LifePoint Hospitals, Inc. Q1 2008 Earnings Call Transcript

 |  About: LifePoint Hospitals, Inc. (LPNT)
by: SA Transcripts


Welcome to the LifePoint Hospitals first quarter earnings conference call. (Operator Instructions) It's my pleasure and honor to turn this conference to Mr. Bill Carpenter, President and Chief Executive Officer at LifePoint Hospitals.

Bill Carpenter

Before we get into the business of the call, it's important to me and to the company to recognize the passing of Bill Lapham, one of the founding Board members of LifePoint and the Chair of our Audit and Compliance Committee. Last week Bill lost his courageous battle with cancer. During his long tenure with the company, among many other things, Bill helped to set the tone and culture of the company, one founded on integrity and doing the right thing every day for each of our constituents - our patients, our physicians, our employees, our communities, and certainly, our stockholders.

Last year, in fact, our Board recognized Bill's efforts in this regard by creating the William V. Lapham Award for Extraordinary Integrity. This award is considered a high honor at the company and will be given not more than once a year to a person associated with the company or one of its hospitals who has clearly demonstrated a truly exceptional commitment to the highest standards of personal or financial integrity. Bill Lapham will be missed.

Consistent with our commitment to succession planning, the Board has named Greg Bier, one of our directors, as Chair of the Audit and Compliance Committee of our Board. You might recall that Greg joined our Board last year, following a nationwide search to identify candidates well-qualified to chair our Audit and Compliance Committee.

Now, let's talk about the first quarter results. 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 those expectations. We outlined 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.

In a few minutes David will summarize the quarter and then we'll take your questions, but first I think it'd be helpful if I put the strategic direction of the company into context and to provide a little color on how our strategic efforts have changed the way we approach our business.

I've talked about our strategic initiatives before, and I don't plan to go through them again today. You know what we're focused on. I do, however, want to emphasize the significance of the steps that we've taken. I know from visiting various stockholders and reading a few analyst reports that many of you do understand the significance of our strategic efforts, but I want to make sure that all of our stakeholders share a clear understanding of the significance of our strategic focus.

The comprehensive and multifaceted strategies that we formulated in 2007 encompass a plan for growth, a plan for efficiency and a plan for our people. Together with a strong balance sheet, these strategies position LifePoint to provide substantial returns to our shareholders over the next two to three years. I'm confident that our financial results will be positively impacted by these efforts over that timeframe.

While we don't claim to have a silver bullet, what we're doing today is a fundamental shift in how we approach our business. For instance, you know that we have conducted deep dive reviews of seven of our largest hospitals. We're beginning to implement the market-specific plans developed during these reviews, and more importantly, we're beginning to see results from these initiatives.

As a result of these efforts, together with other of our strategic initiatives, we're on track to meet our internal EBITDA targets for 2008. We're pleased about that. You've all seen our proxy statement, and you know that our incentive compensation, including my own, are tied to the high end of the guidance that we gave you in February for 2008. And let me assure you, our targets for growth from these strategic initiatives over the next two to three years are substantially higher than our 2008 targets.

As this suggests, my expectations for our corporate and hospital-level leaders are very high. We're also tracking and holding people accountable for the actual results of our efforts in a way that we never have before.

I'm convinced that the key element of our success over the next two to three years is execution of our strategic plan, without taking our eye off the core competencies that have made LifePoint an industry leader in health care operations.

If we do these things, and I'm confident we will, we'll achieve organic growth from existing assets, and we'll seize market share in existing communities. We'll build and better leverage existing resources in our corporate center for the benefit of all our hospitals and, in a concerted effort; we'll share best practices throughout the company.

We'll develop and train our own leaders and ensure that our current and future leaders are continually challenged to understand our business and seek creative avenues of growth. If we do these things, we'll generate significant value for you, our stockholders. This is what I expect from our company.

In this first quarter, I believe we did see some traction and we did make some progress. David will give you the detail but, for example, revenue for the quarter was good, up 5.8%. Volume for the quarter, within our expectations. Our provision for doubtful accounts was better than expectations. We had strong cash flow from operations. And we continued to improve our core measure scores. Rest assured we're always focused on continuous improvement.

But at the same time, it's important in this industry climate to recognize the achievements that have resulted from the attention of our leaders and from our commitment to a new way of doing many things and doing them better. Improvements we see in our operations and performance will not, as I have said many times, be linear. The improvements we expect in our operations and performance will, however, occur as a result of the steps that we're taking and we will continue to refine every day.

David Dill

Earlier today we announced our results for the first quarter. I'd like to take a few moments to provide some additional detail about our results and the trends we experienced. We suggest that you supplement your understanding of our company by reviewing the SEC filings. We plan to file our 10Q later today.

First, revenues and volume. Revenues for the first quarter were $699.9 million, an increase of 5.8% from the first quarter of 2007. Earnings before interest, taxes, depreciation and amortization from continuing operations were $121 million during the quarter, and the related margins were 17.3%. This translated into diluted earnings per share of $0.72, an increase of approximately 5.9% from the year ago period.

In-patient admissions increased by 0.3% during the quarter, and adjusted admission increased by 0.1%. The increase was positively impacted by approximately 150 to 175 basis points as a result of the flu season we experienced over about a six-week period, the impact of an additional day during the month of February partially offset by the timing of the Easter holiday moving up into March and the closure of a couple of service lines that we talked about on our last call.

In addition, surgical volumes declined by 3.2%, with inpatient surgeries down 4.7% and outpatient surgeries down 2.6%. We experienced an increase in our ER volume of approximately 5.3% for the quarter.

Self-pay admissions, which represent approximately 5% of our overall admissions, declined during the quarter by 7%. Our net revenue per adjusted admission increased by 5.7% during the quarter. This increase was driven from pricing across all of our payer classes and an increase of about 1.6% in our case mix index. The case mix index increased from 1.25% to 1.27%.

The price increases we experienced from both the Medicaid business and the commercial business were essentially in line with our expectations, however the increases on the Medicare business were slightly better than our expectations, being driven mostly from the MSDRG implementation that went into effect on October 1, 2007. Our initial view was our Medicare in-patient rates were going to be essentially flat, however we've seen an increase in these rates of approximately 1.5%.

DSOs at the end of the quarter were approximately 41 days, which represent a 2-day decline from the fourth quarter and essentially flat to the year ago period. Now let's turn to expenses.

During the quarter, the operators did a good job of managing costs throughout the organization. Our salary, wages and benefits represented 39.4% of our revenue, down 20 basis points from the fourth quarter. We continue to see improvements in contract labor. Contract labor declined by about $1.4 million from the year ago period.

Supply costs declined from 13.9% in the first quarter of 2007 to 13.6% in the first quarter of 2008. This decline is driven primarily by the related decline in surgical volumes. Other operating expenses represent approximately 17.9% of our revenue for the quarter compared to 18.5% in the fourth quarter.

We continue to see increases in professional fees, specifically hospitalist, anesthesia, and call pay. We expect this to continue into the foreseeable future. Professional fees increased by approximately 12% during the first quarter of 2008 compared to the first quarter of 2007.

Provision for doubtful accounts for the quarter represented 11.8% of our revenue. This represents a decline of approximately 50 basis points from the fourth quarter. We continue to see stable trends related to our collection efforts, and volume trends remain consistent with our experience during the past couple of quarters, specifically ending 2007.

Our provision for doubtful accounts and charity as a percent of gross self-pay revenue for the quarter was approximately 93%. This is consistent with what we experienced during the second half of 2007, and in addition, our allowance as a percent of [self-payer] was approximately 90%, which also remained very consistent.

Overall EBITDA margins increased from 15.8% in the fourth quarter to 17.3% in the first quarter. This 150 basis point increase in margins is being driven from volume increases from the fourth quarter to the first quarter, stable to improved pricing trends, good management of costs across the organization, and a decline in our provision for doubtful accounts as a percent of revenue.

The provision for income taxes declined to 38.4% of revenue. This decrease was the result of some state tax planning that was completed during the quarter which allowed us to recognize a one-time benefit of approximately $1.5 million or about $0.03 per share. This is a non-recurring benefit and we expect our tax rate to be in the range of approximately 41% to 41.5% of revenue for the remainder of the year.

Our cash flow from operations increased from $51.4 million in the first quarter of 2007 to $105.1 million in the first quarter of 2008. That's from continuing operations. Approximately $20 million of this increase is a result of the prior year overfunding of our 401(k) plan and lower interest and tax payments in the current period. The remaining amount is the result of timing differences in accounts payable and accrued expenses.

During the first quarter we spent approximately $33 million in capital expenditures, which is very consistent with what we spent during the first quarter of 2007. We remain on track to spend between $160 and $175 million for the year.

During the quarter we repurchased approximately 3 million shares of stock, and to date we have repurchased 4.4 million shares at an average price of just under $27.00 per share for a total of $116.6 million of the $150 million program we announced during the fourth quarter. It remains our plan to complete this program during the first half of the year and use cash from operations to fund the program.

And as you can see from the balance sheet, we have approximately $33 million in cash and cash equivalents. This, coupled with cash from operations during the second quarter, will be more than needed to complete the program without dipping into our revolver.

At the end of this program, we will have repurchased more than 5 million shares or approximately 9% of the outstanding shares without adding any additional leverage on the balance sheet. And as a reminder, our leverage as measured by total debt to EBITDA is approximately 3.3 times. This gives us tremendous capacity to continue executing our plan.

I would like to spend a couple more minutes talking about two more items - the impact of some new accounting rules on our convertible securities and guidance. First, the new accounting rules.

As we discussed in our third quarter call from last year, there's some new accounting rules that will impact how we account for the two tranches of convertible securities that we have. We'll be required to place a fair value on these instruments at the time they were issued and record additional non-cash interest expense for the difference between the current coupon and the prevailing market rates for a similar security at the time of issuance that did not include an option to convert the debt into equity.

Based upon our current analysis, we expect this new accounting rule to increase our interest expense and therefore decrease our annual fully diluted EPS by approximately $0.20 per share.

The ultimate impact is dependent upon the fair value analysis that will be completed in the next few months. The rule is expected to go into effect on January 1, 2009 and once implemented, we'll be required to go back and restate all prior year results to account for this change.

Finally, guidance, based upon the first quarter results and our outlook for the remainder of 2008, we are leaving the ranges in our original guidance the same with the exception of the range of EPS. Due to the favorable tax adjustment that we just spoke about during the quarter and the impact of the share repurchase program, we are changing the range of EPS guidance from $2.25 to $2.55 per share to the new range of $2.35 to $2.65 per share.

As the year continues to develop, we will review our guidance and make additional changes as we deem necessary.

I want to thank the operators, both here in Nashville and in each of our communities for all their hard work and dedication. And with that, I'll turn the call back over to Bill.

Bill Carpenter

We are ready to begin with our question-and-answer period.

Questions-and-Answer Session


(Operator Instructions) Your first question comes from Whit Mayo - Stephens Inc.

Whit Mayo - Stephens Inc.

Can we go back to the pricing a little bit? Clearly a little bit stronger than I think we were looking for. And I hear that the MSDRGs has been a little bit more of a benefit than you had budgeted for. And typically we think of pricing being a little softer with the flu season, but your case mix was indeed up. So can you just go back and walk us through and help us understand a little bit more what drove the pricing in the quarter?

David Dill

Yes. From a commercial payer standpoint, Whit, our expectation is in the range of 6% to 8% from a pricing standpoint.

If you remember back to the fourth quarter, we pushed that up a little bit, our expectations, anyway, because we felt that we would see some softness on the Medicare in-patient side. So the range of 6% to 8% was a little more aggressive than what we'd seen in the past, not much, but a little bit more. And the good news is we're seeing in the midpoint of that range from a commercial side. So that was essentially in line.

Medicaid essentially in line. There was a little bit of a shift of volume between states that drove Medicaid pricing up a little bit. If you remember, we also closed down a couple of OB programs in the fourth quarter that helped us as well. But overall Medicaid and commercial essentially in line with what we expected.

Medicare, when you blend in-patient and out-patient together, we had all the expectations of the market basket increase that would affect the out-patient book of business that came into effect January 1, as we had expected. The real upside was driven from the MSDRG in-patient rates. We thought that we would lose most of that market basket increase. Early indications in the fourth quarter was it was getting a little bit better, but with the volume declines that we experienced in the fourth quarter, we were a little hesitant to bracket a number because of some unusual volume.

But now after six months and take the average of the two and look at it over the past six months, we feel very comfortable that about half of that market basket increase, we will see. It's showing up in cash collections. So Medicare pricing is up a little bit more than what we had anticipated.

Other than that, everything else was relatively consistent with our expectations on the pricing side.

Whit Mayo - Stephens Inc.

Well, with pricing being a little better on the Medicare side, can you just help me understand a little bit more the rationale for not adjusting your EBITDA guidance then? Clearly I would think that would just fall through as well, just from a pricing standpoint.

David Dill

Yes, well, pricing on the net revenue per A, it's a complicated metric.

For example, if you go back and look at our press release, our length of stay was up in excess of 2%. If you were to assume that length of stay was flat, then what that would have done is that would have said our adjusted admissions, just by the formula, would have been up, instead of 0.1%, would have been up somewhere in the neighborhood of 1.5% and pricing would have been down somewhere in the neighborhood from 5.7% down to about 4.2% or 4.3%.

So a lot of that is the mix and the length of stay, and that's the main reason we decided not to adjust the top-line revenue assumptions and the EBITDA assumptions related to good strong pricing growth. But we have a lot of confidence, a lot of visibility, in what the book of business looks like today and feel like we continue to be in good shape related to pricing assumptions.

Whit Mayo - Stephens Inc.

And just on the convert itself, do we have a final ruling on that or are you being just a little conservative by going ahead and discussing that?

David Dill

The recommendation has been put in front of the FASB. The FASB has not formally adopted it yet, but it's my understanding that they will do that in the ordinary course of business at their next meeting, which is scheduled to happen here shortly. But there shouldn't be any changes to our expectations.

The $0.20 that I gave you, that number will move around some. That's an exact number and it won't be an exact number, but somewhere in that range, which is consistent with what we said, I believe, in the third quarter when we thought this would go into effect for 2008. I feel very confident that this is going to go into place on January 1, 2009 and the ultimate impact will be very close to the number that we shared with you.

Whit Mayo - Stephens Inc.

Could we just get maybe a pre-tax number for what you think that equates to on an interest expense basis?

David Dill

Yes. What you'll see is you'll see our interest expense go up by roughly $18 to $20 million. Now that's noncash interest expense, so it won't affect the cash flow statement, but it will go up by about $18 to $20 million under that analysis. And then if the number's a little bit different, it'll go up or down about - after the share repurchase, about $900,000 or so is $0.01 to EPS.


Your next question comes from Adam Feinstein - Lehman Brothers.

Adam Feinstein - Lehman Brothers

Last quarter you'd highlighted five to six troubled markets; you'd said that they improved some in January, but I believe you said that they were still down relative to the rest of the company. Maybe you can just give us a quick update about those troubled markets and at the same time just comment in terms of your efforts around recruiting new doctors as well as just the turnover. Thank you.

David Dill

We did identify five facilities on the fourth quarter call that were down, if you recall, about 14% to 15% in volume. Those same facilities in the third quarter of last year were down about 5% in volume, so we saw that deterioration happen, down 5%, down 14% to 15%. In the first quarter, those are down about 5% to 6% in volume.

So while we did see some improvement, we expected to see that improvement with the flu season and with some other things that were happening and we'll jump into physician recruiting here in just a second because it ties into that.

There still is work to be done here. There are still some facilities in that list. These are the exact same five facilities that we talked about or hospitals that we talked about on the fourth quarter call. There are opportunities there for us to continue to bring physicians into the market as we continue to close that gap.

But we are pleased with the improvement that we've seen in those hospitals, but still some work to be done in them as well.

Bill Carpenter

We are aggressively focused on physician recruitment. We have added staff in that regard, added resources to help in our recruiting efforts, additional recruitment staff at our local hospitals, dedicated personnel, added corporate recruitment expertise to help manage, try and educate our local recruiters and help our CEOs out there who are doing it. We have a couple of dedicated recruitment firms that are helping us, and they have dedicated people specifically to LifePoint, including recruiters and sourcers.

So we continue to work hard on our recruitment effort. We are well on track to meet our goals with respect to recruitment for '08, and so moving right ahead on that.

Adam Feinstein - Lehman Brothers

So it sounds like you've been aggressively recruiting new doctors, but just curious if you had seen any change in terms of the turnover ratios?

David Dill

Going forward, I'm going to try to resist the temptation of giving exact numbers on physician recruiting and retention. I'll be more than happy to share with you and be very open with you in the trends that we're seeing, but when I start giving numbers I think it leads to some misleading conclusions because of the type of doctors and the type of markets that we're in.

For example, losing an orthopedic surgeon and adding a hospitalist is a one-for-one. When you just look at a number, it gets you to the wrong answer. On the other side, losing a hospitalist and adding an orthopedic surgeon is much better than a onetoone comparison. So those exact numbers lead you to perhaps misleading answers, and I don't want to do that.

Directionally speaking, our recruitment efforts are on track. Our retention efforts are on track. We don't see a single hospital that has retention issues. We continue to believe that we are at or near or leading the industry in terms of retention and nothing has changed.

We will lose this year, it's our expectation that we'll lose somewhere in the neighborhood of 100 doctors. There may be years and quarters that we lose a little bit less than that or a little bit more than that on an annualized basis, but we expect to lose about 100 doctors. We expect to add somewhere in the neighborhood of a couple hundred doctors.

So it's our plan in the process that Bill just shared with you and the people that are working on this, at least 100 net new doctors is our target and that's what it's going to take for us to continue to overcome not only challenges that we face in the market with referral patterns, with physicians' different lifestyle issues that are out there. You read all about them. We've constantly got to be adding somewhere in the neighborhood of 100 net new doctors a year at a minimum to hit the targets in these deep dives and these strategic initiatives that Bill outlined.

Bill Carpenter

And retaining key doctors in our markets is a key piece of our strategy. We have formalized - and we've talked about this before - we have formalized our efforts with respect to physician relationships, a specific physician relations initiative has been rolled out. We have targeted doctors that we think could be a risk to leave in the course of the next year or so, and we're making sure that we are focusing efforts on those people.

So our efforts in this regard with respect to physician relationships and formalizing our retention efforts are stronger than they ever have been, and I believe also will pay dividends.


Your next question comes from Jason Gurda - Bear, Stearns & Co.

Jason Gurda - Bear, Stearns & Co.

Can you give us a sense of what type of procedures are driving up your case mix while at the same time you're seeing surgeries decline?

David Dill

There's the closing down of a couple service lines. We have seen a reduction in some of our oneday stays. It hasn't been a big impact, but we have seen some of that. And as those one-day stays convert over to observations visits you see the revenue showing up on the out-patient side. You lose it on the in-patient side, and therefore it tends to drive up a little bit your case mix index. And then just the overall quarter, a heavy flu season in some of these markets. We saw over about a six-week period some more severe cases than what we saw in the last few quarters.

Those are probably the three big reasons. There's nothing else fundamental driving that number.

Jason Gurda - Bear, Stearns & Co.

Are you seeing any changes in overall managed care utilization? You talked about uninsured mix being down.

David Dill

We're not seeing that. On our volume mix of what we saw, we see commercial pricing about what we had expected. Commercial volumes are relatively flat. I'm not seeing large increases or any increases on the commercial side. The volume increases we did see came on the Medicare side.

Jason Gurda - Bear, Stearns & Co.

David, if you've had a chance to look at the proposed 2009 Medicare rates, but if you have, if you have any comments on how that looks relative to what you're getting in '08?

David Dill

I have to confess I have not read them all myself. I know there are people that have. We have reviewed them. The preliminary indications are that we will receive pretty much the 3% increase that is in there. It is subject to wage indexes, geographic reclass. Those numbers will firm up as the year goes on. So relative pricing on the in-patient side in fiscal '09 relative to '08 will be a little bit better because of the 1.5% or so that we're getting this year versus perhaps the 3% next year.

But it's still a little too early to bracket a number, an exact number, until we get those wage index reclasses and geographic reclasses. It always happens some time in the late summer or early fall.


Your next question comes from Melissa Jaffe - Merrill Lynch

Melissa Jaffe - Merrill Lynch

Just given the visibility that you cited and the slight increase in EPS guidance was there any thought to narrowing the range a little bit?

David Dill

There was some thought. I'll start my comment by saying we decided to leave everything unchanged, as is.

I didn't really look at necessarily what Wall Street was expecting from us for the first quarter but relative to our plan, relative to the plan that we put in place, relative to the numbers that Bill shared with you, our incentive comp, our budget is tied to, we're a little bit better than that plan but not a lot. Not a lot better than that plan that justified, from our standpoint, addressing the numbers.

We'll wait and see how the year continues to develop and if we come across a period of time anytime between now and through the end of the year, if it becomes appropriate for us, given the visibility that we have to narrow the range or change the range, we'll certainly do that. But there's nothing that's come to our attention yet that gives us reason to tighten the range.

There's a lot of uncertainty as we go ahead in these local markets that we operate in. As this economy continues to soften, our view of what bad debt could look like, even though we had a good quarter in the first quarter, our view is we could still see pressure in that area. And we're not far enough into the year to make that call yet on tightening the range.

Melissa Jaffe - Merrill Lynch

So is it fair to say that bad debt would be the biggest swing factor in the outlook?

David Dill

Yes, it probably would be. We were expecting, with the flu season, maybe volume to be a little bit stronger. So volume is at or maybe a little bit below where we expected. Pricing has more than covered that, so overall our top-line assumptions, I feel very comfortable with when you combine pricing and volume together.

On the cost side, all the other cost inputs I feel very comfortable with. Bad debt would then be the only swing factor. Now we have enough visibility on our share repurchase and some other things that below the EBITDA line we're in a pretty tight range now. We're 75% to 80% the way through the share repurchase program, so bad debt does become that swing factor.

If you recall on our fourth quarter earnings call the range of bad debt provision as a percent of revenue, it was between 12.5% and 13.5%. I expect us to move closer to that 12.5% range as the second and third quarter go, and if we get to the point where we don't think the 13.5% is a fair assumption, that's when I'll go back to the comments I shared with you earlier. We'll make that change. But we're not ready to make that yet.


Your next question comes from Darren Lehrich - Deutsche Bank.

Darren Lehrich - Deutsche Bank

David, what's the view with regard to leverage and where you'd be comfortable taking it should a good acquisition come along as you also are working to finish the buyback? I just want to get that view.

Bill, in conjunction with that question, just your comments on the M&A environment and what you're seeing there in terms of LifePoint returning back to the market as a buyer.

David Dill

From a leverage standpoint, we're at just over 3 times today. I feel very, very comfortable in a 3 to 4 times EBITDA range. Given the risk and uncertainties that we face, given the pressures on volume coupled with uncertainties around bad debt, I like operating toward the bottom end of that range. It gives us a lot of flexibility to execute our plan, to invest back in our communities, in a tough operating environment.

If one or both of those items were to change and start working in our favor then I think you can certainly add a little more leverage to this balance sheet.

Overall, Darren, in the 3 to 4 range is where I feel comfortable. A turn of leverage for us, is somewhere in the neighborhood of about $450 million, so from now to the high end of the range you've got about $300 million worth of borrowing capacity and you probably still don't hit $300 million because you probably still only hit 4 times EBITDA because when you bring a hospital like that in, it certainly has EBITDA that comes with it. So we have tremendous flexibility; 3 to 4, I feel very comfortable with given the uncertainties that we face, as it relates to strategy, Bill.

Bill Carpenter

With respect to what we're seeing out there as far as acquisitions, Darren, the pipeline does seem to be more open again. We are seeing more opportunities, and some that I think are potentially good ones for us.

We still do see strategic notforprofit buyers out there, so we're going to remain disciplined but aggressively looking for potential deals.

Darren Lehrich - Deutsche Bank

Relating to your professional fees, we've continued to hear about pressure there, and obviously that's a secular trend for you and others in the industry. But I just wanted to return to that conversation. What are you doing in response? Have you been able to consolidate any of your outside physician services into single contracts or regional contracts? Just help me understand what you're doing to alleviate that pressure. Thanks.

David Dill

We're looking at all these service lines where we use an enormous amount of professional fees - ER, consolidating groups regionally into different buckets. We have large clusters of hospitals in certain parts of the country.

From a dollar amount standpoint, this is the line item that's increased probably at the rate of about 20% to 25% over the last three or four quarters. This is really the first quarter we've seen that number moderate a little bit. We expect it to continue to climb, probably two times, at least two times our overall top-line revenue growth rate, so it will continue to put a little pressure on margins as we go.

And the things that we're doing, I think you're starting to see some of that now show up in these results, but there's still a lot of work that'll be done as we consolidate these, as we put RFPs out there to try to draw down costs in many of our markets.

Bill Carpenter

And David, we are in that RFP process now, and are bidding now with respect to some of those groups. So it is something that we are working hard on and moving forward with.


Your next question comes from Shelley Nall - Goldman Sachs.

Shelley Nall - Goldman Sachs

I think you had indicated in your opening comments that you were seeing some traction on the growth initiatives. I was wondering if you could give us some more detail there?

David Dill

We are going through the process. We have completed our deep dives that we've talked about now over the last few quarters. We are looking at the next tier hospitals. We are seeing in the very early stages some success in some of these markets.

It's our plan at a point in time - we're not ready to say exactly when yet - but at a point in time when we feel like we have enough traction and we're seeing the results that we're expecting in these markets, I will or Bill will, the company will share with our investors what to expect, what we've experienced in these markets, what we expect to experience in these markets not only over the next few quarters but over the next couple years.

It's a little too early now to give you specifics, but there is a lot of opportunity in these, and we're excited about being able to share those with you in the future.

CT volumes is probably the one that comes to mind the most that we've seen the most traction the quickest. We've seen CT volume increases in many of our hospitals where we have put in new technology that otherwise didn't have that technology.

So that's probably the single biggest, but there's so many other initiatives underneath CT that involve oncology, cardiology, general surgery, orthopedic in some areas, but really cardiology and oncology are the two biggest ones that we'll be able to share with you.

Shelley Nall - Goldman Sachs

On the self-pay mix, it looks like it declined pretty significantly. Is that the result of any company specific initiatives?

David Dill

Not really. Partially it's a result. We have seen the absolute number of our self-pay admissions have been relatively flat over about the last three quarters, but when we entered a heavy volume quarter in January on the same self-pay admission numbers, therefore the percentage went down a little bit.

So I think that trend may go up a little bit. We may see some self-pay admissions tick up a little bit in the second and third quarter as a percent of our overall admissions, but there's no specific trends that are driving those numbers down. On the other side, there's nothing that we're seeing that are driving those numbers up, which has been a little bit of a welcome relief as we start this year.

Shelley Nall - Goldman Sachs

And then just to confirm, does that indicate that you're not seeing any increased unemployment in your own markets? I think that's something you had spoken to, I think, in the fourth quarter.

David Dill

There are some pockets where we do, but none that are affecting the overall results yet. But it's something that we track on a monthly basis. There are a couple of our markets where you can see soft patches beginning to happen. None that worry me about the company overall, but there are a couple of hospitals that are more exposed than others.

There's going to be some ups and some downs. We reported, for example, in Danville there's new factories coming to town in Danville, which is great. So where we see some softness in some areas, we see it going up in a few other areas, net-net at this point. I think our results for the first quarter reflect that. Relatively comfortable with what we're seeing.


Your next question comes from Gary Lieberman - Stanford Group Company

Gary Lieberman - Stanford Group Company

David, do you have a charity care and a self-pay number?

David Dill

The self-pay number for the quarter was about $104 million in self-pay revenue; charity discounts about $14 million for the quarter. You'll see that broken out on the 10Q that we file later on today.

Gary Lieberman - Stanford Group Company

And then just to maybe push a little bit more on some of the comments around bad debt, so it sounds like your self-pay admissions are down, you're not really seeing it come back too strongly, but just from a conservative perspective are staying with the original guidance on bad debts.

What worries you as you go out in the rest of the year, or maybe worries is the wrong word, but what possibly concerns you about the bad debts reaccelerating? Is it just the history and the uncertainty that the industry has faced or is there something more specific?

David Dill

Yes. I think its three things.

We did see a decline in our self-pay volumes coming in through what we call in-patient admissions. On the outpatient side through the ER we saw ER visits on the self-pay side go up a little bit. It was directly attributable to when the flu season was at its peak. You could see those match up pretty well. So overall, we did say selfpay ER picking up. We saw self-pay in-patient coming down. So net-net, from a volume standpoint, not much of an impact when you put those two together and weight those through the book of business.

The things that do concern me as we go into the future have a lot to do with the local economies, it has a lot to do with more self-pay volume showing up in the back half of the year that we don't see today but we could see as the year goes on.

Also, let's don't lose sight of rising co-pay and deductibles that continue to put pressure. That doesn't show up in the self-pay revenue, Gary, that I just shared with you. For us, those dollars show up in what we call insured receivables. But as those programs change and people's inability to pay those copay and deductibles  we're off to a good start so far, but there's a lot of money out there that's incumbent upon us to collect every day that's important dollars for us.

And if an economy slips, it may be more than just self-pay volume in the collection efforts on it. I'm quite frankly less concerned about that because we collect $0.08 on the dollar and if it goes from 8% to 7%, it's not that big of a number across a company our size. What's a bigger number is the co-pay and deductibles changing from a 50% collection rate to a 40% collection rate. And those are people that have access to jobs theoretically and have money to pay. We've just got to go collect it. And in some of these markets, that could get more difficult as this year goes on. We don't know. That is incorporated into the range of bad debt guidance that we gave you back in February.

Gary Lieberman - Stanford Group Company

Not to push you to put on your economist hat too much here but when you think about your markets, would you typically think that they are more or less sensitive to the overall economy? Historically some people have said that rural markets typically, baseline unemployment might be a little bit higher, but during downturns in the economy, they are a little bit less susceptible to the general unemployment trends. Is that accurate or is that not right?

Bill Carpenter

Gary, when I think about our markets, I think about two or three significant employers there. And so while we do look at overall economic trends, what we're really focusing on is how is that individual plant or that particular business in our local community? So staying really close to that for us is the key, as David said on a very regular basis.

Economic trends are, of course, important as they impact those plants, for instance, but that's where our focus is.


Your next question comes from Robert Hawkins - Stifel Nicolaus & Company.

Robert Hawkins - Stifel Nicolaus & Company

In your markets, are you seeing greater managed Medicare increases the way we're seeing in some of the more urban markets, and what is that doing to CMI and medical management or what do you think it might do to it?

David Dill

Yes, we see it some but it's just not as big as probably some of our urban companies are seeing. It is creeping in a little bit. It's something I stay concerned about. As the Medicare volume converts in Medicare Advantage, it becomes a tighter case mix. These programs have been funded pretty well here over the last couple of years, and if that were to change into the future from a tighter case management process, it could hamper volumes.

It's just not a big enough driver for our business yet to spend a lot of time concerned about on these results, but as we think over the next two or three years, what we have seen is what happens in many of the urban settings eventually gets down into the rural settings, and this may be one that gets to us a few years out. But we're not seeing it now.

Our biggest payers in these markets are the Blue Cross plans when you think about commercial business and Medicare Advantage, Medicaid managed-type plans are just not a big piece of our business yet.

Robert Hawkins - Stifel Nicolaus & Company

And then maybe to drill a little further into the guidance. I know this has been hit on a little bit, and I understand you bad debt [inaudible] but as I look at it, it looks like this quarter you're getting $0.03 benefit from the repurchase, about $0.03 from the tax, so maybe $0.04 - $0.05 related to better expense management, bad debt.

You think that going forward, then, that the potential for bad debt may offset some of the improvements you have seen? You don't feel like the guidance, the results that you've gotten with contract labor and some of the other expense categories, you don't think it really warrants turning this number from a larger number than $0.10?

David Dill

Well, let me go back because I look at this a little bit differently, Rob

Robert Hawkins - Stifel Nicolaus & Company

Yes, because there's another $0.03 likely coming from additional share repurchases. It looks like you're about half done.

David Dill

When we gave our original guidance in February, our range of EPS was $2.25 to $2.55. We did not exclude the assumption of buying stock back. That was included in that estimate.

We made some assumptions in there as to when the stock would be bought back, and we said during the first half of the year. We also made an assumption at that point in time at about what price we thought the stock would be bought back at.

I think what we've seen here over this quarter is we have completed the program or will complete the program a little bit quicker, i.e., more heavily weighted to repurchases in the first quarter than we originally planned. And, as a result of the stock price trading where it was, we were able to buy stock back at a cheaper price and therefore affect more shares.

So the accretion that we're getting, the incremental accretion that we're getting over the next three quarters, from share repurchase is only over and above what we shared in February. It was already built into our numbers.

The favorable tax adjustment was not built into our numbers, and that is a real $0.03.


Your next question comes from Bill Bonello - Wachovia Securities.

Bill Bonello - Wachovia Securities

David, you talked about the impact of flu on the admissions growth. Can you just give us any thoughts on how that flows through to the bottom line?

David Dill

Yes. I tried to go back and compute the incremental EPS impact from a heavy flu season. We think overall flu added somewhere in the neighborhood of 175 basis points to our growth rate. That was offset a little bit with some other things, leap year, Easter holiday, the closure of some service lines. But when you look at that impact, what that equates to over about 50,000 admissions you get to 7,000 or 8,000 admissions that we would have, about 1,200 admissions that we would have experienced as a result of it; you plot some case mix weighted net revenue per adjusted admission.

And some of it is not very profitable. It all covers cost. Some of it, when it gets a little more severe, does have margin in it. But when you blend together somewhere in the neighborhood of maybe $0.02 or $0.03 of EPS came from the flu, that's probably a best guess without getting into a lot of specifics, hospital by hospital.

Bill Bonello - Wachovia Securities

And then just on the surgery volume, any thoughts there just in terms of it continues to be not real great, and I don't know if in the quarter it maybe was impacted because of the flu somehow and stuff got postponed or what but just what are your thoughts on that front?

David Dill

If you go back and look at third quarter, fourth quarter and first quarter, you can see what our results look like, down a little bit in the third quarter, flat in the fourth quarter and down about 3% this quarter.

Lake Havasu, we acquired that ASC back toward the end of 2006 and as we rolled that in, that helped our overall surgery numbers when you just look at it from a gross standpoint somewhere in the neighborhood of about 100 basis points, maybe a little bit less than that. So we have now comped out of that. We started comping out of that in the fourth quarter. So that is a piece of it.

The economy is a piece of it. The doctor issues that we talked about on the fourth call, not specifically related to Havasu but doctor issues in many of our other markets that we've talked about - orthopedic surgeons and general surgeons  we think have added to it as well.

It's my expectation that we'll see that number go up on things that we can control. What we can't control are changes in practice patterns that are out there and the economic conditions in some of these markets, where we may have consumers that are opting out of elective-type procedures and waiting for a change in economic conditions close to home. Those are some things that are a little bit out of our control.

But the things that are within our control and they all tie back into physician recruiting - I'll go back to what Bill said. We are on track. We have plans in place in specific markets. And it's my feeling that we'll be able to get those physicians in, those specialists in, those surgeons in these key markets to see these numbers stabilize and continue to grow.

Bill Carpenter

And David, in a couple of key markets, when you talk about doctor issues, it's an issue of ramp up of a doctor who's already been brought into the market, maybe replacing a doctor who has left, and that doctor's just in the process of ramping up.

So it's not that we have to recruit doctors in particular markets. It's a matter of ramping up some that we have already added there.


Your next question comes from David Bachman - Longbow Research.

David Bachman - Longbow Research

What was a positive point for you on the contract labor front? Give us a little bit of color on what you're doing differently or is that drop a drop in usage, a drop in pricing? Just give us a little bit more insight into what's going on.

David Dill

Part of it is aggressive management. One of the hallmarks of this company, one of the things that I have a lot of confidence in, is our ability to manage costs not only in good times but, more importantly, in tough times like we've seen here over the last few quarters with volume declines like we have experienced. The operators have done a wonderful job of managing those costs.

We have seen some of those dollars convert up into full-time equivalents. Contract labor in and of itself is not a bad thing. We need to use it. We will continue to use it in markets that it makes sense to use it.

What are we doing? We're looking at national agreements, regional agreements where we can buy contract labor at a cheaper price. Orientation programs, fixed staffing models in selected markets - we have initiative after initiative related to that. Those things help a little bit, but what really helps is the on the ground management and the focus on it on a daytoday basis. And that's what we have seen here over the last couple of quarters.

David Bachman - Longbow Research

Does that on the ground management get a bit easier in a weakening economy in terms of picking up some of that extra slack through your existing permanent staff?

David Dill

I think it does a little bit. It's hard to quantify, David, how much that means, but I think it does help a little bit.

Bill Carpenter

And it's an interesting point. The hospital, remember, in our communities is one of the largest employers, and it's a stable place. And we do see folks coming to the hospital in a down market. It's a good place to work.

David Bachman - Longbow Research

And then just one quick question on the proposed accounting changes related to the convert. Do you have a pro forma number for what this quarter would have been EPS-wise with that change in place?

David Dill

Well, if you assume $0.20 and it's going to be evenly throughout the quarters, you get to something like $0.05 a share would have been the impact.

Now from an absolute EPS standpoint, it will come out. We'll go back and restate our results, so from a growth standpoint, from a comparability standpoint, it'll be apples to apples. Roughly, you should assume that it will be evenly throughout the quarters once implemented.

David Bachman - Longbow Research

And the scheduling of the final ruling on this is what?

David Dill

I don't have that exact date when the FASB is meeting, but at their next meeting they'll get it done. I expect it to be some time here in the next - within this quarter.


Gentlemen, we'll turn it back to you once again for your concluding remarks.

Bill Carpenter

Thanks to all of you for taking the time today to be with us on the call. We appreciate your interest in LifePoint. We'll be out on the road at several investment conferences in the near future. David and I will be here if you have questions. We're always available to talk with you, and we look forward to talking to you next quarter. Thanks for your interest in LifePoint.

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