美國醫院公司 (HCA) 2013 Q4 法說會逐字稿

Welcome to the HCA fourth quarter 2013 earnings and year-end release conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions I would like to turn the call over to Senior Vice President Mr. Vic Campbell, please go ahead.

Casey, thank you.

Good morning everyone.

Mark Kimbrough our Chief Investor Relations Officer and I would like to welcome all of you on today's call, including those of you listening to the webcast.

With me here this morning, our President and CEO; Milton Johnson, our CFO Executive VP; Bill Rutherford, his maiden voyage for a call.

Welcome, Bill.

Sam Hazen our President of Operations and several other members of HCA senior management team are here, as well.

Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they are based on management's current expectations.

Numerous risks, uncertainties, and other factors may cause the actual results to differ materially from those that might be expressed today.

Many of these factors are listed in today's press release and in our various SEC filings.

Many of the factors that will determine the company's future results are beyond the ability of the company to control or predict.

In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements.

The company undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information or future events.

This morning's call is being recorded, as you heard.

Replay will be available later today.

With that, I will turn the call over to Milton.

Thanks, Vic and good morning to everyone joining us on our call this morning.

Let me start by welcoming Bill Rutherford to the earnings call.

As most of you know, Bill was named Chief Financial Officer effective January 1 and you will hear from Bill later this morning.

I will start today by providing a few general thoughts on our fourth-quarter performance, as well as some observations for the entire year, and then following this, I have a few comments on healthcare reform, as well is 2014 guidance.

First, the fourth quarter, we were very pleased with our overall performance for the quarter.

Due to the exceptional volume we experienced in last year's fourth quarter, and the implementation of the 2-midnight rule in the fourth quarter of this year, we expected softer volume growth rates in the quarter.

We were able to deliver EBITDA growth in excess of our internal expectations due to better-than-expected service mix that resulted in higher revenue rates per equivalent emission.

This, along with solid performance in managing expenses in the quarter resulted in adjusted EBITDA growth of 6.7%.

Much of my commentary for the quarter can be said for the year.

The year 2013 was the year that we experienced softer volume growth trends compared to recent years for HCA.

Softer volume trends were offset by higher acuity patients and focused expense management.

Our operating teams did an excellent job of making appropriate adjustments to our cost structure to reflect the change in volume trends.

Adjusted EBITDA for 2013 of $6.574 billion increased 0.7% over 2012 adjusted EBITDA of $6.531 billion on a reported basis.

However, adjusting for the $170 million net favorable Medicare settlement recorded in the first quarter of 2012, and $120 million last high-tech incentive income in 2013, and an increase in non cash share-based compensation expense in 2013 of $57 million, adjusted EBITDA growth in 2013 would have increased by an additional 570 basis points.

In addition to our financial success in 2013, I want to highlight our continuing clinical quality improvement, as well.

HCAs aggregate performance on CMS core measures is above the 90th percentile.

110 HCA hospitals or 80% were recognized in 2013 by joint commission as top performers versus 33% of US hospitals.

And in 2014, we will continue to build our programs in patient safety, infection prevention and the use of electronic health records in clinical data for the highest quality and most efficient healthcare.

Before moving to 2014 guidance, I have a few general thoughts to share.

I believe we're well-positioned in our key markets as we start 2014.

Our operating agendas are structured appropriately, they're focused and they're effective.

Operationally, we are focused on patient volume growth, quality outcomes, improving patient service, and efficiency and service delivery.

We believe these are the key ingredients for success.

In a moment, Bill will provide details on our 2014 guidance including healthcare reform.

First, I will provide a few thoughts.

In this morning's earnings release, we provided guidance estimates for certain financial metrics, including the expected financial impact from the Affordable Care Act.

Our adjusted EBITDA range is $6.6 billion to $6.85 billion for 2014.

Included in our adjusted guidance is a benefit from the Affordable Care Act in the range of 1% to 2% of adjusted EBITDA.

Let me make a few comments about our guidance for healthcare reform.

Number one, many of us at HC have worked diligently over many months in an attempt to model the adjusted EBITDA impact of healthcare reform for 2014 and beyond.

Number two, which should come as no surprise; there continues to be many uncertainties for the key variables which will drive the financial impact of reform.

Number three, the Medicare rate reductions we have been incurring since 2010 and that we will continue to incur as reformed pay fors are built into our core business run rate and are not included in the calculation of our 1% to 2% benefit range.

Finally, let me just say that while I'd always hoped we could provide annual reform guidance for multiple years, there remain too many uncertainties for many of the key variables to do so.

However, we remain optimistic that reform should contribute to additional growth or HCA over the longer-term.

As we reflect upon all this, we believe we are well-positioned to succeed in the healthcare reform environment.

Before turning the call over to Bill, as you may know, yesterday, we announced the appointment of three new independent directors to our board.

Also, as a result of the company's transition from a controlled company, two directors from each of our private equity sponsors stepped down from the board, leaving one director from each firm on the board.

This transition is the result of reduction in share ownership buy our sponsors that occurred in 2013.

I am looking forward to working with our new independent directors, as well as existing board members in the years ahead.

Now, I will turn the call over to Bill for additional details regarding the fourth quarter and 2013.

Thank you, Milton and good morning everybody.

I will cover some additional detail around the fourth quarter results, then I will turn it over to Sam and he will provide commentary on our growth agenda and some market share information.

I will then come back and conclude with some remarks on our approach to health reform modeling and some additional detail on our 2014 guidance.

As Milton mentioned, we were very pleased with the quarter's results, especially given the strength of last year's fourth quarter.

The fourth quarter results were driven by solid revenue growth resulting from relatively stable volume trends and increased intensity of service, as well as excellent expense management by our operators.

Revenues in the fourth quarter increased 4.8%, to $8.836 billion driven primarily by revenue per equivalent emission growth of 4.6%.

Case mix or the level of acuity of patients served in our facilities increased 3% in the quarter, compared to the prior year.

We saw solid surgical volume in the quarter, while also seeing a reduction in lower acuity cases such as pulmonary.

And Sam will share some additional details on this.

In the fourth quarter, adjusted EBITDA increased to $1.714 billion, an increase of 6.7% in the prior year, EBITDA margin increased 40 basis points to 19.4%.

Volume trends in the quarter were below our recent trends.

However, this was not surprising given the strength of last year's fourth quarter where same facility admissions grew 4.3% and equivalent admissions grew 5%.

So, this quarter did provided difficult comp.

In the fourth quarter of this year, our same facility total admissions declined 1.8% over prior year and equivalent admissions declined 1%.

During the fourth quarter, same facility Medicare admissions and equivalent admissions declined 2.4% and 0.9% respectively.

Same facility Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions increased 4.4% on a same facility basis and now represent 29.5% of our total Medicare admissions.

Let me take a moment to comment on the 2-midnight rule.

As you would expect, we have spent a considerable amount of time and effort on the implementation of this new rule which became effective October 1, 2013.

In addition to a significant amount of training, education and process redesign, we've implemented a new Medicare order form; work diligently with our physicians and implemented tracking and monitoring processes.

This new rule did have an impact on our reported Medicare and total admissions for the quarter.

Our decline in Medicare one day stays accounted for about 50 basis points of our total admission decline for the quarter.

We continue to implement and monitor the impact of this new rule and while it did and will likely continue to have an impact on our reported admission metrics, we do not believe it will have a material financial impact, as we were also able to eliminate some operating expenses associated with outside reviewer cost that had previously been incurred related to reviewing our short stay Medicare admissions.

Same facility Medicaid admissions and equivalent admissions declined 1.6% in the fourth quarter when compared to the prior year.

Managed care admissions and equivalent admissions declined 3.8% and 3%, respectively, in the quarter on a same facility basis.

And same facility emergency room visits declined 2.4% in the quarter.

This is also against a difficult comp as emergency room visits increased 12.7% in last year's fourth quarter.

Our softer volume was mostly in our lower acuity business and this, coupled with continued surgical growth helped drive stronger revenue intensity.

Same facility revenue per equivalent admissions in the quarter increased a solid 4.8%, compared to the prior year.

Same facility Medicare revenue per equivalent admission increased 1.3% in the fourth quarter, while Medicare case mix increased 3.3%.

Same facility Medicaid revenue per equivalent admission declined 0.6%, excluding the Medicaid waiver programs, while case mix increased 3.1% over the prior year.

Same facility managed and other revenue per equivalent admission increased 7.7 -- 7.1%, a slight increase from our year-to-date trends.

Case mix increased 3.6% in the quarter.

Same facility charity care and uninsured discounts increased $498 million in the fourth quarter compared to the prior year.

Of this same facility, charity care discounts totaled $916 million in the fourth quarter, an increase of $165 million from for the prior year, while same facility uninsured discounts totaled $2.139 billion, an increase of $333 million from the fourth quarter of 2012.

Now, turning to expenses, expense management in the quarter remained strong, consistent with our previous quarters in 2013.

Same facility operating expense per equivalent admission increased 3.5% reflecting increased acuity and surgical volume in our patient population.

As you see on a reported basis, salaries and benefits as a percentage of revenue improved to 44.9% from 45.8% in the fourth quarter of last year.

Salaries per equivalent admissions increased 1.5% on a same facility basis in the quarter.

Same facility supply expense per equivalent admission increased 4.5% in the quarter when compared to last year.

This primarily reflects the service intensity and increased surgical volume we saw in the quarter.

We recognized $50 million in electronic health record income in the fourth quarter compared to $80 million last year.

The Company also incurred approximately $28 million in HER related expenses in the quarter, compared to $19 million in last year's fourth quarter.

Both of these are consistent with our expectations.

Cash flows from operating activities totaled $1.226 billion, compared to $1.263 billion in last year's fourth quarter.

We spent $596 million in capital expenditures in the quarter, bringing our full-year CapEx spend to $1.943 billion.

Days in AR increased slightly to 54 days at the end of the quarter.

At December 31, the company's ratio of debt to adjusted EBITDA was 4.32 times compared to 4.39 times at September 30.

At the end of the quarter, the Company had approximately $2 billion of availability under its revolving credit facilities.

That concludes my remarks in 2013 and I will turn it over to Sam for some additional comments.

Good morning.

I'm going to provide some detail on both fourth-quarter volumes and market share performance for the company.

Same facility inpatient admissions in the fourth quarter were down approximately 8,000.

Three factors explain this decline.

First, pulmonary admissions were down 9%, almost 3,500 admissions.

We believe the lighter flu season is the reason.

Second, Medicare short stay inpatient admissions, those staying less than 2 midnights, were down 12%, almost 2,500 admissions and third, we believe the implementation of the CMS 2-midnight rule spilled over into other payers, as short stay inpatient admissions and other payer categories declined by another 2,100 admissions, or 4%.

Outpatient observation visits, the alternative category for many short stay inpatient admissions increased by almost 11,000, or 8.5%.

Pulmonary related emergency room visits were down in the quarter by over 9%, or approximately 23,000 visits.

This decline represents approximately 53% of the overall reduction in emergency room visits.

The positive story inside our volume analysis is the increased acuity.

As you heard our case mix index for the quarter was strong.

This increase was driven by a number of factors.

First, inpatient surgery volume grew by 1%.

As a result, surgical admissions were a larger percentage of total admissions in the fourth quarter, as compared to the prior year.

Secondly, across our surgical business, service lines with higher acuity such as orthopedics, neurosciences and cardiovascular grew at a faster rate.

Third, within our medical and surgical service lines, the overall acuity was higher within many individual service lines this quarter.

We believe declines in short stay admissions explain some of this change.

Average length of stay increased by 1.4% in the quarter, reflecting the increased acuity of our inpatient business.

Other inpatient statistics for the company are as follows; obstetric admissions grew by 1%, behavioral services admissions grew by 1.6%, rehabilitation admissions grew by 9%, and census levels inside our intensive care units were slightly up.

Same facility outpatient surgical cases grew 1.6% in the quarter.

We saw growth in both our hospital outpatient surgical department and our ambulatory surgery division.

We believe our program to become the OR of choice for physicians and patients is driving this growth and our inpatient surgical growth.

In the quarter, 8 out of 14 divisions had growth in inpatient surgical volumes and 10 out of 14 divisions had growth in outpatient surgical volumes.

Our international division also had solid growth in total surgical volumes.

Now, let me transition to some market share highlights for the 12 months ended June 2013.

Once again, this data is the most current data available for the company and represents almost 90% of the company's markets.

The company's inpatient market share for this period increased by 44 basis points to 23.8%.

Inpatient demand in these markets during this 12 month period was essentially flat.

For the three months ended June, 2013, however, inpatient demand increase by 0.3%, which is a rebound from the decline in demand experienced in the first quarter of 2013.

We gained share in 13 out of 17 service lines.

We gained share in 27 of 37 markets.

Our market share in both the commercial and in migration segments of our business continued to grow in this period.

Across all these metrics, the company's market share trends are generally consistent with past reports.

HCA continues to invest in this growth agenda.

As you saw in our press release, we are going to increase capital spending in 2014 to around $2.2 billion, which is approximately $200 million greater than 2013.

This increase will go to expanding our operating capacity and existing facilities, and to expanding the number of facilities, both inpatient and outpatient in our existing markets.

As part of our capital spending for 2013 and 2014, the Company will add approximately 770 new inpatient beds, and 270 emergency room beds.

Included in these additions are five new hospitals, two of which have already begun operations, 15 new emergency rooms in outreach markets, and 3 replacement surgery centers.

Additionally, we are investing and more technology and organizational resources to improve our quality and service offerings, which should make our facilities more competitive and responsive to the needs of our patients and physicians.

With that, let me turn the call back to Bill.

Thank you, Sam.

So, now let me conclude with a discussion about health reform and some additional commentary on 2014 guidance.

As Milton mentioned, and I think we all know, much uncertainty remains around health reform.

So, we want to walk you through the approach we used in developing our guidance range.

We remain optimistic on the long-term benefits of health reform.

But the slower than expected rollout, discussion around the percentage of enrollment that are newly insured, the reported disruption in the individual and small group marketplace and lack of specific market level enrollment data, our outlook and evaluation of health reform will remain fluid during the year.

As mentioned in our release, we are currently estimating a positive impact of health reform on our adjusted EBITDA between 1% in 2%.

While there are multiple assumptions around health reform, there are really four key variables that drive the majority of our estimated impact.

First, are the assumptions around the final enrollment and exchanges and newly covered Medicaid lives due to expansion.

We operate in four states that elected to expand Medicaid as of this time.

California, Nevada, Colorado and Kentucky.

So, Medicaid expansion has only a moderate impact within our estimate versus the exchange enrollment.

On the exchange enrollment, your information is as current as ours.

Knowing that there are roughly 2 million people enrolled in exchanges at the end of 2013 and that was updated last week to now just under 3 million enrolled.

Our model builds from this base.

The second variable to the model is the estimate for the percentage of enrollment that was previously uninsured versus previously insured.

I believe we've all read a variety of ranges on this issue over the past couple of weeks, and our model makes some broad estimates for this variable.

The third variable is our participation in exchange networks, the related revenue clearance of this exchange network volume, and assumptions around metal tier selection.

Currently, 97% of our facilities participate in exchange product.

64% of our facilities have access to the lowest-priced bronze and 54% having access to the lowest-priced silver.

The last variable relates to assumptions around out-of-network treatment and reimbursement.

Over the past several months, our team, with the assistance of outside resources have performed exhaustive market evaluation, data analysis and updated our market our market assumptions on each of these and other variables.

It is the product in this work and our updated assumptions that have led to the guidance we are sharing with you today.

In summary, our estimate is the net effect of the upside remodel for our share of newly insured individuals, offset by lower revenue clearance for the migration of previously insured moving into an exchange or exchange like product.

The summation of our work can be characterized that we are estimating 7% to 9% of our uninsured business will gain some new coverage.

This will provide a positive benefit in new reimbursement.

However, this will be partially offset with some revenue clearance decline from previously insured exchange enrollment.

The net effect being an increase in our adjusted EBITDA between 1% and 2%.

So, to conclude my health reform comments, we know all of this is still unfolding and there remain many unknowns.

I believe it is important to share with you some insight into how we're thinking about reform.

All right.

Let's move onto 2014 guidance.

As highlighted in our earnings release, this morning, we estimated our 2014 consolidated revenues should range from $35.5 billion to $36.5 billion.

This does not include the impact from any acquisitions not yet completed.

We also expect adjusted EBITDA to be between $6.6 billion and $6.85 billion.

Within our revenue estimate, we estimate the equivalent admission growth to range from 1% to 2% for the year, and revenue per equivalent admission growth to range from 2% to 3% for 2014.

Medicare revenues in 2014 reflect a composite growth rate of approximately 1%, factoring in market basket changes, oca reduction and the annualizing affect of sequestration.

Medicaid revenue per equivalent admission is expected to be flat year-over-year, and for 2014 we have virtually all of our managed care revenue under contract with rates averaging between 4.5% and 5.5%.

Operating expenses are anticipated to continue to benefit from a continued low inflationary environment in 2014, and our operating expense guidance is built on maintaining margins while we continue to invest into our clinical and HER development initiatives.

High-tech revenues for 2014 are estimated to range from $110 million to $130 million, a reduction of approximately $100 million from 2013.

High-tech expenses should also range from $110 million to $130 million for the year, comparable to last year.

2014 guidance also incorporates the third year of our post IPO share-based awards and non-cash share-based compensation expense, which is expected to increase to approximately $168 million for the year, or an increase of $55 million from 2013.

Depreciation and amortization Douglas Packard to be approximately $1.8 billion.

Interest expense is projected to be about $1.8 billion, as well.

Our effective tax rates will be approximately 38.5%.

We are estimating our outstanding share count will average just over 461 million shares.

Lastly, our earnings per diluted share guidance for 2014 is $3.45 to $3.75.

So that, I conclude my remarks and turn it over to Vic for some Q&A.

All right Bill, thank you, Sam and Milton, as well.

All right Casey, you want to come back on?

We are going to poll for questions.

As we always do, we'd like you to hold her questions to one so that we can cover all those that have a question to ask.

You can circle back in the queue if you like.

All yours, Casey.

Absolutely.

(Operator Instructions)

Sheryl Skolnick with CRT Capital Group.

Good morning everyone and great job on the quarter and thank you for the guidance.

Obviously, reform is a huge task to model into the business.

But, I was wondering if you could help us further the explanation was great thank you Bill, welcome to the call.

I was wondering if you could help us further.

There still some lingering focus on the provision for doubtful accounts.

Either using that as a proxy for how much reform might add, or I think more materially, trying to understand how it's going to change with at least some of your uninsured volumes being covered.

Could you walk through your thoughts on that, please, with us?

Also, any timing that you might be able to help us out with, in terms of understanding when you think you might have enough data to update us again on reform.

All right who wants that Milt -- Bill?

I will take the first stab and then Milton or Sam add in as necessary.

Sheryl, thank you for the question.

So, we believe by laying out our expectations of 7% to 9% of uninsured gains and some coverage give some insight in how we're thinking about that.

We know that will leave 92%, 94% of our current uninsured business that will still float through on to bad debts and we know that book has been growing 6% to 8% a year.

So, may be hard to see the impact of that on our provision, at least on our reported statements.

As part of our deduct that we say partially offsets the upside of the uninsured, is that conversion of insured into an exchange product.

A subset of that population will move into a product that is comparable revenue clearance.

There is a subset of that population that will move into exchange products with perhaps some reduced revenue clearance, either through a discount for participating on exchange product or higher bad debt because of deductible and coinsurance.

So that offset a some of that movement on the previously uninsured and some of that may move into a restricted network and we'll either see that in an out-of-network position or it be directed around us.

So, I think it's hard-pressed to kind of see that exactly show up in our provision of uninsured.

There will be some relief of the uninsured gaining coverage.

But, we will see some continued growth with the business that remains and there will be some offset to that with increased bad debts with the higher deductible and co-pays for exchange like products.

That's my best answer.

Milt did you want to add to that?

Yes, Sheryl let me maybe help frame it a little bit.

If you think about this year, 2013, when you look at our self-pay our uninsured revenue increased by roughly $100 million over 2012.

When you look at our provision for doubtful accounts, roughly about 70% of that amount in 2013, was used to reserve for self-pay revenue or uninsured revenue, leaving about 30% for co-pay and deductibles for insured patients.

That helps frame how it's growing most recently coming in into reform.

When I think about reform, as well, into 2014, I think it's going to be, the benefits will be more backend loaded.

There will probably be some small benefit we will see in the first quarter, growing maybe into the second.

Really, we see it as more of a third and fourth quarter opportunity for us, quite frankly.

As you are thinking about modeling that 1% to 2%.

I see it more of a backend loaded number for us rather than early here in 2014.

As far as when we think we will have more clarity about some of these variables, at the very earliest, and this again is the earliest that I would expect, and I'm not sure we'll have it then is midyear.

So, when we give our, you know, into the third quarter of 2014 where we giving second quarter earnings analysis, we might have some more clarity around some of these variables as we see the first six months of reform.

Again, because I think it's going to be largely backend loaded, it maybe even later into the year.

I'd say midyear would be the earliest.

I don't think we will have much color based on the first quarter results, frankly.

All right.

Thank you, Sheryl.

Thank you.

Frank Morgan with RBC Capital Markets.

Good morning, I appreciate your description on the pending acquisitions not being included in the guidance.

I was hoping you could give us a little color surrounding those pending deals.

When you think those might close and how much those might contribute?

Then also, just the development activity in the CapEx that you outlined.

How much of that is implied in the guidance that actually comes online in 2014?

Thank you.

Frank, as far as acquisition impact, based on the pipeline today, I don't think it would be material impact in 2014.

You may have read yesterday, or may have been released late last week, that our hospital transaction with Ascension in Kansas City, two hospital transaction is not going to happen.

Could not get the FTC clearance.

So, that deal is off.

Of course, we are integrating our three hospitals in the Tampa market that we acquired from IASIS in 2013.

I don't expect those, to those were built into our guidance since we did have those, acquired those by the end of the year.

So, those are built-in.

Right now, I don't expect, hopefully something will come up here in 2014 that will be attractive for us.

But, nothing in the pipeline that I think will be material, as of today.

(multiple speakers)

Yes, Frank, this is Sam.

Excuse me, let me add to the answer Milton just gave you around the capital.

A couple things.

One, for any large capital expenditures that we do inside of HCA we have a very specific process that we hold to, to ensure that the expectations around those capital projects are included in our budgets and plans as laid out in those approvals.

So, there's a natural flow of those expectations in our guidance.

The second thing is, on new capital, there is a natural ramp-up.

These are long-lived assets.

We have a natural ramp-up that occurs on new capital that goes into the market.

Some of that is fed into the guidance for 2014, but it's not that material, as it relates to the overall performance of the company.

Frank, thank you.

Gary Taylor with Citigroup.

Hi good morning, I just wanted to clarify two things, I think it was Bill that was talking.

The first is, when you went through some of the detailed metrics behind the 2014 guidance, did you give a same-store admissions or admissions outlook, did I miss that?

You did.

Gary, so, we said the equivalent admissions would range 1% to 2% and revenue per equivalent admission would run 2% to 3%.

Okay, and then just my second clarification.

When you said for 2014 you expect 7% to 9% of uninsured to gain coverage, you are saying 7% to 9% of your uninsured adjusted admissions volume, right?

Not 7% to 9% of uninsured population in your market.

Just trying --

Correct.

Correct, Gary.

As we step down enrollment in our markets, our share kind of equates to 7% to 9% of our current uninsured volume.

Okay.

Thank you Gary --

(multiple speakers) okay.

Are you assuming a pro rata, so, if 9% get covered, that's a 9% impact on utilization -- I'm just trying to understand if you baked in this concept of some of those folks are disproportionate utilizers or if you just kind of pro rata the enrollment, here.

Yes, Gary, this is Milton.

So the stat that Bill gave you, is just the coverage statistics.

We have other assumptions in the model around utilization from the population that gains coverage.

So, that's an independent variable from the overall coverage variable.

Okay.

Thank you.

Thank you, Gary.

We'll go next to Whit Mayo with Robert Baird.

Thanks, Sam, just wanted to go back to the comment around outpatient observation.

I think you said in your prepared remarks that they were up 8%, maybe 11,000 cases in the quarter.

Was that all traditional Medicare?

Was it across other payers?

Any color would be helpful.

I don't have the exact payer mix of all our observations visits in front of me Whit.

I will say this, that the short stay admissions decline was fairly broad-based across all of our payers.

So, I would infer from that, that as a result of our increase in observation visits we saw natural growth in all the different payer classes for observations.

I've got it in my office, I just didn't bring it in here with me.

I can get that information to Mark and he can get it back to you.

But I think it's reasonable to assume that.

Okay.

No that's helpful.

Maybe just one other one.

Just Bill, can you remind us on the restricted basket and where you are now?

We are about $750 million we anticipate by the end of the year.

Great.

Thank you.

Thank you, Whit.

Darren Lehrich with Deutsche Bank.

Thanks good morning everybody.

I wanted to ask about your surgery trends.

When we look at the ratio of your inpatient surgeries to that of your inpatient admissions, it's really moved up.

I recall being much higher before the downturn, probably 32% to 33% we're now back up to 29%, 30%.

I'm just wondering if you can comment a little bit more about what you guys are seeing, whether this is some kind of come back have you based in CRM in some of the other things that caused the pressure on surgery and broader thoughts on how surgeries play into your outlook for 2014?

Sam, you want that one?

When I think about surgery as a percent of our total business, I think there's two components that affect it, as you look at that ratio.

First, we are intentionally investing heavily in our surgical growth across the company.

We've been doing that now for over two years and I think it's having an impact.

It's all imbedded in what we call our OR of choice initiative, where we are intentionally detailing each of our surgical departments to ensure that they have the necessary equipment to meet our physician needs and patient needs, that they have the right process improvement efforts in place to ensure efficiency.

Then, we are very specific with our physician liaisons to respond to the individual physician's needs as it relates to scheduling and so forth.

I think, in addition to the capital that we've committed to that, those elements are driving improved performance for the company.

We continue to believe that there is capacity in that effort.

Opportunities for continued improvement in growth along the lines of what we've seen or the last couple of years.

The second thing that affects the ratio that you are referring to is the fact that our emergency room volume has slowed a little bit and we haven't seen the emergency room admissions that we had seen in previous years.

A lot of the emergency room admission activity is medicine oriented business and when you put that into the mix, it affects that ratio that you were referring to, as well.

When you look inside our market share, and look specifically inside a surgical service lines.

We are seeing solid growth in orthopedics, we are seeing solid growth in neurosciences, we're gaining ground in general surgery categories and so I feel very good about that metric bumping up against the effort that I just mentioned to you.

Again, I think 2014 is a year where we are still pretty optimistic around what we're doing on the surgical front.

Darren, thank you.

Justin Lake with JPMorgan.

Thanks good morning.

On the guidance, I am trying to back into what you are implying for core EBITDA growth.

I think we talked previously and you mentioned 3% to 5% is your core target.

I'm getting closer to 2% to 4% within that guidance after making the adjustments for the stock comp in the healthcare IT.

Just wondering if I'm missing anything or if there is some reason for some increased conservatism?

Milton, you want that one?

Sure.

Justin, if you walk down the low-end, and the high end of our guidance, adjusting for the three items that we've identified, high-tech revenue, if you back out $120 million out of both sides of our guidance there, for 2014, you back out or-- add back the share-based comp expense of $168 million to each side.

If you use the 1% to 2% of EBITDA, you'll get a range of $65 million to $130 million for healthcare reform.

If you adjust the high and the low for that, what I get when I do that math and compared it to the adjusted number for 2013, is that the low-end we have got a growth rate implied of 1.75% and on the high end, a growth rate implied about 4.6%.

So, that would be -- that would be our core range there.

This year, we've got it ranging from our guidance of 1.75% to 4.6%, clearly, when you think about the point estimate in that range, it would be in the 3% to 5% zone.

Okay.

Great and if I could just ask, what are you assuming for the percentage of people that are newly covered within that guidance assumption?

You mentioned that is one of the core, you know, percentage of enrollment previously uninsured is one of the core key issues.

Just what we can assuming there.

Justin.

We are not going to disclose the detailed assumptions.

What we wanted to do this morning was to give you obviously the projected impact on 2014 EBITDA.

Bill walked through the four main variables of reform.

One of which being the percentage in the exchange enrollment that's newly insured.

We are not going to disclose that level of our model and we want some experience to see how it plays out over time, of course.

We are not going to disclose the detail assumptions of those key variables at this point in time.

Obviously, as we built our motto we put ranges in for that and other items to get some comfort with it.

We start dwelling on single points and it leads you to the next one and the next one.

So, as the year goes, we will provide a little more color on that.

Okay.

Thanks Justin.

Ralph Giacobbe with Credit Suisse.

Thanks, good morning.

I wanted to go back to the offset of the previously insured, getting coverage and moving to the exchanges.

Is there an assumption that you just flat-out lose volume versus the out-of-network?

I would assume if you capture, it would actually be sort of incrementally beneficial to you.

One is, what of that assumption is straight up loss volume, or does it largely just reflect lower pricing on the exchange and collection?

Maybe just remind us of your pricing on the exchange relative to your commercial book.

Thanks.

Hey Ralph, Bill.

So, I will walk you through and kind of did before answering Sheryl, there's kind of four subsets of those previously in insured.

I think as Milton said, we are going to resist giving you our exact assumptions under each one of those, knowing that it's fluid and there's offsets and there's different points.

We know there's a subset of that population that is moving into a comparable product with really comparable revenues, so set that aside.

There's a subset of that population that's moving into an exchange of product and there's a discount associated with that, relative to participation.

There's likely some higher bad debts associated with that, higher deductibles and co-pays.

There's a subset of that population, to your question, that moves into a restricted network.

A portion of those we may see in an out-of-network basis given our footprint in the marketplace and, yes, there's an assumption for a portion of those that we lose because it gets erected away from our network.

But again I think we are going to resist giving you our exact assumptions as we break that out.

Knowing that becomes fluid, it's part in parcel of multiple other assumptions we are using in our estimate.

I think, too, one thing to think about here, as healthcare reform is being implemented across the nation.

Of course, we all read about and saw the disruption in the individual market.

So, we have factored that in, into our guidance.

You know, the question I would have is, is that disruption a one-time event?

So, it may be an event that may have more impact here in 2014 than in later years.

But, again, you have to see that play out.

Thank you, Ralph.

Josh Raskin with Barclays.

Hi thanks, good morning.

Question also on the impact of reform.

I think you said that the 1% to 2% positive, is obviously exclusive of the Medicare cuts we keep seeing now for a couple of years.

Is it safe to assume net-net PACA is still a negative for you guys in 2014?

I'm also curious, the 1% to 2%, how does that vary by state?

I know you have four states that are expanding Medicaid.

I'm just curious, is in a much bigger positive impact in those states?

And obviously and is actually not a positive in the other states?

Josh, this is a Vic.

If you go back and look -- and these are percentage points cuts to market basket and productivity.

We started seeing hits in 2011.

There was a quarter point reduction then in 2012, it was 1.1 in 2013 it was 80 basis points in 2014 it's another 80 basis points.

You can kind of run those numbers through and you can see that they are bigger than the upside range we just gave you for 2014.

So, obviously, we've been incurring these cuts to get there and so it will take a little while for that to offset it.

The second piece of it, we are not going to go into state-by-state.

Obviously, there's still and not a lot of data.

We've obviously made an assumption they're not many of our states with Medicaid expansions, but we do get some benefits, a little bit in California and Colorado.

We are real small in Kentucky and in Nevada, we would pick up some, as well, through Medicaid.

We also continue to be hopeful we will see some states step up and expand their Medicaid in out years.

At this point, we are going to kind of hold back, in terms of any specific state information.

Not necessarily quantifying the states, but I'm thinking about what if Florida does go, et cetera, this year.

Just what's the incremental delta on your average state that has expanded Medicaid versus (inaudible).

Yes, we are not, we are not going to that detail at this point.

Again, we will see as we get later in the year if we learned have some realtime data that's worth sharing, we will go there.

Right now, those aren't assumptions we are willing to put out on the table.

Okay.

Thanks

Gary Leiberman, Wells Fargo.

Good morning, thanks for taking the question.

Can you talk a little bit about what you are experience has been like with the use of certified application counselors in the hospitals?

Has that gone smoothly?

Has it improved as the technology on the exchanges has gotten better?

Also, if you could talk about any benefit from presumptive eligibility that you are seeing.

Bill, do want those?

Yes, hey Gary this is Bill, thanks for the questions.

We have about 400 certified application counselors throughout our system that continue to screen and counsel patients in our facilities.

We definitely have seen that activity ramp up.

Compared to October and November, when there were issues with the website.

That continues to be an active part of our reform effort.

We continue to evaluate some other outreach efforts for within our marketplace for uninsureds, as well.

The certified application counselor activity, continuing to counsel a lot of people and we have seen the assistance in the application increase here in December and January and hope to see that continue to grow, February and March.

It did have a slow start, just given the website piece of that.

Our presumptive eligibility, we are still working with our states on there.

You know some of our states already had presumptive eligibility.

There is a certification process an application process that you go through.

We think that, ultimately, will just allow us to accelerate some Medicaid applications versus necessarily increase our net-net yield.

So, we are still optimistic on the presumptive eligibility piece.

Thank you, Gary.

Tom Gallucci with FBR.

Good morning thank you.

First just wanted to clarify.

Did you have outlined a margin expectation for EBITDA for 2014?

From a bigger picture standpoint, we are sort of seeing the impact of the exchanges and deductibles rising there in the private sector, traditionally.

How are you sort of thinking about the seasonality of the business these days?

Is it materially different as you think to the future compared to the past?

With respect to margins, you know, and the comments, we are trying to manage our cost with to match our revenue and you know margin maintenance would be the target for 2014.

Sam, do you want to respond to the seasonality?

I think, if you look back over the past few years, we started to see more outpatient demand occur in the last half of the year, especially in surgical areas and some other outpatient service lines.

That has been a shift.

We've heard it from our physicians we've seen it in our data and so forth.

I think it's natural to assume that, that is coming from higher deductibles and co-pay requirements that get exhausted as the year progresses and people decide to go ahead and get their procedures done in the latter part of the year.

So, on the outpatient side, I do see more seasonality toward the end of the year than what we've seen in the past.

Actually, in this fourth quarter, compared to the third quarter on a sequential basis, our outpatient surgical activity, I think, grew somewhere around 6.5% to 7%.

Last year it grew about 6%, so it really wasn't changed materially from the previous year, as far as the sequential performance on that particular metric.

Obviously, the first quarter has a variation from one year to the next as it relates to flu season activity.

I think, primarily, but that would be the only thing that drives uniqueness from one year to the next.

Clearly on the outpatient side, we have seen a seasonality shift that is more in the back half of the year as opposed to the first half of the year.

Thank you, Tom.

Next to Kevin Fischbeck with Bank of America Merrill Lynch.

This is actually [Jillanna Gadgock] filling in for Kevin today.

I would just like to ask a little bit more about the reform assumptions there and also what you are doing around that.

First, as a follow-up to the comment you made about what you include, in terms of utilization assumption for the people getting insurance.

You know, we are thinking that it's probably sicker people that are buying insurance.

So, if you can comment on how you feel about that and also around the outreach put forth in your markets around reform.

If you can maybe shed some light, in terms of, are you having more success signing up people for Medicaid you know for those that are in the Medicaid expansion states and how to best compared to your success rates in signing up people for core Medicaid, so to speak.

Thank you.

All right, Bill you want that?

Yes, so on the utilization, I think as Milton mentioned before, we do have a utilization factor built into our model for the newly insured.

That's just one of many variables that's in our model.

So, I imagine to just really kind of talk about what that actual utilization factor is.

I think we've all read reports about some increased activity.

So, we do have a utilization factor on that piece, as we look at that 7% to 9%.

It's one of many variables that's included in our model.

Regarding the outreach, principally, our efforts have been around our CAC our certified application counselors as people visit our facilities.

We have an effort under way in several, in a couple markets, to do outreach for uninsured patients that have visited our facilities over the past 12 to 18 months.

That includes both outbound calls and other outreach efforts.

I think it's too early to kind of report on the net effect of that, you also may know that we have fairly robust Medicaid eligibility processes already in place at our facilities.

If an individual shows up, we assist them with evaluating coverage options and if they turn out to be eligible for Medicaid within our states already, we go through a Medicaid eligibility process to assist them to gain coverage.

All of that is part of not only our ongoing operations effort, but some increased activity relative to reform adoption.

Kevin, thank you.

Casey, I think we have time for one more question.

See who the lucky one is.

A.J. Rice with UBS.

We are not going to take him.

(laughter).

The pressure is on, there.

Anyway, I should say congratulations to Milton and Bill for the new roles and best wishes there.

I am going to have a two-part, here.

First of all, you didn't really provide much of an update on Parrallon.

Is there anything to say there?

Second, on the exchange area, itself, thanks for the comments about where you are at with respect to the bronze and silver.

When you think about your market share in the markets where you are at, and how you are positioned on the exchanges, do think you are sort of in a position to maintain your current share?

I know there was some discussion about out-of-network strategies and so forth.

Give us some flavor for a little bit more how you are positioned with the payers on the exchanges if possible.

All right who wants that.

Let me make a couple comments on Parallon and Bill, I will ask you to maybe comment, as well, before we go to the exchange positioning.

First of all, I think Parallon actually is moving very well, going very well.

We think about 2014, we've got the outsourced groups, our acquisition to complete the integration into Parallon.

We see some upside there, of course, with that.

With respect to like point implementation, continues to move on schedule and we should be fully implemented with LifePoint in 2014.

Then, of course, we are starting the build out of her service center for CHP in Cincinnati.

That is on schedule and under way and looking forward to starting that transition into the consolidated environment for CHP.

So, things at Parallon are moving very well and on track with our expectations.

We are still bullish on Parallon.

We are seeing opportunities in our pipeline continue to be out there and the team is really performing well.

You all want to talk about the metal position on the exchange?

Well, again, we've added, I think, the number of possible we have in each level at the lowest or second lowest tier.

But, Juan any other comments you have or knowledge you have about position.

Sure, A.J. it's still evolving.

It's a relatively small part of the business, you heard it all said.

There are some markets, a very few, where we are not positioned correctly.

There are a lot more markets, major markets where we are very well-positioned.

Until we get enrollment data, I think it's too early to tell how poorly-positioned or well-positioned we really are.

Milton?

Let me just add, with respect to reform obviously, over the coming year, we are going to continue to monitor the actual exchange volume, understand utilization in the back half and capture network share.

Also, with respect to Parallon, monitoring our revenue cycle capabilities to make sure that we can be effective in collecting the patient portions of any out-of-pocket that is due from this newly insured group.

Again, we will continue to look at opportunities to be in more networks and the exchanges as we go through 2014.

Then, as we see it, how our strategy is playing out, we will be evaluating our strategy market by market and could make changes if we feel like that we would be better positioned in the network.

So, there's a number of moving parts with respect to our reform strategy, as we enter in 2014.

I'm sure those strategies would be considered and be constantly reviewed as well throughout the year.

All right.

Thank the team, thank all of you for being on the call and Mark is here all day and I may be.

(laughter) Have a great day.

Thank you.

Ladies and gentleman, this does conclude today's presentation.

We appreciate your participation.

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