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Health Management Associate Inc. (NYSE:HMA)

Q1 2008 Earnings Call

April 23. 2008 11:00 am ET

Executives

John Merriweather Vice President of Financial Relations

Burke W. Whitman-President, Chief Executive Officer, Director

Robert E. Farnham-Chief Financial Officer, Senior Vice President

Kelly Curry-Chief Operating Officer, Executive Vice President

Analysts

Christine Arnold-Morgan Stanley

Jason Gurda-Bear Stearns

Ken Weakley-Credit Suisse

William Bonello-Wachovia Securities

Adam Feinstein-Lehman Brothers

Gary Lieberman-Stanford Group

Tom Gallucci-Merrill Lynch & Co

Operator

Good afternoon. My name is Lynn and I will be your conference operator today. At this time I would like to welcome everyone to the HMA First Quarter 2008 Earnings Conference Call. (Operator Instructions) Mr. Merriweather, you may begin your conference.

Thank you Lynn and good morning everyone. I am John Merriweather Vice President of Financial Relations for Health Management Associates. I would like to welcome you this morning to HMA’s First Quarter 2008 Earnings Conference Call. Before we get started with the call I’d like to read our disclosure statement. Certain statements contained in this presentation, including the words “without limitation”, statements containing the words "believes," "anticipates," "intends," "expects," "optimistic," "objectives," and words of similar import, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include projections of revenue, income or loss, capital expenditures, capital structure, or other financial items, statements regarding the plans and objectives of management for future operations and statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements, and other statements which are other than statements of historical fact.

Statements made throughout this presentation are based on current estimates of future events and the company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and the actual results may differ materially as a result of these various factors. In addition, EBITDA, as mentioned on this call today, is defined as earnings before interest, income taxes, depreciation, amortization, gain on sale of assets, write-offs of deferred financing costs and after minority interests. I will refer you to HMA’s earnings press release issued this morning for a disclosure statement regarding EBITDA as a non-GAAP financial measure.

On the call with me this morning is Chief Executive Officer Burke Whitman, Chief Financial Officer Bob Farnham and Chief Operating Officer Kelly Curry. Thank you for your attention and now I’ll turn the call over to Burke.

Burke Whitman

Thanks John, good morning, and thanks again for joining our call. In a moment Bob will discuss the financial highlights and Kelly will describe specific operating highlights, but first I want to talk about our first quarter performance in the context of our company’s new direction. During the later part of 2007 we put into place all of the elements of that new direction in order to begin the company’s turn around during 2008 and to improve our performance gradually and steadily over the next two to three years. Our new direction includes four elements: mission, vision, strategy and plan, pretty basic. We have described these elements previously. I’m not going to review the fourth element, our detailed plan this morning, we don’t have enough time to do that, but I will this morning briefly summarize the first three elements, our mission, vision and strategy and how our first quarter reflects the new direction. Our restated mission is to deliver compassionate and high quality health care services that improve the quality of life for our patients, physicians and the communities we serve. Our new vision is to lead the hospital industry in clinical quality and service as fashion among our patients, our physicians and our employees in order to accomplish our mission and to maximize our performance.

Our strategy has seven broad components: first, stabilize our operations; second build a foundation for more sustainable performance; third take the necessary steps to become the national industry leader in clinical quality and service satisfaction; fourth, seize and defend market share; fifth, enhance our operational discipline to increase revenue and manage resources; six, rationalize our portfolio of assets and seven, gradually deleverage our balance sheet.

Over the next two to three years we expect to make significant progress in executing our strategy, accomplishing the mission and increasing the value of the company. In this first quarter we did gain some traction and we did make some progress. In a moment Bob will review the key financial results and Kelly will tell you some of the specific and exciting progress in operations we’ve made under his aggressive and capable leadership. But, I would like to note some key points of progress and how they result from our new direction.

First we have begun to stabilize our operations. Financially during the first quarter our earnings were generally consistent with expectations, our operating margins improved for the first time in several quarters, our uninsured patient volume comprised a smaller portion of overall patient revenue and our bad debt expense declined as a percent of revenue. We still have plenty of challenges and plenty of room to improve on these fronts and elsewhere, but these initial accomplishments are the direct result of the steps that Kelly, Bob and our other leaders and employees have taken and continue to take in order to stabilize our operations. They’re the direct initial result of enhanced operational discipline that will improve our revenues and our resource management in accordance with our strategy.

In addition, we’ve taken the initial steps required to achieve leadership and clinical quality in service satisfaction. With new leaders in place to support these critical functions we are now measuring the right objectives, holding ourselves accountable for achieving them, tracking them in a way that we have never done before and compensating our leaders not just on the earnings they produce this year, but also on the progress they make this year in clinical quality and service delivery that will make our performance more sustainable beyond the current year in accordance with our strategy. This is something of a cultural change, but our capable leaders have embraced it and are fully engaged, committed, and excited.

We’re also working with talented partners, such as our new partner in North and South Carolina, Novant Health, to accelerate our progress in quality and service. All of these steps will begin to put us in a position to begin seizing and defending market share in accordance with the strategy.

Let me tell you a little bit more about the Novant transaction, because it actually helps us make progress on several of our strategic priorities. We’re particularly pleased and proud to have this national leading not for profit hospital organization and an industry innovator as our partner. We sold to Novant during this quarter a 27% interest in our seven hospitals in North and South Carolina for $300 million, resulting in net proceeds after tax of more than $280 million and we recorded a gain of $200 million on the sale of that 27% interest that was contributed $0.50 to our earnings per share this quarter. But, what was most exciting for us about Novant is the opportunity to work collaboratively with such an outstanding and innovative health care provider and to benefit from their leadership and strength in clinical quality, service delivery, managed care, physician practice management, and multi-faceted service integration. Novant and HMA will share in the governance of our seven hospitals, HMA will continue to manage the facilities on behalf of the partnership, and Novant and HMA will share a quality committee. We also expect and are fully committed to making the relationship mutually beneficial for Novant’s benefit as well, to expand their mission and to reinforce their performance. You can expect more of these kinds of partnerships from us at HMA in the future.

We’ve also begun to rationalize our portfolio of assets. During the first quarter we discontinued operations at one hospital campus in Mississippi and we discontinued operations at another hospital campus in Texas. By the way, John and Bob have mentioned to me that there’s been some confusion among some investors regarding the history of HMA’s investment in the Texas hospitals, so let me just make a quick point here to clear that up. Last year HMA invested an additional $32 million to acquire the remaining interest in those two Texas hospital campuses that had been owned by a partner, but this was not a voluntary purchase on our part, this was instead the partners exercise of a put option that HMA had given to that partner back in 2002 when HMA made its original investment. The $32 million that we paid last year was the minimal purchase price for that partner’s 20% interest in both hospitals accordance with that original transaction. We certainly did not want to pay the additional $32 million for the additional 20% interest last year, but we had no choice based on the terms of the original acquisition that HMA negotiated in 2002.

At any rate, during the first quarter we reported a loss of $45 million from our various discontinued operations including, most importantly, a write-down of some hospital assets in that category. We also progressed in negotiations to sell a very small number of additional hospitals to other good and capable hospital operators for whom those hospital operators might simply be a better fit. It is possible that we may write-down the value of some of those additional assets during this year as we complete our portfolio rationalization; however, if we do write-down additional assets, we would expect the total value of all write-downs during the year, including those already incurred, to equal less than the $200 million gain on the sale of the 27% interest in our North and South Carolina hospitals resulting from the Novant partnership.

We expect to complete most of the additional transactions during the second and third quarters. We anticipate proceeds from the additional transactions to total somewhere between 0 and $200 million with the possibility of an even higher number. These proceeds would be in addition to the $300 million in proceeds from the Novant partnership that we already completed this quarter. The proceeds from these transactions will enable us to invest more capital in our existing hospitals which will move us further toward quality and service leadership. They will allow us to focus our attention on the markets where we have the best opportunity and of course the proceeds from the transactions will also better position us to deleverage and improve our balance sheet in accordance with our strategy. Given our focus on the fundamentals of turning around the company in our existing operations, we have redirected our capital expenditures away from acquisitions in the near term and are instead focusing our investment of capital more than ever into our existing hospitals in order to reinforce our mission and performance. However, we do expect to begin growing again through selective acquisitions after 2008, after we have completed early implementation of our operating strategy and rationalizing our portfolio.

Everything I’ve described will help us achieve more sustainable performance in accordance with our plan. We do expect to be a stronger company two years from now. Our progress will not always be in a straight line, but our company’s new direction is the right one for us. We have some initial traction and we already are making some initial progress. We expect more continuously over the next two to three years. We do expect to increase the value of our company and we do expect even better than ever before to accomplish our mission.

Now let me turn the telephone over to the two people from whom all of you really want to hear, Bob and Kelly. Bob.

Robert Farnham

Thanks, Burke and good morning everyone. Earlier this morning we announced the results for the first quarter ended March 31, 2008. For the first quarter HMA reported net revenue of $1,152,000.6 million. EBITDA was $180.8 million. Income from continuing operations of $161.6 million, net income of $133.9 million, diluted EPS from continuing operations of $0.66 and diluted EPS of $0.55. Excluding the gain on sales transactions of continuing operations, diluted EPS from continuing operations was $0.15 per share.

Results for the quarter included pre- tax loss from discontinued operations of approximately $45.3 million. The majority of the loss relates to the company’s decision to dispose of the Women’s Center campus of its Dallas Regional Medical Center and includes both the hospitals operating loss for the period and a write-down of the hospital’s assets to their estimated net realized disposable value. The loss from discontinued operations also includes HMA’s employed physician practices in North and South Carolina, the ownership of which will be assumed by Novant Health as part of the company’s recently announced joint venture with Novant. Operations at the Women’s Center campus and the employed physician practices combined for approximately $0.02 per diluted share of discontinued operations losses.

Continuing same hospital admissions for the first quarter increased 0.4% while continuing same hospital adjusted admissions increased 1.2% compared to the same quarter a year ago. Continuing same hospital emergency room visits grew 6.3% and surgeries declined 0.8% compared to the same quarter a year ago.

Pricing in the first quarter showed a 1.8% increase in continuing same hospital net revenue per adjusted admission relative to the same period a year ago, which contributed to a continuing same hospital net revenue increase of 3.1%. Adjusting out a $36 million decrease in self-pay net revenue from last years net revenue to affect basically the increase in our real paying business, same hospital net revenue increased 6.6% and same hospital net revenue per adjusted admission increased 5.1%.

There are two factors that contributed to the decline in self-paid net revenue: first during the first quarter of last year, on February 1, 2007, we implemented our new discount policy and modified charity care policy. The discount policy was in effect for only two of the three months of last years first quarter and with the transition in policies a smaller percentage of self-pay gross charges were written off as charity and charity and indigent to a discount and charity and indigent than subsequent quarters. Second, this year's first quarter was the first quarter that we experienced a decrease in uninsured volumes both on the inpatient side and in our ER business. The same hospital net revenue increase of 6.6% and the net revenue for AA of 5.1% is in line with the annual increases we have seen for the last two years. Since the discount program was in effect as of February 1 of last year, I would expect that the rest of this year’s net revenue and net revenue per adjusted admission increases to track more along historical levels. Although I would say that a decrease in self-pay volumes continuing going forward will serve to lower the comparison on net revenue, which would also result in lower bad debt expense as well.

Our same hospital EBITDA from continuing operations for the first quarter was 202.1 million and a corresponding same hospital EBITDA margin from continuing operations was 17.8% which is a modest improvement from the last several quarters. Maintaining our historical discipline cost control is imperative to meeting our EBITDA expectations for 2008.

Uninsured patient volumes and increasing bad debt expense continue to be an industry issue affecting operating returns, but for the first time in many quarters, uninsured patient volumes declined for the first quarter compared to the same period a year ago. Continuing same hospital uninsured admissions for the first quarter totaled approximately 6.3% of total admissions, which is down 30 basis points from the same quarter a year ago.

Bad debt expense for the first quarter was $1.29 million or 11.2% of net revenue compared to 118.8 million or 10.7% of net revenue for the same period last year and 12.3% sequentially for the quarter ended December 31, 2007.

Uninsured volumes and bad debt expense have two components: an accounting component and an operational component. From an accounting perspective I continue to feel comfortable that our estimates are accurate and we are appropriately reserving for uninsured and under insured. In addition, we are obviously pleased to see the decline in uninsured admissions and we believe that the operational initiatives we have implemented at our hospitals and in our emergency rooms have contributed to this improvement. I am hopeful we continue to experience this trend in the stabilization of uninsured volumes.

With regard to bad debt expense levels, if we continue to do a good job of collections and we continue to experience a similar downward trend in uninsured patient volumes, bad debt expense as a percent of net revenue may continue to run between 11% and 12% for the remainder of the year. At this time we do not anticipate changing our bad debt accounting policy.

Moving over to the balance sheet and cash flow statement, total assets are more than $4.9 billion. The balance in accounts receivable net as of March 31, 2008 was $657.8 million and the balance in the allowance for doubtful accounts was 477.2 million. Cash flow from continuing operating activities was $145.1 million for the first quarter and cash interest and cash tax payments aggregated 19.7 million. Included in cash flow from operations and also netted in the cash interest and taxes number is income tax refunds of $42 million received during the quarter.

Lastly, HMA’s daily sales outstanding or DSOs as of March 31, 2008 for 51 days were unchanged compared to both March 31 a year ago and also sequentially to December 31, 2007.

Based on current and predicted market conditions, it looks likely that holders of our 4 3/8% convertible bonds will put those bonds to us at par on August 1, 2008. Our intention continues to be to pay down a significant portion of the $575 million bond issue, using as sources of cash, cash on hand, free cash flow, availability under our $500 million line of credit and proceeds from asset sales and joint venture transactions. The remainder of the outstanding convertible bonds could then be addressed by either an exchange of the old convert for a new convert with some of the existing holders or, and this is more likely, the issuance of a new convertible, the proceeds of which will be used to retire the existing issue in the open market in advance of the put date.

To review this first quarters results, same hospital admissions increased 0.4%, adjusted admissions and emergency room visits increased 1.2% and 6.3% respectively and surgeries declined 0.8%. Continuing same hospital net revenue per adjusted admission increased 1.8% or 5.1% on a pro forma basis. Total net revenue increased 4.1 % and same hospital net revenue from continuing operations increased 3.1%. Continuing same hospital EBITDA margins were 17.8%. Bad dept expense was 11.2% of net revenue. Cash flow from operations was $145 million and for the first time in many quarters, same hospital uninsured admissions as a percentage of total admissions declined 30 basis points to 6.3% compared to the same quarter a year ago.

I’ll now turn the call over to Kelly for an update on operations.

Kelly Curry

Thanks Bob and good morning to each of you. As Burke mentioned I will be updating you further on the strategic initiatives which we’ve been communicating to you during the past earnings calls and we’re pleased to report an admissions up tick of 4/10% in our same store facilities, which also reflects a 3/10% drop in no pay admissions over the same period. These indicators are reflective of our more robust private pay admission practices which include the statement of financial responsibility and our entire registration policies. Admissions up tick, we believe, is anecdotally related to our renewed focus on satisfactions and quality and only slightly due to the flu season. The flu for us occurred a couple of weeks into February and was less severe in Florida and Mississippi where the preponderance of our facilities are located.

Physician, employee, and customer satisfactions continue to be a focus for us going forward and we do believe that continued improvement in these scores will bring further volume increases going forward. Further, to update you on these important initiatives, our cash collections continue to exceed our net revenue less our provision for doubtful accounts by a significant amount. We do expect this to result in a further reduction of our bad debt expense as indicated by this month’s 11.2% versus the fourth quarter’s 12.3%. We continue to emphasize with our facilities management the importance of attracting direct admissions to the hospital, which generally indicate a better paying patient by providing a concierge service, making the process as seamless as possible, this also contributed to the quarter. Our document our excellence program really got results for us as we saw a three point increase in our CMI for the quarter as compared to the prior year. Needless to say this contributed directly to improved profitability. We have renegotiated 102 of our managed care contracts, which represents 2/3 of the ones that are coming up for renewal this year. In addition we have added 50 new contracts to our mix. The increases in these agreements track right along with our prior years 7 to 9% in increases.

The Novant transaction represented a n obviously quite large joint venture for us, but was one that we had contemplated when we had contemplated when we had mentioned in past calls that we were looking to develop these relationships in our markets. Our emphasis continues to be on strategic relationships with physicians, and other market service area participants. Incidentally, the Novant transaction has developed a lot of interest in these types of transactions with other not for profit partners due to the innovative attitude we have for joint ventures.

Our process for perfection, which is what we are branding our clinical excellence program, has now been rolled out to all of our hospitals. There is a lot of work ahead for us as we make quality job one at HMA, but it is our aim and purpose to achieve the goal as a number one quality provider as a system in the country over the next two years, no exceptions, no excuses. The challenge is there, but we have 33,000 employees and 10,000 physicians dedicated to providing the best of care to make it a reality. All of these initiatives will bear fruit somewhat in 2008, but much more so in 2009 and beyond.

With these remarks I will conclude and turn the call over to John.

John Merriweather

Thank you, Kelly. Just to let everyone know, we plan today to answer questions until about 12 noon and to conclude today’s call no later than that time. So with that, I will turn the call back over to Lynn to start the Q&A.

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Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Christine Arnold with Morgan Stanley

Christine Arnold-Morgan Stanley

Good morning, thanks for taking my question. You said you don’t expect to change your bad debt policy, yet your cast is over net revenue considering allowance, by a significant amount. It seems that a change in policy might some day be in order, could you comment on that? Then you have $455 million in cash on your balance sheet, and if you could raise another 200 million by selling assets, it seems to me that you don’t need to borrow you can retire the convert. What’s the likelihood that you get that you get that 200 million and you don’t need to borrow?

Kelly Curry

Hi Christine, this is Kelly Curry. I’ll take the first part of your question there and I’m sure Bob will have some follow on comments. Number one, as an operations person what I’m interested in is cash. I mean accrual basis accounting is lovely, but you know at HMA it’s just like at your house, what really matters is how much cash is in the bank. I agree with you that we should see, because of the results that we are getting, an impact and perhaps in the future a change in our reserving methodology; however as you know accountants are slow to change, that’s number one and number two and I fully concur with this, is that considering the challenges that we faced, as well as others in this industry in this particular area, actually it would be probably slow about changing our methodologies until we’ve seen a little more history. I also have to say that all of these things that we’re talking about right now don’t include the impact of a recession that would be steep and deep. With that in front of us until we see the outcome, I mean we’re in an election year and as you know, an election year is always an uncertain year, until we see the outcome of that I think it would be prudent for us all to be conservative in our reserving methodologies.

Robert Farnham

Christine, this is Bob. I would echo Kelly’s comments. We’ve worked hard over the last couple of years to get our estimate where we think it should be, based on collections and our level of uninsured and this last change that we made, which was last June, has only been in place for less than a year, so that’s why our intention at this point is just to current at the current time with the current policy. As we do collect that cash, it does come back through the income statement, so it’s not like we’re realizing the benefit of our cash collections. With regard to the, some transactions and pay down of debt, yes we were very pleased this quarter to get the Novant transaction done, happy to have them as a partner. We currently have the $300 million in the bank. We’ll have to pay Uncle Sam about $20 million of that, so net proceeds on that transaction are about $280 million. As Burke said, we have the opportunity to complete a couple of other asset sale transactions as we rationalize the portfolio. Not quite sure of the timing of those transactions, although we think it might be later this quarter or possibly the third quarter. The third quarter, obviously though, ends September 30. The put date is August 1. I don’t think that we want to really wait for the realization of those transactions to deal with the put, it’s still more likely than not that we would have some kind of capital market transaction before then and it’s most likely another convert. I think that that would be well received by everybody to take care of this in advance of the put date, but having done it, a capital markets transaction, then if some of these asset sales materialize then we would just use that money to partially put back into the business as Burke said or then pay down on some debt at that point in time.

Burke Whitman

Christine, this is Burke. I’ll add just a couple of broad comments. Your observations are astute on both fronts and you may prove to be right and then some and that would be great if that proves to be true.

Christine Arnold-Morgan Stanley

Okay, thank you.

Operator

Your next question comes from the line of Jason Gurda with Bear Stearns.

Jason Gurda-Bear Stearns

Good morning everyone.

Kelly Curry

Good morning.

Jason Gurda-Bear Stearns

One quick question I had, I noticed admissions being up about 0.4%, but patient days on the same store basis were up significantly more, almost 4%. Was there anything unusual there?

Kelly Curry

No, actually in terms of Medicare in particular Jason, obviously when you have a higher case mix index you have a longer length of stay that reflects that; however what we do is we look at that on a case mix adjusted basis to determine how it compares to the prior year and whether or not it’s reasonable within the DRG categories and in fact our case mix adjusted average length of stay for Medicare was down nearly a full day, which is some what related to our quality initiatives, because one of the things that we’re really focusing on is we’re looking at infections really, really hard. We’re working on driving down infections, particularly central line type of infections and UTIs and that greatly affects your length of stay, so that’s what contributed to those figures, we had a higher acuity.

Jason Gurda-Bear Stearns

Well how much was your case mix up this quarter?

Kelly Curry

Three basis points, three or four basis points. It was 1.34 versus 1.31 for the prior year and I believe that’s the highest case mix that we’ve ever had for an individual quarter and that’s with actually surgeries being down quarter-over-quarter. So I think it speaks to some of the efforts that we’ve had with documentation and coding.

Jason Gurda-Bear Stearns

Okay, that’s great. Could you just, last question here would be, maybe talk about some of the opportunities that the Novant deal offers you down the road and then the time frame for some of those opportunities?

Kelly Curry

We’re all fighting for the microphone here Jason.

Burke Whitman

We probably are ─ I think within the, this is Burke Jason, within the transaction itself, already we have benefited in our balance sheet management and that’s now done and that’s great, but the great opportunity, as I mentioned, is really the opportunity to link with them strategically and operationally among several things in no particular order, we will collaborate operationally on clinic issues heavily. They have been very much a national leader, very innovative in patient safety programs that are very implementable, easy to translate to each individual ploy will be really in effect a source of operational leverage for us on that objective that we have and we’re already working together on that. Integrated service delivery and smoothing the flow of patients and the cases that we take care of and that they take care of within the North Carolina and to some extent in the South Carolina area, managed care negotiations strength by combining our forces on that front will help in several ways and a number of other things that we are just beginning to put into place, we’re actually meeting, having a major kick-off meeting with them in a couple of weeks to spend a day to put some meat onto these bones. We’re very excited about it. They are exactly the kind of partner and in this case the partner that we wanted to have and I hope we can have some others like this. Then outside beyond the scope of the transaction itself ─ oh one other thing internally, I mentioned physician practice management. They have close to 1000 employed physicians and they have by all accounts a very successful physician practice operation and they will step in over the next, I guess three months now, and allow us to shift our physician practices, the management and ownership of those, into their fold where they can leverage their strengths and we can leverage their strengths and do that, the physicians will still be on our staff at our hospitals; but Novant will handle the billing, the collections, all the administrative duties associated with that, which they do very well. We will probably learn a lot about that as well. Than externally, outside the scope of the transaction itself, Kelly mentioned that this transaction already has helped us in discussions, some of which we already were having and some of which actually are new, that represent similar kinds of mutually beneficial activities in other communities and other markets that we have. In some cases, in North and South Carolina, we and Novant together are quite likely to bring on another partner or two in individual markets and then in some of our other 57 remaining communities we’ve got some other partners that represent clear, mutually beneficial opportunities that we’ll be able to articulate at that time.

Kelly Curry

I’d like to also jump in there and say this Jason; we had seven facilities, no tertiary care facilities in that area. Novant has nine facilities, two of which are tertiary care facilities. We now negotiate with 16 facilities. I like that metric, it gives me a good feeling.

Jason Gurda-Bear Stearns

Thank you.

Burke Whitman

And I’ll mention too, I, you know Novant can better speak to the benefits to them, but I believe that this will be, believe strongly, this is going to be really beneficial to them too for their mission, for their performance, I know that is what they are saying about it as well; so it really has great potential for us. It’s similar to some things others have done in the past, all of which we’ve seen be really quite successful.

Jason Gurda-Bear Stearns

Thanks for the color.

Operator

Your next question comes from the line of Ken Weakley with Credit Suisse

Ken Weakley-Credit Suisse

I’m just curious, last week General Logic reported that the domestic hospital equipment sales were down I think 17% or so and you know leading one to think that maybe the not for profit hospital industry as a whole was maybe under some pressure in terms of the credit crunch and their ability to with stand. I’m just curious if anyone in the company has any observations either to confirm or refute that general thesis about what’s happening on the not for profit side in terms of their ability to keep up the spending cycle if you will.

Burke Whitman

Yes, we saw that. We’ve read and seen the same things and seen some of the commentary Ken that you and some other analysts have made. It certainly is interesting. We don’t have any direct further insight beyond the gee discussions, but clearly there are some anecdotes and it affects some limited number of our local competitors anecdotes of hospitals that are having difficulty getting financing, particularly if they were using the auction oriented financing. But, I think what we continue to see in our markets is what you probably see nationally is there is very much a bifurcation between the strong, really well run, highly regarded, very financially well positioned not for profits, such as Novant and others who are at the other end of the spectrum who are struggling and probably have some operational issues that are contributing to those financial issues. I don’t, I guess I would say we haven’t seen any immediate impact on day-to-day operations in any of our markets, we just know that a couple of hospitals have had a little difficulty raising financing. I know in one case right here in Florida a hospital is going to completely recapitalize themselves to get away from the auction-oriented financing.

Ken Weakley-Credit Suisse

Okay. Second question, there has also been some talk, a lot of talk, about the state of Florida itself becoming at least more stable as a marketplace for hospital operations. I was just curious if you could comment on that in the general inference in the marketplace, especially relative to your progress in terms of improving.

Kelly Curry

I think that’s accurate. You know, as you know we are not on the East coast, we are in the more, you know this is of course relative, but the more stable parts of Florida in terms of the population movement. I can tell you that I think it’s true going forward. I can tell you that in Fort Meyers, for instance, where the, you know that’s been the highest hit in the country, highest foreclosures. Just in the newspaper this morning there was an article that housing sales, single family homes are actually up and the pricing has fallen about 25% on average, but that would look like that it’s starting to stabilize. It means banks are loaning money to people for mortgages, so that’s a good sign.

Ken Weakley-Credit Suisse

Would you say that are improvements in self pay and bad debt and all that in Florida have been even better than what you’ve reported as a company average?

Kelly Curry

No, we’re not. I would say that and one of the reasons why is that it was tougher in Florida before. Now one thing that has happened, it’s an interesting observation Ken, but one of the things that has happened is that as the building trades have dried up people have gone elsewhere looking for work.

Ken Weakley-Credit Suisse

Right, okay. I guess the last question, looking at your surgical volume, 69,800, could you break that out between inpatient and outpatient and then maybe tell me what the trend was for each on the year over year basis. I guess that same store if you have it or total, whichever one you’re comfortable disclosing.

Kelly Curry

Yes, Ken. We commented that total surgery volume was down 0.8%, inpatient procedures were off more than outpatient. Inpatient was down about 1.4%, outpatient was down about 0.5%. That’s same store year over year. Also just as another point, Ken, what is not in those numbers, we are a change from the past, but since I’ve been here we are quite aggressively now investing with physician partners and ambulatory surgery centers. We’ve done several of those, we’ve got several more that are pending, so even though this business is business that has moved away from us, it’s business that we are still a part of.

Ken Weakley-Credit Suisse

Okay and as a percentage of that 69,800, what percentage is inpatient?

Kelly Curry

I don’t have that particular…

Ken Weakley-Credit Suisse

Okay, we’ll follow up later. Thanks so much.

Operator

Your next question comes from the line of Bill Bonello with Wachovia.

William Bonello-Wachovia Securities

Good morning, just a couple of questions. First of all I’m wondering if there is any way that you could quantify the couple of assets that were put into discontinued operations, how much they had been contributing on a quarterly basis, either to revenue?

Burke Whitman

Bill we could, we probably won’t at this point, only because just giving individual market information can end up being damaging to us for local competitive reasons. There is probably a time at which we’ll be able to do that…

William Bonello-Wachovia Securities

Okay, so you can’t say on the physician side either than.

Robert Farnham

Excuse me, Bill?

William Bonello-Wachovia Securities

So you can’t say on the physician practices either than?

Robert Farnham

Well just in general terms and I think it was about 12 or $13 million of revenue and because it went into discontinued it was pulled out of both periods, so it’s apples to apples and the loss on those was about $4 million.

William Bonello-Wachovia Securities

I was just, I mean the purpose of the question was you sort of fell short of the consensus revenue expectations and our revenue expectations and I was trying to figure out if that was really just because things went into discontinued operations that we hadn’t been modeling or, you know it was truly a revenue short fall, so that was the purpose behind the question.

Robert Farnham

I covered that on my comments, it was $0.02 in total that otherwise would have been in continuing operations. There was about a penny from the physician practices that have been sold and then also another penny in operating loss from the Mesquite facility.

William Bonello-Wachovia Securities

Yes I know I got that, I was just trying to get the revenue, but that’s okay. The other question I guess would just be, you gave sort of, you know, here’s what revenue per adjusted admissions growth would look like, you know on this adjusted basis and I’m just wondering if you can give us then in apples to apples what the revenue for adjusted admissions growth would have been in the past several quarters, again adjusted for the changes in the accounting and the uninsured.

Robert Farnham

I did not go back and calculate all that. What I can tell you is that, for example in the third quarter our increase in self-pay gross charges was like $36 million. In the fourth quarter the increase in gross self-pay charges was $23 million and here in this first quarter it was flat, it was actually up $1 million, so we’ve seen a real decrease in total gross pay dollars and that’s good and so that contributed to part of the overall decrease in self-pay net revenue quarter over quarter.

William Bonello-Wachovia Securities

So is it your general assessment that sort of looking sequentially that the growth, you know stripping out the impact of self-pay that the growth is pretty much in line with where it has been? I mean it sounds like that’s what you were saying, but I guess I’m just not totally clear on that.

Robert Farnham

Yes I think that’s a fair statement. I knew that the 1.8% in net revenue per adjusted increase is no representative of the real increase that we’ve been seeing in our paying business. You know Kelly talked about the number of managed care contracts that are being negotiated. You know case mix was up in spite of lower surgeries, so I knew that wasn’t the right number and in looking at the reason, it was the decrease in self-pay charges and that’s actually good because we’re not getting paid our costs on that side of the business, so, I mean it’s a good thing.

Kelly Curry

Bill, this is Kelly. Just using a rough figure, it’s $36 million that would have been in net revenue from no pay business, it isn’t there.

William Bonello-Wachovia Securities

Okay and then just the final question This may be trying to get you to be too specific, but the guidance which you didn’t change, is that, then does it still assume sort of a similar bad debt as your previous guidance had assumed or are you maintain your guidance but assuming lower bad debt?

Kelly Curry

The guidance continues to incorporate the possibility of additional transactions, so it’s a relatively wide number because of that. It does incorporate what we currently expect to have that Bob mentioned, somewhere below 12%, north of 11%, somewhere in that 11s range through the course of this year, if we can do that.

William Bonello-Wachovia Securities

Okay, so don’t look for, if you’re able to maintain the bad debt at this lower level, don’t look for that as something that would drive upside to the guidance.

Kelly Curry

Probably not just from that, but you know we’re painting a pretty broad…

William Bonello-Wachovia Securities

You have a broad yes.

Kelly Curry

From 11 to 12% is a broad number, even in itself, so there is certainly room for a little upside maybe there.

Burke Whitman

What’s 1% of 1.2 billion? I’m not sure.

William Bonello-Wachovia Securities

Got it, I’m one that’s all for no change in bad debt policy. Thanks a lot.

Burke Whitman

You are right, we kept it deliberately a little broader than we otherwise would because of the transactional potential and the continuing focus on bad debt and you know kind of leaving ourselves a little room there as we watch that.

William Bonello-Wachovia Securities

All right, thanks a lot.

Operator

Your next question comes from the line of Adam Feinstein with Lehman Brothers

Adam Feinstein-Lehman Brothers

Okay thank you. Good morning and great job on the quarter. Just, I guess a few questions, just back to the guidance real quick. The minority interest associated with this transaction. Bob can you just help us ballpark how we should think about that going forward?

Robert Farnham

Sure. On an annual basis we talked a little bit about the assumption of the physician practices and we will have to partially fund some of the losses to the extent that Novant continues to incur losses and they very well may not have any. Burke mentioned that they do a very good job with the integration of their physician practices into their businesses, but initially that savings to us is probably you know in the 4 to $ 6 million a year, so that’s a benefit to our pre tax. The other benefit would be using the net proceed of about $280 million to pay down on debt and even using our lowest coupon, which would be the convert, that rate of debt there is 4.375%, so that would be an annual savings of interest expense in pre tax of about 12, $12.5 million. So between those two items, looking at savings of somewhere in the 15, 16, $17 million range, their 27% minority interest is figured obviously on pre tax, that’s none of the management fee. It’s probably somewhere in the $20 million range, somewhere in that area. It obviously will depend on the performance of those facilities, but that’s why we said probably out of the box it might be a penny diluted or so on an annual basis. But, obviously some of the benefits with regard to the integration that Kelly and Burke mentioned, we think we’ll more than make up for that over the next year or so.

Burke Whitman

This is Burke, I’ll just say for the non-accountants, since I am not an accountant, the way we would account or anyone would account for a minority partnership like this is we still record all the revenues, all the admissions, all the expenses and then just take out that minority interest in a separate line item of minority interest expense and that’s what Bob’s talking about; so you’ll still see us track the operational metrics with the facilities just as we have been.

Adam Feinstein-Lehman Brothers

Sure, okay and with the potential to raise an additional $200 million from asset sales, just to make sure I was correct in hearing you there, were you referring to the assets that you are currently holding for sale or are you referring to additional asset also?

Burke Whitman

Yes and Yes. We have the, to sound nerdy about it, we’ve got a handful of things that have various probabilities associated with them that we are working on. It includes a couple of things that are designated sale for sale, it also includes asset to assets that are not designated as discontinued operations and there just all in the works. That’s why, you know we mentioned it could be zero, all of these depend on the actions and reactions of the folks on the other side of the table in each case, but right now it appears that it would be somewhere between zero and 200 million of gross proceeds with the possibility of it being a meaningfully higher number than that if everything fell into place.

Adam Feinstein-Lehman Brothers

Okay and one more final question here and I’ll get off. I appreciate the time here. I guess, you had made a comment earlier or I think Kelly made that, you didn’t see a big benefit from flu volumes into the quarter and lots of times, you know with flu it tends to be more Medicare and so that tends to help your mix respect to the bad debt, so it doesn’t sound like you guys necessarily saw a mixed shift there, so I’m must trying to reconcile with the bad debt. I guess before, you know, Bob you gave a number for the uninsured volumes about 6.3%. Do you have a gross number for the uninsured volumes so we can think about it that way also? Then, in the past we’ve talked about uninsured AR, also I was just curious if there was any updated numbers for that. Thank you.

Kelly Curry

The actual number reduction on uninsured was about 250 patients. It was about 5,200 last year and 4.950 this year and I also mentioned too that we had reductions in uninsured on the emergency room side, that was all pleasant to see as well and it has to do with some of our more enhanced collection efforts as well as our prescreening. Our uninsured emergency room visits were 22.4% for the quarter and just looking back at the last couple of quarters, it had been 23.6%, 25.7, 24.8, so we really had some traction with regards to our operational initiatives in reducing he percentage of uninsured in our emergency rooms as well.

Burke Whitman

And, I believe Bob mentioned earlier that our uninsured receivables also declined this quarter again.

Robert Farnham

I did not mention that, but it was down about 3 or so million. By the way, as you probably are well aware, when you talk about flu volumes, you’re talking about cost covering.

Adam Feinstein-Lehman Brothers

Sure. All right great, thank you.

Operator

Your next question comes from the line of Gary Lieberman with Stanford Group.

Gary Lieberman-Stanford Group

Thanks for taking the call, good morning.

Kelly Curry

Good morning, Gary.

Gary Lieberman-Stanford Group

First question I have is a house keeping; I’m not sure if you gave it, but do you have the amount your allowance for doubtful account amount handy?

Robert Farnham

I did, it was in the prepared comments, and it was $477.2 million.

Gary Lieberman-Stanford Group

Okay thank you and then, I guess just a follow up on the last point or I guess one of the last points that you guys were discussing in terms of flu volumes. There is a lot of discussion going into this quarter on flu volume. If you could just provide a little bit of incremental color in terms of how much of a role it played in your overall volumes and impact on pricing and what you, where you see it going on a run rate basis?

Kelly Curry

Our flu volumes were quite modest. As I mentioned we saw about two weeks of flu, it was in February. I’m sure you saw the CDC maps and all that kind of stuff and you saw that it was less prevalent in Florida, particularly in the west part of Florida and also less prevalent in Mississippi. We did have, like I said, we had about two weeks that we saw flu volumes and it was frankly it was, as we looked at all of our data concerning that, it was very modest to us and as I also just mentioned, you’re talking about cost covering in that business anyway. So, I can’t speak for anybody else, I don’t know what anybody else’s experience was, but I can tell you that’s what ours was.

Gary Lieberman-Stanford Group

Thanks a lot.

Operator

Your final question comes from the line of Tom Gallucci with Merrill Lynch & Co

Tom Gallucci with Merrill Lynch & Co

Good afternoon. I guess at this point thanks for taking one more question a couple of quick ones. On the additional proceeds if you could raise additional transactions, I guess is it also a combination of outright sales and potential JVs or should we be thinking about it more in one direction or the other?

Robert Farnham

It does represent the potential for both types of transactions.

Tom Gallucci with Merrill Lynch & Co

Okay and then maybe if you have any comment, I saw some chatter about proposed Medicaid cuts down in Florida, so I was wondering what your perspective is on the odds there and than the outlook?

Kelly Curry

It’s very modest to us. In fact, because of some issues that we have that are unique to our company it will be zero probably to us year over year; however it is an issue, Medicaid is an issue, because across the country as tax revenues have shrunk, Medicaid is a challenge and we have several states that we are dealing with issues relative to Medicaid. But, Florida, for us, is going to be a minor to a non-event for now, at the levels that they’re talking about. Now if that changes and again as I said earlier, if we have a steep and deep recession than that’s another matter entirely.

Tom Gallucci with Merrill Lynch & Co

Are there particular issues in other states that we should be closely monitoring or that are high on your radar screen?

Kelly Curry

They’re only higher on my radar screen in the fact that when you’re dealing with Medicaid payments, you’re already dealing with a minimal payment at best, that’s why we pay close attention to it. I think that it’s pretty across the country I think it’s, as you read the paper et cetera you’re probably seeing this. I know there have been articles in the Wall Street Journal on this topic. So anywhere that we have a preponderance of hospitals, i.e. Florida and Mississippi, it’s something that we’re paying attention to. There are a number of proposals out there. There are no concrete results from these proposals yet. Yes we’ve done our calculations but who know which one is going to pass. There is strong politicking going on on both sides of the table. I can also tell you that in every state and particularly in Mississippi that this issue has come up. There are hospitals that would be put out of business by some of the proposals that have been made ─ not ours, but hospitals. Therefore the hospital associations are in the middle of it and it’s a political football.

Burke Whitman

And, Tom, we are engaged in all of this as you would imagine, in every one of our state, particularly where it’s a hotter topic. We’re fairly heavily engaged at the state level and continue to be at the national level as well, as always. Perhaps right now a little more than even typically.

Kelly Curry

We’ve met with, I’ve met with governors, we’ve met with politicians and leaders in the Houses and the Senate et cetera on this subject, so we are at the table and we are being heard.

Tom Gallucci with Merrill Lynch & Co

Okay, thanks a lot.

Burke Whitman

You’re welcome.

Kelly Curry

Thank you everybody, thank you Lynn, for your help this morning and have a great day.

Burke Whitman

Thank you everybody.

Operator

Thank you. That does conclude the HMA First Quarter 2008 Earnings Conference Call.

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Source: Health Management Associates Inc. Q1 2008 Earnings Call Transcript
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