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LifePoint Hospitals, Inc. (NASDAQ:LPNT)

Q22012 Earnings Call

July 27, 2012 10:00 am ET

Executives

Bill Carpenter - Chairman and Chief Executive Officer

Jeff Sherman - our Chief Financial Officer

David Dill - President and Chief Operating Officer

Analysts

A.J. Rice – UBS

Darren Lehrich - Deutsche Bank

Kevin Fischbeck - Banc of America

Tom Gallucci - Lazard Capital Markets

Kevin Campbell - Avondale Partners

Gary Taylor - Citigroup

Ralph Giacobbe - Credit Suisse

Chris Rigg - Susquehanna Financial Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LifePoint Hospitals’ second quarter 2012 earnings conference call.

On today’s call, LifePoint will be making forward-looking statements based upon management's current expectations. Numerous factors could cause LifePoint's results to differ from these expectations and LifePoint has outlined these factors in its filings with the SEC.

The company encourages you to review these filings. LifePoint also asks that you please review the cautionary language under the caption Important Legal Information in the company's press release issued this morning. The company undertakes no obligation to update or make any other forward-looking statements, whether as a result of new information, future events or otherwise. Also, please visit LifePoint's website for links to various information and filings.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, July 27, 2012.

I would now like to turn the conference over to Bill Carpenter, Chairman and Chief Executive Officer at LifePoint Hospitals. Please go ahead, sir.

Bill Carpenter

Thank you and welcome everyone LifePoint Hospitals' second quarter 2012 earnings call. We hope you've had a chance to review the press release we issued earlier this morning. After my initial remarks, Jeff Sherman, our Chief Financial Officer will discuss in detail LifePoint's results for the second quarter. After our prepared remarks, Jeff and I, as well as David Dill, our President and Chief Operating Officer, will be available to answer your questions.

Let me begin by summarizing our solid results for the second quarter. Revenues from continuing operations grew to $827 million, up 10.7% from the same period last year. EBITDA for the quarter was $139 million, up 2.7% from the prior year, and EPS for the quarter was $0.83, up 7.8% over last year.

We also announced this week that we entered into a new credit facility at very attractive terms. Jeff will discuss this in our financial results in greater detail later during the call.

Inpatient volumes continued to be soft and we were impacted in large part by the economy and the continued shift to outpatient services. In the second quarter, which is our toughest quarter, we experienced a 6.4% decline in inpatient admissions. However, outpatient volumes continued to be strong. We experienced an increase of 3.8% in emergency department business and 2.9% in outpatient surgeries. The improvement in outpatient volume resulted in a 13% in our outpatient revenue growth for the quarter.

We also saw an improvement in our payor mix. This quarter, we continued to execute our strategic plan and invested in our business to better position LifePoint for the future. While these investments will impact our near term results, they are critical to our future success and ability to maximize returns.

We continue to make progress on key initiatives including successfully implementing our acquisition strategy, continuing our physician recruitment efforts including increased physician employments, adding resources to improve clinical quality and manage increase regulatory oversight facing our industry, investing appropriate in meaningful use initiatives and announcing a shared services arrangement with Parallon Business Solutions.

We are continuing our disciplined approach to acquisitions. On July 2, we finalized the purchase of Woods Memorial Hospital in Etowah, Tennessee. The Woods Memorial facility includes a 72 bed hospital and 88 bed nursing home and is Lifepoint’s 56th hospital campus and our 11th facility in Tennessee. As part of the acquisition, Woods will partner with nearby Athens Regional Medical Center to strengthen healthcare in the region.

The hospitals will operate as part of a common system sharing resources and coordinating services to enhance the care provided in their communities. One component of our strategy is to acquire hospitals through our innovative joint venture with Duke. To date, we have successfully purchased three hospitals in Duke LifePoint.

We are also close to completing or previously announced acquisition of Marquette General Health System in the Upper Peninsula of Michigan. We are very excited about this transaction. In addition to being a high quality regional referral center and market of good demographics, it also expands the Duke LifePoint footprint into a new market and state. The Marquette acquisition highlights the evolution of the Duke Lifepoint partnership. It also demonstrates our commitment to using our combined resources to expand already successful clinical programs at leading hospitals.

At Marquette, we are committed to investing in physician recruitment and capital improvement projects including a state-of-the-art outpatient surgery center and a comprehensive cancer center. This acquisition presents an opportunity to expand our concept of the becoming originally integrate health system in the Upper Peninsula with Marquette General at the center.

In addition to the strong growth we anticipate as a result of recent acquisitions we remain focused on continuing to improve our recruitment and professional development efforts. Year-to-date, we are on target in terms of physician recruitment.

We also continued to provide employees across the company with leadership training through our LifePoint learning academy. This program allows us to train and develop future leaders within our company especially leaders at individual hospitals.

With that I would now like to turn the call over to Jeff to discuss our financial results for the second quarter. Jeff?

Jeff Sherman

Thank you, Bill, and good morning, everyone. Second quarter represented another quarter of consistent performance. Starting with revenues. Revenues in the second quarter were $827 million, an increase of $80 million or 10.7% versus prior year. Same-store revenues increased by $27 million or 3.6%. Revenues in the quarter were impacted by a few notable items.

As I noted on the first quarter call, we expected that Life’s new provider tax program to be approved by CMS in the second or third quarter. The program was approved in the second quarter with an effective date of July 1, 2011 and we have recorded $7.8 million in additional Medicaid revenue representing four quarters of payments.

After taking into account the provider taxes, this translated into increased EBITDA of $5.8 million in the second quarter. We also experienced a net decline of $3.5 million in Georgia Medicaid based payments in the quarter versus prior year.

A new provider tax program was also approved in North Carolina in the second quarter with an effect date of January 1, 2011 which positively impacted the revenue from continuing operations by $9.4 million and EBITDA of $5.8 million. This represented six quarters of revenue and will continue each quarter going forward. This was higher than our initial estimate due to final stage calculations and adjustments.

Bad debt expense was 18.5% of revenue up 160 basis points from the prior year and charity care write-offs were 3% in the quarter. The allowance as a percentage of self-pay AR was 87.6% in the second quarter, an increase of 60 basis points over the prior year quarter.

EBITDA from continuing operations was $139 million, an increase of 2.7% over prior year. Diluted earnings per share from continuing operations were $0.83 in the quarter, an increase of 7.8% over prior year.

For the first six months of the year, EBITDA from continuing operations was $304 million, an increase of 8.8% with earnings per share from continuing operations increasing by 19.9% to $1.99.

On a same-store basis, admissions were down 6.4% in the second quarter. The second quarter was our most difficult prior year comp with admissions up 0.9% in the second quarter of 2011. June was a particularly soft month but today, we have seeing July admission numbers improve. Adjusted admissions for the quarter decreased by 2.1% on a same store basis versus prior year. Outpatient activity was driven by stronger surgical volumes, emergency department growth and growth in oncology and imaging services.

Turning to pricing. On a same-store basis, net revenue per adjusted admission was up 5.8%. Medicare and Medicaid admissions represented the majority of the admission decline. The Medicare case ix in that was up by 0.8% in the quarter with the total case mix up by 1.3% over prior year. Our strong pricing was again driven by solid outpatient volume, higher intensity and a favorable payor mix. Commercial revenues were up 110 basis points as percentage of revenues over the prior year quarter on a same-store basis.

Same store SW&B cost, as a percent of revenues, declined by 70 basis points over prior year even after taking into account increased physician employment cost of $9 million and meaningful use cost of $2.3 million. Same store supply costs for the quarter declined by 20 basis points and continued to be impacted by higher pharmacy cost driven by growth in oncology programs. Same store other operating expenses in the quarter increased by 180 basis points primarily due higher contract services, due to meaningful use costs, provider taxes and professional fees.

We expect the high tech payments to be a headwind in 2012 with the majority of the payments recorded in the second half of the year. For the second quarter, we recorded $1.5 million in meaningful use payments and had related incremental operating costs of $5.1 million plus $2.6 million in incremental depreciation in the quarter. This results in a reduction of $3.6 million to EBITDA and a reduction to EPS of $0.06. For the second quarter of 2011, meaningful use payments positively impacted EBITDA by $1.7 million and EPS by $0.01.

We also incurred $1.7 million in acquisition in acquisition cost related to the Marquette, Woods Memorial, Twin County and other deals in the pipeline in the quarter that are in the same store results.

Cash flow from continuing operations for the quarter was $104 million versus $93 million in the second quarter of 2011. The primary driver of increased cash flow was the collection of the Rural Floor settlement, offset by higher income tax payments. We invested $49 million in capital expenditures in the quarter with $21 million spend on IT system investments primarily to meet meaningful use requirements.

Depreciation and amortization expense increased by $6.3 million or 15.3% versus the prior year. The increase was driven by higher IT investments in three new hospitals in the quarter versus the prior year. We also have the incremental depreciation from our recently opened Clark Regional Medical Center in the second quarter. We finished the quarter with $172 million in cash on hand.

We announced this week the completion of a new credit facility and term loan A. This new agreement lowers our current borrowing costs while providing us with significant flexibility to continue to deploy capital for acquisitions. The new rate on the term loan A will be 75 basis points to 100 basis points lower than our existing term loan B rates depending on leverage ratios excluding additional cost in the third quarter for the write off of unamortized loan costs.

Additional information regarding our second quarter results is available by reviewing our SEC filings, including our 10-Q, which will be filed later today.

In summary, the second quarter continues to position the company for long term success. Stronger outpatient volumes, good cost controls and an improving pair of mix help to offset soft inpatient volumes. The results were negatively impacted by increased physician employment costs and costs exceeding payments related to meaningful use. We expect meaningful use payments to ramp up in the second half of 2012 and to generate significant EBITDA in 2013 and 2014.

To summarize the large items, the new provider tax programs in West Virginia and North Carolina added $11.6 million in EBITDA in the quarter. This was offset by a $5.3 million decline in EBITDA from meaningful use and $3.5 million decline in Georgia Medicaid based payments compared to second quarter in the prior year.

In addition physician employment loss has increased by $4 million in the quarter as we ended the quarter with 390 employee providers, a 38% increase over prior year. We remain committed to our physician recruiting strategy including employment to physician in company for long term success regardless of future payment methodologies.

Finally, we incurred $1.7 million in acquisition related deal on legal costs in the quarter. The acquisition pipeline remains very active with the completion of Woods Memorial and the announcement of the definitive agreement from Marquette General Health System. We have added over $200 million in new revenues in the last three quarters from our physicians. We are excited to add Marquette to our portfolio and believe it has significant growth potential. We are optimistic about our ability to complete additional acquisitions over the next 12 to 18 month period.

We also announced the completion of a shared services agreement with Parallon. We completed the outsourcing of payroll services to Parallon at the end of 2011. With this new announcement we are also moving accounts payable, supply procurement and revenue cycle operations to them. We took a very deliberative approach to evaluating our options for these services and Parallon operates at a considerable and experience in providing these services in its centralized environment.

The rollout of this agreement will take place over 24 to 30 months and we expect to achieve greater operating efficiencies as well as improved performance in these functions. In addition, we extended our existing IT agreement with Parallon as part of this deal on more favorable terms.

Finally, given the difficult volume environment, we are lowering adjusted admission volume guidance for the year to be flat to down 3%. We are also tightening our guidance range by increasing the low end of our EPS range to $3.45 while the top end of our guidance remains unchanged at $3.60. We expect to be in this range of guidance for the year.

I will now turn the call back over to Bill.

Bill Carpenter

Thank you, Jeff. Before we start the question-and-answer period I'd like to share a few closing thoughts. While we continue to see softer inpatient volumes, we are encouraged by our strong outpatient activity. Our acquisition pipeline remains robust and we will continue to target acquisitions in attractive markets. We will also continue to make the necessary investment to maximize returns including capitalizing on our unique and valuable partnership with Duke University Health System.

Above all else, I am extremely proud of all the work the LifePoint team is doing to continue to improve the quality of care we provide while delivering strong value to our stockholders.

With that, operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of A.J. Rice with UBS. Please proceed with your question.

A.J. Rice – UBS

Jeff, lot of numbers coming out there and I am in here three or four times. So let me just make sure I understand. So you are saying $11.6 million of EBITDA impact from West Virginia and North Carolina is that the entire amount or is that the prior period amount?

Jeff Sherman

No, A.J., that is the entire amount that we booked in the quarter. The prior year amounts for those two programs was about $6.8 million with the current year amount about $4.8 million. Both of those programs will continue going forward. So we expect to book another approximately $4.8 million in EBITDA for both of those programs in the third and fourth quarter combined.

So our total book for those two programs for the year of 2012 will be about $16.5 million of EBITDA. In the 2012 piece that would be earned from the four quarters of 2012, it is about $9.7 million of that

A.J. Rice – UBS

Then, in Georgia, how should we look at that additionally? Is that it’s just one way, one quarter or is there some prior period? Is there anything dynamic about that that goes beyond just this period?

Jeff Sherman

It’s a one quarter. We qualified last year, reported the full amount in this quarter last year. We did not qualify this year. So the $3.5 million swing.

A.J. Rice – UBS

My other question, I was going to ask you about was on the Parallon deal. Obviously, you make a deal like that, partly because it gives you more capabilities perhaps, partly because there is cost savings. You alluded to both. You got the experience with the payroll so far this year. Now you are going to go to these other areas. Can you give us a flavor for what you are seeing from payroll that makes you feel excited about the other stuff? What the opportunities are there?

Then, any quantification on the redoing of the IT and what that might mean for you?

Jeff Sherman

Yes, I think the payroll has gone very well. I think we certainly recognize that Parallon has considerable scale in their operations and so I think it’s just a lot of confidence that they have the ability to do this.

They have also been through this process over the last 12 to 15 years themselves in terms of going to centralized environment. So if you look at the volume of our, for instance, accounts receivable transactions with our small hospital base, they are already running a lot of volume through current infrastructure.

So we believe we will be able to integrate it through several of their service centers. So it’s not all going to one center. So I think that will help the integration as well in terms of how this gets rolled in. We do expect its going to save us money on the operating side.

We also expect it is going to improve our operating performance with respect to revenue cycle. We think it will improve our collection percentages and will improve our denial operations, the management operations as well.

So we think there is good opportunity that we have and quantify that. There will be a rollout over time. There will be costs associated with this in terms of retention and severance cost as well. We will start reporting that in the back half of this year and finally, with respect to the IT agreement, we will say, $2 million a year going forward on our IT agreement.

A.J. Rice – UBS

When is that effective?

Jeff Sherman

It is effective when the deal was signed for the back half of the year that they will come into play.

Operator

Thank you. Our next question is coming from the line of Darren Lehrich with Deutsche Bank. Please proceed with your question.

Darren Lehrich - Deutsche Bank

I just wanted to follow up on the provider tax disclosures, would appreciate all the detail there. This is, as it relates to going forward, are there any states where you expect, might come into play in the second half, just trying to understand if we are going to see a bit more of this, in terms of things are out there pending beyond the $4.8 million that you just mentioned to A.J.

Jeff Sherman

Nothing at this point, Darren. There are other states that we operate in that are looking at program that we might participate in. I don’t expect any of those to be done that we would be able to report anything in the second half of this year.

I think the important thing to recognize on these programs, the timing of when these amounts come in is difficult to predict. Certainly, but as we think about it, it is another form of Medicaid reimbursement. That’s going to continue going forward. Once these programs get approved, it’s very unusual for them to stop operating.

So certainly, as we think about it going forward, that we expect these to be in a run rate going forward and in certain states, it’s out of the hospice Medicaid reimbursement cut that we are going to be facing. So in some states, that has been neutral to us. For North Carolina and West Virginia, it has been positive for us.

Darren Lehrich - Deutsche Bank

As far as other supplemental payments go, we all know about New Mexico, for you guys. Is there any update there? Can you just confirm that you have visibility into those numbers?

Jeff Sherman

Yes, our dollar amounts, we expect to continue to be approved going forward there. There is always supplemental payments as well that can impact us. So there is always the chance of sequential reductions there going forward, but in terms of the overall program continuing for our facilities, we have confidence that we will continue to receive those payments. But those payments are always subject to local and state funding issues.

Darren Lehrich - Deutsche Bank

Right, and then if I could just shift gears a little to volume. You are not unique in terms of the inpatient weakness that you are seeing but it was a pretty soft set of numbers we got here. I am just wondering if you can comment a little bit more on whether there are some service line closures in there. If you can maybe add a little bit more flavor for the same store admissions, same store surgery numbers that we saw?

Bill Carpenter

Darren, clearly, inpatient admissions have been soft and they are being impacted by the economy. They are being impacted by the shift to outpatient treatments and it shouldn’t be loss but Q2 was a tough comp for us. So, remember, we had inpatient admission growth than Q2 last year.

We saw good outpatient growth this quarter. ED business grew up 3.8%, outpatient surgeries up 2.9%, outpatient revenue grew 13%. So recruiting physicians and investing in technology these are the right things to do to position the company and hospital towards success in the future.

At the same time, its worth noting and David Dill is covering, maybe you want to cover it in a moment, but its worth noting as well that we focus our acquisition strategy on hospitals in faster growing markets with higher acuity cases. Like Marquette General which will add to growth potential for the company.

So those are relevant.

David Dill

The only, thing, that I would add to that, you can see, Darren, in our release the shift from inpatient surgeries to outpatient surgeries. What’s not too obvious in the release, although you see it in the adjusted admission calculation, a shift of short one and two days stays moving over to observation visits.

This is an area of focus for us. Its an area of focus for a lot of agencies, RACs included, that are looking at primarily three main, MBC, digestive circulatory and respiratory and the changes that we have seen in short stays over to observation visits, predominantly centered around the Medicare book of business.

So it gives me confidence that it’s not business that we are loosing in the market or in our communities. It’s just in a different setting. So obviously areas of focus for the RACs and a huge focus for us in our case management efforts around placing the patients in the right setting and that that shift we are seeing over the last nine months. I think we will continue to see that and that are incorporated into our guidance into the second half of the year which Jeff laid down on the volume side.

Operator

Thank you. Our next question is coming from the line of Kevin Fischbeck with Banc of America. Please proceed with your question.

Kevin Fischbeck - Banc of America

Bill, I think you mentioned in your prepared comments that you are making investments for future growth but that they may impact current results. Wondering if you can clear to me what you were referring to. Can you provide some more color there?

Bill Carpenter

Well, certainly the physician recruitment efforts that we have been evolving including more employment of physicians. We have added resources to clinical quality. David was just talking about, specifically, with respect to case management and other efforts in order to make sure that we are getting patients in the right setting.

The acquisition strategy, in and of itself, is one place where we are devoting resources in order to make sure that we are setting the company up for further growth in the future. So these are the types of things really that add it up.

David Dill

I would add meaningful use investment into that. So we are investing an enormous of dollars in capital and operating expenses over the last several quarters. So for the first two quarters this year, we have had operating cost and depreciation far exceeding in the payments that we have booked for the first two quarters.

We do expect payments to ramp up in the back half of the year and we always expect it to come in to the year with back end loaded and then that will start to turn in 2013 and 2014 when we start getting considerably more payments than our operating cost.

So that’s a good example of a short term investment today, or short term on operating line that we will start seeing the benefit on in ’13 and ’14.

Kevin Fischbeck - Banc of America

Yes, I guess the meaningful use of investments are the most obvious or easy to see how that’s going flipping in 2013 and 2014. The physician recruitment feels like something ends up being an ongoing expense or do you expect that to slow down and become a smaller part of your business or does that always end up being adding some more percentage of revenue.

Then, in the clinical quality stuff, is that something that you make and then sustain or does that rise or does that come down? How do you think of those other two?

Bill Carpenter

Well, I will start in and either Jeff or David are welcome to add in but certainly physician recruitment will continue to be a cost. It’s locking and tackling in any hospital. That having been said, we are growing on the employment side. So we are seeing an increase there and the cost that are associated with that include not only the physician but include offices that we bring in and related personnel.

So I also think on the quality side, all the efforts that we are making in order to focus on improved quality in our hospitals, these are resources that we are adding to the company. We have been building hospital support center infrastructure in order to support the growth of the company that expected that we are seeing and that’s something that we expect to continue to see on annual basis.

Jeff Sherman

Yes, and I would add on to this employment side. So when we see a large ramp up, you are going to have typically bigger losses upfront when you do that as the practice is ramped up, particularly in the specialist area. So I think, as those, overtime, will begin to improve.

With respect to the quality investments, I would add, those are investments we are making today. We do think there is going to be a long term financial payoff on that through value based purchasing, either incentives or penalties. If we don’t perform there, we think those types of clauses will also migrate into commercial managed care contracts over time as well.

So we do think that, but again that’s a long term investment. It’s also the right thing for us to. It’s the product and service we are delivering we would be doing it without that but it is helpful to have some financial incentives at the end of the day to help us pay for these.

With regards to some of our quality initiatives, we are receiving some assistance from our hospital engagement network contract as well for the next two years that will help offset some cost.

Kevin Fischbeck - Banc of America

Then, you also made a comment that you are providing capital to some of these recent deals that you have been doing. How do we think about CapEx as a percent of revenue, as you ramp up your deals obviously? Most of the time, the companies are selling, it’s because of in for capital injection. So may we expect the new CapEx to be rising as a percentage of revenue?

Bill Carpenter

For the most part, so far, as you look at the capital we are committing, it’s over 5 to 10 year period of time and it has generally been in line with what we are spending today as a percentage of revenues. Some of it will be more front end loaded than particular acquisitions. But I think right now, we are seeing that and we are seeing some transactions where it might be a little bit more but overall, I would say, I would expect this to be in a similar range that we have been running.

Jeff Sherman

CapEx is just one of the reasons that smaller community hospitals are looking for a partner. This is a very complex world that’s becoming even more complex as we move into the future.

There is so much uncertainty facing the smaller community hospital around the country including how you recruit physicians, how you respond to the regulatory changes that are coming and they are looking for the resource of the large system and a quality focused large system.

This is one of places that our relationship with Duke University Health System gives us a real advantage, a real leg up, in terms of the quality focus that we bring to the table side-by-side with Duke.

Bill Carpenter

I will add just two closing comments. Certainly capital expenditures we are doing in acquisitions is well, we believe will driving incremental earnings, physicians can get some, perhaps, new service line. I will also say about that total CapEx spend we had said, 2011 and 2012, are going to be our peak years for capital investments related to meaningful use.

So we expect CapEx to decline in 2013, in IT in particular, quite a bit from where it is today. So we will have to free up some capital for meaningful use as well as we head into ’13.

Operator

Our next is coming from the line of Tom Gallucci with Lazard Capital Markets. Please proceed with your question.

Tom Gallucci - Lazard Capital Markets

I just have handful of follow ups. First, just for housekeeping items. Did you talk about same store EBITDA margin, or if you didn’t, do you have a number there or the change year-over-year?

Jeff Sherman

Yes, same store EBITDA margins is very close to continuing ops. It’s at 16.7%. So it’s down about 130 basis points. The meaningful use change represents about 70 basis points of that. The acquisition deal costs are about 20 basis points. The physician practice loss represents about 50 basis points. Then you have got a lot of other things, plusses or minuses, in that margin but it’s pretty consistent with the overall reported company continuing ops margin.

Tom Gallucci - Lazard Capital Markets

On para mix, I think you said, it was improved. Do you have any details of your concern in the major categories in terms of what they changed year-over-year?

Jeff Sherman

On a same store basis, commercial was up about 100 basis points, as a percentage of revenue. Medicare was down slightly, Medicaid was up about 70 basis points, primarily driven from higher tax payments, and self pay was up 200 basis points as well.

Tom Gallucci - Lazard Capital Markets

Did you have any major outliners geographically in terms of para mix or some of the volume trends that you have been talking about?

David Dill

Nothing, Tom, that we have seen historically. It's a very consistent. We didn't see the shift that we've talked about over the observations but that is really country wide, nation wide, not seeing any specific geographical.

Tom Gallucci - Lazard Capital Markets

Right. Did quantify that observation impact?

David Dill

We saw about 5% increase in observation business in our day stays declined proportionally with the total admission decline on a percentage basis.

Tom Gallucci - Lazard Capital Markets

Right. One of your peers was talking about sort of over 24-hour type visits that were increasing. Is there any kind of that dynamic going, or are you talking about something completely different?

David Dill

We are talking about something similar. The increase in the observation business grew as I mentioned 5%. At the same time, we saw the length of time in observation status grow as well, which indicates low DRG inpatients admissions moving over to slightly longer, not much longer but slightly longer observation business that move the whole average out just a little bit.

Tom Gallucci - Lazard Capital Markets

Right. I know you were talking before about sort of case management and quality. How do you sort of think about the length of stay, if you will, of the observation visit going up? Is there a point where there is too much pushback from payors than maybe there should have been inpatients or is that a proper setting in your minds?

David Dill

Well, we have case managers, we have physicians. We use physician’s advisory firms to help us. They are physicians to making that determination, and yes there is pushback and we are pushing back with the payors only to be fair to make a determination across the board that a small move upstairs. They are pushing too hard.

So our efforts, our investments, our vendors that we're working with and certainly our physicians that are making these decisions are all focused on the seeing patients in the right setting and taking care of them and then making sure they could discharge when they need to be discharge.

Tom Gallucci - Lazard Capital Markets

Now, last one if I could. You talked a lot about the acquisitions and opportunity, any updated thoughts on share repurchases?

Jeff Sherman

It's something we continue to evaluate, Tom, as we look at our priorities. First and foremost, it's investing in existing hospitals. Second its acquisition and third is buying back stock depending on where the stock is treading. So we do have acquisitions in the pipeline that we've talked about.

We will continue to evaluate share buybacks as we go forward and it's just a continuous process, but we do believe we have the necessary flexibility in capability in capital structure as well as ability to produce free cash flow to provide all of the options and flexibility we need to continue to buy hospitals and we continue to buyback our stock. So we think we have the necessary things going forward to continue to do that if it makes sense.

Operator

Our next question coming from the line of Kevin Campbell with Avondale Partners. Please proceed with your question.

Kevin Campbell - Avondale Partners

Good morning. Thanks for taking my question. I just wanted to confirm first on some of the comments on guidance. Did you say you raised the lower end of EPS to 345?

Bill Carpenter

That's correct.

Kevin Campbell - Avondale Partners

Okay. So, it's now 345 to 360?

Bill Carpenter

Correct.

Kevin Campbell - Avondale Partners

Okay. What were the comments on adjusted admissions guidance?

Bill Carpenter

We have revised our adjusted admission guidance down to be flat to down 2% for original guidance it goes flat to up 2%.

David Dill

Kevin, this is David. Our adjusted admissions for the first of the year are down about 1.2% to 1.3%, so that implies in the second half the volumes looked pretty similar in the second half to what we have experienced in the first half on the adjusted admissions side.

Kevin Campbell - Avondale Partners

Then just give a little bit more detail on the Georgia loss of the dispayments. So that about $3.5 million in EBITDA, is that for the reversal of prior period that was built up, and so you had a higher amount this quarter or is it $3.5 million reduction per quarter and that goes on?

David Dill

No, it is. We booked probably $1.5 million, $1.08 last year this time, and we are not looking at it this year. S the swing between the two is $3.5 million.

Kevin Campbell - Avondale Partners

Okay, so it's just taking that 1.8 times too?

David Dill

That's right. One-time. It's one-time, so this is a program that gets approved once a year and you get a payment, and so it's not something like taxes going forward.

Kevin Campbell - Avondale Partners

Okay. Then Parallon. Can you maybe give us a little bit of color on over time as that's implemented over in 18 to 24 month period exactly sort of the dollar amount of savings you might expect to achieve from that agreement.

David Dill

We already implemented over a 24 to 30-month period, and won't be putting more information out as time progresses, but we believe there are good opportunities for savings and improved operational performance both, in the revenue cycle side and the materials management, supply and procurement functions as well.

Kevin Campbell - Avondale Partners

I know you may not want to give specifics whether we are talking less than $10 million or more than $10 million. That type of magnitude?

David Dill

It's significant. We are not going to put dollar number on that yet, but we believe it's going to be significant. We wouldn't have gone through the trouble of the significant contract if there wasn't good upside potential on it.

Jeff Sherman

Kevin, not only was there decent savings, this will allow us to really scale up and grow and continue to focus on those things that are really important to us, as Bill laid out, providing high quality patient's care in these communities and focus attention there and have a group if their sole mission is to protect these processes and we can continue to grow and add without having to focus on that that. Our vendor will help us do, and our partner will help us do that.

Kevin Campbell - Avondale Partners

Last question on the outlook for do you see one of your competitors on a call prior you and they were pretty bullish about sort of hospitals and their position with the administration and I am curious if you have any thoughts about that and as we look sequestration?

Bill Carpenter

Hospitals are important piece of the puzzle and I really don't expect much to happen between now and the election. There's going to be a lot of back and forth. There's going to be a lot of conversations, but I think everyone is waiting on the election.

We are obviously at the table. We have been involved in conversations both with state and federal leaders and we will continue to monitor the situation very closely and continue to be a part of the dialogue, representing our hospitals and representing hospitals and small communities around the country. So we are optimistic than we are being heard.

Kevin Campbell - Avondale Partners

Given the fact that Medicaid may not expand as much as it was originally anticipated from reform that better protects you from other future cuts or not really?

Jeff Sherman

That's really one of the specifics places, where I don't think you'll see decisions made until actually the elections. I really don't expect many states to make those decisions at this point. A few states have been vocal about it, but the political landscape is changing and I think it's one of the specific slots where you wait and see. CMS is seeking clarification of Supreme Court's decision about the Medicaid expense improvement and we are-monitoring that very closely.

As far as that dialogue goes and analyzing the impact of Medicaid expense and scenarios and what that could have on our hospitals. So we will continue to work closely on that. We'll continue to work closely with the AHF, the federation and state federal leaders to stay up on what's going on.

Bill Carpenter

And our biggest five sate that we operate in are top states in terms of revenue that we operate in were not part of the 26 states that sued the federal government over the Medicaid expansion. We think that positions us reasonably well in our key states about their likelihood to see the Medicaid expansion.

Operator

Our next question is coming from the line of Gary Taylor with Citigroup. Please proceed with your question.

Gary Taylor - Citigroup

We covered most of them. I guess two I have remaining. One just on the inpatient surgical decline of the down 7%. I wouldn't imagine there's been any surgical cases moving towards outpatient at this point. Maybe in your markets I'm still wrong on that. Is that still a significant driver there, are there particular service lines that you would call out as being down more than others?

David Dill

There continues to be a shift that's happening not across some of the major service lines, but in some of the areas that's focus for the last year on sort of in-patients pulling over the outpatient primarily the OB/GYN delivery has been down. You can imagine that there will in July related surgical cases are down as well. Then outside of that is just general softness across all of our existing physician base couple of percent here and there are spread out throughout the country.

Gary Taylor - Citigroup

What are you seeing on ASC developments in your markets which have been largely have been less exposed to that trend? Is there any new development?

David Dill

Now they're showing the only developments. We are still fighting every one of opening of an ASC in Louisiana that will comp out later on this year, and its 200 or 300 cases a year and those weren't inpatient. Those were already outpatient surgeries low-end type surgeries, so there is ophthalmology and things like that.

Gary Taylor - Citigroup

200, 300 cases a month?

David Dill

200, 300 cases a quarter. I'm sorry.

Gary Taylor - Citigroup

Jeff, to help us model provider tax going forward. Obviously there is a revenue component and there then expense component to tax piece and then there has been the net benefit, so did I miss on the 11.6 net benefit this quarter? Did you give us the revenue and tax components of that?

Jeff Sherman

I did, but I'll do it again. It's $17.2 million in revenue and $5.6 million in taxes.

Gary Taylor - Citigroup

Is that revenue component in your same store revenue number?

Jeff Sherman

It’s half and half. There is $7.8 million in same-store for West Virginia, and there is $9.4 million related to North Carolina that is not in same-store.

Gary Taylor - Citigroup

Okay. Then for the third quarter, I guess the normalized benefit of these two programs is going to be roughly somewhere between $2 million and $3 million net benefit.

Jeff Sherman

That's correct. About $3.5 million in revenue about $1.1 million in taxes going forward for these two programs for net benefit of about $2.4 million.

Operator

Our next question is coming from the line from Ralph Giacobbe with Credit Suisse. Please proceed with your question.

Ralph Giacobbe - Credit Suisse

I just want to go back to the observation one day stay. I know you guys are one of the first to discuss that. I think it was maybe a couple of years back, and I thought we had sort of turned the corner. Is there something else that's sort of re-picking up, or was it just magnified because the other underlying volume wasn't as strong?

David Dill

I think part of it is just overall volume, Ralph. I think, in 2010, we saw it kind of bottom out, we say one day sales actually increasing some in 2011. First quarter was kind of basically flat on one day stays and we just saw it decline this quarter but it declined proportional with the total admission. So I don't think we can call that a trend yet, but it is still we're watching very closely.

Ralph Giacobbe - Credit Suisse

Okay. Then I may have misunderstood. Did you say in your prepared remarks that Medicare and Medicaid made up most of the decline on the volume side.

David Dill

In terms of the emissions, they were the vast majority of the admission decline. In fact, commercial admission declined may be less than total admissions, so even on the inpatient side, we had a reasonable mix than the commercial side.

Ralph Giacobbe - Credit Suisse

Then have you guys talked about, is the Medicare and Medicaid business profitable for you? Any help there in terms of how we can think about those in the context of sort of where your aggregate margin levels are?

David Dill

I think if you look at Medicaid in total, it's still a difficult product line that loses money for us. Medicare, if I make a little bit of money on, but not much so balanced mix is going to breakeven Medicaid, we lose money on and it's very state specific as well.

We had states that we had more favorable Medicaid reimbursement in and we have less variable Medicaid when you are aggregated in total, Medicaid is a loser and Medicare is breakeven to a little bit better.

Ralph Giacobbe - Credit Suisse

Just to make sure. On the cash flow side, I just want to make sure in the first quarter call, I think you talked about receiving the $27 million Rural settlement payment in June or expected too, and was that the case? Did you get that payment?

David Dill

I said in my prepared remarks that that one of the helpers for cash flow in the quarter. We also had I'll go in the other direction we had increased tax payment, and we also had some malpractice settlements that were paid in the quarter as well that went the other way.

Operator

Thank you. Our last question is coming from the line of Chris Rigg with Susquehanna Financial Group. Please proceed with your question.

Chris Rigg - Susquehanna Financial Group

In terms of the North Carolina provider tax, can you just give us a flavor for how that evolved? Was that in the revenues there, is that entirely for 2012, or is there any prior year there?

Jeff Sherman

It represents six quarters worth revenue, so we recorded $9.4 million in revenue for North Carolina, we had taxes of $3.6 million, and we had EBITDA of $5.8 million. The prior year component of those categories, prior year revenue of the $9.4 million in revenue $6.3 million was prior year of the $3.6 million in taxes, $2.4 million in prior year and another $5.8 million in EBITDA, $3.9 million was prior year.

On a go-forward basis, we expect to record about $1.6 million revenue each quarter and about $600,000 in taxes for EBITDA of about $1 million a quarter going forward on North Carolina.

Chris Rigg - Susquehanna Financial Group

Okay. I guess, I am just trying to figure out, so when you reported the first quarter, you sort of spiked out the delay in West Virginia, but didn't say anything about North Carolina, can you just help me understand sort of the logic as to why you would talk about one and not the other in a given period?

Jeff Sherman

Well, it's just the timing of when we expect it to be approved. We knew about North Carolina, but it was a new state for us as well, so we were just figuring out the landscape of this state as well. We just acquired hospitals in the fourth quarter of 2011, and also I think the process for us as we thought about coming into the year, we did expect provider taxes in both of those states included it in our guidance. North Carolina came in a little bit higher than we were expecting as well.

Operator

Mr. Carpenter, I will now turn the call back to you for your closing remarks.

Bill Carpenter

Great. Thank you, Susie. There are few things I hope you will take away from our call today that I think are important. We have a proven track record of providing value to our shareholders and have succeeded in achieving that return again in the second quarter especially in light of the challenging macroeconomic environment.

While achieving these results today, we are also investing in the future, so that we can deliver shareholder value for the long-term. These investments are tied directly to how we have and will continue to achieve success which is executing on our strategies for delivering quality care and service to our patients, growing in our existing markets and by adding the right assets to our portfolio. Operating efficiently and effectively and developing high performing talent.

I want to say thanks to all our physicians and employees who are the heart of our success. Also, thanks to each of you for joining the call today and for your interest in LifePoint Hospitals.

With that, thank you very much and we'll talk to you soon.

Operator

Ladies and gentlemen, that does conclude conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

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