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Lifepoint Hospitals Inc. (NASDAQ:LPNT)

Q3 2012 Results Earnings Call

October 26, 2012 10:00 AM ET

Executives

Bill Carpenter - Chairman and CEO

Jeff Sherman - Chief Financial Officer

David Dill - President and COO

Analysts

Josh Raskin -Barclays

A.J. Rice -UBS

Tom Gallucci - Lazard Capital Markets

Darren Lehrich - Deutsche Bank

Ralph Giacobbe - Credit Suisse

Whit Mayo - Robert W. Baird

Frank Morgan - RBC Capital

Jake Hindelong - Imperial Capital

Operator

Before we begin on today’s call LifePoint will be making forward-looking statements based upon management's current expectations. Numerous factors could cause LifePoint's results to differ from these expectations and LifePoint has outlined these factors in its filings with the SEC. The company encourages you to review these filings.

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

Ladies and gentlemen thank you for standing by. And welcome to the LifePoint Hospitals’ Third Quarter 2012 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded, Friday, October 26, 2012. I would now like to turn the conference over to Mr. Bill Carpenter, Chairman and Chief Executive Officer with LifePoint Hospitals. Please go ahead, sir.

Bill Carpenter

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

Let me start out by saying that this was challenging quarter. On today’s call, I’d like to discuss what happened in the quarter, highlighting certain costs which were related to investments we’ve made for the future, as well as some changes we experienced in our business. All these impacted our results. Then I’d like to review the actions we are taking to address these challenges and the progress we are making to best position the company heading into 2013.

We’ve made a number of investments that while critical to the company’s future growth and success impacted the bottom line this quarter. We recorded $6.2 million in transaction-related costs associated with the closing of the Marquette General Health System transaction.

Marquette is the only tertiary care provider serving 300,000 residents in the upper Peninsula of Michigan and has leading programs in specialties such as cardiology and oncology.

In addition to having a new established revenue stream, it presents opportunities for growth in a very attractive market. We recorded $4.4 million in debt retirement costs associated with our new credit facility and term loan.

This allowed us to extend the maturity of this debt and lower our borrowing costs. The strength of our balance sheet is a differentiator for Lifepoint and will allow us to continue to invest in our hospitals, acquire new hospitals and buyback stock.

We also recorded $1.8 million in retention costs related to our recently announced shared services agreement with Parallon. By outsourcing accounts payable, supply procurement and revenue cycle operations over the next two years. We expect to achieve greater operating efficiencies, improve our performance and generate incremental earnings. Jeff will discuss these and other items in more detail shortly.

There have also been some changes in our operations. These items are having an impact on our business and we expect them to continue going forward. In the third quarter, we experienced a reduction in revenue of $4 million related to recovery audit contractors or RAC take backs.

In addition, reimbursement from indigent funding programs in New Mexico declined by $2.8 million in the quarter. We’re committed to our strategy of delivering high quality care and service, growing in each market and through acquisitions, improving operating efficiency and developing talent.

A cornerstone of our strategy continues to be moving into faster growing markets with a more diversified employer base. Over the last year, we’ve acquired hospitals with $500 million in annualized revenues or approximately 15% of our total revenues.

We’re confident in the potential of our recent acquisitions, while each of these acquisitions will ramp up at a different pace. We expect all of them to meet our expectations within three to four years.

Our recent acquisition of Marquette is an excellent example of the kind of growth opportunities we’re seeking. It also highlights the evolution of our unique partnership with Duke and demonstrates our focus on pursing hospitals that we believe will become centers of a regional integrated health system.

We will invest in physician recruitment and capital improvement projects at Marquette. And believe that over time, we will create a successful network to meet the demands of the future in that region.

Importantly, Marquette represents over $300 million of the $500 million in acquired revenue over last year, and we've only operated the hospital for a month. We’re excited about our ability to develop an integrated healthcare delivery system in the region.

With that, I’d now like to turn the call over to Jeff to discuss our financial results for the third quarter in more detail. Jeff?

Jeff Sherman

Thank you, Bill and good morning everyone. The third quarter results were below our plan. We performed at our expected level in July, but did not meet our plan in the months of August and September. With many moving parts in the quarter, I want to provide a perspective on the third quarter results as detailed in our press release this morning.

EBITDA in the quarter was $107.3 million. We had several items that adversely impacting our performance in the quarter, consisting of $6.2 million in Marquette deal costs, $2.6 million for our prior year repayment obligation in one of our hospitals, $1.8 million in retention cost related to shared services and an estimated $1.5 million of negative impact from Hurricane Isaac.

Adding these back to the $107.3 million EBITDA, equates to adjusted normalized EBITDA of $119.4 million. Reported EPS in the quarter was $0.39. The above items impacted EPS by $0.15, and when combined with the $0.06 EPS impact from the debt retirement costs associated with our new credit facility, EPS was negatively impacted by $0.21 in the quarter.

Additional items that impacted the quarter and will continue at some level going forward were the decrease in New Mexico indigent funding programs of $2.8 million, RAC revenue reductions of $4 million, higher physician practice losses of $3.5 million and patients migrating to the outpatient setting resulting in a negative $2 million impact on reimbursement in the quarter.

I’ll now review the individual drivers of our results in more detail, starting with volumes. On a same-store basis, admissions were down 4.6% in the third quarter. As we noted on our second quarter call, our volume trend improved in July but weakened in August and September versus the prior year.

The decline in one-day stays continued from the second quarter. One-day stay admissions were down by 9.3%, and represented 39% of the admission variance. Observation visits grew by 8.1% in the quarter and more than covered the decline in one-day stays, indicating again that we are not losing this volume but seeing a shift to the outpatient setting.

The reimbursement impact of this shift to observation visits is approximately $2 million in lower reimbursement in the quarter. Deliveries were down by 3.2% and represented 9% of the variance, with the balance of the admission decline in surgical admissions.

Surgical volumes were down by 3.6% over prior year. Adjusted admissions for the quarter decreased by 1.6% on a same-store basis versus prior year. Additionally, there was one last weekday in a quarter, negatively impacting admissions by approximately 1% and adjusted admissions by approximately 1.2% versus the prior year.

Same-store ER visits were up 2.8% over prior year. Same-store gross outpatient revenue was up 11% in the quarter, driven by higher ER volume in growth in oncology and cardiology programs. Finally, we experienced the negative volume impact from Hurricane Isaac in our Louisiana Hospitals in the third quarter. We estimate the impact of this at $1.5 million in the quarter.

Revenues in the quarter were $820 million, an increase of $81 million or 11% versus prior year. Revenue in the quarter includes $24 million for Marquette for the month of September.

Of the totally $820 million in revenue, $72 million or 8.7% pertains to hospitals acquired in the last 12 months that had a combining EBITDA margin of less than 1% in the quarter. We expect these hospitals to be a source of upside in the fourth quarter, with significantly higher upside in 2013.

As previously noted, we have over $500 million in revenue acquired in the past 12 months, and expect operational improvements over the next several years. Same-store revenues increased by $9 million, or 1.3%, over the prior year.

Bad debt expense was 20.1% of revenue, up 290 basis points from the prior year and charity care write-offs were 3.6% in the quarter. The allowance as a percentage of self-pay-AR was 85.5% as of September 30, 2012.

Same-store self-pay admissions were up 5.2% in the quarter and represented 7.5% of total admissions. Same store self-pay ER visits increased by 7.5% in the quarter. The higher levels of ER volumes, including admissions cost increases to self-pay revenue, which led to the higher bad debt in the quarter.

We experienced higher self-pay revenue in September than we expected, which necessitated additional bad debt expense to properly account from 0 to 90 self-pay AR bucket. We performed our AR analysis consistent with our practice at the end of the quarter as part of our final accounting close process.

EBITDA from continuing operations was $107.3 million, a decline of $20.1 million from the prior year. Diluted earnings per share from continuing operations were $0.39 in the quarter, a decrease of $0.38 from prior year. For the first nine months of the year, EBITDA from continuing operations was $410.8 million, an increase of 1.1% with earnings per share from continuing operations of $2.38.

Turning to pricing, on a same-store basis, net revenue per adjusted admission was up 2.9%. The admission decline was evenly spread on percentage basis in Medicare and Medicaid in commercial. However, self-pay admissions were up by 165% or 5.2% over prior year.

The Medicare case mix index was up by 1.6% in the quarter, with the total case mix up 1% over prior year. Reimbursements under New Mexico indigent program declined by $2.8 million in the quarter from the prior year and from the second quarter of 2012.

We’ve been negatively impacted by an increasingly rate of RAC take backs in 2012. In the third quarter, RAC reductions to revenue were $4 million, an increase of $3.2 million over the prior year.

Same-store SW&B costs as a percent of revenues increased 110 basis points over prior year, and including increased physician employment costs of $6.2 million and retention cost of $1.8 million related to our shared services initiative. We recruited 110 physicians in the quarter with approximately 40% of them employed.

The physician practice losses in the quarter increased by $3.5 million over prior year. Same-store supply cost as a percentage of revenues for the quarter were flat, but higher pharmacy costs driven by growth in oncology programs.

Same-store other operating expenses in the quarter increased by 190 basis points, primarily due to higher contract services, provider taxes and professional fees. Other operating expenses also include $6.2 million in acquisition cost related to Marquette deal in the quarter, and $2.6 million accrued in connection with the prior-year repayment obligation in one of our hospitals.

For the third quarter, we’ve recorded $12 million in meaningful use payments and have related operating costs of $5.7 million, plus $3 million in depreciation in the quarter. This equates to $6.3 million in EBITDA, net income of $2 million and EPS of $0.04.

For the third quarter of 2011, meaningful use payments positively impacted EBITDA by $7.5 million, net income by $4 million and EPS $0.05.

Cash flow from continuing operations for the quarter was $84 million versus $110 million in the third quarter of 2011. We are continuing to experience a temporary build up in receivables for recent acquisitions with $16 million waiting for Medicare and Medicaid tie-in notices for Twin County and Woods.

Income tax payments increased by $43 million over prior year due to the benefit of accelerated depreciation in 2011 from the federal stimulus bill passed in 2010. We invested $47 million in capital expenditures in the quarter with $21 million in IT capital investments.

Depreciation and amortization expense increased by $7 million or 17.3% versus the prior year, the increase was driven by higher IT investments and five new hospitals in the quarter versus the prior year.

We finished the quarter with $98 million in cash on hand. We purchase Marquette General Health System for $133 million, including working capital in the quarter out of cash. We also assume $71 million in liabilities for total consideration of approximately $204 million on a revenue base of over $300 million.

We access to credit facility towards the end of the third quarter for $40 million after Marquette acquisition was complete. We did not buyback any stock in the quarter and had $185 million remaining in our authorization as of September 30, 2012. This authorization expires in March 2013.

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

Finally, we are adjusting our annual 2012 guidance range to reflect the results from the third quarter. We now expect revenues to be in a range of $3.35 billion to $3.4 billion, EBITDA to be in a range of $535 million to $545 million and EPS to be in a range of $2.97 to $3.10.

This includes meaningful use payments of $10 million to $15 million in the fourth quarter and a similar amount of RAC reductions to revenue as we experienced in the third quarter. As it’s been our historical practice, we will provide further guidance for 2013 when we report our fourth quarter results in February.

I will now turn it back over to Bill.

Bill Carpenter

Thank you, Jeff. Before we start the question-and-answer period, I'd like to put some of the guidance in context. We’ve highlighted for you today some headwinds facing our company. There are other potential challenges in our industry from reimbursements, state and local budgets, and potential sequestration. However, reactions we are taking give us confidence that we are on the right path for a successful future.

We’ll continue to push for saving to offset the reimbursement and volume challenges that we are experiencing. We’re also continuing to improve operating efficiencies and reduce costs in our hospitals. And we expect to get the benefits from our shared services agreement in 2013 and beyond.

We make significant investments in meaningful use initiatives and expect meaningful use EBITDA to be in a range of $25 million to $30 million more in 2013 than in 2012. We’re acquiring the right hospitals in faster growing markets. We've added over $500 million in new revenues in the last four quarters from acquisitions and we have significant opportunities to expand margins at these hospitals.

We expect they will positively contribute to operating performance over the next year as they continue to ramp up. We’ll use our strong balance sheet to continue positioning the company for growth, as well as returning capital to stockholders through the existing stock authorization buyback.

Our approach is to continue to improve the quality and service we provide in our hospitals and develop high performing talents for the future. We’re confident that we have the right strategies to drive growth, reduce costs and deliver results for all our stockholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Now, first question comes from the line of Josh Raskin with Barclays. Please proceed with your questions.

Josh Raskin - Barclays

Hi. Thanks. Good morning. I guess first question just around the shared services agreement with Parallon. And I am just curious have you start to see any impact from that and maybe is there a way to quantify, sort of a range of basis point improvement in 2013 EBITDA margins from the new relationship?

Jeff Sherman

Hi, Josh. This is Jeff. We have not seeing any benefit yet from shared services. In fact, we are reporting expenses now, we recorded $1.8 million in the quarter related to retention and severance costs for our shared services initiative.

We have three facilities moving into the materials management services at Parallon in the fourth quarter that our pilot facilities. We expect about another 20 to 25 to move in in 2013 for materials management and the balance in 2014.

On the revenue cycle side, we have our three facilities going into Parallon service centers in the fourth quarter. It’s important to know we already have three hospitals where Parallon is doing a revenue cycle operations. So, we have a lot of knowledge already and how to work with them. So we are excited about the prospects.

In terms of benefit in 2013, we would estimate the benefit to be around $7 million to $10 million and incremental EBITDA in 2013, and that number will continue to ramp up in 2014 and 2015 as all the facilities move into these centers and get fully operational.

Josh Raskin - Barclays

Right. That’s perfect color. And then just on the RAC audits. Is there a change in sort of the technique or did they, CMS using a different set of auditors that are looking. I’m just curious what precipitated sort of the ramp up in the payback?

Bill Carpenter

Well, we’ve done a lot of work over the last few weeks looking at our RAC activity. First, I would say, if you look at the government database, the government recoveries that they are reporting have grown significantly over the last several quarters. There is four RAC auditors, there is four territories for RAC audits, depending on where hospital is located. And we are seeing more activity in terms of these different areas.

And so, I think it is -- they are continuing to look at accounts. A couple of things I would point out, number one, these -- they are looking at accounts up to three years old. So, these reductions to revenue almost all, if not entirely all related to prior year operations. And so I think, we will see how that flows through going forward. In terms of our action plans and what we are doing, I’ll ask David to talk about that.

David Dill

There's a lot of things that are going on inside the company, kind of highlighting in the three different buckets. One around medical necessity ensuring the patient is in the right status every time. So we have gone through extensive training with our case managers deploying technology in our hospitals that helped apply inter-qual criteria on a consistent basis. Standardization have outside physician advisory groups that we are using around the organization.

So, as we learn from historical views of the RAC activity we are also working on the front-end. So you have a little of double impact going on. So you have this shift that Jeff talked about from inpatient to outpatient on a real-time basis that’s impacting our volume indicators and our financial results in the quarter.

In addition, you have some RAC take backs that Bill talked about in his opening comment that have more of a kind of prior period impacts going backwards up to the three years that Jeff talked about.

So while we’re working around medical necessity, the appeals process, spending a lot of time with our hospital CFOs and case managers around the organization ensuring or maximizing our appeal process and the success rates within the RAC activity. That’s really looking backwards, not looking forwards but it’s dealing with the large influx that Jeff talked about, the RAC activity that’s happening around the country with each of different regions that the government had set up.

And then finally clinical documentation, we are using external contractors. We have launched several significant CDI programs in the some of the larger hospitals to make sure to make sure that our physicians have appropriately documented in the patient record.

So those are the three main buckets of activity that’s happening that not only help us on the front end but also maximize our appeal rate on the activity that’s coming in from some historical records.

Bill Carpenter

I would add to that. We’ve added a lot of resources at a hospital level, case manager resources to help our processes here as well as David said external advisors as well. So our costs are increasing that had to deal with it as well. And we’re going to continue to work on it and hopefully see improvement over time.

Josh Raskin - Barclays

Got you. So Jeff, when you say the $4 million that’s just a revenue impact, that doesn’t include all these additional costs you guys are building up to slow that number down?

Jeff Sherman

[Dan], it’s correct. That’s just a net reduction to our revenue. And it’s related to prior year accounts.

Josh Raskin - Barclays

Got you. So it’s even a bigger impact. I appreciate you guys taking the question. Thanks.

Operator

Thank you. Our next question comes from the line of A.J. Rice with UBS. Please proceed with your question.

A.J. Rice - UBS

Thanks. Hello everybody. Couple of questions on the -- just to make sure I’ve got it right. So on the year-to-date EPS that you’re using to get to your updated full-year guidance. Is that -- did you say 238 is the number that you’re using?

Jeff Sherman

Correct.

A.J. Rice - UBS

Okay. All right. And then just on three acquired facilities that are coming in the back half of the year, Marquette, Woods, and Twin. So there are about $375 million in incremental revenue and you said in the -- obviously Marquette wasn’t in for the four quarter but they were running about 1% EBITDA margin but you expect that to step up. I mean, are we talking, sort of, mid-single digit type of number for the fourth quarter. Would that be a reasonable variance. Is it significant enough to move the needle for you?

Jeff Sherman

Yeah. The number I gave, $72 million, actually includes all hospitals we acquired in last year, A.J., so that includes (inaudible).

A.J. Rice - UBS

Okay.

Jeff Sherman

… question in woods as well.

A.J. Rice - UBS

Okay.

Jeff Sherman

So with the total combined EBITDA margin of 1%, we have few of those hospitals that are ramping up a little slower than our historical ramp up has been. But we have plans in place at those hospitals.

In terms of the fourth quarter, we expect to ramp up. I wouldn’t give a specific percentage for the fourth quarter but I think rolling into 2013 as we think about taking facilities from the middle to mid single digit EBITDA margins up to the company’s average over the three to four year time period, we would generally look at a 300 to 400 basis point improvement in margin per year to get to that -- to get to the company’s average margin.

David Dill

This is David. More specifically in the fourth quarter, I do expect in the three hospitals that you mentioned, our recent acquisition in Galax, Virginia and then market transaction in East Tennessee and then Marquette expect improvement in fourth quarter from the third quarter, in each of those three transactions. Both in Twin and Woods, the numbers will probably be so small that you won’t feel in CD impact.

Marquette on the other hand is such a big acquisition for us, I do expect margin improvement. We only had it for one month as we integrated into the third quarter. As we enter fourth quarter, we have expectations build up that we will see margin expansion.

Marquette is a profitable organization before like point gains. So those operations will continue into the fourth quarter. And then the improvement that our transition services team through deep-dive work that we’ve done through all the diligence efforts to moving them through the GPO, applying productivity measures and really integrating that medical staff into the hospital will result in only long-term margin improvement but some short-term margin improvement that you will see in fourth quarter.

A.J. Rice - UBS

Okay.

Bill Carpenter

There is a lot of excitement in the upper peninsula about new glide point into that area and we’re seeing that excitement translated into activity at the hospital. And I do expect to see that hospital particularly having an impact not only next quarter but for the long term.

A.J. Rice - UBS

Sure. Okay. And then just last question, if I look at your revenue for adjusted EBITDA against your pricing proxy. You had a pretty strong second quarter of 5.8% of moderated at 2.9. I know there is a lot of moving parts here. Can you just give us a flavor?

Has there when you appeal back, the issues like the Mexico and I guess, the RAC audits number would affect that. Can you tell us -- is there a change going on there because your case mix was actually up. So I thought that would have helped us?

Jeff Sherman

Yeah. A.J., this is Jeff. When you look at the RAC audits, the Mexico reduction and just the lower revenue for observation business that alone is almost $9 million, 120 basis points in that revenue for adjusted admission. That’s not there in the quarter and we did see just deterioration in terms of mix.

Our commercial -- same store commercial revenue in the second quarter was up about $20 million and first quarter was up about $30 million. And it was only up about $7 million in the third quarter. So our commercial mix, our commercial revenue was lower. As a percentage of revenue, it’s not that much different but since the revenue was lower, just on a pure dollar basis, our commercial revenue was down from the second and the first quarter in terms of prior year change.

And then we’ve seen an increase in self-pay revenue in the quarter. So self-pay revenue was up $11 million in the second quarter and up $19 million in third quarter on a same-store basis. So we’ve seen a little bit of shift out of commercial in the quarter.

One quarter, we had pretty good quarter last -- in the second quarter of commercial revenue. But certainly that revenue mix in shift out of commercial impacted our results, little bit harder to predict on a monthly or quarterly basis and so obviously trying to respond to that on a daily basis even on the cost side becomes a little bit more challenging.

A.J. Rice - UBS

Sure. Okay. All right. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Tom Gallucci with Lazard Capital Markets. Please proceed with your question.

Tom Gallucci - Lazard Capital Markets

Good morning, everybody. Thank you. Just going back to the RAC audits as well as the short stay observation visit transition, on the RAC audits, are there specific procedures or areas where we see a lot of commentary out there. But are there particular places that you are feeling it more than others at this stage of the game?

Jeff Sherman

Hey Tom. This is Jeff. Do you mean, there is 18 DRGs which I would say the high priority focus DRGs that the RAC auditors are looking at. Most of ours is related to medical necessity and they are looking at one-day stays in that process.

As we look at that, we do have a fair amount of our DRGs in the high -- the 18 DRG category that they are looking at.

Tom Gallucci - Lazard Capital Markets

Yeah. And on the one-day stays, obviously the RACs were talking about Medicare. So is the one-day stay issue mostly Medicare or you’re feeling on the commercial site too.

Bill Carpenter

It will carry over on the commercial side but it’s predominantly, Tom, on the Medicare stuff.

Tom Gallucci - Lazard Capital Markets

Okay. And then just as a matter of perspective, you were probably one of the first company that really started talking about this issue a while back and that seem to stabilize and now it’s got worse again. Can you frame how much of the business is still in this bucket or any perspective on how much more pressure there may be to go on this or was it risk?

Bill Carpenter

Well, we continue to provide education in our hospital. It’s about the issues that government is focused on and clearly this issue of one-day stays and observation visit is something that they have indicated that they are focused on it. As they can impact the side of care to the extent that has an impact on reimbursement, you should expect that.

We have done a lot of work in this area as Jeff and David both described by adding case managers, by increasing education, working with doctors in order to make sure that we’re putting patients in the right side of care. So I think this is something that we will continue to see. I think it’s an issue for all of us. It may be impacting rural hospitals a little bit more.

Because of the point Jeff made a moment ago, because of the type of DRGs that have been the focus more than sort of medical-related DRGs that have the ability to make a determination of observation versus a short stay in the hospital.

Tom Gallucci - Lazard Capital Markets

Okay. Maybe just last one, you cited the increase in self-pay business. Was there any disparity or different geographically for you all or was it fairly evenly spread over the portfolio?

Bill Carpenter

Fairly, evenly spread across the portfolio. It shows up a little bit more in a couple for hospitals just because there are some changes in some state programs like in the Mexico program that Jeff talked about. But once you exclude that specific case then it is spread fairly evenly across geography and you just can’t concentrate in one area.

Tom Gallucci - Lazard Capital Markets

Okay. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed with your question.

Darren Lehrich - Deutsche Bank

Thanks. Hi everybody. So you’ve given us a little bit of flavor for the benefit in 2013 from the move to Parallon. I guess, it would be curious just to get some additional thoughts about what type of restructuring you’ve undertaken beyond transitioning some of the shared services just to reposition for some of the headwinds, you’ve been discussing here.

Are there any discrete amounts that you've taken out of the business, separate from you’ve described from Parallon that can help us just get a little more confident about EBITDA for next year?

Bill Carpenter

Darren, thanks for that. I’ll start and Jeff or David can add in as they’d like. First of all, we always staffed the volume. So that’s just to get in. Second, don’t underestimate or dismiss the cost savings that we expect to achieve through the shared services initiatives.

In addition to those that we’ve talked about that are already in the works, we believe that there are additional shared services opportunities that may also offer value. Also, we now achieved a sufficient size and scale that allows standardization and where appropriate centralization that have a meaningful impact on our results. And we’re looking at each of those kinds of opportunities.

We’re currently engaged in our budgeting process for 2013 like we do every year. We’ve challenged our teams to identify creative and meaningful savings. Please remember operating efficiently has always been the strength of Lifepoint and one of our key strategies.

Also in the current environment and certainly, I know, your question had to do with 2013 but certainly for the fourth quarter, we’ve asked our hospitals and our hospital support center to find additional ways to reduce expenses.

Darren Lehrich - Deutsche Bank

Okay.

Jeff Sherman

Yeah. I would say, just -- again we also have the $500 million in revenue ramp up from acquisitions. And so as we’ve said, we do expect improvement there. That should be meaningful contributor to EBITDA in 2013.

Darren Lehrich - Deutsche Bank

Right. Okay. That’s helpful. I guess, so but there is no discrete cost saved that that you can point to in Q4 that could help us just put that in the perspective on our models beyond the $7 million to $10 million you described around Parallon. Is that what I’m hearing you say?

Jeff Sherman

Yeah. We have cost reduction plans in place, Darren, but to put a firm number going into ‘13 right now. We’re still working through that. We have plans in place for the fourth quarter to help us achieve our numbers. So we do have our plans in place. No single initiative that I would point out to you but a lot of initiatives going on both at the hospital support center and in our hospitals.

Darren Lehrich - Deutsche Bank

Okay. And then if I could, I know the RAC audits have been a big topic here in the call but I guess, I just want to understand on -- about fourth quarter and why there's certainty around another $4 million. Is it because you know what the backlog of the RAC audits are within your hospitals or is it based on settlements that you’ve already been handed already in the quarter. Just help me understand sort of your visibility into the backlog of RAC audits for your hospital and how much longer you think we’re going to see a number like $4 million show up every quarter?

Jeff Sherman

Yeah. I would say, we don’t have certainty, Darren. It’s hard to predict. I think from our perspective when we receive demand notice, we’re accruing accordingly to what we expect to be paid for that, for that RAC audit. So I think our guidance assumes a similar level of RAC activity. It's hard to predict. It is difficult to predict.

But we also took that into account when we gave our guidance range. So we expect to be in that guidance range. And as we think about the fourth quarter, other things we have in the fourth quarter that you assume, we’re at a normalized EBITDA number about $119 million in Q3, we have commercial pricing increases coming in the third -- in the fourth quarter, excuse me.

There is an extra day in the fourth quarter as compared to the third quarter. We have our acquisitions ramping up as we’ve talked about and then we do have cost reduction plans in place that will help the fourth quarter as well.

So there is several things that are occurring that give us confidence about our range is achievable for the fourth quarter.

Darren Lehrich - Deutsche Bank

Okay. That’s helpful. And then just last thing just to clarify, if I could, what is the additional expense from this estimated liability for prior period repayment obligation, I just didn't quite follow what that was?

Jeff Sherman

Yeah. Well, that is an amount we recruit related to an issue of one of our hospitals. We expect we’re going to have a repayment obligation, Darren.

David Dill

Darren, as you know, under the Affordable Care Act, hospitals and other providers have an affirmative obligation to repay the government for any over payments that have been received. For instance, reimbursements are received as a result of admission made by doctor with whom we have so-called technical violation, if you will, of start.

It could be summed as a simple as a list that wasn’t dated or mistake signed by the doctor but not the hospital during what is then called the period of disallowance. Those are now over payments that must be repaid within 60 days. So, going forward don't assume that prior year repayment obligation means something awful that’s going on.

This is just the kind of the cost of doing business these days. And these are things, this instance we talked about is something rose actually before the ACA can apply, so this is something that’s a few years ago. So, any event…

Darren Lehrich - Deutsche Bank

So was it self reported, Bill? Bill, was it self reported?

Bill Carpenter

Yeah.

Darren Lehrich - Deutsche Bank

Okay.

Bill Carpenter

Yeah. Absolutely.

Darren Lehrich - Deutsche Bank

Got it. Thank you. That’s helpful.

Operator

Thank you. Our next question comes from the line of Ralph Giacobbe with Credit Suisse. Please proceed with your question.

Ralph Giacobbe - Credit Suisse

Thanks. Good morning. Just wanted to ask a little bit about on the high-tech side, just to be clear, I think we had thought of it as a drag overall this year, you had, sort of, I think it was a $6.2 million benefit in the quarter. I think it’s what you talked about. So can you help us maybe in terms of what you're expecting now for the full year in 2012?

And then just want to make sure I heard you right the -- for '13 you said $25 million to $30 million more, is that just net benefit from high-tech in '13?

Jeff Sherman

Yeah. So, Ralph, and we gave a range of $10 million to $15 million in the fourth quarter in payments. And so that would basically imply EBITDA of $5 million to $10 million for the year for high-tech meaningful use.

Ralph Giacobbe - Credit Suisse

Positive.

Jeff Sherman

Positive EBITDA.

Ralph Giacobbe - Credit Suisse

Net.

Jeff Sherman

That’s compared to $15 million of EBITDA in 2011. And what we said as we expect 2013 to be $35 million to $40 million more in EBITDA. So, payment plus expenses.

Ralph Giacobbe - Credit Suisse

Okay. All right. That’s you have had that’s in that number. Okay. That’s helpful. I wanted to also go back to -- you talked about the physician losses I think you said $3.5 million. I want to get sense for how that’s been tracking and sort of what’s going on there your ability to sort of turn that around, obviously yourselves and the industry itself is employing more physicians and what the hope obviously that it’s a profitable endeavor. And so I guess just your thoughts around that loss and what you can do to turn that around?

Jeff Sherman

Yeah. I think it’s a lot of it, it really just related with the fewer number of doctors we are employing. So the third quarter is typical our largest quarter in terms of bringing on new doctors. And as I said we brought in 110% and 40% of those were employed. So, lot of it is the startup losses of starting a practice that’s hitting the losses, have ramped up this year in proportion to the number of physicians we've had.

So again, we view this as a long-term investment, strategically physicians of our hospitals certainly focused on primary care, but still about half are primary care and half of our doctors coming in are specialist.

Ralph Giacobbe - Credit Suisse

So you have not seen any issues with productivity?

Jeff Sherman

I think all of our contracts have productivity clauses. We measure profitability and have individual P&L by practice. Certainly, by practice type there is varying levels of profitability or loss by practice type that something we continually monitor on an ongoing basis. There is upside and downside risk in our agreement. So there is absolutely productivity included in our contracts, we watch that closely. And we’ve also terminated agreements that were not making sense to us, but -- the practices were not ramping up like we thought this year.

David Dill

In an effort not to be repetitive, Ralph, this is David, the entire agreement year-over-year is related to 2012 stocks. So its new practices coming in. So, we have seen our practices started in 2010, '11, either ramp up or we made the decision that Jeff talked about if we look at it across the entire enterprise and the value of that investment we will make decisions to make changes.

However, for us to continue to recruit and add the 250 plus physicians that we plan on bringing in each year, we will continue to have to employ, I believe, more and more those physicians. We’ve not hit an inflection point yet. But on boarding these physicians, getting the practices up and running in a standardized fashion, helping to market these physicians in the local communities, I’m confident that we are doing those steps and actions in a consistent manner. And when they don’t prove or it doesn’t work out, while we have our own physician then we will make a change. And we need to expect us and should expect us to our consistently applaud that methodology.

Jeff Sherman

And let me speak a minute about the strategy of employee physicians. In something that as you noted, Ralph, it is increasingly the way that physician recruitment is being done. Its increasingly common, often times being to manage by physicians. So, we believe the physician employment can directly align the interest of our patients and our hospitals and our physicians, as we focus on providing safe quality healthcare and ensure that these communities were located are met.

To David’s point a moment ago, employment also enables us to set performance and quality expectations for our physicians and hold them accountable when they fall short of our expectations.

Ralph Giacobbe - Credit Suisse

Okay. That’s helpful. And then if I could just ask one more. Can you talk about trends on the volume side, any specific geographies and maybe Kentucky specifically, I know that the state it just went to kind of manage Medicaid. And we had some of the manage care companies talk about some big declines in sort of volume that they saw there. So, just wondering about the impact there and if you could parse out any impact across geographies? Thanks.

David Dill

Thanks, Ralph. It’s David. Inpatient to outpatient macro trends are there and I think those will continue. We saw our one-day stays down over 800 in the quarter and we saw our observation business that is up over 1400 in the quarter. So, this business is just moving one starting appear to the other that is still require supplies, still require labor to take care of that care.

But we get paid less for that and that’s across all payors predominantly on Medicare side in the entire risk DRG, this topic in DRGs that Jeff was referring to an earlier question on RAC. Inpatient surgeries moving over to outpatient surgeries, we have now comp out surgery centers that opened up one year ago that negatively impacted our surgical volumes over the course of last 12 months.

We have comped out of that and in the quarter there is one last treatment day, one last calendar day during the quarter that we get that back in October. We are seeing that volume shift if you will from September to October, the cost of one last calendar day in September that just moved into the month of October.

You will see that across everyone of our inpatient, outpatient stats, up and down the company from one quarter to the next quarter. As it relates specifically to state we are seeing any significant utilization trends in the state of Kentucky as we converted to the managed Medicaid program.

Bill Carpenter

It is not been a particularly smooth transition I would say in terms of the administrative processes and claims being paid and in fact one of the largest providers had just announced that they are not going to be providing care as of next year. So, one of that big three players is pulling out of this state, announced in the last week.

Ralph Giacobbe - Credit Suisse

Okay. Thank you.

Bill Carpenter

In Kentucky, there is no other noticeable trends that are either geography related or specific payer related that are noticeable.

Ralph Giacobbe - Credit Suisse

Thanks.

Operator

Thank you. And our next question comes from the line of Whit Mayo with Robert W. Baird. Please proceed with your question.

Whit Mayo - Robert W. Baird

Hey, thanks. The $2.8 million decline in New Mexico indigent care is that Las Cruces [UPEL] level I wasn't sure?

Bill Carpenter

Yeah. It is, Whit. It’s a program that is based upon funding going from the accounting to the state, and there was just less of that funding available, starting in the third quarter. We thought we had a chance to try to mitigate that. There is also supplemental payment and we thought we had an opportunity to do that actually up and through early to mid-October, but we were unsuccessful in accomplishing that.

Whit Mayo - Robert W. Baird

What's the size of that? I guess, let me ask in a different way. For the next 12 months, how large do you anticipate that program to be for you?

Bill Carpenter

In our 10-K for last year, it was approximately $38 million in funding. So this is a $2.8 million reduction to that on a go-forward basis per quarter, so a significant reduction to that.

Whit Mayo - Robert W. Baird

Okay. But other than that, no other pending changes to the program as you are aware.

Bill Carpenter

I think there is still discussions in this state about the program changing. At this point, we’re not expecting those to impact us in 2013. But I think the state is looking at other options for its provider tax CPO program.

Whit Mayo - Robert W. Baird

Was this a dispute with CMS?

Bill Carpenter

No. No. It's just really the mechanics of how the dollars get fend up for federal matching, and whether there is enough dollars for that to take place.

Whit Mayo - Robert W. Baird

Okay. Other question I have, any incremental costs you may anticipate next year with the new headquarter construction?

Bill Carpenter

Those will be some incremental depreciation expense, but it will be smaller. We are not moving into the end of the year on a cash basis, with some of the benefits we’ve gotten from tax credits, you won’t see the rent expense go up. In fact, it might be in the lower for the first couple of years, as we take advantage of the larger amount of credits on the front end.

Whit Mayo - Robert W. Baird

Okay. The increase in depreciation, is that a noticeable amount that you won’t call out?

Bill Carpenter

It won’t be for -- it will not be for 2013, because we are not expected to move in towards the end of the year, to the end of the last month of the year.

Whit Mayo - Robert W. Baird

Got it. Okay. So 2014 is the year when that will see the impact.

Bill Carpenter

But we’ll continue to see depreciation impact from significant IT investments we are making, and have made this year with shorter useful lives. So a larger percentage of our CapEx spend has been spend on shorter live projects, both in 2011 and that will continue through 2012.

Whit Mayo - Robert W. Baird

I know you are in the budgeting process right now, but any way to give us a sense of what the incremental D&A from that can be next year?

Bill Carpenter

We’ll only give guidance. We’ll give that with..

Whit Mayo - Robert W. Baird

That’s great.

Bill Carpenter

I’m going to expect -- I would expect to continue to see it increase.

Whit Mayo - Robert W. Baird

Okay. And one other question I had is, you mentioned, I think to Ralph that you expect commercial pricing to help in the fourth quarter. Can you just remind us, how much of your commercial book resets, it’s pricing in the fourth quarter?

Bill Carpenter

But it’s throughout the year. Most of our contracts are now -- have been now renegotiated, but most of on annual basis or renew annually. So they renew throughout the year.

Whit Mayo - Robert W. Baird

So it is fair to say maybe a quarter of the book is repricing?

Bill Carpenter

That’s probably a reasonable estimate.

Whit Mayo - Robert W. Baird

Okay. All right. That’s it. Thanks a lot, guys.

Operator

Thank you. And our next question comes from the line of Frank Morgan with RBC Capital. Please proceed with your question.

Frank Morgan - RBC Capital

Good morning. Jeff, when you were walking through for the potential incremental improvement in the fourth quarter, you talked about cost reductions being one of those beyond rate increases and what not, cost reductions. Other than the Parallon initiative, where are the specific areas where you will see cost reductions in the fourth quarter, that would help contribute to a better fourth quarter versus third?

David Dill

Yeah, Frank. This is David. We have very specific action plans in place in every one of our hospitals. The volume that we saw, adjusted admissions down 1.6%, fairly consistent with some of the -- where adjusted admissions had been all year and the admission side has actually improved sequentially just a little bit.

But the payer mix shift, the inpatient moving over to outpatient reduction and what we get paid the RAC impact, we have gone through over the last three or four weeks with every one of our hospitals, very specific actions plans that look at discretionary spending items and taking just a really hard look at everything that we spend out here at the hospital support center and each of our hospitals.

As you know, a significant piece of the cost structure is on the waiver side against staffing side. And once again, while we staff to volumes, taking another hard look at that and we have actions plans in place to reduce salary dollars, staffing dollars and other cost up and down in the income statement in the fourth quarter, those were short term.

Then when we turn to intermediate and addition to those items, looking at service lines -- service line by service line and then on the employee position side, making sure that there are decisions that we need to make on reducing those practices that aren’t ramping up and will not ramp up. We will also make those decisions on a hospital-to-hospital basis.

Bill Carpenter

Yeah. I think it’s important to know, we are going to be aggressive in responding on the cost side to the pressures we are facing both on the reimbursement side and on the volume side. I would sum up by just leaving at that.

Jeff Sherman

But I will add that we’ve asked our hospitals to be aggressive as they think about that. And I have asked our hospitals support center also to be aggressive, and that as we find ways to reduce expenses in order to meet, and deal with the environment that we are facing.

Frank Morgan - RBC Capital

And I think you also mentioned on some of the recent acquisitions, kind of some problems with recent acquisitions that didn’t perform up to where you would’ve though they would’ve. Without being very specific, can you just give us some generalizations about kind of, where are the areas will that resulted in problems, like why they would not have executed as you had planned?

Bill Carpenter

Yeah. I will start on that. I hope that’s not the impression that we left with you, Frank. We have detailed models for each of our new acquisitions, and they are three, four year models, as we plan out where we hope that they will get over the course of that time period. And we've owned the new acquisitions for a very short period of time, and there are things that happened faster in some cases, and I don't have them quite on the timeframe that we have in mind in other cases.

I don't want to give any impression that although a couple of the recent acquisitions may have ramped up a little slower than we had expected in the early stages that I don’t have any doubt that they will ramp up consistent with our expectation over the long-term. And there are no problems there. These are just things that require new systems coming in place, new opportunities to do things in a different way.

Now with respect to Marquette, on the other hand, the biggest of the acquisitions. I see a lot of energy there for a change. They are excited about what Duke LifePoint brings and Lifepoint brings to the table. And they are eager to get the new changes in place faster even than I might have expected. So I expect positive actions there.

Frank Morgan - RBC Capital

Okay. Just one final more housekeeping, you talked about the ramp up in self-pay. What were the uninsured or self-pay admit is a total -- percentage of total admits in the quarter and I’ll hop up? Thanks.

Jeff Sherman

Not more than 0.5% Frank, maybe up above 5% -- 5.2% or 165 admissions in the quarter over prior period.

Frank Morgan - RBC Capital

Okay. Thanks.

Operator

Thank you. And ladies and gentlemen, we have time for one more question. Our last question comes from line of Jake Hindelong with Imperial Capital. Please proceed with your question.

Jake Hindelong - Imperial Capital

Good morning. Thank you. Could I squeeze a few one here? Firstly, just for clarity, someone address this, but the $4 million in lower revenue from the RAC that is included or not included in the same hospital numbers?

David Dill

It is included in the same hospital and you could have, most -- vast majority of it same hospital.

Jake Hindelong - Imperial Capital

Got it. Great. And then looking at October you mentioned the extra day, any indication on how volumes are tracking to date?

David Dill

With that extra day, they are tracking…

Jake Hindelong - Imperial Capital

Just in general.

David Dill

Yeah. Just in general, yeah. With that extra day, they are tracking as we would have expected on the track with that they are day moving from September to October.

Jake Hindelong - Imperial Capital

Okay. Great. Moving on the Medicaid. In New Mexico, you previously had mentioned that there other could be reduction and that happened. Is there any potential that you get that back and obviously, not new numbers, but could you get that back at some point over the next 12 months?

Jeff Sherman

At this point, we are not expecting it, but if there is -- there is other opportunities, or there is opportunity for supplemental payment next year, we might be able to achieve a supplemental payment next year, when they go that process in the back half of the year.

Jake Hindelong - Imperial Capital

Great. Okay. Moving on to Kentucky, you had mentioned, dislocation of one of the Medicaid, managed Medicaid providers? Can that create any issues for you, in deed over the next couple of quarters?

Jeff Sherman

Well, I think, it has created some billing issues, but the Kentucky Hospital Association has met and this is part of a larger organization. They have -- they are committed to paying the claims.

So it could impact -- it will impact our AR and it has had some impact on our AR, but we are -- at this point we are confident we are going to pay for it, but it could be some impact on cash flow over the next couple of quarters, as they work through their process. They’ve also said the parent is going to step in health with some of the claims processing as well.

Bill Carpenter

But on the volume and operating side, I don’t see any impact over the next couple of quarters as a result of it.

Jake Hindelong - Imperial Capital

Okay. Great. That’s helpful. And then just moving on the balance sheet, you mentioned a large share repurchase authorization still outstanding. Can you talk a bit about the level of leverage that you’re comfortable with?

Jeff Sherman

We have said for long time, we’ll continue to say, we are very comfortable on the three to four times range. So we will use our balance sheet where appropriate to acquire hospitals, and we have the ability to use it to acquire our stock at attractive levels as well.

It is important to note, I mean, we have bought back over $350 million of stock over the last couple years and the prior authorization that had been announced we have completed. We don’t have make specific guidance in terms of between now and end of the year, or the authorization expiring in March, but we have completed the prior one that has been authorized.

Jake Hindelong - Imperial Capital

Got it. That’s actually very helpful. And then just last question for Bill. In general could you address you are thinking on other potential acquisitions that might be larger such as the recent Marquette acquisition, if there's anything on the front before you?

Bill Carpenter

Well, certainly, our number of acquisitions that are similar to Marquette and we are involved in a couple of different places around the country, obviously, there are confidentiality in another agreements that prohibit me from speaking about those.

But I feel very good that we are well-positioned as Lifepoint and as Duke Lifepoint to have a good shot at being able to bring in more of those types of acquisitions. I would expect to be on a similar pace as we have been on over the past four quarters.

Jake Hindelong - Imperial Capital

Thank you.

Jeff Sherman

And I’ll add. This is Jeff. I will just continue to add. We continue to see very good acquisition opportunities, very attractive hospitals with scale and size in the marketplaces there and we think we have an excellent opportunity to participate in over the next 12 to 18 months.

Jake Hindelong - Imperial Capital

Great. And the Duke Association has helped you significantly with those, correct?

Bill Carpenter

Oh! Certainly, yes, with Duke Association and the upper Peninsula of Michigan was -- it was meaningful, and they are great partner. We have -- we partner with Duke in order to buy own and operate hospitals in North Carolina, and the surrounding area and we are -- we’ve had success now in the upper Peninsula of Michigan with Duke Lifepoint.

But Duke is also our partner in a number of quality programs. It’s very important to Lifepoint that we have -- we are participant in the hospital engagement network contract with CMS, where we are helping to define the way to improve quality care across small community hospitals around the country.

And Duke was so excited about that as we undertook that [AGM] contract that they have joined us as a subcontractor in that. And so, Duke and Lifepoint are doing some really great things together.

We also have other opportunities for partnerships around the country and I continue to think that this partnership strategy that we have put in place gives us a real leg up as we approach acquisitions and as we approach dealing with regional integrated delivery across country. So we are very excited about future as we see that.

Jake Hindelong - Imperial Capital

Great. Thank you for taking all the questions.

Operator

Thank you. And there are no further questions at this time. I will turn the call back over to you.

Bill Carpenter

Great. Thank you, Operator. On this call we try to highlight some of the immediate challenges that face our business. We try to bridge to the fourth quarter and give you perspective about how we think about 2013. Our strategies have proven track record and will continue to deliver value for our stockholders.

Our plan includes continuing to achieve operating efficiencies and cost savings, having value by effectively integrating recently acquired assets, acquiring more hospitals in faster growing markets, using our strong balance sheet to drive growth, as well as return capital to our stockholders, and of course, always focusing on delivering quality care and service through high performing people.

I’d like to say thanks to all our physicians and employees who work very hard everyday to make sure that each of our communities is healthier. Thank you as well for joining us on the call today and for your interest in Lifepoint Hospitals. We look forward to talking with you further in the coming days.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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