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LifePoint Hospitals, Inc. (NASDAQ:LPNT)

Q2 2008 Earnings Call

August 8, 2008 10:00 am ET

Executives

William F. Carpenter III - President and Chief Executive Officer

David M. Dill - Executive Vice President and Chief Financial Officer

Analysts

Darren Lehrich - Deutsche Bank

Gary Lieberman - Stanford Group Company

Adam Feinstein - Lehman Brothers

Ralph Giacobbe - Credit Suisse

Shelley Gnall - Goldman Sachs

Tom Gallucci - Merrill Lynch

Kemp Dolliver - Cowen & Company

Frank Morgan - Jefferies & Co

Robert Hawkins - Stifel Nicolaus & Company

John Ransom - Raymond James & Associates

[Witt Mayo] - Robert W. Baird & Co., Inc.

Operator

Welcome to the LifePoint Hospitals second quarter earnings conference call.

Before I turn the call over to LifePoint, I have been asked by the company to read the following statement: On today’s call LifePoint will be making forward-looking statements based upon managements current expectation. Numerous factors could cause LifePoint’s results to differ from these expectations and LifePoint has outlined these factors in its filing 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.

(Operator Instructions). It is my pleasure to turn the conference over to Bill Carpenter, President and Chief Executive Officer of LifePoint Hospitals.

Bill Carpenter

Welcome everyone to LifePoint Hospitals second quarter 2008 earnings call. By now I expect that you have reviewed our press release that we issued this morning covering our results for the quarter. As I am sure you’ve noticed our press release also contains updated guidance for the year. David will discuss our results and updated guidance in a moment, but before her does I would like to make a few comments.

As I think about the quarter, I am pleased that we are beginning to see real impact, real incremental EBITDA growth from the organic growth strategies that we began implementing shortly after I became CEO. As I have said before, I’m convinced and our leadership teams are convinced that the key driver of our success over the next two to three years will be the heightened execution of our strategic initiatives.

I have spoken before about our deep dive strategy and the organic growth opportunities in high margin service lines that we either identified or confirmed through these intensive and focused reviews of several of our largest hospitals. I said that as a result of these efforts we developed hospital specific plans to drive growth in key profitable product lines. These plans included, among other things, identifying capital projects to enhance capabilities at the hospital level; developing recruiting plans to add specialists needed to offer the identified services; and adding corporate level support to over see these projects.

For our early deep dive hospitals we have now had time to implement these plans and we are seeing significant results: specifically through the second quarter early deep dive hospitals are meeting or exceeding the EBITDA targets that we set for them through the end of 2008. Said another way, early deep dive hospitals have already through the first six months of the year met or exceeded their full year 2008 targets. This gives us a great deal of confidence that as hospital specific plans are fully implemented at other deep dive hospitals, we will also see improved EBITDA growth from them and sustainable EBITDA across the company. Our targeted efforts are yielding fruit and we are very optimistic that this growth is starting to compound within the deep dive hospitals.

As we continue to work our plan I am more confident then ever that we’ll achieve organic growth from existing assets that we’ll strengthen our hospitals and we’ll seize greater market share in our existing communities. As you know, true organic growth requires, among other things, time, up front investments, sometimes completion of construction projects and physicians from recruitment as well as an unwavering focus and determination to achieve results. We’re making, and we will continue to make, investments in capital and people that are intended to drive organic growth and there is no doubt that we are focused and that we remain committed to our growth plan.

As evidenced by our deep diver results, I also believe that greater and more systemic results will come from our other hospitals with time. We are on track.

Now with regard to volume for the quarter, a portion of our volume is explained by a decline in self-pay admissions. The closure of two OB and one rehab unit and a shift, in many instances, in lower acuity and short length of stay admissions from inpatient to the outpatient setting. Much of this is positive. Also, we believe soft economies in our markets probably played a role with respect to volume.

Could our volume results be better? Sure they could. Our short fall on net physician ads during 2007 certainly has created a drag on volumes during the first half of 2008. Still, I’m pleased that we delivered EPS results that generally meet or exceed expectations. We accomplished this by carefully managing the operations of our hospitals. Our strategic initiatives around solid operations contributed to our results. We have improved, for example, our already excellent revenue cycle and supply chain functions. A great deal of hard work in these and other areas is paying off.

For the drivers of volume that we can control or influence, we have taken and will continue to take, proactive steps to improve our processes. For example, as we outlined on our first quarter call we have added dedicated resources to our physician recruitment and retention functions both at the corporate office and in the field. These resources are in place and are working. We have also established higher recruiting and retention targets. Through the first six months of the year we are well ahead of our targets for the year and at the end of the year we fully expect that, consistent with what we said before, we will have recruited approximately 10% of the number o physicians on our medical staffs and that we will have lost approximately 5% of this number for a net increase of 5%. We are on track,

Our recruiting and retention focus will help us achieve results through the remainder of ’08 and in the years to come. We look forward to reporting greater progress against our strategic initiatives in upcoming periods; having said that, I must remind you that our results in this regard, as opposed to our efforts, are not likely to be linear from month to month or quarter to quarter. Over time however, we remain confident that these intentional, focused, and strategic initiatives will enable LifePoint to maximize our performance and results.

Similarly we have seen consistent improvement in core measure scores at our hospitals the quality programs that our chief medical officer, Dr. Lanny Copeland and his experienced team have developed and implemented, together with the medical staffs at our hospitals, are extremely important to us, to our associated physicians and to their patients. We also expect that our improved performance against core measures will provide an objective standard for many of our hospitals, allowing them to compete with larger hospitals in bigger cities and to convince patients who are leaving our communities to stay closer to home for hospital care.

Before I turn to David, I want to make a quick comment about our M&A efforts. We are being disciplined in this regard, but we are also looking to our hospitals to help grow our company. We have seen and are seeing very attractive hospitals and our pipeline of potential deals for the next 12 to 24 months is robust, but again, not withstanding this robust pipeline of opportunities, we will continue to be fiscally responsible. We don’t intend to pay up. We’ve walked away from a number of deals this year and last when others were willing to pay oversized multiples. We will continue to be disciplined, because we are confident in our ability to grow our existing assets.

David Dill

Earlier today we announced our results for the second quarter. I would like to take a few moments to provide some additional details about our results and the trends we experienced during the quarter.

We suggest that you supplement your understanding of our company by reviewing our SEC filings and in addition we plan to file our 10-Q later today.

First our second quarter results:

Revenues for the second quarter were $680.8 million, an increase of 4.1%. Earnings before interest, taxes, depreciation and amortization from continuing operations were $110.7 million or an increase of 7.3%. EBITDA margins for the quarter were 16.3% compared to 15.8% in the year ago period. This translated into fully diluted earnings per share of $0.59 per share, an increase of 37% from the year ago period.

Let’s talk about volume and revenues: in patient admissions decreased by 2.3% for the quarter and adjusted admissions decreased by 1.1%. Self pay admissions, which represent approximately 5.5% of our overall admissions declined by approximately 7%. This is the second consecutive quarter we have seen a decline of approximately 7%. Surgical volumes decreased by 1.2% with inpatient surgeries down 3.9% and outpatient surgeries down 0.2%.

Effective June 1 of 2008 we acquired one surgery center that added about 180 surgeries for the quarter. We experienced a decrease in our ER volume of approximately 2/10 of a percent. Our net revenue per adjusted admission increased 5.2% during the quarter. The increase was driven from pricing across all of our payer classes and an increase of approximately 2.4% in our case mix index.

The effective price increases we are experiencing from Medicare, Medicaid and the commercial business is very consistent between the first and second quarter. Our DSOs at the end of the quarter remained at approximately 41 days, once again, consistent with where we were at the end of the first quarter.

While we are discussing revenue let me give you a quick update on the new IPPS rule that was issued at the end of July. Based upon our initial calculations contained in the rule, we expect our Medicare impatient rates to increase by approximately 3 to 3.5% beginning on October 1. As a reminder approximately 2/3 of our Medicare reimbursement is related to the inpatient business.

Expenses:

Our salary, wages, and benefits, represented 39.9% or our revenue. This is a 60 basis point increase from the same quarter a year ago. Approximately ½ of this increase is attributable to the final year of stock based compensation layering into our results and the other half is a result of both employed physicians and additional investments we have made at the corporate office that Bill has talked so much about. We continue to see improvement sin contract labor with contract labor declining $1.5 million during the quarter and has declined by approximately $2.9 million during the year or an 11% decrease.

Other operating expenses represent 18.5% of our revenue. We continue to see increases, as we have discussed, in professional fees, specifically hospitalist’s, anesthesia, and call pay. Our professional fees increased by approximately 17% during the quarter compared to the same period a year ago. In addition we continue to make investments in physician recruiting. These costs increased by 66% or $2.4 million during the second quarter. We believe these are the right long-term investments to make in order to draw profitable growth in each of our markets.

The provision for doubtful accounts during the quarter represented 11.3% of our revenue. This represents a decline of approximately 50 basis points from the first quarter. As discussed earlier we continue to see favorable trends as it relates to self-pay admissions.

Our overall collection trends remain stable. Importantly, we have seen an improvement in our insurance agings greater than 150 days. These accounts, the insurance aging accounts greater than 150 days are reserved for 100% in accordance with our policy.

The provision for doubtful accounts and charity is a percent of self-pay revenue for the quarter was approximately 84% and our allowance as a percent of self-pay AR was approximately 89% which is consistent with the last few quarters.

Cash flow and balance sheet:

Our cash flow from continuing operations decreased by approximately $10 million compared to the year ago period; however when you exclude the impact of both the timing and payment of interest and tax payments, our cash flow increased approximately $15 million or 12%. During the quarter we spent approximately $42 million in capital expenditures. We remain on track to spend between $`60 and $175 million for the year.

In addition, as we discussed earlier, effective June 1 we purchased a surgery center in Dodge City, Kansas, for approximately $9 million.

We repurchased 900,000 shares of stock during the quarter and to date we have repurchased 5.3 million shares and we have spent approximately $144.9 million of the previously announced $150 million program. As a reminder, our leverage as measured by total debt the last 12 months EBITDA is approximately 3.3 times. The flexibility embedded in our balance sheet gives us tremendous capacity to continue executing our plan.

Finally guidance:

Based upon our results for the first half of the year we are updating our guidance for 2008. Please refer to our press release for each of the components of our guidance; however I would like to draw your attention to three specific areas: EBITDA; EPS; and admission growth. Our range of EBITDA is $460 to $465 million; our range of EPS is $2.55 to $2.70 and admission growth of down 1% to flat. The changes in the financial metrics demonstrate the successful the successful execution of our financial plan during the first half of the year.

As a result of the stability we have experienced in our provision for doubtful accounts, we are adjusting our range for bad debts from 12.5% to 13.5% of our revenue down to 11.5% to 12.5% of our revenue. The result of this is justification for both the tightening of the range of EBITDA and EPS and slightly raising the upper end of the range for the year.

I want to thank the operators both here and national and in each of our 48 communities for all of their hard work.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Darren Lehrich with Deutsche Bank.

Darren Lehrich - Deutsche Bank

My question is about the focused reviews you’ve been doing and I think Bill you mentioned there is a group of early deep dive hospitals where you are seeing some progress. I’m just wondering if you could help us think about those hospitals as a group and maybe just number them and a frame where you are with the other hospitals where you have also done focused reviews and what you would expect to see out of those hospitals over the coming years.

Bill Carpenter

We have conducted focused reviews at seven of our largest hospitals. Those focused reviews have now all been completed and plans are being implemented at those hospitals as we speak. The first couple of those were completed several months ago and we are now fully into the implementation of those; so in those early hospitals we are seeing the results that give me the confidence that I discussed a few minutes ago.

We expect to see the results play out over the next six months or a year as we fully implement these things. Remember, many of these kinds of efforts require capital to be spent. Sometimes that’s involved new construction; sometimes it even involves getting a CO in. It typically involves getting recruitment plans put in place for new doctors that will add a new specialty I that community, so it takes time, but we are seeing traction specifically on these initial projects. So I feel great about that and let me say in addition, we are then rolling out our deep dive process on a little bit less intense basis to our other hospitals.

So far we have completed less intensive, strategic reviews at 25 other smaller hospitals within the system and so we expect to see good results from those initiatives as well. We have conducted a couple of reviews with those hospitals, where they have come to National and presented the plans that they will be implementing and the impact, the EIBTDA impact from those reviews has been very promising to us, so we look forward to talking more about that a little bit more specifically later on.

Darren Lehrich - Deutsche Bank

My follow up is related the change in your bad debt guidance and maybe if you could just frame that alongside the comment that you just made with regard to softer economies in some of your markets. Can you just give us an overall economic barometer that you’re seeing in your communities relative to maybe unemployment trends or any other measure that you track in aggregate?

Bill Carpenter

With respect to overall economies our communities really don’t look any different than the national economy at this point. We do track unemployment in our communities and have been doing that. We see unemployment kicking up in our towns or counties about 1%. That’s kind of what we have seen and that’s not inconsistent with what we see across the country as a whole. But in our specific communities, we also have not seen any plant closures or anything like that that would significantly impact our hospitals.

Our hospital CEOs keep a very close watch on specific employers in our communities and so at this point we are pleased that there seems to be stability there, but we are sure that the economy must be impacting our hospitals as we see it and we see that really coming with respect to some of the more outpatient type procedures. We just believe that that is that case.

Bill Carpenter

Coming into the year our expectations were for bad debt to run at 12.5% to 13% of our revenues; embedded in that assumption was self-pay growing at or even at a quicker rate than the overall admissions. What we have seen throughout the first half of the year, if you combine the first quarter and second quarter together our overall admissions are down 1%.

Overall self-pay admissions are down 7%, so there’s been a decline in self-pay admissions specifically related to the assumptions that we use for bad debt. As we think about the second half of the year, we have through the first six months reported bad debt at 11.5% of revenue.

I do expect bad debt to tick up some from here as the second half of the year develops for a couple of reasons: one, I think there is an impact of a softening economy that we want to be a little cautious with and I hope you hear some caution in my voice with that. Second of all in the second quarter, as I talked about in our prepared comments, there were some older insurance related accounts that our revenue cycle teams, specifically in some of our bigger hospitals, did a nice job of recovering some amounts that were previously reserved for. So there was a couple million dollars of a benefit that we saw during the quarter related to that. So if you just carve that out you’re back up over 11.5% of revenue all by itself. That coupled with a softening economy that we expect to continue, I feel good about the range of 11.5% to 12.5%, but I really don’t see anything out there that lets me think that we could tick above that that would force us to go back to our original guidance of up to 13.5% of revenue.

Overall the trends remain stable, self-pay admission volume is down. I do worry a little bit about the economy as it continues to go, but the range of 11.5% to 12.5% based on everything that we have in front of us should be wide enough to capture that outcome.

Operator

Your next question comes from Gary Lieberman of Stanford Group.

Gary Lieberman - Stanford Group Company

I was wondering if you could talk a little bit more about the volumes and maybe the surgeries in particular and give us some more detail there. Was it in any one or a number of specialties and then with regards to your comments about the addition of physicians, when do you think that your addition of physicians should sort of turn around that trend?

David Dill

Let me start on overall volumes then we’ll talk a little bit about surgeries. In patient surgeries are down pretty consistent with what we saw in the first quarter. I will come back to that here in just a minute.

The 2.3% declines in admissions for the quarter were really made up of primarily three things and Bill talked about those a little bit in his prepared comments. We feel about 30 basis points of the decline in volume, which was a self imposed, was related to the OB closures that we talked about in the fourth quarter. We’ll still have one more quarter before we comp out of that. It made sense for us to close that service line, profitability improved as a result of it, so that’s about 30 basis points.

There is probably another 30 to 40 basis points of volume decline that we saw in the quarter related to self-pay admissions. If you look at a 7% decline across 5.5% of our admissions, you will see that that accounts for 30 to 40 basis points, so those two items represent about 6j0 to 70 basis points of the volume decline and then in addition to that we have seen a shift in low acuity, shorter stay admissions that in some cases you can see them shifting over into the observation visits on the outpatient side; some are a little harder to track so my expectation, my feeling is that we are probably seeing about a 50 to 60 basis point decline in our admission numbers this quarter as a result of that shift. So you add those three things together, roughly half of the overall admission decline that we saw in the quarter was related to that.

That’s kind of overall picture of what we think volumes look like. There is nothing big and unusual in surgery volumes that I could point you to. Out patient surgeries were actually a little bit better than I had originally thought, as the quarter developed. I thought we might even see a little more softness, but we’re down 2/10 of a percent. We did acquire a surgery center effective June 1 that helped us a little bit, 180 those are in our same store numbers. You should expect to see those in our same store numbers here over the course of the year. That helped us maybe 5/10 of a percent, but even with that we were only down a out 7/10% in surgeries which is, once again, a little bit better than what I had originally thought coming into the quarter.

Gary Lieberman - Stanford Group Company

It sounds like you expect self-pay to stay down with the guidance on the bad debt. Can you just frame that for us? Is there something that you’re able to do to sort of lower the self-pay admissions, especially in the face of what you guys see as sort of a weak economic environment?

David Dill

I’m not expecting self-pay to remain this low for the balance of the year. Bad debt as a percent of revenue, 11.5%, our range is 11.5% to 12%, so that assumes it ticks up from here. It also assumes that maybe our collection rates slow down a little bit as well, so we have built into the second half of the year an expectation that bad debt will go up. Now that we have six months of history we are just starting at a lower level than what we thought when we came into the year seven months ago.

Operator

Your next question comes from Adam Feinstein of Lehman Brothers

.

Adam Feinstein - Lehman Brothers

Maybe if you could just talk a little bit more about the markets that earlier in the year you were having some difficulties with. It sounds like things have gotten better, but I’m just curious to the extent if you could provide more detail in terms of what sort of growth those markets showed in out of the quarter, how much impact that may have had on the total volume.

David Dill

If you take those same hospitals that we talked about in the fourth quarter, if you remember the volumes were down about 14%, 15% in the fourth quarter. In the first quarter the volume decline was about 5% or 6%. In the second quarter we did not see much of an improvement in those five or six facilities. Our overall admissions were down a little over 2%, these hospitals were down about 7%. So about the same delta, if you will, between the decline in these five hospitals related to the overall decline in the company existed between the first quarter and the second quarter.

Now within that we saw some hospitals improve and in that we saw some hospitals go backwards a little bit more, but overall the same group of hospitals have about the same variance to the overall relationship to the companies [indiscernible].

Adam Feinstein - Lehman Brothers

Because you called those facilities out a little bit earlier in the year, I just wanted to get a little bit more detail. I guess is it the same issues that you talked about earlier in the year? What is your sense of what is causing some of that weakness and would you anticipate that getting better in the back half of the year?

David Dill

Yes there are a couple hospitals in that group that we have talked about. One is out in Arizona, Lake Havasu; I still firmly believe that that is a direct correlation to the softness in the economy. It is the hospital where we have a physician joint venture. There are no big physician needs that we have, there are always some physician needs that we have in every hospital, but there are no big gaps in coverage there that you could point to. So that one, most if not all of the decline in volume is related to the economy.

The second one we have talked a little bit about is Danville and I will let Bill talk to that one.

Bill Carpenter

Yes with respect to Danville we continue to work hard to make progress there. Danville continues to struggle, but the things that we’re doing there are very positive and will produce results. We’ve signed eight physicians for instance. That’s the key in Danville; we have to get more doctors there. We have significantly seen physician visits pick up to the community. We have continued our CV surgery program with Duke. The new Duke physician joined our staff in March, so we are seeing progress there. All of our officers at the hospital, CEOs, CFOs, CNO positions are filled. All of those people live in Danville. We’re seeing significant reductions in contract labor there, in fact we anticipate getting to zero spend this quarter in contract labor, so things are improving there. The community image is improving. Patient and employee satisfaction is improving. We have spent capital there in productive places so I see positive things in Danville.

Operator

Your next question comes from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

Just going back to the admissions in the guidance, it looks like for the first half of the year admissions were down about 1%. Your guidance is sort of flat to down. I guess we’re just trying to get your comfort level, given kind of the swings in the admission trends the last several quarters, the guidance sort of implies that the admissions would improve in the back half of the year. I’m just trying to get your comfort level and if there’s something that we’re missing as to why we would see that sort of pick up.

David Dill

You’re probably not missing too much; it’s a combination of a couple of things. Bill alluded to the optimism that we had seen and expect to see related to some of the deep dive initiatives that we have in place, so that helps a little bit. A bigger piece of it though is our comps get a little bit easier. If you go through the course of 2008 June was probably so far the easiest comp month that we had. If you remember back to last year June was a tough month for us.

Third quarter comps are not that easy. Fourth quarter comps get a little bit easier where volume is down 4%. A combination of easier comps in the fourth quarter along with the initiatives that Bill talked about and the comping out of the closure of these OB service lines, those three things make us feel that volume will be about where we are on the year-to-date basis so far, with some hope based on all the good work that’s being done and it gets a little bit better.

When we looked at our original guidance above1%, we didn’t think there was enough that was there with the economy the way it is, they could get us back up to that up 1% volume for the overall year.

Ralph Giacobbe - Credit Suisse

Are the deep dive hospitals showing volume growth and then the EBITDA improvement that you talked about, is that just bad debt improvement or are there improvements in other cost line items?

Bill Carpenter

The deep dive hospitals are showing EBITDA growth, certainly. They are showing volume growth in the areas where the focus of the deep dive has been, so to the extent we have added services in the deep dive hospitals, we are seeing improvement there. We are not seeing volume growth in the deep dive hospitals across the basic line of business as much as we are in the new services that we are adding to the communities, but that’s where our focus is there, if that answers your questions.

Ralph Giacobbe - Credit Suisse

Yes on the volumes, but what about on the EBITDA improvement side because you said you saw improvement. Is the improvement largely stemming from just lower bad debt in those specific hospitals or is there something else on the cost line item, because it doesn’t sound like it’s coming from the top line.

Bill Carpenter

Well it’s coming from the top line with respect to the new service lines that we’ve had.

Ralph Giacobbe - Credit Suisse

On the price mix side.

Bill Carpenter

On the price mix side and on the volume side with respect to the service lines that we’ve added. Then don’t forget our strategic initiatives also include operational improvements as well and so those things are contributing at the deep dive hospitals on the EBITDA improvement there too.

Operator

Your next question comes from Matthew Borsch of Goldman Sachs.

Shelley Gnall - Goldman Sachs

This is Shelley Gnall in for Matt Borsch this morning. I was wondering if we could get an update on your internal physician-marketing program. I am wondering if you’ve seen any change yet or if it is too early in relation to your physician referral patterns or out migration trends.

David Dill

It may be a little bit early on that. Our physician resource initiatives, we call it our PRI, is in full swing. We have had over 14,000 visits both structured and unstructured visits with our physicians where we are trying to gain information about what’s important to them and we are being very structured about how we respond to them and keeping the lines of communication wide open with our physicians, so we are seeing improvement there and know that the result of that is also going to be improved relationships with our doctors. So, we feel good about that; it’s on track.

Shelley Gnall- Goldman Sachs

If you have been tracking out migration trends, I’m wondering your views on fuel costs and whether because there was that migration before and patients were driving a significant distance. I’m wondering if the higher fuel costs are actually limiting out migration in your markets now.

David Dill

It’s too early to say on that. I have asked, I’ve looked, I’ve tried to quantify that myself and I think it’s just way too hard to estimate that impact. Anecdotally you’re assumption makes a lot of sense, there’s just nothing empirical I can point you to that says that’s the case.

I was just going to add; on overall physician recruiting we remain on track. As you know coming into the year our plan was to recruit a couple of hundred doctors in, we’re on track with that. Our expectations were that given the retention rate that we have as a company and have had as a company that we would lose about 100 physicians through out the course of the year for a lot of different reasons. We remain on track with that.

Net net physician recruiting just from a number standpoint remains on track. I only want to add that it is getting more expensive. It’s getting more expensive in a couple of ways: the cost of recruiting the doctors into the market is getting a little more expensive and we’re employing more of those doctors. One of the reasons our salary costs are up this quarter was a result of more doctors employed this year than we did this time last year and as we have talked about over the last couple of quarters, expect that trend to continue as we fulfill our initiative and our goals in physician recruitment.

Bill Carpenter

Also as is typically the case, we expect a good number of our physicians to start in the third quarter. That’s the traditional pattern and we don’t see that changing this year. In fact we actually see some of the doctors starting a little earlier perhaps this year, then we’ve had in the past; so by the end of August we expect to have 80% of the doctors who are in that target that David talked about, started. So that’s a good number for us, getting them on board sooner.

Also, just a follow up on part of your earlier question about the PRI, we are also seeing steady improvement in our physician satisfaction scores and so we’re pleased about that and know that that will translate into good results too.

Operator

Your next question comes from Tom Gallucci of Merrill Lynch.

Tom Gallucci - Merrill Lynch

Following up on that last question, one of the things I was going to ask about was employment of doctors to date. Can you quantify at all where you stand in terms of employed docs and how much you are up year-over-year?

David Dill

Yes at this time last year we had employed about 190 doctors, now we’re up to about 215 probably as you get to today, so that’s about a 25 physician increase. It’s pretty steady. Most of it’s happened this year. Very little happened at the back of last year, most of that increase cost 25 over the course of the year which would be a little over 10%, most of that is here over the last six months and you see that really showing up in our salaried wages in benefit numbers through the first half of the year.

We have some more that are coming in the second half as part of the physician recruiting efforts that we have and in our guidance for the second half of the year, we expect a disproportionate number of our new doctor starts to be more on the employment side than what we’ve seen historically. At least 20 to 25 more than what we currently have that I just shared with you, so expect the number to go up to be in the neighborhood of 230 or so doctors by the time we get to the end of the year.

Tom Gallucci - Merrill Lynch

Can you explain maybe a little bit how those agreements or arrangements work these days, because I guess in the last few years the volume has sort of been the soft spot in LifePoint’s results, but the recruiting has been mixed, but if you’re employing more doctors, what kind of guarantees do you have or visibility do you have that they are going to contribute?

Bill Carpenter

Well we can’t really track it that way. We have the same information. We recruit doctors on the basis of needs. We recruit doctors on the basis of what we view is the need for that service line in that community and we have expectations and then we make a fair market value determination about what the recruiting package should be for that doctor, whether or not it is an income guarantee as is done in some instances or employment in others, but that’s just a determination that we make in accordance with our physician recruiting guidelines.

Tom Gallucci - Merrill Lynch

The other topic I was going to ask about was sort of a follow up to what’s been discussed here too. Self-pay volumes being down, Dave I think you said you had something built in that that could up tick a bit, but can you put your finger on any particular reasons why you think self-pay has been down so much year-to-date you know sort of in the face of the economy getting worse?

David Dill

It is one of the areas that as I think about our assumptions or my assumptions that I used in building this guidance for coming into the year, I did expect self-pay volumes to go up. There are a few initiatives that we do have in place though our emergency rooms where we find, obviously that the most appropriate place for care that most efficient place for care and in making sure that the appropriate admission happens for the emergency room.

The operators have rolled out that program through many of our emergency rooms, specifically the bigger hospitals. I think that has had an impact. Outside of that I really can’t point you to many other things internally that we’re doing.

That’s on the admissions side, then on the what ends up rolling through bad debt, we have seen improvements in our up front collections year-over-year, quarter-over-quarter we continue to see more money being collected today than we did a year ago, that has helped offset and add another reason why bad debt is coming down.

Bill Carpenter

I don’t want there to be confusion about what we track and what we don’t with respect to doctors whether employed or not employed, but remember even with employed doctors those doctors have to be able to make their own independent clinical decisions about admissions of patients into the hospital, so we have to be careful about that and make sure that we’re operating in complete compliance with all. That’s not just us that is true for all companies that everybody is in the same situation on that.

I don’t want to be wishy washy on that but I do want to make sure that we are not giving the wrong impression about any treating employed doctors any differently than independent doctors.

Operator

Your next question comes from Kemp Dolliver - Cowen & Company.

Kemp Dolliver - Cowen & Company

Just to focus more on the self-pay discussion. Why did you start implementing the programs with regard to essentially triaging these patients and related to that is do you have any sense of how many people or cases are actually being turned away as a result?

David Dill

I don’t have those numbers, but what I do have is, we started rolling that program and we talked a lot about it last summer. We started rolling that program out towards the end of last year and it would be fair to say that most of those have been impacting our numbers this year. Turning away may be too strong of a word. Redirected is probably a better word that we like to use, appropriately redirected to a more efficient setting of care than being admitted into the hospital. So it’s not turning anything away.

Kemp Dolliver - Cowen & Company

In your prepared remarks you discussed a couple of the drivers of unit expense, but just stepping back it looks like if you ignore bad debt on an equivalent admission basis your expenses are probably up say 6% and your case mix is up about 2.5. How much of the increase in unit expense relates to the case mix change in the service mix shift you’re implementing?

David Dill

I think some, but not a lot. If you go through and when you have an opportunity this afternoon or over the weekend to go through our 10-Q, you’ll see salary’s as a driver of that, a big chunk is share based comp, you carve that out that’s a year-over-year increase. But you do have employment of physicians rolling through that number.

We continue to see pressure on the wage rate line, we have been able to do a good job of managing our way through it, but a soft economy hasn’t given us softness in wage increases, the wage pressures that are out there specifically for the clinical staff.

Supply costs have been relatively flat quarter-over-quarter. Other operating expenses, really three things: medical malpractice costs continue; when you look at year-over-year not much of a variance but when you look at first quarter to second quarter we continue to see a little pressure there. Most of the other operating cost pressure that we’re seeing though relates to what we’ve talked about. Professional fees, they will go up probably 15 to 20% this year on a year-over-year basis. Coming into the year we didn’t expect that to moderate. Sitting here today we don’t expect that to moderate for the balance of the year.

Then the recruiting efforts, the recruiting costs that we have incurred and will continue to incur, even though it’s only up $2.5 million year-over-year it’s about a 2/3 increase, so these are investments that we’re making for a lot of different reasons. So, those three or four things are the main reasons our costs have gone up.

The main reasons why is even though our bad debt expectations were a little bit less, our guidance didn’t go up as much as it would have if you just did straight math, it’s because we do expect our costs to continue to be under a little pressure in the second half of the year.

Operator

Your next question comes from Frank Morgan - Jefferies & Co.

Frank Morgan - Jefferies & Co

I was wondering if you could talk about the improvement in the AR that you saw over 150 days. What was that related to? Then was there $1.5 to $2 million in just straight pick up in bad debt specifically related to that, did I catch that right?

David Dill

That’s about right. Part of it, I believe if you go back into last year we had midway through ’06 we had acquired two large hospitals, we saw some AR balances go up in the second half of the year related to that, those are reserved for. By policy, the hospital level, when an insurance account gets over 150 days it automatically gets reserved for. So we saw some of those accounts grow through the end of last year.

The revenue cycle teams got after a lot of these accounts. We saw about a $2 million reduction from the first quarter to the second quarter in those insurance agings over 150 that rolled through our numbers. You take that across $700 million of revenue and you get about 3/10 of a percent that gave us a benefit. How much more of that do we expect to continue? There is still a little work that can be done on that and some more collections, but probably not to the magnitude that we saw this quarter.

In addition, up front collections as we answered a previous question, specifically probably coming through the ER mostly, was up front collections are up as well. So, a combination of two or three very focused efforts internally have yielded some nice results for us this quarter. I expect a little bit of that to continue, but when it goes away it’s one of the reasons why you should expect our bad debt to go up in the second half of the year.

Frank Morgan - Jefferies & Co

The charity care and the discounts to the uninsured, did you give those numbers and have kind of an adjusted total uncompensated here is a percentage of adjusted revenue did you give that?

David Dill

Ask that question one more time.

Frank Morgan - Jefferies & Co

The total uncompensated care as a percentage of adjusted revenues, in other words the combination of charity care, the discounts for the uninsured and bad debt expenses, did you give that number or do you give that number?

David Dill

We did not give that number. Our charity discounts are about $13 million across $680 million so roughly 2% and then you’ve got our bad debt at 11.3%, so overall a little over 13%, 13.3% actually.

Operator

Your next question comes from Robert Hawkins from Stifel Nicolaus.

Robert Hawkins - Stifel Nicolaus & Company

One question, I don’t really understand a trend that’s going on, not only with you guys but some other folks is the closing of the OB units in the smaller markets. Ten years ago that used to be a pretty important business for rural hospitals and it’s one that the communities want. What has changed in that business over the course of the last ten years that makes people want to shut more of these down?

Bill Carpenter

Well it’s simply a factor of lower volume in those facilities that really drives that answer. Often times in certain states, particularly in some rural areas, you may see a significant Medicaid mix in that service line and the result of that is that those services, although I agree with you the type of services that you’d want to have in a community simply can’t be supported from a profitability point of view going forward. So where there is low volume we tend to shift those patients somewhere else.

That’s consistent with our focus in our strategic initiatives, in our growth initiatives on increasing profitable service lines, so to the extent we have a focus on growing profitable service lines the counter to that is not to continue service lines that are unprofitable for us. I think that is the dynamic that you’re seeing.

David Dill

I think if you were to summarize it probably four ways: loss leader coupled with volumes down; medical malpractice costs going up as a result of it; and most importantly quality gets difficult with the low volumes.

Robert Hawkins - Stifel Nicolaus & Company

Okay fair enough it’s just a sad circumstance.

You guys were talking a little bit about development last quarter and I have seen some coverage of you guys possibly doing some de novo deals. Can you kind of give us an update on what you’re thinking about right now and where you think you might be headed on development in the next 12 months?

David Dill

As you have seen and as Bill talked about, there is a lot of activity going on right now. There are opportunities to acquire hospitals 100% of the hospital, there are opportunities to partner with local communities that don’t want to sell their hospital but they need a capital partner, they need a management partner and they need expertise to surround them in their local markets. The most public one is the one you are referring to which is out in Idaho. There is a process that is going on. The community has selected a couple of companies to enter into discussions with. We are continuing those discussions and if we can find the right projects at the right price, regardless of the ownership structure and the governments around it, it’s something we’re very comfortable doing. Make no mistake that we will remain disciplined and cautious as we look at those opportunities.

Robert Hawkins - Stifel Nicolaus & Company

You guys had some trouble with de novos in the past. Has anything changed there in terms o fa learning curve or what might be different this time?

Bill Carpenter

I think we always learn from our prior experiences and our hospital in Fort Mohave, which experienced a little bit of lag time in getting its provider numbers, which is not untypical, has one very, very well. It’s been a great deal for us. Always learn from your past experiences and get better and move forward.

David Dill

What you may be talking about Rob is the coastal Carolina medical center that we inherited through the Province transaction that was ultimately sold to tenants, I don’t know if you’re referring to that one or the one out in Fort Mohave, but clearly Valley View has been a great success story.

Robert Hawkins - Stifel Nicolaus & Company

It is helpful to kind of have color both ways.

Bill Carpenter

And the project in Idaho is a replacement to us really, more so than a Greenfield.

Operator

Your next question comes from John Ransom of Raymond James & Associates.

John Ransom - Raymond James & Associates

David, are you seeing any change in your collection rates on your self-pay, either insurance co pay or true self-pay?

David Dill

So far is has remained constant. The second quarter is when we start seeing kind of the calendar year recess, the co pay and the doctor bills start flowing through. I think if you look at our cash flow from operations, you look at our balance sheet metrics, you look at our income statement, all of those will tell you that those collections insurance remain a constant.

Once again that’s a little bit counter-intuitive coming into what I had expected coming into the year. We will be updating that analysis again here over the next 60 days; we can report that out to your next quarter, but as of right now everything is stable.

John Ransom - Raymond James & Associates

What are those rates running right now?

David Dill

We collect about 8 to 9% on self-pay and we collect about $0.50 on the dollar on co-pay and deductibles.

John Ransom - Raymond James & Associates

Yes, those really haven’t changed much. The other thing that we noticed was that your balance sheet bad debt reserve declined about $20 million sequentially. I know you’ve talked about $2 million in collections from old receivables, but what drove that?

David Dill

A lot of it is write-off. If you look at the gross AR number, while the provision is down about $20 million as you pointed out from first quarter to second quarter gross AR is down about $30 million and so what that leads to is net AR being up about $9 million and part of that is the collection efforts of collecting amounts of higher first quarter volume that you book in the first quarter but you collect in the second quarter and part of it is the several million that we talked about is long.

John Ransom - Raymond James & Associates

Is there an update on your favorite hospital out in Virginia? I notice the press has calmed down a little bit, but what’s going on out there?

David Dill

Bill gave a great update earlier in the call if you go back and read the transcript you’ll be able to take it off of that.

Operator

Your last question comes from [Witt Mayo] of Robert Baird.

Witt Mayo – Robert W. Baird & Co., Inc.

Back to the deep dives, have you made any other decisions to close any additional service lines as you finish these initiatives and can you kind of give us an example as to what capital has been deployed to date? I guess what I’m asking is other than some 64-slice CT scanners what other examples of tangible service lines have had an early impact?

Bill Carpenter

We have not made any other decisions to close any other service lines at this point, as a result of any of our growth studies that we’ve been doing.

With respect to the way we’ve been deploying capital, we have done things in order to improve our surgery departments in order to make them more efficient, more responsive to patient and physician needs in order to improve quality and through put. We have done some ASC, looked at ASC projects, we’ve looked at CAT projects, we’ve looked at projects designed to improve our cardiology and oncology service lines. If I can just summarize, the focus has been around the deep dive initiatives and what we’ve seen. The focus has been around cardiology, general surgery and cancer care as well as some improvements in the ER.

Of course always, we really have, as you recall, beefed up our imaging departments. We’ve added 31 CT scanners, 22 or so of those have been 64-slice CTs across the company and we’re seeing great results with respect to those additions.

David Dill

To put some number around all those projects that Bill alluded to, we have approved capital of about $80 to $90 million on these deep dive projects, of that amount we have probably spent $50 million of it so far, with another $30 million to go in a couple of big projects, the biggest one being out in Beckley, West Virginia with Riley. Some of that was spent last year, some of it was spent this year, but it’s embedded in that range of $160 to $175 million of CapEx spends.

Witt Mayo - Robert W. Baird & Co., Inc.

So it sounds like some of he big ticket items haven’t really hit yet in terms of their contribution.

David Dill

They haven’t hit their contribution. As you see on the cash flow statement they also, most importantly, haven’t hit in the contribution of what we think will be the income statement that will either see on this issue most probably in 2009 and 2010, given CON limitations in a couple of these states where the big dollars are being spent.

Witt Mayo - Robert W. Baird & Co., Inc.

You are basically done with the buy back now. Bill, any thoughts from the board on another authorization or are you just kind of planning on taking a slight pause and just sort of scope out the landscape in the near term?

David Dill

When we announced this we had some limitations within our credit agreement that we could buy up to $150 million. We also, for support only, we looked out over the landscape from an M&A standpoint and saw transactions happening in the space at multiples that we did not want to participate in. We didn’t think those were the right multiples to pay for those hospitals so when we saw where those were trading we decided the best utilization of our capital in a short period of time was to buy our own stock back. We did it. We completed it through the second quarter like we told you we would, without putting any additional leverage on the company as a result of it.

We have seen the M&A market become a little more robust. That doesn’t mean that we’ll necessarily participate, but there are enough opportunities out there that I think will come to us at a price that’s attractive that we may be able to execute on one or two hospitals here over the next six to nine months.

From that standpoint, our next round of capital we’ll be looking to grow the business in profitable markets at good prices and then as our restricted payment basket inside of our credit agreement continues to fill back up, we can certainly come back six months from now and take a look at that and make a decision or a proposal to the board if we want to do some more share repurchases.

Bill Carpenter

But at this point nothing further has been authorized with respect to stock buy backs. The board is very careful to look all the time at good uses of our capital in order to improve it for the stockholders, so I just echo what David said in response to that.

Bill Carpenter

Thanks to everyone who has been on the call today. We appreciate very much your interest in LifePoint. We will continue to work against our initiatives. We are pleased to see many of them yielding results. We feel strongly that they will allow our company to grow over the next few years, as you knows and as I said before, these organic growth projects take a little bit of time, but we know they are going to pay off and we are committed to our efforts in order to achieve them.

Again thank you for your interest in the company and we’ll talk to you next time.

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Source: LifePoint Hospitals, Inc. Q2 2008 Earnings Call Transcript
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