Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John C. Merriwether - Vice President of Financial Relations

Burke Whitman - President and Chief Executive Officer

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

Kelly E. Curry - Executive Vice President & Chief Operating Officer

Analysts

William Bonello - Wachovia Securities

Gary Lieberman - Stanford Group

Jason Gurda - Leerink Swann & Company

Adam Feinstein - Lehman Brothers

Tom Gallucci - Merrill Lynch & Co.

Sheryl Skolnick - CRT Capital

Ralph Giacobbe - Credit Suisse

John Ransom - Raymond James

Health Management Associates, Inc. (HMA) Q2 2008 Earnings Call August 5, 2008 11:00 AM ET

Operator

Welcome to the HMA second quarter 2008 earnings conference call. (Operator Instructions) Mr. Merriwether, you may begin your conference.

John Merriwether

I would like to welcome you to HMA’s second quarter 2008 earnings conference call.

Before we get started with the call, I would like to read our disclosure statement. Certain statements contained in this presentation including without limitation statements containing the words believes, anticipates, intends, expects, optimistic, objectives, and words with similar import constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include projections of revenue, income or loss, capital expenditures, capital structure, or other financial items, statements regarding the plans and objectives of management for future operations, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements, and other statements which are other than statements of historical fact.

Statements made throughout this presentation are based on current estimates of future events, and the company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially as a result of these various factors.

In addition EBITDA is mentioned on this call as defined as earnings before interest, income taxes, depreciation, amortization, gains on sales of assets, refinancing costs and minority interests. I will refer you to HMA’s earnings press release issued yesterday for a disclosure statement regarding EBITDA as a non-GAAP financial measure.

On the call with me this morning is Chief Executive Officer Burke Whitman, Chief Financial Officer Bob Farnham, and Chief Operating Officer Kelly Curry.

Burke Whitman

For the second quarter we reported earnings per share from continuing operations excluding refinancing calls and gains from sales of $0.10 per share. Patient volumes declined during the quarter in part due to some short-term issues that we can correct, that I have already begun to address, and from which we expect to see gradual improvement, but we succeeded in minimizing the impact of the volume decline on our earnings and cash flow during the quarter through enhanced, focused, managerial discipline on the fundamentals of our operations.

Kelly Curry, our COO, will address in a few moments some of the short-term volume opportunities and what we’re doing about them in some detail, but I’d like to summarize those here before I move on to address some aspects of the direction of the company overall.

There were really six volume related issues this quarter that we can and will do something about directly. We believe these are responsible for the majority of the decline and we believe that our actions will have an impact on them over the course of the remainder of this year. There is one additional issue that we cannot address so directly, but that we can react to by adjusting our operations to minimize the impact and I’ll just go through these quickly with you.

First, we did decrease the number of non-emergent admissions and outpatient visits from uninsured or non-paying patients. This is good news. It is the result of a deliberate effort to program that Kelly and our operational leaders put into place a couple of quarters ago. We have achieved this while still ensuring that those patients received their non-emergent care with us or in some other appropriate setting.

The second reason for the decline in volume this quarter is that in being successful in reducing the number of no-pay patients, it appears that we inadvertently chased away a portion of our paying patients. This was not our intent, but it was the unexpected secondary effect of an otherwise successful program. The solution is that we are modifying our approach to ensure that we incorporate compassion and wisdom into our dealings with all of our patients up front.

The third cause is in our emergency room operations: we lost a bit of focus on the fundamentals in some, but not all, of our hospitals. The solution is that we are reinforcing that focus now with the media improvements to the ER management, quality, and systems, in order to get this back on track.

Fourth, our North and South Carolina volumes were down far more than the rest of the company, the biggest decline of any region. This was primarily the result of short-term disruption to physician referrals resulting from our partnership with Novant that we closed on in April. While we expected some disruption to the volumes in the care line as following that transaction, particularly because of the change in employment for all the physicians there, the disruption has been greater then we expected; however it will be short lived. The solution, we believe those issues will settle down on their own very soon and we are more excited now than ever before about the go forward benefits of that partnership on man fronts, so the hospitals, the communities and HMA and even to our financial performance going forward.

The fifth cause for the decline, our physician recruiting effort, although ahead of last year, is short of goal; Kelly will talk about that some more, but in broad terms we are augmenting our recruiting operations at the corporate and division levels.

The sixth cause, we believe, is the public reports of comparative hospital quality and satisfaction information that are now publicly available. In many cases our hospitals fared less well than our competitor and that’s because the data that’s being reported now is from periods before we had implemented our turn around as a company, which I’ll talk about in a few minutes. The solution here is simply to continue to drive toward industry leadership and quality satisfaction, which we are doing, and upon which we are making enormous strides and I’ll speak to that more in a minute.

All six of those reasons for the volume declines we are doing things about. The seventh one is a little hard to do something about. The economy does appear to have impacted us in some of our markets, especially Florida where the volumes were a little lower than the rest of the company. The solution to this, we can’t impact that directly, but we are prepared to manage our resources I a smart manner. Again, Kelly will provide for the details on all of this.

Now let me address the direction of the company. I am really encouraged by the unambiguous progress we’re making in the core elements of our deliberate turn around of the company. Let me quickly review those elements and then tell you about the progress.

We launched a new direction for the company January 1 of this year, having spent the final months of 2007 organizing all of the elements. The new direction builds on the company’s 30-year bedrock strengths of knowledge, commitment, hard work, discipline, integrity. The new direction comprises a new mission, vision, strategy, and plan. The most important is our vision to lead the industry in quality and satisfaction in two to three years. This will help us better accomplish our mission and it will lead us to become the hospital most preferred by patients and physicians in communities in a manner that eventually will earn their loyalty to our hospital and lead to stronger patient volume and market share.

To achieve that vision we launched a seven part strategy; first stabilize our operations; second build a foundation for more sustainable performance; third enhance our operational discipline in revenues and managing our resources; fourth rationalize our portfolio of assets; fifth gradually de-leverage our balance sheet; sixth take the necessary steps to become the industry leader I quality and satisfaction; and seventh, resulting from the sixth item, seize and defend market share.

As we said at the beginning of the year, we expect to make reportable progress during the first year in six of the seven parts of that strategy, the exception being market share, which we said would take a bit longer to impact the increase, probably beginning within one to two years, maybe sooner, and driven by the improvements we would make to quality and patient satisfaction.

Our timeline for this is based on historical precedent, including our own personal experiences and the documented experience of others in the industry who have had similar opportunities. In the first six months since launching the new direction, we’ve achieved real improvement in all six of those areas we had hoped to improve and we have begun to position ourselves to improve the market share.

Both Bob and Kelly will have specifics on these in a few moments, but I would like to address one right now myself and that’s the progress we have made toward quality and satisfaction leadership.

Bottom line our hospitals have improved patient satisfaction and quality scores sizably in every category, in some cases moving up two core tiles nationally, relative to other hospitals. The improvements are measurable and they’re sustainable. They are the direct result of a proven system of capable leaders new and old, a new incentive system that emphasizes rewards and pays our operations leaders for success in these areas and relentless focus. Most importantly for our investors, we expect these improvements in quality and satisfaction to influence physician and patient preferences for our hospitals and that will in turn build volumes and market share within one to two years, maybe sooner.

It is important to note here that we had a long way to go with the number of our hospitals when we started this. While all of them provided great care on an absolute basis, a number of them began the year with a legacy of satisfaction levels and quality levels that were below their local competitors. Moreover, as some of these relative ratings have now become available publicly and reported with about a one-year time lag, our lower scores from the legacy period, from a year ago, before we were able to launch the company’s new direction are the ones that are now in the public. This legacy we believe, as I mentioned earlier, has been one of the causes of our short-term volume declines, but we’re tracking our own scores on a real-time basis, not on a year lag basis now. We’re confident that our scores reported a year from now will be better and we are also tracking and holding our people accountable for the underlying indicators.

We will need to make adjustments along the way, just was we are doing now, in response to some of these volume issues this quarter, but we are moving in the right direction. As we said when we began, our progress will not be linear it will be an upwardly moving sign way that HMA remains poised to achieve its vision, make us more of a preferred provider among physicians and patients and build volumes and market share. When you combine that with the potential that we have in our managerial and cost discipline, already proven, the managed care improvements, a heightened level that our leaders in the hospitals have in the way of enthusiasm, the numerous partnerships that we’re entering with highly regarded not for private hospitals, academic medical centers and physicians, when you combine all of that, we get out of this company a tremendous amount of operating leverage when those volumes kick in.

When the volumes kick in on the operating base we have, we have a lot of leverage to move the earnings of the company and we have the opportunity to generate exciting returns for HMA shareholders including all of us sitting around this table.

So, even with the near-term volume declines, I believe we are moving in the right direction with our company for our communities and for our shareholders and I feel good about our future.

Robert Farnham

For the second quarter HMA reported net revenue of $1 billion, 105.3 million; EBITDA of $163.3 million; income from continuing operations of $21.9 million; net income of $12.4 million; diluted EPS from continuing operations of $0.09; and diluted EPS of $0.05. Excluding refinancing costs and gains from the sales of assets, HMA reported diluted EPS from continuing operations of $0.10.

Hospital admissions from continuing operations for the second quarter decreased 3.85 while continuing same hospital adjusted admissions decreased 1.5% compared to the same quarter a year ago. A decline in uninsured admissions contributed approximately 1% of the 3.8% decrease in continuing hospital admissions. Continuing hospital emergency room visits grew 1.6% and surgeries declined 0.8% compared to the same quarter a year ago.

Pricing in the quarter showed a 5.4% increase and continuing hospital net revenue per adjusted admission relative to the same period a year ago, which contributed to a continuing hospital net revenue increase of 3.9%.

The second quarter of 2008 marks the second quarter in which the impact our discount policy, which was instituted in February of 2007 was included in both comparable quarters for the entire quarter. Our EBITDA from continuing operations for the second quarter was $183.5 million and a corresponding hospital EBITDA margin from continuing operations was 16.6%

Uninsured patient volumes and bad debt expense continue to be an industry issue affecting operating returns and despite a turbulent economy and recession our uninsured patient volumes declined for the second quarter in a row compared to the same period a year ago.

Continuing hospital uninsured admissions for the second quarter totaled approximately 6.8% of total admissions which is down 75 basis points from the same quarter a year ago. There are three components that comprise how HMA accounts for uninsured and underinsured patients. Bad debt expense, uninsured discounts and charity and indigent write offs. Bad debt expense for the second quarter was $124.8 million or 11.3% of net revenue compared to $142.7 million or 13.4% of net revenue the same period a year ago.

The provision for doubtful accounts for the second quarter ended June 30, 2007 included $39 million of additional reserve to deflect a decline in the collect ability of accounts receivable from uninsured patients. Recall that bad debt expense for the first quarter ended March 31. 2008 was 11.2% of net revenue. Since February of 2007 HMA has given a 60% discount to uninsured patients for non-elective services.

Uninsured discounts for the second quarter were $149.7 million compared to $147.7 million for the same quarter a year ago. HMA’s charity and indigent care write offs for the second quarter were $20.3 million compared to $18.3 million for the same period a year ago. To accurately compare how HMA accounts for the uninsured it is necessary to review all three components together. Therefore the sum of bad debt expense, uninsured discounts and charity and indigent write offs as a percent of the sum of net revenue, uninsured discounts and charity and indigent write offs was 23.1% for the second quarter compared to 25.1% for the same quarter a year ago.

We are convinced that our continuing efforts in the emergency room are having a positive effect on our uninsured volumes. By offering the discount clearly explaining payment responsibilities and then triaging for truly emergent care, we have increased the awareness of our expectations.

Moving over to the balance sheet and cash flow statements, total assets are more than $4.8 billion. The balance in accounts receivable net as of June 30, 2008 was $624.1 million and the balance for doubtful accounts was $463.9 million. Year-to-date cash flows from continuing operation activities was 4286.2 million after cash, interest, and cash tax payments aggregating $83.4 million.

For the quarter cash flow from continuing operating activities was $141.1 million, after cash, interest and cash tax payments aggregating $63.7 million. Lastly days sales outstanding or DSOs as of June 30, 2008 were 50 days, two days less than as of June 30, 2007 and one day less sequentially from March 31, 2008.

During the second quarter HMA completed a private placement of $210 million of 3.75% senior subordinated convertible notes due at 2028. The notes are convertible into cash and in select circumstances shares of the companies common stock or a combination there of calculated on a proportionate basis over a 20-day trading period observation at a base conversion rate of 85.0340 shares per 1,000 principle amount of notes, which is equal to a base conversion price of approximately $11.76 per share subject to adjustment upon the occurrence of certain events. HMA utilized the net proceeds from the offering together with additional cash on hand to repurchase, in the open market, approximately 292 million of HMA’s 4 3/8% convertible senior subordinated notes due 2023, leaving $282.7 million of the 4 3/8 convertible subordinated notes outstanding as of June 30, 2008.

On August 1 of 2008 holders of the 4 3/8 convertible notes exercised their put right and HMA repurchased $282.5 million or 99% of the outstanding convertible notes; so we are de-levering the balance sheet. Principle payments on debt through June 30 for the cash flow statement were $438 million, after deducting $244 million representing the net proceeds of the $250 million convertible debt issued in May to partially refinance the $575 million of outstanding converts, we had paid down a net $194 million of debt through June 30 with the retirement of $282.5 million of the remaining 4 3/8 convert on August 1, we have paid down as of today a net $476 million of debt.

To review the second quarter results, net revenue per adjusted admission from continuing operations increased 5.4% contributing to a net revenue increase of 3.9%. EBITDA margins from continuing operations were 16.6%. Bad debt expense was 11.3% of net revenue. Year-to-date cash flow from operations was $286 million or $370 million after adding back $83 million in cash, interest, and taxes paid. For the second time in many quarters, same hospital uninsured admissions declined to 6.8% of total admits.

Lastly after the end of the second quarter we repurchased $282.5 million of the 4 3/8 convertible notes due 2023 as a result of the exercising put right on August 1 of 2008.

Kelly Curry

We continue to have good results here at midyear given our managerial and cost discipline. In the quarter the company experienced an approximate 80 basis point decline in continuing operations from no pay admissions over the quarter, resulting in a bad debt expense of 11.3% for the quarter, basically flat to the first quarter and 210 basis points lower than the seam quarter a year ago which included our $39 million increased reserve.

On a year-to-date basis bad debt expense as a percentage of net revenue was 11.2% versus 12% reflecting a reduction in no-pay admissions and an improvement in collections for both our ER and direct admit volumes. During the quarter our admissions declined another approximately 3% after giving effect to the reduction in no pay business. Our analysis indicates that our tighter collection policies also negatively affected patients with insurance who were not intending to pay their personal amounts due under the policies.

As a result we are now fine-tuning our collection efforts to address this issue proactively to continue to appropriately manage both our paying and no-pay business. In addition the transition of our North Carolina and South Carolina hospitals in implementing our previously announced joint venture with Novant Health, including the integration of our 110 physicians resulted in an approximately 1% drop of our overall 3.8% decline in our admissions for the quarter.

As this process is now nearly complete, we expect our admissions in these markets to stabilize over the balance of the fiscal year. Finally, we believe the balance of the decline is attributable to economic factors in our markets. Our reviews indicate that people, especially in our more rural markets, are avoiding or postponing trips to the doctor due to fuel costs, general economic conditions, higher deductibles and co-pays and to avoid using company health benefits in a time of workforce reductions.

The company continues to make significant improvement in its documentation which is reflected in its increased case mix index from 1.32 to 1.35 for the quarter. This matches the increase we saw in the first quarter and this quarter’s index actually exceeds the first quarter’s case mix index of 1.34.

HMA’s program to improve our medical record completion and coding called Document Our Excellence continues to develop improved documentation leading to more accurate coding. We continue to emphasize with our leadership teams the importance of attracting direct admissions to the hospital which generally results in an overall better payer mix. We seek to provide a concierge type service offering improved customer service for both the patient and the physicians, making the admission process as seamless as possible for all involved. This service is already beginning to attract our better paying sources for its ease of use.

The company continues to implement its program to improve and promote quality outcomes and customer satisfaction called Process for Perfection and we are seeing internal improvements that will be reported publicly in the future. Ultimately we expect that even in difficult economic times our improvement in quality will help differentiate HMA hospitals to attract patients and new physicians.

We continue to work very hard on satisfactions as another important volume builder. Overall, we have seen an increase in every category as compared to the prior year and importantly we are moving up appreciably in the percentile category as compared to the national database maintained by our vendor. In fact it is a greater improvement than they have seen in other large organizations in the past. Continuous educational programs are in place to develop the customer-focused attitudes of all our hospital employees.

We have renegotiated 125 of our managed care contracts and added 60 new contracts. The increases in the rates on the renegotiated contracts continue to range from 7 to 8%. We are now 75% of the way to our goal for 2008.

The Novant relationship continues on track with our initial integration complete at this time and with progress continuing in the development of our partnership. The initial challenges integrating our position in North Carolina and South Carolina to the transition to Novant have been overcome by both HMA and Novant and we believe historical hospital referral patterns will return by year-end. In addition, we are in talks with other non-profit groups that have indicated an interest in a similar relationship with HMA as a result of this unique partnership with Novant. We would expect that we will have similar opportunities for partnership in the future.

The company has continued to develop our program to recruit, develop, and retain physicians called HMA Physician Security Plus program and we will be on track with the total process by the end of this fiscal year. Physician recruitment continues to be a challenge and we have recently made organizational changes adding specific personnel and additional resources to better manage this process. This will be a high priority for the remainder of 2008 as we build our medical stats for 2009. We are ahead of last years recruitment pace, but we are not where we want to be.

The company continues to focus on its turn around initiatives and we are confident of the ultimate success of these measures even in the face of the significant economic headwinds we feel. We believe that we are uniquely poised for success given our progress in expense control, bad debt management, managed care negotiations, and the resolution of our convertible bonds put. We believe achieving our initiatives in satisfaction and quality will ultimately drive increased patient volumes and returns. We have said that this is a turn around and the improvement in our operations will be upwardly moving and slow but not linear.

Finally we have definitely seen a momentum shift in our markets with very positive comments from our customers. This shift is easily identifiable in our hospitals through much improved relationships with our customers, physicians, and patients. In addition, we continue to invest significant capital and this increased activity has been very well received. In the past our customers have been looking to see if we were going to deliver on our words for increased investment, significantly improved satisfactions and the level of commitment we had to achieve our, as we call it, big hairy audacious goal of being the number one quality provider in the next two years. Their recent comments to us now show they are seeing the proof.

We are positioning ourselves to benefit significantly from the ultimate improvement of the economic climate and to successfully negotiate the existing challenges.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Bonello with Wachovia.

William Bonello - Wachovia Securities

On the Novant thing, first of all just to make sure I caught the number right, did you say that that had a 1% impact on the volume?

Robert Farnham

I did.

William Bonello - Wachovia Securities

I’m just still not necessarily understanding the issue. I mean I know that who is employing the physician changed. I’m not quite sure how that disrupted the referrals to your hospitals.

Robert Farnham

Number one is, is that any time you make a transition there is always going to be issues and we anticipated that there would be some issues. There were 110 physicians involved. We did get around to them. I personally visited with a significant percentage of those, talking directly about this. During the process just to say that probably the biggest single factor was is that it represented change, Bill, just change and because we were unable to comment to them before this transaction took place regarding what was coming, that made it just a little bit tougher.

So we had anticipated an impact from this and frankly it was a little greater than what we expected, but I can tell you that from our conversations with the physicians, with the excellent work that the Novant team has done in their part of this transaction, we are overcoming that and at this stage I am fully confident that we’re going to integrate, we’re going to return to our normal patterns.

It is really no more than it was change and it wasn’t pre-announced and there really wasn’t a lot of time for them to adjust to the idea of change.

William Bonello - Wachovia Securities

Just so I understand, during the quarter then they were referring essentially their patients and cases somewhere else?

Robert Farnham

That’s right.

William Bonello - Wachovia Securities

That makes sense and then the second question relates to the item about chasing away the paying patients. Again, I’m just wondering if you can elaborate a little bit more on what happened. Was it that you were sort of awfully aggressive in asking for payment information up front and what not, I guess I’m just not connecting the dots.

Kelly Curry

Yes and let me say that first and foremost is that this was an area where by necessity we are having to conclude this based on anecdotal evidence as to what the quantify the number. So we’re not really sure what the number is of that, but we do know that people that were on intending on paying their deductibles and co-pays had reluctance to come into our facilities because as I have said when we started this process, the grapevine works both ways. Now what we’ve done is we’ve addressed that specifically in the methodology that we go about, the scripting that we use with those who are perhaps underinsured or not insured or not intending to pay their deductibles and co-payments.

One of the things that is happening right now that we’re seeing is that to avoid increasing health care costs to the employees as much, companies are shifting to HSAs to offer them the opportunity of paying out their deductible and co-payments with pre-tax dollars; however for people that are using their health care in that regard, they’ve got to pay those dollars out a whole lot faster than they were paying out at 20% over 12 months in many cases, as quick as 90 days. We have seen an impact in that particular group, so we’re addressing that.

Burke Whitman

Just to add a couple of things to that, we identified the opportunity and identified and defined targets for making the improvements in the collections relative to the non-payers. We created a number of processes, including as Kelly said, scripts for people to use for doing it. We also had some incentives in place and all those things we are modifying a bit now to get them to do what we want to do on the good side, but without having the negative impact.

William Bonello - Wachovia Securities

How do you know that this is an issue? I mean are you doing some kind of local market surveying of patients or something?

Kelly Curry

Yes and a lot of our hospitals are smaller and there are people in the community and we can ask that question about what they’re hearing etc… but also I’ve got to tell you Bill, at the beginning of the year we said that we expected our admissions to increase from flat to up about ½%. I have to tell you, we have been way more successful than we originally imagined that we would be with this program and as a result, I mean if we had known how successful we were going to be, we would have said that our admissions were going to be down about a point on the year.

Operator

Your next question comes from Gary Lieberman of Stanford Group.

Gary Lieberman - Stanford Group

I just wanted to follow up and make sure I understood the scaring away of the commercial ensures. So was it that if someone came into the hospital and was registering and wasn’t able to pay the co-pay or deductible you turned away the business or was is just that people never came to the hospital in the first place because they heard through the grapevine that you were going to come after them for the co-pay or the deductible?

Kelly Curry

Both and these are non-emergent of course.

Gary Lieberman - Stanford Group

Right so from a hospital perspective you told the admissions staff to still let the patient go through with the procedure or collect the co-pay up front, can you verify that you actually changed that?

Kelly Curry

Yes and how we discovered, I mean one of the things that I did is I went around and asked our outpatient registration people what they thought. That’s how we’ve gotten the information. It is anecdotal for those who didn’t come to the facility, but we do know that it’s taking place.

Gary Lieberman - Stanford Group

Was it widespread or was it just at a select number of facilities?

Kelly Curry

No it was something that showed up, I’ve been all across the [Audio gap 49.4 to 1:39.8] implicitly tell them how to deal with this particular issue with sale we say a little different approach. We gave them scriptings for dealing with different classes of patients; however and frankly the group that we’re talking about here, they are the ones that would be most closely associated with people that don’t have insurance as well.

Gary Lieberman - Stanford Group

It seems like over the past few years, not just for HMA but for the industry as a whole is that it’s been unanticipated issue after unanticipated issue and here it seems like this is another one. What can you do better to try and anticipate some of these things, the law of unanticipated consequences of changing stuff around so that you don’t run into maybe a similar issue in the future?

Kelly Curry

I will tell you what I think is really impacting and that is is that people at the consumer level with their health insurance are a lot more aware of this issue than they have been in the past. This is a really dynamic area. For instance, in the past during times when you moved into a recession period you would expect that people would take advantage of their health care benefits because of the fact that they had them available and were uncertain about their jobs, where as now we are getting completely the opposite.

What we are learning from this and how we are applying it is as we move to HSAs which put a greater fiscal demand on people; in other words they re having to pay out in three months what they would have ordinarily paid out in 12 and they’re going to have to pay a little more money for their coverage, as well, over the course of a year. Consequently, we need to work with them as they come in with these programs putting their minds at ease about how we’re going to deal with that.

As you understand, we have to make a collection effort on them. It’s not like the old days where we could just write them off

Burke Whitman

Gary one other aspect of this is that we are deliberately shaking things up a bit. We used the term turn around, that’s what we said at the beginning of the year, that’s what we said in our annual report, and Kelly just used it again now. We are changing a number of things we knew would have some second order effects, but it is par, particularly when you’re making some changes, we are convinced we’re moving in the right direction. The changes we’re making make sense.

The program that we implemented here still makes sense, what we need to do is just make mid course adjustments to all these things as we go to make sure that we’re getting the maximum net good out of them.

We just last week held a company wide operational leaders meeting with all of our hospital CEOs and others last week and addressed some of these mid course correction needs and this was one of them and I think we will implement this well now over the next few months.

Operator

Your next question comes from Jason Gurda with Leerink Swann.

Jason Gurda - Leerink Swann & Company

Looking at the volume issues I guess both the two issues that you talked about in some detail here, which I certainly appreciate, the North Carolina issue and also the collections. Do you think that the worst of it was seen in the second quarter and that there are some things that can actually be done in the third quarter so that it’s less of a negative impact?

Kelly Curry

Well as we said, we expect this over the balance of the year. This is one of the reason why we’ve given the range as off 1 to 3% on the year. There are some definite things that we’re doing that we know will have a positive impact and that we will expect to see, in fact even are experiencing; however the economy is a wild card that we cannot quantify. With that we feel that we have captured the impact of that with our guidance.

Robert Farnham

The things we hope to improve it will be, in some cases, gradual over the course of the year, but we should be able to improve them.

Jason Gurda - Leerink Swann & Company

Overall do you think that it’s more weighted towards the end of the year, rather than things that you can do right away or is it gradual?

Kelly Curry

Not necessarily, no.

Jason Gurda - Leerink Swann & Company

CapEx is coming in well below your original guidance. Is there a chance that it stays that way or what’s the plan?

Robert Farnham

We are $93.5 million year-to-date which is about $46 million for each of the first and second quarters. We still think we’re going to come in close to 6%, yes that would suggest we’re probably going to spend in the $65 to $70 million the last half of the year in each quarter. We have a couple of larger projects in Mississippi, Tennessee, an Florida that we’ll spend some more money on the last half of the year versus the first half.

Jason Gurda - Leerink Swann & Company

I just want to make sure I got my numbers right on some of the self-pay admission data you had given earlier. I think you said it was 6.8% of total admissions?

Kelly Curry

Yes.

Jason Gurda - Leerink Swann & Company

And that was down 75 basis points?

Kelly Curry

Yes it was about 7.5% the second quarter last year.

Operator

Your next question comes from Adam Feinstein with Lehman Brothers.

Adam Feinstein - Lehman Brothers

It was helpful that you quantified the Novant transaction about 1% impact on volumes, but as we think about all of the other items, was there anything else that had a disproportionate impact? You highlighted seven things in total, so it sounds like just a small impact from a lot of different things, but I just wanted to make sure I was following your comments Burke.

Burke Whitman

Some of it we can quantify. As Kelly mentioned, some of the things are hard to quantify and particularly those such as the patients we may have chased away. The challenge we have of course is that we can’t collect data on people who don’t show up at our hospital. I mean share company’s may have that data on that patient, but we don’t so it does become largely anecdotal, but if you take the no-pay, those we chased away, the ER management opportunities, the physician recruiting Kelly and I both talked about, the North Carolina/South Carolina piece which was a good 1% point of the 3.8% and some impact from these initial reports on satisfaction prior to our getting to improve those, which we are now doing fairly dramatically; all of that appears to us to account for more than half of the decline. The remainder, as we said, appears to be the economy, particularly in some of our markets.

If we are right and we do what we expect we will do, we will improve on the non-economic factors third and fourth quarter. We’re certainly taking action on them and we believe that these will mostly be correctable over the reminder of this year, but nonetheless as we said in our release, down 1 to 3% on the year seems about right. It was down 3.8% for the second quarter so we’re suggesting the year overall will be a little better than the second quarter.

Adam Feinstein - Lehman Brothers

On the physician recruiting issue, I know you touched on that earlier but I just wanted to get you to elaborate there. I know that’s been a key area of focus, Burke, when you came in and just so, what’s going on there and at the same time in terms of employing doctors, I know that’s something that you guys were talking about earlier and other companies have been talking more about that. I’m just curious in terms of as you think about that process, what exactly is going on?

Kelly Curry

Well in response to that, number one is that we are ahead of our prior year; however I’ve got to tell you that compared to anybody in the industry, we employ less doctors. We have been able to continue to attract physicians to our company without employing them, but we’ve come to the conclusion that we’re going to have to change our approach in order to reflect that more robustly in our process. We have actually done that, we have made that adjustment.

In addition, we’ve boosted our personnel and centralized our process even more for this and at the same time we’ve increased our divisional compliment to include a specific recruitment person and we have renegotiated and enhanced the amount that we are willing to pay for physicians that are located including some bonuses related to that, in order to further build our momentum in this area.

We are better than we were last year, we have made progress, we did that without really employment, we’re now going to expand that approach and enhance our employment options and we’ve boosted our managerial talent.

Adam Feinstein - Lehman Brothers

On the collections, I’m curious if you have any sort of numbers that you can share with us I terms of what you’re collecting from a pure uninsured patient these days and how that compares to a year or two as we think about the progress there and it sounds like you’ve been making progress. I’m just curious in terms of as you think about any sort of metrics that you’re tracking there.

Kelly Curry

We haven’t actually reported those in the past, but I can tell you this; we are collecting more as we mentioned, in the past we look at our chief metric is to collect better than our net revenue. We are north of 101% on collections of our net revenue, pretty good. We do know that our efforts are producing results in both outpatient and in our ERs in particular, in collecting from no-pays. We know we’re getting results.

One of the things that is kind of an interesting anecdote here is that were finding that people who are no-pays are willing to pay something. We are continuing to fine-tune our approaches as to what is appropriate in situations like that; so, we’ve got an opportunity really to continue to improve those numbers.

Operator

Your next question comes from Tom Gallucci from Merrill Lynch.

Tom Gallucci - Merrill Lynch & Co.

Actually just following up on that last point and the points that you were making earlier about scaring away some of the patient who didn’t want to pay that much, as you attract them back and you re-script and do the other things that you talked about, should we then expect a commensurate bump up in bad debt potentially?

Kelly Curry

No we don’t think so, but we’re trying to be very, very careful in how we do that to not create that situation; however, we have said at the same time that we do expect that if the economy goes south we will see some change in those numbers because there will be more people out there without insurance.

In terms of holding all things constant, no I think we’ll be able to continue on track where we are. Part of the reason that I can say that is that our practices in the past had been encouraging people to drive past other hospitals to come to us and I don’t view that as really being our responsibility; in fact as a company we have always met our responsibilities.

We have operated a hospital in Williamson, West Virginia, which is where LBJ kicked off the war against poverty and we built a brand new hospital there knowing what our amount of no-pay business would be; however we didn’t agree to take on anybody else’s and so we wanted to make sure we were sending back to them that which we were getting. I think we have achieved that and that’s why we have posted such significant down numbers in respect to no-pay business and I think we can keep that up, yes.

Tom Gallucci - Merrill Lynch & Co.

Then turning to physician recruiting, are there certain types of specialists that are more difficult to attract or is it sort of across the board that the business is getting more competitive from a recruitment standpoint?

Kelly Curry

Actually in the area of hospitalists, which is an area that we are expanding, there are up sides and down sides to the hospitalists from the perspective of your facility and patients. I won’t go into those here unless somebody wants to know more about that.

he advantage of having hospitalists is that A, it really helps you manage your coding efforts, because they are more intuned to those issues than physicians that are trying to run an office practice and see people in the hospital. Also they are move available for us to continue to make training available to them. That has created a great interest in our company for hospitalists.

You are probably aware that that’s the most sought after specialty in the country right now, which is creating challenges for us as the advantages that I’ve just described are apparent to those who pay taxes and those who don’t pay taxes as well.

Tom Gallucci - Merrill Lynch & Co.

The Novant situation, you are pretty confident that that was sort of short-term disruption. Did you mention if you’ve actually seen that specific problem start to turn already at this point or are you just sort of think it will in the next few months?

Burke Whitman

We believe that it will. We have now gotten the great majority of the physicians have now transitioned their employment. They are now in the Novant group and the discussions that we are having with them personally and individually tell us that everybody’s calming down and getting comfortable. There is a spectrum. There are a couple of markets where there was even more disruption than in others, particularly those that were not as familiar with Novant and really did not have as much of an understanding out of the box what it really all meant. We really do expect that to settle down and so do our partners and so do the physicians.

Kelly Curry

However, there are Novant physicians, by the same token, that were associated with Novant that were in our markets that were not using us, who have now because of this transition become aware of us and we expect that we will benefit from that as well.

Operator

Your next question comes from Sheryl Skolnick from CRT Capital.

Sheryl Skolnick - CRT Capital

I think in the second quarter conference season you had made mention of additional asset sales. Did I miss it or was that not discussed in your comments and if it wasn’t can you give us an update on that?

Burke Whitman

We did talk about it. We have not made any further announcements. We had said at the time that we had a small number easily countable on one hand that could go anywhere from gross proceeds of zero to $200 million, maybe even a little more. There are still some potential things. We had a couple of transactions that came close to happening but really was a pretty simple decision on our part, the evaluation just was not what it needed to be. In at least on case it would have been a de-leveraging event and it would have made the balance sheet happy, but it wasn’t equivalent to what we felt was the value of that asset remaining part of this family.

We are still working on some things of greater significance and higher likelihood are the additional partnership interest sales that we’re working on. We have several that we cannot announce at this point, but that are partnerships with very highly regarded academic and other not for profit organizations that we believe would have a very favorable impact on us and would represent sales of interest in our existing assets so upfront would represent a receipt of proceeds here in a fashion, plus some additional boost to our performance going forward.

We also have in the double digits north of a dozen additional physician joint ventures that we are working on. We have completed several of those in recent quarters. We are working on a number of others, willing to do those when and where the physicians are interested in doing them and so far the ones we have done have succeeded as we expected they would at first of all improving quality performance, measurable quality performance, decreasing the number of bad incidents, but also improving volumes in market share within a very few months or quarters after doing them.

Those we are working on and all those partnerships will result in additional proceeds. We don’t have a number to give you at this point, but we are working hard on those. The outright asset sales are still a possibility and at the right valuation we would potentially do those, but we don’t feel that we need to at this point unless the valuation makes sense.

Kelly Curry

We’re not going to sell anything that doesn’t bring a price that we think is appropriate and frankly it wasn’t the pricing that was the issue in terms of people’s ability to complete the deal, it was their ability to get money.

Sheryl Skolnick - CRT Capital

I was wondering if the financing environment had a role so play in this, yes.

Burke Whitman

In two cases, yes.

Sheryl Skolnick - CRT Capital

Okay and then I guess as we look at the, Kelly you were very clear on the last conference call as were other members of management about the potential impact of the economy and a deep dark recession would negatively impact your outlook; so I think you’re square on that. We were fairly warned.

Now as you look at the guidance and in particular the decrease in volume is it still a deep dark recession as being sort of a nasty recession in your markets that would bring that guidance down more or do you think that it’s still a modest to significantly negative recession that could bring that guidance down more?

Kelly Curry

Based on what we’re seeing right now I would say no. I feel like we’ve kind of quantified. I think you’re seeing the, you know bernakies [ph] comments today what are expected. I’m sure you’ve seen the housing data. You know houses are selling, again they found a place where pricing has found buyers. I think that there is some liquidity coming back into the credit markets, so given that I feel like we’ve captured it and as I said earlier, had we known we were going to be as successful as we were, we would have expected to be down probably a full percentage point anyway on admissions.

Sheryl Skolnick - CRT Capital

As successful as you were on eliminating the admissions for which you don’t get paid and that are best treated elsewhere?

Kelly Curry

That’s correct and I can tell you that on a year-to-date basis we have saved a ton of money. It’s reflected in our margins, you can see that.

Sheryl Skolnick - CRT Capital

You mentioned something about changing the way you position the collection for the self-pay portion or the upfront payment. Can you go into any more detail about that, are you still outsourcing it , are you still sort of being pretty strict shall we say?

Kelly Curry

Oh no we’re being just as strict. What we changed was, it’s not that we changed our program; we changed the emphasis to provide more differentiation between different classes of patients. What we did was we provided scripting that we thought addressed that , but we found that we needed to enhance it further.

Sheryl Skolnick - CRT Capital

Okay then one question for Bob Farnham. In the debt reduction that you’ve done did the balance on the term loan change at all?

Robert Farnham

Yes it did. In total I said we’ve paid down about, including the convert about $475 million. That breakdown, there is $325 that we’ve paid off on the old convert and there is about $133 million that we’ve paid down on term B, the balances in just other miscellaneous of about $20 million.

Operator

Your next question comes from Ralph Giacobbe from Credit Suisse.

Ralph Giacobbe - Credit Suisse

Can you talk about how much you think the significant turn over in your hospital’s COO and COOB may be impacting the business?

Kelly Curry

We are really through the curve on that and as Burke mentioned, last week we had our hospital key management conference and I want to tell you that there is a definite shift I the momentum of this company. We have people that are excited, they’ve got a vision; the vision is that we are going to be the number one quality provider of health care I this country.

That is something that they can take to their communities, that is something that they felt that they can personally grab a hold of that they can personally take part in and do what we really do, which is make investments in communities to improve the quality of life for people that live there and taking that seriously.

I think that in addition there is a shift in the attitude of our physicians and in our employees in this regard, because they are seeing from Burke and I on our visits to the facilities and on our webinars etc… that we are being consistent on this and we are requiring and we are taking action to assure that we are moving forward in these areas of quality measures and satisfactions for the changes in the never events, we’re on top of those we’re ready for them coming down the pike.

We have got a system that is efficient. In fact in our conversations with, where we are in a situation where we can share our actually quality data, people are quite impressed with what we’re achieving, so all of those factors have really shifted in this company since January.

Burke Whitman

On this front it is exactly what we hoped, is that we would get real fraction in the underlying drivers to performance; we’ve gotten it. In fact in several of these cases we’ve gotten more than what we hoped we would get these first six months. It doesn’t show up in the financial results completely yet, but absolutely I believe that it will.

Ralph Giacobbe - Credit Suisse

Okay and then just sort of jump into I guess the leverage of the business and your comfort level and the ability to sustain margins at this level in the face of volume pressures, can you talk about that, obviously there is the benefit on the bad debt side, but just in terms of some of the other cost line items and again without the volume coming through the sustainability of the margin.

Burke Whitman

Before Bob addresses it quantitatively the updated earnings and volume guidance that we have given you would leave us, through the end of this year and into next year, comfortably within the range of all of our financing covenants, so we don’t have any fundamental issue there. If we had a really striking fall off in the economy we might have to start doing something different, but we’re not even close to that.

We’re comfortable we still have a cushion or margin of error if we have a shoe drop that’s unexpected.

Robert Farnham

Our debt to EBITDA leverage here at the end of June was about 5.74. That does not include the reduction on the convert that we paid down on August 1, so I would expect that probably at the end of September we’ll be at 5.3 or there about.

I think ultimately Burke, Kelly and I would like us to be a good another turn lower than that and that’s where we’d like to go long-term.

Burke Whitman

The only reason we’re not doing that more quickly is we do have value added capital projects, as Kelly discussed, that we want to follow through on, that we believe will add value.

Ralph Giacobbe - Credit Suisse

On the pricing side I think you mentioned 7 to 8% rate increases. Those are multi-year contracts I’m assuming and the 7, 8% is the sort of first year kicker and then the second and third year are more CPI adjustments, is that right? I’m just trying to get a normalized annual increase over the term of the contracts.

Kelly Curry

That’s correct. Not necessarily that they’re normalized in the next couple of years, in some cases, but that they would be greater than that, but at least normalized.

Ralph Giacobbe - Credit Suisse

Okay so something less than 7, 8% though if we think of it on a two or three year term?

Kelly Curry

Correct.

Operator

Your final question comes from John Ransom - Raymond James

John Ransom - Raymond James

Burke I wanted to ask you about your quality data. When you were measuring your quality, what is your primary source for that information, is it the Medicare data?

Burke Whitman

It’s a number of things. It certainly includes the Medicare data that gets reported, but we’re also tracking a number of underlying items to come up with our own composite scores. We have actually created what I really believe is the most robust system in the industry that I know of and our partners are impressed with it. It is proving to be a very useful tool. It is very detailed. It lets everybody drill down to address the specific issues.

What we are finding is when all those elements then roll up into a composite score and we kind of rank those green, yellow, and red so that even non-physicians can understand them and spot very quickly where the opportunities and issues are. We are tracking lots of details, things like

AMI and CHF, a lot of deals roll up into an overall performance and we are paying our people on the basis of their ability, all of our operational leaders, on their success at driving that forward.

Some of this certainly does include the core measures and as those continue to grow in the reportable pieces, the real key is to also track the things that are underlying those and really driving those to create the cultural change, which we really believe we’ve made significant headway in and as Kelly said there is a lot of excitements about it.

We are also tracking the down side of things. The never events, there were eight and now ten of those, of things we can’t bet paid for. We are really on this. There is a point which it would make sense probably for us to layout a little bit of this for you all in the investment community. We have felt that this is not quite that time, but it’s impressive.

We know the results you want to see are going to come from this. We will be the industry leader in this. We are on track to get there in the time frame we’ve talked about and every situation that we’ve ever seen in academic studies, published books, personal experiences and even those of us sitting here, these kinds of improvements when you’re starting where we started from and getting to where we’ve already gotten much less going even further, which is what we believe we’re going to do, it will result in volume and market share improvement because of increased preferences among the physicians. Patients, it typically unfortunately just takes somewhere in the 9 month to 1 ½ year kind of range to really start seeing that.

John Ransom - Raymond James

Is there nothing we can look at externally other than the Medicare data? I guess there is the health grades, but.

Kelly Curry

No nothing. You can look at health grades, but no there is not and that’s a little bit the frustrating part of it is the time lag for us. But, to put a little flesh on it for you John, we have implemented a complete internal control system monitoring four major areas in the company that come under nursing score cards, core measures, JCAHO and patient safety goals. We track them in every single hospital and by each one of those groups.

It is orange, yellow, red and green are the quadrants and we look at each hospital on a continual basis in each one of those quadrants and I can tell you that it is very, very sophisticated. I can tell you at the end of every month exactly where we stand and so we’re way ahead of the goal We also know that when we look at the data with the expected increases that are coming along, how we are going to stack up; so we are looking forward to October and after October results.

Burke Whitman

And along with the quality we are tracking the satisfactions, the patient loyalty an those two on all fronts, every category has moved up meaningfully in some cases the scores, on a percentile basis, have a percentile basis relative to our competitors our scores have doubled.

John Ransom - Raymond James

As an editorial comment I would urge you to just put four or five things in your earnings report and chart them out so external constituents can track what you’re doing and the more quantitative the better. I guess morale and those sort of things are great, but if you have some stats around hospital based infection rates, and outcomes and some of the key things that you’re doing in cardio and things like that, I mean it would be useful to know if people are buying a Chevy Malibu or buying a Lexus and it’s hard to tell in your industry because of the quality stuff is a little more [interposing]

Robert Farnham

well let me say something here about that, because you’ve hit on a point, a lot of people don’t understand. When the government tells the American public that they’re going to be measuring the quality of hospitals, they hear the difference between a Ford and a Toyota, assuming that you think the perception is that Toyota is a better quality product. However the reality is is that we’re not talking about that at all. What we’re really talking about is how you write stuff down.

For instance, our pneumonia data, when we did our study on pneumonia, our outcome data looked poor. The reason why was because we couldn’t code that data based upon the laboratory results that were the key element in deciding the treatment pattern. You can only code it that way based on people spitting in a cup, frankly. So when we went in and we had everybody that was having chest pain that wasn’t having a heart attack spit in a cup, our numbers came out exactly like they should have, okay, so there is this perception issue out there that we’re dealing with.

Burke Whitman

We will continue to consider reporting some of this. We have considered it and decided not to so far, knowing that eventually the publicly available stuff will come out down the road, but at least the next couple of reports will not reflect any of these improvements that we’re talking about because they’re all old data.

John Ransom - Raymond James

I just can’t understand if it’s improving and it’s a focus of the company, I don’t understand why you would want to sit on that information, but I’ll leave that.

My other question and this is just to challenge you a little bit, it seems like you guys have gotten religion on some of this stuff, but I know the President of the company has been at the company for a while. Is this something that you’ve had frankly maybe a lagging appreciation for? I notice based on at least some of the Medicare data that some of the quality issues have been out there for awhile. Is it just you felt like this was something that, why the other thing now, why weren’t you doing some of this stuff a couple of years ago?

Kelly Curry

First off, as you well know, non-tax paying entities borrow for less. Therefore it’s cheaper for them to finance their working capital that’s tied up in AR. Now w3hat HMA has always been very good at is being efficient at getting that bill out in fact we have a typical closing period that’s three to four days once the patient is discharged as opposed to a non-tax paying entity that will hold those records open for up to two weeks or more. Consequently, when you pour more data into that medical record that gets abstracted out for the quality reporting, it reflects better on those that keep their records open longer than it does on those who did not. Consequently, and the reason in the past was that you weren’t rewarded for doing that, where as now you are.

No I wasn’t here, but frankly, we had not clinical people at this company at a executive level of the company engaged in advising senior management. That was something that when Burke talked to me about coming on board that we both agreed was an imperative. We decided that we wanted only the very best person in the industry. We got that individual. We are going to get our big, hairy, audacious goal. We are going to have these kinds of results and we know we’re tracking on them.

Burke Whitman

Just to add to that in a very frank fashion, there were a number of things that if I were in this role as CEO we would have done earlier and we couldn’t do them. There are 17 new areas of functional support centralized that we’ve got here now with some of the top leaders, I believe, in the industry working it and we are now doing it. So anything from January 1 on we were very clear in announcing that as the beginning of a turn around because from that point forward we got the ability to do the things that we want to do and that’s really the answer and now those things are in place. With little adjustments left and right I think we’ll get there.

Robert Farnham

Thank you everyone, have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Health Management Associates, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts