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LifePoint Hospitals, Inc. (NASDAQ:LPNT)

Q4 2011 Earnings Call

February 17, 2012 10:00 AM ET

Executives

William Carpenter – Chairman and CEO

Jeff Sherman – Chief Financial Officer

David Dill – President and COO

Analysts

Jailendra Singh – Susquehanna Financial Group

Whit Mayo – Robert Baird

Adam Feinstein – Barclays Capital

Tom Gallucci – Lazard Capital Markets

Gary Lieberman – Wells Fargo Securities

Kevin Fischbeck – Bank of America-Merrill Lynch

Brian Zimmerman – Deutsche Bank

Gary Taylor – Citigroup

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospital’s Fourth Quarter and Year End Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Friday, February 17, 2012.

On today’s call, LifePoint will be making forward-looking statements based upon management’s current expectations. Numerous factors could cause LifePoint’s results to differ from these expectations and LifePoint has outlined these factors in its filings with the SEC. The company encourages you to review these filings.

LifePoint also asks that you please review the cautionary language under the caption important legal information in the company’s press release issued this morning. The company undertakes no obligation to update or make any other forward-looking statements whether as a result of new information, future events or otherwise. Also, please visit LifePoint’s website for links to various information and filings.

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

William Carpenter

Thank you. And welcome everyone to LifePoint Hospital’s fourth quarter and full year 2011 earnings call. We hope you’ve had a chance to review the press release we issued earlier this morning. After my initial remarks Jeff Sherman, our Chief Financial Officer will discuss in detail LifePoint’s results for the fourth quarter and the full year, as well as our outlook for 2012. After our prepared remarks, Jeff and I, as well as David Dill, our President and Chief Operating Officer will be here to answer your questions.

Let me begin by summarizing our results for the fourth quarter. Revenues from continuing operations grew to $781million, up 6.6% from the same period last year. As Jeff will discuss in more detail, we adopted an accounting change that directly impacts the classification of bad debt in our revenue line.

Absent this change, we would have recorded revenues from continuing operations of $916 million. EBIDTA for the quarter was $130 million, up 4.6% over last year and EPS for the quarter was $0.78, up 11.4% over last year.

For the year, revenues from continuing operations were up 7.4%, compared to 2010, EBIDTA was up 7.2% over the prior year and EPS was up 10.7% over the same period.

In 2011, our strong balance sheet and cash flows, as well as our ample liquidity allowed us to make strategic investments to grow organically and through acquisitions. In addition, we repurchased $169 million of common stock in the year. We continued to develop significant resources to acquisitions, service line development and position recruiting.

In the fourth quarter, admissions from continuing operations were up 1.4% and adjusted admissions were up 3.4% versus 2010.

In addition to the solid financial results we achieved in 2011, there are other key accomplishments I would like to mention briefly. In 2011, we improved our core measure inpatient satisfaction results. We successfully integrated new acquisitions into the company and we launched the LifePoint Learning Academy, designed to train and develop leaders within our company especially leaders at the hospitals.

We were recently awarded one of 26 Hospital Engagement Network contracts from CMS. We’re one of the four systems and the only investor-owned company to have been awarded a HEN contract. We believe that CMS recognizes the value LifePoint brings to this, based on our expertise of providing healthcare and enroll settings. We will focus on taking best practices primarily developed in large urban hospitals and customizing them to fit the needs of smaller non-urban hospitals.

The goal of this work is to partner with our physicians to improve patient safety and reduce harm. We are excited about this opportunity and hope that our work will ultimately benefit rural hospitals all across the country. This is what our mission is all about, making communities healthier.

A key component of our strategy going forward is developing stronger relationships with our physicians to help optimize clinical outcomes and enhance our mutual success. To the end we are adding structure to our physician engagement effort that will improve communications with our physicians and lead to quicker resolution of day-to-day issues.

In addition, we’re developing and piloting Shared Savings Programs with different physician groups aimed at taking waste and duplication out of the system. While it’s too early to discuss any results, the reaction has been positive.

Acquisitions were also in a row to our success in 2011 and will be a key driver of growth going forward. Clark Regional and HighPoint Health System are performing well and on plan. We believe we are well-positioned to capture incremental market share with the opening of the Clark’s new state-of-the-art facility, which is planned for the second quarter of 2012.

Another element of our acquisition strategy is forming innovative partnerships. In the first quarter, we announced the formation of Duke LifePoint Healthcare and we hit the ground running. This is truly an innovative collaboration that is gaining momentum.

In its first year Duke LifePoint completed two hospital acquisitions in North Carolina, Person Memorial Hospital in Roxboro and Maria Parham Medical Center in Henderson. We also acquired a cardiac cath business, which is now known as DLP Cardiac Partners and announced the acquisition of Twin County Regional Healthcare in Galax, Virginia. Combined these four acquisitions will represent approximately $200 million in annual revenue.

The opportunities inherent in this partnership are significant and compelling. The pipeline of potential growth opportunities and acquisitions remain strong and our development team lead by Leif Murphy is committed to identifying the right opportunities.

These include new strategic partnerships, traditional hospital acquisitions, ancillary service lines and post-acute services. We believe we are well-positioned to offer unique solutions in today’s healthcare market and we will continue to pursue acquisition targets both within and outside Duke LifePoint.

LifePoint delivered solid results again in 2011 in a challenging economic environment. At the outset of the year, we outlined our key strategies for enhancing value, providing quality care, growing both organically and through acquisitions, improving operational efficiency and developing high performing talent.

We also talked about pursuing targeted acquisitions in areas with faster population growth, a more diversified employment base and a favorable payor mix. We’re pleased with the progress we’ve made in these areas, which helped us achieved the high-end of our EBITDA and EPS guidance.

While the economy and healthcare regulatory environment remained uncertain. We believe we are well-positioned to maintain our momentum in 2012 and beyond. Of course none of our growth and quality improvements will be possible without the talented physicians, nurses and other employees who work throughout the LifePoint system.

With that, I’d now like to turn the call over to Jeff to discuss our financial results for the fourth quarter and full year, as well as our financial outlook for 2012. Jeff?

Jeff Sherman

Thank you, Bill, and good morning, everyone. We’re pleased with our results in a challenging environment and continue to position the company for long-term growth. Starting with volumes, on a same-store basis admissions were down by 0.9% in the fourth quarter, deliveries represented 85% of the admission decline with the closure of 10b program in early 2011 accounting for the come one third of the total admissions decline.

Adjusted admissions increased by 0.2% reflecting stronger outpatient activity in the fourth quarter versus prior year. Outpatient activity was stronger in cardiology, oncology and imaging services.

Total surgeries were down 2.8% on a same-store basis from prior year and improvement from the third quarter, over half of the surgery decline was due to the opening of two competing physician owned ASCs in our markets in 2011 and the loss of lower intensity, lower margin cases.

Our physician recruitment continues to be on track. We recruited 222 physicians in 2011, down slightly from 2010 and in line our expectations with a mix evenly split between primary care and specialties.

We have elected to adopt the accounting change, which requires the presentation of revenues, net of a provision for doubtful accounts. Unless otherwise stated, the remainder of my remarks will be based on revenues net of the provision for doubtful accounts.

Revenues in the fourth quarter were $781 million, an increase of $48 million or 6.6% versus prior year. Same-store revenues increased by $29 million or 4.3%. On the old revenue calculations method, bad debt expense was 14.7% in the quarter, 14.6% for the full year and in the guidance range for 2011 of 14% to 14.8%. The allowance as a percentage of self-pay AR was 86.7% versus 86.3% in the prior year quarter.

EBIDTA from continuing operations was $130 million, an increase of $5.7 million or 4.6% over prior year. Diluted earnings per share from continuing operations were $0.78 in the quarter, an increase of 11.4% over prior year. EBIDTA margins for the quarter were 16.6%.

For the full year, revenues were up $208 million or 7.4%, EBIDTA was up $36 million or 7.2% and diluted earnings per share from continuing operations were up $0.31 or 10.7%. EBIDTA margins were 17.7% for 2011, which is flat compared to 2010. EBIDTA results were at the high-end of our guidance and EPS performance exceeded the high-end of our guidance.

Turning to pricing, same-store net revenue for adjusted admission was up 4.1% in the quarter versus the prior year. The Medicare case mix index was 1.31 versus 1.32 in the prior year. The overall case mix continues to increase and was up by 2.4% on a same-store basis.

We have previously recorded $15.2 million in revenue in the second and third quarters for meeting the Medicaid meaningful use criteria. Consisting with SEC guidance, we’re now recording meaningful use payments under gain contingency accounting.

Accordingly, we are booking meaningful use dollars as an offset to expense under the separate income statement category other income. As a result, we reclassified the $15.2 million revenue booked through the third quarter to other income.

In addition, we have recorded $11.5 million in other income in the fourth quarter for Medicaid meaningful use payments. The operating cost incurred to meet the meaningful use thresholds were approximately $3.3 million in the quarter with depreciation expense of $1.7 million.

Turning to cost, the following cost as a percentage of revenue are based on a new revenue calculation I mentioned earlier. SWB costs as a percent of revenues were 45.2% and declined by 50 basis points from the prior year quarter and include incremental meaningful use costs.

Supply costs for the quarter increased by 30 basis points to 15.7% of revenues versus the prior year due primarily to increased pharmacy costs for new and expanding oncology programs, other operating expenses in the quarter increased by 210 basis points, 24% of revenue, due to higher pro-fees, repairs, provider taxes and insurance costs.

Insurance costs increased by $5 million over prior year due to loss development in a few malpractice cases that increased during the quarter. For the year, our total insurance costs declined by $3.3 million representing overall favorable settlements in loss development.

Cash flow from continuing operations for the quarter was $83 million. For the year, cash flow from continuing operations was $401 million, an increase of $26 million or 6.8% over 2010. At the yearend, we had $15 million in receivables from Medicaid for meaningful use.

We incurred $66 million in capital expenditures in the quarter with $24 million spent on IT systems investments primarily to meet the increased requirements and capital associated with the new datacenter for the company.

IT investments for the year were $83 million, an increase of $38 million or 85% over 2010. As these IT investments have significantly shorter lives than our historical capital investments, depreciation expense will be ramping up over the next several quarters as these assets are placed into service. I will discuss in a minute how this impacts our guidance.

In the fourth quarter depreciation expense increased by $4 million from the third quarter, this reflects the increased IT investments and depreciation expense associated with Person Memorial and Maria Parham that started in the fourth quarter.

On November 1st, we purchased an 80% interest in Maria Parham Medical Center for $58 million or approximately 75% of revenue through the Duke LifePoint joint venture. We will be consolidating the results of Maria Parham with non-controlling interest reporting for the JV partners.

We bought back $33 million of stock in the quarter at an average price of $35 per share. For the year, we bought $169 million of stock at average price of $35 per share. We have $185 million remaining out of the $250 million plan approved in third quarter of 2011. Over the past two years we have repurchased 9.1 million shares totaling $315 million.

Our strong free cash flow generation provides us with significant flexibility in executing our stock buybacks. We finished the quarter with $126 million of cash on hand. Additional information regarding our fourth quarter and full year results is available by reviewing our SEC filings including our 10-K which will be filed later today.

To summarize the year, we achieved the top end of the EPS range and achieved the top end of the EBITDA range. In addition, we grew EBITDA by $36 million or 7.2% with EPS growth of 10.7%. Cash flow from operations was again strong in 2011 at $401 million or 6.8% growth over prior year. Free cash flow defined as cash flow from operations less capital investments was a $181 million.

We are committed to using our cash flow to drive shareholder value. In 2011, we invested $220 million in capital on our existing facilities, acquired $135 million in annual hospital revenue and announced the third acquisition in the fourth quarter. We also bought back $169 million of stock.

While the mix may change as opportunities are presented, we remain committed to enhancing shareholder value by using our financial strength to invest in our facilities, acquire hospitals and opportunistically buyback our stock.

Turning to guidance, in our earnings release today, we also provided guidance for 2012 for revenues, EBITDA and EPS, after giving effect to the adoption of the new revenue accounting standard, we expect revenues to be in a range of $3.25, $3.35 billion for 2012. The EBITDA range for 2012 is $540 million to $570 million and EPS in a range of $3.05 to $3.30.

We expect adjusted admissions to be flat to up 2% in 2012. We’re expecting Medicaid revenues to be flat to down 2%. Managed care pricing increases are expected to be in a range of 5% to 6% for the year. We’ve not included any share buybacks or any acquisitions for 2012 in the guidance range.

It appears that current consensus estimates do not fully reflect the increase depreciation expense related to our most recent acquisitions and IT investments. We expect depreciation expense to be in a range of 5.4% to 5.7% of revenues.

We’ve invested over $80 million in IT projects in 2011 with more than $19 million projected for IT investments in 2012, primarily to meet the meaningful use criteria. IT investments are expected to decline significantly in 2013.

In addition, depreciation associated with our recent acquisition and the construction of Clark Regional Medical Center will result an incremental depreciation of approximately $9 million in 2012.

Meaningful use dollars are expected to be a headwind in 2012 versus 2011. We have a plan in place to meet Stage 1 meaningful use in all of our hospitals by third quarter of 2013 in order to fully qualify for all the incentive payments.

As a result of the gain contingency accounting, a considerable amount of the dollars that we initially expected to record in 2012 will not be recorded in 2013. We are estimating that we will record $10 million in meaningful use payments and other income in 2012 with the potential to record an additional $5 million to $10 million in payments depending on our pace of roll out and certification process. The timing of the payments is expected to be in the third and fourth quarters of 2012.

Our operating costs are expected to be $22 million in 2012 with $14 million in depreciation expense for the year. We expect to recognize additional meaningful use payments over the next six years with $80 million to $100 million recorded over the two-year period of 2013 and 2014.

I will now turn the call back over to Bill.

William Carpenter

Thank you, Jeff. Before we take questions, here are some final thoughts. As we navigate through this tough economic environment, we will remain focused on executing our strategy well. We’ll also remain nimble in our approach and mindful of managing costs. It’s all part of our effort as we strive to provide the highest quality care and make communities healthier. We’re pleased with our progress to-date and look forward to the opportunities that lie ahead.

With that, Operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of A.J. Rice with Susquehanna Financial Group. Please proceed.

Jailendra Singh – Susquehanna Financial Group

Hi. Thank you. This is actually Jailendra Singh filling for A. J. Just few questions here. I appreciate all color for 2012 guidance and I was wondering if you can share some thoughts around CapEx and cash flow expectations, and also how should we think about capital deployment going forward.

Jeff Sherman

Yeah. On the capital expenditure side, I would expect capital expenditures to be in the $230 million to $240 million range for 2012 that includes the $90 million of IT investments that I noted in my remarks. It also will include some final construction cost for Clark Regional Medical Center, which will be completed at the end of the first quarter.

Cash flow from operation, you can do the math on our EBITDA. I would expect it to be similar in line with where we have been in 2011 with free cash flow in a similar range as well.

Jailendra Singh – Susquehanna Financial Group

Okay. Okay. And any thoughts of capital deployment like how should we think about shares buyback versus acquisitions in 2012?

Jeff Sherman

We’ll be consistent with the approach that we’ve taken historically. As you know, we’ve always been opportunistic about buying back stock. Our balance sheet gets this flexibility. Traditionally, we’ve used cash for operations, for acquisitions and for buybacks, and that’s the way we think about it, sort of a three legged stool approach. We always look at everything and we’ll continue to take a balanced approach.

William Carpenter

And that will also be driven by the acquisition pipeline. The timing of when we think acquisitions will take place, as well as where our current stock price is trading, are all factors we look at on a continuing basis each quarter during the year.

Jailendra Singh – Susquehanna Financial Group

Okay. And my follow-up, I believe recently you have talked about potentially being close to coming up with a new JV partners similar to Duke. I was wondering if you had any update on that?

William Carpenter

Well, we continue to look and to work on a number of other potential arrangements along the lines of the Duke LifePoint partnership. These transactions are very complex, difficult to predict when the timing of any one them, I’m not going to try this morning to predict it. But as with any deal when we have something to announce we will.

Jailendra Singh – Susquehanna Financial Group

All right. Thank you.

Operator

And our next question comes in the line of Whit Mayo with Robert Baird. Please proceed.

Whit Mayo – Robert Baird

Hey. Good morning. Thanks. Maybe just one first clarification question back on the guidance, Jeff, just to make sure I heard you correctly about the meaningful use. It sounds like you said $10 million of HIT income, comp expense whatever we are calling it for the year $22 million of total expenses including $14 million of incremental D&A, is that right?

Jeff Sherman

No. The depreciation is on top of that. So the $22 million is operating expense line. So we’re doing a lot of work this year to get ready for meaningful use on the Medicare side. So everything we’ve booked up to this point 2011 was for Medicaid, which had an easier threshold to qualify for meaningful use payments.

But we will be working on many hospital conversions this year, obviously with the third quarter of 2013 being the last quarter, you can meet Phase I and receive full payments. We have a lot of work to do in 2012 and 2013.

But as I’ve said in my prepared remarks, the timing giving gain contingency accounting we maybe certified, but the cost report period is in for the next year, so we won’t be able to record that revenue in until 2013. So we may actually receive the cash payments in 2012 but we’ll not be able to record the revenue until 2013.

Whit Mayo – Robert Baird

Okay. No. That’s perfect. I want to just clarify that. And maybe just turning to the cost side for a second, I mean, there was a material jump in the other operating expenses even when you take out some HITECH costs and you mentioned, I think net mal up $5 million, if maybe you could comment on whether or not that’s one-time or in the run rate, and maybe on some of the proceeds or contract services?

William Carpenter

Yeah. The malpractice issue in particular is really a couple of cases unusual from our perspective, don’t expect that to repeat. As I said for the year, we had favorable cost development, but we had a couple of cases that were not favorable in the fourth quarter, development of a couple of cases, these are cases that are several years old, so we don’t expect that to move forward at that rate.

In terms of other costs, we do have continued increases in professional fees. We’ve had increases in provider taxes and cost associated with UPL programs in states that have increased as well. Those are mostly been offset by revenue associated with those programs. Those are the key drivers of the other cost increases.

Whit Mayo – Robert Baird

Okay. It will be more…

William Carpenter

And then the meaningful use costs that are in contract services as well.

David Dill

Whit, this is David. One other thing back on the second quarter I think we talked about some of our employ positions have flipped especially on the hospital side from salary and wages where they were historically been recorded over to other operating expenses.

Whit Mayo – Robert Baird

Yeah. Absolutely. Maybe one last if I could slide it in just for Bill, if you could, you maybe go back and elaborate on the comments around your physician engagement strategy and you’ve mentioned the requirement for, I guess addition structure to facilitate that. And just curious if there are any material costs associated with that, just any color around that would be helpful?

William Carpenter

Not really material costs associated with that, well, it’s more of an effort to make sure that we are engaging our physicians in an intentional way in each of our hospitals in order to make sure that they are surely feel like a partner and this is important of course as healthcare reform advances and something that we are emphasizing this year.

We believe that we have the ability to work together with our physicians in order to improve outcomes in our hospitals, which is obviously very important to them and to us, and to improve our mutual success. That’s our effort. David, anything you want to add?

David Dill

Just to add, some other programs that we’re rolling out and piloting, Bill talked about some of those in his prepared comments, we’re not taking risk by any means. But developing organizations that we will partner with our doctors to then go out and set budget amounts to spending on a per patient basis with different state Medicaid plans and to the extent that we can fund saving to taking ways in duplication out, we’ll be able to share some of the savings. So those are additional ways. Those have a little cost to it but nothing that’s material as Bill has already talked about it.

Whit Mayo – Robert Baird

Okay. Thanks a lot guys.

William Carpenter

Thanks.

Operator

And our next question comes from line of Adam Feinstein with Barclays Capital. Please proceed.

Adam Feinstein – Barclays Capital

All right. Thank you. Good morning, guys. A strong end to the year. Just, I guess, maybe just a first question. Jeff, the range of guidance is pretty wide and you guys have typically provided a wide range of guidance and then, have done the high-end of the range in recent years.

So, I guess just, maybe just walk us through, just what it would take to get to the high-end versus the low-end. I’m assuming volumes is probably the biggest swing factor but just, maybe just give us some thoughts there and then maybe a quick follow-up question?

William Carpenter

Yeah. Thanks Adam. First, I would say, we do expect to be at the high-end of the guidance range that’s where our budgets will be based on. The factors impacting guidance will continue to be the macroeconomic conditions and the impact on elective procedures and volumes, unemployment improving, but the impact versus the utilization especially commercial would be an issue. The ramp up of our recent acquisition, if that pace is slower, we might be towards the lower end or if it’s fast are on plan on the higher end.

Meaningful use, a lot of moving parts there, so that is in the guidance right now. We do have some potential upside there as I commented in my remarks. Medicare reimbursement and Medicaid reimbursement are two other areas that continue to be at risk.

We have pretty good visibility in Medicaid through the first half of the year in our key states. We think the environment is stable, we have some reductions in the few states that’s why we gave that range of flat to down 2%, but we will also have some potential upside in 2012 also.

Adam Feinstein – Barclays Capital

Okay. Great. And just a follow up question, the revenue per adjusted admit was pretty strong in the quarter and in the past you guys have done a good job of breaking down the various pieces and helping us think about just getting to the aggregate number.

So just, may be just give us an update in terms of in, you made a comment that stable Medicaid trends in some of your key market. But just how are you guys thinking about the different components of your revenue for adjusted admit?

William Carpenter

So outpatient activity was stronger that helped in the quarter. I think for Medicare for 2012 there are still some unsettled potential reimbursement changes. But I would expect Medicare to be in that upper 0.5% to 1%, Medicaid as I said, flat to down 2% and managed care pricing 5% to 6%.

So if you look at, Medicare and Medicaid, and almost 50% now based on the new revenue calculation, and managed care at 48.9%. You can do the math there going forward on how that looks for us. But pretty consistent with what we’ve seen historically.

Adam Feinstein – Barclays Capital

Okay. Great. And then just my final question. Just on the surgeries -- on the outpatient surgeries. We saw some improvement relative to the third quarter, so the trend is moving in the right way, obviously, I know there is still some pressure, but things seem to be somewhat better?

So I was just curious in terms of what other things going on there. I believe last quarter you talked about some surgery centers opening up in a couple of markets, but having some impact do you think now you guys are getting some share back. So, just curious as you look at the outpatient surgery numbers.

David Dill

We are seeing as those trends improve the result of physicians recruiting and those physicians ramping up has been one component, Jeff talked about 50% of the decline in the outpatient surgeries or result of the opening up of the two ASCs, those two ASCs, one of those makes up probably 75% of the volume, the other one is about 25% just on a relative size.

The big one comes out here at the end of the first quarter, beginning of the second quarter. So I think not only where we see improvement in the trends based on that comping out, but also just the other trends that we’re seeing with physician recruiting successes that we’ve had.

Adam Feinstein – Barclays Capital

All right. Thank you, David.

Operator

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

Tom Gallucci – Lazard Capital Markets

Good morning. Thanks for all the color. Just a couple of follow-ups. I’m not sure if I miss this, did you mention uninsured and sort of commercial admission trend or payors mix trends in the current -- in the fourth quarter?

Jeff Sherman

Uninsured admissions were up slightly 2% in the quarter, very consistent as a percentage of total mix, little bit over 6%, so not a big change there in the quarter. Charity write-offs in the quarter were $20 million on a same-store basis, $22 million on continuing operations basis or about 2.4% on the old calculation, roughly 2.8% on the new revenue calculation.

Tom Gallucci – Lazard Capital Markets

Okay. And the commercial was -- does that -- how much is that down?

Jeff Sherman

Yeah. Our commercial mix has actually improved sequentially over the last couple of quarters in terms of percentage of revenue. We haven’t disclosed commercial admission mix. But the revenue -- commercial revenue mix is actually up sequentially over the last two quarters, so we’re slightly below 49% in the fourth quarter based on the new revenue calculation. So the commercial mix is, it’s down slightly from the fourth quarter of 2010 as a percentage of revenues but up sequentially from the second and third quarter.

Tom Gallucci – Lazard Capital Markets

Okay. And then I know you alluded to some of your payor mix extra payor, pricing expectations this year. How are you thinking about the pay roll tax legislation, I guess that’s in process right now, any particular comments on the impact there?

William Carpenter

Well, its look like bad debt is one of the key, is one of the factors. So bad debt is going down from 70% to 65%. It will impact us. It’s not going to be a big impact for us. We’re still studying some of the other proposals including dish impact, all of the formulary requirements are not currently available yet to calculate the impact on the dish.

But from our understanding that’s tenure is out as well and so a lot will happen between now and then. So a lot of moving parts there, right now as it stands, it looks to be minimal impact as currently proposed.

Tom Gallucci – Lazard Capital Markets

Okay. Great. And last one if I could, I think Bill earlier mentioned on the acquisition landscape. I think it’s really post-acute, just wondering if that’s home health or other areas that we should be thinking about? Thank you.

David Dill

Yeah. Really it’s our desire to be market dominant in the places where we own hospitals. And so we’re looking at all business lines across the continual care in -- in the markets where we own hospitals. So that’s really it. It could be ASC, it could be home health, it could be any other businesses, diagnostic businesses in our markets. So that’s really what I’m talking about.

Tom Gallucci – Lazard Capital Markets

Okay. Thank you.

Operator

Our next question comes from the line of Gary Lieberman with Wells Fargo Securities. Please proceed.

Gary Lieberman – Wells Fargo Securities

Thanks. It sounds like you guys are still pretty cautious on the admission trends. Can you talk about any payor mix shifts that you saw in the quarter and what your expectations are for admission trends overall for next year and any mix shift that you would expect?

William Carpenter

Yeah. So deliveries have been down, so that’s primarily Medicaid. So Medicaid we have seen decline in the fourth quarter. Medicare has been up and commercial has been down. Commercial continue to be down more than the total admissions, but we’re having some growth in the commercial outpatient side, on the revenue side, which has helped the commercial revenue mix.

So overall the payor mix has remained relatively stable throughout 2011 and we’re not expecting significant changes heading into 2012. We are seeing in one of our larger states, Kentucky, it went to managed Medicaid in the fourth quarter and it’s just too early to tell any impact on utilization trends in that state. We don’t expect it will be a material reimbursement change. We’ll be watching utilization trends in Kentucky as a result of managed Medicaid in that state.

Gary Lieberman – Wells Fargo Securities

Okay. And then I know the doc fix bill, the final conference version hasn’t been out that long. But have you had a chance to take a look at it, is there anything in it that isn’t in your guidance that might either help or hurt you guys?

William Carpenter

I don’t think so, as I think about it and we’re continuing, it’s sort of a very fluid process at this moment. I would say, we’re glad to see the SDR extended, obviously as we partner with our doctors that’s important, we’re always concerned when the payment fix is up on the back of other providers.

But included in the legislation are all the Medicare tenders that are important to us that were extended in the December package for two months. So those are linked up with the SDR through the end of the year.

David Dill

There are some other extenders that expire in the third quarter that were still -- that have not been extended yet, that we will be watching carefully, that could have an impact in the fourth quarter, but not a big material impact at this point.

And we’ll be working on those, just as we did, frankly the Medicare extenders who weren’t included in the original bill until hospitals, including LifePoint Hospitals were very actively involved in making clear as the importance of these. So it’s a process and we’ll continue to go through it.

Gary Lieberman – Wells Fargo Securities

Okay. Great. Thanks a lot.

Operator

Our next question comes from the line of Kevin Fischbeck with Bank of America-Merrill Lynch. Please proceed.

Kevin Fischbeck – Bank of America-Merrill Lynch

Okay. Thank you. I guess a quick clarification here. The healthcare IT, you mentioned $80 million to $100 million of payments in 2013 and 2014, was that a cash payment expectation or kind of an accrual on the income statement?

Jeff Sherman

That was an accrual expectation, Kevin.

Kevin Fischbeck – Bank of America-Merrill Lynch

Okay. And it looks like by my calculations the guidance for kind of cash EBIDTA margins is down in 2012 versus 2011. Is that right and is that purely from acquisitions or is there something else going on there?

Jeff Sherman

Yeah. Two main things driving that, acquisitions, the recent acquisitions in the fourth quarter is about 30 basis points of margin decline, and the meaningful use change from 2011 to 2012 is about 30 basis margin decline. So those are two key drivers on margins in 2012.

Kevin Fischbeck – Bank of America-Merrill Lynch

Okay. And then, if I try to back into your share count guidance, it looks like it’s about $50 million versus the $48 million that you had in Q4, about 4% higher something going on there.

Jeff Sherman

Well, we always have share counts increased during the year as stock client invest throughout the year. So, it’s just a continual process and we always have share count increasing during the year, so it’s been normal process of that occurring in 2012.

Kevin Fischbeck – Bank of America-Merrill Lynch

Okay. And then last question here, again I guess, the D&A does look to be opposite what the street was looking for and you mentioned that these things have shorter useful lives. Do you expect D&A to remain as is it for couple of years or should we start to expect this to kind of trend back down in 2013 to more normal levels?

Jeff Sherman

You’ve got a five to six year life on most of this stuff. So I think you’ve got ways to go to cycle through this high level of capital investment. It will fell off after that five to six year period, but with those shorter lives you’re going to see higher depreciation expense for the next several years.

Kevin Fischbeck – Bank of America-Merrill Lynch

Okay. Great. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Brian Zimmerman – Deutsche Bank

Hi. Thanks and good morning. This is Brian Zimmerman in for Darren. My first question is, have you made the final decision on whether to outsource your revenue cycle management business and if so have you been able to identify any savings that could come from making the switch.

William Carpenter

We had not made any final decisions as it relates to both our supply chain services and our revenue cycle services. We have begun the process of standardizing and centralizing some function starting with payroll. We have made a decision there. We’ve done that. You should expect us during the first half of this year to make decisions on both of the other two areas that I talked about.

We have looked at opportunities to not only save costs, but improve operations as a result of it. That’s why we’ll do it and we’ll spend lot of time building that business case, looking at the numbers and we think it is compelling.

Brian Zimmerman – Deutsche Bank

Okay. And then my second question is, can you give us, last quarter you commented that you’d seen slightly higher physician turnover. Are you continuing to see these changes or have you seen any changes there?

William Carpenter

We did commented a couple of quarters ago and even last quarter about some very specific doctors that we had lost that were high volume contributors, we had backed fill those doctors but nothing that’s unusual or alarming. We’re off to a great start in recruiting in 2012.

Brian Zimmerman – Deutsche Bank

Okay. And then my final question is, can you give us an update on the hospitals in your Duke LifePoint partnership and in terms of your growth priorities, are you looking to expand hospitals on this partnership or is your priority to look for a new JV opportunity perhaps in a different footprint?

David Dill

Well, our hospitals that we’ve acquired in the Duke LifePoint partnership so far Person Memorial and Maria Parham are doing very well, progressing according to our plan. Of course it’s very early with respect to those two acquisitions.

In addition, we are looking forward to the final steps of getting ready to close on the acquisition of Twin County, hospital in Galax, Virginia. So that process is going well, it’s working through the regulatory stages, the final stages of that and we expect it to be able to close in the year.

As I think about ways last year worked out 2011, we knew coming into the year when we announced the formation of Duke LifePoint in the first quarter that they were going to be -- that there would be a lot of momentum with Duke LifePoint and that’s exactly what we saw.

We are considering deals both within and without Duke LifePoint. And last year just the opportunities that we saw and the decisions that we made were within the Duke LifePoint partnership and we did hit the ground running with that.

So we will be looking at other opportunities. I expect the momentum of Duke LifePoint to continue. I’m impressed with the reach of Duke -- of the brand and with the interest that that has generated across the country. So we’re just going to continue to focus on adding new hospitals, good new hospitals to LifePoint and we’ll see where that plays out through the course of the year.

Brian Zimmerman – Deutsche Bank

Okay. Thanks a lot guys.

Operator

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

Gary Taylor – Citigroup

Hi. Good morning. The first one for Jeff, I think. I just wanted to make sure I understood, did you take the negative $15.2 million revenue adjustment in this quarter?

Jeff Sherman

It’s on a year-to-date basis, Gary, we did not reduce the revenue in the fourth quarter, the adjustment was made on a year-to-date basis and in the K you’ll see the adjustment in each one of the quarters.

Gary Taylor – Citigroup

Okay. So that revenue as a normalized number and there wouldn’t be any impact on the revenue per admit from that?

Jeff Sherman

Correct.

Gary Taylor – Citigroup

Okay. And I wanted to go back to what you’re saying about ‘12 and I know someone asked the question I still, I’m still not sure, I entirely understand. So I just want to make sure for 2012 on HIT you’re expecting $10 million of payments, but when you said the $22 million of operating cost, is that in total for all your HIT efforts or that’s the incremental spend versus ‘11?

Jeff Sherman

That’s total cost, that’s total operating cost above the EBITDA line for meaningful use in 2012, and then with the IT investments we’re seeing a depreciation ramp up as well.

Gary Taylor – Citigroup

Right. When I -- the total cost for HIT in ‘11, yeah, $26.7 million of revenue and the total cost was $11.2 million above the EBITDA line, right?

Jeff Sherman

Correct.

Gary Taylor – Citigroup

So there is essentially $10 million of incremental payment, $11 million incremental costs, so sort of a loss in terms of impact on EBITDA year-over-year?

Jeff Sherman

No. It’s less payments. It’s going from $26 million in ‘11 to $10 million in ‘12 on the payment side with the ability…

Gary Taylor – Citigroup

Right.

Jeff Sherman

… with the potential that were recorded now $5 million to $10 million and our costs are going from $11 million to $22 million.

Gary Taylor – Citigroup

Right. But I’m -- it was a tailwind in ‘11, it’s -- I got it. I understand what you’re saying.

Jeff Sherman

Okay.

Gary Taylor – Citigroup

And then my last question. Given that presumably we’re getting the SDR fixed, which Congress only seems to do, and is good. But given the fact that you guys have continued to employ more docs, could you give us an annualized physician fee schedule revenue figure, like coming out of the fourth quarter. How much of your total revenue is tied to physician fee schedule now…

William Carpenter

We had…

Gary Taylor – Citigroup

… or not just Medicare but in total?

William Carpenter

Yeah. We haven’t disclosed that, Gary. But physician practice losses were very consistent in 2011 with 2010. And there is moving parts there when you employ physicians you have revenues that might come on the hospital, on the ancillary side, but there is a lot of different things that impact our revenue number when we employ them. So we have not disclosed that number.

Gary Taylor – Citigroup

Can you tell us of the 222 docs you recruited, how many were employed?

William Carpenter

About a third.

Gary Taylor – Citigroup

Okay. And will that split change materially going into ‘12?

David Dill

Yeah. I don’t think, on ongoing recruiting basis, Gary, I don’t think that percentage will change that much, maybe it’ll climb a little bit, where it could change or the opportunities that we’re seeing in existing markets to employ doctors that are already there and built up the practices, you may see us do a little more of that in 2012 and beyond than we’ve done historically, just given the environment, the dynamics on what’s happening in the marketplace.

Gary Taylor – Citigroup

Okay. Thanks guys.

Operator

I’m showing no further questions Mr. Carpenter. I’ll turn the call back to you.

William Carpenter

Great. Thank you very much. As we close the call today. I want to thank our more than 24,000 employees across the country for a successful 2011. For 2012, our strategies for enhancing shareholder value have not changed, providing quality care, growing both organically and through acquisitions, improving operational efficiency and developing high performing talent. While certain tactics may change, our focus in these areas has caused us to achieve past success and we believe will lead to success in 2012.

In spite of the uncertainty with the economy and the healthcare regulatory environment, we see opportunity to create shareholder value and spread our mission of making communities healthier into more markets. Again, thank you for joining our call today and thank you for your interest in LifePoint Hospitals.

Operator

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

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