LifePoint Health (LPNT) William F. Carpenter III on Q4 2015 Results - Earnings Call Transcript

| About: LifePoint Hospitals, (LPNT)

LifePoint Health, Inc. (NASDAQ:LPNT)

Q4 2015 Earnings Call

February 12, 2016 10:00 am ET

Executives

William F. Carpenter III - Chairman and Chief Executive Officer

Leif M. Murphy - Executive Vice President and Chief Financial Officer

David M. Dill - President & Chief Operating Officer

Analysts

A.J. Rice - UBS Securities LLC

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Scott Fidel - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Joanna Gajuk - Bank of America Merrill Lynch

Gary P. Taylor - JPMorgan Securities LLC

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Andy Schenker - Morgan Stanley & Co. LLC

Matthew Borsch - Goldman Sachs & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the LifePoint Health Fourth Quarter and Year-End 2015 Earnings Conference Call.

On today's call, LifePoint will be making forward-looking statements based on management's current expectations. Numerous factors could cause LifePoint results to differ from those expectations, and LifePoint has outlined these factors in its filings with the SEC.

The company encourages you to review these filings. LifePoint also asks that you please review the cautionary language under the caption, Important Legal Information, in the company's press release issued this morning.

The company undertakes no obligation to update or make any other forward-looking statements whether as a result of new information, future events, or otherwise. Also, please visit LifePoint's website for links to various information and filings. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Friday, February 12, 2016.

It's now my pleasure to turn the conference over to Bill Carpenter, Chairman and Chief Executive Officer at LifePoint Health. Please go ahead, sir.

William F. Carpenter III - Chairman and Chief Executive Officer

Great. Thank you. Welcome everyone to LifePoint Health's fourth quarter and full-year 2015 earnings call. We hope you've had a chance to review the press release we issued earlier this morning. I'll begin by taking you through some of the highlights from the fourth quarter and the year, and then I'll hand the call over to Leif Murphy, our Chief Financial Officer, for a closer look at our financial performance. Following our prepared remarks, Leif and I, as well as David Dill, our President and Chief Operating Officer, will be available to answer your questions.

We're pleased with our results, which were in line with our expectations. For the quarter, revenues from consolidated operations were $1.37 billion, an increase of approximately 8% over last year. Adjusted EBITDA was $184.2 million, up by approximately 6% from a year ago. And diluted earnings per share as adjusted were $1.11, an increase of approximately 3% over the fourth quarter of 2014. Same-hospital admissions were down 4.2% in the fourth quarter and equivalent admissions were down 1.1%.

As I'm sure everyone has seen, this has been a very mild flu season, which makes year-over-year volume comparisons challenging. While a mild flu season impacts volumes, these cases tend to be low acuity and have little effect on our financial results.

Turning to the full-year; LifePoint achieved record revenue, EBITDA, and adjusted diluted EPS in 2015. Our revenues were approximately $5.2 billion, up 16% from 2014. Adjusted EBITDA from consolidated operations was $705.7 million, an 11% increase from last year. And diluted earnings per share as adjusted were $4.09, an increase of 19% over 2014.

2015 was a transformative year for LifePoint. Our acquisition strategy is really taking hold and we anticipate our recent acquisitions will be significant contributors to the bottom line in the years ahead. It also was a year in which we made great progress as a national leader in the critical area of patient safety.

Starting with acquisitions; we're extremely proud of the progress we've made on our acquisition strategy over the last several years. Our 2015 acquisitions combined with the two Providence Hospitals in Columbia, South Carolina which closed February 1, 2016 will add approximately $1.25 billion of revenue this year.

Importantly, we accomplished this while staying true to our strategy of entering new and growing markets, while continuing to build networks in existing markets. Our strategic plans and integration activities provide LifePoint with the significant opportunity to improve margins that at the time of acquisition are typically near breakeven or low-single digits.

We've demonstrated our ability to bring these margins to the low-double digits within three years following the acquisition date. At the same time, we are recruiting medical staff, expanding service lines, and further improving the quality and safety in our new markets. Effective January 1, 2016, LifePoint completed the acquisition of St. Francis Hospital in Columbus, Georgia. Also effective January 1, 2016, Duke LifePoint completed the acquisitions of Central Carolina Hospital in Sanford, North Carolina and Frye Regional Medical Center in Hickory, North Carolina.

LifePoint also, as I've mentioned, recently completed the acquisition of the two Providence Hospitals; each represents a strong opportunity to build upon our legacy of providing excellent healthcare while operating in attractive markets that are consistent with our growth strategy. Our pipeline continues to be active as community hospitals, regional referral centers and health systems seek the benefits of scale and the additional resources that LifePoint brings.

As you know, LifePoint has developed a national reputation as a leader in the critical area of patient safety. Our partnership with CMS in the Hospital Engagement Network continues to exceed the targeted 40% improvement in patient safety measures that CMS set at the beginning of the program. Another ongoing goal of the HEN has been to reduce readmissions by 20%. Through our focused work in patient safety and care coordination, we're very close to achieving that target.

Additionally, many of you are familiar with our National Quality Program in collaboration with Duke, setting forth rigorous standards for quality, safety, leadership and organizational culture. By the end of 2016, all LifePoint hospitals across the country will have enrolled in our National Quality Program.

Before turning the call over to Leif, let me briefly discuss healthcare reform. In 2015, we successfully capitalized on the benefits of reform, which we expect will continue. The Medicaid expansion map continues to evolve, now totaling 32 states, including 10 LifePoint states, which encompasses approximately 45% of our beds.

Recently, the Governor of Louisiana signed an executive order that will make more than 400,000 people eligible for expanded coverage effective July 1, 2016. We've seen activity in at least four other LifePoint states including Kansas, Utah, Wyoming, and Tennessee. However, given that it is an election year, we're not counting on seeing additional expansion before the election cycle is completed.

As we said before, we believe that continued expansion is an opportunity for us to add up to $100 million in new revenue and EBITDA. And so, we're working hard in all LifePoint states to educate leadership on the positive impact of expansion and the negative repercussions of the status quo. And we ultimately expect to see expansion in every state.

Overall, we delivered strong performance in 2015 and entered 2016 with solid momentum. Our focus on improving the quality of care we deliver, growing through organic initiatives, and acquiring and integrating hospitals in faster-growing markets, effectively managing costs, and developing higher-performing talent is delivering value for our shareholders.

I'll turn the call over now to Leif for an in-depth review of our fourth quarter and full-year results and a discussion of our 2016 guidance. Leif?

Leif M. Murphy - Executive Vice President and Chief Financial Officer

Thank you, Bill, and good morning, everyone. As Bill said, despite a very mild flu season, we had another strong financial quarter that was in line with our expectations. I will start by covering our fourth quarter results in more detail and finish up with a discussion of our 2016 guidance.

Starting with inpatient admissions; same-hospital admissions were down 4.2% for the fourth quarter of 2015 as compared to the same quarter of the prior year. Approximately 1.7 percentage points of the decline was caused by reductions in flu-related admissions in the quarter as compared to last year. In December of 2015, only one state of our 21 states reported widespread flu activity as compared to 19 states of 21 states reporting widespread flu activity in December of 2014. In addition, we saw a 0.6 percentage point reduction related to one-day stays, which were down 6.7% in the quarter and another 1 percentage point decline related to a reduction in readmissions; that were a result of our Quality Program initiatives.

Moving to surgeries; same-hospital total surgeries decreased by 0.2% in the fourth quarter. Same-hospital inpatient surgeries were down by 1% as compared to the fourth quarter of 2014. Outpatient surgeries were up 0.1% as compared to the fourth quarter of 2014.

For the fourth quarter of 2015, same-hospital equivalent admissions were down by 1.1%. This decrease in same-hospital equivalent admissions was driven primarily by 1.8% decrease in emergency department visits. Flu-related emergency department visits were down 7.6% while all other emergency department visits were up 3.4%. On a same-hospital basis, our Medicare case mix increased by 5.8% to 1.47 for the fourth quarter of 2015.

Turning to pricing, during the current quarter as compared to last year, net revenue per equivalent admission was up 5.8% on a same-hospital basis and up 5.9% on a consolidated basis driven primarily by higher reimbursement rates from commercial payers as well as case mix improvements during the quarter.

Our revenues from consolidated operations in the quarter were up $107.8 million or 8.5% to $1.37 billion as compared to $1.26 billion in the prior year. Same-hospital revenues in the quarter compared with the fourth quarter of the prior year were up $57.1 million or 4.6%, primarily as a result of improvements in reimbursement rates and overall case mix. As additional color, despite same-hospital admissions declining 4.2%, we estimate that our inpatient revenue was up 1.1% and represented 38% of our net revenue in the quarter. We estimate that our outpatient revenue is up 6.9% and represented 62% of our net revenue in the quarter.

These figures reflect strong growth in outpatient services and the trend of lower acuity volumes moving from inpatient to outpatient services. Same-hospital self-pay admissions were down approximately 11.1% and represented 4.4% of total admissions, down from 4.7% of total admissions in the fourth quarter of 2014. Same-hospital self-pay emergency department visits were down approximately 7.9% and represented 14.5% of total emergency department visits down from 15.6% in the fourth quarter of last year.

We continue to effectively manage costs in the quarter. As a percentage of revenues, same-hospital salary, wage, and benefit costs improved by 110 basis points to 47.2%; and same-hospital supply costs remained flat at 15.8%. Same-hospital other operating expenses increased 60 basis points to 24%, when compared to the fourth quarter of 2014 as a result of higher professional fees and contracted service fees, primarily in certain hospital-based physician services, and in costs related to our revenue cycle conversions.

In our fourth quarter 2015, adjusted EBITDA increased 5.9% to $184.2 million, an increase of $10.2 million from the same quarter of last year. Adjusted EBITDA was positively impacted by our strong operating performance, including the results of our acquisitions. These increases were partially offset by an expected reduction in meaningful use income of approximately $6.9 million, which declined from $22.4 million in the fourth quarter of 2014 to $15.5 million in the fourth quarter of 2015.

Our fourth quarter 2015 EBITDA margin from consolidated operations declined slightly by 40 basis points to 13.4% as compared to 13.8% in the same quarter of the prior year. The decline was primarily the result of an expected 70 basis point dilution from reductions in meaningful use income as well as the dilutive effect of approximately 20 basis points from our recent acquisitions, offset by the same-hospital improvements I described earlier of approximately 50 basis points. As you know, we typically acquire hospitals at breakeven to low-single-digit EBITDA margins and move them to the low-double digits in the first three years.

Diluted earnings per share were $1.16 in the quarter, up $0.68 compared to $0.48 in the same quarter the prior year. Our diluted EPS calculation includes a non-cash gain of $4 million gross, $2.5 million net of taxes, or $0.05 earnings per diluted share for the three months ended December 31, 2015. The gain relates to a recently acquired hospital. Because the final fair value is assigned to the tangible and intangible assets acquired less obligations assumed for this hospital exceeded the total cash consideration paid, we recognized a bargain purchase gain for the difference.

Additionally, during the same quarter of the prior year, we recognized impairment charges totaling $45.5 million gross, $28.1 million net of tax, or $0.60 loss per diluted share. When adjusted for these impairment charges and the gain, diluted earnings per share were $1.11, up $0.03 compared to $1.08 in the same quarter of the prior year. Earnings per share as adjusted were $4.09 for the year ending December 31, 2015, an increase of 18.6% over adjusted EPS of $3.45 for 2014.

Cash flow from operations for the quarter was $84.8 million. Effective December 4, 2015, we issued $500 million of unsecured senior notes, the proceeds from which were partially used to fund our acquisitions that were effective January 1, 2016 and February 1, 2016. Additionally, we invested $121 million in capital expenditures and bought back approximately $33 million of our common stock during the fourth quarter. We have $125 million remaining under our current authorization.

Depreciation and amortization expense increased by $12.2 million or 20.4% compared to the same quarter of the prior year, primarily as a result of our acquisitions completed earlier in 2015.

Turning to guidance; in our earnings release today, we provided guidance for 2016 revenue, adjusted EBITDA and diluted earnings per share. We expect revenues to be in a range of $6.45 billion to $6.55 billion for 2016. Our expected adjusted EBITDA range for 2016 is $765 million to $795 million. And our expected diluted EPS range is $3.65 to $3.91 per share.

Our 2016 guidance includes a number of assumptions, the most significant of which I will detail, as we look ahead into next year. First, our guidance includes the expected results of our new acquisitions completed in 2015 including Frye Regional Medical Center and Central Carolina Hospital both in North Carolina and St. Francis Hospital in Columbus, Georgia. These acquisitions closed effective January 1, 2016. Guidance also includes our two Providence Hospitals located in Columbia, South Carolina, which we closed effective February 1, 2016. Each of these transactions was funded at December 31, 2015.

In 2016, after taking into account improvements in commercial rates as well as reform-related governmental reimbursement rates, we expect our blended same-hospital net revenue per equivalent admission to be in a range of up 1.5% to 2.5% in 2016. This is below our 2015 growth rate primarily as a result of Medicare's 2% OPPS reimbursement rate cut related to prior-year lab payments and imposed on all hospital service providers.

Moving to volume, we are forecasting same-hospital equivalent admissions to increase by 1.5% to up 2.5% in 2016, continuing to benefit from the recruiting and service line initiatives in our markets. As a headwind, we expect meaningful use to decline in 2016 dropping to $27 million as we complete our full implementation of certified EHR technology.

We expect the final year of meaningful use income to be 2017, when we expect to recognize $7 million in income. We expect depreciation expense to increase by approximately $50 million to $60 million in 2016, most of which relates to our recent acquisitions in 2015 and early 2016. We expect interest expense in 2016 to be $150 million representing an increase of approximately $36 million over 2015.

Additional interest cost is being incurred on our new $500 million, 5.875% notes that were issued in December along with interest expense associated with an assumed capital lease at one of our recent acquisitions. Although we estimate that our 2015 and early 2016 acquisitions will contribute almost $60 million to EBITDA in 2016, combined depreciation and amortization expense and interest expense allocated to these acquisitions is estimated to slightly exceed $100 million. As a result of the depreciation and amortization expense along with the allocated interest expense, we anticipate an approximate $0.60 dilutive effect on our 2016 earnings per share. The impact of this dilution is fully reflected in our 2016 guidance.

Because our recently acquired assets have a combined EBITDA margin of less than 5%, our guidance reflects a dilutive effect of 1.7 percentage points on our consolidated EBIT – our consolidated EBITDA margin in 2016. However, combined with our 2014 acquisitions, we expect our future EBITDA margins will benefit from the integration of these hospitals by 100 basis points in 2017 and by another 100 basis points in 2018. As we have consistently done in the past, we've not included any estimated impact of future share repurchase or acquisitions beyond those specifically mentioned in 2016.

In summary, we are making the right strategic moves, becoming more efficient operators, and using our strong balance sheet to drive shareholder value. Additional information regarding our fourth quarter and full-year results together with our 2016 guidance is available by reviewing our SEC filings including our 10-K, which we will file later today.

With that, I'll turn it over to Bill for some closing remarks.

William F. Carpenter III - Chairman and Chief Executive Officer

Leif, thank you. We are very pleased with our results for the quarter and the full year. Our teams across the organization are performing well. We are delivering superior care to our patients and executing on our acquisition and integration plans while continuing to manage costs. LifePoint's achievements in improving safety, quality, and the patient experience have differentiated our company and continue to fulfill our vision of creating places where patients choose to come for care.

Before we open up the call for questions, I also want to take this opportunity to thank all of LifePoint's talented employees and physicians who work hard every day to help achieve our strategic objectives.

With that, we're now ready to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. Our first question comes from the line of A.J. Rice from UBS. Please proceed with your question.

A.J. Rice - UBS Securities LLC

Thanks. Hi, everybody. Maybe first just – it sounds like in the prepared remarks that you're still saying that the deal activity behind the scenes is pretty robust; you haven't factored that into your guidance – future, additional unannounced acquisitions. But can you maybe just expand a little bit on where you're at in terms of thinking about balance sheet capacity to continue at the current pace, also management ability to continue to take on deals at the current pace? Just give us a little flavor. Is the pipeline indeed that strong? And what about the capacity to continue to bring things on at the pace we're at?

William F. Carpenter III - Chairman and Chief Executive Officer

Great, A.J. Thanks for that. First of all, the acquisitions that we've made over the past several years are really exceptional assets, and they have great potential as we have discussed for 2016 and beyond. The focus on quality improvement and the focus on improving the operations of hospitals and our experience in doing that really has created what, I believe, is an exception pipeline of opportunities for us in the future.

So the acquisition environment, for us, continues to be active and continues to be strong. I'll ask Leif to speak to the balance sheet in a minute. But clearly, we have viewed the balance sheet as an asset of this company, and it is something that we have protected very carefully. And we continue to manage it, recognizing that we have a great deal of capacity in order to use the balance sheet for the best interest of our stockholders.

Now, with regard to our ability to bring acquisitions into the company, I've never felt better about it. Our results have proven that we can bring low-single-digit EBITDA margin hospitals into the company and, over the course of two years or three years, grow them up to low-double-digit margins approaching the company average.

We have put in place, and we did this several years ago before we saw the acquisition opportunities really ramp up for us, an infrastructure here at LifePoint that gives us confidence in our ability to bring these acquisitions effectively and well – and I think positions us for a great deal of future growth. So, Leif, you might want to speak to the balance sheet or add on to anything that I've just said.

Leif M. Murphy - Executive Vice President and Chief Financial Officer

A.J., if we look at our recent acquisitions, including Providence, which closed effective February 1 that was essentially funded pre-12/31, we were at a leverage rate of 3.4 times without including any EBITDA on the denominator for these new transactions.

So if we adjust it for our 2016 expectation of approximately $60 million in new EBITDA from all of these transactions, our pro forma leverage is about 3.3 times. So there is ample capacity to consider additional acquisitions as well as to continue to consider share repurchase strategies.

The only thing I would add to Bill's comment is, operationally, the resources are there. There is expense associated with doing those transactions. And if we look back at 2015, by doing $1.25 billion in new acquired revenue, I think the only variance for us, and we would expect to see it in real strong acquisition years, is on the transaction cost side. So we ran about $4 million over our expected transaction budget just as a function of being able to accelerate that many transactions into the year.

A.J. Rice - UBS Securities LLC

Okay. And maybe just one follow-up. I know you've just given 2016 guidance today, but you did open Pandora's box by saying in 2017 and 2018 you sort of saw from the acquisitions a further 100 basis points of margin improvement.

First of all, I want to make sure that's the entire company you're talking about and not just on those acquisitions, but that's the impact on the entire company. And then just to put some parameters around that further, is it the right way to think about that, that that's what's happening from the sort of maturing of the class, the last two years' classes, but then you've got the core business?

And I'm assuming you'd say, as you think out the next few years, you at least think you'll hold your margin there. And if you think over the next few years in terms of any further acquisitions, at least on an absolute basis, they would be accretive to EBITDA; is that the way to think about those trajectories and points of clarification?

Leif M. Murphy - Executive Vice President and Chief Financial Officer

So a few things there, first and importantly, the 100 basis points relates to our consolidated EBITDA margin. So that's number one. Number two is – I think very important is, that that is holding all things equal. And so that is what, as we execute on our integration plans for these acquisitions, we believe the impact of the acquisitions alone will have on our consolidated margins.

As we get through 2016 and further, we'll give guidance on our overall company results and the impact of other things that will benefit and potentially be headwinds against our earnings results. But the integration of these transactions, which includes the acceleration of the 2014 transactions which continue to do very well and the 2015 transactions including Providence will contribute 100 basis points to 2017 and 100 basis points that will benefit 2018.

A.J. Rice - UBS Securities LLC

Okay. Great. Yeah...

William F. Carpenter III - Chairman and Chief Executive Officer

A.J., let me add one additional thought to this. Strategically, for the company, as we think about adding hospitals that are – the place where people want to come in their markets today and then we bring the resources that we bring to help these hospitals expand and grow, we really are positioning the company for that growth that is represented by the expansion, the benefit to margin that Leif has described.

So strategically, it makes a great deal of sense to us to acquire these hospitals at low-single-digit EBITDA margins and then be in a position to grow them up to achieve the earnings drive that will come from that over the next several years. We're really pleased about our ability to do that, and we just wanted to give you that perspective today.

A.J. Rice - UBS Securities LLC

Okay.

Leif M. Murphy - Executive Vice President and Chief Financial Officer

And there was one other question in there – I want to make sure that I don't miss – about the continued dilution from further acquisitions. And I think the piece that has been difficult is that, if you look back to 2013, we completed about $285 million in acquired revenue, $924 million in 2014, and now $1.25 billion at the beginning of 2016. So that acceleration is what is causing that dilution and specifically that 170 basis points this year.

As we get into the second year and third year of these transactions, they make the turn and then become significantly accretive. And as you just think about the numbers I shared, with $60 million in expected EBITDA versus $100 million in depreciation and allocated interest, there's only $40 million that has to be made up on $1.25 billion of revenue to get them to earnings neutral. And then as which – just the simple math, there is 3 percentage points. And then, as we move forward from there, they become very significantly accretive.

So there is some pain in the first year just as a function of acquiring large fixed asset businesses that are going to have depreciation expense and the interest associated with the debt that incurs for the purchase price, but, as we operate them and integrate them, they quickly become breakeven and then very significantly accretive.

A.J. Rice - UBS Securities LLC

I got it. Okay. Thanks a lot.

Operator

Thank you. Continuing on; our next question comes from the line of Ralph Giacobbe from Citigroup. Please proceed with your question.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Thanks. Good morning. I guess, first, can you give us the payer mix stats from 4Q and maybe versus a year ago?

And then, just on the pricing side; the 5.8% obviously is a strong stat and certainly understand that the flu had some impact, but even excluding that, the numbers are pretty strong. So can you help us, sort of on the mix side, what exactly did you see? What type of procedures? And do you think there is any impact from sort of high deductible, maybe higher ticket items coming through in the fourth quarter?

Leif M. Murphy - Executive Vice President and Chief Financial Officer

Sure thing. As we look at payer mix, on a consolidated basis, fourth quarter 2015, Medicare was 27.7% versus 28.3% fourth quarter 2014. Medicaid is 15.8% versus 13.3% fourth quarter 2014. Our HMO, PPO and other is 54.5% which is down from 58%, again on a consolidated basis. Self-pay 14.4% versus 15.6%. And then other revenue, 2.2% versus 2.3%.

So you can see there some of the movement that reflects the reductions in the self-pay admits and the self-pay ER visits as we continue to see traction from healthcare reform, better uptake into the exchange products, and now, hopefully, as we go into 2016, benefits in at least Louisiana which should expand here in July and forward.

David M. Dill - President & Chief Operating Officer

As it relates to the case mix, Ralph, you saw in our release this morning, on a year-to-date basis, our case mix was up about 4% in the fourth quarter. It was up to 5.8% that Leif disclosed in our prepared comments.

Really two things, and you hit on one of them. Clearly, the mild flu season in the fourth quarter of this year compared to the last year positively impacted case mix. The second item is just the growth in some of our more complex service lines, higher acuity cases, those cases with a case mix north of 3%, we're seeing it in many of our markets. But really, in some of the newer hospitals that have rolled into our same-store results over the course of the last year have seen growth in their case mix, that's now benefiting us. I think that points back, to me the comments that Bill and Leif have both made over time about moving into bigger, faster-growing markets, as we expand those service lines and the benefit that we can bring to these communities.

William F. Carpenter III - Chairman and Chief Executive Officer

Again, this is a strategic directional focus for the company, very intentional as we move into these larger markets with the ability to impact more complex service lines while at the same time making sure that we are investing in our existing markets to expand and grow services.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. All right. That's helpful. And then, just a point of clarification on the 2016 guidance, the adjusted EBITDA, does that consider improvement in the newly acquired? And if so, maybe can you help us where you expect margins to go? Or is that $60 million just sort of the run rate layered in to the underlying assumptions?

William F. Carpenter III - Chairman and Chief Executive Officer

So there is some improvement in there, but it's offset by other investments that we will have to make in those hospitals around lost 340B incentives, having to pay state and local income taxes that weren't paid, offset by certain of the benefits of our early integration plans. So the $60 million number really reflects acquiring things at the first of the year without really seeing benefits in them until we start getting into the fourth quarter and into the 2017 year.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Scott Fidel from Credit Suisse. Please proceed with your question.

Scott Fidel - Credit Suisse Securities (USA) LLC (Broker)

Thanks. Good morning. First question just – I know you mentioned that you're seeing some advances around commercial pricing for 2016. So can you just give us an update on what you're expecting for commercial pricing this year relative to last year? And then maybe some details on specifically what some of those positive drivers are?

Leif M. Murphy - Executive Vice President and Chief Financial Officer

So our commercial pricing has been very consistent with what we have seen in past years. I think a lot of it is a function of the markets that we're in and the strategic positions that we have in, but we have always guided to 4% to 6% on the commercial pricing side and we expect something consistent this year.

Governmental side is a little more challenging this year, because despite a healthy market basket increase, when you look at all of the reform-related cuts in DSH (38:53) and productivity in the market basket, and now this lab adjustment on the OPPS side, it actually comes in a little less than zero.

So there is a decline in the overall Medicare reimbursement. Whereas as we look at 2015, we had about a 50 basis point to a little under 1 percentage point increase in our Medicare pricing. So the headwind is more in that. It's a one-time adjustment that then we should compound in at the normal rates of reimbursement in 2017 and forward.

Scott Fidel - Credit Suisse Securities (USA) LLC (Broker)

Okay. Got it. So on the commercial side, it sounds more like positive, but stable pricing. And then just a second question, just thinking about – any way you can sort of quantify for us, what you're thinking in terms of ACA contribution to EBITDA on an incremental basis for this year, I guess, on the Medicaid side, maybe a little bit on Louisiana, and then sort of thinking about any incremental benefit from the exchanges; if you add those together, what you're thinking in terms of incremental contribution.

William F. Carpenter III - Chairman and Chief Executive Officer

Yeah. We are always hesitant to put expected numbers in as it relates to better uptake into exchange products. Our experience going through enrollment was very positive. The number of completed applications that we had was almost double what we had in past years.

The anecdotal information that came back from our call centers was that receptivity was much higher than it had been in the past. But we've not specifically added anything into our guidance for that experience, and would prefer, instead, to look back and see if there is a measurable impact that comes from that.

At Louisiana, we don't expect to expand until July 1 from an effective perspective. The potential there, if everything goes on schedule, would be that we could see $5 million to $10 million worth of benefit for a full year, not for the back half of the year. And so as we look at the range of estimates there, that would easily be captured inside of that range at the high end of the guidance number.

Scott Fidel - Credit Suisse Securities (USA) LLC (Broker)

Okay, great. Thank you.

Operator

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

Joanna Gajuk - Bank of America Merrill Lynch

Hello. This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So I just want to go back to 2016 guidance here, which calls for an EBITDA growth of 10% but excluding the $60 million that you sort of called out that is build inside on the 2% growth of EBITDA. So the question there is, whether – if we want to look at what the, sort of the same-store margin improvement of growth you assume in 2016, should we also adjust the base rate or rather the contribution from the same assets last year? Or is 2% sort of in the ballpark?

And I guess the question, the basic question is, does this guidance assume margin compression, because when we look at the same-store revenue guidance, which calls for a 3% to 5% and then when you kind of come up with this 2% EBITDA growth, that kind of suggests that there is same-store margin compression. So if you just can walk us through that math (42:31). Thank you.

Leif M. Murphy - Executive Vice President and Chief Financial Officer

Joanna, it's – there is a lot in that question. I'll boil it down to the simple things that we laid out here on the call. We finished the year at $705.7 million in EBITDA. We have a meaningful use decline. That's going to come right out of the run rate there of $23.1 million.

So really, as we think about what is the same-store business growing, it's growing at a base of $705.7 million less that $23.1 million. So the differential there when – we've given you the $60 million would be the same-store contribution, which I think is very positive and reflective of how the business is moving forward.

Joanna Gajuk - Bank of America Merrill Lynch

Great. And also on another point, I know that you gave us -commented around margin – same-store margin this quarter which were up 50 basis points and I guess labor costs down. So some companies do talk about labor cost pressure, wage pressure. So is there any change in your markets, or you still kind of see that that's not really affecting your hospitals?

David M. Dill - President & Chief Operating Officer

Well, we're constantly – even in a tough operating environment, I'm really proud of our operators around the country and the work that they did in a tough volume environment managing labor. There are pressures that we're feeling, but none that we don't think we cannot manage through. And everything that we see coming in 2016 is reflected in the guidance on a same-store basis and in our consolidated numbers that Leif laid out a little bit earlier.

Leif M. Murphy - Executive Vice President and Chief Financial Officer

And I think it's important also, as I shared some of the same-store numbers, the work that's getting done on the field is quite remarkable across the new acquisitions, but also in the core business, and between productivity and then just focus on cost. We've seen our salary, wage and benefit cost improve a 110 basis points on a same-store basis fourth quarter 2014 to fourth quarter 2015, which I think is indicative of what we expect to see going forward.

Joanna Gajuk - Bank of America Merrill Lynch

Great. Thank you. That's all from me. Thank you.

Operator

Thank you. And our next question comes from the line of Gary Taylor from JPMorgan. Please proceed with your question.

Gary P. Taylor - JPMorgan Securities LLC

Hi. Good morning. Maybe just kind of following up on that question, just asking it in a little bit different way, when we look at the EBITDA of $60 million to $90 million, you've got a $23 million headwind, you've got $60 million from the new deals. If we exclude these deals, there's maybe $1.5 billion of acquisition revenue from 2013 to 2015 where presumably there's some good margin growth.

When I work through all of that and I kind of think about let's look at the 55 or so sort of legacy hospitals owned before 2013, it doesn't look like there is much EBITDA growth expectations in those legacy hospitals. So I know that's not the same at same-store, because you've certainly got some deals in the last two years, three years that are now in same-store. But when we kind of think about legacy 55 or so hospitals owned before 2013, what is generally kind of the outlook for EBITDA growth on those assets?

Leif M. Murphy - Executive Vice President and Chief Financial Officer

So, Gary, if I just took to midpoint on our guidance, it's $780 million, and kind of did my walk backwards, from $705.7 million minus the $23.1 million minus the $60 million that we are talking about on the acquisition side, you have something close to $40 million in EBITDA that is growing on a base of around $682 million. So it's better than 5% growth in our core business which really gets back to the rate and volume targets that we've talked about 1.5% to 2.5% on volume and then 1.5% to 2.5% on price.

To the extent that we could have seen a little more strength on the governmental side of pricing, I think we would have seen more strength in the core of that legacy business. So the OPPS number was a little disappointing for us, especially since we could never measure a benefit in our book of business. But nevertheless, it's still reflective of a real strong commitment on the part of growing the legacy hospitals at over 5%.

Gary P. Taylor - JPMorgan Securities LLC

I get to same number. I guess, I'm just thinking maybe there's $1.5 billion of revenue acquired between 2013 and 2015 where margins are presumably growing 200 basis points to 300 basis points, and that kind of gets you to that $40 million. But then that still leave 50 hospitals or 55 hospitals that were owned before 2013, that don't seem to have a lot of EBITDA growth. That's what I was kind of working to, but...

Leif M. Murphy - Executive Vice President and Chief Financial Officer

Yeah. Remember that almost all of this new revenue has been acquired effective 1/1 and would be included in the $60 million. And that's also inclusive of the transactions that closed midyear 2015. So there is a lot of work that has to be done there with that $1.250 billion at less than a 5% margin. So a lot of our efforts, a lot of the growth is going to come out of the integration and the transition of those hospitals.

Gary P. Taylor - JPMorgan Securities LLC

Yeah. My one other question – maybe that's a little more for David, and I think Ralph was asking around this, and I was listening, but I'm not sure I totally got it. So I'm going to ask it a slightly different way and just hoping for a little color. When I look at inpatient surgery growth, for example, in the fourth quarter, same-store down 1% year-over-year, massively better than the down 4.6% through the first nine-months of the year on the same-store.

And then the story is a little different on outpatient surgeries, up a tenth of a point same-store year-to-year in the fourth quarter, but that's not as good as up almost 2% through the first nine months. So I was just wondering, is that because – I think probably Conemaugh has now flipped into same-store. So I don't know if there were some big moving parts that are now in same-store that are skewing those, or if there was some more important color just around sort of a new robust trajectory on inpatient surgeries or it just happened to be a very good quarter?

David M. Dill - President & Chief Operating Officer

Well, I think it was a good quarter for us especially when you frame in terms of how much these statistics were down in the first three quarters versus where we ended up in the fourth quarter. We continue to see a shift from in to out that's there. I think Conemaugh did help that number, but was not the only driver of that number. It's part of the case mix discussion that we had.

As it relates to Ralph's question, we did see higher acuity surgical cases. So we're seeing medical volumes continue to decline or shift from inpatient to outpatient and then higher acuity surgical cases grow, not just in Conemaugh and not just in the new hospitals, but in many of our hospitals.

Why (50:06) you're not seeing it on the outpatient side, I think Leif hit on it in his opening comments around some lower acuity surgeries and statistics, we had some pain volumes, some real low acuity cases that were taken back into some physician practices during the third quarter and fourth quarter, put a little pressure on us in the third quarter and we felt it again in the fourth quarter. Those have very little financial impact to us, but have more of a statistical impact as we – this is where we can't form (50:36) in these outpatient surgical cases.

But higher acuity surgical cases, much stronger in the fourth quarter, really across the board. And whether it's orthopedic cases, general surgery cases, urology cases, very strong. And I expect those to continue.

Gary P. Taylor - JPMorgan Securities LLC

Okay. That is helpful. Thank you.

Operator

Thank you. And our next question comes from the line of Whit Mayo from Robert Baird. Please proceed with your question.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Hey. Thanks. Good morning. David, a couple of quarters ago you guys discussed some physician coverage gaps in a few markets, maybe some new acute capacity that was eating into the service area of one of your newer hospitals. Is there any relevant update on those developments?

David M. Dill - President & Chief Operating Officer

No, it's still there in the market that we talked about, but it's a much, much smaller number. We knew that it would be a temporary headwind for us. We have not completely comp-ed out of it, but it was a very small percentage of the 4.2% decline that we reported this morning, Whit. Outside of that, there is no other real competitive pressures that we see that are impacting volumes other than just the continued movement in the one-day stay headwind that Leif talked about.

The readmission impact that Leif talked about and the hard work that's happening as it relates to all of our care coordination teams, that's real. I think we'll comp out at both of those middle part of 2016, they give us some visibility as we head to the back half of 2016 on the adjusted admission statistics that we gave in our guidance this morning.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Got it. And, Leif, maybe just one random question for you. Obviously leverage is a toxic cocktail today for the equity markets, and I know you don't need to access the credit markets to fund your growth, but presumably you've got your finger on the pulse of what the market is like, and just to know if you had any general color or thoughts as to what the appetite for your paper could be today and just kind of where you see the market and just didn't know if you had any general commentary or thoughts on this specific topic.

Leif M. Murphy - Executive Vice President and Chief Financial Officer

So we – despite having pretty difficult markets out there, I still feel very good about our access to the debt capital markets. It's reflective in the issue that we did at 5.875% notes back really in November that funded in December 4, but continues with reverse inquiries back to the company about whether we'd like to add on to or increase the issuance levels there.

We were very deliberate about putting money out there at the long term at a fixed rate. And I think the strength in the bank markets in particular allows us significant access at floating rate interest rates that'll be significantly below the 5.875% notes.

So part of the dilutive effect is we've allocated interest at the incremental borrowing rate that we brought at 5.875% notes. I think that as we continue to look at 2016, we can bring in transactions or we can bring in share repurchase on the floating rate side with access to the bank markets over the course of 2016.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Andrew Schenker from Morgan Stanley. Please proceed with your question.

Andy Schenker - Morgan Stanley & Co. LLC

Thanks. Good morning. Maybe this follows up on your comments earlier about the higher acuity surgeries you've been seeing. But when we look at labor statistics, employment in your market has continued to improve throughout the last year. I mean, are you seeing that translate into business mix or elective surgeries, or are there perhaps other factors driving some of that higher acuity surgery mix?

Leif M. Murphy - Executive Vice President and Chief Financial Officer

So we track it very closely, Andrew. It is very hard to callout (54:40) an impact. Clearly, we've seen unemployment come down in our markets. We have not seen real job growth as we look in aggregate. But as we look at the specific markets where we've been investing our capital here over the last two years, it's a very different growth profile, and we feel very positively about the demographic growth rates in those communities.

So there is nothing that I would say, as we look at our year-end 2015 results, that would be measurable in terms of the job impact or the impact on commercial mix. But we're optimistic as we improve the growth rate through some of the acquisitions that we're adding to the business that we will be able to demonstrate some of that.

Andy Schenker - Morgan Stanley & Co. LLC

Okay. Thanks. And then, can you discuss actually CapEx guidance for 2016, and then a little more detail on where you're spending that money, which areas are you investing in, particularly around service lines or maybe even geographies as you just hinted at to drive inpatient, outpatient volumes? Thank you.

Leif M. Murphy - Executive Vice President and Chief Financial Officer

So, 2016, our expected spend will go up largely as a function of the increase in the revenue base. Our capital budget as we look at it today is about $425 million. A fair amount of that money is going into the newly acquired hospitals and strategic initiatives that are going into those hospitals to ensure their success over the next two years to five years in achieving the growth targets, in achieving the kind of community support that we want to achieve. We also have significant investments that are going into IT and into return-generating projects that are included in that $425 million.

Andy Schenker - Morgan Stanley & Co. LLC

Okay. Thank you.

Operator

Thank you. And due to time, our final question will come from the line of Matthew Borsch with Goldman Sachs. Please proceed with your question.

Matthew Borsch - Goldman Sachs & Co.

All right. Well, due to time, thank you for picking me, getting me in there. So just as I understand, the higher acuity surgical cases that you saw this quarter, do you – is there anything you can attribute that to other than may be some of the lower acuity stuff moving to the outpatient side over time. Some of it – in other words, you think some of it's seasonality; or conversely, you think some of it might be – some of it elective and therefore reflecting perhaps just sort of better consumer environment, employment, et cetera.

David M. Dill - President & Chief Operating Officer

Well, I don't think you can pinpoint it to one thing, and I think you covered most of what it is. Don't lose sight of the growth of the company, the new hospitals that we have brought into the organization in bigger, faster-growing markets. And that is having an impact. It's not all of the impact, but that is clearly having an impact in some of these higher acuity services for sure. At the end of the year, the consumer-driven squeezed in to the fourth quarter versus the fourth quarter, maybe some things moved around a little bit. I don't think we're any different than anybody else and we experienced that. But it's a combination of just very many things. It's hard to pinpoint one of them.

Matthew Borsch - Goldman Sachs & Co.

Okay.

William F. Carpenter III - Chairman and Chief Executive Officer

But they're very strategic, focused efforts in investments that are being made in service lines and the acquisitions that David mentioned, which should drive that higher acuity business that you're seeing reported here today. So this is very intentional as we go about this.

Matthew Borsch - Goldman Sachs & Co.

No. It's great. Let me just ask you one more, on the payer mix. Is it a little surprising to see it, if I got it right, come down from 58% to 54.5% on the category of commercial just given – l understand some of that's coming because Medicaid is getting bigger, but given the sort of the economic trend direction, you might have expected it to sort of go the other way or at least not decline as much.

William F. Carpenter III - Chairman and Chief Executive Officer

Yeah. I think part of the problem there is it's a consolidated statistic that we report and not a same-store statistic.

Matthew Borsch - Goldman Sachs & Co.

Okay.

William F. Carpenter III - Chairman and Chief Executive Officer

So, in particular, as we add these very significant acquisitions to the revenue base, it has the tendency to move the mix based on a particular community's payer mix.

Matthew Borsch - Goldman Sachs & Co.

Right.

William F. Carpenter III - Chairman and Chief Executive Officer

So I don't see and I'm not concerned about a degradation in payer mix. More to the earlier comments, it's our hope that some job growth inside of our communities lagging the urban markets would give us the opposite effect of growth in the employee base, and as a result, growth in the commercial base.

We're also optimistic on that front around the health insurance exchange and the experience that we had in this enrollment period that would also translate to folks going from an uncompensated base into a commercial insurance product.

Matthew Borsch - Goldman Sachs & Co.

Right. Okay. Thank you.

Operator

Thank you. Mr. Carpenter, I'll return the presentation to you once again for your concluding remarks. Thank you.

William F. Carpenter III - Chairman and Chief Executive Officer

Great. Thank you very much. As you've heard today, 2015 was a record year for LifePoint, and our growth story and future potential is promising and very real. We're differentiating ourselves with our focus on improving quality and safety with our ability to acquire, integrate and improve margins in the right hospitals, with our relentless attention to operating efficiently, and developing high-performing talents. We have been and continue to be committed to these strategies as they are the foundation of our ability to deliver shareholder value and make our communities healthier.

So thank you very much for joining our call today and for your interest in LifePoint Health.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a wonderful weekend.

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