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Health Management Associates, Inc. (NYSE:HMA)

Q4 2011 Earnings Call

February 14, 2012 11:00 AM ET

Executives

John Merriwether - VP, IR

Gary Newsome - President and CEO

Kelly Curry - CFO

Bob Farnham - VP, Finance

Analysts

Adam Feinstein - Barclays Capital

John Ransom - Raymond James

Dana Vartabedian - Deutsche Bank

Ralph Giacobbe - Credit Suisse

A. J. Rice - Susquehanna Financial

Gary Lieberman - Wells Fargo

Justin Lake - UBS

Tom Gallucci - Lazard Markets

Whit Mayo - Robert W. Baird

Kevin Fischbeck - Bank of America

Operator

Good morning, my name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the Health Management Year End 2011 Earnings Conference Call. (Operator Instructions).

Thank you and I’ll now introduce and turn the call over to Mr. John Merriwether, Vice President of Financial Relations. You may begin your conference, sir.

John Merriwether

Thank you, Tracy, and good morning everyone. I’m John Merriwether. I’d like to welcome you to Health Management’s fourth quarter and year end 2011 earnings conference call.

Before we get started with the call, I’d like to read our disclosure statement. This presentation contains forward-looking statements within the meanings of Section 27A of the Securities Act of 1933 as amended, Section 21E of the Securities Exchange Act of 1934 as amended. Forward looking statements are subject to risks, uncertainties and assumptions and are identified by words such as expects, estimates, projects, anticipates, believes, plans, could and other similar words.

All statements addressing operating performance, events or developments that Health Management Associates Inc. expects or anticipates will occur in the future including but not limited to incurrence of indebtedness, projections of revenue, income or loss, capital expenditures, earnings per share, the timing and receipt of Medicare and Medicaid HCIT incentive payments, the financial impact expected from interest rate swap accounting, debt structure, bad debt expense, capital structure, repayment of indebtedness, other financial items and operating statistics, statements regarding the plans and objectives of management for future operations, innovations or market service developments, statements regarding acquisitions, joint ventures, divestitures and other proposed or contemplated transactions, including but not limited to statements regarding the timing of anticipated acquisitions, the potential for future acquisitions and proceeds benefits of those acquisitions, statements of future economic performance, statements regarding the effects and or interpretations of recently enacted future healthcare laws and regulations, statements of the assumptions underlying or relating to any of the foregoing statements and other statements which are other than statements of historical fact are considered to be forward looking statements.

Statements made throughout this presentation are based on current estimates of future events and the company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially as a result of these various factors.

In addition, adjusted EBITDA as mentioned on this call is defined as consolidated net income before discontinued operations, net gains or losses on sale of assets, net interest and other income, interest expense, income taxes, cost for acquisitions and investigations, write-offs and deferred debt issuance cost, restructuring cost and depreciation and amortization.

On the call with me this morning are President and Chief Executive Officer Gary Newsome; Chief Financial Officer Kelly Curry and Senior Vice President of Finance, Bob Farnham.

Thank you for your attention. I’ll now turn the call over to Gary.

Gary Newsome

Thanks John and good morning everyone. Thank you for joining us to discuss another solid quarter and a strong 2011 as we report our results for the fourth quarter and year ended December 31, 2011.

For the fourth quarter from continuing operations and compared to the same quarter a year ago, Health Management reported net revenue growth of 17.6% to $1,587 billion and adjusted EBITDA growth of 27.3% to $236.2 million. Excluding certain write-offs of deferred debt issuance costs, Tennova restructuring charges and interest rates swap accounting, diluted earnings per share from continuing operations increased 63.5% to $0.26 contributing to these outstanding continuing operations financial results where admissions increased to 6.8%, adjusted admissions increased over 11.6%, emergency room visit increase of 12.4% and a surgery increase of 18%.

For continuing operations of the hospitals we have owned and operated for one year or more referred to as same hospital continuing operations, compared to the prior year’s fourth quarter, revenues increased 5.5%. Adjusted EBITDA increased 25.3% to $271.6 million resulting in a 300 basis point improvement in EBITDA margins and 19.1% and surgeries were up 0.8%.

Recall that our same hospital surgery growth in the fourth quarter last year was among the best in the publicly traded space at 5.2%. We believe a challenging economic environment is continuing to impact our volumes as patients seek more outpatient services to limit their time away from work to better ensure their employment. We continue to see declines in uninsured volumes and this contributed to a same hospital admission decline for the fourth quarter of 3.7% compared to the same period a year ago.

Outpatient services however continued their 2011 positive trend as outpatient surgeries grew. As a result, same hospital adjusted admissions showed a smaller decline of 1.1% for the quarter. Excluding the declines in uninsured admissions at same hospital facilities, same hospital admissions would have declined 3% compared to a year ago quarter and same hospital adjusted admissions would have been approximately flat.

For the year ended December 31, 2011, we generated record revenues of $5.8 billion, 14% growth over 2010. Likewise adjusted EBITDA for 2011 was strong, $848.2 million. For the year ended excluding write-offs of debt insurance cost, interest rate swap accounting, Tennova restructuring charges and acquisition and investigation charges, diluted earnings per share increased 32.3% to $0.86 compared to the same period a year ago.

As we have stated before we believe our consistently good results reflect our commitment to a patient centered approach, innovation, physician recruitment and development expansion of services, all while being good stores of our resources. Our physicians and hospital associates are providing quality services in our hospitals. Patients recognize us and are seeking us out for their care.

Unfortunately, in our markets a lackluster economy and lack of real job growth has impacted our volumes as we perceive a reluctance on behalf of the insured to seek in-patient care unless there is no other option. We are continuing to see stability in doctors office visits but these visits are not translating into follow-up visits or hospital stays as patients remain weary of spending time way from work or having to spend more disposable income on healthcare.

Outpatient activity remains a bright spot. Our outpatient services are attractive to patients for a number of reasons, less time away from family and work, less invasive procedures, less chance of complications and often fewer dollars out of pocket. Technology and our investment in innovation has now made it possible for patients to be treated in an outpatient setting while just a few short years ago, it could have only been done in an in-patient setting.

We are continuing to seek innovation and approaches to best suit our patients needs. Our operating approach continues to evolve, but is centered around emergency room physicians, physician recruitment and market service development, and certainly our results would not have been possible without effective cost management.

We believe same hospital facilities should continue to have opportunities for improvement, especially as acquisitions roll into the same hospital family and we seek to improve our operating margins and achieve our full year cash-on-cash return objective.

Since December 2009, we have added approximately $1.3 billion of acquisition revenue and those facilities are meeting our expectations as we invest in existing services or develop new product lines, recruit new physicians and effectively manage our operations.

As a result of our recent partnership successes, new opportunities are bound. In fact as we announced just last week, we have entered to a definitive agreement to partner with Integris Health of Oklahoma, the largest Oklahoma based provider of healthcare in the States. It's a joint venture filed with their hospitals.

The hospitals are geographically dispersed and offer opportunities for synergies with existing Health Management Oklahoma Hospitals. These five hospitals represent 226 licensed beds and generate approximately $95 million of revenue over the last 12 months. We’re seeking an 80% partnership interest and we will have day-to-day operational responsibility.

Integris has a great reputation and we are looking forward to establishing this partnership to enable Oklahoma’s best local healthcare. This transaction is expected to be completed April 1, 2012. The pipeline is full and as good as we have seen it. Potential partners are seeking us out for our operational expertise, systems, capital resources and even more importantly our patient centered approach and cultural fit.

It is the combination of these operational attributes with our flexible partnership structure of asset purchase, long-term lease or joint venture that makes us believe we remain the acquirer of choice and positions us well in key markets for anticipated changes in the future of healthcare delivery.

Before I hand the call over to Kelly, I’d like to take a moment to address any questions surrounding the wrongful termination litigation that has been disclosed and the previously disclosed subpoena activity.

There is nothing new to disclose regarding the wrongful termination litigation. We’ve disclosed what we know with regard to the case; we have stated our position via the legal system and will adhere to that process. We have filed a counter claim and we will defend ourselves vigorously. Because it is an active litigation and in the best interest of the Company, associates and our shareholders, we are unable to answer questions beyond what we have already disclosed.

As it relates to the previously disclosed subpoenas requesting documentation surrounding our physician relationships and the years of the Pro-MED emergency room software, we are cooperating fully with the request for documentation and are still in the document gathering stages.

We have a robust compliance program. It has been designed to educate, audit and enforce the complex regulatory environment comprised of ever changing rules, laws and regulations under which we do business.

Our compliance department’s job is to investigate every concern brought to it by associates, physicians, vendors and patients and determine whether or not these rules, laws and regulations have been properly followed. The compliance department exists to ensure that we are doing the right things with the approximately four million patients (inaudible) we brought them to 2011.

We strive to live and work by three main principles here at Health Management, be a servant leader, never settle for second best, and always do the right thing.

Thank you again for your attention and at this point, I’ll turn the call over to Kelly to review the third quarter results in a little further detail.

Kelly Curry

Thanks, Gary, and good morning to each of you. To summarize, our fourth quarter net revenues are 17.6%. Adjusted EBITDA grew a strong 27.3% and excluding certain write-off of debt issuance cost, cost for acquisition and restructuring and interest rate swap accounting, diluted earnings per share from continuing operations increased 62.5% to $0.26 after 1.5% increase in a number of fully diluted shares outstanding.

During the fourth quarter, the company incurred approximately $12.9 million, or $0.03 per diluted share through acquisition and restructuring expenses, $24.6 million or $0.06 per diluted share of write-offs of deferred debt issuance costs related to our successful refinancing in November and $16.4 million or $0.04 per diluted share of interest rate swap accounting impact.

Also during the quarter, we recognized approximately $38.2 million, or approximately $0.09 per diluted share of benefit related to Medicare and Medicaid FCIT incentive reimbursement. Same hospital operations continued to perform well, Compared to the prior year’s fourth quarter net revenue increased 5.5% and net revenue per adjusted admission growth was a strong 6.6%.

For the sixth quarter in a row, we’ve seen the decline in uninsured patients seeking care at our same hospital facilities. Unemployment rates in our markets have proved about 90 basis points since last year but are still 70 to 80 basis points above the national average. We believe the improvement in our markets are less from people finding jobs and more from unemployed having left the market to seek employment elsewhere.

Continued same hospital uninsured admissions for the fourth quarter totaled 6.4% of total admissions, which is a 70 point decrease from the same quarter a year ago. As you know, there are three components that comprise our accounts for uninsured and under insured patients as bad debt expense, uninsured discounts and charity indigent write-offs. These figures are consolidated and included acquisitions.

Bad debt expense for the fourth quarter was $195.1 million or 12.3% of net revenue, compared to $163.9 million, or 12.2% of net revenue for the same period a year ago. Acquisition hospitals and routine charge master changes are contributing to this increase.

Uninsured discounts for the fourth quarter were $254.5 million, compared to $209.3 million a year ago and Health Management’s charity and indigent care write-offs for the fourth quarter were $23.1 million, compared to $24.2 million for the prior year.

The sum of bad debt expense, uninsured discounts and charity indigent write-offs as a percent of the sum of net revenues uninsured discounts and charity indigent write-offs, which Health Management refers to as our uncompensated patient care percentage was 25.4% for the fourth quarter, compared to 25.2% for the same quarter a year ago and 26.1% for the third quarter ended September 30, 2011.

Our adjusted EBITDA from continuing operations for the fourth quarter was $236.2 million, or 14.9% of revenue, a jump of 27.3% and $50.7 million increase over the prior year’s $185.6 million.

Our same hospital adjusted EBITDA from continuing operations for the fourth quarter was $271.6 million, or a 19.1% margin, compared to a $216.7 million, or 16.1% margin for the same period a year ago. This represents a 300 basis point $54.9 million, or 25.3% increase for the fourth quarter this year.

As with the consolidated adjusted EBITDA same hospital EBITDA includes a Medicare and Medicaid HCIT incentive payment and excludes acquisition, investigation and restructuring expenses, write-offs of deferred debt issuance cost related to our successful refinancing in November and the interest rate swap accounting impact. We continue to believe we have more runway with regard to cost control opportunities.

Quickly summarizing our year ended December 31, 2011, revenues grew 14% or $712.3 million to the record level of $5.8 billion. Likewise adjusted EBITDA increased 15.9% to more than $848 million and diluted EPS from continuing operations excluding acquisitions investigation and restructuring expenses, write-offs of deferred debt issuance cost and interest rate swap accounting grew 32.3% to $0.86 per diluted share.

Moving over to balance sheet and the cash flow statement, total assets as of December 31, exceeded $6 billion for the first time ever. The balance in accounts receivable net as of December 31 was $903.5 million and the balance in the allowance for doubtful accounts was $579 million.

Health Management’s day sales outstanding as of December 31 were 51 days. There are about two to three days that are related to our acquisitions and conversions that are ongoing in the Company presently.

Our cash collections continue to be strong and we are achieving our internal targets. For the fourth quarter, cash flow from continuing operating activities was strong at $114.8 million after cash, interest and tax payments aggregating $59 million. This compared to net $79.6 million of cash flow from operations in the fourth quarter of the prior year. Capital expenditures for the fourth quarter were $99.2 million.

With regard to our debt covenants as of December 31, Health Management’s total leverage ratio and interest coverage ratio were both right around 4. There were no covenant requirements under our new debt for the December 31 period. They began for the first quarter of 2012 but our ratios are well within those requirements.

As a result of our compliance with CHS requirements in 2011 we became eligible for meaningful use or HCIT incentive payments during the third quarter. As we have reported during the third quarter, Health Management’s hospitals received less than $1.8 million of Medicaid HCIT funds and zero Medicare HCIT funds.

Our first wave of five hospitals passed the Medicare accreditation period and became eligible for the Medicare payment for the fourth quarter. During the fourth quarter, we’ve recognized $38.2 million of Medicare and Medicaid incentive payments and in 2012 we expect to recognize $90 million to a $120 million of additional payments. The bulk of those payments will be coming in the third and fourth quarters.

To review our results, fully diluted EPS from continuing operations excluding write-offs and deferred debt issuance costs, acquisitions, investigations and restructuring costs and interest rate swap accounting grew to $0.26, a 62.5% increase, as compared to $0.16 per diluted share for the same quarter a year ago.

After a 1.5% increase and the number of fully diluted shares outstanding, same hospital adjusted admissions were approximately flat, when uninsured adjusted admissions are excluded. Same hospital surgeries were up 8/10th of a percent compared to the peer group leading 5.2% growth for the same quarter a year ago.

Same hospital net revenue increased 5.5% and same hospital net revenue per adjusted admission increased 6.6%. And same hospital adjusted EBITDA excluding certain items increased 25.3% to $271.6 million, and same hospital adjusted EBITDA margins increased 300 basis points to 19.1%.

For same-stores excluding the HCIT funds, same-store EBITDA grew 7.8% with a margin increase of 30 basis points to 16.4%. This is the largest increase in same-store EBITDA this fiscal year.

Thanks again for your attention, and I’ll turn the call back over to Gary.

Gary Newsome

Thanks, Kelly. We’re very pleased with the results for the fourth quarter and year ended December 31, 2011. We are affirming our 2012 annual diluted EPS objective of between $0.80 and $0.90 for the year excluding HCIT funds and 2011 diluted EPS compared to 2011.

We continue to believe our objectives are achievable by maintaining our focus and discipline on cost containment and our three operating initiatives, focus on our emergency room, which is the front door to the hospital, our physician recruitment development as we continue to meet their needs and find ways to partner in certain cases; and in market service development, as we expand existing services and add new services.

Before I close our formal remarks and open the call up to questions I need to recognize our dedicated hospital associates, divisional leaders, home office associates and medical staffs for their tremendous contribution during 2011. Without their commitment to our patient centered approach to healthcare delivery, none of our success will be possible.

Truly, our associates and physicians are making a positive difference in the lives of our patients every single day, and I’m proud to serve them as they took part in such a great organization. Again, thank you to all those associates and physicians.

Health management provides the people, processes, capital and expertise necessary for our hospital and physician partners to fulfill their local missions of delivering superior healthcare service.

Our strategy of ensuring the most modern, high-quality care remains close to the citizens of our communities is gaining ever-increasing importance. Health Management stands ready to enable America’s best local healthcare.

Thank you again for your attention this morning. And I’ll now open the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Adam Feinstein with Barclays Capital. Please go ahead.

Adam Feinstein - Barclays Capital

Just I guess maybe a starting point to Gary, maybe just talk a little bit about the acquisitions in the integration; clearly guys have some good deals recently, so it will be a big year from an integration standpoint. Maybe just talk about that and then maybe after this Kelly if you can elaborate a little more in the revenue per adjusted admit, which is very strong in the quarter, and just what are some other things driving that and how should we think about that going forward? Thanks guys.

Gary Newsome

Well, I think we are extremely excited about obviously the acquisitions we’ve had over the last couple of years, and you’re right, the opportunities as we are going forward as we integrate those hospitals into our operating model as they began to grow and develop and achieve our operating model results going forward as they’re going to be outstanding, we feel very confident in these facilities and actually there is another acquisition last year was just an outstanding opportunity for us, a great community, it’s a great system of hospitals, they were well capitalized, they were managed by an outstanding group part thus taking over the types of challenges from an investment standpoint and as we go forward there, it’s outstanding and we have a smaller acquisition in Mississippi, which too will give us great synergies as we have a large presence in Mississippi.

If you look at the opportunities we have in our pipeline and let me tell you I have never seen a pipeline this full before ever and as you look at those opportunities, we can pick and choose strategically where we want to go and who we want to partner with in certain cases. Because of our success, and historically since the beginning of our company, where we’ve had very successive communities, the community leaders where we have hospitals are our best resources, referrals for us as we look at communities and the leaders there will contact where we’ve had hospitals for many years, and talk to those leaders.

I think importantly the partnerships that we’ve done with Shands, University of Florida Medical Center, of course the partnership with Milwaukee and the recently announced in a Tennessee partnership with University of Mississippi Medical Center, which is in the definition stage and now with INTEGRIS. All of this really gives us a great opportunity as we look at markets for example Oklahoma where we had two outstanding hospitals in a very good locations and now partnering with INTEGRIS initially with these five hospitals, which will open up in Oklahoma, which is a great state. I think one of the fastest growing states in terms of population and one of the lowest unemployment rates in the nation around 6%. So, we’ll look at that and how we can expand in markets where we have synergies. This is tremendous opportunity for us.

Kelly Curry

Alan we have decided we can no longer because the pipeline has been growing so full. We can no longer stay robust anymore. So, I know the official time is humongous.

Adam Feinstein - Barclays Capital

Okay.

Kelly Curry

Anyway our net revenue per adjusted admission, yes it was very, very strong and its related specifically to the fact that we’ve grown our menu of services available to outpatient because what our markets are telling us is that they will seek outpatient care. They want outpatient care. They want to get as much outpatient care as they can as we’ve been said, saying now for a while that given the economic circumstances if patients are insured, they basically have to be carried in for an overnight stay.

So, we’ve diligently expanded our menu of services. We also know that with the acuity of those services has increased, for instance we’re doing knee surgery now on an outpatient basis and that sort of thing. And so, we can’t measure the acuity, but we know it’s up. So, all of those things have contributed to a very strong growth in our outpatient business, which is a terrific business, very high margin and we believe that there is a lot of future available to us in the outpatient arena.

As far as going forward one of the things that will affect that calculation, I’m sure you’re are well aware is that as you do have higher demand on inpatient services particularly for more higher acuity inpatient services, it will tend to average down the impact of that calculation, but I think that’s a function of the mathematics but in terms of what we’re doing to continue to expand and grow innovate in the area of outpatient services we’re doing that. And despite the volume environment which has been what it’s been for the past few quarters, we’ve sustained strong profitability growth, same store year-over-year increase of 7.8% excluding the HCIT money. That is evident and frankly that’s 10.8, the highest this year. It was like 5, 5.5 and 7.6 in the previous three quarters.

So, it’s showing that our strategy is working. Our cost controls are working. We’re converting that to the profitability. So, we know that we have increased our market share in our markets despite the inpatient volume circumstances. So, at any rate we are very positive.

Adam Feinstein - Barclays Capital

All right. Well, thank you.

Bob Farnham

Also Adam, on the acuity. Acuity was very good for the quarter at 1.39, that’s a good number for us. Also on the mix, we’ve seen pretty flat on the commercial business as a percent of total and we had a reduction on the uninsured as Kelly mentioned in his comments down 70 basis points that really flipped to a Medicare and Medicaid, so that paid for those. So, that trend I think is also helping us well.

Operator

Your next question comes from the line of John Ransom with Raymond James. Please go ahead.

John Ransom - Raymond James

I’m not used to be this early in the queue. I wasn’t really ready. Your surgical growth has moderated, is that a function of tough comps, tough economy, are you seeing less MAKOplasty, I don’t know if you didn’t really talk about that or did you mention that?

Gary Newsome

No, no. Really, John, the growth we had a pre-stake comparable last year.

John Ransom - Raymond James

Right.

Gary Newsome

I think it was like 5.2 and from that standpoint that was pretty big deal. I can tell you that we’re very bullish on our ability to continue to do surgeries and the company I think we’re going to continue to see that. And what’s interesting is while we had a lot of outpatient growth on the surgery side, the intensity which we typically don’t measure, there is not a case in this index number for that on the outpatient side, we know is way up. So, that’s why we’ve seen the growth in the net revenue per adjusted net that we saw in the quarter because the intensity of that type surgery we are seeing on the outpatient side. And we feel very comfortable that we can continue to grow surgeries and I think it was a just a really function comparable.

John Ransom - Raymond James

Are you seeing any not to get to granular, but the new indication for MAKO in hips? Is that helping yet or is that too early to tell?

Gary Newsome

I think it’s early. I think those new procedures are really early in the process and physicians have to obviously be trained and be skilled with that training as we go forward, but that will be an opportunity as we just go forward.

John Ransom - Raymond James

And then my second question, market share, can you give us some indication of – I don’t know how recent you are either Medicare market share numbers or your total market share numbers are, but just kind of how you’re tracking with that. Thanks.

Kelly Curry

We have ongoing reviews and where we examine and how we’re doing in the market because we are trying to understand our markets better and better and in the process of doing that, our marketing folks are continually evaluating our market share figures. In some states, those are easier to get and others and another that we don’t. We don’t have a fixed date for every hospital that we got it at, because of that, but we do know that we are growing.

John Ransom - Raymond James

You think your market shows up despite the weak, kind of weak, inpatient numbers?

Kelly Curry

Yes, because we know that within our markets that what you are seeing with respect to the inpatient business is it is the market.

John Ransom - Raymond James

Right. And then my last one, Florida Medicaid, I know this is not a huge exposure for you, but have you been able to dig into the Senate proposal and the House proposal and our question was, was that, could you just help us understand kind of the difference between the low income pool, the Fee for Service Medicaid, the Medicaid Managed Care and when the Senate or House floods the headline cut, just kind of how to think about in the context of the complexity of that and do the Medicaid plans, pay on Medicaid etcetera? Thanks.

Kelly Curry

Well, first off when they say a cut; they are almost always talking about rate, unless they say they’re talking about another program like (inaudible) or something.

John Ransom - Raymond James

Okay.

Kelly Curry

So, if it’s general, its rate and right now that’s most of where the focus is on Medicare, Medicaid and rate.

John Ransom - Raymond James

And does that include the low income pool, so that the low income pool would not be included in that headline cut?

Kelly Curry

No, no it’s a different kettle of fish or bucket if you will.

John Ransom - Raymond James

Okay.

Kelly Curry

Right now, John we are in the way early stages in terms of what’s going to happen, what we can say is, is that the proposal to cut Medicaid a $1 billion is a non-starter. So, that’s not going to happen. Where we go from there is still in the political arena. I mean, you’ve read the same things I have and you can see the politics that are going on right now. This is just February; they don’t have to be done for another, till the end of April.

John Ransom - Raymond James

All right.

Kelly Curry

So, we will see, but we are on top of that. We are intimately engaged in the process and we are having an opportunity to have a word on the subject. The other thing is, is I think that it’s absolutely, probably take it to the bank staff the list won’t be cut.

John Ransom - Raymond James

Okay. Great.

Gary Newsome

John, here as well and we are not going to see the type of cuts in the rate that we saw last year.

John Ransom - Raymond James

Okay.

Gary Newsome

No question about it.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please go ahead.

Dana Vartabedian - Deutsche Bank

This is Dana Vartabedian in for Darren Lehrich. I just have one quick question. When you file your 10-K, can you give us an idea for how your disclosure around the two ongoing government investigations will change? I guess we just want to get a sense for whether anything has changed in scope, activity and I guess your understanding of what the government is looking at since the last time you disclosed in the September 10-Q?

Kelly Curry

Well, number one is that there isn’t really anything to add to what we’ve already disclosed as Gary has already covered in his comments. Secondly, we are going to very transparent about this process as we learn anything that’s relevant, we are going to be very transparent about it. Thirdly, in the process of drafting our 10-K right now it will be out next week.

Dana Vartabedian - Deutsche Bank

I see. Okay, great. Thanks. And one quick question, if I could ask, on the Tennova integration for modeling purposes, is the 70 million trailing EBITDA still a good run rate number?

Kelly Curry

No, that was really more of a pro forma type figure. We said before and I think some maybe overestimated on Tennova. Essentially Tennova is no different than any of our other acquisitions. It was basically a breakeven operation, it’s going to ramp up on a similar basis, it will be in the mid-single digits by the end of the first year, it will ramp up to our same store margins by the fourth year. And unfortunately, what we can’t tell you is that will be a nice little stair step on the spreadsheet because it depends on a lot of factors as to how that will end up, we are going to do necessary capital enhancements and that’s true in any acquisition and physician recruiting et cetera that needs to take place and in net size market the strategic plan takes longer to implement. But we do know that and are quite comfortable that we will achieve our four year goal of cash on cash payback.

Operator

Your next question comes from the line of Ralph Giacobbe with Credit Suisse. Please go ahead.

Ralph Giacobbe - Credit Suisse

Can you give us what the outpatient visit growth was on a same-store basis in the quarter? And then, I don’t know if I missed this, did you give how much of the inpatient was impacted by one-day stays maybe shifting to outpatient?

Kelly Curry

Well, actually no, we didn’t on either one of those, we don’t report our actual, because the counting outpatient visits is a challenging endeavor. If you have come in and you get a x-ray and there is four pictures, is that one visit or four. So, people have different ways of calculating it. So, rather than get into trying to define all that we don’t.

But in terms of we do know that for our internal purposes that our same-store clinic visits continue to be up. We know now that people are seeking healthcare, they do want outpatient cares, they will take outpatient cares, I am saying of the insured and in some extent Medicare has been impacted by this, because our Medicare patients have opted for the managed care programs which have initial lower deductible, that you have to pay the deductible every time you go in as opposed to the $1,000 a year. So, that has impacted some of their choices as well. So, we’ve seen more take up of drug therapies for whereas in the past people might have opted for implants, for that sort of thing.

Ralph Giacobbe - Credit Suisse

Okay, then the impact from one-day stay?

Kelly Curry

We’re average, I don’t actually know what that number is off the top of my head. It's not as you know from the data that’s been published that we are right on the average.

Ralph Giacobbe - Credit Suisse

Okay and then I guess when you contract with managed care, do you negotiate the inpatient and outpatient businesses separately and if that’s the case is there a difference in the pricing increases you get from one over the other?

Kelly Curry

Yes, all of that.

Ralph Giacobbe - Credit Suisse

Yes, you do get different pricing increases, inpatient versus out?

Kelly Curry

Some are on the inpatient side and percentage charges on the outpatient side, some are fee screens and it varies, varies widely.

Ralph Giacobbe - Credit Suisse

Okay, and then just my last one just in terms of High-Tech, the guidance 90 million to 120 million. So, should we think is that sort of a net number, are there incremental costs that you are taking on to meet meaningful use that you could parse out?

Kelly Curry

Well that’s a gross figure. Although our costs are fairly low, but one thing I’ve been saying now for two years is that the government neither would not pay High-Tech or if they did they would take the payments out of the other buckets to pay for it, which is what they are doing. The average of the 2% sequesters about equal to one year’s HIT payment. So, that’s exactly what’s happening and that’s why we’ve held it out separate because we believe that was going to be the process the government would follow. And that’s what we’re seeing.

Operator

Your next question comes from the line of A. J. Rice with Susquehanna Financial. Please go ahead.

A. J. Rice - Susquehanna Financial

Kelly, if they’re tying the sequester to the HCIT payments, there is more of underlying conspiracy going on now and why shouldn’t then I thought there was, I guess.

Kelly Curry

Well, I think it’s a high coincidence. When you have high coincidence something can be highly correlated, but not necessarily related. You know what I mean?

A. J. Rice - Susquehanna Financial

Okay.

Kelly Curry

But I said the same (inaudible) but I think you know that A. J.

A. J. Rice - Susquehanna Financial

Okay. On the bad debt, you’re saying that the percent of uninsured of your volumes is down year-to-year and your uncompensated patient care percentage is flattening out. I guess in January when you gave the guidance for bad debt, you said 12.5% to 13.5% of revenues for 2012. You’ve been running 12.3% or so, low 12’s%. I mean it seems like that conservative given the trends you’re seeing. What is sort of missing in that equation or are you just trying to be conservative?

Kelly Curry

Well, although we don’t include acquisitions in that figure in terms of the acquisition. There is an uncertainty out there concerning what that range will be and everybody is going to remember it, and we reported on a consolidated basis.

A. J. Rice - Susquehanna Financial

So, basically you’re just giving yourselves some leeway for potential drag from acquisitions, is that the way to interpret it?

Kelly Curry

Yes.

A. J. Rice - Susquehanna Financial

Okay, but otherwise your core business, it is a better trend in that it seems like.

Kelly Curry

Well, we continue to see, I think this the sixth quarter in a row now that we have seen a decline in no-pay business. Also we have an impact. Yes, don’t forget that there will be some change due to charge master increases and stuff like that.

A. J. Rice - Susquehanna Financial

Sure. Then the other point that you guys have pointed to for margin improvement on the cost side has been, is particularly in the supply expense area, I know you’ve singled out before, the HPG global sourcing initiative, the fact the drug costs have been trending down. I’ll be interested in A, in the same-store numbers that you indeed see improvement in the supply expense to our ratio, again this quarter year-to-year, and B, maybe an update on those initiatives or any other ones that are impacting supply trends?

Bob Farnham

Yeah, A.J., this is Bob. On the same hospital margins even when you take out the HCIT, we were up 30 basis points for the quarter from 61 up to 64, and as you would suspect, the majority of that 30 basis points was in supply and just looking forward to 2012, a lot of the initiatives that we talked about all the year, really have not anniversaried themselves. You mentioned global sourcing; they’ve really just started in the fourth quarter.

The spinal implant program, which was 5 million to $7 million savings program, really two of our divisions just implemented that in the second quarter. Our last two divisions really was the end of the third quarter, beginning the fourth quarter. So, we’ve annualized savings on that yet. I mentioned all of our trauma ends, which is basically orthopedic outside of hips and knees and talking about screws and pins and wires. We’re actually expanding the number of vendors we fire from there and that's created some competition and we should see a couple of million dollars of savings on that.

Stance, I don’t think I mentioned this on the last quarter call, but we renegotiated lower pricing on our stance effective in October. That should help us something like $0.5 million in 2012 and we are going back this quarter with our orthopedics on the hips and knees and we are renegotiating lower pricing with all of our orthopedic vendors on hips and knees and so that will provide savings in 2012 that we did not realize in 2011.

So, a lot of good things that we’ve started, continuing, and so we think 2012 will be another good year on the supply expense side as a percent of net.

A. J. Rice - Susquehanna Financial

Okay, just one last technical one. You have been breaking out legal cost at about, the run rate of about 45 million a quarter. It didn’t look like you broke that out this quarter. Did you incur that and I know it’s been cost you about a $0.01 a share, just want to make sure is that still happening or not?

Bob Farnham

Yeah, that’s about right and we expect that to continue.

Operator

Your next question comes from the line of Gary Lieberman with Wells Fargo. Please go ahead.

Gary Lieberman - Wells Fargo

Thanks, just a couple of housekeeping. You said that the case mix index was 1.39 in the quarter. What is that year-over-year?

Kelly Curry

It was pretty close to the same number last year, 1.38 or 1.39, yes that’s mathematic here.

Gary Lieberman - Wells Fargo

And then sequentially?

Kelly Curry

Sequentially, hang on a second, I don’t have that, probably 135.

Gary Lieberman - Wells Fargo

135 okay great. And then is there anything, any update you can give us on the search you have for the general council spot?

Gary Newsome

We are still in process.

Operator

Your next question comes from the line of Justin Lake with UBS please go ahead.

Justin Lake - UBS

Thanks good morning. Couple of questions, just first now you have chosen not to include healthcare, I have seen your numbers. Can you give us any color though in terms of I know most of your peers that have talked about it and I have mentioned some not immaterial costs associated with implementation? Any thoughts on what kind of drag there is there in terms of the cost of implementing this?

Kelly Curry

Well our cost are very low with regard to that, I think that from our perspective, really the cuts that we have seen like France and talked about in other state and with the changes potentially in Medicare, I think those are the real costs to us frankly, the HCIT it’s not really the cost of what we need to do to get the money. We wrote that system, its highly automated. It’s not highly labor intensive and it was all capitalizable cost when we wrote it. So we don’t have a lot of ongoing operating cost with it. Some, but not a whole lot.

Justin Lake - UBS

And any way to ballpark just even as a percentage of how much you're going to collect? What your costs are, is that 10% or 30% just trying to look at you guys versus the rest of the industry?

Kelly Curry

I understand. I actually haven’t really looked at it from that perspective. But I would say from when I heard other companies say our cost would be significantly less than theirs.

Justin Lake - UBS

And do you think the reconciling item there is just that you have a homemade system versus peers or what do you think that might be?

Kelly Curry

We wouldn’t refer to it, it’s homemade but maybe homegrown.

Justin Lake - UBS

Okay.

Kelly Curry

But I would say that a lot of the IT companies view that HCIT money as their money, not the healthcare company’s money. But from what I’ve seen that they are charging for it. I mean we maintain one system that is a purchase system so that can kind of compare what’s going on with the market in terms of service bureau type companies compared to what our experience is. So I have some experience as to what they’re charging for these types of things.

Justin Lake - UBS

Okay and just last question on I think a lot of the questions on the call today have been trying to reconcile your pricing number, which was obviously pretty strong and seem to be significant on the outpatient side and you’re seeing a big change of mix there obviously on the same-store basis.

I was just wondering if there is any way to bifurcate, I mean you’re a little unique in terms of the fact that you’ve done all these deals and obviously you are doing a great job of integrating them and bringing on new services and increasing revenues. So you’ve done a lot more deals than your peers in terms of percentage of total hospitals. So I’m just wondering if you can kind of think about the hospitals you've had from more than three to five years and what kind of same-store revenue growth you’re getting there. And maybe how differentiated that versus the new guide for hospitals you brought and to help us understand, is it really the new hospitals that are driving a lot of this, or is that 5.5% pricing number relatively similar across the entire portfolio?

Kelly Curry

Because of the low number, I mean it’s significant in terms of relative to bringing on the hospitals to the company.

Justin Lake - UBS

Absolutely that’s what I meant.

Kelly Curry

Comparing to the total of the revenues of the same-store hospitals it’s not that significant. So now what the growth that you are seeing is relatively going to be from once we had it for a while. And in addition, our innovative technology has been across our entire company and we think that’s been the big driver and in terms of the robotics etcetera.

Operator

Your next question comes from the line of Tom Gallucci with Lazard Markets. Please go ahead.

Tom Gallucci - Lazard Markets

Good morning. Thank you very much, just two quick follow-ups here. First you mentioned some Florida Medicaid commentary. How are you thinking about Medicaid rates all in for this year, and number two obviously good growth and focus on the outpatient side, does any acquisition strategy come into play in outpatient as we look forward or is that primarily sort of internal driven?

Kelly Curry

In the Medicaid it’s about a 1% to 2%, where we are looking at 1 to 2% here on Medicaid this year. That’s what our view is on it. I’ll like Gary to respond the other question.

Gary Newsome

Basically in development on the outside terms and services, as we look at the opportunities and as we grow for example in outpatient surgery centers, we develop surgery centers on our own in this process, but we’ve also acquired surgery centers and partnered with surgery centers, so it’s really all of the above in terms how we are growing on the outpatient side and as we look at vertically where we need to be, as where healthcare is going forward, we are obviously evaluating the opportunity to be broader on the outpatient side than we have historically. And in some cases, we’ve already gone in that direction. So it’s both internally developed as well as acquired on the outpatient and we certainly will evaluate how we tackle that going forward.

Tom Gallucci - Lazard Markets

And I guess, you made the comment earlier that the pipeline is as full as sort of as full as never, I was assuming that was on the inpatient side, but how would you characterize the pipeline on the outpatient side?

Gary Newsome

I think, we have more opportunities on the outpatient side today as well than we’ve seen historically as we look at where we’re going with our outpatient services.

Tom Gallucci - Lazard Markets

Okay.

Gary Newsome

It's equally ripe with opportunities.

Tom Gallucci - Lazard Markets

And then, pricing compared to maybe what it’s been in the last couple of years?

Gary Newsome

I don’t think we’re seeing significantly different. It really depends on the quality and the capital conditions of the facilities as we acquire them in terms of the pricing, I don’t think we are going to see a lot of change, and we haven’t seen lot of change, lot of the things we are doing just innovatively, not just the robotics or things like that but looking at athletics and how we approach our business analytically and parse our markets and our market share growth and settle the growing areas and services that are accretive to our business and really are helpful with our earnings overall.

Operator

The next question comes from the line of Whit Mayo with Robert W. Baird. Please go ahead.

Whit Mayo - Robert W. Baird

Gary, just wanted to kind of follow up on that last question a little bit maybe ask it sort of a different way just was hoping you could remind us as an organization where you are with your physician employment group strategy and sort of what the expectations are for acquiring practices, employment, etcetera this year. I guess I’m just asking is there anything that’s materially different as we think about ‘12 and what could be in ‘13 versus what you did in 2010 and 2011?

Gary Newsome

We continue to have great success by the way in recruiting physicians both, non-employ there is independent physicians as well as employed. In 2011, we really look at the structure of our physician practice management and we retool that, we recruited an executive and an executive team to manage that that in a different way than we have historically. We really focus on our physician practices. We currently have just a little less of a thousand employee physicians in the company and we see that growing. We have over 10,000 physicians on a medical staff. So that just gives you kind of the perspective of where we are today.

We will see that grow over time and because of that we’ve put a structure and infrastructure in place to be able to help us manage that and to manage the costs associated with physician practice management. And it’s unique, it’s different than operating hospitals and so that’s why we’ve acquired talent that knows how to do that.

Whit Mayo - Robert W. Baird

Right. And maybe just one guidance related question sorry to ask this we look at your guidance it’s a really wide range that's out there, the largest that I can recall in the years and I understand the larger you get the more sensitivity there is to the growth. But can you help us just sort of understand what you see is the material swing factors as we look at your guidance?

Kelly Curry

Well, I’m a pretty conservative guy and in my experience you guys are really forgiving if I make a mistake. So actually in terms of a range on these figures, I think it’s pretty solid to give you some good direction on where you want to go and in terms of your models and some of the people are treating things differently, we chosen because for the reasons we discussed about the HCIT and then keeping everybody mind about the swap to pull those out of summer including those and their models as well and I can understand that they do. So for that reason we’ve got to accommodate all that.

Whit Mayo - Robert W. Baird

Yeah I think I’ve heard the use of the word humongous twice Kelly and I don’t know that’s exactly a conservative term?

Gary Newsome

This is Gary, I think one of things too is, we’ve had tremendous growth on the outpatient side, and historically in healthcare and you heard me say this before that was always a precursor to strong inpatient growth. So I believe that’s true. I think it’s been moderating significantly because of the economy has been moderated and a lot of factors that are external to us quite frankly. So that could be contributed to the range of expectations out there so.

Operator

Due to time constraints, we have time for one more question from Kevin Fischbeck, Bank of America. Please go ahead.

Kevin Fischbeck - Bank of America

I wanted to follow up with that on that last comment there maybe Gary. And I think every year, people want to say that this is the year we’re going to see a rebound and volumes back to normal and obviously you’re assuming in your guidance some headwinds on the volume outlook, but are you seeing any real signs that volumes are going to be improving or just 2012 based demand kind of look similar to where 2011 was at this point?

Kelly Curry

We’re doing all the really fundamental things. Number one, that will contribute to our positioning volume growth going forward. And as I mentioned earlier, outpatient growth typically was precursor inpatient volume there. We demonstrated our strategy that we can grow market share and even though our markets, I mean quite frankly are down. The inpatient business is moderated, no question about that. We were in best position because of the investment we’ve made in our facilities, both facility and technology. The investments we’ve made in developing physician networks permit, working with primary care, as a foundation of developing our physician networks. We really have developed ourselves and positioned ourselves well, so that in our markets from the economy changes for example we’re in the best position to grow.

When things change in healthcare, which we know things are changing in terms of the model to certain extent, we’re going to be well-positioned because of our physician development and in many cases because of some of the partnerships we’ve made in some strategic states. So I can tell you, I feel very good about our ability to grow and excited about that. I’d love to be able to tell you that, that’s going to gush in 2012. I can’t do that. I don’t have that crystal ball, but I can tell you we’re doing the things we’re doing are fundamentally sound and in many cases we’re doing things that I think are very cutting-edge in terms of positioning our facilities.

Kevin Fischbeck - Bank of America

Okay, great and then one last question. I don’t know if you have this now, but it will be really interesting since a lot of the story here is going to be your ability to improve margins at recent and future deals, do have any data about where the margins are on your kind of 2009, 2010, 2011 class of acquisitions today versus when you bought them. Seeing that type of progression is really I think helpful kind of giving us visibility into that earnings power that you kind of have embedded in your portfolio right now?

Kelly Curry

Well, we have as reported the fact that they are on track according to our projections that we prepared in the acquisition process that we were on track to obtain our four-year cash on cash payback. And that gives you a lot of heads up in terms of the direction of where they are. And that’s really the position that we have. One of the reasons why we do that is because we have same store that we have to report on that year-over-year and that for the first year, the return on same stores within those numbers.

Gary Newsome

I think Kevin, it's important to realize this. With our growth and our acquisitions in 2009, we’ve added significant acquisition revenues about 1.3 billion and you compare that to our base, that’s very significant. I think that’s recognized. You guys look at that and I think it’s fundamentally, as none of those hospitals have been in our portfolio long enough to really get fully in gear. So that is a tremendous opportunity for us. There is a significant amount of revenue, that’s really early in the process and I think we have poised well for us going forward.

Operator

This concludes the Q&A portion of the call. I turn the call back over to the presenters for any closing remarks.

Gary Newsome

Thanks everybody and have a great day.

Operator

That concludes today’s conference call. You may now disconnect.

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