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HCA Holdings, Inc. (NYSE:HCA)

Q1 2012 Earnings Call

May 3, 2012 10:00 AM ET

Executives

Vic Campbell – SVP

Richard Bracken – Chairman and CEO

Milton Johnson – President and CFO

Samuel Hazen – President of Operations

Juan Vallarino – SVP, Strategic Pricing and Analytics

Analysts

Ralph Giacobbe – Credit Suisse

Adam Feinstein – Barclays

Kevin Fischbeck – Bank of America/Merrill Lynch

Tom Gallucci – Lazard Capital Markets

AJ Rice – UBS

Matthew Borsch – Goldman Sachs

Sheryl Skolnick – CRT Capital Group

Gary Taylor – Citi

Deepak Raja – Broad Arch Capital

Darren Lehrich – Deutsche Bank

Whit Mayo – Robert Baird

Operator

Welcome to the HCA First Quarter 2012 Earnings Release Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Vic Campbell. Please go ahead, sir.

Vic Campbell

All right. Thank you and good morning, everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome everyone on today’s call, including those of you who are listening to the webcast.

With me this morning, as usual, are Chairman and CEO, Richard Bracken; President and CFO, Milton Johnson; Sam Hazen, President of Operations; and then we have many other members of the management team that are here with us or on the call to assist during the Q&A.

Before I turn the call over to Richard, let me remind everyone that should today’s call contain any forward-looking statements, they’re based on management’s current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. Many of these factors are listed in today’s press release and in our various SEC filings.

Many of the factors that will determine the company’s future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information or future events.

As you’ve heard, the call is being recorded. A replay of the call will be available later today.

With that, let me turn the call over to Richard Bracken.

Richard Bracken

Thank you, Vic. Good morning to all, and we do appreciate your participation on our call this morning. Before I ask Milton and Sam to provide some operating details for the quarter, let me start by sharing a few brief and general observations.

We are pleased to report that overall the results of our first quarter were generally in line with our expectations and provided a solid start for the year. Generally, we saw a continuation of the trends that we’ve been reporting on in recent quarters – favorable patient volumes, supported by efficient cost management, offsetting continued pressure on revenue per unit of service.

For the quarter, and as reported, adjusted EBITDA was $1.823 billion, an increase of 14.6%. And adjusted EBITDA, excluding the net positive prior-year Medicare adjustments we announced on April 12th, was $1.652 billion, an increase of 3.9% compared to the prior year.

Now, please keep in mind that our as-reported numbers do include the full ownership and consolidation of our Denver HealthONE market, as completed last November, and our Miami Mercy Hospital acquisition completed last April.

Growth in patient volumes remained favorable for the quarter, even considering that all volume metrics were aided by the extra day in February due to Leap Year. Given this, reported admissions for the quarter were up 9%, and reported equivalent admissions increased 11.4%. On a same-facility basis, admissions and equivalent admissions grew 3.2% and 4.8, respectively. We now have experienced 18 quarters in a row of positive equivalent admissions growth.

In addition, we also continued our favorable trends in emergency visits growth. As reported the emergency department growth was 10.5% for the first quarter or a 5.3% rate on a same facility basis. We also experienced growth in surgical volumes of 10.6% on a reported basis and 2.3% on the same facility basis. And as I’ve stated previously we believe our patients volume growth reflects not only strategic facility locations in areas with favorable growth dynamics, but also due to the success of our operating agenda that seek to improve accessibility of our services and the efficiency and effectiveness with which we service our patients through the system.

We remain committed to the strategies as a way to not only improve efficiency but to improve the patient experience and clinical outcomes as well. Market share performance for the quarter remained positive and you will hear from Sam about some observations we have on market growth characteristics as well as recent share gains. We believe these gains reflect traction around our emergency department strategies, rural outreach efforts, patient transfer centers, physician integration, and quality performance agendas.

On the pricing front, while Medicaid and Medicare pressures continued we saw some favorable results this quarter in our commercial book and Milton will provide some details on these metrics in just a minute. Once again, and as we have also reported recent quarters, our expense management has been effective. On a same facility basis our cost per equivalent admission for the past five quarters has been generally consistent. In essence we have managed volume adjusted cost inflation flat compared to prior year with three quarters. This reflects a very solid performance by our operating teams.

In addition to operating costs we’ve also reduced our cost of debt capital, interest expense in the first quarter of 2012, is down $91 million compared to the same quarter of last year. And at quarter end our debt to adjusted EBITDA has improved to 4.43 times. Our quality performance initiatives continue with much success during the quarter, 9% of hospitals named to the Thomson Reuters 100 top hospitals for 2012 rates safe facilities, these results were based upon measures of clinical quality, efficiency and patient perception of care. These hospitals achieve lower 30-day readmission rates, shorter hospital stays and better survival rates, we are pleased with this recognition.

And as I turn the call over to Milton I do want to draw your attention to our increased guidance for 2012 as provided in this morning’s earnings release. Our revised guidance reflects the net effect of the two Medicare adjustments as identified in the first quarter results. So with that let me turn this over to Milton.

Milton Johnson

Right. Thank you, Richard and good morning to all. I trust most of you have had a chance to review the company’s first quarter earnings release issued this morning. Our reported numbers require some explanation to understand the underlying trends and I will attempt to provide more clarity and be happy to take questions afterwards. Just to remind everyone HealthONE is not included in our same facility stats for the quarter. As Richard mentioned, the first quarter results once again provided for strong same facility volume growth and excellent same facility expense management. Same facility total case mix declined 0.5% in the prior year’s first quarter, which was generally consistent with the third and fourth quarter of 2011 which declined 0.5 and 0.4 from the prior year’s third and fourth-quarter respectively.

Revenues in the first quarter increased 13.5% to 8.405 billion, primarily driven by the financial consolidation of our HealthONE venture, increased patient volumes, and the net effect of the two Medicare adjustments that we disclosed in our prerelease of April 12th. Same-facility revenue increased 5.1% in the first quarter compared to the prior year, and excluding the Medicare adjustments, it grew 2.7%.

Net income attributable to HCA Holdings, Inc. in the first quarter totaled $540 million, or $1.18 per diluted share, compared to $240 million, or $0.52 per diluted share, in the first quarter of 2011. Results for the first quarter of 2012 include the two previously announced Medicare adjustments, which had the net effect of increases of $188 million to revenues, $170 million to adjusted EBITDA, and $0.22 to earnings per diluted share.

The Rural Floor Settlement will have no impact on future results, while the SSI ratio recalculation is estimated to reduce Medicare revenues by approximately $1 million per month in future periods.

Results for the first quarter of 2011 include a charge of $181 million, or $0.32 per diluted share, for the termination of the private sponsors management agreement, which was terminated pursuant to its terms upon completion of the company’s IPO in March of 2011.

During the first quarter, same-facility admissions increased 3.2%, while same-facility equivalent admissions increased 4.8%. Patient volume growth was primarily driven by medical admissions, which increased 4.5%, while surgical admissions increased 1.1% on a same-facility basis.

Total admissions increased to 9% and equivalent admissions increased 11.4% during the quarter, primarily reflecting the HealthONE consolidation. Sam will provide additional insights into our volume growth in his comments.

Volume growth from governmental payors continued to outpace growth from commercial payors. Same-facility Medicare admissions and equivalent admissions increased 3.8% and 5.4%, respectively, in the quarter. Same-facility Medicare admissions include both traditional and managed Medicare. Managed Medicare admissions increased 12.1% on a same-facility basis and now represents 25.4% of our total Medicare admissions.

Same-facility Medicaid admissions increased 4.1%, while same-facility equivalent admissions increased 4.7% in the first quarter compared to the prior-year period. Same-facility managed care and other admissions were flat with prior year, while same-facility managed care equivalent admissions increased 2.8% in the first quarter compared to the prior-year period.

This is the third consecutive quarter that we have seen equivalent admission growth in our managed care book and the highest rate of growth in the last four years – in my view, an encouraging trend. The growth was fairly broad along all major service lines, with the exception of pulmonary and OB/GYN surgical discharges.

Same-facility uninsured admissions increased 11.6% in the first quarter. The growth in same-facility uninsured admissions accounted for 60 basis points of the 3.2 total admissions growth during the first quarter. Same-facility uninsured admissions represented 7.1% of total admissions in the quarter compared to 6.5% in last year’s first quarter.

Same-facility total surgeries increased 2.3% in the quarter, when compared to the prior year, reflecting an increase in inpatient surgeries of 1.5% and outpatient surgeries of 2.7% an improvement from past quarters. The increase in inpatient surgeries did not result in an overall increase in same facility total case mix due to the fact that the increases occurred in less complex surgical DRGs as compared to last year’s first quarter. Growth in our emergency room visits remain strong in the first quarter increasing 5.3% compared to the prior year on a same facility basis. As you might remember, we had an extremely strong first quarter in 2011 with same facility ER visits increasing 11.3%.

Same facility revenue growth in the first quarter was driven by strong equivalent admission growth. Same facility revenue per equivalent admission excluding the Rural Floor Settlement, SSI adjustments, and the Texas Medicaid Waiver program declined 1.4% in the quarter. Various factors are influencing our revenue per equivalent admission, including higher growth of medical admissions in relation to surgical admissions, payor mix, and rate reductions in Florida and Texas Medicaid programs.

The same facility Medicare revenue per equivalent admission excluding the impact of the Rural Floor Settlement and the Medicare SSI adjustments declined 1.8% from the prior year, same facility Medicare case mix declined on 1.2% in the quarter. Same facility Medicaid revenue per equivalent admission excluding Texas Medicaid Waiver program declined 10.2%, and that’s generally consistent with prior quarters. If you include the reductions in the Texas Medicaid Waiver program, Medicaid revenue per equivalent admission declined 13.4% compared to the prior year.

Managed care and other facility revenue per equivalent admission growth improved from the most recent quarterly trends, increasing 4.1% in the first quarter of 2012 compared to the first quarter of last year. Managed-care same facility case mix index increased 0.6% compared to the prior year. Same facility charity care and uninsured discounts increased by 412 million in the first quarter compared to the prior year, and during the first quarter same facility charity care discounts totaled 761 million, an increase of 129 million from the prior year while same facility uninsured discounts totaled 1.552 billion, an increase of 283 million from the prior year.

We were extremely pleased with expense management in the first quarter. As same facility operating expense per equivalent admission, excluding the Texas Medicaid Waiver program, equity and earnings of affiliates, and high tech incentive income, increased 0.2% from the prior year period and as Richard mentioned, on the same facility basis our operating expense per equivalent admissions compared to prior year has been essentially flat for three consecutive quarters. Salaries per equivalent admission on a same facility basis increased 1.4% from the prior year, productivity performance improved 1.2% on the same facility basis compared to prior year, same facility wage growth was 1.8% for the quarter.

Personnel costs associated with physician employment increased by 20.9% or $50 million from the first quarter of the prior year which is a reduction in rate of growth from the 2011 first quarter increase of 42.4% or $71 million compared to the first quarter of 2010. Same facility supply cost per equivalent admission declined 2% from the prior year, reflecting minimal supply cost inflation which the company has been able to mitigate by many of our supply cost reduction initiatives. Same-facility other operating expense per equivalent admission declined 1.4% in the quarter, reflecting several small reductions in various expenses.

As noted in our income statement released this morning, the company recognized $55 million in electronic health record income in the first quarter, consistent with our expectations. The company also incurred approximately $18 million in HER-related expense in the first quarter compared to $20 million in the first quarter of 2011.

Cash flows from operating activities for the first quarter totaled $797 million compared to $918 million last year. The decline was primarily due to an increase of $233 million in adjusted EBITDA, being offset by a $135-million decline in net tax refunds, a $116-million increase in interest paid related to the timing of coupon interest payments on newly refinanced debt, and a $103-million net reduction from the net change in operating assets and liabilities. And this would include the increases in AR from the Medicare settlement and a decline in accounts payable and accrued expenses.

CapEx for the quarter was $335 million compared to $329 million last year. Acquisitions totaled $112 million in the quarter. This includes one hospital, Galichia Heart Hospital in Wichita, Kansas, and other smaller acquisitions. Days in accounts receivable at March 31, 2012 were 53 compared to 49 days at March 31, 2011. The AR associated with the Medicare settlement adjustments accounted for about one-day increase and the recent acquisitions added one day.

At March 31, 2012, the company’s debt to adjusted EBITDA was 4.3 times compared to 4.46 times at December 31, 2011 and compared to 4.62 times at December 31, 2011 pro forma for the February 2012 dividend of $955 million. At the end of the quarter, we had approximately $2.75 billion of borrowing capacity under our senior secured credit facilities.

Now, turning to our revised 2012 guidance. The revised guidance included in today’s earnings release incorporates the net benefit of the previously discussed Medicare settlement adjustments. We have maintained our existing revenue range of $32 million to $33 billion, while increasing our adjusted EBITDA range by $170 million to $6.37 billion to $6.62 billion and our adjusted earnings per diluted share range by $0.22 to $3.50 to $3.77.

We are also revising our 2012 guidance relative to EHR development expenses from $160 million to $160 million – from $140 million to 160 million range to a new range of $125 million to $150 million. Our guidance remains unchanged for EHR incentive income, which is a range of $325 million to $350 million.

Let me turn the call over to Sam.

Samuel Hazen

Good morning. I’ll begin my comments this morning on our volume for the first quarter and wrap up with an update on market share for the third quarter 2011, which is the most recent data available.

With respect to volume growth, the company had very good balance across our 15 divisions, again, this quarter and very good balance across our service lines. 13 out of 14 domestic divisions had growth in same-facility inpatient admissions. All domestic divisions had growth in same-facility adjusted admissions.

13 out of 14 domestic divisions had growth in same-facility emergency room visits. The emergency room continues to be an area of focus for the company, both strategically and operationally. We have numerous hospitals that have enhanced their service offerings with certified trauma programs, comprehensive stroke programs, including telemedicine and accredited chest paint program. Additionally, we have invested capital to increase our emergency room bed capacity and expand our geographic access to new patients.

Last quarter, I reviewed our surgical growth initiative in detail. I am pleased to report that we had 12 out of 14 domestic divisions with same-facility total surgery growth for the quarter. We are still in the early stages of this effort, but we are encouraged by the results thus far.

Within surgery, we continue to see solid growth in orthopedic and neurosurgery services. This quarter we also saw strong growth in general surgery volume. Within cardiovascular service line, we grew 1.7% in overall surgical activity with certain cardiovascular procedures rebounding. Open-heart surgeries were down by 1% in the quarter. And finally, within our ambulatory surgery division, same-facility case volumes grew by 3% in the quarter.

Volumes in our intensive care units were up this quarter. ICU admissions on a same-facility basis were up 7.4% and same-facility admissions into our neonatal intensive care units were up 1.6%. Within these units we continue to see some length of stay declines, which can negatively affect our revenue per adjusted admissions for commercial business.

As Milton mentioned in his comments, growth in medical admissions was strong in the first quarter. We also had strong growth in both behavioral services and rehab services. Admissions were up 17% and 10%, respectively, for the first quarter as compared to the prior year.

Now let me wrap up my comments with an update on third-quarter market share data for the 12 months ended September 30, 2011. As a reminder, we typically have a 90 to 180-day delay in getting market share data to analyze. So this is the most current data available for 37 HCA markets and it represents approximately 90% of our hospitals.

In general there are two positive takeaways. First, market demand appears to be increasing. And two, HCA market share is growing. Market demand for this period grew 1.2% as compared to only 0.4% in the same twelve-month period in the previous year. HCA’s market share for this period grew by 20 basis points to 23.1%. Within the various service lines, market demand grew across all categories except for women’s and cardiovascular service lines. In particular, medicine and behavioral service lines grew by 4.9% combined. HCA was up in nine service lines, flat in four service lines and down in only three service lines.

Our growth plan continues to be focused on the following six areas. First, maintaining patients within our networks; two, expanding the markets that we serve; three is increasing the access to our facilities with capacity increases and new outreach sites; four developing high-quality service lines; five, solidifying physician engagement; and six, leveraging HCA scale. This plan is built on a foundation of quality outcomes, customer service and operational efficiency. We believe this growth plan is both producing gains in the marketplace today and positioning us to compete more effectively in the future for business.

That concludes my comments, and I’ll turn the call back to Vic.

Vic Campbell

All right. With that, operator, would you solicit any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will now go first to Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe – Credit Suisse

Thanks, good morning.

Vic Campbell

Morning.

Ralph Giacobbe – Credit Suisse

I just wanted to reconcile the pricing statistic; I think you had said the same-store revenue, ex the settlements was up 2.7 compared to the kind of 4.8 on the adjusted admissions side, which means sort of pricing was down a little over 2. And I think in the prepared remarks you had said pricing was down 1.4, so I guess just to reconcile that. And maybe just if you could talk about the components of kind of the pure pricing acuity and payor mix along those lines? Thanks.

Vic Campbell

Milton, do you want to take that?

Milton Johnson

Sure. Yes, let me take a shot. There was a lot of parts and pieces to our revenue per unit because of the various impacts of Medicaid changes and the Texas Medicaid waiver program as well. So again, I think we – it’s 1.4% decline Ralph. And that 1.4% compared to last year excludes the two Medicare adjustments in the period and also excludes the impact of the Texas waiver program.

If you include the impact of the Texas waiver program, the decline would be 2%. So I think that more closely reconciles to the overall revenue increase number which I gave you excluding the Medicare pickups, because that number did have the impact of the Texas waiver program.

Ralph Giacobbe – Credit Suisse

Okay. And then just in terms of the dynamics–?

Milton Johnson

Well, what we’re seeing is, of course, we’ve seen now Medicare was down 1.8% in terms of rate. We saw an acuity decrease there of 1.2%. So that again, we knew this would be a tough comp here in the first quarter. The case mix index for Medicare though continues to trend consistently going back, say, to the second quarter of 2011. So it was a difficult comp, and you saw that impacting our rate. But it’s not inconsistent where we have been in recent quarters.

With respect to managed care, again, there the yield on our managed care book was 4.1% in the quarter. We saw a slight acuity increase of 0.6%. The 4.1% on a trend basis is the highest number we’ve had in the last two quarters. If you recall in 2011, we started out last year up 5.5%. We dropped to about 4.8% in the second quarter down to 3.8%. And then in the fourth quarter of last year, of course, we’re up only 1.3% in managed care. So a rebound now of 4.1% was a slight acuity increase.

And then on Medicaid again, we were down over just – down over 10% there, again reflecting the reductions that we’re seeing in Medicaid reimbursements in Florida and Texas, primarily.

Vic Campbell

Good, Milt. Thanks. Thanks, Ralph.

Ralph Giacobbe – Credit Suisse

Thank you.

Operator

Our next question will come from Adam Feinstein with Barclays.

Adam Feinstein – Barclays

All right. Thank you. Good morning, everyone.

Vic Campbell

Good morning.

Adam Feinstein – Barclays

I guess just – appreciate all of the details you guys gave us and just certainly the volume growth is just so much stronger than what the rest of the industry has been seeing. So, Sam, you made the comments with some of the data in terms of growing market share, as well as demand picking up in some of the markets. So just want to see if you could elaborate a little bit more, you know, which areas are you guys growing market share, and just trying to better understand in terms of what’s driving that. So I know it’s a tough question to answer, but just curious how long you guys are thinking about it.

Vic Campbell

All right. Sam is up to it.

Samuel Hazen

Well, I think we do have specific data through the third quarter. It doesn’t reconcile necessarily to the fourth quarter and the first quarter volume metrics that we published. We do believe that the growth in the marketplace is probably still there for the fourth quarter and the first quarter of 2012, but again, we need to see the market share data to verify that. But again, the marketplace for all of HCA’s markets grew as I indicated, and largely it was consistent across most of our markets. We do have some markets that grew in excess of that. Austin, Texas is a market that’s continued to have strong demand. And then we have markets like Las Vegas where we were down 2% during this time period. So, again, the portfolio of the company I think has positioned us to benefit from inherent demand growth.

But when you look underneath the demand growth from a geographic standpoint and look at it from a service line standpoint, the business that we’ve been seeing, our medicine business, our behavioral business, and sort of that kind of activity has grown. For example, medicine grew 4.7%, HCA grew 7% on that service line. So we picked up 60 basis points of share on the medicine business. I think that’s partly due to our emergency room strategy where we continue to pick up share, we believe. And a lot of the activity that comes through the emergency room is medicine related.

In surgery, our surgical growth initiative we believe is gaining some traction, and we’re benefiting from increased demand in orthopedics and neural sciences there, and we have picked up share in both of those service lines.

If you look at women’s services, conversely, women’s services is down for two reasons. One, GYN surgery has generally migrated to outpatient because of technology. And so we’ve seen a drop in demand related to that. And then from an obstetrics standpoint, our delivery volumes have been down, and HCA is essentially flat in women services. So we’ve seen no growth in our market share on women’s services. And we have initiatives in place to try to deal with that.

So that’s some color, Adam. I don’t know if that really answers your question completely. But it gives you some sense of it. And again, when you look across the geography, HCA, I think picked up share during this time in 22 or 23 markets, and we lost share in 14 markets. And so the combined share gain was 20 basis points, suggesting that in our larger markets we picked up enough share to compensate for those markets that were down.

Adam Feinstein – Barclays

All right. Thank you very much. That was very helpful.

Vic Campbell

All right. Thanks, Adam.

Operator

And next we move to Kevin Fischbeck with Bank of America Merrill Lynch.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. Thank you. Just wanted to ask a question here on the commercial pricing side of things. Could you just talk a little bit about the trends that you’re seeing, commercial rate increases and any discussions that you might be having on commercial narrow networks or ACO-type products? And actually any thoughts about actually taking risk going forward on the commercial side.

Milton Johnson

Well maybe just – I mean on the rate side, of course, I think I just went through that we had a rebound relative to recent couple of quarters’ performance with our managed-care rate. Still not yielding our contracted rate.

Again, we would have expected it to be, say, around 5.5% and 4.1% this quarter. As far as visibility into our managed-care revenue, we’ve got about roughly 90% under contract for 2012, at that – call it 5% to 6% sort of increase.

We’ve got about 60% of 2013 under contract and about 30% roughly of 2014. So, a lot of visibility into our managed-care revenue, and all that priced in that kind of 5% to 6% range contracted rate at this point.

And I’m looking at Juan Vallarino. We’re not seeing, Juan, any sort of changes in structure right now of our contracts and the like. So – and really nothing material with respect to ACOs or any sort of tighter networks at this point in time in our managed-care book.

Juan Vallarino

That’s correct.

Kevin Fischbeck – Bank of America/Merrill Lynch

Well, the managed care companies seem to be talking a lot about that. Are you seeing your competitors do this, and you’re not participating because it’s too early, or how do you reconcile those two?

Juan Vallarino

No; I think there are conversations. I think that’s all they are right now, is just feeling each other out for a period of time. I think you have to let it run its course, but we’re having dialogue; it’s just not materializing into contracts yet.

Milton Johnson

And that was Juan Vallarino. I think, Juan, too, that would be based upon our markets that we’re in. And there could be other markets in the country where there could be more activity, but we’re not seeing that in our markets at this point.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay, great. Thanks.

Richard Bracken

Thanks Kevin.

Operator

Next we’ll go to Tom Gallucci with Lazard Capital Markets.

Tom Gallucci – Lazard Capital Markets

Thank you very much for all the color. Obviously topline has been strong, but so was the cost side as you mentioned in some of your prepared remarks. Could you talk about maybe the sustainability of some of what we’re seeing on the cost side and going forward where the major opportunities might be to the extent anything can get even better?

Milton Johnson

Richard, do you want to lead with that?

Richard Bracken

Well, I think I sort of indicated in my remarks that we’ve been pretty successful in managing the cost side of our business over the last five quarters. And I guess in terms of thinking ahead and what’s still out there, I mean managing cost and reengineering how we provide healthcare services is absolutely a daily effort at the company.

We – and I’ve stated in the past, we benefit – our cost structure to a certain extent benefits from the less intense service mix that we’ve reported, and the lesser surgery volumes; we get an automatic ride with that. But in terms of reengineering how we provide healthcare, our agenda is very complete.

We see this as the next era of how appropriately cost can be taken out of the system, whether it’s in length of stay management, efficient care algorithms and the like. And actually the company has got a huge effort underway with our medical leadership designing those programs as we speak.

To sit there and put a number on it right now would be premature. I think it’s fair to say that we believe this to be where the industry needs to be, certainly where we’re taking HCA, to provide highest value for the dollar spent. So, I think there’s a lot of opportunity going forward.

We’ll continue in the traditional avenues of expense management. We’re not seeing wage rate pressure, given where the economy is. But in terms of reinventing healthcare, that’s really where our attention is at this point in time.

Tom Gallucci – Lazard Capital Markets

On the supply side, how do you expect the medical device tax to ultimately play through on your side of the coin?

Richard Bracken

Medical device tax.

Milton Johnson

Sam, you?

Samuel Hazen

We’re not anticipating a pass-through to that effect. I mean we have contracts that are already established with our vendors through our HPG organization. And as those contracts get negotiated, I presume there will be discussion about that, but at this particular point in time, we’re not anticipating any kind of pass-through related to the medical device tax that’s embedded in the Affordable Care Act.

Tom Gallucci – Lazard Capital Markets

Okay. Thank you.

Milton Johnson

Thanks Tom.

Operator

And next we’ll hear from A.J. Rice with UBS.

AJ Rice – UBS

Hello, everybody. I guess maybe I’ll ask about the Parallon initiative and see if there’s an update on that. And specifically maybe comment – I know Accretive Health has been in the paper lately. Does that present any opportunities for you guys?

Richard Bracken

Milton, do you want to address that?

Milton Johnson

Sure, yes. Parallon development, A. J., we continue to see progress there. We have several discussions underway for supply chain as well as revenue cycle, and we will see over time how those work out, of course. We’re seeing also good traction in our workforce management section of Parallon as well. So we of course have new leadership in Parallon with Beverly’s retirement and with Michael O’Boyle coming in, and we are looking forward to seeing his contributions going forward as well.

With respect to the accretive situation, A.J., I don’t know. I mean, it’s too early to tell where that’s going to play out as to whether that will present an opportunity or not.

Richard Bracken

Thanks, A.J.

AJ Rice – UBS

Thanks.

Operator

And next we’ll hear from Matt Borsch with Goldman Sachs.

Matthew Borsch – Goldman Sachs

Yes, thanks, guys. If you look back and – at the current quarter, recognizing that you’ve done a lot from your own execution. Can you see a pattern here on commercial utilization that makes sense to you relative to the timing of the recession? Did you know, do you see that trough in 2010 that the managed care companies point to?

And any sense that you have on the pickup in volumes that you are seeing to the extent – it’s not just a market share thing where it might be more insured, commercially insured patients versus patients feeling a little bit more ready to use healthcare services?

Richard Bracken

Sam, do you want that one? Thanks.

Samuel Hazen

Well, we are still studying our third-quarter market share data, and we do have within certain markets very good and accurate payer mix data within our market share metrics. And in those markets we have seen, if you look at sort of the sequential quarterly performance of those markets, not HCA performance, just the overall market, a reduction in the rate of decline related to commercial admission activity.

It hasn’t necessarily rebounded to where there is growth in the metrics yet, that could be in place in the fourth quarter and the first quarter. Again we don’t have that data. But in some of the markets where we do have good commercial payer activity, we’ve seen a slowdown in the rate of decline, it’s still not positive. Within our own metrics, we are seeing more commercial activity in our emergency services. Milton mentioned that we actually had probably the best metric on commercial admission activity this past quarter. I do sense that we are picking up some market share, but it could be that there is some lift in the marketplace as well with respect to overall commercial demand.

And so as we move through ‘11 and we did see better metrics on that front versus 2010. And we are hopeful, as I indicated on the last call, that we are going to continue to see those trends progress into 2012.

Richard Bracken

Thanks, Matt.

Matthew Borsch – Goldman Sachs

Thank you.

Operator

Our next question will come from Sheryl Skolnick with CRT Capital Group.

Sheryl Skolnick – CRT Capital Group

Good morning, everyone. Oh, there’s so many questions to pick from. Okay.

Vic Campbell

Be kind.

Sheryl Skolnick – CRT Capital Group

Yes, okay. I’m going to ask you this one. HealthONE clearly helped on the volume side. And – but you know as I look at the EBITDA on – excluding the high tech and excluding the Medicare settlement dollars, you’re to be commended given all the headwinds on pricing that this is flat.

But I guess I’ll ask the question, and is HealthONE as accretive as you and we hoped it would be, and the base business is just that much deteriorated because of the pricing? Or am I looking at this wrong? And is that linked to the performance and cash flow this quarter at all?

Vic Campbell

All right. Good question. Milt, do you want that one?

Milton Johnson

Sure. Yes, I mean, first of all, HealthONE is performing as we expected, actually, I think slightly better than we expected. And so when you look at the base business, as we say, we are being negatively impacted by the revenue changes, the reimbursement changes in Medicaid. And Sheryl, I know you recall these, but just – we are going through roughly about a $13 million per month reduction in Medicare reimbursement when you combine the impact – monthly impact of Texas and Florida.

And then in addition to that in this quarter there was a $40 million reduction in revenue from the Texas Medicaid program. Now we had about a $10 million reduction in related expenses, so about a $30 million negative impact in the quarter. So you do the math on that and that’s a lot of headwinds hitting EBITDA here in the first quarter relative to just governmental reimbursement changes. And so despite that, as your analysis just went through, we’re basically flat on an EBITDA basis including HealthONE.

So – and with respect to cash flow, clearly, the cash flow being down was related to less tax refunds for the first quarter versus a year ago. And then the other piece was interest payments. And its where we – with some of our refinanced debt, we changed the coupon payment dates. And so now we have more interest being due in the first quarter in 2012 than we had coupons being due in 2011.

As Richard mentioned in his notes the actual interest expense on the accounting side on an accrual basis declined $91 million year-over-year. So this is strictly a timing of payments impacting our cash flow. And we should see that normalized out later in the year of course as we pick up the favorable impact of the timing on interest payments.

Sheryl Skolnick – CRT Capital Group

Okay, great. Thank you.

Vic Campbell

Thank you.

Operator

Our next question will come from Gary Taylor with Citi.

Gary Taylor – Citi

Hi. Good morning, everybody. One clarification and one question, so I’m going to hope the clarification doesn’t count as my question.

Vic Campbell

It depends on what it is.

Gary Taylor – Citi

The clarification is, I don’t know – I guess I wasn’t paying close attention early on, Milt, but on the net revenue per – the same-store net revenue per adjusted admission figure, were you saying that the Medicare settlement was in there and really that plus 0.3 was a minus 2? Is that what Ralph was clarifying? I got confused there.

Milton Johnson

No. I think the number I gave was we were down 1.4%, and that excludes the two special Medicare adjustments we had during the first quarter. It excludes the impact of the Texas Medicaid waiver program impact.

Gary Taylor – Citi

So I’m sorry, so 0.3 you’re showing includes – that includes the Medicare settlement?

Milton Johnson

Yes. That includes the Medicare settlement; that’s correct.

Gary Taylor – Citi

So the same-store revenue growth is 3.4% in the quarter, is that right, if you exclude the Medicare settlement?

Milton Johnson

No. I think how we get there – you think about same-store, we had volume growth of, I think, it was 4.8% adjusted admissions. Then if you factor in on the same facility basis, take out the two Medicare settlements, the Texas waiver, and I’m sorry, leave the Texas waiver program in, we get about the 2% reduction in net revenue per adjusted admissions same-store, which would net out to roughly 2.7%, 2.8% same facility top-line revenue growth.

Gary Taylor – Citi

Okay. I just wanted to clarify that. Okay. That’s still better than we thought given how much tougher the comp got. And now of course, I’ve completely forgotten what my question was. Texas, the additional pending changes to UPL and DSH, did I miss an early comment on that as well, just kind what you guys are thinking? Obviously you must think plausible outcomes are within your range of guidance, but is there anything else that you said about it?

Samuel Hazen

We didn’t say anything else about it in the discussion, Gary. But Texas just recently published some proposed rules around disproportionate share payments in the state. That has initiated the rule making process. We are actively engaged in the rule making process, and think there will be some adjustments to what is proposed. And at this particular point in time we really don’t have any specificity around that. But we are actively engaged on that. As it relates to UPL program, there are still developments and discussions related to the two components of the waiver program. Those won’t be resolved probably until late this year. And so we really don’t have anything else to guide you on as it relates to that program either.

Vic Campbell

Thanks, Gary.

Gary Taylor – Citi

Okay, thanks.

Operator

Next we will hear from Deepak Raja with Broad Arch Capital.

Deepak Raja – Broad Arch Capital

Thanks. First, thank you for the dividend, and I wanted to know when I’m going to get the next one. But my real question is 2013, I guess we’re all talking about Medicare cuts, and I don’t know what’s going to happen in Washington, but can you kind of guide me a little bit as to how much of a cut you can take on the Medicare side and still maintain your growth profile?

Vic Campbell

Let me – this is Vic, and let me just address what has been proposed. The IPPS rule and I think everyone saw it come out a week ago, and it was a positive adjustment. However, once you put the 2% sequester against it, you’re looking at something that’s flat to down for most folks, including us. So we are disappointed with the proposed rule, in particular the coding and outlier adjustments. And we will be working with Federation, AHA and all hospitals to provide appropriate comments and indicate why those cuts should not be there.

And as some have pointed out, many of you on the call, that history shows that the final rule often differs from the proposed rule. We hope that’s the case again this year but time will tell, but we will be working on that. But net-net, if you look at what has been proposed, we have an increase in the fourth quarter of something between 1% and 2%, before the sequester; then the sequester, if it kicks in early next year, obviously, it takes that away and you’re looking at something less. So, but again, it’s early on. I don’t know, Milt, if you want to address anything further than that, but that’s what we – in fact, thank you. And thank you for the comment on the dividend.

Deepak Raja – Broad Arch Capital

I’m waiting for the next one, so I am here.

Operator

Next we will go to Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. So my question is really around M&A and acquisition environment. You’ve stuck to your knitting for the most part with M&A doing a lot of tuck-in in market type deals and things that you’ve operated in the past, like in Denver. I guess the real quest question here is what are you seeing out there, do you think geographically we’ll see any change in the strategy, and given the fact that after having just paid that dividend to your shareholder, like, your leverage is basically flat sequentially. Does that suggest that at this leverage level you might be comfortable doing a little bit more M&A?

Vic Campbell

Richard?

Richard Bracken

Yeah. Well, first of all, relative to acquisition strategy, and our strategy to some extent is independent of geography. When we talk about acquisitions, we – our primary filter of course is as you mentioned, existing markets, some things that are supportive and additive in existing markets. But we obviously look at new markets if we can create a substantial presence or see a way to create a substantial presence over time, and on that filter we’re open.

We did it in Kansas City where we had nothing; that was the last big one. But as we think this market continues to consolidate with the revenue pressures that are out there, there might well be new geographies that are presented to us and our strategy will be the same.

Can we, for a fair price, buy assets, typically troubled? Do we have a view where we can be a major market share player in that? In that, can we bring our shared service agenda to create value? And if we can do that in a disciplined way, we will execute.

And I think it’s a fair question that you asked. We’ve asked ourselves that question. Do we have to commit ourselves to very, very large urban markets? Well, that’s where we’re at; that’s our core business. But I think we look at everything in this period of change, and we apply the strategy across all opportunity.

Darren Lehrich – Deutsche Bank

And is the environment changing for you, just as you think about the pipeline of deals that you have right this moment?

Richard Bracken

Is the environment – I’m sorry, I miss the question.

Darren Lehrich – Deutsche Bank

Is your pipeline much different today than, say, it was a year or so ago? Maybe just help us think about the M&A piece over the next 12, 24 months.

Richard Bracken

Well, I definitely think – I’m not exactly sure what you define as a pipeline. There is certainly the inbounds. The opportunities in the marketplace are much greater than they have been in recent times, and we are processing all those.

I would be quick to point out, though, that we are disciplined buyers. And just because something is for sale doesn’t mean that we’re necessarily going to jump all over it. We have a formula, we feel it important in this time with a certain amount of revenue uncertainty to stick to that formula, and it served us well. I think our track record speaks for itself.

We do see acquisition opportunities increasing, as we have said. It’s certainly different now than it was even three years ago. We have actually added resources to our M&A function as you know, and so we’re being very thoughtful about how to be productive in this new environment.

Darren Lehrich – Deutsche Bank

That’s helpful.

Vic Campbell

All Right. Thank you, Darren. Probably time for just one more question.

Operator

With that, our final question then will come from Whit Mayo with Robert Baird.

Whit Mayo – Robert Baird

Hey, thanks. Good morning. Thanks for slipping me in. I guess I just had a general question around the IT strategy and high tech, and Milton, I’m just sort of curious where you guys are relative to your IT work plan at this point, and maybe how that’s met up with expectations. And if you could comment on cost and just any general commentary for how we should think about the next step, when you guys are thinking about stage two.

Milton Johnson

Sure. Well, let me just say first of all that our IT strategy is primarily around the clinical agenda as you can imagine. Currently, we are about six months into a development of the clinical data warehouse. We’re also working on the health information exchange. And of course as we’ve discussed before, we have a couple of pilots going on; one with Meditech 6.0 version, and another pilot with Epic.

And so we need to see the outcome of those pilots, but – and then make some decisions about how we go forward with a new clinical system. That will be a multi-year sort of implementation. We don’t have all the cost estimates on that yet. That is what the pilots will help us inform us as to how we should think about cost and again how we should formulate implementation plans. So we’re a little too early to talk about that. But certainly our IT agenda is very full right now, and it is going well. And again, it’s primarily around the clinical agenda.

Vic Campbell

All right. Whit, I thank – you very much. I thank everyone. Mark and I are both here, happy to take your calls. You all have a great day.

Operator

And with that, ladies and gentlemen, that does conclude today’s call. Thank you for your participation and have a great day.

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