MedCath Corporation F4Q07 (Qtr End 09/30/07) Earnings Call Transcript

MedCath Corp. (MDTH)

F4Q3 2007 Earnings Call

November 14, 2007 9:00 a.m. ET

Executives

Ed French - President and Chief Executive Officer

Phil Mazzuca - Chief Operating Officer

Jamie Harris - Chief Financial Officer

Analysts

Darren Lehrich - Deutsche Bank

Matt Ripperger - Citigroup

Erik Chiprich - BMO Capital Markets

Rob Hawkins - Stifel Nicolaus

Gary Taylor - Banc of America

Nicholas Jansen - Raymond James & Associates

David Bachman - Longbow Research

Presentation

Operator

Welcome to the MedCath Corporation Conference Call. Today, management will discuss the company's operating results for its fourth fiscal quarter ended September 30, 2007. Parts of this announcement contain forward-looking statements that involve risks and uncertainties. Although management believes that these forward-looking statements are based on reasonable assumptions, these assumptions are inherently subject to significant economic, regulatory and competitive uncertainties and contingencies that are difficult or impossible to predict accurately and are beyond its control including, but not limited to changes in federal law that would limit the physician hospital ownership.

Actual results could differ materially from those projected in these forward-looking statements. MedCath does not assume any obligation to update these statements in a news release or otherwise should material facts or circumstances change in ways that will affect their accuracy. These various risks and uncertainties are described in detail in Risk Factors in the company's Registration Statement on Form S-3/A, which was filed with the Securities and Exchange Commission on March 29, 2007, and its quarterly report on Form 10-Q for the quarter ended June 30, 2007.

A copy of the Registration Statement, including exhibits, is available on the Internet site of the Commission at www.sec.gov. These risks and uncertainties include among others the impact of healthcare reform initiatives, possible reductions or changes in reimbursements from government or third-party payers that would decrease our revenue, a negative finding by a regulatory organization with oversight of one of our facilities and changes in medical or other technology and reimbursement rates for new technologies.

After management's prepared remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press "*", then the number "1" on your telephone keypad. If you would like to withdraw your question, press "*", then the number "2" on your telephone keypad.

I would now like to turn the call over to Ed French, President and CEO. Please go ahead, sir.

Ed French - President and Chief Executive Officer

Hello. Thank you, and good morning to everyone, and thank you to the employees, physicians, investors, analysts, and other friends of the Company for joining in this fourth quarter conference call. Participating today are Phil Mazzuca, our COO and Jamie Harris, our CFO. I'll begin by thanking our doctor partners and our other medical staff members and all the MedCath team members for contributing to what we believe is a successful 2007.

During this last year, we laid the foundation for future growth by putting into place an operating system and culture that maintains our long-standing commitment to quality care while rewarding and requiring accountability that leverages our internal resources and systemizes this system, the phrase you heard me often repeat over the past year. We also have identified various specific growth opportunities, both in our existing markets and in new market center, executing on several of those at this time.

In fact of the five planned areas of execution, we accomplished four of them as intended during the past year. We believe that our operating accomplishments have allowed us to become more predictable that we have historically been and also provides the ability to deliver higher margins.

Accomplishments include these. Our normalized adjusted EBITDA for the year was $108.1 million, up from $99.6 million in the year earlier in line with our guidance that we provided at the beginning of the year. Adjusted EBITDA includes our Harlingen Medical Center up until the fourth quarter, which is when the recapitalization occurred and we began to account for the hospital as an equity investment.

Our fiscal 2007 normalized adjusted EBITDA margin was 14.9%, up 80 basis points from fiscal '06. We are on track to reach an adjusted EBITDA margin of 60% by the end of 2008, a year earlier than expected.

Our marginal cost contribution was 54%, meaning that for each additional revenue dollar, our normalized adjusted EBITDA increased $0.54. This is an area of focus for me and it also speaks to the focus of our operating initiatives and our cultural of focus on finding new ways of doing all things.

Significant highlights include the four growth initiatives that I mentioned earlier which are as follows:

• We started the expansion of our Louisiana Medical Center and Heart Hospital to add 120 beds in capacity to meet the demands of this growing community.
• We started the development of our Hualapai Mountain Medical Center in Kingman, Arizona to bring 105 new beds to this underserved population.
• We are adding 28 inpatient beds to Arkansas Heart Hospital, increasing our bed capacity in that market to 114 and what we believe is one of largest heart hospitals in the United States.
• Also our MedCath Partners Division successfully completed several ventures that are accretive to us and allow us to grow this part of the business even more.

The remaining area of growth contemplates an acquisition during 2008. We have explored several and have yet to find one that fits our profile as to demographics, size, value or all those. I use this occasion to mention that we've eliminated the CDO job, preferring instead use of existing senior management staff to meet the development opportunities.

Actually all the growth accomplishments that I just mentioned were brought to a conclusion by the same group that will bring future deals to a conclusion.

During this quarter, we've completed the recapitalization of our Harlingen Medical Center, an effort that began in 2005, and this puts into a place a permanent ownership and capital structure that will help maximize the growth and success opportunity of that hospital over the long term.

As a part of this recap, Harlingen Medical Center will be accounted for the equity investment and beginning with the three months ended September 30, is no longer part of our consolidated financial results. I am also pleased to report that our full year results were in line with our guidance expectations of a year ago.

We delivered on our operating and financial expectations during the year and I believe we are attractively positioned to do better in 2008. Our growth opportunities allow us to expand the company in terms of completing our vision of becoming the high-acuity healthcare provider, and allows us to diversify and increase our revenue.

Revenue in the fourth quarter was $158.6 million versus $161.3 million when excluding Harlingen from the earlier quarter. This was lower than our internal budgets and resulted for more pronounced seasonal weakness throughout the industry, and in certain of our southwestern markets, decrease in our case mix and lower stent revenue.

We worked closely with our physician partners to understand the current cardiovascular market and they discussed within the outlook for stent placements. Based on a series of discussions over the last few weeks, we believe that the volume declines have reached a trough and are likely beginning to see a major increase. Initial support for this is the fact that during October, we began to see strong admissions and growth in year-over-year stent volumes which our physicians attribute to recent studies showing the efficacy of stenting versus optimal medical management therapy.

While revenues less than budgeted, we are pleased we were able to grow our normalized EBITDA versus a year earlier, and with a margin expansion we realized this quarter, we think that underscores our success. We also have prepared ourselves to be able to address any legislative changes that may occur to our business model.

While we believe that physician involvement and participation are important to the delivery of quality care, we are strong in continued commitment to educate policy leaders of the merits of physician ownership. We are also practical in knowing that there are some healthcare policy leaders that are opposed to it. Regardless, the physician joint ventures are allowed with shared economics or without shared economics for the deals. We will maintain our ability to find attractive opportunities to invest in healthcare assets in markets where we desire to be.

For fiscal 2008, we published our outlook in today's earnings release, and includes the following: Net revenue, $685 million to $700 million; adjusted EBITDA, $110 million to $114 million; income from continuing operations, $32.8 million to $34.3 million; and the capital spending with recurring operations, $35 million to $40 million.

As we stated in our earnings release, we anticipated incurring about $1 million in pre-opening expenses associated with the development of the Hualapai Mountain Medical Center in Kingman, Arizona, which is excluded from the outlook provided above. Our outlook also excludes non-cash share compensation. This amount will vary based on any share or option grants extended during the year.

Let me now turn the call over to Jamie to discuss the financial results.

Jamie Harris - Chief Financial Officer

Sure, thanks, Ed. In our review of the quarter, we will make reference to the adjusted EBITDA. This measure is used by management to measure operating performance in the Alacare Capital.

Adjusted EBITDA and similar metrics are commonly used in the healthcare industry as an indicator of performance and also used as a measure of debt capacity and ability to service that debt. Adjusted EBITDA should not be used as a measure of financial performance as defined under Generally Accepted Accounting Principles.

The calculation of adjusted EBITDA excludes many items in this calculation, and as a non-GAAP measure, it's susceptible to varying calculations. Adjusted EBITDA as presented by us may not be similar to other company's definitions or calculations. Our press release issued and posted on our website prior to this call, provides a reconciliation from income from continuing operations, which is a GAAP measure, to adjusted EBITDA, which you might find helpful as you review our quarterly results.

For this quarter, our net revenues were $158.6 million, down a slight 1.6% from fourth quarter of last year when you exclude $16.2 million in the fourth quarter of 2006 net revenue, which is attributable to our Harlingen Medical Center, which as Ed mentioned is now accounted for as an equity investment.

Income from operations was $14.2 million, compared to $13.7 million during the fourth quarter of last year, again excluding the Harlingen Medical Center results from last year. Income from continuing operations, $2.5 million or $0.12 per diluted share versus $4.5 million or $0.23 per diluted share; income from continuing ops would have been $0.24 had Harlingen Medical Center been accounted for as an equity investment in fourth quarter of last year.

Same facility inpatient surgeries were down 4% this quarter. Of note, our same facility hospitals include 8 hospitals that are consolidated. It does not include Harlingen Medical Center or Avera Heart Hospital of South Dakota, as we have minority ownership in these hospitals. It does also exclude the Heart Hospital of Lafayette, which is accounted for as an asset held for sale.

As we now we have two hospitals with minority ownership, we began with today's earnings release, providing operating statistics for our combined hospitals as well. Inpatients surgeries for the combined hospitals were down 1.7%. Same facility inpatient procedures performed in the cath lab were down 9.1%. For the combined hospitals, they were down 6.2%.

MedCath's fourth quarter of fiscal 2007 financial results contain several unusual items. They include a $500,000 or net impact of $0.01 per diluted share, decrease in net revenue and adjusted EBITDA due to the settlement of Medicare cost reports related to prior years. A $4.8 million or net impact of $0.13 per diluted share, loss from debt refinancing related to pre-payment fees and loan fee write-off associated with the Harlingen Medical Centre recapitalization.

A $100,000, a net impact of $0.01 per share reduction in income from continued ops due to the combined labor costs incurred for the Harlingen Medical Center recap, and the bound settlement of Medicare billing dispute between Arizona Heart Hospital and the Department of Justice.

In the quarter, we also incurred $600,000 or $0.02 per share in pre-opening expenses related to the development of Hualapai Medical Center in Kingman, Arizona.

In comparison, MedCath's fourth quarter fiscal 2006 financial results were impacted by certain items that collectively had a $1 million favorable impact to adjusted EBITDA and a $450,000 favorable impact to income from continuing operations. That was a net positive impact on a per diluted share basis of $0.02.

MedCath's fourth quarter results compared to fourth quarter last year; our net revenue for the 8 same facility hospitals was down 0.5%. On a combined basis, was up 3.6%. Adjustment admissions were up 1.9% for the same facility hospitals and 3.6% for the combined hospitals.

Revenue for adjusted admissions was down 2.3% to $13,625 for adjusted admissions for the same facility consolidated hospitals and was essentially flat for the 10 combined hospitals.

On a divisional basis, hospital division revenue, which was 92.5% of our total revenue for the quarter was down 1.2% to $146.8 million from $148.6 million. This does exclude approximately $16.2 million in net revenue attributable to Harlingen for the fourth quarter.

MedCath Partners' revenue, which was 7.1% of total revenue, was down 6.8% to $11.2 million due to the termination of several ventures during the past year.

On a revenue mix basis, inpatient revenue equaled 74.2% of total hospital revenue, down from 76.2% in the fourth quarter of last year. Net revenue on a payer mix basis for the total company; Medicare, 40.7% in fourth quarter, 42.3% in the fourth quarter of ‘06.

Payer mix within the Hospital Division stated on a net revenue basis, fourth quarter of 2007 – Medicare 43.7%, Medicaid 4.1%, commercial and other 44.5%, self-pay, 7.7%.

Fourth quarter of 2006 – Medicare, 44.9%; Medicaid, 5.1%; commercial and other, 40.8%; self-pay, 9.2%.

The days outstanding within the Hospital Division on a net basis were 49 days for the second quarter, up for the quarter ended September 30, 2007, which was consistent with the same number of 49 days for the quarter ended June 30.

A review of our margins – our adjusted EBITDA margin was 14.8% this fourth quarter of 2007 versus 13.4% for the fourth quarter of 2006, and that is data excluding Harlingen Medical Center and the unusual items that I outlined earlier.

Our view of the expense reported line items for the quarter on a normalized basis and accounted for Harlingen Medical Center as an equity investment; salary expense, 32.3%, up from 30.8% in the prior year. That is the number when non-cash share-based compensation is excluded from each quarter in '07 and in '06. Phil will review later in the call some more specifics related to our salary, wages, and benefits.

Medical supplies were 27%, which was down from 28.2% in the prior year. This decline reflects our case mix in the quarter, whereby we experienced a 40% decline in drug-eluting-stent cases with 4% increase in bare metal stent cases.

We also experienced a 3.4% decrease in AICD volumes this quarter. Our supply chain initiatives benefited during the quarter as we saw a decline in per unit cost of most of the - our most costly devices and benefited from our new GPO arrangement.

Our bad debt expense was 6.3%, which is compared with the last year's 7.9%. This reduction is due to lower self-pay revenue in the quarter, successful efforts in our business offerings to costs our patients from Medicaid and a slightly higher collection of self-pay revenue. For the quarter, self-pay revenue equaled 7.7% of the Hospital Division, total net revenue was, however, down from the 9.2 last year.

Our other operating expenses remained consistent with prior year and equaled 19.6% versus 19.7 for the last year.

Cash flow from continued ops totaled $27.6 million in the quarter, up from $15.6 million in the prior year; CAPEX is $18 million versus $7.5 million in the prior year.

From a balance sheet basis, first, some of our key metrics, cash was $140.4 million. Our total debt was $160.5 million, which includes debt of our one hospital classified as discontinued operations being part of hospital Lafayette.

Our net debt-to-cap ratio of 5% is down from 30.4 in the fourth quarter of 2006 and our net -- our leverage ratio on a net basis is 0.2x. We have considered -- we have considerable balance sheet capacity and liquidity to fund our growth plans. As we had discussed on previous calls, MedCath makes interest bearing loans to our hospitals. We do provide working capital resources to support their financial needs.

These funds are loaned to the hospital ventures in the form of secured debt, and therefore, senior structured to the interest of our hospital equity owners. The notes created through this lending arrangement are an asset to MedCath, and currently totaled $248 million, net of approximately $11.8 million owed to MedCath -- by MedCath to the hospitals.

Due to the consolidation process the financial statements of these notes are eliminated as their liabilities at the hospital level and assets to the MedCath Corp level. As such, these notes were not apparent on our consolidated results, however, as we've discussed, these notes are senior structured to the hospital equity, and would be paid off to MedCath with any proceeds of a divestiture, prior to equity holders receiving any return of capital owner account, an initial capital contributions.

With that I will turn the call over to Phil Mazzuca to review operation.

Phil Mazzuca - Chief Operating Officer

Thank you, Jamie. First, as in the past quarters, I'll spend the few minutes providing you with an update and where we are related to achieving our primary operating objectives, and the current and future trends, and benefits of these objectives.

During fiscal year 2007, we focused on lowering supply cost, through a combination of specific contract negotiations, for certain high cost medical devices, and entering into a new GPO arrangement with Broadlane.

These medical device contracts allowed us to materially reduce our cardiac rhythm management and drug-eluting stent purchasing costs. Combined with our GPO savings, we estimate the fourth quarter impact to be $1.9 million from GPO and CRM contract savings.

We believe we will continue to be successful in reducing our per-unit stent and CRM costs, as competition increases and new products are released. Additionally, we are on-track to achieve a projected run rate of several million dollars in annualized savings by the end of our second quarter of fiscal year '08 related to our GPO contract. Of the reduction and supply expense as a percent of net revenue achieved this quarter, approximately 70% was due to our contracting efforts and 30% was due to case mix changes during the quarter.

We continue to make progress on our productivity initiatives. Our management engineering efforts are beginning to show results by identifying areas in which we can realize better efficiency of labor resources. Although we have just begun to implement the opportunities identified through this process, we have begun to see the financial impact from a worked man-hours basis as well as from a reduction in our average hourly rate.

During the quarter, worked man-hours per adjusted admission declined 2.8%, even though length of stay was up quarter-over-quarter. It should be noted that for every paid man-hour per adjusted admission reduction, the annual savings would equate to approximately $1.5 million.

As Jamie indicated earlier, we've been investing in training and orientation of clinical staff in preparation for our expansion project at Arkansas Heart where we are nearing completion of the 28 bed addition as well as in preparation for the implementation of expanded services at other facilities.

Additionally, we have filled many open clinical positions during the last quarter who'll replace contract labor. These new hires contributed to the increase in orientation hours last quarter, which were substantially higher than the same quarter last year.

Our orientation in training dollars increased to $600,000 quarter-over-quarter, of which more than half was associated with the orientation of training due to the pending capacity in service line expansions at various facilities. Although this investment in orientation and training negatively impacted the quarter, we believe that will materially benefit future quarters.

We've also seen the average hourly rate for our employees decline 1% in the last quarter as compared to fiscal year 2007, in part due to a reduction in contract labor from the quarter.

Another area that we've kept focused on is bad debt. The reduction in bad debt was driven by lower self-pay volumes, improved collections, and our continued improvement in qualifying uninsured patients for third-party reimbursement.

Our managed care initiatives have continued to result in gaining access to additional covered lives. For the quarter, we executed contracts which approximate access to an additional 135,000 covered lives in our markets. We also continue to see improved pricing on certain legacy contracts. Our average increase continues to run in the mid-single digits. For the year, we expect to see managed care pricing increase as 5% to 7% on the average.

Ed mentioned volumes in the quarter were below our expectations. Although volumes have picked up nicely in our first quarter of fiscal year '08, we're experiencing admissions growth quarter-over-quarter to date, as well as adjusted admissions growth. We've also experienced a significant increase in total cath as well as valve and vascular procedures.

In the fourth quarter, we experienced what we believe is a low point of declines in our drug-eluting stent procedures, as recent studies have indicated that safety concerns may have been overstated. We have started to see stent volumes increase over prior year volumes during the first quarter of '08 as well as an increase in case mix index.

I'll now turn the call back to Ed.

Ed French - President and Chief Executive Officer

Phil, thank you. We appreciate your time in listening to our story this morning and we would love to entertain some questions at this point in time.

Question-and-Answer Session

Operator

At this time I would like to remind everyone, in order to ask a question press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Darren Lehrich with Deutsche Bank.

Darren Lehrich - Deutsche Bank

Thanks. Good morning, everyone. I do have a couple of questions here. I just want to start out with housekeeping one, Jamie. The hospital revenue and adjusted admission numbers for the Company in 2006 by quarter, if you could, excluding HMC, I think it would be good just to see how that lays out on a quarterly basis if you have that information?

Jamie Harris - Chief Financial Officer

Yeah, revenue would be $157.1 in the first quarter, $168.6 in the second quarter, $173.6 in the third quarter, $158.6 which is what we reported today in the fourth quarter.

Darren Lehrich - Deutsche Bank

Right.

Jamie Harris - Chief Financial Officer

I don't have the adjusted admissions at the moment, but I will get them for you later, before we end the call.

Darren Lehrich - Deutsche Bank

Okay, that's helpful. And then, the adjusted EBITDA in 2007 on a pro forma basis excluding HMC, just so we can look at the guidance that you just gave us, on a comparable basis?

Jamie Harris - Chief Financial Officer

Yeah, Darren, the net number is $99 million, I don't know, let me double check one thing. That number on a normalized, excluding Harlingen, it's going to be approximately $101.9 million.

Darren Lehrich - Deutsche Bank

Okay, great. That's helpful. And then so, Phil and Ed, heard your comments with regard to volume trends, maybe if you can just help us think about what you are looking for with regard to volume growth in 2008. I am not sure that I caught that, can you just give us a sense for what's embedded in your guidance for either adjusted admissions or admissions in what that growth rate looks like?

Ed French - President and Chief Executive Officer

Darren, good morning, it's Ed, and thanks for the question. We are expecting in '08, 3% to 4% adjusted admission growth, and as you heard us speak to this earlier, the industry had some general softness in the fourth quarter -- our fourth quarter -- third fiscal quarter from most of the others. And, also we saw that the drug-eluting stent conversions continue and we believe, as Phil and I both said, to trough.

One of the perspectives I could give you on this is, is not alluded in science, in terms of my intuitiveness, but what I think, we'll see some admission growth and nor do I have any kind of modeling to represent, but, you consider that the science we didn't know about has suggested that one of the values of the drug-eluting stent was that it tipped the restenosis rate from some cases 20%, 30% depending from studies you saw or for angioplasties or a bare metal stent down to flat 5.8% to 6%.

While over last year, little over a year, we've seen some diversion rate for drug-eluting stents to bare metal stents, increase in angioplasties, and we have also, because of the COURAGE study, I've seen some inclination toward no stent and toward our Optimum Medical Therapy (OMT) as its often referred to. But, if we reflect on the fact that the restenosis rates for angioplasties, bare metal stents exceeded drug-eluting, my expectation is that sometimes in this year or perhaps the next quarter or two, we should begin to see some -- a revisit from patients who were chose to not have drug-eluting stent, and that will be because we think of the increased restenosis rates that science has existed prior to drug-eluting stent intervention.

So, that's not baked into our model, but, we have had conversations with our physicians, many of whom support that notion.

Darren Lehrich - Deutsche Bank

Okay. So, you broke up a little bit, but, 3% to 4% adjusted admission growth, is that what you are seeing? And then if I just revisit the numbers you just gave us, your AICD volumes were down about 3.5%, is that what I heard, Phil? And are you expecting growth in that product line, and then overall, is your expectation that stents in total would grow next year?

Phil Mazzuca - Chief Operating Officer

Well, yes, we are expecting that stents would grow in total next year. And we are expecting AICD volumes to come up as well, because the new electrophysiology physicians who are joining us and our investment in Stereotaxis equipment in Austin and additional investment in electrophysiology for ablation therapy in other markets as well, where our doctors have a lot of interest.

Darren Lehrich - Deutsche Bank

Great. And then just one last thing, Ed, you said CDO do all this in the financial community that means something else, we have this right now, but your Chief Development Officer obviously, has left the company. Is that something that you think you'll be needing to fill and can you just give us your comments there? Thanks.

Ed French - President and Chief Executive Officer

Right, we don't want to fill that job, I really don't need that position. As I indicated in my comments earlier, we have – the deals that we've done this past year, the success that we had in growing the company, the four to five ways we talked about were all done with the folks who are now in place, and we expect to accomplish our growth objectives going forward with the same team.

I have a personal interest in development. I have done a lot of it. And frankly, we are the right size. I'm going to be going be close to any material deal that's done anyhow, so might as well be close from the front end to help me develop them, to help me helping push them through quicker. I think we are short of timelines Darren. I think will short in the time from conception to execution on a project when we want to do it. So my intention is to continue with efforts we've made and we have done a awful lot in the last two months to put our tentacles out in the communities, with the investing community, with other hospital companies and with many of the large systems, not the profit systems and smaller systems in the country, letting them know that we are in an acquisition mode, outling the assets we're looking for and offering our readiness to respond immediately to those opportunities that come forth.

Darren Lehrich - Deutsche Bank

Great. Thanks very much.

Ed French - President and Chief Executive Officer

Thanks you, Darren.

Operator

Your next question comes from Matt Ripperger with Citigroup.

Matt Ripperger - Citigroup

Hi, thanks very much. Just a couple of questions. Can you just update us on the rollout of the new 28 plus beds at Arkansas? And do you expect those to come on line in January, and how should we think of occupancy ramping up for those beds through 2008?

Ed French - President and Chief Executive Officer

Well, Phil may have some observation about that in terms of the ramping, but as I recall -- well, first of all, we will have them on line by January 1st, or perhaps a little bit earlier, but by January 1st as we said we would. And Phil, do you the stats in front of me in terms of our expectation, because we announced earlier our revenue expectation from that, I don't have in front of me.

Phil Mazzuca - Chief Operating Officer

As far as occupancy presents for this fiscal year, we're projecting somewhere in the 30% to 40% range.

Ed French - President and Chief Executive Officer

For the new beds?

Phil Mazzuca - Chief Operating Officer

That's right.

Ed French - President and Chief Executive Officer

Yeah.

Matt Ripperger - Citigroup

Okay, great. And then, you provided in your outlook for next year, you provided maintenance CAPEX of around 35 to 40. Jamie, I wondered if you could provide a little more color in terms of what the incremental CAPEX is for the Arizona facility in Louisiana, and then any other shelf beds you might be taking on next year?

Jamie Harris - Chief Financial Officer

Yeah. Matt, I think you have heard before, our expectations for the total projects. So our view is this year -- give me one second to get some of that data. Expectations, Matt, I think are, Louisiana Medical Center, $21.3 million, and I don't have the spread by quarter right now. So, we will distribute that information to the group later. Louisiana, 21.3; Hualapai Mountain Medical Center, approximately $14.8 million. And again, that's an annual number.

Matt Ripperger - Citigroup

Okay. And in terms of how you intend to finance that, is it going to be the sort of 60-40 debt-to-cash or can you give some color there?

Jamie Harris - Chief Financial Officer

From an outside-looking-in perspective, meaning outside the MedCath, our consolidated entity will be using our cash on the balance sheet to finance this. We will make some inter-company loans, secured loans as we have on our other projects to finance it. But from an outside-looking-in, we'll use cash.

Matt Ripperger - Citigroup

Okay. Great. And then coming back to the volume trends, the cath volumes and surgery volumes on a same-store basis were down about 7.5%. So it looks like the other volumes were up over 20%. Can you give a little more detail in terms of which categories you are seeing such strong growth in?

Ed French - President and Chief Executive Officer

Phil, go ahead.

Phil Mazzuca - Chief Operating Officer

I can tell you that what we're seeing in this quarter and we are currently in right now is several reversals of some of those trends we saw in the fourth quarter, we are seeing pacers up, AICDs up. Our total cath is up significantly. We still saw a little softness in surgeries in the first part of the quarter, but that's picked up in the second part of the quarter.

As far as the other DRGs that you are referencing as far as what we are picking up, we are starting to see additional neurosurgery-type and orthopedic-type volumes. We have some hospitals that are actively expanding into the non-MDC 5 areas, and we are seeing an increase in our ER volumes and ultimate resulting admissions from those volumes.

Matt Ripperger - Citigroup

Okay. Great. And then the last question I had is, I wanted to see how your guidance factored in, any change in the regulatory outlook related to the physician ownership of hospitals. And if there is something on that front, and doctors can only own up to 40%, can you just remind us how many of your hospitals would have to change their ownership structures as a result of that?

Ed French - President and Chief Executive Officer

Well, Matt, you bet. First of all, we've factored in nothing in our guidance that reflects into legislative changes, and that's because we don't see legislative changes makes the difference on how we do our business next year. Those changes as they come to pass or when they come to pass, they have a very long perspective deals, whole hospital deals. And our existing assets, we would expect to be grandfathers, we are hopeful we would able to expand them. And if not, then we will figure out in instance what we do. But anyway, we factored no impact for next year.

We actually see a minimal impact, I think, in the two hospitals, maybe three, where we have ownership that will approximate something more than 40% in aggregate and very few instances where an individual shareholder owns more than two. So those will be no burden at all to resolve, if the limits come into play since we understand it might.

Matt Ripperger - Citigroup

Great. Thanks very much.

Ed French - President and Chief Executive Officer

Thank you, Matt.

Operator

Your next question comes from Erik Chiprich with BMO Capital Markets.

Erik Chiprich - BMO Capital Markets

Good morning. Thanks for taking the call. I was curious, I know you'd mentioned a little bit earlier about mix. Could you talk about the shift of stenting? What percentage is now done in outpatient versus inpatient?

Phil Mazzuca - Chief Operating Officer

This is Phil. What we are seeing is we are not seeing any significant shift beyond what we have been experiencing over the quarters. I think that what we saw over the last year was really the shift from drug-eluting stent to bare metal stent versus really the shift from inpatient to outpatient. The inpatient to outpatient shift, sort of settled out to about two or three quarters ago, so we are not seeing any significant shift into the outpatient side at this point, it was just a shift from drug-eluting to bare metal.

Erik Chiprich - BMO Capital Markets

Okay. Thanks. And then on Medicare reimbursement side, I know there are some changes in 2008 with the new DRGs, if you kind of just discuss what your expectations are for Medicare increases on the inpatient side for next year?

Jamie Harris - Chief Financial Officer

This is Jamie. Erik, we think it's reported earlier that we anticipated the move to the MSCRG to have a mutual slight positive impact to us. At this point, as we move into the new year, it will be sort of little bit of unknown as what the case mix index actually shows up to be, what actually plays out to be, but our anticipation is that we think, based on our internal views on severity that we know is there, we think that'll actually be a little bit higher than neutral, but we expect a slight positive not been materially to weigh that.

Erik Chiprich - BMO Capital Markets

Great. And then finally on the -- I know Arkansas is going to be opening, but you think, there are 135 beds, total beds you were looking to add in the future, could you just give an update on when you expect the rest of those might come on line?

Ed French - President and Chief Executive Officer

Erik, you are right. We have -- we said we would get 135 beds completed by the end of '09 and allotted for about a fourth of -- the 135 to be done this year. And we are approximating that with our consult. By now it's 55 or 60 next year, and we still expect that to be done, and the balance in '09.

Erik Chiprich - BMO Capital Markets

Okay. Thank you very much.

Ed French - President and Chief Executive Officer

Hey, thanks very much, Erik.

Operator

Your next question comes from Rob Hawkins with Stifel Nicolaus.

Rob Hawkins - Stifel Nicolaus

Hi! Good morning.

Ed French - President and Chief Executive Officer

Hi Rob!

Rob Hawkins - Stifel Nicolaus

Can we go over follow-on on Erik's question because I am little bit confused, I mean, it looks from the numbers, we have seen a pretty big shift from Medicare to Managed Medicare and quite a few to southwestern markets, particularly. What are you getting in terms of feedback from them as you renegotiate contracts in terms of medical management shifting from inpatient to more outpatient procedures within the hospitals, do you feel like that's stabilized?

Ed French - President and Chief Executive Officer

Yeah, Rob, I think we might have offered some misunderstandings somewhere on the way, we have not seen a shift though -- a mega shift in the Medicare managed care. We have lesser Medicare that can favor other payers.

Rob Hawkins - Stifel Nicolaus

Okay.

Jamie Harris - Chief Financial Officer

Its on a commercial.

Rob Hawkins - Stifel Nicolaus

Okay, so on the commercial side though, I mean, as I guess understand maybe a couple of quarters back, you were seeing more medical management and it seemed to be playing favorably for you on an adjusted admissions basis, particularly, that you were moving more from inpatient procedures much more of a push towards outpatient and may not just been on the cardiac side, but also on the general med/surge side stuff. Is that still going on, and from Phil's comments it sound like that's stabilized or should we still kind of expect more of a shift towards outpatient volumes?

Ed French - President and Chief Executive Officer

I'll bet you are thinking about the discussion we had going back about three quarters when a couple of markets saw an increase in outpatient stents from the inpatient side, Rob?

Rob Hawkins - Stifel Nicolaus

Yeah.

Ed French - President and Chief Executive Officer

But that was necessarily a switch in payers and generally was not. Actually, we're seeing accretion in our managed care contracts with pricing coming up, new contracts in mid single-digits, 5% to 7% or so. So, nothing adverse on that front.

Rob Hawkins - Stifel Nicolaus

Is it a push towards inpatient or outpatient or do you think it's just pretty much the same business?

Ed French - President and Chief Executive Officer

I think it's -- we've seen some, we'd always see a little bit of push toward the outpatient side, but not materially so as a company goal.

Rob Hawkins - Stifel Nicolaus

Okay.

Phil Mazzuca - Chief Operating Officer

I think, Ed, just to add on to that.

Rob Hawkins - Stifel Nicolaus

Yeah.

Phil Mazzuca - Chief Operating Officer

It's less of a sort of a switch to outpatients versus -- we've seen our outpatient volumes increase, which, is beneficial on the adjusted admission basis, less than a shift itself.

Rob Hawkins - Stifel Nicolaus

And is that increase coming from commercial or Medicare or Managed Care, and I guess and how are you looking at it? Are you looking at Medicare or Managed Care as a Medicare item or do you consider that a Medicare payment or a payer mix or do you consider it commercial?

Phil Mazzuca - Chief Operating Officer

The Medicare or Managed Care is considered commercial.

Rob Hawkins - Stifel Nicolaus

Okay.

Phil Mazzuca - Chief Operating Officer

As far as, seeing increases, we're seeing increases in some of our new contracts. Its not really significant at this point, but the shift that you're talking about, we had some shift in the stent cases in a couple of our markets, but the actual increases that you're seeing in the adjusted admissions isn't increasing our operation volumes. And I don't think it's related to any particular payer source.

Rob Hawkins - Stifel Nicolaus

Okay.

Phil Mazzuca - Chief Operating Officer

I just think that our focus on our sort of our revenue growth also includes outpatient volumes.

Ed French - President and Chief Executive Officer

And so Rob, we should expect that to continue, because remember, in the past we've had as much as 33% of our business on the outpatient side. Typically, acute care hospital earns 50% to 70% of their revenues on the outpatient side.

Rob Hawkins - Stifel Nicolaus

That's right.

Ed French - President and Chief Executive Officer

Their adjusted categories are much different than how we would adjust as a percentage growth. So, as we continue to evolve into a more diversified acute line, open up our emergency rooms, they're already open, understand. But open them up to a marketing and development to greater volumes, we're going to expect to find a disproportionate higher increase of outpatients from those new volumes because the admissions from emergency rooms typically will number, and in the most acute hospitals, you may know, in 16% to 18% or so. Actually, we have a higher admit rate than that. I'd expect over time, our admit rate to come down, but the absolute numbers to come up, that means the absolute numbers in our admits come up, and absolute numbers in outpatients business also would be our admits coming up.

Rob Hawkins - Stifel Nicolaus

Okay. And so, I guess just to summarize, to make sure I have it right. You expect the outpatient volumes to pick up, probably from as you skew a little bit more towards non-cardiology, and that outpatients volumes is going to grow more from diagnostic procedures or would that more from kind of the just where you are or…?

Phil Mazzuca - Chief Operating Officer

Well, I think the growth is going to be diagnostic, it's going to be surgical, it's going to be ER.

Rob Hawkins - Stifel Nicolaus

But non-cardiology per se.

Phil Mazzuca - Chief Operating Officer

Well, some of it will be, but…

Rob Hawkins - Stifel Nicolaus

For the most part.

Phil Mazzuca - Chief Operating Officer

A greater proportion will be general acute.

Rob Hawkins - Stifel Nicolaus

All right, thanks. That helps clarify it for me. I'll jump back in the queue.

Ed French - President and Chief Executive Officer

Thanks Rob.

Operator

Your next question comes from Gary Taylor with Banc of America.

Gary Taylor - Banc of America

Hi! Good morning guys. Jamie, you ran through some numbers pretty quickly, I didn't get them all down. I think it was -- I just wondered if you could go back through those. I think you said, and I think you were talking about the quarter year-over-year, but you said, drug-eluting-stents down 40, bare metal up 56. Is that right?

Jamie Harris - Chief Financial Officer

I think that's correct. Yes, that's right.

Gary Taylor - Banc of America

And that was for the quarter year-over-year. Right?

Jamie Harris - Chief Financial Officer

That's correct.

Gary Taylor - Banc of America

And then you said a AICD number that I didn't catch?

Jamie Harris - Chief Financial Officer

3.4% decrease.

Gary Taylor - Banc of America

Okay. And, just a follow-up on one of the previous questions. I don't think there's any outpatient visits that you've generally disclosed. I just want to confirm, when you actually look at outpatient visits, the year-over-year volume is up, that adjusted admission number isn't just up because of the revenue mix shift between gross inpatient and gross outpatient revenue?

Jamie Harris - Chief Financial Officer

It's a combination of visits and revenue.

Gary Taylor - Banc of America

There is positive year-over-year volumes on the outpatient side?

Jamie Harris - Chief Financial Officer

Yes.

Gary Taylor - Banc of America

And, Ed, just a question going back to the regulatory. I believe one of the elements of the proposed CHMP legislation to the extent that some of the elements of that survive and make it into something else. But, obviously they did allow for grandfathering your facilities, but if I am not mistaken that grandfathering would be lost if you expanded the bed count?

Ed French - President and Chief Executive Officer

That's how it was proposed, yes.

Gary Taylor - Banc of America

If that actually became law, would that impact any of your bed expansion plans or would you just proceed with those and then go ahead and do the restructuring of the ownership?

Ed French - President and Chief Executive Officer

Gary, it would be the latter. We've had conversations with a couple of our hospitals where we anticipate some growth, and we have been candid with them about the legislative initiatives proposed, and that we have no prediction as to what will eventually be the case.

But, I could tell you that the doctors with whom we deal assure us that they are more interested in the shared governance relationship in having a say in what happens in the hospitals than they are in the economics of the hospital per se. And they would join with us and make whatever is the right decision for the hospital going forward, and restructuring as we must to accommodate that.

That's why our comfort that, though we prefer to have whole hospital exception in grandfathering with unlimited expansions that they may not in fact be there, we still find a comfort in knowing that we will be able to adapt quite readily, and we don't see any impingement on our growth plan.

Gary Taylor - Banc of America

Thank you. On Arkansas, I think Matt asked this, but I didn't catch. When did you say the 28 beds come on line?

Ed French - President and Chief Executive Officer

January 1 is when I said they would be on line. They will be on line by January 1.

Gary Taylor - Banc of America

And why such a low occupancy projection for the year, because I mean I know across the company you run 80% or somewhere around in there?

Ed French - President and Chief Executive Officer

Well, we do, but that's an annualized figure, Gary. And so, if you've noticed how the quarters fall together, the fourth quarter comes within just a -- within a three or that, to be opened, that's the weakest quarter for our company. And so the quarter we are in now typically is a pretty descent quarter, and certainly better than the fourth. So, we'd rather throw out an expectation we think is within reason, and if we exceed it, then we will all be pleased.

Gary Taylor - Banc of America

Okay. Jamie, on the '08 EBITDA guidance, which I think you said excluded non-cash stock comp, should we be anticipating just roughly 1 million sort of restricted stock comp, at least as a recurring element in '08?

Jamie Harris - Chief Financial Officer

That is correct, Gary. You will have that, you will have some director's options, which are annually granted on October 1st of each year, and you will have various on the sundry option grants throughout the year.

Gary Taylor - Banc of America

That's all excluded from the EBITDA guidance?

Jamie Harris - Chief Financial Officer

That's correct.

Gary Taylor - Banc of America

What's the projected opening date in Arizona?

Jamie Harris - Chief Financial Officer

You are talking about Kingman, Arizona?

Gary Taylor - Banc of America

Yes.

Jamie Harris - Chief Financial Officer

We expect it by the end of '09, about three years from now.

Gary Taylor - Banc of America

Okay.

Jamie Harris - Chief Financial Officer

We're just planning now and we expect to be moving there in January.

Gary Taylor - Banc of America

Can you give us a thought just roughly on pre-opening expenses in '09, to the extent we want to look at '09 models at this point?

Ed French - President and Chief Executive Officer

Yeah, I am going to have to back into, I am going to say with regard to the pre-opening, we are estimating roughly $5.5 million.

Gary Taylor - Banc of America

In '09?

Ed French - President and Chief Executive Officer

In '09, it was about $0.5 million this year we bought -- we've just announced $1 million next year. So it's about $4 million left.

Gary Taylor - Banc of America

Okay, my last question, so for the '08 guidance 3% to 4% adjusted admissions expectations, what's the same-store revenue number that's embedded in that guidance?

Ed French - President and Chief Executive Officer

685 to 700, that's what we've put in our guidance this morning, that’s the total revenue, the same facility revenue number is embedded?

Gary Taylor - Banc of America

Same facility revenue growth, I mean I am looking for a percentage number?

Jamie Harris - Chief Financial Officer

Well, we are anticipating 3% to 4% -- 3%, let's call it adjusted admission and 1% to 2% on same-facility revenue on pricing --

Gary Taylor - Banc of America

4% to 6%?

Jamie Harris - Chief Financial Officer

About 4% to 5%.

Gary Taylor - Banc of America

Great, thank you.

Ed French - President and Chief Executive Officer

Thanks, Gary.

Operator

As a reminder if you would like to ask a question, press "*" then the number "1" on your telephone keypad. Your next question comes from Nicholas Jansen with Raymond James & Associates.

Nicholas Jansen - Raymond James & Associates

Hey guys, quick question on the stenting. I know that if you move towards more drug- eluting, it helps the revenue, but can you just talk about the profitability metrics between drug-eluting and bare metal at this time?

Ed French - President and Chief Executive Officer

Clearly on an absolute basis, the dollars are greater on the drug-eluting as we'd expect because the product itself has, by about 2.5 times the cost connected with it, and so, on a per procedure basis, we are going to see a decrease in profitability, on the conversions that have taken place to bare metal. Likewise, if we are correcting our assumptions the drug-eluting stents will increase, we expect to find a reverse of that going forward.

Nicholas Jansen - Raymond James & Associates

Okay. And one quick follow-up on the '09 outlook, when you talk about the dilution from the Kingman, Arizona facility, the de novo, with those $68 million, that you are planning to spend, to develop that, is that included in basically the dilution in the net income, the loss interest income that you are having there?

Ed French - President and Chief Executive Officer

Could you repeat that again, I'll make sure I understood your question?

Nicholas Jansen - Raymond James & Associates

I guess, when you issued your press release for the Kingman facility, you gave a loss of dilution for what you expected, what the pre-opening cost and, how you are expecting to spend around $68 million for the facility. So, is that loss interest income included in that net income guidance?

Ed French - President and Chief Executive Officer

Yeah, all the usage of cash are pushed down to the various facilities. So, yes, whatever impact that would have on interest income will be included.

Nicholas Jansen - Raymond James & Associates

Okay, thanks.

Ed French - President and Chief Executive Officer

Thanks, Nick.

Operator

Your next question comes from David Bachman with Longbow Research.

David Bachman - Longbow Research

Good morning. I think, most of my questions have been answered, but I'd just a quick question on Harlingen again. Was there an impact from the move there on either reported payer mix or on the bad debt expense, overall?

Jamie Harris - Chief Financial Officer

We excluded them from our calculations for the quarter, David.

Ed French - President and Chief Executive Officer

Yeah, you had -- on the payer mix -- you have both consolidated and combined operating staff, so I think those that you have evident.

David Bachman - Longbow Research

Sure.

Ed French - President and Chief Executive Officer

On your payer mix, on the consolidated numbers I gave there would be a slight change, Phil.

Phil Mazzuca - Chief Operating Officer

I mean, it's off the top of your head without digging into that individual math, I mean gut feel is Medicare probably is a little higher there?

Ed French - President and Chief Executive Officer

Yes.

Phil Mazzuca - Chief Operating Officer

And the 40% commercial is a little lower, it has less cardiac business than other facilities that cover this already as the general acute facility?

So I mean, yes there will be some payer and procedural mix differences, bad debt as a general rule will be lower without Harlingen included in the numbers, I mean this time our bad debt went down, the figures I gave 63 versus last year's 79 did include -- Harlingen excluded and I mean, we've had some very good successes in our business office operations, recoveries, and our collections upfront, our qualifications for patients, for other insurance plans. So, that was driven with large part by positive operating initiatives in our business offices.

David Bachman - Longbow Research

Okay, good. I just wanted to make sure especially on that bad debt numbers that I was looking at, you know apples-to-apples for the most part.

Phil Mazzuca - Chief Operating Officer

Yes you are.

David Bachman - Longbow Research

Great. Okay good. Thanks.

Ed French - President and Chief Executive Officer

Thanks David.

Operator

At this time there are no further questions. Are there are any closing remarks?

Ed French - President and Chief Executive Officer

No. Well we appreciate everybody's participation, curiosity and support for MedCath. Thank you very much, we look forward to call next quarter. Bye.

Operator

That concludes today's MedCath Corporation conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!