the health insurance exchange side it was very similar experience, higher acuity and then with variance across the different rates that we see in the states volume utilization favorable in stage where we have favorable reimbursement.

Justin Lake - JP Morgan

So on Medicaid specifically if you think about that 50% how much of acuity versus just better rate?

Bill Carpenter

So I would say that the lion share is acuity as we looked at it and evaluated I had on our last call talked about our expectation of seeing self-pay move from essentially very little reimbursement because we’re collecting it from the patient so between $4,000 and $4,500 to where experience in the second quarter has been between $5,000 and $6,000, almost all of which is driven by the acuity of the patient as they have presented into our system and that’s obviously on the end patient side.

Justin Lake - JP Morgan

Okay. And just last do you feel like there has to be pent up demand do you feel like that’s something that might normalize next year or do you feel like this is a reasonable run rate?

Bill Carpenter

So we have looked at that very carefully Justin and it’s very good question. We believe that the acuity levels that we saw are sustainable and then there will be consistent as we look at through the remainder of the year and into the future. Obviously, it’s a small part of the patient population so we’ll have to continue to manage that and as a result we’ve provided a range of expectations that we’ll see under reform. But overall, where we saw acuity come out we think after close analysis that that sustainable.

Justin Lake - JP Morgan

Okay great. Just one the numbers question you mentioned the meaningful declines in uninsured volumes as a percent of the total, can you delineate for us the number there in terms of seven states where do you see Medicaid expansion so 4.1% average what’s the number in the states?

Bill Carpenter

It is significantly higher greater than 50% Justin.

Justin Lake - JP Morgan

Okay. So that you mean 2% like half of four, I'm sorry the volume?

Bill Carpenter

So in the states, in terms of the reductions in our self-pay admits, if we look at specifically in the states that expanded, we were approximately 67% in those expansion states on the admission side, and if we look at it on the ED side overall lower 60% as well.

Justin Lake - JP Morgan

Perfect. Thank you very much.

Operator

And thank you Mr. Lake for your question. Our next question comes from the line of Darren Lehrich from Deutsche Bank. Please proceed with your question.

Darren Lehrich - Deutsche Bank

Thanks. Good morning everybody nice job in the quarter. I wanted to ask another question on ACA. And Leif you talked about the assumption that you're seeing 25% to 30% of the exchange eligible enrolled and obviously that’s the huge different in the original take up rate assumption. So I'm wondering if you can just share with us any thoughts you might have about what's different in your market and just maybe operationally how that number, that take up range you're describing was achieved, because it's certainly a lot higher than what we're seeing in other places with another markets?

Leif Murphy

Darren, it's something that, when we provided our guidance, if we when all the way back into the fourth quarter. I think our hopes for enrollment on the exchange side we're higher than where we ultimately reflected things and guidance. And so when we provided guidance it was a reflection on the experience that we had in our out-reach efforts in the fourth quarter as well as our continued efforts into the first part of the year. Interestingly as we got though the first quarter, we still saw uptick into the exchange that was only about 15% of the eligible population and here as we get through the second quarter we really saw significantly higher enrollment from folks likely also reflected in folks that had gotten enrolled and then actually started to use our system which is when we can measure their participation. So each month of the year, January to February, February to March, March to April really at peak in there as where we started to see sequential improvements in participation under the health insurance exchange.

So I think it had a lot to do with education I think it had a lot to do with continued outreach efforts that we are throwing at our hospitals and with initiatives in our marketplace. And also had a lot to do with the publicity and the press that it was getting across the country over the course of March and April.

David Dill

And I think it had a lot to do with the good experience that people are having when they use the services. So small community particularly that good experience is translated throughout the community and I think that’s part of it too.

Darren Lehrich - Deutsche Bank

Okay, that’s helpful. And then just one more question I had. Bill just be curious to know if when you think about all the excess issues that have been described in the press and in terms of veteran administration whether you have had any specific discussions about how your hospitals and new clinics might be positioned to take on some of that overflow elevates in the wait list just curious if there is any plan to we should be thinking about?

Bill Carpenter

Well, we continue to have excess capacity in our hospitals and the ability to take care of more people. So there is no question about that and we have positioned ourselves I think very well to be opportunistic when and if more patients come. So, if I'm understanding your question correctly Darren the things that we are doing, blocking and tackling, things that we do every day will position us well for that outcome.

Darren Lehrich - Deutsche Bank

Okay. Thanks a lot.

Operator

Thank you sir for your question. Our next question comes from the line of A.J. Rice from UBS. Please proceed with your question.

A.J. Rice - UBS

Thanks and hi everybody. A couple of questions. So this is round numbers and I know it's dangerous to do the numbers like this. But looks like you are raising reform by that 15 million to 25 million for the year and you are raising overall EBITDA by about 30 million to 45 million for the year. Two questions around that, one assuming that Medicaid had a relatively good predictability around it, is most of that raise associated with what you are seeing on the exchanges? And second maybe just comment about the beyond reform raise what's behind that?

Bill Carpenter

So, I'll take those A.J. Yes as we look at in here provided the additional guidance on reform, what we are driving at there is essentially that what we've already achieved which is $7 million or $8 million in the first quarter and $12 million to $13 million in the second quarter, plus the addition of seeing that sustainable run rate in the back half which $10 million to $15 million in each quarter

Leif Murphy

Right.

Bill Carpenter

I think translates to a favorable impact. We've left ourselves some room in that range from where we were at the mid-point of the second quarter call it 12.5 to see variance in the rates that we collect and to see whether positive or negative as well as variance in the volumes that we see in those populations. But as we have done our best to try to analyze the volumes and the rates that we've seen we believe that they are sustainable going into the back half, especially in the seven states that have expanded Medicaid as well as in the folks that have enrolled in the exchanges which remembers across all 20 of our states.

So I feel good about hanging on hat on that number as we go through the year. On the rest of the guidance. So we have that component of reform. We are also adding the acquisitions that we talked about Wilson, Rutherford and MedWest which together contribute a fairly small amount to EBITDA in the back half of the year because consistent with our other transactions they are coming in and the low to mid single-digit from an EBITDA perspective.

And so as we look through to the back half for the year, we have the favorability that we have seen in our cooperation and through margin expansion. We've got the benefits of reform in the back half and then we also have those acquisitions rolling into the number.

A.J. Rice - UBS

Okay.

David Dill

I think if you go back to Bill's opening comments, volume firming up great cost management which creates some tailwinds force in the second half of the year in the M&A program. And the integration in the acquisition is not just bringing that new revenue into the organization but the integration efforts and expansion of margins as well.

Bill Carpenter

David that’s actually good point, A.J. since you’re talking and asking about guidance, we believe and still believe that our meaningful use number for the year at the EBITDA line will be $40 to $42 million. And so you do the math on that with what we just reported in the first half, it means that we’re going to see a second half reduction, a meaningful use of $5 million to $7 million and that is incorporated into our guidance. The other thing that I think is important as David just alluded to is transaction and transition costs are high in this year because of the level of transaction activity that we have. The Conemaugh transaction is still underway, it is not in our guidance but there is a whole lot of work that’s getting done on that side to bring it to closure as soon as possible.

A.J. Rice - UBS

Okay. And as David mentioned, you’ve seen there is sort of improvement in volume both inpatient relatively speaking compared to last year and first quarter and then obviously when you do equivalent, you mentioned you saw nicely positive, one of the stronger shown in quite a while Is that -- how much of that is being driven by reform versus just what’s happening in your underlying markets, do you have any sense of that?

Bill Carpenter

Really on two fronts, we’ve looked at it from an improving economy, so we’ve seen unemployment rates in our communities come down but when we look at the actual job participation, it is flat to down indicating that jobs aren’t being created. So, we’re attributing very little with any of the volume performance from Q1 to Q2 and going forward to improving economy. In addition, we are attributing very little to increased utilization to health care reform as well. So, we believe the volume firming up coming out of the first quarter A.J., we talked about small weather impact, we think we recaptured that in the month of April, but the volume continued to remain strong through the quarter.

So our operating initiatives service line work, focused physician recruiting, capital investments and then some very focused physician engagement activities working to build market share in each and every one of our communities I think are beginning to take hold.

A.J. Rice - UBS

Okay, great. Thanks a lot.

Operator

Thank you, Mr. Rice. Continuing on, our next question comes from the line of Kevin Fischbeck from Banc of America Merrill Lynch. Please proceed, sir.

Kevin Fischbeck - Banc of America Merrill Lynch

Great, thanks. I just want to go back to the acuity comment. I don’t know if there is any way for you to tell this or not, but you're saying you’re seeing higher acuities within the population than you expected to see. Are you under the view that it was the sickest people who got insurance first and that's really what you're seeing or is there some way for you to tell that you saw in the past but now that they have coverage that are getting more things done than they might have in the past, the most expensive things done than they might have done in the past when they done the quick fix, stabilize, go home, now they're getting the full procedure type dynamic?

Bill Carpenter

So it is -- that really strikes Kevin at the sustainability issue that we question whether or not this level of acuity was going to be sustainable. It’s a very difficult question to answer in the parse out, but as we've evaluated the types of services that are being provided to the patients and what that translates to in billing and net revenue collected, we do believe that it is sustainable and not something that is just indicative of the beginning of the program.

Kevin Fischbeck - Banc of America Merrill Lynch

Okay. Maybe a better way to ask it then is, are you seeing acuity drop on the uninsured that still coming through, so that would tell us whether it was newly insured, was the sickest people and maybe left a lot of [treated] people on the uninsured side?

Bill Carpenter

We are not, and as we look at it Kevin I think that what didn’t do on the front end is really try to map specific acuity inside of this specific patient population, into the specific rate of reimbursement that we would have seen under the program and instead worked with averages. And so as we have now had the hindsight benefit of actually billing and collecting for the services provided to this newly covered population, we just have an ability to be much more precise around what the collection rates will be.

Kevin Fischbeck - Banc of America Merrill Lynch

Okay. So you are saying that you are kind of using historical tenants type utilization average rates and now you are saying that the extensive population is using the mix of services than the historical tenants and that’s raised your assumption on rate, is that?

Bill Carpenter

So there are number of things inside of that question there. But yes, I would say that as we really look closely at the specific patients that we have provided care to here that the acuity levels were higher than where we forecast but we believe them to be sustainable meaning that this part of the population that we’ve treated in the past likely does have a higher CMI than the rest of the population.

Kevin Fischbeck - Banc of America Merrill Lynch

Okay that makes sense. Then I guess just last question is on the cost side because obviously what we have seen so far from companies is that reform was clearly better sequentially but every company is talking about a better core number as well. So I want to understand on the cost side, is this just a reflection of what can happen when volumes are positive versus nothing being negative for so long? Is it refraction of just talking about same store margins being better than obviously the other better rate that's coming out back to you so that partner reform or is there something else that you would specifically point to saying that this year you guys have a much better deal on certain line items and it's not purely just leveraging fixed cost and better volume?

Bill Carpenter

Kevin, it's a very good question and one that we spend a great deal of time analyzing from a same store perspective and performance perspective. And as we look at it, clearly in the margin we have the benefits of healthcare reform, we have some benefit of meaningful use over prior year, we have the offsetting costs of some of the transaction and transition costs that are impacted and then we have solid core growth associated with revenue per equivalent admission in the volume side of the business.

So we feel good about our core growth and we feel good about the trends that we are seeing in our core pricing and in our core volumes in the quarter. And then the tailwinds that come with reform that is a sustainable improvements in our margin on the revenue side have made us all feel very good with where the quarter is. I’ll look David to talk a little bit about the operational initiatives, but there has been a lot of hard work on the core side of the business.

David Dill

So, Kevin, I think we've talked about this in quarters past. But in our hospitals when we have seen volumes move down, we work hard to flex cost down best we can, but in some of our service lines, many of our service lines you get to a level where it's hard to flex down much more than what you already have.

So, I do think you are seeing with a little volume coming in the ability to leverage your fixed cost structure. And so as volumes improve during the second quarter with the just admissions moving up with the trends in admissions and improving it in the surgical volumes and ED visits I mean those are really three or four big drivers leverage that you should get on the one when that happens.

And that's been part of the company from the very beginning. And I expect that to continue not just at back half of this year but into the future.

Bill Carpenter

And I can't let this pass without saying how afraid I am of the work that our operating teams both here at the hospital support centers as well as in our hospitals have done to manage cost. Not only this quarter but in the pace of volume pressure that we felt for a long time.

And one of the metrics that I am most proud about in this release is that margin increased that we saw and it is noteworthy. And particularly when I factor in the impact of the new acquisitions that are rolling into same-store and as they rolling into same store they are still dilutive to the margin. And so this is impressive work that our operating teams have done and everyone here has done in order to hold the line and to take advantage of the things that David talked about. But just good work all around on that.

Kevin Fischbeck - Banc of America Merrill Lynch

Okay, great thanks.

Operator

Thank you Mr. Fischbeck and continuing on our next question comes from the line of Ralph Giacobbe from Credit Suisse. Please proceed with your question, sir.

Ralph Giacobbe - Credit Suisse

Thanks good morning. Just wanted to go back to the exchange I understood and followed it if you talk about your initial expectation of 10% on the exchange in that moving up to 25% to 30% is that just the number of people up-taking within your markets on to the exchangers that something related to volume that’s actually coming into your markets?

Bill Carpenter

It is the latter Ralph for us the only way that we can really measure the impact of reform is by looking at what self-paid population was last year and measuring that population against now who is covered under Medicaid and who is covered under the health insurance exchange. And so that comparison is going to get more difficult as we get into even the second half of the year and into 2015 and ‘16 but right now because of our communities and the fact that we’re in most of our communities the only provider to keep your services we have the ability to really evaluate the movement of self-pay into the health insurance exchange versus remaining self-pay.

Ralph Giacobbe - Credit Suisse

Okay. So, that 25% to 30% is representative of the portion of the uninsured becoming insured that, that’s the level of what you’ve seen on the in terms of exchanger moment of yourselves?

Bill Carpenter

That’s correct.

Ralph Giacobbe - Credit Suisse

Okay. All right that’s helpful. And then I guess I just want to go back to the acuity question that’s a pretty big number to 50% sort of pricing benefit, I guess I am little surprised the implications certainly improved on supply it didn’t improve more and/or the revenue per adjusted emission wouldn’t be higher is it just sort of math that that the overall bucket isn’t enough to sort of push those numbers higher?

Bill Carpenter

Yes. At the end of the day you just take that total net revenue number that $12 million to $13 million over a denominator of last year’s revenue or even this year’s revenue it’s a very small figure.

Ralph Giacobbe - Credit Suisse

Okay, all right that’s fair. And then just last one just on the bad debt, I guess it was certainly down year-over-year but it is actually up I guess sequentially. Could you just talk about some of the dynamics around that whether there is any sort of seasonal elements to it maybe some of the deals the acquisition that sort of came on maybe drove that higher in the quarter relative to 1Q and if you could can you give us the same facilities that for bad debt?

Bill Carpenter

Yes I can. Let me pull out the same facility stats. I’ll give you a couple of thoughts around, so we've got a couple of things that are driving, our provision number, you get self-pay revenue and historically we have only collected about $0.05 on a dollar on our self-pay revenue. And then we also have our co-pay and deductible revenue. And on the copay deductible side, we’ve had higher collection rate of closure to 50%, but those reflected in the provision number, but they are associated with revenues that are recognized in the discounted payer line.

And so if, the phenomenon that we will see as we look out if they're going forward is that as self-pay revenues go down, the provision we don't expect to go down dollar-for-dollar with it. And there are two reasons for that, one related to reform which is as we see more patients that participate in the health insurance exchange, there is a copay and deductible component of that.

Now as we just talk about that still a small part of our overall revenue infrastructure. But another phenomenon that we have seen as we've look in 2014 is increases in the number of our patients that are participating in high deductible plans. And those higher deductible plans also recognized in our discounted payer lines, have higher levels of copay and deductible bad debt associated with them. And so as we have looked at 2014 to 2015, we may have had $15 million last year per quarter in copay deductible bad debt, this year it’s $25 million or more per quarter, and there is also some acquisition moving in there that is driving that upward so that is why we are seeing a provision number that’s moving forward going to be a little bit higher.

In terms of the absolute numbers on the same hospital side, our provision for doubtful accounts for the second quarter of 2013 was $180.8 million and for the three months ended June 30, 2014 was $180.6 million. So despite seeing a decline of self-pay revenue, we are seeing that number more flat and that’s a function of those increases in copay and deductible that relate to the discounted payer line.

Ralph Giacobbe - Credit Suisse

Just the last thing on that point, I am sorry go ahead.

Bill Carpenter

Yes sorry, hopefully not more than you we are looking for but.

Ralph Giacobbe - Credit Suisse

No that’s very helpful just on that point though when we think about deductibles I mean typically you sort restate in the beginning of the year is there a true up as you move through the year because I would think that that magnitude of that would be sort of greatest in 1Q and then sort of step down as people start to burn through the deductibles am I not thinking about that right or is it difficult for you guys to gauge that early on and so there is some level of true up in sort of 2Q?

Bill Carpenter

So we it’s a very fair point so number one it’s been a movement so we have been studying this carefully it’s pretty big increase for versus second quarter. Now we obviously reserve for that, it's the time that we have recognized the revenues. So, we won't see any kind of catch up through the income statement, but from an absolute overall pricing perspective. Yes we may see some tailwind as both of method adoptables in the first and the second quarter as we look into the third and the fourth quarter.

Ralph Giacobbe - Credit Suisse

Okay, alright. That's helpful. Thanks for the detail.

Operator

Thank you sir. Continuing on, our next question comes from Frank Morgan from RBC. Please proceed with your question.

Frank Morgan - RBC

Good morning. I was curious, are the trends you are describing for ACA in your portfolio, are those trends different for the more mature same store hospitals versus say recent acquisitions? And is there any difference in the underlying assumptions or is there more upside still out there as it relates to ACA for the non-same store hospitals versus these other?

Bill Carpenter

Frank, it's most of our acquisitions have been in states that have not expanded Medicaid. And so, it's difficult for us to cut a same store comparison there. [Market] Michigan and also Portage and Bell which were Michigan just became a part of expansion here in the second quarter. But they have had historically very low percentages of soft pay.

So, as we look at relative to the rest of our 20 states that upper Peninsula at of Michigan as we talked about in the past not have the same levels of uncompensated care. And so it's difficult really to earn out any kind of difference there.

Leif Murphy

So even though the states have an expanded frame, we are buying hospitals in bigger markets but we're still sole community hospitals adopting the energy care policies of the hospital. So over time I would expect the characteristics to be fairly similar if and when those states expand Medicaid as far as the [method number].

Frank Morgan - RBC

Have you -- I am sorry. Have you seen the self paid volume declines in states that didn't expand Medicaid are you getting the good work effect?

Bill Carpenter

So yes I think the answer of that is yes we are. It's not a material number, but on the in-patient side on the self pay side we're probably down 14.4ish%, 15ish%. As I look at our chart and as we look at the ED side fairly flat.

Frank Morgan - RBC

One more and I will hope, are you actually starting to see from a revenue cycle stand point, you are actually starting to collect cash on these newly ensured volume that came in, in the first quarter like from Medicaid and may be even any from that came in through exchanges? Thanks.

Bill Carpenter

So yes we're collecting cash on claims across the entire universe patients in Medicaid and exchange plans. So we haven't seen anything that would standout as a difference in the revenue cycle related to those. Although we've had a couple of states that were a little bit slow on actually trying to get folks both in a row.

Frank Morgan - RBC

Okay, thanks.

Operator

Thank you Mr. Morgan. Continuing on our next question comes from the line of Whit Mayo from Robert W. Baird & Company. Please proceed sir.

Whit Mayo - Robert W. Baird & Company

Hey thanks good morning. Leif can you maybe just provide any detail or color on let's call it the class of 2012 and 2013 acquisitions margins, higher or lower versus your -- versus when you acquired them in line with the expectations, just anything to help us gauge sort of the level of progress there?

Leif Murphy

Yes. I’ll give you a little bit of the view on that. So as Bill had mentioned a little bit earlier, [market] is in same store this year. And [market] along with the acquisitions, they proceeded [market] a really following that framework that we have seen and reported as is being a good guidance tool which is starting out in the mid single-digits moving up into the high single-digits then into the low double-digits. That’s where we’re seeing those transactions there in that low double-digit number. In the newer acquisitions that we completed in the fourth quarter of last year is I think I mentioned in my prepared remarks for CMOs move up into the higher single-digits, fairly quickly as a function of really trying to accelerate the transition and opportunities available under our LifePoint and Duke LifePoint partnership.

Whit Mayo - Robert W. Baird & Company

That’s really helpful. And Bill, I think you referenced a few times in your prepared remarks, just the level of confidence that you have additional states will probably expand their Medicaid programs and I don’t disagree. I just like to hear maybe your thoughts on what gives you the confidence there and you seem to have your finger on the pulse with many of these governors and states, so just kind of curious to kind of hear you talk about that?

Bill Carpenter

Yes. It’s a very dynamic situation of course and particularly as we approach these mid-term elections, so I don’t speculate anything immediate as we move through that. But probably, five states that we are looking at very carefully that are in some sort of conversation and that we certainly are in compensation with Utah, Indiana, Pennsylvania, I think are all working with CMS at some level regarding some sort of waiver program. Others, Virginia certainly has expressed some interest of course in expansion, but we’ve all seen the political dynamic there. Tennessee doesn't seem to be very close, but it's an important state for many of us, many of the companies. And so we're going to continue to emphasize to our local -- to our state representatives and governor in Tennessee how important that is. So that's kind of the way, those are some pretty important states for us, as you think about it that I just listed. And so we're working hard on those.

Whit Mayo - Robert W. Baird & Company

Great thanks.

Leif Murphy

I have jotted it down here, I want to make sure I didn’t skip because I think it's important, is on the collectability of the revenues that we've been booking. And we are very confident and our experience has been consistent on collecting the net revenues that we're booking around the form and overall.

I think it's also important from a day’s perspective and from a dollar’s perspective in accounts receivable, we had a very good quarter. We saw our DSOs decline by almost two days sequentially, really as we’ve completed the transitions that we've had on the revenue cycle side to Parallon, starting to see some stability there and still seeing some prepayment and RAC audits, some of the North Carolina Medicaid delays that are out there where we continue to see liquidly opportunity around that but seeing sequential reductions in AR despite having acquired $12 million or $13 million worth of AR in the quarter; it’s been very good complete statement around collectability and the improvement that we are seeing in our net revenue.

Operator

Mr. Mayo, do you have any further questions at this time?

Whit Mayo - Robert W. Baird & Company

No, I am good, thanks.

Operator

Thank you once again sir. And we’ll move on to the next question, this comes from the line of Gary Lieberman from Wells Fargo. Please proceed, sir.

Gary Lieberman - Wells Fargo

Good morning thanks for taking the question. I am not sure if you gave it, but do you have a charity care number in the quarter?

Leif Murphy

I don’t think I did give it. From a charity care perspective on the same hospital side, we -- same hospital charity care was about $16.8 million, second quarter last year was about $39.5 million, so down $22.7 million.

Gary Lieberman - Wells Fargo

Okay. And do you have a number on an all-in basis?

Leif Murphy

On an all-in basis, we were from continuing operations in the quarter $20.1 million, down from $39.5 million.

Gary Lieberman - Wells Fargo

Okay, great. I guess last quarter you had talked about some backlogs in Medicaid payments from a couple of states, I think New Mexico and Arizona were mentioned in particular. Could you just update us on that and maybe if you could parse out the impact if there was any on payments in the quarter from those states?

Leif Murphy

So, there continued delays that we are seeing just from a backlog perspective. So to the extent that there are dollars that are tied up and processing there from an accounts receivable perspective, it’s very small and not impactful, but they continue to remain. We do recognize the revenue that we ultimately collect there, so from an income statement perspective; there is no backlog in the recognition of earnings associated with those delays.

Gary Lieberman - Wells Fargo

Okay. And then maybe just go back to the guidance and maybe I'm not looking at it correctly. But it’d seem like your guidance increase for the year based on this quarter would seem, it seems very conservative having beat consensus EBITDA by sort of $26 million this quarter and taking up full year guidance by the $38 million it would seem like that you are not expecting to see nearly as much benefit in the second half and based on your comments that wouldn't seem to be the case. So, am I thinking about this correctly or you guys just being conservative or is there some other reason?

Bill Carpenter

So, we finished the first half, $305 million of EBITDA. As I had mentioned earlier, as we think about sequentially going from the first half to the second half, we are going to see meaningful used comp, $5 million to $7 million.

We anticipate that a couple of these transactions that we have as they work through their transition periods as well as incur some other transaction cost to be a headwind of a coupled of $3 million that we have incorporated into our back half guidance. And as we do the math on the healthcare reform side, we did in the first half recognized in the second quarter of $12 million to $13 million. And so as we think about the back half, we're really picking up one quarter a benefit over what we saw in the first half.

So, I call it $5 million-ish as we work from mid-point to mid-point on the ranges there. So there is still a significant number as you roll that up to guidance that we are counting on continuing to achieve from a same-store sequential growth perspective and the continuation of the solid margins that we're achieving.

So we think it's a reasonable range of guidance that and that gives us confidence that operationally we will be right there. And it gives us comfort that if we see anything on the reform side that comes in a little light or on the volume side they came in a little light or sort of contrary or little favorable on either of those that will be inside of that range.

Gary Lieberman - Wells Fargo

Okay, great thanks very much.

Operator

Thank you, Mr. Lieberman. That’s all the time we have. So our last question will be from the line of Gary Taylor from Citi. Please proceed, sir.

Gary Taylor - Citi

Hey good morning guys thanks for taking the question. Most of my questions have been answered. One I just want to go back to some of the same-store disclosure and you had given the same store trend on bad debt what about just total same-store margins year-over-year?

Bill Carpenter

We historically have not disclosed all the way down that the same-store side our margin. Our total margin was up 210 basis points I think that was way down by some of the transactions we have out there. And we're probably up another 20 to 30 basis points on the same store side to give you some view for the level of performance that's occurring in the core business.

Gary Taylor - Citi

Okay. My other question was you had a little trouble just truing up same-store revenue versus acquired revenue if we look this quarter is there roughly 115 million of non same-store revenue in your gross revenue for the quarter, is that right?

Bill Carpenter

In our net collected revenue its somewhere between a $110 million and $115 million in the quarter.

Gary Taylor - Citi

After bad debt?

Bill Carpenter

That’s right.

Gary Taylor - Citi

Okay. And then finally, I just want to clarify you gave us the charity care number which is helpful which does actually show that your total write-offs are down pretty significantly year-over-year more so than the bad debt. On uninsured discounts, you guys are still doing nothing to very de minimis there, is that correct?

Bill Carpenter

That is correct.

Gary Taylor - Citi

Okay. Just wanted to make sure. That’s all I had. Thank you.

Operator

Thank you Mr. Taylor. Gentlemen, thank you so much for taking the questions. Mr. Carpenter, I’ll turn the call back to you for your closing remarks.

Bill Carpenter

Great, thank you Tama. As we close this morning, I want to say again that we’re very pleased with the results that we have been able to discuss with you this morning. Rest assured, that we will maintain our disciplined focus on our strategies for continuously improving quality of care and service that we deliver, growing both organically and through acquisitions, finding new ways to improve our efficiency and developing talent throughout our organization.

Our ability to execute in these areas has and will continue to be the driver of our ability to provide a meaningful return to our shareholders. Thanks once again to our employees and our physicians who make the communities we serve healthier every day and thanks to all of you on the call for your interest in LifePoint Hospitals. With that, a good morning.

Operator

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

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