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

Executives

Victor Campbell - SVP

Mark Kimbrough - Chief IR Officer

Richard Bracken - Chairman and CEO

Milton Johnson - President and CFO

Sam Hazen - President of Operations

Analysts

Ralph Giacobbe - Credit Suisse

Justin Lakes – UBS

Sheryl Skolnick - CRT Capital

Adam Feinstein - Barclays Capital

Christine Arnold - Cowen And Company

Tom Gallucci - Lazard Capital Markets

Gary Lieberman - Wells Fargo Securities

A J Rice - Susquehanna Financial Group

Frank Morgan - RBC Capital Markets

Kevin Fischbeck – Bank of America Merrill Lynch

HCA Holdings, Inc. (HCA) Q3 2011 Earnings Conference Call November 1, 2011 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the HCA third quarter 2011 earnings release conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call conference over to the Senior Vice President Mr. Vic Campbell. Please go ahead sir.

Victor Campbell

Carla, thank you and good morning everyone. Mark Kimbrough, our Chief Investor Relations Officer is here with me this morning and we would like to welcome everyone on today's call, also to those of you that are listening to the webcast. Here in the room with me this morning are Chairman and CEO Richard Bracken, President and CFO Milton Johnson, Sam Hazen, President of Operations, and then we have a cast of other characters here, senior officers of the company that can help us during the Q&A.

Before I turn the call over to Richard, let me remind everyone that should today's call contain any forward-looking statements, they are based on management's current expectations. Numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. Many of the factors that are listed in today's press release are included in our various SEC filings.

Many of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events.

This morning's call is being recorded. A replay will be available starting later today. With that, I'll turn the call over to Richard Bracken.

Richard Bracken

All right. Thank you Vic, and good morning to all. We do appreciate your participation on our call this morning. This has been a very busy quarter for all of us at HCA, so we have a lot to comment on this morning. Before we get started, let me thank many of you for the meetings over the last month as we provided commentary on the company and market dynamics.

So, let’s get started. First Earnings, for the quarter we reported adjustment EBITDA growth of 4% or $1.412 billion, well this does include revenues for meeting Stage 1 Meaningful Use requirements, excluding both HITECH revenues and expenses, our adjusted EBITDA grew 1.3% over last year’s third quarter. From an operations perspective, our earnings were achieved primarily due to strong patient volumes and expense control despite a continued softness in revenues per unit.

During the quarter we continued on track for a successful rollout of our electronics health records initiative consistent with meeting Stage 1 Meaningful Use requirements.

As delineated in our release this morning, we recorded both Medicare and Medicaid incentive revenues as certain of our hospitals completed their attestation process. During the fourth quarter we will continue the process of attestation and we expect that most all of our remaining hospitals will also meet performance standards.

We are quite satisfied with our performance in this regard. I believe this could be a major accomplishment for our organization, albeit only a first step in a long process. It represents solid execution by our operating quality performance in IT&S [ph] teams and is an important foundational step in our ability to create a digitalized medical record to a system providing cost efficient and effective healthcare services.

Our review indicates that at this point only a fraction of all US hospitals are expected to attest in 2011, we are proud to be part of this group. Also during the quarter our finance team has been exceedingly active in the quarter, we refinanced approximately $7 billion of existing indebtedness that net will lower our annual interest expense and strengthen our balance sheet. These transactions coupled with the financing activities in the second quarter are expected to generate annual interest savings of approximately $350 million next year and we expect the EPS impact to be accretive by approximately $0.47 in 2012.

Additionally, on September, 21st, recall that we were successful in repurchasing more 80 million shares of our common stocks from Bank of America. This repurchase represented a buyout of their equity interest and resulted in the termination of any governance rights they had. We estimate this repurchase of nearly 16% of our outstanding shares will be accretive to EPS by approximately $0.46 in 2012.

And finally shortly after the quarter ended, we completed the purchase of the remaining 40% of our HealthONE Joint Venture in the Denver market for $1.45 billion. We are very pleased with the opportunity to purchase this remaining equity percentage. We have appreciated our association with the Colorado Health Foundation over the past years. Look forward to continuing the very solid performance that our partnership had achieved and to serving the Denver community for many years to come. We do estimate that this acquisition will be accretive to EPS by approximately $0.12 in 2012.

Now, a few thoughts on some of the operating highlights for the third quarter. Our patient volumes for the quarter including our newly acquired facilities continued in line with recent favourable trends. Reported admissions for the quarter were up 4.8% and reported equivalent admissions increased 5.4%. Similarly, on a same facility basis, we reported that admissions and equivalent admissions grew 3.2% and 3.8%, respectively. We have now experienced 16 quarters in a row of positive equivalent admission growth. Also consistent with strong admission growth we continued our favourable trends in same facility emergency visit growth with a 4.9% growth rate for the third quarter. I think that you generally, are aware that we believe this growth reflects not only favourable facility locations and areas with favourable growth dynamics, but also an operating agenda that seeks to improve the efficiency in which we process patients through our system.

With these strong volumes, our company reported revenues for the quarter totalling $7.31 billion up 5.5% from $6.93 billion last year. Same facility revenue grew 3.7% in the quarter or about 60 basis points favourable to our second quarter growth.

Our primary challenge in the quarter is reflected in our revenue per equivalent admission growth of only 0.2%. Milton and Sam will provide more on this in a moment, but as we indicated in our release this morning, we continue to experience growth in medical admissions and declines in surgical admissions, this obviously led to lower revenue per unit equivalent admission.

As we mentioned on our last two conference calls, when we identified this revenue issue back in the second quarter, our operator set in motion a number of adjustments. The efforts of our operating teams during the quarter were effective as reflected in our operating expenses per equivalent admission increasing only 0.5% for the quarter. You will also hear more about our cost management agenda in just a few moments.

And finally, let me mention that in September the joint commission for accreditation of hospital organization recognized 76 HCA hospitals among 405 US hospitals as top performers on key quality measures. The joint commission recognized these hospitals for evidenced-based care processes closely linked to positive patient outcomes as demonstrated by attaining and sustaining excellence in accountability measured performance. Only 14% of the joint commission accredited hospitals earn this distinction and we were proud that HCA hospitals were among them

On that note let me close and turn the call over to Milton.

Milton Johnson

Thank you Richard and good morning to all. Hopefully everyone has had an opportunity to review the company’s third quarter earnings release issued earlier today.

As noted in our release this morning, we have chosen early adoption of the provisions of accounting standards update number 2011-07 for the presentation of patient service revenue and provision for bad debts for the periods ended September, 30 2011. The new accounting standard changes presentation of the provisions for bad debts from our operating expense through a deduction from patient service revenue. This new presentation is consistent with our previous presentation of cash revenue and cash expenses that we supplementally provided to investors over the past few years.

As Richard mentioned, the third quarter results provided strong volume growth and excellent expense management. However, we did continue to experience an unfavourable shift in service mix much like the second quarter, resulting in lower equity and revenue per adjusted admission growth.

Revenues in the third quarter increased 5.5% to $7.31 billion primarily driven by increased patient volumes. Same facility revenues increased 3.7%. As noted in this morning’s release, the company recognized $51 million of HITECH revenues comprised of $34 million of Medicaid incentives and $17 million of Medicare incentives in the third quarter. Additionally, we incurred $14 million of expense related HITECH implementation in the third quarter.

Net income in the third quarter totalled $61 million, or a $0.11 per diluted share which includes pre-tax losses on retirement of debt of $406 million, or $0.49 per diluted share related to the company’s debt refinancing during the third quarter.

Tax rate in the third quarter was favourably impacted by the finalization of certain settlements for the tax years 1997 through 2001. These settlements resulted in a reduction to the company’s tax related interest expense of $66 million pre-tax, or $0.08 per diluted share.

Shares used in computing our diluted earnings per share for the third quarter of 2011 increased 20.2% from the third quarter 2010, due primarily to the issuance of shares in the company’s IPO in March of this year.

The repurchase of 80.8 million Bank of America shares had an immaterial impact on the share count in the quarter due to the September 21 closing of the transaction.

During the third quarter, same facility admissions increased 3.2%, while same facility equivalent admissions increased 3.8%, the company’s strongest growth in same facility equivalent admissions since the third quarter of 2009.

Consolidated admissions and equivalent admissions, which include recent acquisitions, increased 4.8% and 5.4%, respectively. As noted in our release, patient volumes in the quarter were driven by higher medical admits of 5.7 %, while surgical admits decreased 1.4%. This compares to our second quarter when medical admits increased 3.7% and surgical admits decreased 1.6%.

We continue to see growth in volumes from patients covered by governmental programs. Same facility Medicare admissions and equivalent admissions increased 4.4% and 5.3% respectively compared to the prior year’s third quarter. Our same facility Medicare admissions included both traditional and managed Medicare. Managed Medicare admissions increased 6.8% on the same facility basis and represents 24.1% of our total Medicare admissions.

Same facility Medicaid admissions increased 5.8% and same facility equivalent admissions increased 5.2% in the quarter compared to the prior year. Same facility managed care and other admissions decreased 0.8% in the quarter. However, same facility equivalent admissions actually increased 0.5% in the third quarter as compared to the prior year. This is the first quarter in several years where we have experienced growth in our same facility managed care and other equivalent admissions.

Same facility total surgical volume in the third quarter declined 1.1% from the prior year and Sam will provide additional insights into our surgical volumes following my comments. Same facility uninsured admissions increased by 8.8%, or 2,489 admissions in the third quarter compared to the prior year. Same facility uninsured admissions represent 7.8% of total admits in the quarter compared 7.4% in the third quarter of 2010. Same facility ER business increased 4.9% in the third quarter as compared to prior year.

Now, a few comments on revenue. Our revenue growth was driven by strong same facility equivalent admission growth in the quarter. The unfavourable shift in our service mix during the quarter is reflected in our same facility revenue per adjusted admission decline of 0.1% for the third quarter.

Without HITECH related revenues, same facility revenue per equivalent admission declined 0.8% for the third quarter. Same facility Medicare revenue per equivalent admission declined 0.6% in the quarter. Same facility Medicare CMI declined 1.8% from last year’s third quarter and declined 0.4% on a sequential comparison to the second quarter of this year. Same facility Medicaid revenue per equivalent admission excluding UPL declined by 2.5% in the third quarter compared to the prior year. The decline in Medicaid rate per equivalent admission is primarily attributed to Florida funding reductions.

During our previous earnings call we provided the estimated impact of Medicaid reimbursement cuts in both Florida and Texas. We have revised our estimates as follows. In Florida, we previously estimated Medicaid reimbursement cuts to be approximately 50 million annualized impact, effective July 1, 2011.

Based on the final published rates from the state of Florida, we have revised the assessment upward to be an annualized impact of 70 million, 35 million in the second half of 2011 and 35 million in the first half of 2012. This represents the impact of the state Medicaid rate cuts, the flow through of the rate cuts to manage Medicaid contracts, and the reduction of low income for re-imbursement. The original estimates were based on the information available to management at that time. The revised estimate reflects the state’s final calculations resulted in the actual rate cut being worse than our original estimates. The newly revised estimate is included in our 2011 full-year earnings guidance.

In Texas, we previously estimated Medicaid reimbursements cuts to be approximately 25 to 30 million annualized impacts effective September 1, 2011. Based on our understanding, the final published rules in the state of Texas, we have revised this estimate upwards to be an annualized impact of 80 million, 20 million in 2011 and 60 million in 2012. This represents the impact of the state Medicaid rate cut and the flow through of that rate cut to manage Medicaid contracts. The original estimates were based on information available to management at that time and this newly revised estimate is also included in our 2011 full-year earnings guidance.

Now moving to managed care, same facility managed care revenue and other insured per equivalent admission increased 3.8% in the quarter. This growth rate compares to 5.5% growth in the first quarter and 4.9% growth in the second quarter of this year. The declining rate of growth is attributable to the changes in managed care service mix compared to last year’s third quarter. Same facility managed care and other case mix increased 0.9% over the last year’s third quarter.

The monthly trend on our managed care and other revenue per equivalent admission growth rate was as follows

In July, we were up 2.7%, in August we increased 4.3%, and in September we increased 4.7%. After an unusually low rate of growth in July, we saw an improving growth rate in August and September.

Same facility charity care and uninsured discounts increased by 349 million in the third quarter compared to the prior year and during the third quarter the same facility charity care discounts totalled 676 million, an increase of 92 million from the prior year while the same facility uninsured discounts totalled 1.432 billion, an increase of 257 million from the prior year. We were very pleased with expense management in the third quarter, as same facility operating expense per equivalent admission increased only 0.1% compared to the prior year. On a reported basis, operating expense per equivalent admission increased 0.5%.

Salaries per equivalent admission on the same facility basis increased 0.6% in the quarter compared to the prior year. (inaudible) performance as measured by man-hours per equivalent admission improved 3.4% while the company improved 2.2% on the same facility basis compared to the prior year.

Wage rate growth for the third quarter was 2% on the same facility basis compared to the prior year. Same facility supply cost per equivalent admission declined to 3.5% in the third quarter, reflecting benefits from our contracting pricing established by our GPO Health Trust Purchasing Group, a decline in high intensity surgical volumes and several supply cost saving initiatives.

Same facility other operating expense per equivalent admission increased 2% in the quarter consistent with prior quarters and reflective of several small variances from the prior year.

Adjusted EBITDA increased 4% to $1.412 billion in the third quarter from $1.357 billion in the prior year. Adjusted EBITDA margin declined 30 basis points to 19.3% from 19.6% in the prior year third quarter, reflecting a slower revenue growth, an increased position employment expenses. Same facility personnel cost associated with our physician employment company increased to 247 million in the third quarter of this year compared to 192 million in the third quarter of 2010.

Bad debts plus security, noninsured discounts and as a percentage of revenue plus bad debts, charity and uninsured discounts was 28.3% compared to 26.4% for the third quarter of 2010.

We currently have 92% of our self pay book reserve, upfront collections totalled 78 million, up 2.8% from the prior year. Our cash flows from operating activities decreased to 880 million from 1.256 billion in the prior year’s third quarter, primarily due to changes in working capital items. The reduction of cash flow in the third quarter was more of a reflection of the strength in cash flows in the working capital items in the third quarter of 2010, which includes by approximately 490 million, while the cash flow is related to changes in working capital items for the current quarter, were relatively flat.

As an example, accounts receivable went down approximately 20 million in the third quarter of this year, but was down approximately 130 million in the third quarter of 2010. So although, positive to cash flow in the third quarter of this year, a significant decline from the prior years’ third quarter.

Accounts payable, salaries payable, and accrued expenses increased by approximately 270 million in the third quarter of 2010, but declined by approximately 40 million in the current quarter, resulting in approximately 310 million negative impact on cash flows through the third quarter of 2011, compared to the third quarter of 2010. I believe this was primarily due to timing issues from period-to-period. Based on accounts receivables at the end of the third quarter were 49 days which compares to 48 days at September 30, 2010. These calculations have been made based upon revenues after predation for those accounts in both periods.

Capital expenditures totalled $394 million during the quarter. At September 30, 2011, the company’s debt-to-adjusted EBITDA ratio was 4.53 times compared to 4.36 times at June 30, 2011. At the end of third quarter, we had $1.928 billion of liquidity available under our senior secured credit facilities.

The company completed significant refinancing activities during the third quarter which will provide significant interests with expense reductions in future period. Considering the impact of the repurchase of 80.8 million shares from the Bank of America, I would expect the company’s diluted share account to be approximately 457 million shares for the fourth quarter of 2011 and 497 million shares for the full year of 2011.

As previously mentioned, the HealthONE acquisition closed on October 14. We will use November 1, 2011, as the effective date for accounting purposes, therefore HealthONE would be accounted for on a consolidated basis effective November 1. Annual revenues associated with HealthONE are approximately 2 billion.

In closing, I’d like to address fourth quarter expectations for HITECH revenues. We would expect based upon completion of our attestations that the company would recognize additional HITECH revenues of 310 to 340 million in the fourth quarter. For the full year 2011, we expect HITECH revenues of 400 million to 430 million. We expect HITECH related expenses of 15 to 25 million in the fourth quarter. And for the full year 2011, we expect HITECH expenses of 75 to 85 million. Our fourth quarter estimated HITECH revenues and our full-year estimate now includes an estimated 60 million of incentives attributable to year two of Stage 1 Meaningful Use. We expect to begin accruing the pro rata estimate of our second payment and give a HITECH incentive revenues during October 2011. Our previous HITECH guidance for 2011 did not include any year two incentives.

This morning we are confirming our 2011 adjusted EBITDA guidance of 3 to 5% growth. Our guidance includes HITECH related revenues and expenses but excludes the recently closed HealthONE transaction. With or without the estimated 60 million of accrued year two HITECH incentives for fourth quarter of this year. We expect to be within a 3 to 5% adjusted EBITDA guidance range for 2011. Although, with the additional 60 million we now expect to be near the top of that range. I’d now – I’ll turn the call over to Sam Hazen.

Sam Hazen

Good Morning. I am going to begin my comments this morning with you in various components of our volumes for the second quarter. First I want to speak to the balance across our portfolio, which again this quarter is a favorable factor for the company. 14 out of 16 divisions had growth in same facility inpatient admissions for the quarter. Of the two divisions that were down, one was down only 0.2% and the other was down 0.6%. 15 out of 16 divisions had growth in same facility adjusted admission and for the third consecutive quarter all divisions had growth in same facility emergency room visits. The only volume indicator that had inconsistent performance across the company were surgeries, only six divisions had growth in same facility total surgery which combined in-patient and out-patient volumes. We continue to experience softness in our surgical volumes. In-patient surgical admits represented 31.3% of total admits for the third quarter. This is down from 32.8% in the third quarter of the prior year.

Year-to-date through June, surgical admits represented 30.9% of total admits. Seasonally, surgical admits in the third quarter represent a greater percentage of total admits, as compared to the first half of the year. This year’s third quarter seasonality factor was slightly down only 20 basis points as compared to the third quarter of the prior year. Once again cardiovascular surgical procedures represented the majority of our decline. Cardiovascular surgical procedures were down 6% in the third quarter, as compared to the third quarter of prior year.

Year-to-date through June, cardiovascular surgical procedures were down by 4%, so we did see a slight acceleration in the rate of decline for the third quarter. This acceleration explains most of the seasonality factor decline mentioned previously. Orthopedic and neurological surgical procedures were up almost 2% for the third quarter. This growth represents an improvement in our rate of growth as compared to the growth with each service lines in the first half of the year.

Now, let me transition to market share data. As a reminder, we typically have a 90- to 180-day delay in getting market share data to analyze. So the most current data we have is for the second quarter in certain markets.

We have received market share data for 11 major markets, which includes data from the following states

Texas, Virginia, Nevada, Utah and Colorado. In total, for all payers in these markets, cardiovascular demand both medical and surgical decline in the second quarter of 2011 by 2.4%. Medical cardiovascular demand, which makes up almost 60% of the total, declined by 1.8% during this time period and surgical related cardiovascular demand declined by 3.4%.

HCA in these 11 markets picked up a 140 basis points of cardiovascular share. On the medical side, HCA picked up 210 basis points and on the surgical side HCA picked up 30 basis points. Of the 11 markets studied, 7 were up in total cardiovascular share, 6 were up in medical and 7 were up in surgical. Although, we are still dealing with pressures on our cardiovascular surgical volumes, I am encouraged by our hospital’s efforts to grow high acuity business in other areas. For example, in the third quarter we saw 2.7% growth in admissions to our intensive care units. Our efforts to expand the market areas that we serve by affiliating with other facilities and providers in rural markets are maturing and as a result we are seeing market share gain on in-migration business.

The most recent market share data shows that HCA has grown its in-migration share in these rural markets by 73 basis points. Our physician strategies are focused in these areas also and finally the company has rolled out a number of operational initiatives to improve our surgical department and make them more attractive to our surgeons.

And to wrap up, let me make a few comments about our operating costs. Milton mentioned the positive trends in the quarter. We have numerous efforts at the hospital level to improve the day-to-day shift-to-shift components of our labor cost management. These efforts include an enhanced scheduling management system, which allows our hospital to adjust our staffing levels more timely to fluctuations in both census levels and patient acuity. Also we have improved our human resource systems which helped our hospitals manage premium paid practices more effectively thus reducing the most expensive components of labor.

Additionally, we have many corporate initiatives that are designed to support our hospitals and reduce the overhead cost in our company. An example of this is our consolidation of coding into a shared service environment. Another example of this is our comprehensive supply-chain agenda which continues to produce good cost trends for the company and finally we continue to implement numerous clinical excellence initiatives that we believe will deliver better patient care, greater physician engagement and reduced cost by eliminating inefficient processes and unnecessary variations, that concludes my comments, so I’ll return the call back to Vic.

Victor Campbell

Alright. I thank everyone. Carla [ph], if you can please come back on and we will call for questions. I do want to ask today that people really try to hold to your questions to one at a time so we can get people. We do want to be respectful knowing that many of you need to be on a call, another earnings call in about 30 minutes, so with that Carla [ph].

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) Our first question comes from Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe - Credit Suisse

Thanks good morning. Just want to go back to the pricing metric, maybe it will be helpful if you could just go through just pure pricing increases on each of the books of business, just in terms of what your expectations are for managed care? It was helpful to get the Medicaid color, but just in terms of an aggregate, what should we think about in terms of cuts on the Medicaid side? And then the Medicare increase? And then I may have missed it, did you give just an overall drag from mix?

Richard Bracken

All right. Milton, you want to take that?

Milton Johnson

Yes. Well, basically our overall revenue for adjusted admission was basically flat the third quarter over a year ago and basically looking at it by payer for the third quarter on a same facility basis. Our traditional Medicare was down 0.7%, again reflecting the lowercase mix index that we reported is well down 1.8%. Managed Medicare was basically flat it’s actually down 0.1%. Medicare, I am sorry, Medicaid excluding UPL was down 2.5% for adjusted admission and our managed care and other book was up 3.8% third quarter over a year ago. And as I mentioned, that managed care and other rate growth was adversely impacted by a very unusually low rate in July of under 3% and the saw it rebound to up to 4.7% by September, but the average came in at 3.8%.

Ralph Giacobbe - Credit Suisse

Okay. And then as we sort of think about things going forward, any commentary on how we should think about even sort of the contribution between sort of that adjusted admission and the revenue per adjusted admission?

Milton Johnson

Well, I think – right now our revenue growth is being driven by volume and that's where we are seeing the top line growth was primarily driven by the strong volumes that we are seeing in the third quarter. We are optimistic about our volumes in the fourth quarter. With respect to rate, although we did receive about 1% Medicare rate in October. We continue to see the impact of the cuts from Medicaid relative to the net revenue per adjusted admission rate increases. So I think as you look at the fourth quarter, again the hard part is this acuity trend and how it will play out in the fourth quarter, but assuming it continues – it stabilizes and continues where it is. I think you'll continue to see as be [ph] flattish rate maybe up or down a few points, but primarily top line driven by a volume in the fourth quarter.

Richard Bracken

And Milton, you may add, we have really haven't seen material changes at managed care pricing as we go forward.

Milton Johnson

In the contracted rate, that's correct. We are continuing to see our contracts, we are about roughly 65% to 70% through the 2012 revenue book on our managed care contracts and we are at a rate of approximately 6% increase from managed care.

Richard Bracken

Alright. Thank you Ralph.

Operator

And moving on, we will hear from Justin Lakes with UBS.

Justin Lakes – UBS

Thanks good morning. My question was just around trying to put together the pieces for next year. I know you haven't given guidance, but I would like to just kind of walk through the head winds and tail winds that we know about. For instance, you gave some Medicaid numbers. Just wanted to get an update on UPL, the healthcare IT year-over-year, and then maybe the HealthONE contribution that should be tail wind next year and kind of the one-time items?

Richard Bracken

I think, yes one we can talk, we have sort of talked a little bit about, but Justin we're not going to get into this the pieces for guidance for next year and I know everyone would love to do that but we will do that on our next quarter's call. So, we have laid out the Medicaid that we know about because those changes took place both in Texas and in Florida. I think we’ve talked about HealthONE, Milton.

Milton Johnson

Nearly about $250 million additional EBITDA next year over the – EBITDA will pickup for the last two months of this year.

Richard Bracken

Yes. And then obviously the Medicare payment rates are out there in terms we saw that rate October 1 at roughly 1%. But the other parts are obviously moving, we know it is piecemeal, but we want to come back to you with the very comprehensive look at next year with appropriate guidance. Same way with HITECH, we do have – you may want to readdress that accrual just a little bit to make sure they understand that item as it relates to the fourth quarter and we'll have better guidance to on next year on HITECH.

Milton Johnson

Yes. So with respect to as I said, with respect to the fourth quarter we're expecting to book HITECH revenues of $310 million to $340 million during the fourth quarter. The expenses in the fourth quarter related to that would be anywhere from $15 million to $25 million in the fourth quarter. And again, that revenue range that I gave you did include an expected $60 million accrual. We are converting from basically the recognition of the revenue when we attest to meeting the HITECH Meaningful 1 standards to an accrual basis starting now with the effect of October 1st. Now we are in year two Stage 1 Meaningful Use and we're going to accrue the revenue associated with the year two starting October 1st. We estimate that accrual to be about $60 million of additional revenue and we haven't included that in our guidance for the full year 2011.

Richard Bracken

And I guess my last comment, Richard, reminds me, I mean, we are just in the midst of our budget process which really runs up end of December. And so, we have an, very expensive budget process that we need to go through before we get to the guidance level.

Justin Lakes – UBS

No problem, thanks.

Richard Bracken

Thank you.

Justin Lakes – UBS

Got it.

Richard Bracken

If we could go to the next question, we are running tight here.

Operator

And now we'll hear from Sheryl Skolnick with CRT Capital.

Richard Bracken

Hi Sheryl.

Sheryl Skolnick - CRT Capital

Good morning everyone. Thank you for all of that. Can we go back to the cash flows and particular emphasis trying to understand the difference in the accounting on the accruals versus the prior revenue recognition for the HITECH. So first of all, if there are timing differences in the cash flow in this quarter, when will we see those timing differences made up, that’s question number one? And question number two, talk to me about the pattern of the receipt of cash for all of the HITECH revenues that we need to get used to and we need to understand because I suspect strongly that your cash flow in the fourth quarter will not be as robust as your EBITDA?

Milton Johnson

Sheryl, this is Milton. Let me try to take on that. First of all, I refer to the timing issues, it had to do with that accounts payable and salaries payable and accrued expenses that – the way the cut off dropped and happened in the – a year ago, we realized more benefits on the cash flow in the third quarter and then this year the way the cut off occurred, the timing of it, it is such that we didn't see it. So, I think that those are just timing issues as opposed to a real change in an annual run rate of our cash flows related to those working capital items.

Sheryl Skolnick - CRT Capital

So, did they slide into the fourth quarter or were they in the second quarter?

Milton Johnson

I'm not sure, Sheryl, right now. I haven't looked at that whether – I think our second quarter cash flows were pretty strong that I can't say that it is best attributable to that reason. But for the point, I'm getting at, for the full year if you think about cash flow for HCA, I don't think that this is going to be a drag on the full year. Relative to HITECH, we do expect – I'm not exactly sure of the timing obviously, we haven't ever received these funds before, we are receiving cash from certain states with respect to the Medicaid associations that we have made in certain states. With respect to the larger Medicare and the federal money, the way we're planning for – we to expect to receive some of that money in the fourth quarter of this year and there is some that we have about $100 million or so I think we have planned to receive in early part of the first quarter, but that's our best estimate. Again going through this as we try to understand the timing, with respect to the $60 million accrual that I mentioned though for the fourth quarter of 2011, we would not expect to receive that cash until the fourth quarter of 2012. So as we accrue this revenue throughout the year we will be building up the receivable that we will not receive towards the end of the year.

Sheryl Skolnick - CRT Capital

Okay. So we should think of that instead of having a lump sum fourth quarter payment as we did this year and a lot of risk around that, you are accruing as you achieve?

Milton Johnson

Yes. The reason is we have systems in place, dashboards in place, tracking mechanisms in place that we know where we stand relative to meeting the requirements of meaningful use.

Sheryl Skolnick - CRT Capital

Got it.

Milton Johnson

And so, we can – as we see the – we will have to adjust of course our accrual, as we see a hospital or two fall off and we can’t – we then believe they cannot meet the requirements, will have to adjust our accruals for that hospital. So it'll be a fluid accrual throughout the year, but based on our performance for the first 90-day period of Meaningful Use Stage 1 year 1, we believe that going through the accrual method is a better accounting recognition method than the lump sum.

Sheryl Skolnick - CRT Capital

Okay. Thanks very much.

Richard Bracken

Thank you.

Operator

Moving on. We will hear from Adam Feinstein with Barclays Capital.

Adam Feinstein - Barclays Capital

All right thank you. Good morning everyone. It seems like you guys simply did a great job of mitigating some of the impacts from the acuity issue. So I guess my question is just, can you just break out what the impact on the revenue per adjusted admin was from the acuity in other quarter? I think the last quarter you broke out $74 million number, just want to see what is the comparable number this quarter would be? And then just as we get to the mitigation, Sam it’s helpful you spoke about some of the initiatives in place, was just curious in terms of as you give this costs as ongoing savings, I am just curious if you have a number in terms of run rate savings from the various initiatives you have outlined?

Milton Johnson

Maybe the acuity question. The 74 million that you referenced, that my belief was the total Medicare revenue attributable to all of the factors we described, including prior-year cost report (inaudible) and alike. I think at the end of the day we attributed about 25 million of that 74 to the acuity issue. We were down I think 1.4, 1.2 –, 1.4 in acuity and the second quarter we were down 1.8. So I haven't updated that number but I would assume it's going to be something around the same probably financial impact of $25 million to $30 million for this year as far as the acuity impact would be my best estimate based on the work we did the second quarter.

Richard Bracken

Sam, you want to talk about cost going forward?

Milton Johnson

Well let me just, just generally on cost. We get a lot of questions. Our cost performance has been very good and how sustainable is it. And let me just give you a couple of broad thoughts and how we think about it. First of all, our cost agenda is not static, it’s not like there are certain things we can do and that’s it. It continues to grow, there is new ideas all the time and we develop these ideas from different sources. The most fundamental source of course is 160 hospitals out there, all trying to solve many of the same problem and we get ideas and we move them across the system as you know and it’s been very, very productive for us as a company over a time. We look at benchmarking externally, of course and as Sam mentioned during his remarks, we are adding technology, he mentioned the example of technology to help us do our forecasting as the label lines and alike. The fundamental issue for us is that we know that the cost agenda is flexible, there are new ideas all the time. We are continually harvesting it for what ideas can we deploy across the company at large. We invest in both short term and long term solutions. The EHR and all this effort to get it up and running, at the end of the day it’s not only going about better care, that’s going to be about more efficient care. These are longer term solutions that we are putting in place. And you know, the general answer I would offer is that it’s our approach to managing cost both in the short term and the long term have provided – have we had a good track record around it and we expect that that’s going to continue to be situation going forward. We are going to take a look at all opportunities as they present themselves and we are going to continue to manage through the different aspects of the business cycle.

Richard Bracken

All right. I think that’s good with that.

Adam Feinstein - Barclays Capital

Thank you.

Richard Bracken

Thanks, Adam.

Operator

Moving on. We will hear from Christine Arnold with Cowen And Company.

Christine Arnold - Cowen And Company

Hi there, just a quick revenue questions, if you are comfortable answering them. HITECH next year, will that be down about $85 million which I think was what you guys been sensing earlier? And then UPL on the quarter please?

Richard Bracken

All right. In terms of HITECH, of course we had the accrual of about $60 million. Mil, you want to—

Milton Johnson

Well, I mean, the HITECH is going to – revenue – what we don’t know yet about 2012 is the fourth quarter of 2012. And of course, at the end of September of 2012 we will be at the end of year two stage one incentives. And then how will stage two incentives work, will they be postponed? Will they be effective? And we don’t–, I don't know those numbers yet. So it's very hard at this point in time to give guidance for the full year 2012 because there is still some uncertainty about the fourth quarter of next year.

Christine Arnold - Cowen And Company

Should each of the quarters, the first three quarters be similar to this year or is there a year-over-year drag each of the first three quarters?

Milton Johnson

Yes, so if you think about the revenue we are accruing $60 million here in the fourth quarter, I would expect that number might move around a little bit, but I would use that as a proxy for the first second and third quarters of 2012 as the amount of revenue we will accrue.

Christine Arnold - Cowen And Company

Each quarter?

Milton Johnson

Yes. Each quarter.

Christine Arnold - Cowen And Company

Okay.

Milton Johnson

And fourth quarter is the one that we're going to have more visibility before we can clarify. With respect to UPL, Texas UPL in the third quarter of this year, we had about $48 million of EBITDA net from the program down about $15 million from a year ago.

Christine Arnold - Cowen And Company

And the revenue, please?

Milton Johnson

The revenue in the third quarter of about $129 million versus $150 million a year ago, down about $20 million to $21 million.

Christine Arnold - Cowen And Company

Thanks so much.

Richard Bracken

Thanks, Christine.

Operator

And now we will hear from Tom Gallucci with Lazard Capital Markets.

Richard Bracken

Hi, Tom.

Tom Gallucci - Lazard Capital Markets

Thank you. Good morning. Just following up on Christine’s question there, Texas UPL, am not really so worried or concerned about fiscal ’12, I guess, but can you give us your perspective on maybe some of the changes that are going on down there as we look into fiscal ’13 and beyond, the way the program seems to be getting adjusted potentially?

Richard Bracken

Either Sam or John you want to talk – I guess, the question is really about the waiver in any updates on the status of the waiver.

Sam Hazen

Well, this is Sam. Let me start out about saying this. We know obviously there are some adjustments, obviously there are some adjustments in the first half of next year related to the fact that after math supplemental funding will not exist. And so that is a bona fide change that we know will occur regardless of what happens with the waiver let’s just say that Texas is trying to achieve with CMS. As it relates to the waiver, to date the state has still not received a waiver from CMS, so I’ll say this, we are in a little bit of state of flux with respect to that program and understanding exactly what the modifications will be and what the implications of those modifications will be. We are actively involved in the process with our representatives at the THA as well as our senior management in Texas. And so as we get more information we will share it, but at this particular point in time we are really at a loss with being able to provide any details.

Richard Bracken

And, I think it goes back to the intent is to try to keep the transition (inaudible) key hospitals hold, we just got to see the final rules and regs, whether not that flies out or not. So, we will be suspect until everything is in writing and once it’s been in writing we will deliver the best prognosis that we can give you on where we think those numbers will go.

Tom Gallucci - Lazard Capital Markets

Okay, thanks. I’ll let you move on to the next one.

Richard Bracken

Thanks.

Operator

And I’ll open the floor up to Gary Lieberman with Wells Fargo Securities.

Gary Lieberman - Wells Fargo Securities

Thanks. You talked about the favourable monthly progression on the service mix during the quarter, can you just talk a little bit more about that, was that just a matter of how the comps played out or do you think you are seeing an impact from some of the implementations of some of the programs that you got?

Milton Johnson

Well, Gary, it’s Milton. I think you are referring to the favourable progression that we saw around managed care and the underlying trends there. I am quite seeing – well we started off below three and progressed up to I think, up to increase of 4.7. Gary, it’s very hard. Some of the – July was no doubt, adversely impacted by the business. We had one less business day in July this year than a year ago, that’ going to affect surgical volumes, especially in managed care surgical volumes and it’s going put some pressure. So we did see that – that’s probably a piece of July downturn. But, as Sam mentioned, and the service mix overall, we are just continuing to see our growth come from the medical admissions – medical volumes and less surgical volumes and that’s what is I think is putting pressure on our managed care to push it below the contracted rate. We expected about 5.5% this year and we are running year-to-date, slightly under that at around 5%. So, I think that’s just most reflective of the service mix that Sam mentioned at this point in time.

Gary Lieberman - Wells Fargo Securities

But do you think that trend is starting to turn your favour base on monthly progression or it is too early to say?

Samuel Hazen

I think Gary, this is Sam. Our surgical volumes were fairly consistent with previous quarters with respect to decline. We were down somewhere around 1% and that’s about what we have been. What we are seeing is that the admission activity that is being generated in the hospital is more medicine. So the ratio of surgery to total is declining a little bit faster than previous, simply because we are seeing more of the total volume grow from the medical side and so it’s queuing the composite ratio – it’s having an impact on our composite revenue per unit. But, we are able leverage some of that. We just don’t get to leverage it as much from a profitability standpoint, because there is not as much revenue associated with the medicine patient. There was no substantial trend change – it was month to month, over the last few months in our volume with respect to surgical activity or cardiac activity or a critical care activity, so from that standpoint I am not seeing any trend change, it is just that we are seeing is more medicine business and it is a significant portion of our growth and that yields lesser revenue and a little less margin than our surgical business. So that’s really sort of the implication and sort of the trend.

Victor Campbell

Gary, thank you, time for probably a couple more questions before nine.

Operator

Now we will go to A J Rice with Susquehanna Financial Group.

A J Rice - Susquehanna Financial Group

Hello everyone, maybe just a broad question about capital deployment strategies. You guys put a lot of capital to work here in the last three months. But going forward debt pay down versus – I guess you guys have been mentioning about a couple of – at least one big acquisition opportunity in Colorado, how does that affect your end, do you think going forward?

Milton Johnson

A J, this is Milton. I think we will use our free cash flow to take leverage down here over the next several months. We are looking for transactions, we are looking acquisitions that fit our strategy, fit our market. The one that’s mentioned in the quarter down in Colorado, that’s going to – even if that occurs that’s much down the road. So our strategy right now, after taking on the BofA repurchase and HealthONE purchase would be to reduce our leverage at this time.

A J Rice - Susquehanna Financial Group

Okay, all right thanks.

Richard Bracken

Thanks A J.

Operator

Moving on we’ll go to Frank Morgan with RBC Capital Markets.

Frank Morgan - RBC Capital Markets

Good morning. A quick question here with regard to the volume in acute and surgical trends. Could you talk a little bit about – did you see any regional variations from one part of the country to the other? And then the second question is, you mentioned what your managed care book looks like for 2012, for the most part on the rate side, but are you seeing any changes kind of in the structure of those contracts? Thanks.

Richard Bracken

Sam you want to do this.

Samuel Hazen

Yeah, this is Sam Hazen again. If you look at the three groups, I will use that as the geography. I don’t have a map of every division in front of me and it would take while to sort through that. But if you look at the three groups, the one group that had better surgical performance was the southwest group which includes Texas, Colorado, Oklahoma, and Kansas, that group actually saw growth in their surgical admissions in the quarter. The other two groups were consistently down at about 2% with again significant declines in cardiology. I will say this that in the southwest group their cardiology trends were consistent with the other two groups. So, quite a bit of cardiology pressure in Florida based upon some first quarter market share data that we could see and that’s obviously a big book of their business given our position in Florida, so that puts pressure on the national group. And then again the central group was down also at about 2% on a year-over-year basis. So fairly consistent in those groups, a little better performance in Texas, and so we felt slight growth there on our total surgical activity.

Victor Campbell

Richard, do you want address the other question?

Richard Bracken

I would just say that we really haven’t seen any material changes in the structure of any managed care contracts that we have executed.

Frank Morgan - RBC Capital Markets

Okay, thanks.

Richard Bracken

Thanks Frank.

Victor Campbell

There would be one last question.

Operator

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

Kevin Fischbeck – Bank of America Merrill Lynch

Okay Great. Thank you. The cost control in the quarter was pretty impressive and you guys went through a lot other things that you’re doing. I guess, I want to get your sense about what you think – how sustainable this 50 basis point increase at least for the next couple of quarters, before you start counting against or is there some extra pressure you would expect, for the next couple of quarters on that line?

Sam Hazen

I am Sam Hazen again. I think as we move through the fourth quarter, we’re fairly confident that we will continue to see similar trends. It can move a little bit depending on equity and so forth, as certain markets have wage adjustments as they put in the last half of the year. So those kinds of things could have a slight impact, but largely we’re confident that we’ve instituted some permanent adjustments that will carry us through the fourth quarter and in some instances on into next year with some of those adjustments.

Again, as Richard mentioned, it’s a dynamic process, cost management in a hospital business and as we identify new opportunities, we move to implement those, so there could be additional initiatives that surface as we move through the rest of this year into the budgeting process and on into the next year. But cost management in our business is day to day, it’s reflective of what’s going on from an equity standpoint, a mix standpoint and so forth, and I am confident that our systems are getting better and so we’re encouraged by where we are and we will just continue to be diligent in the effort. I am really not position to give any kind of numbers for next year but I will say that if we move through the fourth quarter, we are pretty confident with where we are.

Richard Bracken

And I think also underlying those keys trends around those metrics would be volumes that we continue with our fixed cost structure to leverage the current volume that we’re seeing and to drive towards a 0.5 or lower sort of a target. Volume is going to be a part of the equation as well.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay great. Thanks.

Victor Campbell

Alright, Kevin thank you. With that apologize to anyone who didn’t get a question in, but I do know there’s a call now and there’s another call in another hour. So thank you very much and Mark and I are here happy to answer any other questions. Have a great day.

Operator

Ladies and gentlemen that does conclude our conference call for today. Again thank you for your participation.

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: HCA Holdings CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts