Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Bill Carpenter – Chairman and CEO

Jeff Sherman – Chief Financial Officer

David Dill – President and COO

Analysts

Adam Feinstein – Barclays Capital

A.J. Rice – Susquehanna Financial Group

Tom Gallucci – Lazard Capital Markets

Darren Lehrich – Deutsche Bank

Gary Lieberman – Wells Fargo Securities

Whit Mayo – Robert Baird

Kemp Dolliver – Avondale Partners

Gary Taylor – Citigroup

Art Henderson – Jefferies & Co.

LifePoint Hospitals Inc. (LPNT) Q2 2011 Earnings Call July 30, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospital’s Second Quarter 2011 Earnings Conference Call. On today’s call, LifePoint will be making forward-looking statements based upon management’s current expectations. Numerous factors could cause LifePoint’s results to differ from these expectations and LifePoint has outlined these factors in its 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 for links to various information and filings.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded today, Friday, July 29, 2011.

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

Bill Carpenter

Thank you. Thanks to all of you for joining us today for LifePoint Hospital’s second quarter 2011 earnings call. We hope that you’ve had a chance to review the press release we issued earlier this morning.

On today’s call, after my remarks, Jeff Sherman, our Chief Financial Officer will take about LifePoint’s results for the second quarter in detail. Following that, Jeff and I, as well as David Dill, our President and Chief Operating Officer will be glad to answer your questions.

To summarize our results for the second quarter, revenues from continuing operations grew to $878 million, up 11% from the same period in the prior year. EBITDA for the quarter was $135 million, up 8.9% over the prior year and EPS for the quarter was $0.77, up 11.6% over the prior year.

Through the first half of the year, we successfully executed our strategies to drive performance. Our quality metrics continue to improve. We’re growing the company with our recent acquisitions which are performing very well and we are operating effectively and efficiently. LifePoint has a longstanding history of solid operations, which remains a core competency of our hospital leadership teams.

Admissions from continuing operations were up 6.1% but adjusted admissions increasing by 4.6% versus the prior year. On a same store basis, admissions were up 0.9% with same store adjusted admissions declining 1.1% due to lower outpatient activity, which reflects fewer observations visits, a decline in outpatient surgeries and lower ED volume growth in the quarter.

So let’s spend a minute on service and quality which are critical to our ability to be the provider of choice in each of our markets. We’re focused on making progress in these areas by implementing improved processes and setting higher targets for ourselves. As a result, we have consistently increased our core measure scores to above 95% for each of the four core measure sets, with our skip scores reaching 98% during 2011.

In addition, we have consistently increased our aggregate [each] cat results in each of the past three years and are on target to meet our goals for 2011. We remained focused on recruiting the right physicians in the right communities and we’re on track once again to achieve our annual recruiting targets.

LifePoint is implementing strategies to enhance relationships with our physicians, which will improve outcomes, enhance our mutual success and drive performance. We maintain a solid balance sheet with strong cash flows and ample liquidity.

Our financial strength allows us to make strategic investments in our hospitals including new technologies and facility renovations. While maintaining our focus on being the sole provider in smaller communities, we are repositioning our portfolio by moving into faster growing markets with a more diversified employer base and a more favorable payer mix.

We’re a disciplined buyer and together with our strong balance sheet and track record of successfully integrating our acquisitions, we’re confident that we can continue to identify and integrate acquisitions that add value for our stockholders.

The latest acquisitions -- hospital acquisitions, Rockdale, Clark Regional and High Point Health System have all contributed to our earnings growth and continue to demonstrate tremendous potential. The state-of-the-art hospital that we’re currently building to replace the existing Clark Regional Medical Center facility remains on track and it’s expected to be completed by the first quarter of 2012.

There are a number of attractive acquisition opportunities in the pipeline. As always, we will remain disciplined in our approach. We continue to move forward with the strategic partnership components of our acquisition strategy.

Our innovative partnership with Duke University Health System is well underway. Duke LifePoint Healthcare currently has a number of exciting products in line that we believe will transform healthcare in North Carolina and the surrounding regions.

During the quarter, DLP acquired an outpatient cardiac business consisting of nine mobile and fixed sites cath labs. This represents an important product line for the company and provides us flexibility in our acquisition strategy since the COMs associated with these cath labs are portable.

Last week we signed a definitive agreement with Maria Parham Medical Center, a hospital located in Henderson, North Carolina with approximately $95 million in net revenues. As part of this agreement, which we expect will close in the fourth quarter. DLP will own 80% and LifePoint will operate the hospital. As manager and majority owner, LifePoint will consolidate the results. DLP also signed a Letter of Intent to acquire all of Person Memorial, a hospital in Roxboro, North Carolina with approximately $40 million in net revenues.

We’re in the process of developing additional partnerships similar to the Duke relationship in other parts of the country. Given changing industry dynamics, we recognized that regional scale matters and building strong relationships and collaboration with leading providers is important.

By forming networks in specific geographic regions, we believe we can enhance the quality of care we provide and ensure that patients are in the most appropriate and cost effective setting to receive that care. This is a differentiating strategy for LifePoint.

In summary, we made continued progress on our strategic initiatives in the second quarter. We’re well-positioned in the markets we serve and excited about the new markets we’ve entered. We remain focused on delivering value for our stockholders throughout 2011 and beyond.

With that, I’d now like to turn the call over to Jeff to discuss our financial results for the quarter in more detail. Jeff?

Jeff Sherman

Thank you, Bill, and good morning, everyone. The second quarter trends include growth in same store admissions, solid pricing and good cost management, which produced strong earnings growth. Starting with volumes, on a same store basis, admissions were up 0.9% even taking into account the closure of an IB program, which accounted for 30 basis points of decline.

Outpatient surgeries declined by 4% on a same store basis, with about half the decline related to the opening of a competing physician-owned ASC in one of our markets. Outpatient volume growth was also impacted by the comping out of some strategic investments we have made in certain service lines.

As we’ve discussed over the last several quarters, we have continued to invest in internal and external case management resources to get patients in the appropriate clinical setting. One-day stays have been a contributing factor to volume declines historically but that same trend -- the same trend that we saw in the first quarter continued in the second quarter. One day stays contributed to our admissions growth.

Revenues in the first quarter were $878 million, an increase of $87 million or 11% versus prior year. Same store revenues increased by $40 million or 5.1%. Cash revenues defined as net revenue less bad debt were up 9.6% in continuing operations versus the prior year.

EBITDA from continuing operations was $135 million, an increase of $11 million or 8.9% over prior year. Diluted earnings per share from continuing operations were $0.77 in the quarter, an increase of 11.6% over prior year.

EBITDA margins for the quarter were 15.4%, down 30 basis points over prior year. Cash EBITDA margins defined as EBITDA divided by cash net revenues were 18% in the second quarter versus 18.1% in the prior year.

On a year-to-date basis, revenues were up $189 million or 12%, EBITDA was up $23 million or 8.9% and diluted earnings per share from continuing operations were up $0.18 or 12.2%.

Cash EBITDA margins were 18.5% for the first six months of 2011, down 20 basis points over prior year.

Turning to pricing, same store net revenue for adjusted admission was up 6.3% in the quarter versus the prior year. Our pricing strength continues to be driven by managed care pricing increases, Medicare increases and Medicaid net revenue increases associated with new state programs with provider taxes.

Increasing intensity also contribute to net revenue growth with the Medicare case mix up by 0.5% in the quarter. In addition, self-pay revenue increased by $19 million in the quarter on a same store basis, was impacted by an increase in self-pay ED visits, ED initiatives for coding and charge capture and pricing increases.

We booked $4 million in the quarter in Medicaid revenue related to meeting the meaningful use criteria. The operating costs incurred to meet the meaningful used thresholds continued to increase and were $2.5 million in the quarter. For the year, we spent $4.3 million in operating cost to meet the meaningful used thresholds.

SWB costs as a percent of revenues were 38.6% and declined by 20 basis points from the prior year quarter. Benefit costs increased in the second quarter by 45 basis points primarily driven by higher health insurance claims expense versus the prior year.

Supply costs for the quarter declined by 80 basis points to 13% of revenue versus the prior year. The timing of rebate, accounted for 10 basis points of improvement over prior year. Pharmacy costs improved due to generic price savings and other initiatives to lower drug costs. Lower surgical volumes also impacted supply expense in the quarter.

Other operating expenses in the quarter increased by 20 basis points to $18.6 revenue versus the prior year due to increases in provider taxes, contract services and professional fees.

Bad debt expense was 14.4% of revenue in the quarter versus 14.6% in the first quarter and 13.3% in the second quarter of 2010. Charity care write-offs were 2.6% in the quarter, an increase of 90 basis points over the prior year quarter.

Total bad debts plus charity care were 17% of revenues an increased by 200 basis points over prior year. The allowance has a percentage of self-pay AR was 87% versus 86.8% in the prior year quarter.

We continue to focus on collecting cash in the registration process and have seen good results with upfront cash collection, increasing by 10% over the prior year quarter.

Self-pay revenue growth has been driven by emergency department self-pay visit growth over the past several quarters. As I have discussed in detail in the first quarter call, these lower-intensity outpatient self-pay ED visits have a low incremental treatment cost.

Cash flow from continuing operations for the quarter was $93 million, an increase of 9.3% over the prior year quarter. On a year-to-date basis, cash flow from continuing operations was $209 million, an increase of $40 million or 24% over the first six months of 2010. We spent $49 million in capital expenditures in the quarter with $19 million spent on IT system investments, primarily to meet meaningful use requirements.

We bought back $36 million of stock in the quarter at an average price of $39 per share. We have $67 million remaining out of the $250 million in plans previously approved by the Board. We finished the quarter with $276 million of cash and we’ll continue to deploy our cash and invest in our existing facilities, fund our acquisition pipeline and opportunistically buy back our stock.

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

In summary, the second quarter continued momentum from the first quarter with positive inpatient admissions and strong EBITDA and EPS growth. Our acquisitions continue to perform well versus our budgets in prior year.

Free cash flow defined as cash flow from operations less capital investments was $44 million in the quarter and $104 million for the first six months of 2011. This represents a 10% increase versus the first six months of 2010 even after taking into account incremental capital investments of $31 million versus 2010.

In terms of guidance, we are increasing both the low-end and high-end of the EBITDA and EPS range. Our original EBITDA guidance was $510 million to $540 million. This range is being increased to $525 million to $545 million. The EPS guidance range is being increased in the original range of $2.80 to $3.10 to $2.95 to $3.15.

I will now turn it back over to Bill.

Bill Carpenter

Thank you, Jeff. Before we open the call for your questions, let me provide a few final thoughts on the second quarter. I’m proud of what our team has accomplished in the first half of 2011. During the quarter, our country saw devastating floods, tornados and wildfires and several of our communities were affected especially hospitals located in Southern Tennessee, Northern Alabama, Louisiana hospitals and our Los Alamos hospital – Los Alamos, New Mexico hospital was closed due to the wildfire there for almost a week or for about a week.

Our employees and our physicians worked carelessly to ensure the safety of every single patient and of their hospital. Northern Alabama and Los Alamos reopening their hospitals after they were closed and all work that went into that. I want to thank those people. They represent the heart of LifePoint and who we are as an industry.

Our acquisitions, as well as our other initiatives to drive growth are performing well and have tremendous potential. It’s important to recognize that physicians are critical to the quality of care that we provide in our hospitals and that will be increasingly important as we think about the future.

We continue to work closely with the great leaders in our hospitals, including physicians to successfully navigate the challenges of our changing industry. We’re focused on delivering value for our stockholders as we work to improve performance and make communities healthier.

With that, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question coming from the line of Adam Feinstein from Barclays Capital. Please proceed with your question.

Adam Feinstein – Barclays Capital

Yeah. Thank you. Good morning, everyone. A great end to a busy week here. So, just wanted to get some feedback in this, as you guys think about to see components of the volumes, you’ve seen the volume growth, picking up in terms of the admission growth but the adjusted admission growth being a little bit lower -- it looks like the outpatient surgeries being down. So just wanted to get some more clarity as how you guys are thinking about just the components of the volumes and then I have a quick follow-up question?

Bill Carpenter

Okay, Adam. Thanks very much. This is Bill. I’ll start and then I’ll turn it over to David or Jeff to add anything if they wanted to. We are encouraged about the improvement that we saw in inpatient admissions in the quarter. That reflects a lot of hard work by a lot of people, not the least of them are our physicians in the market.

Where we’ve made investments in service lines and recruited physicians, we seem to get improvement. And obviously, we continue to see the impact of the economy on volumes and that’s consistent with what others have seen. We saw it again this quarter. Jeff went over a number of things that have impacted [AAs] and David, I think I’ll turn it over to you and let you go through more detail on that or Jeff but I won’t go into further detail on that.

We’ve always said results aren’t going to be linear and certainly that is the case. But I think it’s important to note that throughout this economic downturn, we have continued to grow earnings for the company. David?

Dave Dill

Yeah. As it relates, Adam to both our inpatient and outpatient volumes and then how that impacts our adjusted admissions, we were pleased with the results on the inpatient side. On the outpatient side, during the quarter our outpatient revenue growth, it’s low from low double digits to mid to high single digits during the second quarter. There are a lot of reasons why that happened but I’ll share with you really the four main drivers of that decline that we saw during the quarter.

One, decline in observation business during the quarter we’ve seen that trend for several quarters now but in this quarter it slightly exceeded the decline that we experienced during the first quarter.

Slower growth rates in ED volumes, I think it should be loss on anybody that we had ED volumes in the first quarter like most others in the industry up significantly with the heavy full volume of 7% almost during the first quarter slowing down to only up 1% in the second quarter. That doesn’t just affect the ED volumes but some of the radiology volumes and revenue is generated from those pieces of technology as well. That’s two.

Three, decline in outpatient surgical volumes that you talked about of about 4% and then with that decline in surgical volumes, some of those surgical volumes clearly had radiology volumes tied to them, ortho and general surgery cases as an example.

And then finally, they’re comping a couple of end market transactions that Jeff talked about that we completed last year that we have now camped out of during the second quarter. So as a result of the reduction in that growth rate, it compressed that outpatient factor.

We continue and we will continue to make investments in technology, physician recruiting and certainly outpatient businesses. We call those end market transactions certain, end market transactions that we expect to complete in the second half of this year, yet the combination of those three things we feel like should increase the growth rate in our outpatient revenue back to that double-digit range during the second half of the year, which I think you’ll see in our outpatient factor during the third and the fourth quarters.

Adam Feinstein – Barclays Capital

Okay. Great. I appreciate all of the details. And then just one quick follow up, if I may. So based on that and you guys raised the earnings guidance, so looks like you’re seeing better margins. So, as you think about volumes for the full year, what are you guys thinking about in terms of the range?

Dave Dill

Yeah. Our initial guidance, Adam was flat to up 2%. So we’re down 0.5% through the first six months of the year. We are not changing our adjusted admission guidance at this point, so we still believe that’s an achievable range for the year.

Adam Feinstein – Barclays Capital

All right. Thank you very much.

Operator

Thank you. Our next question coming from the line of A.J. Rice with Susquehanna Financial Group. Please proceed with your question.

A.J. Rice – Susquehanna Financial Group

Hello, everybody and also congratulations on seeing that admission number turn positive. I know it’s been a while. So that’s a good result there. Maybe just flushing out a little more on the comments you’re making Bill about deal activities, you say you’ve seen good deal activity across the home and you got to do JV where you’re seeing activity and then you also mentioned I think some additional strategic partnerships. Can we flush that out a little bit in terms of what do you think your capacity not just financial but managerial maybe to take on transactions would be?

And I mean, it almost sounds like a new world in terms of the number of opportunities you’re describing. And particularly maybe if there’s any further color on strategic partnerships, I mean, how broad, I mean, how many Dukes can you do and not start step on each toes with the other guys you’ve already got partnerships with?

Bill Carpenter

Well, A.J., thanks for your comments there and for your questions, I’ll try to address each of the points that you’ve raised, questions about the acquisition environment, about Duke and about other partnerships that are potential for us.

As far as our capacity to do deals, one of the things that we have done over the past several years is develop a strong corporate center here that has the ability to help our hospitals to deal with all of the changes that are coming at them, as a result of very many things.

Those are the things that are impacting the decisions that hospitals in smaller communities are making about whether or not to consider a partnership, factors like healthcare reform, factors like their access to capital and the ability of a smaller hospital in a smaller community to access a capital markets. Their ability to recruit physicians and their ability to manage through the change that is impacting them and all of us today, without the infrastructure or resources of a system to help them do that.

Our balance sheet gives us great flexibility and we are actively looking for the right hospitals and the right markets today and there are a lot of good opportunities. And they are all around the country, A.J., as I have look at it. We’ll continue to be disciplined no question about that. But on the whole, I’d say the quantity and quality of the pipeline is better than it has been in the past.

Regarding Duke, from your questions about Duke LifePoint partnership we couldn’t be more pleased about the way that that partnership is developing and working relationship we have with Duke University helps us and it’s just been outstanding.

We are very pleased of course to have signed the Maria Parham deal and it is now at the Attorney General’s office awaiting approval there. We said we think we’ll get that approval within 60 to 90 days. So, we’re anticipating closing that transaction in the fourth quarter.

There is a lot of momentum in the Duke LifePoint partnership. We have a Letter of Intent to acquire Person Memorial and we’re very close to reaching a purchase agreement there. These two together represent approximately a $135 million in revenue. So, that’s significant for us as we think about the rest of the year and on into the next couple of years.

Regarding other partnership deals, we are working on a number of other potential arrangements that are similar along the lines of DLP. At least one of these is really close and I’m hopeful that we will be in position to make an announcement in the near future. These partnerships are strategically spotted around the country and so I don’t believe that we’ll be stepping on toes of these that we – that you mentioned.

These partnerships are going to be good for patients and good for our community based hospitals because they focus on keeping patients close to home for services that should be provided there and only those higher end procedures such as open heart cases or transplants would need to be referred to the tertiary area partner.

In addition to that, hospitals in smaller communities welcome the clinical quality oversight that they get from the larger tertiary providers such as Duke. So you’re right, these hospitals are designed to help us buy more hospitals in smaller communities around the country including markets like North Carolina where previously, we didn’t have a presence and to gain scale in those markets very quickly.

So you maybe able to tell, I’m excited about the potential that I see in this strategic initiative for our company, which I -- as I said in my opening comments, I really think differentiates LifePoint.

Jeff Sherman

This is Jeff, A.J. The only thing I would add to that from a capacity standpoint from a capital structure standpoint, we said we’re very comfortable in three to four times range, leverage range, we’re at three times basically today with $276 million in cash on the books and continuing to produce free cash flow each year, so we have a lot of capital structure flexibility to continue the acquisition pace that we’ve been on.

A.J. Rice – Susquehanna Financial Group

All right. That’s great. Can I just, Jeff, slip in one real quick one here? You have five new facilities or four to five different -- ones that are not in the same store mix. And I just wondered if you would just comment whether the same store margin trends, what do they look like compared to the consolidated margin and is there any place on the same store basis where the expense of new items are moving around in a different direction than you might take from just looking at the consolidate numbers?

Jeff Sherman

Same store margin are down about 40 basis points in the quarter, A.J. and when I looked that on a cash margin basis same store margins were down 10 basis points, so not a lot of difference of the same store basis from continuing operations at this point.

A.J. Rice – Susquehanna Financial Group

Okay. That’s great. Thanks a lot.

Operator

Thank you. Our next question coming from the line of Tom Gallucci from Lazard Capital Markets. Please proceed with your question.

Tom Gallucci – Lazard Capital Markets

Thank you. Good morning, everybody. Maybe just a couple of housekeeping items and a strategic question. Maybe I missed it, did you mention what sort of the weather impact was, the fires and the closure that you had on the volume metrics?

Bill Carpenter

No, Tom. We didn’t -- we really don’t -- we really haven’t quantified that. I just really wanted to acknowledge those dedicated employees who help get those hospitals back open and doing a great job of working in our community. So we really -- it had some impact, but we didn’t really quantify that.

Jeff Sherman

Yeah. Los Alamos was more on the outpatient -- impact of the outpatient side more than inpatient side. It’s more of an outpatient driven facility

Tom Gallucci – Lazard Capital Markets

Okay. That’s good. So maybe that’s a little bit of the issue there too. And then just one on the housekeeping item, provider taxes, you mentioned a little bit there, Dave, can you quantify that?

Dave Dill

We had incremental Alabama from prior year. Remember in the third quarter of last year we had five quarters worth of provider taxes booked for Alabama. So incremental over the last year that was about $1.5 million and there was about another $1 million of other provider taxes net revenue versus prior year in the quarter.

Tom Gallucci – Lazard Capital Markets

Okay. And then, I guess, just strategically, we’re talking a lot about acquisitions and your partnerships and that’s all exciting relative to growth. Bill, I think you mentioned maybe a little bit of repositioning of the portfolio towards the faster markets, faster growth markets. Do you see any potential to maybe call out some of the existing portfolio over time?

Bill Carpenter

Well, you’ve seen that’s moved into faster growing markets in the last three acquisitions that we’ve done, specifically HighPoint Health System in Gallatin, Tennessee, about 45 miles north of Nashville, Clark Regional in Winchester, Kentucky about 40 miles outside of Lexington and in addition, of course, Rockdale Medical Center about 40 miles outside of Atlanta.

So we are repositioning the portfolio by moving the company and our most recent acquisitions in that direction. But we will always look at our hospitals and what makes the most sense for the communities where we’re located and that’s something that we sort of always do and we’ll continue to do that. But I don’t have anything to announce in that regard now and if I ever do we’ll get that out.

Tom Gallucci – Lazard Capital Markets

Okay. Thanks a lot, guys. Good quarter.

Bill Carpenter

Thank you.

Operator

Thank you. Our next question coming from the line of Darren Lehrich from Deutsche

Bank. Please proceed with your question.

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody. Just a few things here. I wanted to ask Jeff if you’ve got a number for us for the physician losses. I think we’ve been tracking that, I’m just curious to know how that looks this quarter and what your outlook is if that stabilized in anyway?

Jeff Sherman

Yeah. As we had expected, Darren, it has stabilized. We had EBITDA losses in the quarter of about $9 million, which is pretty consistent -- it’s up a little bit from last year by about a couple of hundred thousand from prior year.

So as we have expected, that has stabilized and as we add new physicians unemployment in the second half of this year they will have -- we’ll see higher losses from those adds but that will be mitigated by improvement for the processes that we’ve operated for over 12 months and 24 months.

Darren Lehrich – Deutsche Bank

And can you just comment at all about turnover and overall retention, how is that looking and I’m not sure if you’re giving us any numbers at this point, but just from a recruiting standpoint, Bill, what is 2011 looking like on a net addition basis?

Bill Carpenter

Yeah. We’re on -- Darren, we’re on track to achieve our stated goal with regard to net position ads. So I think about that -- I think about recruiting physicians less those that retire or may have moved to another community. David, do you have anything you want to add to that?

Dave Dill

I think it’s -- the numbers that Jeff gave on physician practice losses are a good proxy for the development of these practices when we go back and look at recruiting success for the last several years. We continue to add employ doctors in the development of existing practices continue to offset the new investment that we’re making and what I’ll call the 2011 class of employee doctors.

Their decisions that we may have made this year is clearly impacting some of our surgical volumes where we are seeing practices not developed as quick and we’ve made changes in those positions in certain markets. So I think that is a good proxy for you to continue to look at for the development of our class of physicians that we’re bringing in over the last several years.

Darren Lehrich – Deutsche Bank

Okay. That’s great. And just the last thing here, obviously, your pricing and acuity was up a bit and pricing was above what we’re looking for. I guess just drilling down into that, a little bit more you had very modest Medicare case mix growth. Can you just help us think through the rest of the pricing growth that you saw in terms of the rate and the mix piece in the non-Medicare business?

And then, I guess, the other part of the question would just be maybe, David, you guys have talked about the observation visit trend now for a couple of quarters going through the opposite way and is there anything that you guys have done just from a case management standpoint differently as you look at that trend and just help us think about what that means and when it comes out?

Jeff Sherman

Hi, Darren. This is Jeff. I’ll start on the revenue side. So Medicare case mix was up slightly. You’ll see -- on the same store basis its showing $1.29 and $1.29 and that’s rounding on the same store basis Medicare case mix was up about 0.5%. Total case mix was up almost 3%, so we are seeing intensity in other product lines increase as well helping to drive revenue.

We are also seeing -- continue to see good managed care pricing increases. So our expectation that we’ll continue to get in the 5% to 7% range, so we’ve got 85% of our book done for 2011 with results expected to come in that range. We’ve got 50 plus percent of our book done for 2012 and still expect to see results in that range on the pricing side there as well.

So I think increasing intensity, increasing managed care pricing, Medicare pretty consistent with prior quarters. It is continuing to drive credible net revenue ventures for us.

Bill Carpenter

As it relates to observation business, clearly when they say it’s contributed to volume, declines historically actually helped us a little bit in the first and second quarter. That trend continues. It’s relates to observation visits specifically we have invested significant resources, significant internal resources, case management staff in a lot of our hospitals and out side resources, physician review groups, that are assisting our hospitals, ensuring that we get patients in the right setting.

As it relates, Darren to the comping out, it’ll continue for the balance of this year. It may go over a little bit into the first quarter of next year, but I expect it to be the same trend during the third and the fourth quarter as we’ve experienced in the first and second quarter of this year.

Jeff Sherman

And we did see that trend of one-day stays making up a smaller percentage of our admission variance decline in each quarter of 2010 and then turn positive actually in the first quarter of 2011. So that trend actually started in the second quarter of 2010 and started declining sequentially each quarter from there, Darren.

Darren Lehrich – Deutsche Bank

Okay.

Jeff Sherman

Bill, just to put a bow on it. Our goal is to treat each patient in the proper care setting whether that’s inpatient or outpatient. We’re thrilled that, we’ve seen the shift turn positive with respect to admissions but this is about quality patient care, getting patients in the right care setting whether inpatient or outpatient. So we feel like we’re making good progress there.

Darren Lehrich – Deutsche Bank

Thanks a lot.

Operator

Thank you. Our next question coming from the line of Gary Lieberman from Wells Fargo Securities. Please proceed with your question.

Gary Lieberman – Wells Fargo Securities

Thanks. Maybe just to follow-up on some of the acuity questions. Is there any way to give us a sense of what impact new services at your hospitals have an impact on acuity?

Jeff Sherman

Yeah. In terms of -- on a quarter-to-quarter basis, I don’t think there’s a huge change there. I think as you look over multiple quarters, you know, we are seeing intensity improved from those. And we also have seen just lower OB volume which is lower intensity business as well, you know, over the past four quarters of 2010 and into the first two quarters of 2011.

So there’s not a dramatic -- I wouldn’t say there is not a dramatic change on overall intensity on the inpatient side. Maybe some on the outpatient side with cardiology programs and cath lab programs expanding there.

And on the outpatient surgery side, I noted in my remarks about half of the outpatient surgery decline is related to one market. We are completing a ASC center open. 90% of that loss was low-intensity pain and endo cases. So we are seeing in our remaining outpatient surgical mix a higher intensity in the quarter.

Gary Lieberman – Wells Fargo Securities

Good, that’s helpful. And then, obviously your guidance, you raised your guidance for the full year. As you are looking at the Medicaid component of reimbursement in the second half with some of the cuts, can you maybe share with us how, if you guys changed your assumptions there at all?

Jeff Sherman

So, our original guidance was down 4% to 5% for Medicaid. At this point, I expect that’s going to improve a little bit. So, I would expect we are going to be down 2% to 3% for the year in Medicaid and just with all the pluses and minuses going on there. So, I’m not as bad as we originally anticipated, a little bit better for the year. But again, keep in mind that the third quarter had -- had the big increase in Medicaid revenue for Alabama provider taxes.

So, that will not repeat in the third quarter this year. We’ll just have one quarter’s worth versus five quarters’ worth of provider tax revenue in Alabama in the third quarter.

Gary Lieberman – Wells Fargo Securities

Okay. And was there anything specific that you could note or a couple of things that you could note about that improved assumption for the minus 4 to 5, for the minus 2 to 3?

Jeff Sherman

I think its various states, a little bit better than what we were expecting heading into the year, nothing else at this point that I would drive.

Gary Lieberman – Wells Fargo Securities

Great. Thanks a lot.

Operator

Thank you. Our next question is coming from the line of Whit Mayo from Robert Baird. Please proceed with your question.

Whit Mayo – Robert Baird

Thanks. Good morning. Just on the supply expense, probably one of the better quarters and I get that your surgeries were down. Can you maybe provide a little bit more color with that number just to help us understand maybe the sustainability of that number and just maybe, if you could comment on any newer initiatives that are under way and maybe comment on any meaningful contracts that you’ve changed?

Jeff Sherman

Yeah. So we’re part of the HPG, continue to benefit from HPG pricing. On the pharmaceutical side, I talked about this previously. We are deploying technology and clinical pharmacists to look at substituting higher cost drugs for lower cost drugs, or lower cost drugs for higher cost drugs, excuse me, that has same clinical efficacy in outcomes. So I think we’ve seen improvement there. We have seen improvement from some brand name drugs going to generic in the quarter.

In terms of rebates, if you look at the second quarter this year versus last year, there is about close to $1 million of higher rebate savings in the second quarter of this year. Some of that is timing, so rebates were down a little bit in the first quarter, higher a little bit in the second quarter. But surgeries definitely have had an impact on surgical volumes.

We did and also note in surgical volumes, we did close spine program in one of our hospitals, also that had high expense cost, but was a non-profitable service line. And we have had improved stent pricing that should continue. We have gone to a sole-source vendor for stents and have seen very good price savings there.

Whit Mayo – Robert Baird

Okay. Great. Anything on ortho?

Jeff Sherman

Well ortho, in terms of on the pricing side, we are currently in the process of working on that. The volume is down, but we are working on some programs to capture incremental orthopedics savings program. As you know that is one of the contracts that is not -- that does not go to a HPG and our volumes are just lower than I would say a lot of our peer companies. So it’s harder to get leverage there, but we are looking at programs and potential ways to reduce our -- I think our pricing cost as well on the orthopedic side.

Whit Mayo – Robert Baird

Yeah. And maybe one other questions just, Jeff, you’ve had some swaps that matured in May, can you remind us the size of that and just your overall thoughts on managing your interest rate exposure going forward?

Jeff Sherman

Yeah. So our swaps ended in May. So that’s about a $3 million a month in interest savings going forward, so interest expense will be lower in the second half of the year. We are over 70% fixed now and 28%, 29% variable. Continuing to look at that in terms of whether it’s entering into new swaps, at this point we don’t have a lot of expectation about interest rates spiking in the next, call it, 12 to 18 months certainly going into election year, I think and the overall general state of the economy that there is less risk for seeing significant increase in interest rates.

So, it is something we continue to evaluate as we look at the whole capital structure, but as of now after May we are on swap on about a third of our capital structure, the rest being fixed.

Whit Mayo – Robert Baird

I mean longer term is there a more optimal fix to floating rate ratio that you are comfortable with? Is the 70:30 a good number?

Jeff Sherman

I think it’s something we continue to evaluate with and I think the other important point is, I think the size and number of acquisitions in the pipeline will factor into that. So I think the bigger the size or acquisitions that we’re looking at -- now will impact our desire to probably go longer term and maybe more fixed going down the line.

Whit Mayo – Robert Baird

Okay. Maybe one last one and I’ll hop off. Just, Jeff, can you update us with regards to buybacks and authorizations and any updated thoughts?

Jeff Sherman

So we bought back $36 million of stock in the quarter and have bought back a significant amount, almost $200 million worth of stock now through 2010 and 2011. So, that is a process we continue to evaluate with as we look at the acquisition pipeline, the timing of when we think the acquisitions will take place. I think we’ve had a fairly balanced approach between deploying capital for acquisitions and deploying capital for stock buybacks.

So we have done the buybacks we have authorized in the past. And certainly, if we are buying back stocks at 39, the price continues to be attractive and we think it’s a good value. So we’ll just match that up against our acquisition pipeline and the timing of that in terms of how we deploy capital for stock buybacks and for the rest of the second half of the year.

We are not contemplating any incremental stock buybacks in the revised guidance for the second half of the year, just to be clear on that point.

Whit Mayo – Robert Baird

Okay. Maybe one quick follow-up? Just the $36 million you bought in the quarter, was that -- when did you buy that? Was that at the very end of the quarter?

Jeff Sherman

We haven’t given any timing of that, Whit. But you can look that with the average price mix and assumptions on when it took place just with the price -- average price that we got it at.

Whit Mayo – Robert Baird

Okay. Thanks a lot. Nice quarter.

Jeff Sherman

Thank you, Whit.

Operator

Thank you. Our next question coming from the line of Kemp Dolliver from Avondale Partners. Please proceed with your question.

Kemp Dolliver – Avondale Partners

Right. Thank you. Could you elaborate more on your expectations for meaningful use of dollars over the course of the year or the course of -- and or the course of the program? And any thoughts on Medicaid versus Medicare opportunity?

Jeff Sherman

Hi, Kemp. This is Jeff. So we booked $4 million in the quarter. We are expecting, in our guidance, an incremental $5 million to $10 million in the second half of the year, but coinciding with that, we’re expecting incremental operating expenses of [$46] million in the second half of the year as to kind of flow in line with that.

So, that is in Medicaid at this point. The criteria for any meaningful use for Medicaid is a little bit easier to meet than from Medicare. So, that’s what I’m thinking right now in terms of Medicaid dollars for this year.

We have spent, in 2010, we spent about $45 million in capital and we’re looking to spend about $75 million in capital in 2011. So, we’ve already invested a lot of cash in terms of capital investments and operating expense to meet meaningful use throughout 2010 and 2011.

Kemp Dolliver – Avondale Partners

That’s great. Thanks. And Bill, you talked about the DLP joint venture, you discussed the opportunity and you talked about North Carolina and the region, how broad are the ambitions there geographically?

Bill Carpenter

Well, the reach of Duke is broader than just North Carolina. Certainly we got to know Duke well in Southern Virginia at our Danville Regional Medical Center. So, I think you could expect that the reach of Duke is -- go in contiguous states and at this point we think that we see so much opportunity in North Carolina and nearby areas that -- that’s where we’ll stay focused at this time.

Kemp Dolliver – Avondale Partners

That’s great. Thank you.

Operator

Thank you. Our next question coming from the line of Gary Taylor from Citigroup. Please proceed with your question.

Gary Taylor – Citigroup

Hey. Good morning, guys. Good job. Most of my questions have been answered. Just a couple randomly? Jeff, I think you said your total case mix up over 3%, so -- I mean is that -- am I right? I mean that implies commercial acuity, commercial case mix up better than 6%?

Jeff Sherman

I just -- well, when you’ve got Medicaid in there, you’ve got Medicaid in there as well and again with OB volume down that’s impacting that some.

Gary Taylor – Citigroup

And I know you talked about some of service lines driving intensity on the outpatient side. What about -- what’s the biggest driver of that acuity growth in terms of inpatient service line?

Jeff Sherman

I think as we look on the inpatient side, cardiology is the product line that’s driving intensity there, Gary. Oncology is another product line that we’ve expanded in. So, those are, I would say, two product lines that we are seeing intensity in.

Gary Taylor – Citigroup

Okay. On labor cost on a consolidated basis, labor per adjusted patient day was up about 8% year-over-year. So obviously that includes some of the impact of bringing in the non-same store facilities, but the trend did pick up a little bit. So, is there any -- what are your thoughts on your labor cost performance this quarter?

Did you catch up on that 401k match or was the incremental physician employment moving that labor number?

Jeff Sherman

We did have some 401(k) dollars in the quarter and also health insurance expense was up over prior years, but that health insurance expense is about 45 -- I mean on the benefit side, health insurance is contributing about 45 basis points of increase in cost. So -- and some that is quarterly claims.

So sometimes one quarter is high, one quarter is low and only if there is any trend there, but second quarter claims cost, overall, was higher than in the second quarter of last year and the first quarter of this year. So, I think it was more of a benefit side than a productive side driving some of the costs in the second quarter.

David Dill

Anyway, I have two more things to add here. One is the, just the softness on the outpatient volume side that just puts me out. There was a shortfall on outpatient revenue and that contributed to 57. And we are just continuing to invest on the IT side. There are a lot of additional resources. Talk about case management on the clinical side, a lot of IT resources that are impacting these numbers.

Jeff Sherman

Yeah. The majority of the incremental costs, I noticed for, I mean, HITECH is on the labor line.

Gary Taylor – Citigroup

Right. And so underlying wage growth and productivity, nothing notable there?

Bill Carpenter

No, I feel very comfortable with these volume levels. Our operators do a wonderful job every month trying to match up utilization and efficiency to volume and it’s tough to do that. They did a good job. There’s always opportunities to improve, but across the book of business I feel very confident in to the second half of the year.

Gary Taylor – Citigroup

And my last question is, I don’t recall -- so you said you had $4 million of Medicaid HITECH revenues this quarter. I don’t recall if you had -- if you had recognized any dollars in the first quarter of this year?

Jeff Sherman

We did not.

Gary Taylor – Citigroup

Okay. Thank you.

Operator

Thank you. Our last question is coming from the line of Art Henderson from Jefferies & Co. Please proceed with your question.

Art Henderson – Jefferies & Co.

Hi. Thanks for taking my question, a very nice quarter. Jeff, if I annualized kind of where your CapEx spend is right now, it looks like it’s about 210 and I know your guidance I think is 240 to 250. Does that guidance still hold, -- and is there a particular reason why it should accelerate in the back half of the year?

Jeff Sherman

Yeah. The single biggest reason is we have a new hospital project in Clark Regional Medical Center, so as that gets closer to completion, you’ll see cost ramping up for that project and just continued spend for meeting meaningful use that -- those continue to ramp us -- those are the two main drivers.

So I would not take the current six months and annualize it and expect CapEx to be in that guidance range that we provided.

Art Henderson – Jefferies & Co.

Okay. That’s good. And then going back to the Duke joint venture, obviously that’s going along much better than you had thought, I was just curios Dave and Bill if from a -- anything from an operational clinical side of any observations there that have -- things have worked out better than you thought. I know you talked about some exciting projects and I didn’t know whether there was anything in there from an operational clinical side that you could talk about?

David Dill

Just a couple, as you know we have not closed on any of the transactions yet. So, as far as just the day-to-day operations of inside DLP, I really don’t have anything to add at this point. I will, over the course of next six months, clearly, but there’s some things outside of the deal partnership that are very exciting.

The relationship that we have with Duke in assisting us for the cardiology program at Danville, remember that’s where the relationship with Duke that got us to the point that we are today really started at some three, three and a half years ago sitting side by side, looking at cardiology firm and knowing the quality had to improve in that market.

And Duke really came alongside and helped us with that and that relationship geared itself to where we are today. There is also other joint quality projects that we are working on with Duke. They are outside of DLP. So, clearly, they will provide some expertise and help to us and then we’ll provide some expertise and help to them. And so, we are working with them inside of this partnership and we are also working with them outside this partnership on a day-to-day basis.

Art Henderson – Jefferies & Co.

Okay. That’s helpful. One last thing. Bill, any sort of thoughts on Medicare hospital reimbursement coming out of this debt ceiling discussion?

Bill Carpenter

Well, our -- I’ll tell you, I think even as we speak the Republican Conference was scheduled to be meeting in the House. Obviously, the House didn’t vote on speaker (inaudible) last night. He didn’t have enough votes from Republicans. Senator Reid and others are putting together a bipartisan compromise that could be a vehicle for the Senate and the House.

What we’re hearing is that in that compromise, there is the potential that Medicare and Medicaid payment policies will not be directly impacted by this short-term process. So, it’s a very fluid situation and it is ongoing and obviously we are keeping very close tabs on it.

Art Henderson – Jefferies & Co.

Okay. Great. Thank you for the color.

Bill Carpenter

Thank you.

Okay. Well, thank you very much everyone. We really appreciate your participation on this call today. In closing, let me just say, we continue to focus on executing on our strategies which resulted in growth of revenue, EBITDA and EPS for the quarter. Our advances on investments and improved quality patient care and attracting the best of positions provide significant opportunity for value creation at LifePoint.

Our balance sheet gives us lots of flexibility and we have a infrastructure with a proven track record of successfully integrating new hospitals.

We will continue to target acquisitions in faster growing markets and leverage the strategic partnership component of our acquisition strategy. As always, we will continue to focus on effectively and efficiently operating our hospitals. We look forward to continued discussions with you on these results.

And again, we thank you for joining our call today and thank you for your interest in LifePoint Hospitals.

With that operator, I turn it back to you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LifePoint's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts