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Executives

William Carpenter – Chairman and CEO

Jeffrey Sherman – EVP and CFO

David Dill – President and COO

Analysts

Adam Feinstein – Barclays Capital

Ralph Giacobbe – Credit Suisse

Frank Morgan – RBC Capital Markets

Gary Lieberman – Wells Fargo

AJ Rice – UBS

Kevin Fischbeck – Bank of America/Merrill Lynch

Gary Taylor – Citigroup

Thomas Gallucci – Lazard

Whit Mayo – Robert W Baird

Darren Lehrich – Deutsche Bank

LifePoint Hospitals, Inc. (LPNT) Q1 2012 Earnings Call April 27, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospital’s First Quarter 2012 Earnings Conference Call. (Operator Instructions) On today’s call LifePoint will be making forward-looking statements based upon management’s current expectations. Numerous factors could cause LifePoint’s results to defer from these expectations and LifePoint has outlined these factors in its filings with the SEC. The company encourages you to review these filings. LifePoint also asks that you please review the cautionary language under the caption Important Legal Information in the company’s press release issued this morning.

The company undertakes no obligation to update or make any other forward-looking statements whether as a result of new information, future events or otherwise. Also please visit LifePoint’s website for links to various information and filings. (Operator Instructions) As a reminder, this conference is being recorded Friday, April 27, 2012. I would now like to turn the conference over to William Carpenter, Chairman and Chief Executive Officer. Please go ahead, sir.

William Carpenter

Thank you. Welcome, everyone, to LifePoint Hospital’s First Quarter 2012 Earnings Call. We hope you’ve had a chance to review the press release we issued earlier this morning. After my initial remarks Jeff Sherman, our Chief Financial Officer, will discuss in detail LifePoint’s results for the quarter. After our prepared remarks Jeff and I as well as David Dill, our President and Chief Operating Officer, will be available to answer your questions.

Let me begin by summarizing our results for the first quarter. Revenues from continuing operations grew to $851 million, up 12.2% from the same period last year. EBITDA for the quarter was $165 million, up 14.6% over last year. And EPS for the quarter was $1.16, up 30% over last year.

After taking into account the items noted in our earnings release, adjusted EPS was $0.94 for the quarter. Jeff will discuss this in more detail later.

LifePoint delivered a solid first quarter and we continue to stay focused on executing our strategic plan. We’ve benefited from the continued success of our organic investments and recent acquisitions as well as our efforts to provide quality care, improve operational efficiency and develop high-performing talent. This positions us well for the future. Although overall volumes were down impacted by a significant decline in flu during the quarter, we’re pleased by the improvement in surgical volumes, growth in our cardiology program and positive results in other outpatient service lines. We also experienced an increase in intensity during the quarter.

Acquisitions continue to play an important role for our company, with opportunities being fueled by the pressures facing the industry as a whole. These pressures are causing more community hospitals to look for opportunities to join strong systems like LifePoint that can help physicians plan for the future. We have the financial, operational and quality resources to help them survive in these challenging times. Our pipeline remains very active. We will continue our disciplined approach to acquisitions.

In late March we formally opened the new Clark Regional Medical Center in Winchester, Kentucky. We’re very excited about Clark’s prospects and we’re confident that it will allow us to grow in that marketplace. In July we’ll open the new mobile office building on the Clark campus, allowing key members of our medical staff to relocate to the new facility.

After just over a year the Duke LifePoint component of our acquisition strategy has been very successful with four acquisitions completed totaling approximately $200 million in revenue. On April 3 Duke LifePoint finalized a joint venture with Twin County Regional Healthcare, the third hospital to join the partnership and the first Virginia hospital in the network. Duke LifePoint is pleased to partner with Twin County, which complements LifePoint’s existing network in the Southern Virginia area and adds to our presence in this state.

In early March Duke LifePoint signed a memorandum of understanding with Marquette General Health System. Marquette is a tertiary care provider serving 300,000 residents in the Upper Peninsula of Michigan and has leading programs in cardiology and oncology. This will be Duke LifePoint’s largest acquisition to date and the first to be considered outside of North Carolina and Virginia. We’ll continue to move forward with due diligence and anticipate that this acquisition will close in 2012.

Duke LifePoint has great potential and the response it has received proves its scope extends beyond our initially targeted region. As you know, providing patients with quality care in the right setting is one of our top priorities at LifePoint. In this quarter we began our hospital engagement network contract with CMS. This is yet another way LifePoint has been able to differentiate itself as a provider of quality healthcare and as a preferred partner to other community hospitals. Through this engagement LifePoint is working with our physicians to customize best practices and to improve patient safety and clinical outcomes. We’re committed to equipping our hospitals and hospital support center leaders with the tools and training they need to execute our strategic plan and drive meaningful quality improvements.

With that, I’d now like to turn the call over to Jeff to discuss our financial results for the first quarter. Jeff?

Jeffrey Sherman

Thank you, Bill, and good morning, everyone. The first quarter performance was solid with several notable items impacting operating results, including the Medicare Rural Floor settlement, a delay in a new Medicaid provider tax program and the naphtha impairment charge.

Starting with volumes, on a same-store basis admissions were down 3.9% in the first quarter. In the first quarter of 2011 we experienced widespread flu activity in our states, which did not repeat in 2012. Flu admissions were down significantly in the quarter and represented approximately 65% of the admission decline versus the prior year. Lower deliveries represented 10% of the admission decline, with the closure of one OB program in 2011 representing most of this decline. Adjusted admissions for the quarter decreased by 0.4% on a same-store basis versus prior year.

Outpatient activity was driven by stronger surgical volumes and the continuing growth in cardiology, oncology and imaging services. We are encouraged with the surgery volumes in the quarter, with total surgeries increasing by 3.2% on a same-store basis from prior year.

Consistent with the fourth quarter of 2011, my comments this morning are based on revenues after deducting the provision for doubtful accounts. Revenues in the first quarter were $851 million, an increase of $93 million or 12.2% versus prior year. Same-store revenues increased by $63 million or 8.3%. On April 5 a settlement agreement was signed to resolve outstanding payment disputes regarding the rural floor settlement. LifePoint recognized $31.3 million in Medicare revenue and $25.6 million in EBITDA in the first quarter as a result of this settlement. Excluding the rural floor settlement same-store revenues grew by 4.2% in the quarter.

Bad debt expense was 17.9% of revenue, up 80 basis points from the prior year. And charity care write-offs were 3.2% in the quarter, an increase of 60 basis points after adjusting for the Rural Floor settlement. The allowance as a percentage of self-payer was 86.9% in the first quarter, consistent with the prior year. Income from continued operations was $165 million, an increase of 14.6% over prior year. Diluted earnings per share from continuing operations were $1.16 in the quarter, an increase of 30.3% over prior year.

Turning to pricing, net revenue growth was strong in the quarter. On a same-store basis, net revenue per adjusted admission was up 8.8%, and after adjusting for the Rural Floor settlement, was up 4.7% over prior year. Our guidance for the year reflected our expectation that Medicaid pricing would improve versus 2011 and be in a range of flat to down 2% for the year.

This was in part based on our expectation that a new provider tax program in West Virginia would be approved in the first quarter of 2012, with a retroactive effective date of July 2011. While this did not occur, we expect to record approximately $5 million in EBITDA in the first quarter, representing three quarters of payments net of expenses. We remain confident that this provider tax program will be approved in either the second or third quarter of 2012. We expect this provider tax to generate approximately $10 million in incremental EBITDA in 2012.

The Medicare case mix was up by 0.8% in the quarter, with the total case mix up by 1.2% over prior year. Our strong pricing was driven by solid outpatient volume, higher intensity and a favorable payer mix, with the commercial revenue mix up 240 basis points on a same-store basis versus prior year after adjusting for the Rural Floor settlement.

The following cost metrics as a percent of revenues are adjusted to exclude the Rural Floor settlement. SW&B costs increased by 100 basis points over prior year, due to increasing physician employment and higher health insurance costs. Supply costs for the quarter were flat, with favorable pricing and high-cost items offsetting increases in pharmacy costs driven by growth in oncology programs. Other operating expenses in the quarter increased by 170 basis points primarily due to higher contract services, provider taxes and costs associated with the Rural Floor settlement.

As we discussed on the fourth quarter call, we expected high-tech payments to be a head wind in 2012, with the majority of the payments recorded in the second half of the year. For the first quarter, we recorded $1.2 million in Medicaid meaningful use payments and had related incremental operating costs of $3.6 million, plus $2.2 million in incremental depreciation in the quarter. This calculates to EBITDA loss of $2.4 million and a net loss of $2.9 million, or $0.06 in the first quarter of 2012. We also incurred $600,000 in costs to relocate patients and open the new Clark Regional Medical Center and $900,000 in acquisition costs related to Twin County and other deals in the pipeline.

Finally, we had an impairment charge of $3.1 million in the first quarter relating to capitalized costs associated with information technology assets that were not necessary for our ongoing IT strategy. Cap slope from continuing operations for the quarter was $74 million, versus $116 million in the first quarter of 2011. Primary driver of lower cash flow from operations was increasing accounts receivable. This increase was due to the $31.3 million in AR, recorded from the Royal Floor settlement, a $10 million buildup in AR in our recent acquisitions and typical first quarter seasonal increases.

The first quarter of 2011 was also favorably impacted by approximately $12 million in collections for aged AR related to Clark and HighPoint. We have received the Medicare tie-in notices for the recent acquisition and expect to collect this AR as well as the Royal Floor settlement in the second quarter. We incurred $61 million in capital expenditures in the quarter with $28 million spent on IT systems and that’s met primarily the minimum requirements. Depreciation in spend increased by $5.4 million, or 13.6% versus the prior year. The increase was driven by higher IT investments and two new hospitals in the quarter versus the prior year.

We completed our move into the new Clark Regional Medical Center at the end of the first quarter, and will have an amount of appreciation for this hospital in the remainder of the year. On April 1st, Duke LifePoint Healthcare purchased an 80% interest in Twin County Regional Healthcare for $20 million or approximately 50% of revenue. We will be consolidating the results of Twin County with non-controlling interest reporting for the JV partners.

The escrow was funded at the end of March and it is recorded as a deposit and not our assets at the end of the first quarter. We bought less than $100,000 in stock in the quarter. The company also redeemed approximately $5.4 million of stock from employees in the first quarter for tax withholdings related to the vesting of stock awards.

We finished the quarter with $116 million in cash on-hand. Additional information regarding our first quarter results is available by reviewing our SEC filings, including our 10-Q which will be filed later today.

In summary, because there are a few pluses and minuses, I would like to provide management’s perspective on the quarter. First, starting with EPS of $1.16, subtract $0.33 for the net benefit of the Medicare Rural Floor settlement, then add back $0.04 for the absent impairment charge and $0.07 for the delay in recording the West Virginia provider tax totaling an adjusted EPS of $0.94. We do not adjust EPS for the $0.06 per share impact for the meaningful use loss in the quarter.

Given these items and the fact that the Medicare Rural Floor settlement was not in our original guidance, we are raising our adjusted EBITDA guidance to be in a range of $565 million to $595 million for the year and EPS to be in a range of $3.35 to $3.60 for the year. I will now turn the call back over to Bill.

William Carpenter

Thanks, Jeff. Before we begin the question-and-answer period I’d like to provide some closing thoughts. To summarize the quarter, strong operation volumes and a favorable payer mix helped to offset softer inpatient admissions due to a very light flu season. In addition we’re encouraged by our 3.2% increase in total surgeries on a same-store basis in the quarter. Finally, Jeff has reviewed the factors contributing to our adjusted EPS of $0.94 for the quarter and we believe we are well positioned to achieve the high end of our increased guidance this year.

I’m extremely proud of the hard work that the entire LifePoint team has done throughout this quarter. As always, I’d like to thank the talented physicians, nurses and other employees throughout the LifePoint system. LifePoint’s off to a solid start and we look forward to continuing to provide quality care to the communities we serve as we create value for our stockholders.

With that, operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question is from the line of Adam Feinstein with Barclays Capital. Please go ahead.

Adam Feinstein – Barclays Capital

Hey. Thank you. Good morning, guys. Appreciate the overview there, very helpful. Maybe just a quick housekeeping question then a more detailed question, just on the West Virginia provider tax, will that be retroactive as of January 1? Or how is that going to get finalized, just what’s the details there?

Jeffrey Sherman

Yes, Adam. This is Jeff. Once the state submits the state plan, they meant to CMS for approval, the clock starts. So the West Virginia provider tax will be retroactive to July of 2011. So it was our expectation it was going to be approved actually first in the fourth quarter and then into the first quarter of this year. And it will include – we were expecting it to include three quarters worth of payments in the first quarter of this year, but it will be retroactive. So if it’s approved in the second quarter, there’ll be four quarters worth of payments for that tax.

Adam Feinstein – Barclays Capital

Okay. Great. Then just, so I guess just to maybe get a little bit more color. The outpatient surgery number was very strong, up 4.9%. So a very robust number there, so, you know, pleased to see the trend there. So maybe just comment a little bit about the volumes in general and just the mix. And obviously surgeries are strong, inpatient still a little bit soft, so just maybe just more color would be great. Thank you.

David Dill

Adam, this is David. I’ll start and I’ll let Jeff fill in any blanks that I leave. On the surgery side, we are very encouraged with the stabilizing and growing surgical volumes that we saw in the quarter. If you look at inpatient surgeries down 1.8%, outpatient surgeries up 4.9%, that total is up 3.2% when you put those together. Keep in mind that back in the third and fourth quarter conference calls, we did talk about the acquisition of an outpatient surgery center.

We’ve also talked about two surgery centers in our markets that have opened that we haven’t comped out of yet. After you exclude all of those, we still saw surgical volumes up in the neighborhood of 0.5% to 1% and that compares to down about 2.5% in the fourth quarter. So the sequential increase we are encouraged with. Orthopedic surgeries are flat to growing, general surgery as well. ENP volumes for us have been a little soft but the emphasis around general surgery and orthopedics are paying off.

As it relates to inpatient admissions, clearly inpatient surgeries is having an impact. Deliveries are down a little bit as well, down about 3%. Then, as Jeff talked about in his prepared comments, really slow respiratory volumes in the quarter that made up about a half to two-thirds of the overall volume decline from first quarter last year to first quarter this year.

Jeffrey Sherman

Yes, I would only add that the inpatient surgery trend definitely improved quite a bit from what we were averaging all of 2011. So being down 1.8% was a marked improvement on the inpatient surgery side. The overall mix, as I commented, was positive. We had commercial revenues on a same-store basis up by 240 basis points. So our strong outpatient growth in some of the things we talked about, imaging services, oncology, cardiology helped, on the commercial revenue side and particularly on the outpatient side, drive improving net revenues. And then the overall intensity was up in the quarter around 1% on the Medicare side and a little bit over 1% in total.

William Carpenter

This is Bill. Just to add on, the impact of low respiratory volume, a light flu season if you will, and a rural market where medical admissions are perhaps at a more profound impact, can be felt more there than it may be in a more urban setting. But our strategies around adding more intensity with respect to service lines that we’re bringing into these markets is going to continue to be helpful to us as we go forward.

Adam Feinstein – Barclays Capital

All right. Thank you very much. Appreciate it.

Operator

Our next question is from the line of Ralph Giacobbe with Credit Suisse. Please go ahead.

Ralph Giacobbe – Credit Suisse

Thanks. Good morning. Can you maybe talk about the margin profile of the company? It certainly kind of bounced around a little bit with some of the larger deals you’ve done, so where do you think you kind of can improve margins to with the current asset base?

Jeffrey Sherman

Well, you’re right, Ralph. As we continue to add acquisitions that’s going to impact margins. And in the first quarter that’s about 50 basis points worth of margin on a continuing operations basis with that – recent acquisitions in there. We think there’s a lot of things we can do to improve margins. Certainly driving strong outpatient revenue growth can improve margins. We think we have opportunities still on the cost side to improve margin. It’s going to be lumpy with meaningful use payments to get a clear quarter-to-quarter picture on margins, but we think we have the opportunity to improve margins over time with adjusted admission growth and improving costs are related to that growth.

Ralph Giacobbe – Credit Suisse

Okay. And then just going back to sort of the volume – some of the volume commentary, anything to note on sort of the observation or one-day stay side? Or is that pretty stable?

Jeffrey Sherman

No, it’s been stable for us. We talked about it a lot in 2009 and 2010 that one-day stays were declining. One-day stays have improved some in 2011 and I would characterize both one-day stays and observation visits in a stable range for us now.

Ralph Giacobbe – Credit Suisse

Okay. That’s helpful. And then just my last one, on the flu impact obviously 2% to 2.5% – looks like it may be 2%, 2.5% sort of drag. Should – do – and should we think about the impact on the inpatient and outpatient basis the same way? Or is there one that hits disproportionately more?

Jeffrey Sherman

Oh, I think it hits for us more the inpatient side in terms of the admission number.

Ralph Giacobbe – Credit Suisse

Okay. So on the outpatient side, the numbers there, is there any estimate for what you think the flu could have contributed?

Jeffrey Sherman

Well, when you do the math I mean it certainly impacted that, probably 150 basis points, 200 basis points as well.

Ralph Giacobbe – Credit Suisse

Okay. Thank you.

Operator

Our next question is from the line of Frank Morgan with RBC Capital Markets. Please go ahead.

Frank Morgan – RBC Capital Markets

Good morning. Two questions very quickly, you commented on the improvement in the trends and the commercial mix, and I think you said that mostly attributed to the out-patient side. I wanted to make sure that was the case. And then also, is there any geography where, maybe, the commercial mix is improving? That would be the first question. And the second one would be just how much did uninsured admissions impact the volume deposit negatively? Was it up or down or what percentage of admissions was it? Thanks.

Jeffrey Sherman

Frank, no particular geography on the commercial mix side. It is more driven by out-patient. As you know, we continue to have a fair amount of contracts that have a good out-patient reimbursement on the commercial side, and having good out-patient growth will drive more commercial revenue for us. Self-pay admissions for us, they go up and down a couple of percentage points.

They were down a little bit over – I think or increase, excuse me, a little bit over 3% in the first quarter. But that’s a small number. I mean it’s less than 200 admissions and overall remained very stable around 6.2% of total admissions. So we haven’t seen that change much. It’s been pretty stable. And that number going up or down three or four percentage points really doesn’t impact self-paid revenue that expend that much in any given quarter.

Frank Morgan – RBC Capital Markets

Okay, thanks.

Operator

Our next question is from the line of Gary Lieberman with Wells Fargo. Please go ahead.

Gary Lieberman – Wells Fargo

Thanks. I have just a quick housekeeping question up front. Jeff, can you just walk through the HCIT impact? You said it was $1.2 million of revenue. And then can you just give the expenses again?

Jeffrey Sherman

Yes, it was $3.6 million in operating expenses and the incremental of $2.2 million in appreciation. So it was net EBITDA loss of $2.4 million and a net income loss of $2.9 million. So it was a $0.06 negative EPS impact in the first quarter of this year. That compares to a $0.03 negative impact in 2011. We didn’t have any revenue in the first quarter of 2011, but we did have a little bit less than $2 million in expense. So it was about $1 million incremental EBITDA loss in the first quarter of this year and a $0.03 higher EPS loss in the first quarter this year.

Gary Lieberman – Wells Fargo

Okay. That’s helpful. And then, maybe, if you could just talk a little bit about the Marquette JV, that’s a new geography for LifePoint. So can you talk a little bit about how you came to look at that market? Is Michigan sort of going to be a new market for you guys? Talk about that a little bit.

Jeffrey Sherman

Well, the Upper Peninsula of Michigan is very much a market that looks like the LifePoint markets. It’s a very rural area with – in this case, a very good population base. So we feel like the Upper Peninsula and Marquette in particular is a great fit for LifePoint. We’re also excited that Duke, our partner in the Duke LifePoint partnership, was interested in moving into the – outside of our original planned geography for the Duke LifePoint partnership.

But they saw there a hospital that can really benefit from the expertise that Duke brings to the table, particularly with respect to the cardiology program. Marquette’s a top 50 cardiology program. They have a great oncology program. So these are programs that we can expand and grow along with our partner at Duke. So it looks very much like LifePoint and we think – very excited about the fact that our Duke partner is interested in going there with us.

Gary Lieberman – Wells Fargo

Okay. Great. Thanks a lot.

Operator

Our next question is from the line of A.J. Rice with UBS. Please go ahead.

AJ Rice – UBS

Hi, everybody. A couple questions if I could ask, first of all the roll-out of the replacement hospital for Clark, does that – did that impact the quarter from your perspective in any way that we should think about or be aware of?

Jeffrey Sherman

No, that didn’t have a material impact, A.J., in the quarter. We did relocate patients and move. We did incur about $600,000 in costs that I don’t expect to repeat in the quarter, really from moving patients and just gearing up the hospital and winding down the old hospital, but nominal impact on volumes for the company.

AJ Rice – UBS

Okay. Obviously the recent acquisitions are maturing and that’s having an impact on margin as that plays out, but if you look at supplies, labor and other the divergent trend a little bit there, any commentary around what you’re seeing in specific cost items? And whether favorable trends, some headwinds, anything to highlight?

Jeffrey Sherman

Yeah. I would say for supplies we are having some good results with high cost items and getting some price reductions there in the area of orthopedics, in particular. We continue to think we have good opportunities on the supply side, both from high cost pharmaceuticals that we’re working on as well as high cost implant items. So I think we have more cost savings to achieve there on the supply side. Other things impacting costs are increasing physician employment, that’s impacting the SM&D line.

From a trending perspective we saw our number of employed positions increase in the first quarter and so that’s impacting costs as well. And then we just have costs in the other control book expense lines are related to provider taxes related to meeting meaningful use, some related to the Rural Floor settlement that are impacting costs there. But overall I would continue to say that we have cost opportunities in each one of those categories that we think we can achieve over time.

AJ Rice – UBS

Okay. And then just one, maybe just ask a little bit further about Marquette. I know a while back you guys were talking about potentially using the Duke relationship as a template for other relationships with major teaching hospitals around the country. Obviously if we do deal, it can reach as far as Michigan. Does that lessen the interest of potentially striking other of those type of relationships? And maybe just comment on the fact that all of a sudden now it’s not just the greater North Carolina or Southwest Virginia, it’s all the way out in the Michigan. Is that given the fact that you’ve announced that, does that give and rise to people from other parts of the country calling and saying, hey, I’d like to explore doing something with you?

William Carpenter

Well, A.J., we certainly have been extremely pleased about the recession that Duke LifePoint partnership has received both in North Carolina and contiguous area and outside of Duke’s immediate marketplace. We’re still working together with our partner at Duke to understand the potential reach of the partnership and I think really at this point it’s still too early because it’s on any boundaries for what we will and we won’t pursue together.

AJ Rice – UBS

Is it a closure from pursuing a similar relationship with another teaching hospital do you think?

William Carpenter

No. It doesn’t. In fact there will be other partnerships but Duke is always going to be unique, A.J., Duke is very involved in LifePoint’s quality in patient safety program. They’re playing a significant role in this hospital’s engagement network contract that we talked about and they’re going to help us have an impact on quality throughout LifePoint hospitals. So we’re very excited about that. We’re continuing to work and develop relationships that could develop in the new partnerships but it’s too early to comment on any of that and these deals are very complicated. I am very pleased and very gratified I guess if you will about the perception that Duke LifePoint has received. Our people have seen it as an innovative approach to healthcare, an innovative approach that LifePoint has taken to improve quality care in smaller community hospitals and I think it has great potential.

AJ Rice – UBS

Yeah. Okay. Thanks a lot.

Operator

Our next question is from the line of Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. Thank you. Just wanted to clarify a couple of things on the guidance, basically it feels like you’re keeping the core number the same but you’re just raising the guidance for the settlement. Is that the right way to read it?

Jeffrey Sherman

I think that’s a fair way to look at it, Kevin. We raised the low end and the high end for basically the net benefit, the Medicare Rural Floor settlement on the EBITDA line and basically kind of the net between the Rural Floor settlement and the write off for the IT on the EPS side.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. And just to make sure. The West Virginia impact that you mentioned, $10 million, that’s consistent with your undersold assumption? There’s just a delay of timing not a change in that in the view there?

Jeffrey Sherman

That is correct. So when we gave our initial guidance in 2011 we expected Medicaid pricing to improve and be flat to down 2%. Getting the Medicaid West Virginia provider tax was certainly part of that guidance, and we knew we didn’t receive it in December. So when we gave it for year was assuming we would have six quarters’ worth of benefit in 2012.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. And quantifying the headwinds on the volume side were helpful. It wasn’t clear to me whether those numbers though were adjusted for the impact of leap year. I guess, were they? Or is there an actual 1% somewhere that we have to think about?

Jeffrey Sherman

No. Leap year definitely had an impact on an adjust-admission basis probably in the 50 to 60 basis point range I would estimate. So it definitely impacted that, but if you factor in – if you normalized for the weak flu and normalize for leap year on adjust-admission basis you’d still have positive adjust-admission growth.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. And then how do you guys view this proposed rule from CMS on the in-patient side? I know that the impact on rural hospitals was worse than the impact for overall hospital. Are you impacted by any of the rural-specific items? And I guess based on this, what would you think your fiscal 2013 update might be?

Jeffrey Sherman

Well, I think first it’s important to note that it’s a draft rule that’s subject to change. Over the past several years the final IPPS has changed significantly from the draft rule. So we’re going to continue to be active participants in the process and provide feedback on the proposed rule through the appropriate channels. On a historical basis Congress has recognized the critical role that rural hospitals play to ensure that healthcare services are maintained at the local level.

So we will continue to inform our congressional representatives about the important role our hospitals play and need for this funding to help ensure we can provide the needed emergency and other health services. We’re continuing to study the draft to determine the ultimate impact to LifePoint. I think it’s premature for us to comment on the proposed draft rule. We do benefit from some rural designations and we will be actively participating in the process to hopefully insure that those continue.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. Great. Thanks.

Operator

Our next question is from the line of Gary Taylor with Citigroup. Please go ahead.

Gary Taylor – Citigroup

Hi. Good morning. A few questions; I guess one, just conceptually I want to understand it. As you kind of walked through your view of normalized earnings for the quarter, this $5 million for West Virginia, that’s for three trailing quarters. Why would we add back $5 million? Why wouldn’t we just add back $5 million divided by three or $1.6 to a normalized EBITDA number?

Jeffrey Sherman

Well, as we were reviewing it, I mean we were expecting to get it in the first quarter, Gary. So I mean our view as we thought about the first quarter performance was it should be in the first quarter. As you go out over time, that will normalize out. So we’ll get one quarter’s worth next year. But I think the important thing to note is, for the year that was included in our guidance. The $10 million was included in our guidance for the year, and we still expect to get that during the year.

Gary Taylor – Citigroup

Okay. That makes sense. So it’s a comparison to what was in your guidance.

Jeffrey Sherman

Correct.

Gary Taylor – Citigroup

Got it. The other question, you gave us the net revenue per adjusted admission, excluding the settlement. I think the same sort of net revenue goes from 8 4 to 4 3, but I don’t know if you gave that or if you agree with that number? Same-store net revenue excluding the settlement would be 4.3?

Jeffrey Sherman

That’s correct. I did give that number and that is correct. And the same-store net revenue per adjusted admission was up about 4.7%.

Gary Taylor – Citigroup

Right. And the way you calculate your outpatient factor, would this have been excluded from that, so it has no impact on the adjusted admissions count?

Jeffrey Sherman

That is correct.

Gary Taylor – Citigroup

Okay. Last year, I know you did make a 401(k) match in the first quarter. Was that a year-over-year drag? Did you do some matching in this quarter?

Jeffrey Sherman

We did do matching in this quarter, as we’d planned heading into the year.

Gary Taylor – Citigroup

Right. I didn’t see anywhere in the release that you talk about same-store margin. Do you have either a same-store margin or a same-store EBITDA for us?

Jeffrey Sherman

Yes, if you adjusted for the Rural Floor settlement, same-store margins, and the West Virginia provider tax, same-store margins were 18%, down about 100 basis points from prior year.

Gary Taylor – Citigroup

And I guess I’m just trying to think about, you know with pretty good pricing and mix growth and good surgical growth where that pressure is. And I guess the answer is because any patient is still down and the higher doc employment, I guess, are the primary pressures on the margin?

Jeffrey Sherman

That’s correct. And we also had higher benefits costs, primarily driven by health insurance costs that were up for self-insured, so we had higher claim activity in the quarter as well as the 401(k) which you already noted.

Gary Taylor – Citigroup

And my last question. When you look at all of your non-acquired – I’m sorry, non-same-store revenue in the quarter, in the EBITDA associated with that non same-store revenue, is that EBITDA positive, absolute or is that a negative, I guess?

Jeffrey Sherman

It’s a small number. It’s breakeven, slightly less than break even. Remember, we just acquired Maria Parham and Person in the fourth quarter. So we’re really just into early phases of the ramp-up of those two facilities. It’s a small number in total, but it’s breakeven or slightly negative and that’s between the two hospitals.

David Dill

And, Gary, since we are early in the integration of those, we tend to be on the conservative side of revenue estimates until we get and have visibility around revenue recognition. So while they may be roughly breakeven today, I do expect that we’ll see some benefit in the out four. But keep in mind, just that they are small on a relative basis.

Gary Taylor – Citigroup

Got it. Do you have the total of non-same-store revenue for the quarter and if not, I’ll circle back.

Jeffrey Sherman

It’s around $36 million.

Gary Taylor – Citigroup

$36 million and there’s no adjustments to that? It’s none of the Medicare or anything would have impacted that, right?

Jeffrey Sherman

Correct.

Gary Taylor – Citigroup

Okay. Thank you.

Operator

Our next question is from the line of Tom Gallucci with Lazard. Please go ahead.

Thomas Gallucci – Lazard

Good morning. Just a handful of follow-ups, just on Gary’s question there, the 18% same-store margin, just to be clear, what were you doing with West Virginia numbers in that?

Jeffrey Sherman

I was calling out a normalized number. I was adding in the West Virginia number and backing out the Rural Floor settlement.

Thomas Gallucci – Lazard

Okay. That’s good. Thank you. And then I know acuities showed some nice step-up. Is the lack of the flu material to the numbers that we’re seeing on the intensity side or not so much?

Jeffrey Sherman

It impacted some but I think the surgical volumes are impacting on it, compared to basis as well but not down as much, anything from high intensity procedures and the high intensity cardiology as well.

Thomas Gallucci – Lazard

Okay, good. On the provider fees, I guess, can you just remind us what are the other or are there any other major states that you’re expected money from this year or do you continue to get money from, just so we can make sure we’re all on the same page there?

Jeffrey Sherman

Well, we’re getting dollars in Alabama. We’re getting dollars in Louisiana. Those are two big states. West Virginia we’re expecting. I mean other states have provider taxes. Tennessee is basically neutral on a bottom line basis. Kentucky has provider tax program as well. We have some in our smaller states; don’t have a major impact. Colorado is a state we have them in. Bottom line, we’re calling out the West Virginia. That’s new and incremental. The rest of them are pretty stable in comparison to prior year.

Thomas Gallucci – Lazard

Okay. Good. Then the last one I guess, David, on the outpatient side, I think you alluded to it in an answer to a question before. Your comps have new competition coming up where you just did at the end of the quarter. Can you remind us of some of the dynamics there?

David Dill

Are you talking on the outpatient surgeries?

Thomas Gallucci – Lazard

Right.

David Dill

Really nothing new this quarter. This carries back into last year where we had a couple of surgery centers that have opened up; one in Texas and one in Louisiana. The larger of the two actually happened in the spring of last year. We’ll be comping out of that in Q2. The other one we will not be comping out of until we get toward the end of the third quarter. Really no new competition other than those two that we previously mentioned.

Thomas Gallucci – Lazard

Right. Okay. Perfect. I just wanted to make sure of the timing. Actually that helps as we look forward. Thanks a lot.

Operator

Our last question comes from the line of Whit Mayo with Robert Baird. Please go ahead.

Whit Mayo – Robert W Baird

Thanks. I just wanted to clarify one more thing on West Virginia. Jeff, what’s the revenue and the cost associated with that provider fee program this year?

Jeffrey Sherman

The revenue is about for the year $13 million to $14 million and cost is about $3 million or $4 million. The net benefit is the $10 million on EBITDA.

Whit Mayo – Robert W Baird

Got it. And I’m sorry, but what should we think about as occurring, assuming this program continued in perpetuity, what an annual contribution would be just to kind of size up in period out of period?

Jeffrey Sherman

It’s a little bit over $6 million; between $6 million and $6.5 million.

Whit Mayo – Robert W Baird

Okay. Of net. What about Las Cruces and the UPL program there? Is that up meaningfully on a year-to-year basis? Maybe just remind us of the status of that particular program.

Jeffrey Sherman

The status is active and it’s pretty consistent on a year-over-year basis. It hasn’t changed dramatically up or down. It is ongoing and approved to be ongoing. We don’t anticipate any change in that status.

Whit Mayo – Robert W Baird

Okay. The prior disclosure is about the size of that program. The contribution hasn’t materially changed.

Jeffrey Sherman

Correct.

Whit Mayo – Robert W Baird

Okay. Maybe for David I was just hoping you could maybe update us a little bit on the employment strategy. Maybe just ask it a different way is how should we from the outside be gauging your success with that strategy at this point?

David Dill

I think part of it is a strategy; part of it is a reality of the market place, and as we continue to recruit 250-plus doctors into our communities, a growing number of those will be employed physicians, probably one in three a year and a half ago, moving closer to one in two now. That trend is really market-driven and less just a strategic, this is the direction we want to go. Where success will be measured is ultimately on the volume side as we continue to bring doctors in, not only to back bill but to continue to grow service lines and provide call coverage that we need in some of these communities. The ultimate answer that you will be able to judge the success on will be volumes.

Whit Mayo – Robert W Baird

Got it. You guys have put a lot more effort involved into on-boarding deals as you acquire hospitals, and I’m just wondering how that effort may be helping on vetting transactions and pitching deals. I’m just kind of curious how Jeff Seraphine’s group sort of marries up with looking at acquisitions and their contribution on the front end of the transaction.

David Dill

This is a process that we continue to refund, but something that we are very proud of. We’ve got a great team, and I think, Whit, you’ve had a chance to meet a few of them, but we have a great team in what we call our Transition Services division. That division works very closely with Leif and his team here at the hospital support center, and as we are vetting transactions, our operators are there literally every step of the way in the building of the Pro Forma, the vetting of the pro forma, looking at quality results to make decisions on pricing, but also whether or not we want to pursue that opportunity. That helps us on the front end. It helps us equally, if not more, on the back end post-closing.

So during our diligence phase, it’s much more the diligence. It’s really integration planning as well. So as we integrate those hospitals into the company, the same team that was there meeting with the leadership team, the board, the physicians, six months prior to the bill are the same people integrating the plan that was mutually agreed upon during that process, and I do think that has gilded success on the integration side. It’s what gives us confidence as we continue to use the balance sheet and the leverage that we have to take advantage of the pipeline; gives me a lot of confidence in our ability to integrate.

Jeffrey Sherman

I think as we look at larger hospitals as well, we’re going to see more employed physician practices as we look at larger acquisitions, so certainly being able to manage those and improve operating performance we think also gives us sub-site opportunity on acquisitions.

Whit Mayo – Robert W Baird

Yeah. No, I can say from visiting your hospitals you’ve acquired that the continuity of the leadership has been really helpful in integrating those transactions.

William Carpenter

I think it’s a real differentiator. Our Transition Services division has been an outstanding strategic effort for us. It builds trust through the process as they develop not only the due diligence data but translate that data along with the operators and the board of trustees of that hospital to know exactly where we’re going from day one after we close the acquisition. It’s a real helper for us and a real differentiator for our program.

Whit Mayo – Robert W Baird

Okay. Thanks a lot guys.

Operator

And our last question is from the line of Darren Lehrich with Deutsche Bank. Please go ahead.

Darren Lehrich – Deutsche Bank

Thanks for taking the question. So I just want to make sure I’m hearing what you’re saying about the physician employment cost and maybe just to clarify. Can you maybe update us on the number of physicians you’re now employing? Jeff, I think we’ve been tracking just the drag from physician practice expense quarterly. Can you just update us on that number and how much it’s changed I guess from I think it was $8 million or $9 million a quarter range.

Jeffrey Sherman

Yeah. It had been increasing. It increased throughout last year. So we finished 2011 on a continuing operations basis where about $11.5 million EBITDA loss in the fourth quarter. But we are as we acquired a couple of hospitals in the fourth quarter; we did pick up some employee practices on that. The total number of employee physicians has gone up.

We’re at around the 360 range today in the first quarter. I think as we have seen growth there, we will see practice losses early on as we add them and those will begin to stabilize over time. We continue to see for the practices that we’ve operated for 12 to 18 months, the performance improved on those practices. It’s just a question of pace and timing of how many practices get added to see where the losses go. But losses were in line with our expectations in the first quarter and up slightly from the fourth quarter.

David Dill

Darren, in addition you’ll see that number go up as just a result of our ongoing recruiting efforts into the backfill to replace or to grow service lines. Also we’re in discussions with several practices in our markets already. That may result in additional physicians coming into an employment status over time. The good news with those is it’s already an ongoing business that’s rare. So it shouldn’t increase the losses as that number continues to build. But that would be something to keep in mind as you say the absolute number continue to climb, you may not see the losses climb at the same rate.

Darren Lehrich – Deutsche Bank

Okay. That’s helpful. And as we’re thinking about I guess the sequencing of your quarters. Given that trend and then also given the healthcare IT conversions you’re doing and the added DNA. I guess I just want to make sure I’m thinking about the mismatched I guess in the first half of the year between high-tech income in the cost. So, Jeff, maybe can you just help us think about Q2 then if you had $3.6 million of cost and some incremental DNA. How much more does that grow in Q2?

Jeffrey Sherman

Yeah. Well, we didn’t give quarterly specific on that, Darren. I said in the fourth quarter when we get our annual guidance that on the payment side we expect a 10 million with the potential to receive another 10 million in the year and on the payment side.

And again some of that is just meeting meaningful use. I mean we actually get the cash but not be able to record the cash this year. So that was about 10 million to 20 million in payments with operating expenses of about 22 million. So both the operating expenses then the payments will ramp up. We expected most of that would be back and loaded. The payment received in the first quarter was for Medicaid. We’re pretty much done with Medicaid. We may have one or two more hospitals there. So the bulk of the payment is going to be on the Medicare side and I still expected that’s going to be back and loaded in the year.

Darren Lehrich – Deutsche Bank

Okay. That’s helpful. Thank you.

Operator

I will now turn the call back to you, Mr. Carpenter, for some closing remarks.

William Carpenter

Thank you, operator, and thanks, everyone, for participating in today’s call. LifePoint’s off to a solid start for the year. Our plan is to remain focused on executing our strategies, delivering high quality care, growing through acquisitions and in our existing markets, improving operational efficiency and developing high performing talent. We’re confident that executing on these strategies positions us to deliver result of the high end of our increased guidance for the year and continued long-term value for our stock holders. We look forward to further discussions about the company. Thank you for joining the call today and for your interest in LifePoint Hospitals.

Operator

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

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