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Executives

John Merriwether - VP of Financial Relations

Gary Newsome - President and CEO

Kelly Curry - CFO

Bob Farnham - SVP, Finance

Analysts

Adam Feinstein - Barclays Capital

Whit Mayo - Robert Baird

Gary Leiberman - Wells Fargo Securities

A.J. Rice - UBS

Kevin Fischbeck - Bank of America/Merrill Lynch

Gary Taylor - Citigroup

Ralph Giacobbe - Credit Suisse

Dana Vartabedian - Deutsche Bank

Tom Gallucci - Lazard Capital Markets

Health Management Associates, Inc. (HMA) Q1 2012 Earnings Call April 24, 2012 11:00 AM ET

Operator

Good morning, my name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the Health Management First Quarter 2012 Earnings Conference Call. (Operator Instructions). Thank you.

Mr. John Merriwether, Vice President of Financial Relations, you may begin your conference.

John Merriwether

Thank you, Melissa, and good morning everyone. I am John Merriwether, Vice President of Financial Relations for Health Management Associates. I would like to welcome you to Health Management's First Quarter 2012 Earnings Conference Call.

Before we get started with the call, I would like to read a disclosure statement. Statements made thought this presentation are based on current estimates of future events and the company has no obligation to update or correct these estimates. Listeners are cautioned that any such looking statements are not guarantees of future performance that involve risks and uncertainties that may and that actual results made different materially as a result of these various factors.

This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by word such as expects, estimate, project, anticipates, beliefs, intends, plans, may, continues, should, could, and other similar words. All statements addressing operating performance, events and development of Health Management Associates maybe expects or anticipates will occur the future including but not limited to incurrence of indebtedness, projection to revenue, income or loss, capital expenditures and earnings per share, debt structure, bad dept expense, capital structure, repayment of indebtedness, the amount and timing of funds under meaningful use measurements standard of various Health Care Information Technology incentive programs.

Other financial items and operating statistics, statements regarding the plans and objectives of management for future operations, innovations, or market service development, statements regarding acquisitions, joint ventures divestitures and other proposed or contemplated transactions, including but not limited to statements regarding the potential for future acquisitions and perceived benefits of acquisitions, statements of future economic performance, statements regarding legal proceedings and other loss contingencies, statements regarding market risk exposures, statements regarding effects and/or interpretations that recently enacted a future healthcare laws and regulations, statements of the assumptions underlying or relating to any of the foregoing statements, and other statements which are other than statements of historical fact, are considered to be forward-looking statements.

In addition, adjusted EBITDA as mentioned on this call is defined as consolidated net income before discontinued operations, net gains, losses on sales of the assets, net interest and other income, interest expense, income taxes and depreciation and amortization.

On the call with me this morning are President and Chief Executive Officer, Gary Newsome; Chief Financial Officer, Kelly Curry; Senior Vice President - Finance, Bob Farnham. Thank you for you attention. And I will turn the call over to Gary.

Gary Newsome

Thanks John. Good morning everyone. Thank you for joining us to discuss another solid quarter and strong start of 2012, as we report our result for the first quarter ending March 31st.

For the first quarter from continuing operations and compared to the same quarter a year ago, Health Management reported net revenue growth of 18.4% to $1.485 billion and an adjusted EBIDTA growth of 12.7% to $239.5 million.

Excluding the impact of approximately $36.7 million or $0.09 per diluted share per interest rate swap accounting, as well as the significant mark to marked adjustments on the swap due to interest rate conditions, diluted earnings per share from continuing operations increased 9.1% to $0.24 as compared to $0.22 per diluted share for the same period a year ago.

Contributing to these solid continuing operational financial results were an admission increase of 5.9%, adjusted admission increase of 11.8%, emergency room visit increase of 13.4% and a surgery increase of 20.6%.

For continuing operations at hospitals we have owned and operated for one year or more, referred to as same hospital continuing operations compared to the prior year's first quarter, net revenues increased 5.7%, adjusted EBIDTA increased 6.6% to $264 million resulting in a 20 basis point improvement in EBIDTA margin to 19.9% and surgeries were up 3.8%.

Our outpatient volume continued to grow in the first quarter of 2012 and we believe our inpatient volumes continue to be affected by a challenging economic environment as patients seek to limit time away from the jobs to ensure continue employment.

We continue to see declines in uninsured volumes, and we also saw significant decline in flu related admissions during the first quarter. This contributed to the same hospital admission decline for the first quarter of 4.2% compared to the same period a year ago.

Outpatient services, however, continued their positive trend as outpatient surgeries grew and, as a result, same hospital adjusted admissions were flat for the quarter.

Importantly, had uninsured and flu related volumes have been the same as last year, first quarter same hospital admissions would have decline 1.6% and same hospital adjusted admissions would have increased 2.4%.

We recently held our annual management retreat with our hospital CEOs recognizing their successes of the past year and sharing best practices and ideas for 2012.

Sticking to our patient-centered operating strategy with a focus on the emergency room operations, physician recruitment and market service development while we maintain a discipline cost environment continue to be the central theme. And we believe there continues to be an opportunity in the same hospital and newly acquired or partner facilities who employed these initiatives to improve results.

As I mentioned, outpatient activity remains a bright spot as our technology investment and the attractiveness of outpatient services for patients continues to be a draw. Less invasive procedures, fewer consultations, often times lower out pocket dollars, and the ever important less time out of work continue to make outpatient services desirable for a patient. While we are seeing improvements in outpatient services across the broad range of our hospitals, we also are seeing considerable opportunity to expand enhanced outpatient services in the hospitals we have acquired over the last 36 months.

Speaking of acquisitions shortly after the end of the first quarter subsidiaries of Health Management completed a transaction to joint venture five INTEGRIS Health Oklahoma hospitals. Under the joint venture Health Management owns an 80% controlling interest in the five hospitals and manages the day-to-day operations.

The transaction was effective April 1, 2012, and combined these five hospitals represent 226 licensed beds and generate approximately $95 million of bed revenue before the provision of doubtful accounts over the last 12 months.

We are very excited to expand our presence in Oklahoma through our partnership with such a well-known and respected organization like Integris. They have an excellent reputation and are widely known throughout Oklahoma with 1 in 6 Oklahomans living within 30 miles within Integris facility.

I believe our similar patient focused culture combined with our expertise in non-urban hospital operations and previous partnership success with similar organizations like the Stance Healthcare here in Florida were the deciding factors in choosing Health Management as a partner. As a result of these developing relationships we are seeing similar interests from other well-known and respected organizations for future partnerships.

Our pipeline continues to be very attractive as potential partners are seeking us out for operational expertise assistance, capital resources and even more importantly our patient-centered approach and cultural fit. It is the combination of these operational attributes with our flexible partnership structures of an asset purchase, long-term lease or joint venture, that positions us as a partner of choice.

Thank you again for your attention. At this point, I turn the call to Kelly for a review of the first quarter results in a little further detail.

Kelly Curry

Thanks Gary. Good morning to each of you. My comments will as usual will be brief following Gary’s explanation for the first quarter.

As you've seen from the press release last night, our first quarter net revenue grew 18.4%, adjusted EBITDA grew 12.7% and excluding interest rates swap accounting and the significant mark-to-market adjustment, diluted earnings per share from continuing operations increased 9.1% to 24 % after nearly 1% increase in the number of fully diluted shares outstanding.

Same hospital operations continued to perform well compared to the prior year's first quarter, net revenue increased 5.7% and net revenue per adjusted admissions grew a strong 5.9%.

For the seventh quarter in a row, we have seen a decline in uninsured patients taken care at our same hospital facility. Unemployment rates in our markets have improved about a 100 basis points since last year, but are still 67 basis points above the national average. We believe the improvement in our markets are less from people finding work and more from the unemployed having left the market to seek employment elsewhere.

Continued same hospital uninsured admissions for the first quarter totaled 6.2% of the total admissions, which is a 20 basis point decrease from the same quarter a year ago. As you know, there are three components that comprise our accounts for uninsured and under insured patients, bad debt expense, uninsured discounts, and charity indigent write-offs. These figures are consolidated and includes acquisitions.

Bad debt expense for the quarter was $201.3 million or 11.9% of net revenues before the provision for doubtful accounts, which is the same comparable metric we have always used, compared to $172.1 million or 12.1% of net revenues for the same period a year ago.

Uninsured discounts for the quarter were $299.7 million, compared to $225.7 million a year ago. Health Management's charity and indigent care write-offs for the first quarter were $22.7 million compared to $21.4 million for the prior year.

The sum of bad debt expense, uninsured discounts, and charity indigent write-offs, as a percent of the sum of net revenues before the provision for doubtful accounts, uninsured discounts, and charity indigent write-offs, which Health Management refers to as our uncompensated patient care percentage was 26.1% for the first quarter compared to 25% for the same quarter a year ago, and 25.4% for the fourth quarter ended December 31. This increase is reflective of our acquisitions and our annual charge adjustment.

Our adjusted EBITDA from continuing operations for the first quarter was $239.5 million or 16.1% of net revenues an increase of $27 million or 12.7% over the prior year's $212.5 million.

Our same hospital prices for adjusted EBITDA from continuing operations for the first quarter was $254 million or a 19.9% margin, compared to $247.7 million or 19.7% margin for the same period a year ago. This represents 20 basis points $16.3 million, 6.6% increase over for the first quarter of this prior year.

As with consolidated adjusted EBITDA, same hospital EBITDA in 2012 includes approximately $4.6 million incentive paying an HCIT incentive payments, which is offsetting government payments program reductions in the first quarter.

Moving over to the balance sheet and cash flow statement. Total assets at March 31, again exceeded $6 billion. The balance in accounts receivable net, as of March 31, was $994.7 million. And the balance in the allowance for doubtful accounts was $600.9 million. Health Management's days sales are outstanding or DSO's as of March 31, were 52 days. About three days are related to our Tennova acquisitions, as we had not yet received a Medicare tie-in notices as of March 31. We have sent received those tie-in notices and expect to build and collect the backlog of AR during the second quarter.

Our cash collections continue to be strong and we are achieving our internal targets. For the first quarter, cash flow from continuing operating activities was $62.1 million, after cash interest and tax payments aggregate $52.8 million. Again, cash flow from acquisitions, I mean from operations, does not reflect our Tennova health acquisition, as we did not have the Medicare tie-in notice until April. We are now billing this backlog and we will receive these payments in the second quarter.

Also, of note, probably the cash balances. We completed the five hospital Integris joint venture effective April 1st, by utilizing cash on hand. So we have no borrowings in the first quarter, despite not having received the tie-in notice in completing the Integris acquisition.

Capital expenditure for the first quarter were $80.8 million. With regard to our debt covenant as of March 31, Health Management's total leverage ratio is 4.1 and our interest coverage expense was 4.0. These ratios compared to the total leverage ratio maximum of 5.5, and an interest coverage ratio minimum of 3.25, as of March 31. We are well within these requirements.

Before I wrap up and hand the call back over to Gary, I also want to mention the accounting for the interest rate swap. When we provided our 2012 objectives early this year, we expected to incur $20 million or $0.05 per diluted share per quarter of additional interest expense related to these outstanding swaps. And we did in fact incur that expense in the first quarter. In addition to that expense we were required to mark the swap market and record the impact as an additional interest expense. Because of the yield curve change with the short-term rate falling and long-term rate steeping, we recorded an additional $16 million of interest expense or $0.04 per share.

As a result, we will continue to mark the swap to market each quarter and expect that interest rate rise or interest rate expense could be mitigated in the future.

To review the first quarter results, excluding the impact of approximately $36.7 million or $0.09 per diluted share for the interest rate swap accounting in the significant mark-to-market adjustment on the swap.

Diluted earnings per share from continuing operations increased 9.1% to $0.24, as compared to $0.22 per diluted share for the same quarter a year ago after a nearly 1% increase in the number of fully diluted shares outstanding.

Same hospital adjusted admissions were flat and would have grown 2.4% and uninsured and flu-related admission levels were the same as the prior year. Same hospital surgeries were up 3.8%. Same hospital net revenue increased 5.7% and same hospital net revenue for adjusted admissions increased 5.9%. And same hospital adjusted admissions increased -- adjusted EBITDA increased 6.6% to $264 million. And same hospital adjusted EBITDA margins increased 20 basis points to 19.9%.

Thanks again for your attention. And now, I will turn the call back over to Gary.

Gary Newsome

Thanks, Kelly. We are very pleased with the results for the first quarter ended March 31st. We are reaffirming our 2012 objectives, and we continue to believe our objectives are achievable by maintaining our focus and discipline on cost containment and our three operating initiatives. The emergency room operations and truly the front door to our hospitals; physician recruitment that continue to grow and tie nicely into our market service development strategies as we can continue to expand our footprint in all of our market places. Health Management provides the people, processes, capital, and expertise necessary for a hospital, and decision partners to fulfill their local mission in delivering superior healthcare services. Our strategy of ensuring that the most moderate, high quality care remains close to the citizens of our community, is gaining ever increasing importance. Health Management stands ready to enable America's best local healthcare.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Adam Feinstein from Barclays Capital. Your line is now open.

Adam Feinstein - Barclays Capital

Just maybe just say can you kick things off. Can I just get a little more color around volumes and certainly seen the pickup in surgical cases, just curious, can you elaborate a little bit on that and how you're thinking about that? And then, we had the flu in the quarter and or the impact from that but actually that looks like things are stable to slightly better on the volume side. So, just how are you guys thinking about that? And how are you thinking about the components? And sorry for the long-winded question but also the decline in the short admits also seems to be a positive trend. So how are you thinking about the various components?

Gary Newsome

Thanks, Adam. Interesting that for the quarter the impact of flu and the impact of the decline in uninsured was truly, the most significant part of our decline, which is mainly increasing but is very significant in the quarter compared to any of the prior periods. Just to give you a little flavor on the flu in the State of Florida through February of this year compared to the same period last year, the from the CTC morbidity and mortality report on February 24th, this is an interesting statistics.

In Florida last year the incidence of flu related hospitalizations were 21.6 per 100,000 population and this year it was 1 for 100,000 population. That gives you a little bit of a flavor of the impact and our presence in Florida and certainly throughout the nation and where we've hospitals we've similar, maybe not as dramatic as Florida but similar statistics in terms of comparison to flu last year which in reality was not a very big flu season last year.

So from that standpoint, if you look at our growth that we've had in the quarter in terms of outpatient growth, particularly in surgery, I continue to say that in order to grow on the inpatient side you have to grow and expand your footprint on the outpatient side, and otherwise normalize the economy and the normalized utilization trends that has and really, really changed significantly because of the economy and because of peoples interest in not being away from work and other things.

I believe that our growth in our outpatient would have already driven a lot of inpatient growth in our hospitals and we're very optimistic that passing all the flu related type hospitalizations, getting that out, they're going to continue to see in this quarter we saw a great growth excluding those areas in terms of the outpatient side.

Adam Feinstein - Barclays Capital

Is it a safe way to characterize that I guess you had the right type of volume growth in terms of surgeries and once the decline in the uninsured. So if we just think about the quality of just the volume growth would?

Gary Newsome

Absolutely, as -- absolutely. Otherwise you see the quality of our earnings and that's really is reflective of -- of course our discipline that we've in our structure in terms of cost. But it's also reflective of the quality of the business that we see coming in our doors.

Adam Feinstein - Barclays Capital

Okay. And then just quick follow-up and thanks Gary, just I guess obviously you guys have big opportunity with the acquisitions ramping up and just looking at the size in terms of deals you've done in the past 12 months it seems like clearly a nice tail win now in terms of just ramp up over the next several years or so. So I guess how are you guys thinking about that and with the -- to know the deal and owning it for a little longer relative to the last call just how are you thinking about the opportunity with all of the recent deals by just but obviously focusing on the bigger ones?

Gary Newsome

You know, Adam, all the recent deals over the last 36 months I think are, well I don't think I know for facts are really on track when we thought they would be in our projections and our estimates as we went forward. I can tell you that the quality of our acquisitions have been outstanding. And we've been pleasantly surprised in all our markets but particularly in the -- to know about acquisitions, about the just tremendous number of opportunities to work in that marketplace to expand our business, to develop relationships with physicians in areas and to grow services is tremendous.

If you look at our network of hospitals and to really start organizing and operating as a system versus what was that otherwise a very lose neck of hospitals creates a lot of synergies in terms of developing the programs within the system and rationalizing some cases services and focusing on hospitals that can grow in certain areas such as cardiology or orthopedics or looking at our robotics program and focusing on particular campus to grow that type of business. So it's really an unique opportunity for us.

Adam Feinstein - Barclays Capital

All right, thank you very much, appreciate it, Gary.

Operator

Your next question comes from the line of Whit Mayo from Robert Baird. Your line is now open.

Whit Mayo - Robert Baird

Thanks, good morning. I guess maybe just to start with, I guess Bob; I think you guys are relocating some or part of your billing and collection efforts to Orlando. I think we call it some local pressure ports and maybe can you talk about decision there and where you stand in making that change and any implications we should think about from a cash flow perspective if and when that transition occurs?

Bob Farnham

Yeah this is Bob. Yeah one of the things we're doing to increase efficiencies and leverage are salaries and benefits as a percent of net. Just looking at the number of markets where we've a concentration of facilities, like in Mississippi and in Florida and moving more to CBO, Centralized Business Office model and yeah we're beginning to do that now and so, yeah that's -- that's one of the process of doing that in our Orlando market right now and that's going to continue to result in the savings for us on the salaries and benefits line and also improve our results on billing and collections as well. So you had asked that's an ongoing effort that we're doing it, in most of our markets where we've a concentration of facilities.

Whit Mayo - Robert Baird

Okay. And maybe just shifting gears a little bit to the swaps and the -- and thinking about the interest rate exposure. But if we were to think about the swaps expiring over the next one to two years and I think the market has a pretty good understanding of why you're excluding it from your earnings now but hypothetically that was gone you've nearly 60% of your debt floating at that point. So I guess I'm just trying to get a sense for how we should think about you managing that exposure over the next two to three years?

Bob Farnham

Well we're going to continue to watch the right markets we've. And then a portion of it appeared to us to be a large move, we just look at going ahead and swapping later but 60% is a pretty good number right now. We feel like that's what we've relative to overall market conditions. As we await the, what's going to transpire, number wise, the because of the Spain thing, which is what generated the mark-to-market adjustment on our -- on the two-year index with the impact from the issues arising from their debt sales, drove down the long-term rates, which created the adjustment. We don't know, I don't I think that's a temporary effect. I think it will probably come back as to where it was and that loan is the same but again there is still -- this goes to show that the yield curve is sensitive to market conditions and continue to drop, and we would evolve probably said when likely we are dropping minimal from where it was like it did.

Whit Mayo - Robert Baird

Yeah. And I guess maybe a follow-on to that I can't remember if your credit agreement has some -- does it stipulate anywhere in there what amount have to be fixed versus floating, I just don't know if you have that restriction?

Bob Farnham

No, we do not.

Whit Mayo - Robert Baird

Yeah, and maybe one other, I'm just a little confused about the length of say trends in the quarter. I mean looking at -- at our model, it appears like length of stays and running kind of 4 to 4.3 for how long?

Bob Farnham

That is, our total length of stay is running that. Now that actually was reflects the Medicare length of stay in our press release. Normally we report it was inadvertently reported as the Medicare length of stay.

Whit Mayo - Robert Baird

Okay. So if I have to look at the total or I mean I guess the Medicare length of stay it looks like your length of stay won't?

Bob Farnham

Yeah it won't, it won't. It's about what it's running and the same is true totally I should say.

Whit Mayo - Robert Baird

Okay. So you actually saw an improvement in the length of stay that it went down?

Bob Farnham

Yeah, yeah.

Whit Mayo - Robert Baird

For the total?

Bob Farnham

Right.

Whit Mayo - Robert Baird

Okay, okay. I think that's about it. I'll hope back in the queue. Thanks a lot guys.

Gary Newsome

Thanks.

Operator

Your next question comes from the line of Gary Leiberman from Wells Fargo Securities. Your line is now open.

Gary Leiberman - Wells Fargo Securities

Thinking about acquisitions going forward, it looks you've been very active as you play forward or where do you guys stand and what you think your appetite would be for additional acquisitions?

Gary Newsome

You know, I think if you look at where and we've acquired, I think, other than possibly Tennova, although we do have a -- we had a long-term presence in the State of Tennessee. We're really disciplined about our process, disciplined about the types of facilities, and just new opportunity that's developed over the last few years with partnerships has really created a pipeline that we feel is very unique for us in the industry. So we've, what I would say the luxury to pick and choose the best opportunity. We're not in it, almost every week have opportunities that we say no to, don't get involved in because they don't meet the discipline that we've in our processes in terms of looking at, not only but actually turns over four years, cash-on-cash return getting to the average margin of the company basically is very disciplined how we look at it. So that's a long answer to it, sorry that we're going to continue to acquire but we're going to continue to apply the discipline that we've in the process, I know there is a lot of opportunities out there, we're not going to chase all of those.

Gary Leiberman - Wells Fargo Securities

How competitive you're just for the best properties that are out there?

Gary Newsome

Well I would say the competitive nature of it hasn't significantly changed over the last several years. I think we see this pricing has been fairly stable, see on the 50% to 90% of that revenue depending on the quality of the facility we've got. So and what's good for us, we're not always in many cases not the highest bidder. We will be in shows, they choose us for a lot of reasons, of course the financial piece of it is very important but we're chosen for, chosen for our experience, in some cases with joint ventures, with the not-for-profits in other cases just basically are cultural fit and the comfort with our company and the history that we've had in like communities over the years.

Unidentified Company Speaker

Yeah, I just say that in terms of competition or narrowly I mean, as we've said before is at the upper end of our range we might buy into sort of proprietary companies. At the low end of the range we might run into one of the proprietary companies. But generally speaking, the biggest competitor we're going to see is not-for-profit that’s in the nearby area.

Operator

Your next question comes from the line of A.J. Rice from UBS. Your line is now open.

A.J. Rice - UBS

Hi everybody. Maybe I'll just ask a couple of things, if I could. You guys have talked about a number of initiatives in the supply expense and other operation expense area over the last three quarters. I might ask if you could just update on some of the key initiatives and what you're seeing still remaining as opportunities?

Bob Farnham

Yeah, AJ, this is Bob. We continue to focus on higher rates of compliance for all of our facilities particularly with the acquisitions we've had in the last couple of years. Some of the initiatives that we put in place over the last year or so are still continuing and we're going to enjoy benefits from those in this year and some of that is not annualized particularly the spine capitation program that we put in place last year. We're going to continue to save money on trauma type items outside of histonese as we expand the number of vendors that we actually use there.

Bulk purchasing on the cardiac side, last year we probably bought 50% of our implants on the cardiac on bulk purchasing. So, we look to move that up this year as well and incur greater savings there.

Part of the biggest news this year in 2012 is that similar to the capitation program that we launched last year for spine we've worked with HPG and looked at orthopedic pricing on our histonese and are in the process of renegotiating all of our orthopedic contracts relating to histonese and we should be rolling that our as I speak. And so, that an initiative there that we will begin to see savings on here in the second quarter and drop rest of the year.

So, a number of things going on, on the supply side are going to benefit us this year as well. And I keep talking about what we've done on the pharmacy side as well. Last year, our pharmacy cost per adjusted missions were down over 3%. This year we continue to be very focused in our medication use management and use of generic drugs and looking to have another good year on the pharmacy side as well, which is about 15% to 20% of our supply spend. So, we have a lot of good initiatives ongoing that will continue to drive savings as a percent of net.

A.J. Rice - UBS

Okay. And then just one other question on the strength you saw in the revenue for adjust mission I guess the pricing doesn’t really look like, if my math is right, that the high tech money made much of a difference on that. Can you describe is that coming from the managed care pricing, case mix and what the headwind on the Medicaid side that you're absorbing there, if you got any data on that?

Unidentified Company Speaker

Yeah, well, the -- our managed care pricing still in the 5% to 7% that we've been talking about. And in terms of the -- of our -- we had our case mix continues to be very strong at 140, which is a very good number for us. And yeah, we had this based on last year's state budgets effective July 1. The amount of reduction in rate that we got is about equal to the amount of the HCIT money we got from Medicaid in the first quarter. So, the real money that comes to us won't come until the -- probably the fourth quarter and particular from the Medicare money because that’s the big portion of the money, its the Medicare money.

Operator

Your next question comes from the line of Kevin Fischbeck, Bank of America/Merrill Lynch. Your line is now open.

Kevin Fischbeck - Bank of America/Merrill Lynch

Okay, thank you. The P&L, given all the recent deals that you've done, the little bit there were a lot of swings there on the supply expense and other operating expense that will be -- it will be helpful if you could provide some color what you're going to do on a same-store basis on this line items?

Kelly Curry

Yeah, when you look at the consolidated numbers the main impact is because of acquisitions, but same hospital results are pretty good. I was talking about this supply side and some of the initiatives there. Supplies are actually down 20 basis points of a percent of net revenues with some of the initiatives that I had already mentioned. And even though volumes have been good as well, we have seen some increases in supplies because of additional procedures.

Mix has been good. On the supply side, I can tell you that orthopedics is, in total, we're up about 8.5 %, a lot of that was on the knees from investments that we made in Makoplasty, but we had a real good start to the year on implants on spine, those are up over 10% for the first quarter. Cardiac with regard to stances is up over 6% for the quarter, so we are having good results there. Cardiac, with regard to implants, continues to be down. This is the third year in a row we have seen a starting up from a decrease in cardiac, but overall we are doing really, really well on this supply line.

Some of the other line items, we continued get some efficiencies on. We were already asked earlier about salaries and benefits and some other things that we're doing in central business office are going to benefit us there. We continue to look at where to expense out, outsource some services and you see that in other expense a little bit, but that benefits on other items such as salary benefit.

So, there is a lot of different things going on right now, and in a lot of cases we are -- it's a very competitive environment out there. So in a lot of cases, our vendors are coming to us and proposing ways that that they can save us money. So, there is always opportunity to save cost and some of that where we find opportunities internally and in some cases we have vendors coming to us that can show us some savings as well.

Kevin Fischbeck - Bank of America/Merrill Lynch

Okay. That's helpful I guess. When I look at the same store revenue growth there is almost 6%, and if you strip out the high-tech income I understand how it does offset rate pressures, but look at the same-store EBITDA growth it doesn't look that you got like a whole lot of leverage there if you take out the high-tech. What kind of I guess -- what is pulling back the margin opportunity there and how quickly do you think it will take you to achieve that?

Kelly Curry

Well, as we have brought on these acquisitions which are now we have about in this quarter around a $150 million of net revenue in the total that’s reflective of acquisitions. And as we often indicate, Kevin, we were talking about this, we can cut the bleeding pretty quick and get to a mid-single digit number and we can continue to grow margins in those units, but they are still kind of lag well behind our same-store margins. Even though our acquisitions for instance you know for the acquisition component of our EBITDA this year in continuing units was a double digit, it's still well under what our same stores can do.

And part of what drives that is, and its pretty significant to us, is that we do a lot of heavy recruiting for those units, and we did a lot of heavy recruiting this year in the fourth quarter, and those cost are moving in and they are going to impact us because it takes us, you have heard Gary say on a number of occasions, 18 months for us to ramp-up a primary care and 12 months for us to ramp-up a specialist. So they are good moves for us and future business for us, but it is a cost and it moves with those acquisitions into -- in the same-store and it doesn't -- when we acquire a hospital we can't move to recruiting until we get into the second years and onward because of what we have to get those facilities ready for that process. I hope that helps.

Kevin Fischbeck - Bank of America/Merrill Lynch

All right. And I guess that we are kind of model acquisitions, we like to say a couple of hundred basis points per year in the margin again. Where do you think that sweet spot is and like in the ramp-up where do you start to see that the margin will pickup in the year three then?

Kelly Curry

Well, as you have seen we draw that line in the air, it would be nice if it was a good little step process but sometimes it depend on the units. It can be a flatter curve that swings up towards the end into the third and fourth years of our recovering our investment statistic that we used metrics. Tennova, quite honestly, we have less in the way of asset improvement we have to do there because three of those facilities are fairly new. We do have one that needs work. And we are in the process of beginning to drop our master plans for that sort of thing. And also, on growing services in some of the better the units that are better shape, in other words, we don't have to spend capital on maintenance etc., but we do have to make some changes in order to grow services in those market. So, while it's a better circumstance and what we have normal seen it still leans more towards the rear-end and the front-end.

Kevin Fischbeck - Bank of America/Merrill Lynch

Okay. That makes sense. And last question here. On the volume outlook, I was trying to figure out when there is a flexion point from volume perspective and the number you gave about the same-store paying admissions I guess, ex-flu, I think last quarter the number was basically flat, now you are saying its up 2% plus. You used this leap year and still a good number and to accelerate in Q4. Do you feel if there is a recovery coming back or is it just really still too early to say?

Gary Newsome

We think its very positive signs that we are seeing. We feel good about our guidance for the year in terms of volumes considering we're at the end of the first quarter. From that standpoint, we see a lot of positive signs and it's truly a result of our focus on developing the services, building out these physician networks, recruiting the right types of physicians, and improving our facilities. So we're starting to see the fruits with a lot of effort over the last few years.

Kevin Fischbeck - Bank of America/Merrill Lynch

Okay. So this is in large part based on what you're doing rather than kind of the core volumes per se coming back?

Gary Newsome

Well, as you know, we're certainly affected by flu and by other factors in terms of the economy has been over the last few years. The reality is the excitement we've over the growth on our outpatient side, will drive inpatient volume overtime. There is no question about that.

Kevin Fischbeck - Bank of America/Merrill Lynch

Okay. Great, thanks.

Operator

Your next question comes from the line of Gary Taylor from Citigroup. Your line is now open.

Gary Taylor - Citigroup

A couple of questions. I'm sorry you just covered the, I don't think you had until Kevin asked this question but, did you quantify what you thought leap year was at all?

Bob Farnham

We didn't actually calculate it out we figured you guys. We did mathematics if you wanted to on that. We just kind of take it that leap year occurs every four years, so it parts of the numbers.

Gary Taylor - Citigroup

Right. But you usually view it as a positive, right?

Bob Farnham

Yeah I normally view it as a positive that's right.

Gary Taylor - Citigroup

Okay, that's fine. And then, on inpatient surgery I guess Bob talked about also in cardiac and I presume that was mostly inpatient he was talking about. Overall inpatient surgeries still down year-over-year same store?

Bob Farnham

Yeah, actually we're seeing flat surgeries on the inpatient side in the quarter, which we see as a good sign.

Gary Taylor - Citigroup

Okay.

Bob Farnham

Again, that as you grow surgical specialty and as you grow surgical volume on the outside, we're going to see that grow on the inside as well overtime. So the fact that we were flat on that on the inpatient is good.

Gary Taylor - Citigroup

So outpatient same store must have been positive because your total same store surgical were up? On the outpatient surgical side, where you've seen most of that growth? Is that I wouldn't imagine that's cath lab, or even if you would necessarily count that surgery is that ortho or what do you think on the outpatient side?

Bob Farnham

Yeah, it must be ortho. I mentioned orthopedic procedures they were up about 8.5%. And the majority of that I said was on the knees from the investments that we've made in medical equipment. But spine, spine is up. Spine was -- we're having our best start on spine implants in two years -- in two years. It's spine implants were up over 10% for the first quarter. So orthopedics overall was good for the first quarter.

Gary Taylor - Citigroup

And what do you -- any on the spine anything in particular you would point to new programs, new docs, market share.

Bob Farnham

No, it's just pretty, pretty broad based, nothing in particular there.

Gary Newsome

Gary this is Gary. Just from overall we're just seeing things, strategies that we put in place, just better access for our patients, a broader menu of services. And on the outpatient on ortho, the growth that we've had is -- I just want to give the impression, its all been MAKO-type procedure, its been across the board because as you grow on orthopedic service line that piece, robotics is just a piece of that. And as you grow that you also get other procedures and as you grow centers of excellence in terms of orthopedics or other product lines. What's great is we've seen just pretty standard sustained growth on the outpatient now for several quarters.

Gary Taylor - Citigroup

My last question, which stock was fully in same store metrics this quarter?

Gary Newsome

Yes.

Bob Farnham

Yes.

Gary Taylor - Citigroup

Okay. Thank you.

Gary Taylor

You're welcome.

Operator

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Your line is now open.

Ralph Giacobbe - Credit Suisse

Well, I was just wondering, have you guys quantified or can you tell how much of volume decline on the inpatient side, its just the shift of that same patient to the outpatient as opposed to kind of any actual decline on the inpatient side of the business, does that make sense? And maybe if you give us the increase in observation visits year-over-year versus the decline in one-day stays?

Gary Newsome

No, actually the movement from inpatient outpatient to some is because of the technology pushes so some what has been historically inpatient to outpatient side. Our observation business has really been flat year-over-year in the quarter. So we haven't seen much change at all there. So truly, the -- our decline and the majority of that is really the flow and flow related hospitalizations respiratory as such and declines in the multi business.

Ralph Giacobbe - Credit Suisse

Okay. All right. That's, that's fair. In the release, when I looked at the same hospital EBITDA, you take out the adjustments for kind of corporate overhead in acquisition cost and when I looked at it sequentially, it was down about $10 million bugs or cut by about a third. So, I need details on there in terms of what drove that down since I don't think there is any sort of incremental acquisition sequentially?

Bob Farnham

Are you talking about on the where we show the home office and acquisitions cost on the schedule in the press release?

Ralph Giacobbe - Credit Suisse

Yeah, yeah.

Bob Farnham

Well, there is a lot of components they go in there. There is one of the things that is helping that number look smaller is the fact that we did have a double-digit we achieved a double-digit acquisition performance in the quarter. So, they're adding which reduces of course that number because that's a positive against cost.

Ralph Giacobbe - Credit Suisse

Okay. Okay. And then, maybe can you just give us the payer mix in the quarter verses the year ago of the kind of new cash revenue numbers?

Gary Newsome

It's not -- it's going to be pretty close to what it was percentage wise, yeah.

Kelly Curry

It's been running really, really flattish. We haven't seen a -- in other what goes down and no pay moves to Medicare and Medicaid and commercials has been staying pretty flat.

Ralph Giacobbe - Credit Suisse

Okay. All right. That's all I have. Thank you.

Gary Newsome

Thank You.

Operator

Your next question comes from the line of Darren Lehrich from Deutsche Bank. Your line is now open.

Dana Vartabedian - Deutsche Bank

Hi, good morning. This is in Dana Vartabedian in for Darren. I just first when do you expect to file your 10-Q and then I guess, can you give a sense for whether anything has changed in sort of scope or substance for the two ongoing government investigation since your last disclosure?

Kelly Curry

We will file the 10-Q on May 3rd. And there is no substance of movement whatsoever in the cases that we're dealing with. We're still in the discovery phases. We're going to be in that for a couple of more months.

Gary Newsome

Kelly is exactly right. There has been not include a report in terms of an investigation and managing it's time, really we're focusing on just focusing on growing our business, utilize our markets, looking at acquisitions and focusing our time what we should as a management team and that's what we're.

Dana Vartabedian - Deutsche Bank

Okay great. And just one other quick question, can you confirm that you don't have any material Texas just exposure?

Gary Newsome

Now, we only own one hospital in Texas.

Dana Vartabedian - Deutsche Bank

All right. Okay thanks.

Operator

Your next question comes from the line of Tom Gallucci from Lazard Capital Markets. Your line is now open.

Tom Gallucci - Lazard Capital Markets

I just had two if I could. The first just, as we're seeing outpatient growth remained strong, can you remind us a payer mix there, is it sort of similar to the consolidated average or is it, is it skewed in one direction or other?

Gary Newsome

Yeah, I don’t had it broken down by in-patient out-patient. I am guessing may be on the out patient side, it’s that commercial mix of a little bit better as we have more employees who if they do access, they are going to access on the out patient side, and particularly with regard to the orthopedic.

Tom Gallucci - Lazard Capital Markets

Okay, I made a follow up with you. And then just a big picture question, you mentioned managed care rate sort of steady. We are hearing from different areas of the country different types to relationship may be in the earlier stages of developing between hospitals and managed care companies. Are you doing anything new or different in terms of your major relationships or you have sort of seen the evolution on the horizon that’s are worth pointing out?

Gary Newsome

Well, we are doing some things, we have part of our what we were going to -- we're actually going to talk about this in our Investor Day if we had to change or actually cancel for time being. And part of that is we were going to introduce our new Senior Vice President for Payer Relations. And we are looking a lot of different things to innovate on our managed care side. We are actually looking at how we can maybe get some of that information out to make people aware and we are going to come back to you on that in terms of the market, in terms of being able to do that. But in general, what we've seen in the past is still pretty much what we're continuing to see. The managed care providers are talking to us and asking us what we think the health information networks will mean. And we've got some good dialogues there for some different things to think about.

Also, we're looking into the -- its an idea that we've used in the past where we've had arrangements with employers for specific services. We're looking at ways we can expand in certain markets where we have larger employers. That has been an effective strategy in the past. We've kind of contained it to workmens' comp and that type of thing in the past but we're looking for ways that we can maybe expand on that where we've had good successful relationships.

So there is a lot of stuff that are related to that that we’re looking at to improve and innovate in our managed care contracting area.

Tom Gallucci - Lazard Capital Markets

Okay, great. Look forward the broader update as you get the information out there, thanks.

Gary Newsome

By the way, I think it probably would be a good idea for me to just address everybody and say one of the things we did mention was what's going on with the settlements that, for instance, that some of the companies have reported having that made regarding the rural healthcare and SSI items. Number one is, is that we were not in the group that settled. There are 12 total suits out there. We don’t know how they happened to pick the particular one that they settled first other than the fact that their attorneys began with A and we -- ours is with a K. Maybe that means we're going to be later but at this stage we've not had settlement discussions.

And then in addition to that we will have a settlement, however, and the exact amount of that when we have more information we will let you know.

Then the other part of it is on the SSI side, that’s a minimal affect on us, I know it's largest for some other companies, but in our case its minimal as to what it means to us in total.

John Merriwether

Great. Thanks. Everybody I think we're out of time and we appreciate your attention this morning. Have a great day and we will talk to you soon.

Gary Newsome

Thank you.

Kelly Curry

Thanks guys.

Operator

Ladies and gentlemen, this concludes today's conference, you may now disconnect.

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