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

LifePoint Hospitals, Inc. (NASDAQ:LPNT)

Q3 2011 Earnings Call

October 28, 2011 10:00 am ET

Executives

William Carpenter - Chairman & CEO

Jeff Sherman - EVP & CFO

David Dill - President & COO

Analysts

Justin Lake - UBS

Tom Gallucci - Lazard Capital Markets

Kevin Fischbeck - Bank of America

Darren Lehrich - Deutsche Bank

John Ransom - Raymond James

Gary Taylor - Citigroup

Whit Mayo - Robert W. Baird & Company

A.J. Rice - Susquehanna Financial Group

Frank Morgan - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospital’s third 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, October 28, 2011.

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

William Carpenter

Nelson, thank you very much. Welcome everyone to LifePoint Hospital’s third quarter 2011 earnings call. We hope you’ve had a chance to take a look at the press release we issued this morning. In a few minutes Jeff Sherman, our Chief Financial Officer will discuss in detail LifePoint’s results for the third quarter. After that Jeff and I, as well as David Dill, our President and Chief Operating Officer will answer your questions.

Let me start by summarizing our results for the third quarter. Revenues from continuing operations grew to $877 million, up 5.4% from the same period last year. EBITDA for the quarter was $127 million, up 6.3% over last year and EPS for the quarter was $0.77, up 6.9% over last year. Through the first nine months of the year, our revenues, EBITDA and EPS were up 9.7%, 8.1% and 10% respectively over last year.

We are pleased with our results in the quarter and with the progress that we’ve made throughout 2011. Our quality scores continue to improve. Our acquisitions are performing well. We have very active pipeline and we continue to operate efficiently to control costs. Admissions from continuing operations were up 2.6% and adjusted admissions were up 2.2% versus 2010.

On a same-store basis, admissions were down 0.2%, but adjusted admissions declining 0.9%. As you’ve heard me say, service and quality are key factors in driving value. We strive to be the preferred provider for people in the communities we serve. We are recruiting the right positions in the right communities and we’re on track to achieve our annual recruiting target.

We’re closely working with our positions to optimize critical outcomes, enhance our mutual success and drive performance. Our core measure results are improving across the company and especially in our larger hospitals where we’ve seen the most opportunity. In addition our focus on customer satisfaction continues to produce results as we move toward value-based purchasing.

Our solid balance sheet, strong cash flows and ample liquidity allow us to make strategic investments to improve our performance. While we are maintaining our focus on being the sole provider in smaller communities we are seeking to grow strategically through selective acquisitions and move into faster growing markets with a more diversified employer base and a favorable payer mix.

Our most recent acquisitions Clark Regional and HighPoint Health System continue to contribute to our earnings growth and to demonstrate significant long-term potential. Clark Regional will not move into its new facility until the first half of 2012, but still, already the hospital achieved high single-digit margins in the quarter.

HighPoint has improved to low double-digit margins since we acquired it. We expect to see further significant improvement from these acquisitions, once Clark makes its move and additional market opportunities are realized at HighPoint.

More recently, our innovative partnership Duke/LifePoint Healthcare has made several announcements. We acquired Person Memorial hospital in Roxboro, North Carolina. On Monday, we expect to close our acquisition of Maria Parham Medical Center in Henderson, North Carolina.

Earlier this week, we announced that we signed a memorandum of understanding to acquire Twin County Regional Healthcare in Galax, Virginia. This would be the first acquisition in Virginia as a part of the Duke/LifePoint partnership and we look forward to working with Twin County to finalize this potential transaction.

Combined, these three acquisitions would represent approximately $180 million in annual revenue. These together with our purchase of the North Carolina Cardiac cath labs, and CONs in the second quarter, illustrate the significant progress we’ve made since our partnership with Duke was formed earlier this year.

The momentum we’ve experienced validates the vision we have for Duke/LifePoint and demonstrates the unique option we offer in today’s healthcare market. Of course, we continue to pursue acquisition opportunities outside of Duke/LifePoint. Our pipeline is very active, driven by the hard work of our development team.

In this time of unprecedented change and uncertainty, LifePoint is uniquely positioned to offer solutions to standalone hospitals and the communities they serve. We also continue to drive organic growth through service line development, position recruitment and end market transactions.

While our development results have been strong, I am pleased to say that we are adding resources to these efforts with the appointment of Leif Murphy to our development and executive leadership teams. Many of you know Leif and already understand what he can add to our team. Leif will oversee LifePoint’s growth and development strategy including acquisitions and innovative partnerships. He will also manage development efforts at our existing hospitals seeking ways to augment the services offered at these facilities. We are excited for Leif to join our team. His strengths are perfectly aligned with our strategy and his experience will help grow our business.

So as we look at the results from the quarter and the months ahead, we are confident that LifePoint is well positioned to succeed. We are excited about the opportunities we see in the markets we serve and the markets that we have acquired recently. And we are committed to creating value for our stockholders.

With that, let me turn the call over to Jeff to talk in more detail about of our financial results for the quarter. Jeff?

Jeff Sherman

Thank you Bill and good morning everyone. The third quarter results represent another quarter of earnings growth, free cash flow generation and the strategic deployment of capital to grow our existing facilities, fund acquisitions and buyback stock.

Starting with volumes. On a same store basis admissions were down by 0.2% in the third quarter including the closure of an OB program in early 2011 which accounted for 30 basis points of decline. Adjusted admissions were down by 0.9% in the third quarter with similar impacts on volume that we noted in the second quarter including lower outpatient surgeries and observation visits.

Total surgeries were down 5.3% on a same store basis versus the prior year approximately 40% of the decline is due to the opening of competing ASCs in two of our markets and the closure of a couple of product lines.

Revenues in the third quarter were $877 million, an increase of $45 million or 5.4% versus prior year. Same store revenues increased by $22 million or 2.8%. Cash revenues defined as net revenue less bad debt were up 4.8% in continuing operations and 2.1% on a same store basis versus the prior year.

EBITDA from continuing operations was $127.4 million, an increase of $7.6 million or 6.3% over prior year. Diluted earnings per share from continuing operations were $0.77 in the quarter, an increase of 6.9% over prior year.

EBITDA margins for the quarter were 14.5% up 10 basis points over prior year. Cash EBITDA margins defined as EBITDA divided by cash net revenues were 16.9% in the third quarter versus 16.7% in the prior year. On a year-to-date basis, revenues were up $234 million or 9.7%, EBITDA was up $30.4 million or 8.1% and diluted earnings per share from continuing operations were up $0.22 or 10%. Cash EBITDA margins were 18% through three quarters of 2011 and equal to the first nine months of 2010.

Turning the pricing, same store net revenue for adjusted admission was up 2.4% in the quarter versus the prior year. On a comparative basis this pricing growth is below our previous quarter averages due mainly to two components. First, the third quarter of 2010 included $12.4 million of prior period revenue related to three prior quarters of Alabama provider tax payments. Same store net revenue for admission growth will be 4% in the third quarter of 2011 after normalizing for this.

The second factor contributing to slower net revenue for adjusted admission growth is a deceleration in the amount of self-pay revenue growth. Same store self-pay revenue increased by only $9 million in the third quarter versus the prior year. This compares with growth of $19 million in the second quarter and $23 million in the first quarter of 2011.

After normalizing for the Alabama provider tax payment and this lower self-pay revenue growth, revenue for adjusted admission would have increased by approximately 5.3%. We booked $11 million in the third quarter of 2011 in the other revenue category related to meeting the Medicaid meaning for use criteria and we have elected to not include this revenue in the net revenue for adjusted admission calculation. The operating costs incurred to meet the meaning for use thresholds continue to increase and were approximately $4 million in the quarter.

On a year-to-date basis, we have now booked $15 million in revenue, $8 million in operating expenses and approximately $3 million in depreciation for meaning for use. The $12.4 million Alabama provider tax revenue booked in the third quarter of 2010 contributed approximately $5 million in EBITDA that did not re-occur in the third quarter of 2011.

Turning to costs, SWB cost as a percent of revenues were 38.5% and declined by 50 basis points in the prior year quarter and include incremental meaningful use cost. Supply cost for the quarter declined by 60 basis points to 13% of revenue versus the prior year. Other operating expenses in the quarter increased by 50 basis points to 19.5% of revenue and include meaningful use costs in $2 million in deal costs for acquisitions.

Bad debt expense was 14.5% of revenue in the quarter versus 14.4% in the second quarter, and 14% in the third quarter of 2010. Charity care write-offs were 2.9% in the quarter, an increase of 90 basis points over the prior year quarter.

Same-store bad debts plus charity care were 17.2% of revenues, and increased by 120 basis points over prior year. This is in contrast to the 180 basis points increase in same-store bad debts plus charity care in the second quarter of 2011. The allowance as a percentage of self-pay AR was 86.8% versus 86.3% in the prior year quarter.

Upfront cash collections continue to show good improvement and increased by 8% over the prior year quarter.

Cash flow from continuing operations for the quarter was a $110 million. On a year-to-date basis, cash flow from continuing operations was $318 million, an increase of $37 million or 13% over the first nine months of 2010. We spent $49 million in capital expenditures in the quarter with $20 million spent on IT system investments, primarily to meet meaningful use requirements.

IT investments for the first nine months for 2011 were $58 million, an increase of $24 million or 72% over the first nine months of 2010. On the acquisition front, we’ve purchased Person Memorial Hospital through our joint venture with Duke for $23 million including working capital in the third quarter. The purchase price was approximately 50% of our revenue and was a counterfoil of the deposits under third quarter balance sheet for our October 1, 2011 close.

In late September we also made an in-market acquisition of outpatient centre in one of our key markets. We have bought back $99 million of stock in the quarter at an average price of $34 per share. We have $218 million remaining out of the $250 million plan approved in the third quarter of 2011. The previous authorizations have been fully executed. We finished the quarter with a $199 million of cash on hand and have maintained our price stability to deploy our cash in our existing facilities fund our acquisition pipeline and opportunistically buy back our stock.

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

In summary, the third quarter results demonstrate that we are effectively managing our operations in a difficult environment. We experienced positive in-patient admissions after adjusting for service foreclosures and continued EBITDA and EPS growth. Free cash flow defined as cash flow from operations less capital investment was $61 million in the quarter and a $165 million for the first nine months of 2011.

Excluding the incremental capital expenditures in 2011, free cash flow would have increased by $37 million or 23% over the first nine months of 2010. In terms of guidance we are affirming our revised guidance in the second quarter, which included EBITDA in the range of $525 million to $545 million for the year with EPS of $2.95 to $3.15. We still expect to be at [high] end of the guidance range for both the EBITDA and EPS.

I will now turn it back over to Bill.

William Carpenter

Thank you, Jeff. Before we start the Q&A session I would like to share a few more thoughts on the third quarter. I am proud of what our team has accomplished today in 2011. We continue to improve quality of care we provide in our hospitals as we work more closely with our physicians. We are effectively controlling costs while making strategic investments in our existing assets as well as in new markets. We have the right strategies, the right people and the right tools in place to make communities healthier and drive value for our stockholders.

Now, time for your questions.

Question-and-Answer Session

Operator

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

Adam Feinstein - Barclays Capital

Great. Thank you. Good morning, everyone. Just a good starting point is maybe just talk a little bit about the admissions versus the adjusted admits, I guess, in the past couple of quarters now you guys are seeing stronger growth in the in-patient side than the outpatient side and so the difference in some of your peers. So, maybe if you could just give some commentary in terms of what's driving that, and then I have a couple of follow-up questions.

Jeff Sherman

We did talk in the second quarter that there were several things impacting the adjusted admissions that continued into the third quarter. Lower outpatient surgery volumes were a factor. We talked about 40% of that decline related to two ASCs opening up in two of our markets and most of that volume is low intensity and you know thus could be pain type cases, so low margin cases. Observation visits continue to be down in the quarter and we also are seeing ER visits are slowing in the quarter as well.

So with surgeries down, that’s impacting imaging volume as well on the outpatient side. We do expect that to improve in the fourth quarter and I will let David talk about a few things there.

David Dill

Yeah Jeff talked about roughly 40% of surgical volume coming in a couple of our markets was competing ASCs and product lines. The remaining decline on the surgery side that we have seen is really attributed to two things that on one, volume with doctors above the market in the back half of last year and the first half of this year that we have replaced those physicians and it’s just the timing of the new practices ramping up and then finally just the economic conditions in many of our markets that have slowed down in some of the surgical volumes that have put pressure on that, on the outpatient business. Our outpatient revenue continues to grow, but consistent with what we talked about on the second quarter call.

The outpatient revenue growth has slowed from low double digits to mid to high single digits and we expect that to continue to improve with some ER volumes hopefully coming back in the fourth quarter, but also some other investments that we made in the latter part of the third quarter that Jeff talked about during his prepared comments.

Adam Feinstein - Barclays Capital

And a couple of follow-up questions here. Jeff, maybe just with respect to the meaningful used in high-tech payments, is there few calls going on here, so just want to make sure you know I have the details in terms of, you guys provided a lot of details about the impact year-to-date, but just for the full year I guess what are you guys anticipating for the fourth quarter?

Jeff Sherman

So on the second quarter call, Adam, I said I expected another $5 million to $10 million of revenue and approximately $46 million of incremental operating expenses for the back half of the year. That has come a little bit stronger, so in the third quarter we booked $11 million in revenue, had about $4 million in operating costs and had about $1 million in depreciation in the third quarter.

On a year-to-date basis, it’s about $15 million in revenue, about $8 million in operating costs and a little bit less than $3 million in depreciation on a year-to-date basis. We do expect that we could receive some high-tech dollars in the fourth quarter. I’d expect that would be in the $46 million range, but I would also expect costs will be in the $4 million to $5 million range.

On the operating side, with a $1 million of incremental and depreciation and we’re also expecting additional deal costs, $1 million to $2 million in the fourth quarter. So I think about high-tech in the fourth quarter, I'm not expecting it to be a big helper and not expecting your incremental high-tech dollars to help us meet that high end of the guidance range. I think it’s fairly neutral with the operating costs incurred to meet it as well as incremental deal cost that we will expect to incur in the current fourth quarter.

Adam Feinstein - Barclays Capital

Okay, that’s very helpful and then just my final question. Just New Mexico, can you just give us an update in terms of what’s going there with Medicaid?

William Carpenter

Yes, so in Mexico, on the managed Medicaid side, we took some pretty good reductions and it was a big part of our overall Medicaid reductions for the year. That started in the fourth quarter of 2010 and continues through the third quarter of this year. We have not had any other significant changes in Medicaid in the state. There are different UPL, sole community provider tax programs in the state, but our programs have not been materially impacted in the quarter or for the year.

Operator

And our next question comes from the line of Justin Lake with UBS.

Justin Lake - UBS

First question just on the cost outlook. You know when we look at 2011, there certainly were some, seem to be some benefits from lower cost on the medical supply side, may be some other operating expense reductions. I am just curious as you look out to 2012, you see similar opportunities for costs, to moderate costs as you achieved in 2011?

Jeff Sherman

We do think there is additional opportunities, the supply area is an area, we continue to focus on. We have had good success there. We continue to work with HPG and believe we have additional opportunities there as we seek to centralize what we are doing from a purchasing standpoint and processing standpoint, also looking at HPG, looking at global sourcing.

We think we’ve incremental supply savings there and we are really working on high cost items as well we’ve less volumes in some of our counterparts and cardiology in orthopedics, but we do think we have incremental opportunities there.

We have been successful in saving money and reducing the number of vendors with drug relating expense. We’ve had very good success there. We think we will have additional opportunities to do that and as we employ more physicians and particular specialists we think we’ll have additional opportunities there as well.

Justin Lake - UBS

Okay. So similar opportunities in ’12 as you had in ’11?

William Carpenter

In addition Justin, just the new hospitals that have come in to the company over the last year will continue to drop costs out of the system through those acquisitions.

Jeff Sherman

And we are also working on the supply side with pharmaceuticals as well. We continue to deploy technology as well as clinical pharmacists to help us reduce pharmacy costs so we will think we’ll have opportunities there as well.

Justin Lake - UBS

Got it. And then just one other question, despite these help to achieve payments meaningful uses is done to get somewhat confusing in terms of the figuring out how results looked versus expectations. So just curious if you might be able to share with us in terms of if we exclude the impact of the meaningful use revenue and cost, I am curious if you could tell us how the quarter looked versus your own internal plan for 3Q?

William Carpenter

Well, I think and as we think about meaningful use and as I talked about in the second quarter call, we are expecting some incremental dollars in the bottom line as in the second quarter and that was a part of the reason we raised the top-end of the guidance. So you know we view our third quarter results to be inline with where we expect them to be including some of the meaningful use dollars, but that was part of us increasing the high-end of the guidance range in the second quarter.

Operator

And our next question comes from the line of Tom Gallucci with Lazard Capital Markets. Please proceed.

Tom Gallucci - Lazard Capital Markets

I guess just two questions. First you had reiterated your expectations on EBITDA and the EPS line; any thoughts on the same store adjusted admission goal, I think it was flat up 2% if I recall correctly?

Jeff Sherman

Yes Tom it was. We have not changed that goal; we still expect that we’ll able to be in that range by the end of the year.

Tom Gallucci - Lazard Capital Markets

Okay, good. And then you talked a little bit about surgery I think it was mostly focused on the outpatient side in some of your commentary. Any thoughts on the inpatients side obviously tough environment, but sort of weak there; is that the same sort of doctor turnover that you are alluding to on the outpatient side or are there other factors that we should think about?

William Carpenter

Well, I think we are seeing still a shift from inpatient to outpatient and we are seeing just general economic conditions impact surgical volumes where I think we’re seeing particularly in orthopedic area for us. David do you want to add to that?

David Dill

That’s it.

Tom Gallucci - Lazard Capital Markets

Okay. And any regional variations that are worth highlighting extremely to the better or worse relative to the numbers that we’re seeing on the averages; such as the volume?

David Dill

Not really regional, Tom is David. You know may be some difference when you start looking at bigger hospitals and smaller hospitals that’s when maybe some other commentary you are hearing in the industry, but nothing is really geographic based.

Tom Gallucci - Lazard Capital Markets

Implying the smaller one doing a little worse?

David Dill

Just more volatile.

Tom Gallucci - Lazard Capital Markets

Right, okay.

David Dill

In our hospitals.

Jeff Sherman

And one other point, we did have you know some program service closures that were on profitable impacting surgeries as well as just to lower OB volumes it totals our OB volumes continue to be down primarily in Medicaid, so from a mix standpoint at a lower-payer, lower-margin product line in total. So the lower deliveries, lower OB is contributing the lower surgeries in that product line as well.

Tom Gallucci - Lazard Capital Markets

All right thanks for the color.

William Carpenter

Let me just say, based on the new physicians and targeted investments that we have been making, we expect to see improvement in surgical volumes as we move out over the next several quarters.

Operator

And our next question comes from the line of Kevin Fischbeck of Bank of America. Please proceed.

Kevin Fischbeck - Bank of America

Okay, thank you. I just want to ask a question about the M&A pipeline; I think last quarter you talked about potentially being close to coming up with the new JV partner that kind of replicate what you’re doing with Duke, any update on that?

William Carpenter

Yeah, sure. We continue to work on a number of other potential arrangements along the lines of our Duke/LifePoint partnership. These transactions are very complex it’s very difficult to predict the timing. We were and are close with respect to other announcements which we’ll make as soon as we can.

But these partnerships are the right kind of partnerships. These partnerships are going to be good for patients; it’s going to be good for community-based hospitals because they focus on keeping patients close to home or services. So we are very upbeat about it, we got a great momentum with our Duke partnership and we believe these partnerships will allow us to gain scale quickly in markets. So I am confident we’ll add more of these in the future and when we do, we’ll let you know.

Kevin Fischbeck - Bank of America

Okay. And then can you just give a little bit color on the thought process around just the whole JV structure because a lot of times companies will say that it is much worth to work on a smaller deal as it is on a big deal and since these JVs, specially since if you are going to get a portion of the economics, and I guess the most recent deal is that the JV would have only a majority ownership interest in the facility, you are getting part of a part, I mean how do you think a feature like these type of deals might be more complex, and the net balance of the company might be smaller than some oversized transactions you won’t doubt, right, I mean how do you kind of weight that you know that opportunity cost versus the opportunities within the JV?

William Carpenter

Yeah, sure here is what I think about it. Smaller community hospitals might make decisions about whether or not they are going to be able to survive in the future. Some of them will and today, but they see the future and they see the pressure that continues to exist.

So they are actually looking for a partner, but they don’t feel the need necessarily to divest their hospital completely today, and so this partnership model offers a real advantage to them. It allows them to maintain some level of ownership and some level of input in control into the strategy for that hospital while turning over the operations to a company like LifePoint – turn over to LifePoint in order to bring the resources and scale that we are bring to the table.

So I think it’s a real win-win for them. Offers them the opportunity to bring in the sophisticated resources that we bring, and while at the same time maintaining that local level of controls. So, you know, we have developed a pretty good model for this, and while it’s a little more complicated as you go into the discussion it’s something that people get pretty quickly.

Kevin Fischbeck - Bank of America

Okay. And the last question here, you know, when we think about the debt ceiling negotiations, you know one of the things that gets turned around is reductions to our rural hospital subsidies, can you give any sense about how big exposure LifePoint as to the subsidies?

Jeff Sherman

Well, there are a number of rural programs that do benefit us and that we are watching very carefully. We expect at the end of the day that rural hospitals are not going to be treated in an unfair way and we continue to be a strong voice for rural hospitals, both for private and non-for-profit rural hospitals across the country.

So, I think there's a lot of support frankly for rural hospitals. These are the only hospitals in communities they serve, and so it continues to be politically, I think, a very important factor. Every congressman in America has a rural hospital in his district.

Operator

And our next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Darren Lehrich - Deutsche Bank

Thanks. Good morning, everybody and you know I appreciate how you guys have been disclosing your HITECH, that’s very helpful. Jeff, I wanted to just ask a question about the -- I think you said outpatient centers, but I just want to clarify, is that a surgery center, and you know can you just maybe size it for us so we can understand the impact on your outpatient revenue or volumes, I guess, going into the fourth quarter?

Jeff Sherman

Yeah, it is an outpatient surgery center, Darren in one of our markets. It’s a joint venture as well and we have 70% joint venture ownership of it and so we will -- we do expect that while volumes in its forecast improve some volumes in the fourth quarter both on the surgery side and the revenues side, but we have other end market transactions we continue to look at it as well that we think can help that over the next quarter or two.

William Carpenter

David, as far as stocks go, if not, one that will move us from mid-to-high single-digit back over to double-digit growth in outpatient revenue when we bring in that. So, you can imagine the south surgery centers in most of our South communities.

Darren Lehrich - Deutsche Bank

Sure. Okay, thanks. And then, you know I guess just as it relates to the disposition on employment activity and just the overall practice up organizationally has -- can you update us a bit in the quarter, you know, how many physicians you are employing now, what the practice losses are, and David I think you said there was a little bit of surgeon turnover, so maybe just help to put that into context?

David Dill

I’ll start with just some overall physician results now and then I’ll turn it over to Jeff for some of the numbers behind but through the first (inaudible) year we expect it will end the year pretty close to where we expect it from a position occurring standpoint coming into the year, plus or minus and to the extent that we’re little bit low just timing some physicians may move into the first quarter of next year, but really close on the physicians that left the market make a little bit slightly higher than what we have experienced the last couple of years.

Really two main reasons, one is just the general economy conditions, we have seen some physicians leave their market, but the (inaudible) are that where we have targeted some various specific employed physician practices, we decided to terminate the relationship due to the performance and the development of that practice and that can lead them to our employed physicians, we still have a basis all in one to 300 employed doctors around the country and that we built the infrastructure to manage those practices and when we look out for the next year or two, not only will we see more new physicians coming to us that will be employed, but also existing physicians in the market that are seeking a different option that may ultimately result in employing some of those physicians as well.

Jeff Sherman

Yeah, if you look at the activity, Darren in those practices, the volumes in those practices are ramping up. So Q3 tends to be a bigger employment quarter. So our practice losses are pretty consistent, down slightly from last year in the $10 million range, but very consistent where we expect it to be coming into the year and versus our plan. So again I think the phenomena of existing practices maturing, improving our financial performance as we continue to add new physicians with higher upfront losses continues, but it’s been in a stable range really throughout 2011 as we compare to 2010.

Darren Lehrich - Deutsche Bank

The additional 0:01:19.8 22 (inaudible) to the team, can you just put that into context with Johnny’s portfolio of responsibilities and how that’s going to split out?

David Dill

Sure. Life, it brings an additional resource to the table to work with Johnny and Paul Hannah and all of our team. I think what it’s a signal is the serious priority that development is for us. We have a leader at this level to augment that outstanding team. Johnny and Paul continue to work on those deals along with the other members of the team.

Johnny has a big focus on the partnership development and so I see that continuing and each of those people continue to do the things that they are doing. Our team has done a great job so far, they have identified some great assets that we have been able to acquire and with the opportunities that exist out there and that we believe continue to exist, we are really glad to add Life as another outstanding resource to the team. And quite frankly, I am also proud that such an outstanding leader saw the great opportunity that exists here at LifePoint.

Operator

Our next question comes from the line of John Ransom with Raymond James. Please proceed.

John Ransom - Raymond James

Jeff I was just wondering if you had, if we look at the four-year cycle of meaningful used payments versus capital expenditures, do you have a view of kind of what you think the total dollar is kind of coming in versus going out on CapEx look like and then secondly I just wonder when you might qualify for your first Medicare payments.

Jeff Sherman

In terms of Medicare qualifications, we expect we will qualify for them next year. Probably looking in mid to the third quarter time period, we are doing a lot of system conversions right now. We are doing system conversions from Meditech to HMS and then as part of that doing meaningful use upgrades and we are also upgrading Meditech to do conversions. So there is a lot of moving parts there, maybe start with the basic math. You know it’s basically $2 million a hospital and gets adjusted up for volume.

So I think overall we expect that the capital outlays will be pretty consistent with the dollars we are getting in total. In 2010, we spent about $40 million to $45 million in IT. We are going to spend $70 million to $75 million in 2011 and at least that much in 2012. We will update that more when we give our full-year guidance on the fourth quarter call.

David Dill

We have operating expenses that Jeff talked about. Just keep in mind a lot of these capital investments that we are making into the balance sheet and get depreciated of, so after the money quits coming in, you've got this tale of depreciation that will carry on for several years after that.

John Ransom - Raymond James

And should we think about that kind of like a five or six-year life on the total dollar spent?

Jeff Sherman

Yeah, it’s in between that, that's right.

John Ransom - Raymond James

And then secondly I am just curious to delve into the Duke deal a little bit further, I mean Duke’s got more money than about anybody, so obviously a lot of times these things are driven by capital. In this case obviously capital shouldn't have been the issue for Duke. What did they see in LifePoint. What are you doing for them that they didn't think they could do for themselves, number one.

And then number two, as you've gotten into this, have they figured out five more things you could do for them that they weren't so good at doing themselves. And when you go market this to other audience like this, what's the elevator pitch, I mean what are you selling on the front end, why do you want to partner with LifePoint?

William Carpenter

We don't have enough time for me to answer all those questions, but I am going to give it a shot. Duke has capital certainly and everybody has a limited amount of capital and everybody has priorities about how they are going to spend their capital. When you are on the Duke campus, they are investing a lot of money in new facilities on the Duke campus. They’re just built and are in the process of completing a new patient tower that is basically a large ICU.

That’s how Duke views itself, as a large ICU that is taking care of the highest end patients that need to be treated in that environment. It’s also the most costly environment to take care of a patient with all the infrastructure that they have there. So Duke has capital to invest. They have made a determination to invest their capital in their campus in Durham and they partner with us in order to make investments in smaller hospitals in the region.

They do want to see those patients to the extent that it makes sense for those patients who need care at Duke, to receive care at Duke and we are absolutely happy with that. What we want is to make sure that patients who need to be treated in a lower cost patient setting, get that care in our community-based hospitals and we are building great momentum in order to accomplish that.

What Duke sees in us and you know that is a pleasure for me to be out on the road with Bill Fulkerson and Molly O'Neill from Duke because what they say to community-based hospitals when we are together is that they chose LifePoint because they saw in LifePoint a commitment to quality care and excellent operations that frankly, the quality commitment that we have matches up with Duke’s and the ability to operates small-community hospitals is something that’s just not in the wheelhouse of Duke, that’s not what they do.

So they are looking to us to bring that to the table. When we go out and talk to other community hospitals about the Duke/LifePoint partnership and how it can be in the future, it’s all about quality patient care, putting the staff of Duke quality on our hospitals and bringing the efficiency and the resources that LifePoint brings to the table in order to allow these hospitals to be there for the long-term, to be not only survivors, but to thrive in their markets and be more than that they can be on their own. So a little bit of a long answer I guess but thank you for the question.

David Dill

John, let me add one more item to Bill’s response, as it relates to what have we learned from Duke and how we’re using Duke. One of the exciting things about the relationship with Duke from my standpoint is not just developing and acquiring hospitals in North Carolina and now Virginia and how that translates into other opportunities around the country with other like systems, I mean believing this call in this afternoon going on, we have a group of our position leaders here in town and today our position leaders that we brought in for many of our hospitals are having a day and half session being led by Duke talking about quality patient safety. So it’s not just the hospitals there, but we will partner with them in other parts of the country as well and it’s really exciting to challenge our own selves on what we can do in the communities that we serve.

Operator

Our next question comes from the line of Gary Taylor with Citigroup. Please proceed.

Gary Taylor - Citigroup

Hi good morning. Most of my questions has been answered. I just wanted to go back to the surgery is in kind of, revisit that again, I know you’ve talked about it and listening, but on the outpatient side, well, I guess for both which strikes me is that the year-over-year weakness you said inpatient and outpatient surgery accelerated this quarter versus what we saw in the first part of the year, but for us not much change in your admission numbers. So I think you know the answer to this is very obvious, that’s what I want to understand it a little bit better. I mean essentially you know you are backfilling those cases with, on the inpatient side with medical cases. I just don’t understand entirely what’s driving that, is that a mix of recruited physicians 0:00:38.6 27 practices, what’s allowing the medical inpatient’s cases hold that better in the surgical?

Jeff Sherman

Well we’ve certainly done a lot of primary care recruiting and we’ve expanded our Hospitalist Programs, both of those are performing well. As David talked about, there was some very specific physician losses that occurred, that we are still in the process of filling and some of the more key positions that had a lot of volume within themself and you know in our markets one physician can have a lot of volume, if we loose that physician, it may just takes time to build that up.

So we are in the process of doing that Gary on the inpatient side. I think some of it has been the some conversion from inpatient and outpatient, but obviously outpatient is down as well and that’s why we talked about a couple of other factors impacting that. Would you think that will improve coming into the fourth quarter?

David Dill

And two big surgery centers, competing surgery centers have opened up in a couple of our markets that have accelerated. We talked about it a little bit in the second quarter, another one in the third quarter opens up, but what we’ve typically seen as well, those surgery centers open up in our communities, often over the years, very few of them really had the volumes sustain themselves long term and that volume will end up coming back to us were an opportunity for us to buyback, that sort of stuff if we want to in the future. So even in this timing and we’ll just let those develop the way they will develop and I think we’ll have a chance for those numbers to look different in those two specific markets 12 to 18 to 24 months from now.

Gary Taylor - Citigroup

It’s quite notable, its not, I guess the bad thing that surgical cases are down as much as they are positive, it’s quite notable that non-surgical cases are obviously doing much better. So a couple of quick follow-ups if I can, on the ASC side its impacting the outpatient, what is the visible competing development looks like David, when you look out do you say well, we’re aware that you know somebody is indicating something might going to get up the ground six months from now, a year from now, is there anything visible?

David Dill

There is really not, I mean there are just a handful of markets where we have either physicians that desire to do that and most importantly the volume that could support it and so there is nothing that’s noticeable other than the ones we talked about.

Gary Taylor - Citigroup

And my last question is on the inpatient side and you know I also hear the comments about few physicians loss so I guess a few years ago LifePoint went through kind of a multi-year period where we were always disappointed and mystified by some of the physician retention and I am quite sure one of the reasons David you came there to help address that and clearly its been a much better in your tenure. So I guess may be just kind of opening the question for investors, why or why should we not be worried that we’re going to see another kind of unexplainable period where your trends to this retention it’s problematic?

David Dill

I’ll start with then Jeff and Bill may have some other comments. I appreciate you may be give me small growth in our reserve around some of those items.

Gary Taylor - Citigroup

Well I know you have been beating the bushes….

David Dill

Yeah, we have. Keep in mind maybe the small number of physician they contribute a large number cases in the small markets is something that doesn’t need to be ignored and so as we have some doctors overtime I don’t see anything changing tomorrow that what we had yesterday, but as we have a specific doctor that decides to retire and leave the market and the amount of time it takes for us to back fill for that physician or market you have at least a gap in that volume. If not some of the volume that they give us somewhere else temporarily.

So I think taking up some of that volatilities or employing physicians has been a piece of that; we continue to do that. Working on succession planning strategies with some of these key physicians that refer and practice the disproportion number of cases in the small hospitals.

So trying to take some risk out of that; that risk comes at the cost of as we back fill our employee physicians to come into these markets, to take some of that pressure off; no good either to punish in some of these markets so working closely with our doctors to make sure that we can manage through that with them is extremely important.

Jeff Sherman

Yeah and the only thing I would add is we have spent a lot of resources to build to infrastructure to bolster crude physicians, manage physician practices as well as retain physician. So we have specific leaders and initiatives on all three of those fronts Gary, and it’s just something we continue to focus on a daily basis.

David Dill

Our PRI initiative that we put in place two or three years ago was a resource initiative. A resource that we’ve put in many of our hospitals on a full-time resource in most of our hospitals, part-time in some that was specifically targeted to those type of relationships to let us know as much as we can, as quick as we can, so we can have plans in place to mitigate the potential impact and also build the relationship.

William Carpenter

And Gary this is Bill. Let me say that the infrastructure that we put in place about three years ago now has resulted and are hitting our recruitment targets in each of the last two years and as we said earlier on the call, we’re on-track to hit our recruiting target again this year. So this is something that has an intense focus within the company and something that we are not going to take our eye off the ball on ever again.

Operator

Our next question comes from the line of Whit Mayo with Robert W. Baird and Company. Please proceed.

Whit Mayo - Robert W. Baird & Company

Thanks. I know we’re winding down the hour mark; I’ll make it pretty quick. But Jeff if you take the out of period Alabama provider fee revenues out of the equation, how much would you say your Medicaid was down year-to-year either dollar or percentage wise?

Jeff Sherman

Well if you take it our on a same store basis, it’s basically flat year-to-year. So we take it on 2010 Medicaid revenues basically flat.

Whit Mayo - Robert W. Baird & Company

So that would imply volumes would be up how much and then the pricing I guess that’s what I am trying to get there?

Jeff Sherman

We got a lot of moving parts there with; we have OB volume going down and then we’ve had some improved Medicaid during the year so that does probably help a little bit offset that a little bit better than we are expecting as I said in the second quarter and so we’ve got a lot of moving parts there, but OB being down is in the Medicaid bucket.

Whit Mayo - Robert W. Baird & Company

And when I look at the HITECH and the revenue, where are you going to assign that in your payer mix; is that going to go – is that in the other bucket or do you assign that respectively to Medicaid and Medicare?

Jeff Sherman

Yes it is. We ended the second quarter, it was in the Medicaid bucket that was re-classed and put in the other revenue category in this quarter, so you’ll see that in the Q when it’s released.

Whit Mayo - Robert W. Baird & Company

Okay. So everything will be in other going forward?

Jeff Sherman

Correct.

Whit Mayo - Robert W. Baird & Company

Okay. Do you have handy your collection rates for the insured the co-pay deductible in the insured buckets?

Jeff Sherman

It’s maintained pretty consistent on a pure self-pay $0.06 to $0.07 on the balance after insurance piece. We’re still in the around the 50% range; I have been talking about our upright cash selections are improving so I think if you have some more responsibility being shifted to patients. But in total we’re seeing our collections improve on a quarter-to-quarter basis on the upfront side and we’re seeing our overall collection rates stable.

Whit Mayo - Robert W. Baird & Company

Okay. I think in the end of 2010 your on a pure uninsured rate was you are saying six to seven now?

Jeff Sherman

I mean it hasn’t changed materially.

Whit Mayo - Robert W. Baird & Company

Okay that’s fine. And I think may be I had one other – have decided when Clark is going in the same store count yet?

Jeff Sherman

Yeah it will go in the same store count in the next year, not go January 1.

Whit Mayo - Robert W. Baird & Company

Okay. May be so I had one more and sorry. I used to know this, but can you confirm again what you are thinking about for the IPPS update in ’12 when we think about all the moving pieces with the role adjustments?

Jeff Sherman

Yeah, overall it’s going to be positive for us, so I expect it in the fourth quarter it’s going to be between positive 0.5% and 1% in total.

Whit Mayo - Robert W. Baird & Company

Just IPPS?

Jeff Sherman

Yes, in total, everything in total.

Whit Mayo - Robert W. Baird & Company

Total, including your outpatient?

Jeff Sherman

Yes. Well outpatient is going to be a little bit higher; outpatient is going to be probably 1.75% quarters to 2%.

Operator

Our next question comes from the line of A.J. Rice with Susquehanna Financial Group. Please proceed.

A.J. Rice - Susquehanna Financial Group

A couple of questions if I could ask. Are you, I know you guys don't want to be early guys to see the impact of further pressure on short-term inpatient admissions versus observation status and now it looks like at least in your numbers that sort of played out, and that you are not really seeing that impact on an ongoing basis, is that true or am I misreading it?

Jeff Sherman

No we have, we've talked about it and we've seen the decline in one day phase that was impacting our admission throughout 2009-2010 stabilize. It got smaller throughout 2010 and may have a smaller part of our admission decline in 2010 each quarter and then 2011 it turned a little positive.

So I think we have been talking about a long time, we have invested a lot of resources both internal resources and external resources to make sure we’re getting patience in the proper clinical setting. It’s a patient-by-patient exercise, but we have invested a lot of money in education, we've had a lot case management resources at the hospital level and we’ve added external resources including physician resources to make sure we’re getting it right.

A.J. Rice - Susquehanna Financial Group

Okay. And you said that’s true both ways you look at your commercial mix or your government mix on both sides, at this point there is not a lot of push from the commercial guys you could say they will look at that you sort of got it, everybody sort of happy with where you guys are at?

Jeff Sherman

Well I think there is always continued pressure on that, so I think we’ll continue to look at it. But the periods over the last couple of quarters that stabilized and actually turned positive.

A.J. Rice - Susquehanna Financial Group

Okay. And then we’ve talked a lot of about Duke JV but I had a couple of other questions, obviously as you move out of state, I know that the market in Virginia you’re going to is broadly in a board way part of maybe Duke’s reach but is there any geographic boundary on what acquisitions you would pursue or you pursue together with them that in any way limits it or I mean may be even comment what you think the geographic reach of that JV is?

William Carpenter

Well A.J. this is Bill. We have said that the primary focus of the Duke/LifePoint partnership is going to be in North Carolina. But Duke does have a reach in contiguous states to North Carolina and certainly up in the Southern Virginia. We’re trying to build a regional network here that can take care of patients across the continuum of care and so we think that focus should be sort of in that region with respect to Duke.

A.J. Rice - Susquehanna Financial Group

Okay.

William Carpenter

There is so much opportunity in North Carolina alone, though that we can stay focused there and really build a dynamic partnership in that state, and you know we’ve got a great momentum that we are building there.

A.J. Rice - Susquehanna Financial Group

Is there any way when it’s formerly defined in the JV as to what the geographic boundary sort of all on that from the deal are not really?

William Carpenter

Not really. Consistent with our partnership philosophy with the Duke, we are very open. We sit down with their development team and our development team, and we look at the opportunities. We’re a getting a lot of inbound calls on this. So, you know, Duke has relationships, they have existing relationships today that we are following up on and now there’s something formal in the documents to say how that’s going to happen. But, like the way that our partnership with Duke is working, it’s just working very well.

A.J. Rice - Susquehanna Financial Group

Right, I understand there’d be, obviously a lot of reasons to low capital into that versus your standalone acquisition activity, but talking on a strictly from a financial return on the money you are -- the dollars you invest, is there -- is it that one is inherently more profitable from your perspective, if you are saying, I got you know X amount of dollars to invest and I can do in this Duke JV acquisition versus standalone, if you look at it strictly from a financial standpoint, is one materially different from the other?

William Carpenter

No, it’s the same. You know, if you look at the acquisitions that we’ve announced so far and Duke well, specifically the one that we’ve closed will ask for a Person Memorial is owned 100% by Duke LifePoint and LifePoint is the, you know, very large majority owner of the joint venture.

And then the Maria Parham deal is a partnership deal, but we are looking at the same kind of acquisitions in Duke LifePoint as we are looking at in other parts of the country and on an a standalone basis.

David Dill

And we are going to evaluate through similar returning metrics, AJ, so you know we are going to put through the same rigor from a capital investment return on net capital perspective.

A.J. Rice - Susquehanna Financial Group

Right. Okay. Sometimes on JVs there is a management fee structure or whatever that maybe isn’t transferred on an externally that makes, you know, changes to economics a little bit, but that is not there, is anything like that in place?

And then just maybe the last question broadly, obviously you already commented on bringing relief on board, I guess we are in an environment where it seems like there is a lot of deals to be done and you’ve commented on that. Others have -- so when you think about your capacity for deals both from maybe a financial perspective, and a management perspective, can you maybe comment on, you know, one is sort of a big year going forward, what is -- what is sort of the pace of deals unless you’ll be comfortable taking on, and are you are ready to take on more leverage maybe your -- just give us some thoughts about that?

William Carpenter

Sure A. J, there is still upstart on that. You know over the last few years, we have built the corporate infrastructure here to integrate acquisitions. I am not concerned in the least about doing too many. What I am concerned about is having the right hospitals at the right price that did our strategy. And so, we do believe there are a lot of those opportunities out there, and we are aggressively pursuing them while being very disciplined about what we are going to buy.

I think you know a proxy for what we are going to do in the next -- in the future is sort of what we've done over the last couple of years. And, given our size, we do have the luxury of being able to add the right hospitals to LifePoint and a few good ones can really move them -- meter for us.

David Dill

And again with the same point on the operation side we have processes and people and structures in place to almost ensure, and I think our track record has shown that through Rockdale through the HighPoint and the most recent results that Bill and Jeff talked about in their prepared comments related to the HighPoint. And we have the ability to integrate transition, improve the operations in a very short time period and attaining with some rare resources as we ramp up. We can take on many more hospitals of different sizes within different structures to the first part of your question as well.

Operator

And due to time constraints our final question shall be from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Frank Morgan - RBC Capital Markets

Good morning, two questions. First, on the competing surgical centers that have affected your volumes. I am curious, can you tell us what market size the – are those doctor owned, I am assuming as they are doctor owned and isn’t there sort of a history of overtime, you can actually end up buying those in, I think that happened out and maybe have a [sue]?

And then the second question relates to the trend in the self-pay, the deceleration in the growth in the self-pay, I am curious, could you tell us what the uninsured admits as a percentage of total admits were, and was there any kind of shift in uninsured volume between inpatient and outpatient? Thanks.

William Carpenter

Yeah, I will start with the uninsured. David, do you want to take the second part? Uninsured self-pay admissions were actually up a little bit and they were up over 6% in the quarter, but again what drives our self-pay revenue is our Outpatient Emergency Department volume. And outpatient emergency self-pay ER visit volume has been growing faster than totally our visits for many quarters. But that growth rate slowed quite a bit in the third quarter.

So we have lower self-pay emergency room growth impacting it, and as a percentage of total self-payments are at about 6.7% for the quarter. And we did see charity -- we did see charity share write-offs increased for the quarter as well. So that was part of this self-pay going down.

David Dill

Yeah, as it relates Frank to the specific markets we are not going to get -- similar to what we’ve done historically. We are not going to get into specific markets. As far as the track record of buying back the surgery centers, I am not sure we have a track record of buying back.

We have a track record of showing that they cannot to make it in these communities with this kind of payer mix in the infrastructure to cover the investments. So whether we buy back, that’s an opportunity that we will have to analyze somewhere in the future probably or also just to bring that business back to the hospital is another opportunity as well.

Operator

And Mr. Carpenter, I’ll turn the conference back to your self for any final statements and closing remarks.

William Carpenter

Great. Nelson, thank you. Thank you all for participating on our call today. In conclusion, let me just say our strategies remain consistent. We are working closely with our physicians to deliver quality care on our hospitals.

We are making strategic investments in existing markets, and we are adding the right assets to the portfolio. As always, we are effectively managing our cost and we continuously develop our people.

Our focus on executing these strategies with excellence is unwavering. As we ramp up today, I’d like to say a special thank you to our physicians and to our 24,000 plus employees who deliver quality care in smaller towns across America everyday. These people are executing our strategies and achieving the results to drive value for our shareholders.

So, thank you all for joining us on the call today, and thank you for your interest in LifePoint Hospitals.

Operator

Ladies and gentlemen, that does conclude the conference call. We thank you for your participation and ask that you please disconnect your lines.

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 Hospitals's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts