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Lifepoint Hospitals Inc. (NASDAQ:LPNT)

Q4 2007 Earnings Call

February 8, 2008 11:00 am ET

Executives

Bill Carpenter - President, CEO

David Dill - CFO

Bill Gracey - COO

Scott Raplee - SVP of Operations

Analysts

Christine Arnold - Morgan Stanley

John Ransom - Raymond and Associates

Adam Feinstein - Lehman Brothers

Tom Gallucci - Merrill Lynch

Sheryl Skolnick - CRT Capital

Ken Weakley - Credit Suisse

Jason Gurda - Bear Stearns

Bill Bonello - Wachovia

Operator

Ladies and gentlemen, thank you for standing by and welcome to the LifePoint Hospitals yearend earning conference call. During this presentation, all participants will be in a listen-only mode and afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded on February 8, 2008. And I would now like to turn the conference over to Mr. Bill Carpenter, President and Chief Executive Officer. Please go ahead, sir.

Bill Carpenter

Thank you, Jennifer. Good morning, everyone. I'd like to welcome you to this fourth quarter and yearend 2007 earnings call for LifePoint Hospitals'. We appreciate all of our stockholders who have joined us this morning and also our employees, physicians, and community leaders who generally dial in for these calls.

By now you should have received our press release covering our results for the quarter and the year, which we issues this morning. The press release also outlines our guidance for 2008. If you don't have our press release, it's available on our website at lifepointhospitals.com.

On today's call we will be making forward-looking statements based upon management's current expectations. Numerous factors could cause our results to differ from these expectations. We outline those in our filings with the SEC and encourage you to review these filings. We also ask that you please review the cautionary language under the caption important legal information in our press release. The Company undertakes no obligation to update or make any other forward-looking statements whether as a result of new information, future events, or otherwise. Also, please visit our website for a link to various information and filings.

To get things started this morning, I will make a few introductory remarks after that David Dill, our Chief Financial Officer will make more detailed comments regarding the fourth quarter, the year ended December 31, 2007 and the Company's guidance for 2008. After David's remarks, we will as always be happy to answer your questions.

Although volume for the fourth quarter fell short of our expectations, our results for the year were in line with the guidance we gave you in July. On this call, we'll discuss the issues that contributed to our volume shortfall in the fourth quarter and the steps we have taken or are taking to deal with them. Certainly, more than anything else, it was weak volumes that drilled our fourth quarter results.

In the fourth quarter, circulatory, respiratory and digestive MDCs were down significantly across our hospitals. A portion of these are related to the lack of flu, which we didn't see in virtually any of our markets during the fourth quarter. Our fourth quarter results also reflect hospital's specific issues at a handful of our facilities. While there is a somewhat different story at each of these hospitals, our approach is the same.

We're giving additional attention to these facilities working with our local management teams, our key local physicians and recruiting new physicians where needs exists. Having said this, I don't want to lose site of a fact that many of our hospitals performed very well. David will provide more detail on our admission statistics, but I will say, that in January we saw our admissions improve from the fourth quarter of 2007.

Well some thing's are obviously out of our control, such as the amount or severity of disease in our markets. For those things under our control, we're taking action. We remain committed to the comprehensive strategic initiatives that we developed during the last year and that I have previously outlined on various conference calls and investor presentations.

We're beginning to develop traction across our strategic initiatives and are making progress toward our strategic goals. Having said that, it's important to recognize that our results in this regard as opposed to our efforts will not be linear from month-to-month or quarter-to-quarter. Over time, we remain confident that these intentional focused and strategic initiatives will enable LifePoint to maximize our performance and results.

As I have shared with you before, during 2007 we undertook detailed comprehensive deep dive reviews of the operations at six of our largest hospitals, with a view toward identifying profitable services that we could add to these communities. There are deep dives. We learned a number of lessons. Generally, for example, we confirmed that we should add or further emphasize cardiovascular services, cancer services, general surgery and advanced imaging services. This is exactly what I wanted to accomplish.

Now, we're taking these lessons out to all hospitals within the LifePoint system. I expect to see an emphasis on similar service lines as we roll our strategic process out across the other 40 or so hospitals. We're confident that these efforts and the targeted investments that will be made in our hospital communities as a result will allow the hospitals within LifePoint to increase profitable market share in their communities. These efforts should also facilitate the success of our organic growth initiatives. That said, we know that we can't grow without working to consistently improve our relationships with the physicians on our hospital medical staffs.

During 2007, we added Lanny Copeland, MD, as our Chief Medical Officer. Dr, Copeland has been working with the physicians and nurses at our hospitals to improve quality including performance against core measures. In addition to growing and existing markets, we are actively looking for opportunities to acquire the right hospitals at the right price, and we believe those opportunities are available. Our plan is to acquire one to three hospitals during 2008. As we said before, however, we will be aggressive in our search but we will remain a disciplined buyer.

The bottomline, we have a great team of experienced operators and they're doing all of things that you've seen them do in the past. We're implementing a number of initiatives to combat industry challenges and grow our business. We remained confident that these are the correct initiatives and we will execute on them throughout 2008.

Obviously, our operating environment especially when combined with the broader issues in the economy is becoming increasingly difficult. For example, as the economy slows and it certainly seems that we are moving quickly into a recession. We believe that many individuals enrolled in high deductible insurance plans or plans with large co-pays may self-ration, or they'll decide to delay or forgo needed healthcare L008--0:24.

You may have seen a study recently in New England Journal of Medicine that concluded that women who must make co-pays are deterred from seeking mammograms. The results of this study support our sense that many in need of healthcare services may decide not to seek it, as the economy tightens and consumer confidence falters.

The President's budget which was proposed on February 4, 2008, of course, includes aggressive limits on future Medicare spending, including significant reductions and payments to hospitals, regardless of what direction the President budget takes whether it remains viable or not. It seems clear through the presidential campaigns that healthcare reform is on the national agenda to stay. While we have reason to believe that this fact could benefit us, it will be sometime before the political direction of healthcare is clear.

We will monitor these developments closely and adapt as necessary. We will also work with the Federation of American Hospitals, the AHA, our role coalition and others to make sure that policymakers fully understand the implications of their decisions. With all this in mind, we remained optimistic about the long-term need for healthcare services and the success of LifePoint Hospitals.

At this point, I would like to turn to David, so that he can provide more of the detail on the quarter and the year. David?

David Dill

Good morning, everyone. In the next few minutes, I'd like to cover the following topics. First, our consolidated results; second, volume; third, revenue; fourth, expense; fifth, cash flow and capital spending; and finally, 2008 guidance at the end. In addition, we plan to file our 10-K on or about February 21st.

First, consolidated financial results. For the fourth quarter of 2007, revenues from continuing operations were $658.4 million, up 4.7% from the same period a year ago. Earnings before interest, taxes, depreciation, and amortization were 104 million for the quarter compared to $119.3 million from the prior year period, and the related margins were 15.8% compared to 19% from the prior year period.

Net income from continuing operations for the quarter was $31 million compared to $38.1 million for the same period a year ago, or a decrease of 18.7%. Fully diluted EPS from continuing operations was $0.54 per share in the fourth quarter compared to $0.67 per share a year ago.

For the year, revenues from continuing operations were approximately $2.630 billion, up 9.7% from the prior year. EBITDA was $440.5 million for the year compared to $449.7 million from the prior and the related margins were 16.7% compared to 18.8% from the prior year.

Net income from continuing operations for the year was $125.9 million compared to $144.5 million for the prior year, or a decrease of 12.9%. And fully diluted EPS from continuing operations was $2.20 per share for the year compared to $2.57 per share a year ago.

As we have discussed before, this approximate 200 basis point decline in EBITDA margins we've experienced during the year is comprised of increases in bad debt expense and other operating expenses primarily. And the increase in other operating expenses was driven by professional fees, contract services, and medical malpractice when you compare on a year-over-year basis.

Second, volume. During the quarter our admissions declined from 50,119 admissions to 47,990, or a decline of 4.2% and adjusted admissions declined 3%. In addition, we saw inpatient surgeries decline by 1.5%, outpatient surgeries were flat and ER visits increased by 1.8%. The decline in admissions is a result of many factors, including a very tough year-over-year comp. I'd like to discuss three of the areas in more detail.

First, we have closed down a couple of service lines during the quarter. We're constantly looking at our service lines and have identified based upon operating performance, a couple of unprofitable service lines and a couple of our hospitals. In addition, there is a shift this quarter from certain inpatient business to outpatient business, and a combination of these two accounted for approximately 50 basis points of the decline in margins.

Second, we have seen a lack of disease as Bill pointed out across our markets coupled with a very slow start to the flu season. During the quarter, we experienced a 12% decline in circulatory cases and an 11% decline in respiratory cases. These declines have some geographic concentrations but are generally spread throughout our markets.

In addition, as we have analyzed the CDC information and developed a specific waiting for our markets related to the flu season, the data suggests and the facts support a slower start to the flu season in our markets this year compared to last year. And based on this analysis, we feel this accounts were approximately 200 basis points of the decline. The remaining approximately 150 basis points in the decline is a result of a drop-off in volume in a group of five or six of our markets that cannot be attributed to the previous two categories.

We saw volume declines in these markets of approximately 15% in the fourth quarter, up from a decline of approximately 5% in the third quarter. Our analysis shows various reasons for this decline including the ramp-up period associated with certain of our new physician recruits.

In summary, the continued volume decline in few of our markets coupled with a lack of disease less than approximate 3% decline over what we would have otherwise expected as it relates to admission growth. We're in the process of closing the books in January and the results indicate a decline of about 2% in inpatients admissions during the month of January.

We are seeing improvements in many areas including the small group of markets that we mentioned earlier. In addition, to the focus on inpatient admissions, we did see a drop-off in outpatient volume during the month of December. Our growth in outpatient revenue during December which is a good proxy for volume and mix with approximately half of what we experienced for the entire quarter. Overall, I have to cover a considerable line of detail but I think all this information is relevant to help you in your understanding of the issues we faced related to volume.

Third, revenues. Revenues increased 4.7% for the quarter. This is being driven by an increase in our revenue for adjusted admission of 8%. Net revenue per adjusted admission increased to approximately $6,985 during the quarter from $6,470 in the prior year quarter. This increase is the result of loss and lower acuity volume during the quarter and, the prior year quarter showed a much stronger outpatient volume than we saw this year. And by definition that drove net revenue per adjusted admission down in the fourth quarter of last year. As a result of the loss in this lower acuity volume that we mentioned in our Medicare case mix, increased to 1.29 from 1.24 sequentially from the third quarter.

Consolidated self-pay revenues, including charity and indigent care for the quarter was approximately $94.1 million and represents about a 2.6% increase from the prior year quarter and a sequential decline of 4.6% from the third quarter. For the quarter our self-pay revenues represented approximately 14.8% of our revenue.

Fourth expenses, related to expenses I would like to talk about par payings, and I will start with bad debt, we'll talk a little bit about salaries, other operating expenses and end up with income taxes.

First bad debt expense, bad debt for the quarter was $81.1 million or 12.3% of revenues, compared to $66.9 million or 10.6% of revenues for the same period a year ago. As a percent of revenue, we have operated between 12% and 12.5% for the last three quarters. Charity discounts, which are netted against revenues, remain relatively flat for the quarter at $11.4 million, as compared to $11.8 million in the pervious quarter. As a result through both our provision for doubtful accounts and charity write-offs, we have provided for approximately 95% of self-pay revenue. And once again, this was very consistent throughout each of the four quarters this year.

Salaries and benefits, our salaries and benefits remain consistent from the third quarter of 2007, at 39.6% of revenues. We saw a decline in contract labor of approximately $1.8 million from the third quarter and a $2.1 million decline from the fourth quarter of year ago. The reductions in contract labor are certainly a result of changes in volume that we experienced during the quarter. But also a shift to fulltime employees. However, we did see a net reduction in labor cost as a result of these initiatives that our operators have been focused on.

I want to draw your attention to stock-based compensation during the quarter. We adjusted an assumption related to stock-based compensation, in particular the assumption dealt with our overall forfeiture-rate. The change in this assumption resulted in an additional non-cash charge during the quarter of approximately $1 million or $0.01 per share. Stock-based compensation is included in the salary and benefits amount that you see on the income statement.

Other operating expenses, other operating expenses have increased from 17.4% of revenue in the fourth to 18.5% in the fourth quarter of this year. We continue to see increases in cost associated with physician recruiting and related professional fees. And in addition during the quarter, we wrote-off approximately $1 million of previously capitalized assets, related to equipment and in [IT] system. And that's all included in other operating expenses.

Income taxes, as we have seen in the fourth quarter of prior years, we experienced the reduction in our effective income tax rate. The reduction in the rate is a result of the reconciliation process of prior year returns to the estimated provision that we record, throughout the year, and most importantly the lapsing of statutes of limitations in some states. The effective tax rate of just over 36% is very consistent with the fourth quarter of 2006.

Moving on to cash flow and capital spending, our capital spending for the quarter was $53 million, for the year our spending was approximately $164.1 million and represents 6.2% of our revenues for the year.

Cash flow from continuing operations were strong. Cash flow was up at $82 million in the quarter, compared to $88.9 million from the same period a year ago. As of December 31, 2007 we had totaled debt outstanding of approximately $1.5 billion and cash available on the balance sheet of $52.3 million. In addition, we did begin executing our share repurchase program during the month of December. Till the end the month we had repurchased approximately 1.4 million shares for a total of $41 million. We plan to complete this program during the first half of 2008. Due to the timing of these repurchases there is minimal impact on our current results, as a result of this program.

Finally guys this morning we issued our 2008 guidance. Let me summarize the ranges, as disclosed in our press release. Inpatient admissions down 1% to up 1%. Adjusted admissions up one half of 1% to up 2.5%, revenues in the range of $2.650 billion to $2.770 billion, EBITDA from $430 million to $460 million, EPS $2.25 to $2.55 and capital expenditures in a range of between $160 and a $175 million. The 2008 guidance assumes the completion of our share repurchase program. The guidance also assumes no acquisitions during 2008, with all cash generated from operations being used to finance the share repurchase program or repay existing indebtedness.

With that let me turn call back over to Will Carpenter.

Bill Carpenter

David, thanks very much, we've covered a lot of information so far this morning, but we've tried to keep our remarks concise for you. We are ready to turn to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. And we'll proceed with Christine Arnold with Morgan Stanley. Your line is now open.

Christine Arnold - Morgan Stanley

Good morning. A couple of questions. January volumes are improving relative to fourth quarter but still down 2%, can you help us understand how you kind of developed confidence in your kind of flat assumption for admissions growth in 2008 given what we're seeing in January?

Bill Carpenter

Yeah. Keep in mind Christine, when you look at the fourth quarter volumes were down approximately 4%, if you look through the pervious three quarters and you blend all those together on a same-store basis, our volume was down about 1% for the year, adjusted admissions were up about 1.5% for the year. Those two relate very nicely to the bottom-end of our range that we gave you for 2008. So we know there are some variable abilities for the quarter, but as we looked at January, as we looked at this waiting of the CDC information that we had applied to our markets [are those] with the volume trends that we see we have seen about half of the decline that we saw in the fourth quarter comeback so far in January. To early to tell what that means for February and March, but based on those trends we feel very comfortable with bottom-end of the ranges and it's very consistent with what we saw for 2007 as a whole.

Christine Arnold - Morgan Stanley

Is it accurate to -- sorry go ahead.

David Dill

Well as I said, and with the initiatives that we have been putting in place, I feel good about the traction that we're beginning to see on that and so that may speak a little bit more to the upper end of the range.

Christine Arnold - Morgan Stanley

So is it accurate to say that based from a CDC data that this January's flu season was worst than the year ago Januarys and yet you are still down 2%, or do you think January's flu season for you is less than 10s and helps to explain why you are down to?

Bill Gracey

Christen, this is Gracey. What I would say there is to really be very specific, first couple of weeks of January that we're still in our particular markets no flu traction whatsoever. It kicked up very positively in the third week and a kicked in for real finally in our particular markets in the fourth week of January. That may help you see why we're saying albeit it was down overall for the month, it was trending up as we got toward the end of month and you can see that we feel like at least there is a positive momentum, I need to say positive momentum flu wise -- but positive momentum flu wise.

Christine Arnold - Morgan Stanley

Okay. So flue you think partially explains the minus 2 for January. And then my final question is on pricing, did you increase the chargemaster and how do I think about this price for adjusted admit in the phase of what was probably flat Medicare payments and what can we expect for '08?

Bill Carpenter

Yeah. Let me speak just real quick to what we saw this quarter and I'll turn it to Scott. I think its important, Christen, the 8% growth that we saw is a combination of two things. And just to be clear, last quarter strong, strong outpatient volume relative to this quarter. We saw in the month of December, outpatients volume drop-off dramatically and as a result that by definition, because a strong volume last year you had a lower net revenue per A compared to a loss of low acuity volume this year. That's not a same -- our view of next year for pricing is somewhere in the 2.5% to 4.5% range on pricing given the fact that we are staring at the implementation of the DRGs and the lack of Medicare increase. Although, it's a little bit better than what we had originally thought. With that Scott, anything else you want to add?

Scott Raplee

Sure. Christine, I did say and obviously, we talked about volume and if you look at where significant portion of declines really occurred were in the low end or lower acuity volumes, particularly as it relates to the DRGs like simple pneumonia, bronchitis, and asthma, chest pain, gastrointestinal cases, some of the really low end cases which resulted in a pretty favorable CMI increase for us, grew up almost 6% on our case mix index, and then in mix David also mentioned the little bit easier comp because of the strong outpatient revenue in 2006.

If you look across the payers, a net effective payer increase, we did have the market basket of 3% for Medicare. We talked about the CMI, up about 5.7%, almost 6% which resulted in about 6.5%-7% increase in the Medicare volumes. Medicaid gain was in the 6% to 6.5%, not because of favorable pricing in the Medicaid program, but we have seen some minor rate increases at few stage, really what we saw was a mix exchange, but we saw declines. David mentioned a couple of program closures, two of those were OB related. So, pulling up those low-end OB volumes and some poor paying states had a affective increase with it, affective impact of increase on Medicaid rates. And then we saw better volumes in our western facilities where we tend to see better Medicaid payments.

Our discount payers, with one I think were you probably specifically talking about. We've seen increases there in 7.5% to 8% range and that's a result of couple of things. We did talk to you about mid-year price increases that we did back in May, June, and July, and that has impacted that. Also, we are seeing managed care contracting rates improved in the 5% to 7% range. And then lastly self-pay, we did see a slight increase in our self-pay in the 7.5% to 8% range as well, and that was really, most of it generated on the outpatient revenue side. Our admissions on self-pay were actually down. However, our revenue was up 4.4. What drove that force in the quarter, our revenue per admit was up about 8.5% and lengths of stay in our case mix were also up on the self-pay volume consistent with what we saw in our overall volumes. So hopefully that gives you a little bit of color on that Christine.

Christine Arnold - Morgan Stanley

I appreciate that. Thank you.

Operator

Thank you. And the next question comes from line of John Ransom in Raymond and Associates. Please proceed with your question.

John Ransom - Raymond and Associates

I guess I changed firms. The Raymond and Associates. Good morning. The question I had was, just kind of stepping back and looking at your numbers, over three years you are essentially flat from an EBITDA standpoint. And recognizing the industry headwinds and a kind of dovetailing on your comments they 'are likely to get worse before they get better. Are you guys undertaking any thoughts to some less conventional ways to try to get some earnings growth out of this company, maybe some more aggressive portfolio management, maybe using your balance sheet more aggressively? Because it looks to me that notwithstanding the operational efforts you are taking, its just hard to see a path towards any kind of earnings growth with the current strategy that you have. And I just didn't know what's your threshold of pain where you would look at some more aggressive ways to try to get some bottom line growth for investors.

Bill Carpenter

John, this is Bill. First of all the things that we're doing with effect to strategic initiatives are things that we must do in order to deal with the flattish EBITDA that you've described, over the past few years. That's the reason that we began about a year ago.

John Ransom - Raymond and Associates

Sure.

Bill Carpenter

We're working very hard to put these things into place. And so, I am very pleased about how that's going. I am also very pleased about the way that the company has embraced the direction, and the focus that we're taking on those very specific strategic initiatives. So, that's going very well, we got to be doing that. In addition to that, however, you may rest assure that this Management team and our Board always looks at everything. You saw it a little bit when we used our balance sheet in connection with this stock buyback, the purpose of that is that, as we began it, was to stay very much within our authority, under our credit facility. Recognizing that to go beyond that at this time would have been inappropriate, as it would have required us to go back and renegotiate our credit facility. Not a good time to have done that. And so, we did that. That retained all of the flexibility that we have. In a very clean and a very well positioned balance sheet. So, you should assume that we recognize our obligations and the importance of maximizing value to our stockholders, we will look at every thing, and we'll continue to do that, as we have in the past.

John Ransom - Raymond and Associates

Lets just say though, I know maybe timing is not perfect right now, but what if you took more of a Jack Welch approach to your assets, I am sure there's got to be, if you take your bottom 5% hospitals or your bottom 10% hospitals I am sure they have to be a drag. Is there any thoughts or are you trying to recycle some of your capital into well preserving your leverage ratios. I guess you guys haven't been as aggressive on the portfolio management front, as we are seeing some other companies be right now. And I just didn't know the thought process there.

David Dill

Yeah, you need to assume John, it's David, that we are looking at all those. And you are right, timing is little difficult right now for lot of different reasons, just given where the markets are. We are not in a position to be forced to sell anything to raise money, and I am glad we are not in that position. But you need to assume, whatever we can do to drive returns here, we are looking at them all.

John Ransom - Raymond and Associates

Okay. And I guess just a couple of other questions about the guidance, Dave can you, I may have missed this, but can you give us ending share count for the December quarter? And maybe project your share count for the March quarter, taking into account your buyback activity and your options?

David Dill

Yeah. We ended the year at just over 57 million shares outstanding at the end of '07. We bought back about 1.4 million shares in the month of December. So, that will clearly count out the share count for the whole quarter. Shortly, after this call, we'll go back into the market and begin the share repurchase program. So, something in the neighborhood of, close to probably a couple million shares reduction in the first quarter. And by the time we get to the end of the year, our guidance assumes that the share count will be somewhere in the 54.5 million to 55 million share range. In the end of the year we'll not have a full, obviously, impact of the share repurchase program. The third and fourth quarters should, based on our analysis, but when you weight that throughout the year, it won't, because we fore facing it into the first half of this year.

John Ransom - Raymond and Associates

And again I am sorry, if I missed this, could you update us on your thoughts on interest expense and option expense for calendar '08?

David Dill

Yeah, option expense for calendar '08. It should be very consistent with what you are seeing in stock-based compensation for this year, the layers have all been put on now.

John Ransom - Raymond and Associates

Okay.

David Dill

That maybe a very small increase, but not the increases that we have seen sequentially from '05, '06 to' 07. As it relates to interest expense, you know our capital structure, it's fixed in nature. There was a big swap that the Company put in place in November. We will not be getting the benefit of the reduction level of rate that you have seen somewhere in the $85 million to $90 million range on interest expenses and it all depends on the timing of our share repurchases and how much of the revolver we have to dip into.

John Ransom - Raymond and Associates

And, remind me your balance sheet revolver capacity, right now.

David Dill

About 300 million.

John Ransom - Raymond and Associates

Okay. Thanks a lot.

Bill Carpenter

Thanks John.

Operator

Thank you. And the next question comes from the line of Adam Feinstein of Lehman Brothers. Please proceed with your question.

Adam Feinstein - Lehman Brothers

Yes. Thank you. Good morning.

Bill Carpenter

Hi, Adam.

Adam Feinstein of Lehman Brothers

A couple of questions here, I guess, maybe just first at the guidance. David, it's a very wide range of guidance, so I understand that it incorporates the share buyback, I saw it when I first saw the numbers, that maybe the reason for the range versus due to the share buyback. But, it sounds like it's more than that. Can you just walk us through, I guess, I am just thinking about the low-end of the range relative to the high-end of the range. What are some of the assumptions that really drive that? There is big difference and then maybe you can just comment on what you're assuming around bad debt for that also? And I have a quick follow-up question afterwards.

David Dill

Yes. I had anticipated the question. Let me start with -- let's go the top of the income statement first. We bracketed a number for you on admission growth. The bottom into the range looks a lot like '07, it doesn't look a lot like the fourth quarter but looks like '07. We have initiatives in place that we think we'll add to that. That will drive coupled with pricing. I feel very confident that that drives revenue towards the top into the range of revenue. We feel very confident that we'll be at or near the top into the range in revenue.

If you assume consistent margins item, you get to the high-end of our range on EBITDA but the range of $30 million is approximately a 100 basis point decline in margins. Given the uncertainty that we're facing, given -- and I don't see volume getting a whole lot better than these numbers, given the Medicare pricing environment that we're currently facing with MSDRGs coupled with the pressure even though the presence budget maybe dead on arrival. Given that, there is not going to be a lot of room to exceed these net revenue for adjusted admission targets either.

So if we're able to achieve these targets and drive revenue to the top end of this range given the uncertainties around bad debt, given the uncertainties around professional fees, those are really the only two big things that concern me. I felt it was prudent to give us a range of about a 100 basis points of margin decline this year. If you remember back to our script, what we just talked about, about a 200 basis point decline in margins is what we saw.

In this guidance, Adam, we have our provision for doubtful accounts in a range of between 12.5% and 13.5%. We have been about 12.3% or 12.4% for the second half of this year. Based on everything that we see it's pretty stable. That could change very quickly, but we've given ourselves a range that if that moved to the high-end of the range I really feel like the bottom-end of this guidance catches that.

Same way with professional fees. We have seen dramatic increases in professional fees in the order of magnitude of about 20% on a year-over-year basis. I fully expect that number to moderate. We have seen some moderation in the growth of that number. But there is and will continue to be pressure on the professional fees and once again the combination of those two, I feel like the bottom-end of the range catches it.

You can rest assured we're pushing hard. We're going to do everything that we can do to deliver the margins that we delivered to you this year but given those two uncertainties and the environment that we operate in, feel like the bottom end of the range capture what an outcome could look like if those two continued to deteriorate.

Adam Feinstein of Lehman Brothers

Okay. I appreciate the details there. I guess just follow-up question. I guess as you look at the fourth quarter, the things that's the hardest thing to really reconcile is the fact that your EBITDA in absolute dollars and margins in the fourth quarter relative to the third quarter, the number was down. Just with the seasonality in other business you wouldn't think that would be the case. I heard your comments about the volume weakness, but just trying to understand was there anything in the third quarter that would have given you a boost that maybe we didn't talk about last quarter and just seeing the EBITDA go down in the fourth quarter relative to the third quarter, just having a hard time reconciling that. Do you have any clarity there?

David Dill

Yeah. Three things for you. You can see in business, we've talked about a lot everybody understands it when volume drops off, especially outpatient type revenue. We saw a dramatic drop in outpatient revenue during the month of December. When you see that happen, the impact on that admission whether you have it or you don't have it cuts both ways. So a big chunk of the sequential margin decline relates to volume there is nothing that was material in the third quarter that drove margins to the 16.6 that we reported. So we felt very comfortable that that was a good run rate, but volume accounts were probably 75% of the margin decline.

The remaining amount, there is two items that we talked about non-cash stock-based compensation was up little over $1 million. If you go to cash flow statement, you can see that very easy from the third to the fourth quarter. That was about a 10 or 15 basis point decline in margins. There was also about a $1 million of write-offs -- non-cash write-offs related to some fixed assets, equipment, IT systems. They are incorporated in another operating cost. Once again that's another 10 to 15 basis points in the margin decline as well. Those are non-recurring in nature and won't be either going forward.

You add those two back, you get to about 16.1%. And so, the remaining 50 basis point decline can be explained with that big drop-off in inpatient admissions, but just as important the big drop-off in outpatient revenue that we saw in the month of December.

Adam Feinstein - Lehman Brothers

Okay. Great, and there is final question, I will get back in the queue here, the charity care number, just want to make sure I got the right number there, can you get that to us again/

David Dill

Yeah. Charity care for the quarter, charity discount was $11.4 million in absolute dollars. That's down $400,000 from the third quarter, and down about [$700,000] on the same store basis from the fourth quarter of last year.

Adam Feinstein - Lehman Brothers

Okay. Great, alright thank you.

David Dill

Thanks Adam.

Operator

Thank you. And the next question comes from line of Tom Gallucci with Merrill Lynch. Please proceed with your question.

Tom Gallucci - Merrill Lynch

Good morning. Thank you. I guess first one, you had mentioned a number of markets where you saw a pretty significant drop-off in volumes and you said there were sort of various reasons, so hoping you can expand on what's going on there and the industry is better being put in place to improve that?

David Dill

What we shared, just to frame the conversation and then we can go through and talk a little bit in more detail. If you take a group of our markets, five or six hospitals, and these are big markets for us. These aren't the smallest of our hospitals, but when you take that group of hospitals and look at the volume decline that we experienced in the fourth quarter that number was in the 14%-15% range for the fourth quarter. If you take that same group of hospitals and go back and look at the previous two quarters, the third quarter, we were down about 5% in that same basket of hospitals. So, that 10% decline, additional decline in growth rate, about half of that Tom is many of other things that we've already talked about, lack of disease, they weren't immune to that.

The other half are more specific items, related to a whole host of things, whether it's the timing of our new starts coming on, whether it's timing of few physicians that we lost in contemplate. We have some economically -- in one of the hospitals, we are not seeing these seasonal visitors that we have seen in the past. So, not all these are physician related, nor all of them are operating related, not all of them are economically related, but there is a combination of all those spread. And as a matter of fact there was a combination of all those even spread within specific hospitals as well.

Tom Gallucci - Merrill Lynch

Okay.

David Dill

And that group has, that 15% decline, what we are seeing? How that group has developed in the month of January? It is very consistent with how the whole portfolio has developed from fourth quarter into the month of January. So, they continue to improve at about the same rate, that when we talked about our overall growth rate, it went from down 4 in the fourth quarter to down 2. That is representative of that, we are seeing it everywhere.

Tom Gallucci - Merrill Lynch

So, the down 15% is down 7% or 8% now.

David Dill

Yeah, that's right.

Tom Gallucci - Merrill Lynch

50% better.

David Dill

Yes, 50% better and the piece of those are not,, the piece of that is just the lack of disease coming back, that's what we talked about. That's why that overall declined from the third to the fourth quarter was not just things happening in those specific markets, they are things that we are seeing across the portfolio.

Tom Gallucci - Merrill Lynch

And then may be just, I have to harp on it, but what are your projections in these markets, even down 5% in Q3 or Q2 would still be fairly sizable. So, how do you anticipate these markets improving, over what rate, and what are the some other things that are being done outside of just the flu being good or bad?

David Dill

I will turn it over to Bill, and just may keep in mind. When you are running a portfolio of hospitals, there are always the subsets of hospitals that are growing quicker than the average, there are always some that are growing less than averages. And it's not the same path in any given year, but there are specific issues in these that our operators are constantly focused on. Bill, you want to add some color?

Bill Gracey

Yeah, Tom its Gracey, as David said if you look at pretty much multiple variables that have effected those particular markets, the ones that he listed, which is actually a couple of hospitals we've had a lack of Northerners coming to the Southern retirement villages, that normally they would come to, that's as much an economic issue as much of a weather related issue, as anything. And to your question, will that turn around? In those two cases, don't know. Relative to lost docs, the answer is yes. I think we're right on track there. We've done a beautiful job of recruitment, as you know, over the last couple of years. And where those key docs, key loss docs that David was talking about took place? We either have doctors signed or are very close to having doctors signed or in many cases have already replaced in the month of January. So, that should give you a comfort level on those particular markets that the solutions are in place.

And finally, and again not to be redundant, but don't underestimate the specificity of lack of disease in our particular markets. Every time we would look at the CDC map over the last two or three months, we were shocked how an R-19 station particular there was much less disease even in some of the states we were not in. Kentucky for example, Tennessee, we had our first reported flu case in Tennessee this January the 30th. So you see what's happened, where we have a preponderance of hospitals were states that had an unusually low disease rate on the CDC map. So, I do think to your question relative to those key hospitals, a lot of action steps we have already taken to mitigate the problem but also we think the flu thing should not be underestimated even in those key hospital markets.

Tom Gallucci - Merrill Lynch

Okay. And then, just finally, can you just give us an update on where physician recruiting, sort of, fell out for the year both in terms of absolute new docs and net bases versus losses?

David Dill

That's a great question. Net bases, I believe it was 38 net that runs to about a 169 recruited minus 38,131. The lost docs, please keep in mind, when we look at lost docs, we include things like hospitals to really in and of themselves don't admit new patients, they simply substitute for existing. So there is a lot of variables that can move that number up or down but the cold hard fact answer is around 38 net for this coming year. We have upped our expectations, although, we have a lower number of overall docs recruited.

Anytime we lose a doc that will be added to the 151 total doctors that will be recruited for this coming year. So, albeit, a 151 budgeted, when you start to looking at 80 new docs that have been lost since the time of that budget, already new docs that will be lost during these year, those were immediately get added to that 151 numbers. So, that at the end of the year we hope to have a net number that's more palatable and will sustain our volume better.

Tom Gallucci - Merrill Lynch

Okay. Thanks a lot.

David Dill

Thank you

Operator

Thank you. Please we advise due to time constraints, we asked that you please limit yourself to two questions and we'll now continue with Sheryl Skolnick with CRT Capital. Please proceed with your question.

Sheryl Skolnick - CRT Capital

Thank you very much. And here is one vote for the flu because I've got it. I am sorry, forgive me if I cough in your ears a little bit.

Bill Carpenter

So does Raplee.

Sheryl Skolnick - CRT Capital

Yeah. Sounds like someone has got it there. Okay. So one little detail first, you've discussed the decline in outpatient activity in December but I'm curious, therefore, how the outpatient factor can actually be up the quarter on a continuing operations basis 1.96 I think versus 1.94 was the number? And then I have some follow-up questions getting on a large issue rather than on a nit-picking issue like that.

David Dill

Okay. Sherly, that's a good question. If you look overall our -- even though, we talk about our outpatient revenue being down, its really a decline in the growth, does that makes any sense? If you look I think year-to-date through September, I think on -- through the same facility basis, we are running around less than a 12% outpatient revenue growth over prior years. We stayed very consistent with that in October and November in the fourth quarter and then December the growth over prior year dropped down to about 5.5%.

So we talk about decline in outpatient revenue, we're just we're really talking more and large that the growth slowed pretty dramatically in December. If you look overall in terms of how the outpatient adjustment factor was calculated, our outpatient gross revenues were up for the quarter around 9%, our inpatient gross revenues were only up about 5.7%. A big chunk of that obviously relates to the 4.2 % decline in our admissions than as you heard me say earlier, a significant portion of those were in those lower end acuity basis.

So I think it's -- the slowed growth in December albeit we still ended up over 9%. The 4.2% decline of admissions particularly in those lower end resulted in that factor change.

Sheryl Skolnick - CRT Capital

Okay. So that now makes sense. And I guess what I am concerned about, forgive me if this sounds rather pejorative, but LifePoints had a rather challenging last several years and it seems as if, we have this series of incidents or events at specific hospital that have significant negative impact and a lot of it related to unexpected physician departures and the like. And then I coupled that with maybe not understanding your strategy to put yourself on more consistent growth.

So the question in that by the way is why you are not capturing this stuff better since you have more experience with these doctors leaving, unfortunately not having enough sick people or programs maybe being not as effective as you think. It would seem to me you've been at this long enough, you would catch it soon enough that maybe you can mitigate a little bit better in the quarter. So, why is that not right?

And then the second issue with this whole volume and consistency issue, did I understand you right, Bill, that you've looked at these six hospitals, your largest hospital and have discovered what services you're missing in those markets, and you're rolling out those same services to the other 40 odd hospital or is it the same process that you're applying, because if it's a same services I would like to know why your biggest markets are a good sample or proxy for your smallest markets?

Bill Carpenter

Okay, Sheryl. Let me take the last question first because it's the more direct I guess. What I've said was that we did deep dive investigations at six of our largest hospitals, not necessarily our six largest hospitals but six of our largest hospitals.

Sheryl Skolnick - CRT Capital

Okay.

Bill Carpenter

The information that we discovered there has allowed us, we've used that information in order to create detailed strategic plans to grow market share and grow EBITDA in those specific hospitals.

Sheryl Skolnick - CRT Capital Group

Right

Bill Carpenter

We did learn lessons in those hospitals. And it was interesting to me, across those hospitals, certain service lines which stood at places where across those six hospitals we should either add service lines or enhance service lines that currently exist there. So, those are some lessons learnt. We are taking a similar process, but not the same process out across the other group of hospitals.

We are leveraging, to use a term, the information that we gained in those deep dives and taking that out on a less involved way to the rest of the hospitals, so that each individual hospital will have a specific plan, designed to grow market share and EBITDA in its market, appropriately designed for that hospital. So, its not going to be the same at one of our smaller hospitals, as its going to be at our largest hospital. But, there will be things that we learned through the way we the analyze the data, the way we analyze the hospitals that will allow us to take that information and use it in those other hospitals.

I wouldn't be surprised however, in connection with just the way our hospitals are geographically located around the country, if we won't see in those markets similar results with respect to service lines that maybe capable of been added there, and to the extent we see that result then we'll make decisions that will proceed. We'll make decisions each case that will be designed to achieve a good return for our stockholders.

So, that been said, with respect to your other question it has been challenging last several years. That's the very reason that we started over a year ago to put in place strategic initiatives that we'll use and that we're using in order to grow this business. We're doing a lot of things, physician recruitment absolutely is a key to it and physician retention absolutely is a key to it.

We've got to do better job and we've plans in place at every single one of the hospitals. We've got to do a better job of detailing our physicians, so that our hospital CEO's absolutely know what a physician is thinking, with respect to his or her future plans. They're not always forthcoming about that when they making the decision to leave the market. But we've to know as much as we can know about every single one of our doctors. We also have to work closely with our doctors, in order to make sure that we're providing them with the things that they need and to make to sure that they understand what it's going to take in order to make the hospital successful.

We're doing a lot of other things, end market development programs to assist our management teams to expand service lines, surgical services are been looked at very, very carefully in order to make them more efficient, to make them operate more like a surgery center, to make our hospitals more efficient for our patients and for our physicians, with respect to quality and throughput. So, we are doing a lot of things in a number of different ways, we are expediting our capital projects, they are reviewed here at the office, at the corporate office in order to move that along quicker, always focused on getting a proper return. So, just a little bit of detail on a lot of things that we are doing, all focused on achieving the results that we want.

Sheryl Skolnick - CRT Capital Group

Okay. Thanks very much.

Bill Carpenter

Thanks, hope you feel better.

Sheryl Skolnick - CRT Capital Group

Good.

Operator

Thank you. And the following question comes from line of Ken Weakley with Credit Suisse. Please proceed with your question.

Ken Weakley - Credit Suisse

Sure, thanks good morning everyone, did I hear right that you recruited a net 38 doctors in 2007, is that correct?

Bill Carpenter

That's correct.

Ken Weakley - Credit Suisse

Okay.

David Dill

Hold on, just to make sure, we recruited a 169 we lost to 131 from net physician add of about 38.

Ken Weakley - Credit Suisse

No, right, I understand.

David Dill

Okay.

Ken Weakley - Credit Suisse

Why not try to recruit more?

Bill Carpenter

We are.

Ken Weakley - Credit Suisse

Like, try to recruit 300 doctors. So, is there a goal to recruit as many as, can't you walk me through and also if you can get through the cost of recruitment, I think you mentioned briefly that the cost of recruiting was going higher, so how may ask it -- why you are not trying to recruit maybe two times the number that you are apparently trying to recruit? And number two, what's driving up the cost of recruiting?

Bill Gracey

Ken, this is Gracey let me take the first of the question. The question you've asked, the answer is yes. We are going to try to recruit a lot more this coming year. What had happened in the previous years, we lost around 100 doctors, in this last year '07 we lost 131. So as you can see, once we realize, well, okay that's the net loss, we're going to have to up our recruitment goal. When we gave you our lower recruitment goal for '08 that was the budgeted goal at the time the budget was finalized, sometime in mid-to-late autumn, if you follow me. So, yeah, any loss doc we get in the coming years will be added to that list. I would suspect by the end of the year, we will have a recruitment list over 200. Does that help you?

Ken Weakley - Credit Suisse

Sure.

Bill Carpenter

So I am answering that question since you are right. The second part of the question had to do with physician guarantee and net expense?

Ken Weakley - Credit Suisse

Yeah.

David Dill

In the fourth quarter, Ken, we had, as you know, we changed our policy on accounting for guarantees a couple of years ago, as we entered into year three, we actually had a couple of departures, so we had to write-off those assets and liability, resulting about $1 million impact in the fourth quarter, which is really what drove the overall recruitment, but it's consistently with what we had expected other than that.

Ken Weakley - Credit Suisse

Okay. And I guess question number two, if I could, the 2% trend in the month of January, for that to really tell us anything at all, we need to know what the trend was last January? And in other words, if last January, volume was up 30% and this will be a very good but if volume was down 20% than being down another two actually may signal that the trend has actually worsened from the fourth quarter. So, can you give us a sense of either what January was last year or can you give us a sense of what happened to the monthly data in the fourth quarter of '07, so we can know what sort of variance either kind of characterize as your trends on a month-to-month basis.

David Dill

Yeah. Let me try to do the fourth quarter trend that we saw this year and then relate it back to what we saw at the beginning of 2007.

Ken Weakley - Credit Suisse

Okay.

David Dill

And I don't have the January trended information in front of me. But for the fourth quarter, we saw admissions much in line with our expectations for the month of October and then November started worsening, not necessarily on the outpatient side. We saw continued growth on the outpatient side than on the inpatient side. November trends began to show a slowdown and then December, it just continued to get worse on the inpatient side and then the outpatient business got lot worse in the month of December as well.

So not bad in October, continued to deteriorate and accelerate in November through December, and now just as Bill Gracey pointed out, we started off January looking more like December in the first part of the month and that has began to pick up. As it relates to whether this look like leaving last year I'll just give couple of data points, our same-store admission, inpatient admissions, we were up 1.7% in the fourth quarter of last year.

Ken Weakley - Credit Suisse

Yes.

David Dill

In the first quarter of last year, we were up 1.4%. So growth slowed during the first half of the year a little bit and it has obviously accelerated here. So our comps do get a little bit easier than accounts for a piece of that but certainly not all of it.

Ken Weakley - Credit Suisse

And the 15% delta for the five or six, how much of an out lie is that? Is that, would any five or six hospitals or any large hospital chain, I can imagine you can get a fair degree of variance on admission trend. So in other words, like if you looked in any other very weak quarter in the past are there collection of hospitals that could be run [that much] or is that a really a big delta relative to historical variations.

David Dill

Yeah. I think, if you go back and look historically, having a group of five or six hospitals down 15% I think you could probably find those in some quarters but just due to the size of these being down 15%, I think it is unusual to have this group of hospitals that are of this size that account for a substantial piece of our volume off this much. But, yes, in any given year you could easily find five to eight of our hospitals that saw a decline in volume. But I don't think anything of this magnitude.

Ken Weakley - Credit Suisse

Okay. And I guess last question for Bill is strategically, is there any reason -- I mean it's been six years as docs had a tough time, any reason to be a publicly traded company?

Bill Carpenter

Sure. There are lot of things that we can do as publicly traded company that -- well, yes. The answer is yes, Ken. Again, we have to look at everything and take everything into account, but sure for all the reasons that we said before still makes sense.

Ken Weakley - Credit Suisse

Thanks.

Operator

Thank you. And the next question comes from the line of Jason Gurda with Bear Stearns. Please proceed with our questions.

Jason Gurda - Bear Stearns

Good morning. i think you might have mentioned this earlier but if you could repeat it what the uninsured admissions growth number was for the quarter?

Bill Gracey

Excuse me, inpatient admission?

Jason Gurda - Bear Stearns

Yeah.

Bill Gracey

Our uninsured admission or self-pay admissions for the quarter, Jason, we are down about 1% quarter-over-quarter if you look at inpatient. And that was -- we're down a little more that in the third quarter but it's not as we talked about on the third quarter call, it's not that big of a number in terms of absolute admissions.

Jason Gurda - Bear Stearns

Right.

Bill Gracey

So we saw a slight decline in overall self-pay admissions but not much.

Jason Gurda - Bear Stearns

But less than the overall decline?

Bill Gracey

Yes. Less than the overall decline. That's right.

Jason Gurda - Bear Stearns

And given what's happened obviously in the fourth quarter and continuing partially into January, would you -- you haven't given obviously quarterly guidance but would you characterize the year as more backend weighted than normal?

Bill Gracey

Not much but perhaps a little bit. We will clearly, based on the volume shortfall that we saw late in the year and where we are coming into the year, the month of January is a little bit below the bottom-end of the range as far as volume growth goes. But as far as the costs go its pretty evenly spread. So maybe a little bit, but not that dramatic.

Jason Gurda - Bear Stearns

Okay. And then just a last question, how do you guys think about how you compensate hospital management teams like, what type of incentives do you have in place?

David Dill

Well I think I will have to answer that; generally around 40% of the total bonus potential is based on financial indicators, the same ones that you would look at and some 60% is based on quality measurements, constituency satisfaction measurements and goals that are individual and unique to each hospitals. So, around 25% of the total for example is a custom set of criteria we look for and goals to achieve in those particular hospitals. For example, take that logic over to these key hospitals we talked about that had a rough December. There would be very specific goals unique to the challenges in those particular hospitals.

Jason Gurda - Bear Stearns

And just to clarify how much the bonus or the discretionary pay tends to contribute to the total compensation, let say that it was fully achieved?

David Dill

It varies by position and obviously that would be something we wouldn't want to broadcast. But you can understand that it is significant. It's a significant portion of salary and an amount that although wouldn't incentives anybody to do anything inappropriately, would incentives them to do the right things to grow the business.

Jason Gurda - Bear Stearns

Okay. Thank you very much.

Unidentified Company Representative

Jenifer, we have been at this for a while; I think we'll take one more question.

Operator

Yes, our final question comes from the line of Bill Bonello with Wachovia. Please proceed with your question.

Bill Bonello - Wachovia

Great, I just was just curious, you touched on this just briefly David, but your experience with MSDRGs so far and how that kind of compares us to what you had initially expected.

David Dill

Yeah, it's a third quarter call Bill, we had indicated that the implementation was early. The market basket increased that we had received of approximately 3%. We felt we would completely taken away through the wage index adjustments, behavioral offset and just the impact of the MSDRG, the combination of all those three. It's a little hard to quantify, leaving this quarter, just because drop off in the low acuity volume, this quarter our Medicare pricing looked a little bit higher but it's because of the drop off in admissions. When you try to normalize for that, I think it's fair to say that we'll get a piece of it. We'll not be as bad as what we had originally thought, but we still will lose at least 40% or so if that market basket increases. So, we may see Medicare impatient pricing up in the neighborhood of 1% which would be about a third of the overall market basket increase. Keep in mind we also got back on the outpatient side, the market basket increased to.

Bill Bonello - Wachovia

Okay and then just the last question; you mentioned looking for one or two acquisitions. What’s the rational given sort of the challenges that you have at the existing hospitals and the challenges you have filling the turnover spots that you already have of sort of taking on additional hospitals right now?

Bill Carpenter

Well to the extent there are hospitals that are good hospitals with potential upside that we can acquire at the right price. We want to be proactive there. Lets not say that we’re going to buy anything at this moment and its certainly is to say that we’re not intend to pay to much for those. But we want to be prepared Bill, if there is something that makes sense for us to be in position to do it.

Bill Bonello - Wachovia

Okay. Thank you.

Operator

Thank you and I'll now turn the conference back to you Mr. Carpenter.

Bill Carpenter

Great, Jennifer thanks very much. One last point I guess to make is as we close; I want to emphasize, we are not sitting on the sidelines here. We are very focused on the things that we think will address the challenges that face our industry as well as the challenges that face our hospitals.

We intend to be pro active. We do not intend to be reactive. But you should assume that we are looking at and considering everything. We're looking at sound, long term strategies that will improve and grow this company. We're going to be creative. As we see changes we intend to adapt. We're not worried about change or wedded to doing things the same old way. But we do intend to make responsible decisions.

I want to thank each of you for your interest in Lifepoint. I also want to thank our hardworking and committed employees as well as the physicians and folks in our communities, the patients who rely on and use our hospitals. And of course thanks to our stockholders and our other stake holders.

David and I are here and we are, to an extent there is additional information that you have or other questions, don’t hesitate to call us, 615-372-8500. We look forward to talking to you, if you would call and in the future. Thanks very much and good morning.

Operator

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

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Source: Lifepoint Hospitals Inc. Q4 2007 Earnings Call Transcript
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