Ladiesand gentlemen, thank you for standing by and welcome to the LifePoint HospitalsThird Quarter 2007 Conference Call. During this presentation, all participantsare in a listen-only mode. Afterwards, we will conduct a question-and-answersession (Operator Instructions). As a reminder, today's conference is beingrecorded on Friday, October 26th, 2007.
It'smy pleasure to turn the conference over to Mr. William Carpenter, President andChief Executive Officer of LifePoint Hospitals.
Thankyou, Pamela, and good morning. I'd like to welcome everyone, especially ourstockholders, and also our employees, physicians and community leaders totoday's call to discuss LifePoint Hospitals’ third quarter 2007 earnings.
Ontoday's call we will be making forward-looking statements based uponmanagement's current expectations. Numerous factors could cause our results todiffer from these expectations. We outline those in our filings with the SEC andencourage you to review these filings. We also ask that you please review thecautionary language under the caption Important Legal Information in our pressrelease.
Thecompany undertakes no obligation to update or make any other forward-lookingstatements whether as a result of new information, future events or otherwise.Also, please visit our website for a link to various information and filings.
Wefiled our 10-Q for the third quarter last night simultaneously, with our pressrelease, consistent with our past practice, this 10-Q provides detailedinformation, which should further assist you in understanding the results forthe quarter ended September 30th, 2007.
Ontoday's call, I'll begin by discussing certain key activities that are going onat the company and then David Dill will provide financial information about thequarter. After that, we'll open up the call for questions.
Werecognize that many of you have back-to-back calls this morning. So, we'll doour best to move things along and to be concise and relevant in our remarks. Weshould be able to do so I think, unless, of course, you prove me wrong.
Letme note that Bill Gracey who is normally here with us, is not here thismorning. Bill had a little outpatient surgery yesterday. Checked in with himthis morning, he's doing great. I'm only disappointed that he doesn't live inone of our LifePoint communities. He does have good insurance but he's doingfine. He'll be here Monday. If there are any questions that you have that needBill, he'll be in the office again next Monday. So let's get on to our quarter.
Really,when you reduce the third quarter to its simplest terms, our results can bedefined by good adjusted admissiongrowth, along with solid expense management, including improved contract laborand a moderation in bad debts. I'm pleased this morning to be able to reportresults which are consistent with the expectations we set out on our lastearnings release conference call.
Theseresults reflect a lot of hard work by our hospital teams and corporate supportpersonnel, as we continue to battle against the issues that face our industrygenerally and our company specifically.
Inaddition, I believe that our results are beginning to reflect in the very earlystages, some of the strategic initiatives that we've been working on and thatwe're beginning to implement. As I have discussed over the past few months,we've been focusing a good bit of our company's efforts on five key areas, manyof which you have heard us speak about on recent calls and at recent investormeetings.
Ourfive ongoing areas of focus are, 1) continuing to drive organic growth; 2)building on our strong heritage of excellent operations to maintain or improveoperating margins at all our hospitals; 3) leveraging our scale to have ourcorporate center add increasing value in supporting our hospitals in areas likepurchasing, revenue cycle and clinical quality; 4) getting back in the M&Agame in a measured way, and 5) continuing to focus on retaining, developing andbuilding our talent.
Theseareas of focus are of course in addition to our historical focus on operationsand expense management. We're currently at varying stages of planneddevelopment and execution across each of these areas. This morning, I wouldlike to highlight a couple of the initiatives that we're pursuing where the executionis a little bit further along.
Withregard to organic growth, organic growth has always been a priority area forus. As we’ve highlighted on numerous occasions, physician recruiting has been abig part of this effort, and we're very pleased with our results. At this pointin the year, we’ve met our goal of 167 recruited physicians as we have alreadysigned 170, of which 96 have started.
Recently,we, like most in the industry, have experienced pressure on volume, but overthe past few quarters, our growth and specifically adjusted admissions growth,has begun to pick up. Some of this is, we think, related to our significantemphasis on this initiative. This year our quarterly same store growth inadjusted admissions has ranged between 1.5% and 2% and was 1.9% in the thirdquarter. This improved performance has been driven in large part by a fewimportant initiatives.
Recently,we focused on diagnostic imaging and outpatient surgery. One thing we've donewas to make a significant group buy, since about this time last year, of 29multi-slice CT scanners. At this point, we’ve deployed 21 of those, 16 of thoseare 64 slice units. Technology that's comparable with hospitals in any setting,urban or rural.
Asa result, we have seen a significant increase in our outpatient CT volume. Outpatient CT revenue is up over 23%, with volumes up 17% in‘07. This has been a very good investment for us and has contributed to ourmargins. We continue to believe that in many of our markets, there remainsconsiderable opportunity to expand the scope of our services and thereby providemore care for our patients closer to home.
Inthe next year, you will see us make a concerted effort to streamline ouroutpatient processes for added patient and physician convenience. And, we'llcontinue to invest in new imaging technologies and advanced surgicalcapabilities.
Inconjunction with this focus on growth, we’ve made a conscious decision toinvest in targeted resources at the corporate office to assist our hospitals inmaximizing market share for existing service lines and adding new lines ofbusiness.
Theseresources include dedicated folks in end-market business development, hospitalmarketing, physician referral development, enhancing surgical and imagingefficiency and service line analytics. On top of these efforts, as we’ve discussedpreviously, we're in the process of developing strategies for key service linesin a number of our local markets.
Initially,we will be focusing on our largest hospitals. The top eight of which representover 40% of our total revenues. So far, we’ve conducted four of these intensivereviews, what I call deep dive reviews, to develop service line strategies.Through the remainder of this year, we'll be developing local market strategiesas a result of our deep dive reviews.
Ourhospital CEOs in these markets will be developing detailed growth plans,designed to enable us to grow our share in these markets, while focusing firston the most profitable services. Following the deep dives, we'll take theknowledge that we gained there and incorporate that into our strategy reviewsat our other hospitals, as each of them develops more detailed growth plans for‘08 and beyond. Again, focusing first on the most profitable service lines.
Inconnection with these strategies, we'll be recruiting key specialists andmaking targeted capital investments. We anticipate for example that these localmarket strategies will lead us to take actions that are designed to growspecialized services, such as cardiovascular, cancer care, including oncology,surgery and GI services, much of which involves cancer and emergency services.
Weexpect these efforts to lead to solid EBITDA growth over the next three years,as our volume in these high margin services ramps up. Throughout the year,we'll continue to share developments on this important topic. With regard toour corporate center, we have also been making some changes here where we havemade some targeted investments in people who are bringing additional supportand expertise to our hospitals, notably in areas like purchasing, revenue cycleand clinical quality.
We'llcontinue to focus our attention and resources in the hospitals, rather than inthe corporate offices. We've been carefully adding people to our corporate teamwho will lead or oversee focused efforts across the hospitals. The goal here isto provide additional expertise in a leveraged way, supporting our hospitalswithout having to duplicate those resources in all our hospitals.
Theresults to date have been extremely positive on this. One key person whom we'veadded is Dr. Lanny Copeland, our Chief Medical Officer. Lanny joined LifePointin August and since then has been focusing on improving core measures and thus,quality, across the company through education of our physicians and staff;strengthening physician relations through development of medical staffleadership; working with our medical staffs to help them better understandMS-DRGs and their impact on the hospitals, as well as serving as a resource forour administrative teams at each of our hospitals.
Ona related note, I'm pleased to report that all of our hospitals received thefull market basket update, based on having satisfied their core measurereporting requirements. In the area of purchasing, we have implemented ourelectronic data warehouse across all hospitals, which will allow our materialmanagers to analyze our data at a level that has never been possible for ourcompany in the past.
Wehave also added resources in the area of pharmacy and lab, where we havealready achieved savings. And where we believe there is significant additionalopportunity yet to be captured. With respect to revenue cycle, we have achievedapproximately $12 million or 75% improvement year-over-year in up-frontcollections with approximately $5 million coming from our map program. We havea number of big hospitals, still scheduled to come on line in the map programand so we anticipate additional improvements here.
Inaddition, our passport program, which is a retrospective check on Medicaid eligibility,has been a big positive for us. With approximately $395 million in claimsreviewed, resulting in actual cash recovered of over $1 million. While ourcorporate center enhancements to date have been extremely positive, we believethere's more opportunity to be captured as we roll out programs like theseacross our hospitals. And of course we'll continue to provide updates on thisand our other strategic initiatives as we move ahead.
Withrespect to the IPPS rule change, as you are aware, on October 1st, CMSimplemented a two year phase-in of Medicare severity weighted DRGs. This newclassification system is designed to more precisely categorize the severity ofillnesses and resource usage for Medicare patients.
Assuch, reimbursement funds will be redistributed from smaller, rural hospitalsto larger, urban facilities. In the final rule, CMS also incorporatedbehavioral offset cuts of 1.2% for fiscal year 2008 and 1.8% for 2009 and 2010.As an industry, we were successful in having those reductions cut in half forthe next two years.
Toprepare for the implementation of MS-DRGs, we've been working on concurrentdocumentation improvement processes in preparation for the implementation ofMS-DRGs.
Wehave a task force in place that has focused on communicating, educating andtraining employees affected by the change. We've taken precautions to ensuresystem readiness and accuracy. Ongoing education and support for our employeesand physicians is occurring. And we're confident that our initialimplementation efforts have been thorough and will lead to a successfultransition to the new system.
Davidwill provide information about the financial impact of the inpatient rule afterhe discusses the financial results of the third quarter, which I will ask himto do at this time.
Thanks,Bill. It's been a busy quarter here at LifePoint. During my first 90 days, I'vespent time in approximately 12 of our hospitals, which has been very valuableas I continue to learn both about the company and hospital industry.
Inaddition, I've spent time with many of the corporate departments here in Nashville to gain a better and deeper understanding of eachof our key important processes. It is my pleasure to report our results for thequarter.
Withrespect to our results for the quarter, the same facility results in continuingoperations results are the same due to us now operating the two hospitalsacquired from HCA for a full 12 months. I would like to communicate our resultstoday in the following manner.
First,consolidated financial results; second, volume; third, revenue; fourth, expensemanagement; fifth, capital spending and cash flow and finally, changes inaccounting and government reimbursement.
First,consolidated financial results. For the third quarter of 2007, revenues from continuingoperations were $656.2 million, up 4.6% from $627.3 million for the same perioda year ago.
Earningsbefore interest, taxes, depreciation, and amortization were $108.8 million forthe quarter compared to $115.5 million from the prior year period and therelated margins were 16.6%, compared to 18.4% from the third quarter of 2006.
Incomefrom continuing operations for the quarter were $31.6 million, compared to $34million for the same period a year ago or a decrease of 6.9%. Fully diluted EPSfrom continuing operations was $0.55 per share in the third quarter of 2007,compared to $0.60 a year ago or an 8.3% decrease.
Forthe first nine months of 2007, revenues from continuing operations were$1,971.7 million, up 11.5%, from $1,768.1 million for the same period a yearago.
Earningsbefore interest, taxes depreciation and amortization were $336.5 million forthe first nine months of '07 compared to $330.4 million for the same period ayear ago and the related margins were 17.1%, compared to 18.7% in 2006.
Incomefrom continuing operations for the first nine months was $94.9 million,compared to $106.4 million for the same period a year ago, or a decrease of10.8%. And finally, fully diluted EPS from continuing operations was $1.66 pershare, for the first nine months of '07 compared to $1.89 a year ago or 12.2%decrease.
Iwould like to move to volume. Admissions from continuing operations were down0.3% for the third quarter. However, adjusted admissions increased byapproximately 1.9% as a result of strong outpatient gross revenue growth of11.8%.
Therewere volume increases in outpatient imaging, lab, outpatient surgeries, and ERvisits. During the quarter, our self-pay admissions were down 7% compared tothe prior year, however, our self-pay adjusted admissions were up 6% due to a13% outpatient self-pay revenue growth.
Wesaw total surgeries decline by 0.8% for the quarter. Inpatient surgeries weredown 3.2% for the quarter; outpatient surgeries increased by 0.2%. ER visitsincreased by 3.6% during the quarter.
Third,revenue. As mentioned earlier, revenues increased 4.6% for the quarter this isbeing driven by adjusted admission volume growth of 1.9% and an increase in ourrevenue per adjusted admission of 2.7%.
Netrevenue per adjusted admission increased approximately $180 to $6,757 duringthe quarter. This 2.7% increase in net revenue per adjusted admission was negativelyimpacted by approximately $2 million of net revenue declines related to lowerprior year contractuals in 2007 and a re-class between bad debt and revenue ofapproximately $2.4 million related to our Lake Havasu ASC that I will discusswhen I review our bad debt expense for the quarter.
Theseadjustments impacted net revenue per adjusted admission by 70 basis points foran adjusted growth of 3.4%. The revenue per adjusted admission growth slowed inthe quarter, as a result of the outpatient adjustment factor growth of 2%,slower year-over-year growth in self-pay revenues and a decline in inpatientsurgery volumes.
Self-payrevenues for the quarter were approximately $97.8 million, and represent a 4.4%increase over the prior year amount and a 1.9% increase over the previousquarter.
Asa reminder, this does not include any amounts related to co-pays anddeductibles as these amounts are reflected in our insured revenues. For thequarter, our self-pay revenues remained at just below 15% of our revenue.
Theday sales outstanding have increased to approximately 44 days at the end of thequarter and have increased about 2 days, since the end of the second quarter.We typically see increases in our DSOs from the second quarter to the thirdquarter and this year was no exception.
Ourallowance as a percent of gross AR has increased from approximately 50% at theend of the year to 59% at the end of the third quarter. This is being drivenprimarily from a slowdown in our write-offs during the period. I continue tofeel comfortable with the consistency in the application of our policies toestimate our reserves and the allowances being applied to those revenues.
Four,expense management. Salaries, wages and benefits as a percent of net revenuecame in at 39.6%, which was essentially flat versus the prior year. During thequarter, we did see improvement in contract labor. Same store contract laborwas down approximately $500,000 from the same quarter a year ago and down$600,000 from the second quarter.
Wecontinue to see improvements in our man-hours per adjusted admission with adecline of 1.3% from the prior year. However, we did see an offset to thisproductivity improvement. Our average hourly rate increased 5% versus the prioryear. This is a result of adjusting our wage rates to stay competitive and anincrease in the number of employed physicians in our markets.
Suppliesas a percent of net revenue improved 50 basis points to 13.5% versus prior yearof 14%. We saw improvement in our pharmacy cost combined with lower surgeryrelated cost due to the inpatient surgery volume being down.
Otheroperating expenses increased 100 basis points to 18.3% of net revenue. Wecontinue to see supply and demand pressures on professional fees, particularlyrelated to anesthesiology services, hospitalists, ER physicians and ER callpay.
Baddebt expense for the quarter was $78.7 million compared to $67.8 million forthe same period a year ago. As a percent of revenue, bad debt expense increased120 basis points from the prior year, but decreased approximately 40 basispoints from the second quarter.
Asdiscussed earlier, we had a $2.4 million re-class from bad debt expense tocontractual adjustments related to the Lake Havasu ASC. That re-class wasnecessary as a result of the final receipt of our provider numbers and afterthe provider numbers were received we went back and looked at how things hadbeen recorded for the previous nine months and made the re-class during thisquarter.
Absentthis re-class, our bad debt expense would have been 12.4% of net revenue, ourcharity care for the quarter represented 0.8% of gross revenue or 1.8% of netrevenues. For the quarter, our bad debt expense and charity care excluding the LakeHavasu ASC, approximated 13.8% of our revenues or $90.5 million.
Asa result, we have provided approximately 92.5% of our self-pay revenues and ifyou adjust for the Lake Havasu re-class, the amount was approximately 95%. Ofall the controllable expense items, our operators did an excellent job duringthe quarter and I want to thank them for their efforts.
Fifth,capital spending and cash flow. Our capital spending for the quarter was $38.5million. For the first nine months of 2007, our spending has been $11.1 millionand represents approximately 5.6% of our revenues for the year.
Basedon our spending to date, combined with projects we plan to begin this year, weare now expecting to spend at or slightly below the low end of our range of ourpreviously communicated guidance between $180 and $200 million.
Ourcash flow from continuing operations for the quarter was $23.3 million,compared to $61.2 million for the same period a year ago. This decline inoperating cash flow is a result of approximately $40 million of additionalinterest and tax payments paid during the quarter above our normal expectedamounts. We expect to see these amounts normalize during the fourth quarter.
Asof September 30th, we had total debt outstanding of approximately $1.517billion and cash available on the balance sheet on $48.5 million.
Andfinally, the change in accounting and government reimbursement, there are twoitems I would like to share with you at this time that will impact our resultsin 2008. First, as many of you are aware, a current proposed accounting change,we increase our reported interest expense in two outstanding convertible debtinstruments.
Currently,we estimate the range of additional non-cash interest expense that we would berequired to reflect in our results of operations for 2008 under the currentproposal to be $10 to $15 million net of income taxes.
Thiswill impact GAAP fully diluted EPS by approximately $0.17 to $0.25 per share. Theultimate impact if implemented is highly dependent upon the fair value calculationof the instruments at the time those instruments were issued.
Weare currently working on valuing these instruments and as we prepared toimplement the new accounting standard. The company however, will continue topay the lower cash coupon amount so there will be no cash flow impact from thischange. The proposed accounting standard would also require us to restate allprior periods reported to reflect the change.
Second,as Bill alluded to in his prepared comments, effective October 1st of 2007, thenew Medicare inpatient rates and changes went into effect. As a reminder,Medicare inpatient revenue represents between 20% and 25% of our consolidatedrevenues. Based on our current analysis, the market basket increase ofapproximately 3.3% maybe mostly or entirely offset by the impact of MS-DRGs,the behavioral offset and wage index changes.
Insummary, the quarter developed as we had expected. Today we reconfirm ourfourth quarter guidance of EBITDA in the range of $109 to $114 million andfully diluted EPS in the range of $0.55 to $0.60 per share.
Withthat, let me turn the call back over to Bill.
Thankyou, David and let me thank everyone at LifePoint for the way you've ralliedthis quarter, stayed focused on what we need to do and on the important workthat we have left to do.
Weappreciate how you've responded so well to the agenda that we set out for thecompany in the spirit of cooperation and focus that we're collectively bringingto this business. I'm also grateful to our shareholders for your continuedsupport and for your interest in our company and its future.
Istrongly believe that by staying focused on our strategic initiatives, we willachieve long-term success. The energy level and determination at LifePoint tofulfill our mission of making communities healthier and to improved performancehas never been stronger.
Asyou know, industry headwinds are also stronger than ever. We've got a greatteam here. We understand the issues. And we're executing strategies to improveperformance.
Atthis time, we are ready to take questions.
(OperatorInstructions) Our first question comes from the line of John Ransom of RaymondJames & Associates.
John Ransom - Raymond James &Associates
Hi,Good morning. Nice bounce back from the second quarter. The question I had wasif you looked at year-over-year adjusted volumes and you strip out the uninsured,can you give us an idea of what the volume trend was with patients who haveinsurance cards, not the total number, but the kind of paid patient number forlack of a better term?
Theinpatient admission decline 0.3%, and we did talk about our self-pay admissionsdown about 7%. That only represents about a 150 or so admissions during thequarter. So, if you carve that, it has a very small impact on the overallnumber. It doesn’t even probably get us back to flat but it has a little bit ofan impact.
John Ransom - Raymond James &Associates
Sobase is almost flat but what about adjusted admissions, if you carved out theuninsured from adjusted admissions. Do you have an idea of the volume trendthere?
Itwill go up a little bit but not much.
John Ransom - Raymond James &Associates
Okay.And then secondly, I'm going to torture Bill with his favorite topic. I knowyou have hired a new CEO up in Danville. Is there anything worth mentioning up there interms of what you're looking for?
Andis there any been any progress made that you can tell? I know you haven’tstarted yet but you could you update on us on that situation?
Yeswe really are seeing improvement at Danville. Incremental improvement. We've got the right guycoming there now; he'll start on Monday. We've got a new CFO we have got a newCNO. So we've got a team.
That'swhat we needed there, John we need leadership there in Danville in order to be able to execute the strategiesthat we have in place there. We've done an intensive review of all the systemsat Danville.
We'vehad teams from our corporate office working very, very closely with the folksin Danville. So, we're making great progress as far as thatgoes. We're seeing our doctors becoming more involved with us in a proactiveway, in a positive way, and I'm very, very pleased about that and I appreciatethat. So, I feel like we're on the right trend in Danville. I look forward to Gerald getting there. I lookforward to being there again, very, very soon, and supporting him.
Oneother thing I guess of some note, recently the Joint Commission has reconfirmedour full accreditation there. So, we got the official letter within the pastcouple of weeks. We were of course expecting that but it's always good to getthat in-hand.
John Ransom - Raymond James &Associates
Sopositive things going on at Danville.
John Ransom - Raymond James &Associates
IfCongress does repeal the whole hospital exemption as part of this year’sMedicare Bill. Is there a plan B for the Havasu market and does that concernyou at all?
We'llhave to wait and see the way any bill comes through, of course. With respect tograndfathering, we'll make our plan B based on that.
Wewould expect there to be some grandfathering with respect to that. Somequestions still exist with respect to future expansion capacity in that regard.So we'll continue to monitor it closely and we'll of course have plan B readyto go when and if there's a change.
Ournext question comes from the line of Darren Lehrich of Deutsche Bank.
Darren Lehrich - Deutsche Bank
Goodmorning, everyone. Few things here. I did want to talk a little bit more aboutthe deep dive that you mentioned, Bill. You talked about some of the higher endservices that you're evaluating but can you maybe just give us a sense for whatare the key issues that you're seeing coming out of this process and I thinkyou committed to doing six by the end of the year with your Board, so you'vedone four.
Howdo you feel about getting through the process? And then the corollary to thisquestion really for David is just thinking about CapEx for next year, how mightCapEx be impacted by some of these things? Thanks.
Yesabsolutely, Darren. We have done four of the deep dives so far. We will doseven by the end of the year. We're absolutely on track to do that. We'reabsolutely committed to making sure that those get done so that we see theimpact from those in the next couple years.
Thisend market development work that we're doing is important in order to assistindividual hospital management teams with service line expansion as theyevaluate new programs and development there. I talked about surgical services.We're working very, very hard to assist surgery departments in becoming moreefficient and responsive to patients and physicians’ needs with respect toquality and throughput, providing assistance to the emergency departments.
We'reseeing returns there. We'll be assisting hospital emergency departments withpatient wait times and throughput, as well. All of these things are patient satisfiersand physician satisfiers too. We've got to enhance the image of our hospitals.
We'reseeing that. And so we're working hard to make sure that that comes through.That's going to be the result of improved quality. We know that. We just areconstantly working on the quality aspects and Lanny Copeland is helping us,again very much in that regard.
Withrespect to capital projects, now I’ll turn over to David in just a second. Weare committed to expediting our corporate review of capital projects that comeout of the deep dives in order to more rapidly bring those new services to ourpatients and earnings for our shareholders.
Oneother thing I guess that's important, I would like to make sure that I don'tforget to mention, is our commitment to physician referral relationships - it'smore of a physician sales program. I don't really like to use that term, butthat's what it is, a program that we're establishing at every hospital to makesure that we are responsive to what we're hearing from our physicians andworking very closely with them.
Asit relates to the comments that we made earlier, even though the spending maycome in at below the low end of that range, that's not indicative of us cuttingback on any projects. In fact, we're pushing ahead.
It'sonly indicative of the amount of cash that we will spend this year, so anythingthat we don't spend this year would be built into our '08 cash flow numbers, soit's not a reduction of those projects. It's just more timing.
Darren Lehrich - Deutsche Bank
Thinkingabout CapEx for '08, if the range was going to be close to $200 million thisyear. Would that suggest that we should be higher than $200 million next year,just given all of these things coming out of this process?
Iknow you're not giving guidance at this point, but is that a fair assumption?
We'llcontinue to invest back in our local markets. We won't be giving any guidance.We'll be looking at those as we go through the budgeting process.
Darren Lehrich - Deutsche Bank
Okay.And then just as far as the people side of things, Bill, just as it relates tothese things that you're working on, where are you, what stage are you inbuilding out all the teams necessary to accomplish what you're trying to do atthe corporate office?
Theyare basically there.
Darren Lehrich - Deutsche Bank
Thereare a couple of positions that we continue to consider, but basically ourgrowth team is in place and working very closely with Joni Koford, in thatregard. We have the dedicated people that I talked about with respect to our corporatecenter with respect to lab and pharmacy and those other physicians and so weare on the ground and moving ahead.
WhenI say those people are at the corporate office, they're employed at thecorporate office. Those people are spending 99% of their time at the hospitalsand we're seeing the returns already with respect to the feedback that I'mgetting from the hospitals about the assistance that they're providing to eachone of the hospitals.
Darren Lehrich - Deutsche Bank
Great.And then maybe one thing I could just clarify and I'll jump off here. As far asthe revenue per adjusted admission numbers, I just want to make sure I'mthinking about this clearly, David. You mentioned $2 million was related toprior period contractuals and that was a negative and if I think about thisre-class, basically the two sort of net out on the EPS line, if I'm thinkingabout it correctly.
But,I want to make sure I know what that $2 million was. I think I understand there-class part of it.
Let'sbreak those down. On the Havasu re-class, there were items during the firstnine or twelve months of operating net as we were waiting on provider numbers,where we had recorded some reserves against those revenues down in bad debt. Aswe received those provider numbers we re-classed those out of bad debt. So baddebt expense came down when we did that.
Weput in offsetting debit up in revenue. So revenue came down as well. Therewasn't any effect on the income statement. You combine that with a change inthe prior year contractuals of about $2 million, you get a total impact ofabout $4.4 million of revenue when you look at the growth relative to the thirdquarter of '06. And that's how you get from the $2.7 million to the 3.4% on anadjusted basis.
Darren Lehrich - Deutsche Bank
Okay.And then just in terms of reconciling the bad debt ratio, what is a goodgo-forward at this point? Are you going to give us any thoughts about fourthquarter on that one?
Well,you know, our guidance that we gave you back in June was 12% to 13%. Lastquarter we were at 12.4%; on the face of our income statement this quarter it's12%. I thought it was important to share with you the Havasu re-class thatwon't be going forward. Had that not been there, we would have been at aboutthe same level in the third quarter that we were in the second. And certainlyright in the midpoint of the range for guidance.
Continuingon, our next question comes from the line of Ken Weakley of Credit Suisse.
Ken Weakley - Credit Suisse
Thanksand good morning everyone. I wanted to ask about the profitability of theMedicare business. Based on what you said, on the one hand your market basket a3.3% and you got the offsets on the three things you mentioned, MS-DRG,behavioral adjustments and wage.
Solooks like you’re basically a net zero for the next two years. So I guess thequestion is how are you going to manage your cost per case on the Medicare sidegiven that you effectively have zero percent pricing for two years?
IfI assume an average profitability on your Medicare side, commensurate with whatare you do on the company haul that would wipe off at least half of the profitmargins. I'm trying to think of what's going to happen or how you're going tomanage this process because from it’s my point of view it looks like it's a bignegative.
Areyou talking at this point just about the inpatient business? Because we willreceive [inaudible]
Ken Weakley - Credit Suisse
Yes,just the inpatient.
Well,on our other Medicare business we'll probably see a 2% or 3% increase in '08. Marketbasket type stuff.
Ken Weakley - Credit Suisse
Iunderstand. I was hoping just to get some color on just the inpatient side.Inpatient Medicare.
Ijust wanted to make sure we were clear on inpatient versus outpatient. We'llfocus in on inpatient. I would just reiterate similar to what Bill had said inprevious calls. One of the needs we need to focus on the five key initiativesis that those pressures do occur in third-party reimbursement we going to haveto do a better job of managing the expense side.
Hetalked about the operational assessments that we're doing and the transitionalservices division and the focus that they will be bringing to the under-performinghospitals in terms of just an increased operational focus. He talked about thethings we're doing on the value added corporate center in terms of looking atour costs in different ways, in new ways, in terms of having more dataavailable, utilizing technology.
Wewill become more standardized as an example to hopefully lower our cost percase, particularly in areas from a technology perspective. So we will justcontinue to focus on the five themes that we have in our strategic plan andthat should hopefully help us mitigate some of this margin erosion over thenext couple of years.
Ken Weakley - Credit Suisse
Iwas going to ask, is the average profitability of an inpatient Medicare patientdramatically different than the corporate-wide average? And secondly, I hadasked about the cost per case, if you know that number, could you give us asense of what the cost per case increases are?
We'renot going to disclose any profitability lines. It's too difficult as youallocate certain fixed costs to different product lines. Clearly, if you hadover the years with revenue increases on the inpatient side going up in theyear where we're not going to do an increase it will put pressure on the marginline in ‘08.
Ken Weakley - Credit Suisse
Lastquarter you mentioned malpractice. I don't know if you discussed it in thisquarter. Can you give us a sense of what the dynamics are there for your businessin that regard?
Wecan. Medical malpractice costs have historically run in about 1% of revenue,maybe a little bit more than that. Last quarter, the number was about 1.7% or1.8% of revenue. We did expect that to come in during the third quarter.
Primarilyas a result of some significant isolated cases that some reserves were eithersettled or reserves were required to be increased on. We did see that come in.This quarter I think the number was about 1.3% or 1.4%. Not all the way down toour historical levels but off what we saw in the second quarter.
Ijust want to go back, just very briefly with respect to the reimbursementenvironment. We're also continuing to work very hard in our lobbying efforts onbehalf of rural hospitals. I don't know what's going to happen in Congresstoward the end of the year. There is a lot of uncertainty there currently. ButI think it is likely that Congress will do a wrap up bill at the end of theyear and it is possible.
We'recertainly going to be working hard for some rural healthcare provisions thatwould be positive for us at that time. So in any event, we continue to be veryactive in that regard, you know, working operationally, as well aslegislatively, in order to offset the impact of the new rules.
Ken Weakley - Credit Suisse
Wouldthe provisions relate directly to the issues you've discussed on the MS-DRGside or would it be something just about getting better pricing or something?
Whilewe're lobbying with regard to that, we continue to make disparity a primarygoal on behalf of rural hospitals. So there's opportunities, whether or notit's directly related to the IPPS rule, there are opportunities in otherregards. Bill, do have you anything else to add to that?
Yes.One of the other things too is the outlier pool. I think MedPAC is looking to seenow whether the outlier pool is maybe set too high with the implementation ofthe MS-DRGs and we get very little in outlier payments. So if we could get thatkind of redistributed over to the base rates that would be a pick up for us.
Ken Weakley - Credit Suisse
Outliershaven't always been the best strategy to generate pricing from what I've seen,but I understand. Thanks.
Don'tknow how many questions are still in the queue. I do know there's pressure fromanother call behind this one. So we may limit it to one question going forwardper caller and we'll try to be succinct in our answers as well so that we cancover as many as we can.
Certainly.Ladies and gentlemen, we'll be continuing on with our question-and-answersession. Please note, you are allowed one question. Therefore, our nextquestion comes from the line of Tom Gallucci of Merrill Lynch.
Tom Gallucci - Merrill Lynch
Goodmorning. Thank you. On the topic of physician recruiting, one, I was wonderingif you could give a little bit more color on the mix there in terms ofspecialists and what not. And then in number two, on inpatient admission trends,I guess the theory has been that new docs build their outpatient practicesfirst and you’ve certainly seen growth there.
ButI guess we're still waiting to see improved trend lines on the inpatient side.Do you have any visibility or color that you can add on that sort of concept aswe look forward?
It'sstill consistent with respect to the split between specialists and primary caredoctors, Tom. We're still targeting and are recruiting about 60% on thespecialist side and about 40% on the primary care side. We continue to focus on,as I said in my earlier comments, on increasing the outpatient high marginbusiness and so that's consistent with our strategy.
Butyou're right. It does ramp up first in the operation side and then we'll see itstart to roll into the inpatient side and particularly some of these specialitycases with respect to our efforts that we're making on surgical services. Sodon't know exactly, but see it coming in the next few quarters.
Continuingon, our next question comes from the line of Christine Arnold of MorganStanley.
ChristineArnold - Morgan Stanley
Goodmorning. Thanks for taking my question. Revenue per equivalent admission lookslike it was up 3.4% excluding these re-class adjustments. Is that a good runrate going forward or should we anticipate, because next quarter IPPS isimplemented, that this goes kind of sub-3% and what are you thinking there as ago forward?
Ithink this should be a pretty good number going forward. If there's someuncertainty, obviously in this first quarter of implementing these MS-DRGs, sothere may be a little bit of noise in the fourth quarter as we go through thatthat should normalize itself as we head into 2008.
Absentany changes on that, I expect it's a pretty good run rate. It was a big compthis quarter as we comped out of 2006. And just from a net revenue per adjustedadmission of 6700, as you know, a lot of that is heavily dependent uponimpatient and outpatient mix. So if one changes over the other could impactthat number.
Ournext question comes from the line of Whit Mayo of Stephens Inc.
Whit Mayo - Stephens Inc.
Thanks,good morning. Just any color you can provide a little bit more on the capitalprojects; what's changed between January and now that's either delayed yourtabled, some of those spending projects.
Andjust more specifically, is this a function of the work you're doing in the deepdive and just any comments there would be helpful?
No,really no change. With respect to capital projects, it's only about timing. Weare pushing full speed ahead as far as getting projects that we think are goodprojects approved and getting them into the process.
SoI think, as far as that goes, it's simply about timing. One thing that we havedone is we have met sooner, following the deep dives, in order to make surethat we get approvals sooner with respect to projects that come out of those,because we do think there is great potential in those. So if anything, we'vesort of accelerated our processes and I think it's just with respect to timingof this spend.
Thereare a couple of big projects in a couple of hospitals that our operators aren’tcompletely sure on how much or how big the project needs to be as far as scopegoes so it's really isolated in just a handful of projects.
Continuingon, our next question comes from the line of Mr. Adam Feinstein of LehmanBrothers.
Adam Feinstein - Lehman Brothers
Justback to the bad debt, you did a great job of managing through it this quarter.Obviously it moves around. Just as we think about it your un-insuredreceivables on the balance sheet started the year at 62.9%, looks like it's upto 69%, so a big increase. I know some of that was reflected in the secondquarter in terms of the increase in the bad debt expense and I know the reservehas gone up on the balance sheet, maybe because of that.
Butjust seeing that, almost a 600 basis point increase in your uninsuredreceivables mix there, just thinking about the bad debt going forward, maybejust any additional comments and just David, I know you're still going throughall of the hospitals but certainly, just as you thing about the accounting forthe bad debt, just any updated thoughts in light of the trend that I justhighlighted? Thank you.
It'sa good question. A couple things I will point out. If you look on the cash flowstatement, our cash flow from operations were down considerably. If you look atthe bottom of the cash flow statement, you’ll see that our tax payments wereup.
Taxpayments were up because of a slowdown in the write-offs that have happened.Even though we're reserving for those to the income statement, the allowance onthe balance sheet has increased, as you pointed out, up substantially from 12/31to September the 30th. What that is a result of is you're paying taxes on thatrevenue until you get those written off. In the fourth quarter of each year wego through a pretty extensive write-off process.
Nowgoing back to your question, specifically if you look at that increase of 600,700 basis points, all of that is reserved, I’ll share with you our number. Ourallowance that we have as a percent of self-pay net AR was about 85% at the endof the fourth quarter of last year. That's increased now to about 89% at theend of the third quarter.
So,even though that increase is there, what that says is our reserves have gone upat a quicker rate. We have more self-pay net AR covered today through ourallowances than we had at the end of last year.
SoI feel extremely comfortable with all of our policies, the application of thosepolicies and the consistency of the policies over the first 90 or 100 dayshere.
Continuingon, our next question comes from the line of Matthew Borsch of Goldman Sachs.
Shelley Gnall - Goldman Sachs
Thisis Shelley Gnall in for Matt Borsch. I would like to know, could you talk alittle bit about the drivers, what contributed to the reduction in contractlabor this quarter?
Justmanagement and management. This is something that we saw as we got toward theend of the second quarter. Most of our contract labor is spent out in ourWestern markets where we have significant volume growth.
Wehave another chunk of our contract labor that's spent across various of ourother markets. As volumes slowed down in the month of June, as we saw it, ouroperators began to make changes in the utilization of contract labor. Thoseweren't reflected in the second quarter, because the changes really didn'thappen until the end of the second quarter, first of the third quarter.
Itis hard work but it is managing each of these dollars at the hospital level andthat's where it comes from, matching up productivity and volume. I wish I couldsay it was anything other than management but that's what it is.
I'mreally pleased about the contract labor result this quarter. This is the firsttime in recent memory that we have reported year-over-year reduction incontract labor. That's significant. We've had sequential quarter-over-quarterreductions as we've been doing a good job of working on it, but year-over-yearreduction in contract labor I think is a real testament to how hard ouroperators have worked on that.
I'mpleased about that. We also have a task force in place specifically focused oncontract labor spending and the purpose of that is to make sure that wecontinue to see that play out over the course of the next several quarters butthanks to all of them for the hard work they've done on that.
Wenow have a question from the line of Erik Chiprich of BMO Capital Markets.
Erik Chiprich - BMO Capital Markets
Goodmorning. Thanks for taking the call. You had mentioned M&A activity earlierin your remarks. I was curious if you could just expand on your plans whatyou’ve seen in the pipeline and if it’s internal or external forces that arekeeping you on the sidelines right now. Thanks.
Well,the pipeline is, I wouldn't say robust at the moment, but there are a number ofdeals we're looking at, there are a number of deals we've looked at and franklyhave decided not to pursue. We are being very true to our strategy of notpaying too much for any particular acquisition and making sure that it's onethat will add incremental EBITDA to the company as we go forward.
Sothere are a couple of opportunities that frankly I'm very encouraged about andI have been out, personally, on these visits and look forward to that as we gofurther. We may see more deals. One thing that I believe may be the case, Erik,is that there may be some deals that are being held out there as the creditmarkets have been tight and that as the credit markets ease, we may see alittle bit of a higher influx of deals. We just want to make sure that folkshave the ability to borrow in order to buy their assets. So I hope that'shelpful.
Andcontinuing on, our next question comes from the line of Gary Lieberman ofStanford Group.
Gary Lieberman - Stanford Group
Goodmorning. Thanks. I was hoping you could discuss a little bit more the commentsyou made about the increase in the outpatient charges and I guess the impact ithad on the self-pay adjusted admissions. Could you first talk about what kindof discounts are you offering to the self-pay outpatient patients?
Well,that varies from market to market. Each of our facilities have their owncharity policies and discount policies for uninsured. We do have some stateswhere that is mandated by federal law, like Tennessee, but that does vary from market to market.
Ithink you asked the question in terms of the mix between inpatient andoutpatient, we did see an overall 12%, 13% increase in our overall outpatientrevenues, even though our inpatient revenues did decline related to ouradmission decline.
Continuingon, our next question comings from Matthew Ripperger of Citigroup.
Matthew Ripperger - Citigroup
Hi.Thanks very much. You commented that you've had good success with rolling outthe map programs to some of the facilities. I just wanted to see if you couldgive a sense of how many facilities had you rolled that out to and what thepotential opportunity is as you rolled out to the broader portfolios goingforward?
Sure.We currently have 38 facilities, I think, that are on the map program. We haveanother four or five who are on similar programs with a different vendor. Ithink we have about five or six facilities in the queue to hopefully start bythe end of the year.
Ithink Bill shared a number of over $5 million year-to-date on net recoveries,several of those facilities remaining our larger hospitals. So, we shouldcontinue to see our map collections continue to increase.
Beingtrue to our plan of getting done this morning and giving people time to get totheir next call, let's take a couple more calls and then wrap up.
Ournext question, therefore, comes from the line of Bill Bonello of Wachovia.
Bill Bonello - Wachovia
Thanks.I'm just curious whether the changes to the Medicare inpatient payment systemimpact the method or amount that you'll be paid by any of your other payers?
Well,Bill, it's possible; at this point, not. It's possible that other payers maytake the approach that Medicare has taken. We've seen that in other cases inthe past, but at this point, we don't see that being significant.
I'mgoing to ask Bill Hoffman, our Senior V.P. for Government Programs to chime inon that, however.
Medicarewas very, very specific that MS-DRGs only related to Medicare patients and theydon't have like newborns or they don’t have maternity. We may see other payerspick it up. I don't know if we have at this point.
Ourlast question will therefore come from the line of Gary Taylor of Banc ofAmerica.
Gary Taylor - Banc of America
Justquickly, I don't think we talked much about supply expense this quarter. Itlooked like a great result. If my model is right, I think this is the firsttime in the history of the company it was down sequentially on a dollar basisinto the third quarter. I think that's also true on an adjusted patient daybasis. So, obviously you had some good results on the supply side. Can you justshare what happened this quarter and what success we should be thinking abouton a go-forward basis on supply costs?
The13.5%, it was a good quarter, it was a good result for us. As we talked aboutearlier in our communication, good management in some of the line items, butthe biggest chunk relates to the over 3% drop in inpatient surgeries that weexperienced on an absolute dollar amount, that's one of the big drivers of why thenumber came down.
Asyou think forward, I think, in the 13.5% to 14% range is a number to thinkabout as we head into 2008.
Wecan take one more.
Onthat note, our next question is from Sheryl Skolnick of CRT Capital Group.
Sheryl Skolnick - CRT Capital Group
Iwould like dovetail back a little bit about the MS-DRGs and let's put this insome sort of context.
Firstof all, I gather what you're saying is that there is some certainty withrespect to the implementation and the accuracy, probably not just on your end,but also at the fiscal intermediate end.
So,the question that revolves not only what percentage of your revenue would beaffected by this, but also what effect might it have on the timing of cash flowreceipt, might we not see a delay in the fourth quarter?
Andputting that in the context of when you'll be giving 2008 guidance, how muchtime do you need under the MS-DRG system in order to have good visibility onwhat your 2008 might look like given the pressures on top line, which arecertainly not helped by the ongoing normal pressures of your costs?
Iwant to start with the cash flow question first. Going back to our cash flowstatement, cash flow was down. We talked about the reasons for that.
Inaddition, cash built up a little bit on the balance sheet we had $48.5 millionof cash sitting there. We elected throughout the quarter as we developed cashflow knowing that we had an extra interest payment that needed to be made. Weknew that coming out of the second quarter. We saw a slowdown in our write-offsin our AR accounts. So, we knew that we would have a tax impact in cashpayments related to taxes would be up in the quarter. We expect those tonormalize.
Giventhe tight credit markets, we elect to not pay debt off, but also hitting tothis question directly, we saw the impact of this that would be coming down.When we implemented this in October, we did hold some of the bills that wedropped on the Medicare and patient side.
Happyto report that as of now, most of those bills have been sent. About 70% or 80%of those bills have been sent. We have a few hospitals that are on a differentsystem. Those bills would be sent here in the coming days. So in the month ofOctober we will definitely see a slow down in our cash payments; that assumesall of our files are ready to receive when we send them.
Weknow most are, some aren't ready to receive those. By the end of the fourthquarter, though, we fully expect to be caught up as it relates to cash flowbased on what we know today. Now, as it relates to 2008 guidance it will takeus some time. We're two, three weeks into this.
Wedo not have any trends yet that make us more or less comfortable with the workthat our consultants have done over the course of the last two or three monthsas we get ready for the implementation that went effective October 1. By the timewe get to the normal time of year we give guidance, we will know a lot morethan we know today. We did feel it was prudent on this call to reflect it.
Basedon what we see, based on all the work that our consultants have done and basedupon our preliminary reviews that the 3.3% market basket increase getsprimarily mostly mitigated through the three items that we talked about, wageindex, behavioral offset, and just the affect of MS-DRGs. Having said all that,we have plenty of cash on hand to work our way through this. We're sitting heretoday with $50-$60 million of cash on the balance sheet through mid October.
Wehave a $300 million revolver; so while it's always a concern from our liquiditystandpoint, we're not that concerned intra quarter and we feel like at the endof the fourth quarter we'll be in good shape.
Justto be clear, we held those bills because we were instructed to. We have now, asDavid said, begun to drop those bills and so that should come along very well.We have done a lot of work to prepare for the implementation of the MS-DRGs andour folks have really dug in on this, from the quality side, from the revenuecycle folks, everybody has been very engaged in this in order to make sure thatwe mitigate any impact going forward. So thanks for that question.
Thankyou, gentlemen. We'll return the presentation back to you once again for yourconcluding remarks.
Thanks,again, very much, Pamela. I'm pleased with the results that we've been able toreport, pleased to be within our expectation as we laid that out for you at theend of last quarter. I'm proud of this team. I'm proud of the team that we havein place, I'm proud of the strategy that we have.
Ifeel good about where we are. It's a tough industry right now. We all knowthat. But we also know this industry and we know our business and we know thesehospitals inside and out. We are starting to see the benefit of the strategy.We're starting to see it play out across every single hospital.
Thereis no question that our folks at the corporate office and our folks in thefield absolutely understand the direction that this company needs to be takingin order to be successful. We're going to stay after it. We're going to staythe course. We're going to intensify our focus on the strategy every singleday.
Ifthere are other questions that you have, please call us. We look forward totalking to you. If you need further clarification, call us. Dave and I will behere all day today. We'll be here all day Monday. On Tuesday and for a coupledays next week, we're heading back out to the hospitals. We've been doing thata lot.
We'veboth been in the hospitals. Of course, Gracey is in the hospitals all the time.But we're going to make a swing next week and I think we'll be in threehospitals next week. So excited about that. That's where I like to be. Justmaking sure that everybody is absolutely focused and I assure you they are.Thank you again for your interest in LifePoint Hospitals.
Thankyou for your interest in our strategy and what we're trying to accomplish here.We look forward to talking to you very, very soon.
Thankyou, sir. Ladies and gentlemen, that does conclude the conference call fortoday. We thank you all for your participation and ask that you pleasedisconnect. Thank you once again and have a wonderful weekend.
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