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Edited Transcript of LPNT earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 LifePoint Health Inc Earnings Call

Brentwood Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of LifePoint Health Inc earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Dill

LifePoint Health, Inc. - President and COO

* Michael S. Coggin

LifePoint Health, Inc. - CFO, CAO and EVP

* William F. Carpenter

LifePoint Health, Inc. - Chairman and CEO

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Conference Call Participants

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* Albert J. Rice

UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities

* Ana Gupte

Leerink Partners LLC, Research Division - MD, Healthcare Services and Senior Research Analyst

* Christian Douglas Rigg

Deutsche Bank AG, Research Division - Research Analyst

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Joshua Richard Raskin

Barclays PLC, Research Division - MD and Senior Research Analyst

* Justin Lake

Wolfe Research, LLC - MD and Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Scott J. Fidel

Crédit Suisse AG, Research Division - Director and Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to LifePoint Health First Quarter 2017 Earnings Conference Call.

On today's call, LifePoint will be making forward-looking statements based upon management's current expectations. Numerous factors could cause LifePoint's results to differ from these expectations, and LifePoint has outlined these factors in its filing with the SEC. The company encourages you to review these filings. LifePoint also asks that you please review the cautionary language under the caption Important Legal Information in the company's press release issued this morning. The company undertakes no obligation to update or make any 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.

Importantly, non-GAAP financial information will be used on LifePoint's call today. Comparable GAAP numbers, reconciliations, definitions and other information regarding this non-GAAP financial information are contained in the company's earnings press release filed with the SEC and available on the company's website. (Operator Instructions) As a reminder, this conference is being recorded Friday, April 28, 2017.

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

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [2]

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Thank you. Welcome, everyone, to LifePoint Health's First Quarter 2017 Earnings Call. We hope you've had a chance to review the press release we issued earlier this morning. I'll begin by taking you through a discussion of the first quarter. I'll then hand the call over to Mike Coggin, our Chief Financial Officer, for a closer look at our financial performance. Following our prepared remarks, Mike and I as well as David Dill, our President and Chief Operating Officer, will be available to answer your questions.

For the first quarter, revenues from consolidated operations were approximately $1.63 billion, an increase of approximately 3% over last year. Adjusted normalized EBITDA was approximately $196 million, an increase of approximately 5% when compared to a year ago, and diluted earnings per share as adjusted were $1.07, up 26%.

During the quarter, excluding the impact of meaningful use, operating margins expanded year-over-year and sequentially. This reflects progress toward our strategy to bring acquired hospitals up from low single-digit to low double-digit margins within the first 3 years. Additionally, our volume trends continued in the right direction. While same-hospital admissions were down 0.7% in the quarter, equivalent admissions were up 0.5%. Our cash flow also improved, and Mike will walk you through additional details.

Our strategies have continued to work. We believe that our focus on delivering high-quality care and service, growth, cost management and developing high-performing talent is effective in most any environment. We are pleased to report these solid first quarter results, which were in line with our expectations.

We continue to differentiate our organization based on our results in quality and patient safety. Using the framework of our National Quality Program, we are standardizing the provision of clinical care and progressively eliminating unwanted clinical variation. We are developing best practices and have created methods to effectively spread measurable improvements across our national footprint. An important effect of our standardizing clinical processes is the reduction of unnecessary costs and building out more predictable health care outcomes.

During the quarter, we were proud to celebrate Bourbon Community Hospital as our fourth facility to achieve the prestigious designation as a LifePoint -- a Duke LifePoint Quality Affiliate, and we expect several more facilities to achieve this designation in 2017.

In addition, our commitment to leadership and quality and patient safety is recognized by the National Patient Safety Foundation for the number of LifePoint leaders who are certified professionals in patient safety. As you can see, the actions we're taking to improve performance are delivering results. Building on the experience gained with our partners at Duke and Norton, we continue to look for opportunities to benefit from the expertise of others.

Our recent joint venture with LHC Group brings our company to another level of focus on home health and hospice and enhances our opportunity to grow this portion of our business. We believe we have opportunities for growth in each of our existing markets by adding profitable service lines and recruiting physicians. Additionally, if we identify an acquisition that makes compelling, strategic and financial sense, we have the financial flexibility to take advantage of it and maintain a strong balance sheet.

As you are all aware, discussions regarding health care reform continue. We are closely monitoring developments along with other companies across the health care industry and are participating in ongoing discussions with policymakers. No matter what shape or form it ultimately takes, we are confident our strategy will continue to drive value for our shareholders, patients, physicians and communities. We're encouraged by the positive momentum we experienced in the first quarter and look forward to a strong remainder of the year.

I'll now turn the call over to Mike. Mike?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [3]

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Thank you, Bill, and good morning, everyone. As Bill noted, our first quarter performance was in line with our expectations, and we are pleased with the results. There are several drivers that impacted our results in the quarter, and I will cover them in more detail starting with volume.

In the first quarter of 2017, we continued to see sequential quarterly improvements in admissions and equivalent admissions. For the quarter, same-hospital admissions were down 0.7%. These admissions were reduced by 110 basis points from the impact of 1 less calendar day, 30 basis points from reductions in readmissions and 40 basis points from certain lower acuity admissions such as births. Flu-related admissions favorably impacted the quarter by 110 basis points.

Same-hospital equivalent admissions were up 0.5%, including the negative effect of 100 basis points from the impact of 1 less calendar day. Equivalent admissions were favorably impacted by 100 basis points from an increase in flu-related volume, including a 0.3% increase in same hospital emergency room visits and increases in various other service lines.

We continue to experience declines in self-pay patient volume during the first quarter of 2017. Same hospital self-pay admissions were down approximately 2.9% and represented 4% of total admissions, which is down slightly from 4.1% in the first quarter of 2016. Additionally, same hospital self-pay emergency room visits were down approximately 10% and represented 11% of total emergency room visits, down from 12.2% in the first quarter of last year.

During the first quarter of 2017, our same hospital total surgeries were down 2.6% with inpatient surgeries down 6.2% and outpatient surgeries down 1.6%. When adjusted to exclude the impact of 1 less calendar day, we estimate that same hospital total surgeries would have been down 1.1%.

Our revenues from consolidated operations in the quarter were up $49.5 million or 3.1% to $1.63 billion as compared to $1.58 billion in the prior year, primarily as a result of growth in equivalent admission volumes, higher reimbursement rates from commercial payers as well as 1 additional month of the Providence Health System that we acquired effective February 1, 2016. Our consolidated revenue was reduced as a result of the transfer of 11 of our home health agencies and 6 hospices to our LHC partnership. Accordingly, the revenue and expenses for these businesses are no longer included in our consolidated results as we account for our share of this partnership using the equity method. When adjusted to exclude both Providence as well as the reduction to revenue associated with the LHC transaction, our revenues were up approximately $32 million or 2.1% over the same quarter of the prior year.

On the pricing side, as compared to the first quarter of last year, net revenue per equivalent admission was up 1% on a same-hospital basis and up 1.5% on a consolidated basis, driven primarily by higher reimbursement rates from commercial payers. These increases were offset in part by a shift in payer mix from commercial payers to Medicare for a portion of our patient population as well as the impact of the previously discussed decline in surgical volumes and the impact of the LHC transaction.

In the first quarter of 2017 as compared to the same quarter of the prior year and as a percentage of total revenue, Medicare increased by 160 basis points to 39% and commercial payers decreased by 100 basis points to 45.7%.

Now turning to costs. As a percentage of revenues, consolidated salary, wages and benefit costs increased by 50 basis points to 48.9% primarily as a result of the use of more expensive contract nursing labor in certain of our markets, the increasing cost of employing a greater number of physicians and their related support staff and higher employee health benefit expenses in the first quarter. These increases were partially offset by productivity improvements in certain of our markets.

As a percentage of revenues, consolidated supply costs improved by 20 basis points to 16.4% during the first quarter as a result of our effective cost management strategies in areas such as pharmaceutical utilization, but also as a result of the previously discussed decline in surgeries. We continue to experience pricing pressure with oncology and other cancer-related drugs.

During the first quarter of 2017, our consolidated other operating expenses improved by 230 basis points to 22.9% as a percentage of revenues. As a remainder, during the first quarter of the prior year, we recognized a $24.7 million increase in insurance expense from medical malpractice claims for certain cardiology-related lawsuits. Excluding the impact of this charge in the first quarter of the prior year, our other operating expenses improved 70 basis points primarily as a result of lower acquisition-related legal and consulting fees, favorable claims development under our self-insured professional liability program.

Additionally, other operating expenses included the positive financial performance for certain businesses, which we account for under the equity method. Also, during the quarter, other operating expenses were impacted by an increase in professional fees.

Excluding the impact of the 2016 cardiology-related charge, our first quarter 2017 adjusted normalized EBITDA increased 5% to $195.6 million, an increase of $9.3 million from the same quarter of last year. The improvement in EBITDA -- adjusted EBITDA, was offset in part by a reduction in meaningful use income to $3.2 million, which declined from $6.3 million in the prior year. Again, when normalized to exclude the impact of the prior year cardiology-related charge, our first quarter 2017 margin from consolidated operations improved by 20 basis points to 12% as compared to 11.8% in the prior year.

When further adjusted to exclude the impact of a reduction in our meaningful use funding, our margins improved by 40 basis points over the prior year. The improvement was driven by our operating performance, including the increased margin contributions from many of our recently acquired hospitals. As you can see from our results this quarter, we believe that our strategy is working.

Excluded from EBITDA were 2 additional matters which positively affected our financial performance. During the 3 months ended March 31, 2017, we recognized a gain of $7.9 million or $0.12 per diluted share in connection with the first of 3 expected phases of our LHC partnership. We expect to continue to transfer the remainder of our home health and hospice services to LHC in 2 additional phases over the balance of the year.

Secondly, we recognized a gain of $18 million or $0.27 per diluted share related to the reversal of a previously established reserve in connection with our acquisition of the hospital in Marquette, Michigan in 2012. The reserve related to certain self-disclosure matters that were made to CMS by the prior owners. During the first quarter of 2017, the prior owner successfully negotiated the settlement of these matters at amounts that were less than previously estimated. As a result, our exposure to those matters was eliminated.

Excluding the impact of these 2 items in the quarter as well as the cardiology-related matter and a $1.2 million impairment charge last year, our adjusted diluted earnings per share were $1.07 in the quarter, up $0.22 compared to $0.85 in the same quarter of the prior year. Approximately $0.10 of this increase is a result of improvements in our operating performance and the remaining increase is a result of the full year impact of shares of common stock that were bought back under our repurchase programs throughout 2016.

During the first quarter of 2017, our effective tax rate was 34.9%, down 210 basis points from 37% in the first quarter of 2016. Our effective tax rate was favorably impacted by the adoption of a new accounting standard, which prospectively changes how differences in compensation expense for share-based awards for accounting and tax purposes are recognized upon vesting or settlement as well as the benefit of the reversal of a previously established tax reserve. Excluding these 2 items, we estimate that our normalized effective tax rate was approximately 37.5% for the first quarter of 2017.

Cash flows from operations for the quarter was $91.7 million, an increase of 3.4% when compared to the same quarter of the prior year. Our cash flows were positively impacted by higher net income and improvements in the amount and timing of cash collections of outstanding accounts receivable. These improvements were partially offset by increases in the amount and timing of payments of our accounts payable, accrued salaries, self-insurance claims and income taxes.

During the first quarter of 2017, we funded the settlement of certain cardiology-related matters previously disclosed. Additionally, during the first quarter of 2017, we funded $24.8 million in tax payments compared with just $0.3 million in the same quarter of the prior year. Our net days in accounts receivable on a consolidated basis improved by 4 days to 51.7 as compared to the same period in the prior year, and by 1.8 days when compared to the fourth quarter of 2016.

During the first quarter of 2017, we completed our billing transition process and collected a significant portion of the anticipated surplus of outstanding accounts receivable that was caused by our fourth quarter implementation as a new clinical IT system at our Conemaugh Health System in Pennsylvania. We invested $68.5 million in capital expenditures during the current quarter and did not buy back any shares of our common stock. As a result, we have $100 million remaining under our current authorization that expires in March 2018.

In summary, we're very pleased with our first quarter operating results. We continue to be disciplined in our approach as efficient operators and use our strong balance sheet to drive shareholder value. Additional information regarding our first quarter results is available by reviewing our SEC filings, including our 10-Q, which we will file later today.

With that, I will turn the call back over to Bill for some closing remarks.

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [4]

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Great, Mike. Thanks. I want to take this opportunity to thank all of LifePoint's talented employees and physicians who work hard every day to help us achieve our mission and vision. We look forward to continuing to execute on our strategic initiatives and driving value for our shareholders.

With that, we'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ralph Giacobbe with Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [2]

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Can you maybe break out margin improvement on some of the relatively new deals and maybe break it out by class or year just to help us understand where you stand at this point? It seems like you're doing pretty well there. And then maybe talk a little bit more about the same facility margin profile at this point, whether that sort of improved or not year-over-year? And maybe what sustainable top line you need for sort of margin preservation on those legacy facilities.

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David M. Dill, LifePoint Health, Inc. - President and COO [3]

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On the transitioning hospitals, clearly, all of our new hospitals are rolling in our same-store results, so there's natural pause that we have been talking about for some time. We've been waiting for the quarter to show up and it has this quarter, where each of our hospitals are in the overall results. We continue to have confidence in our ability to achieve the margin expansion in each of these hospitals. And as you would expect, some of these are further along than others. As a reminder, when Mike on our guidance call talked about the class of 2014, 2015 and 2016 hospitals, those 13 hospitals represented just under $2.3 billion worth of revenue. So as you would expect, some are further along than others. We like to look at them as classes of hospitals. We are well into our defined 3-year integration process to expand those margins into the low double-digit range, and we expect to achieve those results in each of the hospitals. And I'm glad that we could make sure that, that showed up loud and clear this quarter.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [4]

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And then the same facility margin profile?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [5]

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Yes. I'll walk you through that, Ralph. Thanks for the question. When we go back, and we're -- just at a point of reference to what David talked about, we did, for this quarter, as I talked about earlier, pulled out Providence from our consolidated operations. So Providence Hospital is the only one that's kind of excluded from the same-store discussion. But same-store margins, again, excluding Providence, would have been up about 10 basis points year-over-year. And the margin improvement in that same-store book of business really follows the same explanations in terms of the consolidated company, pressuring the salary wage and benefit line item, supplies did a little bit better and then our other operating costs were where we saw some favorable development, that really drove the margin improvement. So it's very consistent with what we saw on a consolidated basis.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [6]

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Okay. That's helpful. And then just volume trends, certainly improved sequentially. Surgical numbers continue to see maybe a little bit of pressure, just remind us what's driving that? Is it strategic in any way around letting some of those procedures, whether it's go to urban markets or a flow down to outpatient or ASCs? And maybe what surgery, specifically, are you seeing greatest pressures in?

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David M. Dill, LifePoint Health, Inc. - President and COO [7]

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Let me try to break that down, Ralph, into maybe 3 buckets. One, and when you start about overall volumes, Mike walked through most of those in his prepared comments. Births for us were only down about 1%. We knew that was going to stabilize when we comped out of the program, that we closed down the first quarter of last year, so that provided some stability. ER business is coming back, obviously, it helped overall adjusted and equivalent admissions. There's a decline that we saw in self-pay ED visits. About half of that decline was in one state where Medicaid expanded. The other half was across the organization that put a little pressure on overall ED visits. But with the flu season that Mike talked about, we saw ED visits stabilize and actually grow. As it relates to surgical volumes, adjusted for the 1 less calendar day, we saw about a 1.1% decline overall in surgical volumes. The majority, a little over half was related to low acuity pain cases in a small number of our markets that were a result of a couple of things, a couple of physicians that left that we are working to replace. These are very low acuity cases that don't drive much earnings, but drive a lot of statistics for us. And also, in one case, a physician moved the cases back into their clinic. So the service is still being provided in the community, it's just in one of our independent physician's clinics. We did experience some volume declines in core orthopedic and general surgery service lines during the quarter. Some of these we talked about on the last quarter call, and we are aggressively utilizing locums where appropriate and recruiting and onboarding different positions into different markets to provide the overall coverage. But in our core services, orthopedic and general surgery were the 2 that we saw some weakness. But even once you adjust for the calendar impact that Mike talked about, it's still down a little bit.

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Operator [8]

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Our next question comes from the line of A.J. Rice with UBS.

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Albert J. Rice, UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities [9]

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Maybe -- this may follow-up on the last one a little bit, but it sounds like the self-pay trends you're seeing are a little better than what we're seeing from the peers, both in ER visits and absolute admissions or adjusted admissions. Anything -- how would -- if you drill down on that and -- because it seems like others are seeing sort of it return to the pre-ACA mid-single-digit growth rate of self-pay volumes, and yours is a little better than that. Any reason to why that's happening, you think?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [10]

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A.J., this is Mike. We have, like you pointed out, we've seen some reduction in that growth, especially in the ED side. We call self-pay in our Emergency Department visit line item where we saw the 0.3% growth rate. We saw self-pay down significantly period over period. We see it across the board in many of our markets, but there is a concentration in states like Louisiana, where we saw Medicaid expansion late last year. It is tempering a little bit in terms of the acceleration of that reduction in self-pay growth rate. But we are -- we see it in places like Louisiana, where we saw Medicaid expansion. But I think these trends that you've talked about and what we've mentioned here on the self-pay are starting to be a little more consistent.

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Albert J. Rice, UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities [11]

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I was wondering if we were finally seeing some catch-up in employment picture in some of your markets versus what we've seen in the urban markets for a little while or not, but hard to drill down on that, I'm sure.

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David M. Dill, LifePoint Health, Inc. - President and COO [12]

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Yes. I wish we could put a flag in the ground and say that was the absolute driver in all of it. I think, there are pockets where we have seen employment improve, coupled with just the portfolio of the organization. As we've grown into some bigger markets, I think, you have more stability there compared to many of the markets that we've operated for a decade or longer. And so there are some stability with that, but that's not the main driver, A.J.

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Albert J. Rice, UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities [13]

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Right. You had 3 years of very robust deal volume and the last 12 months is somewhat moderated. Is that reflective of what's the pipeline? The uncertainty around the ACA? Is this a conscious decision to let some of the properties that you bought during that big buildup period mature? Can you give us some flavor for that?

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [14]

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Sure, A.J. This is Bill. We're very focused, as you note, on integrating hospitals that we bought recently. So that $2.3 billion of new revenue that David referred to a minute ago is important to us to bring those hospitals into the system well. I think, it is important to recognize that during this time, this natural pause that we've discussed, that we are taking advantage of the opportunity to prove out the margin expansion component of our strategy. We're also really focused on organic growth opportunities in the markets where we own hospitals today. All that said, we are the buyer of choice for many community-based hospitals around the country. And as we evaluate these opportunities, I think what you're seeing is an exercise of great discipline, but we look forward to continuing to grow the company and enhance shareholder value as compelling opportunities present themselves in the future.

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Albert J. Rice, UBS Investment Bank, Research Division - MD and Equity Research Analyst, Healthcare Facilities [15]

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Okay. Maybe one last one I'll sneak in real quick here on North Carolina which is, obviously, a huge state for you guys. I think the new governor had expressed interest in pursuing the Medicaid expansion without waivers, just outright expansion. Can you give an update on whether there's any activity around that possibly making that happen?

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [16]

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Well, there is a lot of activity, a lot of discussion in North Carolina, Virginia, Kansas, several states, actually. But we are not counting on anything this year. But depending on the outcome of consideration in Washington of everything that's going on, I do think that other states will consider expansion, whether outright or through the use of a waiver. And we're going to continue to work, continue to talk to governors. We're talking to the governors, certainly, in North Carolina and Virginia and Kansas and Tennessee and a number of other states, and with state legislator to advocate for solutions to expand coverage to people in our markets. It will be a continuing focus.

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Operator [17]

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Our next question comes from the line of Chris Rigg with Deutsche Bank.

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Christian Douglas Rigg, Deutsche Bank AG, Research Division - Research Analyst [18]

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Just wanted to come back to the labor commentary. You made a number of points, but what's not clear to me yet, is the labor getting worse? Or do you think it's stabilized? Or is it getting better at this point?

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David M. Dill, LifePoint Health, Inc. - President and COO [19]

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Well, for us, and I can't speak, obviously, to others, but for us, what seemed to be more concentrated in our hospitals that were closer to the urban cores. When you think about the LifePoint portfolio of hospitals and you go to a place like a Conyers, Georgia, that's outside of Atlanta, and a place like Jeffersonville, Indiana, that's across the river, literally, across the river from Louisville, what started in those areas seems to be spreading a little bit. But when you look at our overall results for the quarter, our total labor costs were up approximately 4%. I think, it's 4.1%. 40% of that increase was just putting Providence in for the full period. Remember, we only had Providence for 2 months last year, 3 months this year. The remainder of that increase is where we're seeing the labor pressure. So I would say it's getting a little more intense and moving further from the urban cores into our markets. We're seeing that manifest itself in higher utilization of contract labor, most predominantly on the nursing side in the nursing areas of our hospital, but we're offsetting that with some productivity gains. And we're really proud of our teams around the country that with new tools that we have rolled out, with the new hospitals that have joined the organization, a lot of day-to-day decision-making from frontline caregivers and department managers and improving productivity even in a volume backdrop like we reported this quarter. So we've made some productivity gains to help offset it. I think we've got everything built into our guidance for this year that we feel comfortable with. But it does seem to be spreading out a little bit more over the course of the last 2 or 3 quarters.

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [20]

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And I think it's important to recognize that we expected this creep, this creep from urban markets into more rural markets. And David's right, the plan -- we have put plans in place to mitigate that trend, and we're working hard to create places where people want to work. And we have a very stable group of long-term employees in our hospitals who just absolutely love their hospitals. So I'm proud of the productivity improvements that are helping to offset this trend. I'm also proud of those people who really care about their hospitals and want to be there in these communities.

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Christian Douglas Rigg, Deutsche Bank AG, Research Division - Research Analyst [21]

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Great. And then just one follow-up with regard to the sort of natural pause in M&A. I guess, how should we -- I appreciate what you're trying to do here is show the margin improvement, but I guess how long should that persist? Meaning, when do you think you'll actually get back into the M&A game?

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [22]

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Well, we're not out of the M&A game. We are working on a pipeline that, I think, is strong and with great opportunities. What we are doing is exercising a great deal of discipline as we analyze those opportunities. So we don't have anything to announce. And when we do, we will. But our effort is to make sure, first of all, that we're integrating the hospitals that we've bought recently into the company well. And I think, in our results that you see this morning, we are showing that. And we have been looking forward, frankly, to the ability that this natural pause gives us to be able for our stockholders to see that clearly. And we want to grow the company and we want to do that in the right way. And we think a disciplined approach to acquisitions is a part of that. So not able to give you a timing answer this morning, but know that we are still the buyer of choice for many hospitals around the country who are looking for a quality partner, as either a part of LifePoint, a part of Duke LifePoint, a part of the Norton and LifePoint. It's a compelling story.

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Operator [23]

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Our next question comes from the line of Scott Fidel with Crédit Suisse.

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Scott J. Fidel, Crédit Suisse AG, Research Division - Director and Senior Analyst [24]

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First question, I just want to follow up on the labor pressure dynamics that you're seeing. And maybe just if you can drill in a bit to behavioral in terms of what you saw in the quarter. I know that had been an area you had flagged a number of quarters before, along with the industry, in terms of being an area of recruiting pressure and just interested in an update there.

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David M. Dill, LifePoint Health, Inc. - President and COO [25]

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Yes. So I think it's very similar to the comments that we've made probably over the last 2 or 3 quarters, both on nursing labor and also physician manpower as well to service those programs for us. We had some service line disruptions up in Pennsylvania that we are backfilling those positions, that's progressing. It's taking a little bit longer than what I thought it would. I think that points to, the shortages that are there, I don't see it any worse today than I did a couple of quarters ago, but roughly the same.

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Scott J. Fidel, Crédit Suisse AG, Research Division - Director and Senior Analyst [26]

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Okay. Then I just had a second question, just on some of the payer mix trends and if you can maybe drill into that as well which, again, seems to be sort of similar to what we're seeing with some of the other peers in the industry in terms of the rising Medicare mix and declining commercial in the quarter. Just anything in specific that you can spike out there or is that just my sort of demographics related? And what you're expecting around that for the remainder of the year?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [27]

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Yes. Scott, thanks. This is Mike speaking. With regards to our payer mix and our overall revenue per equivalent admission statistics, when we put the guidance together for the year, we said total revenue would be up somewhere in the range of 2% to 3.5%. The rate component of that, 1.5% to 2.5% up. And as we reported today, just to kind of set the stage, adjusted admissions up 50 basis points on a same-store basis. And then when we adjust for the LHC transaction, revenue per AA up 1.6%, so the combination of those is about a 2.1% increase, and that was in our prepared comments. So as we now kind of turn to your question around payer mix, we did see the shift in Medicare up 160 basis points. And as we pointed out earlier, commercial down about 100 basis points. A large part of that is, first of all, was expected. And then as we saw flu volumes increase, we saw the impact that, that had on our payer mix kind of shifting as you think about flu-related volume. Typically, a lot of folks that are subject to kind of the respiratory issues are of the elderly population, meaning Medicare. We also saw the surgery declines impact the payer mix to some degree as well. So we continue to monitor our payer mix shifts. We're not overly concerned that in one particular quarter, this trends the same way. So we continue to monitor that and look at it. But overall, everything that we have reported today and the trends in that payer mix were things that were expected as we put our plan together.

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Scott J. Fidel, Crédit Suisse AG, Research Division - Director and Senior Analyst [28]

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Okay. Then just one last quick one for you, Mike. Just in terms of for modeling purposes, what tax rate would you suggest that we use for the remainder of the year? Should we be using that 37.5% normalized? Or something sort of in between?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [29]

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Yes. I would think of it in terms of 37.5% for the balance of the year. Now the stock compensation accounting pronouncement that we talked about, does create fluctuation. And so as I mentioned to you earlier, with our effective rate down at 34.9%, that stock comp probably, for this particular quarter, was about -- was a little more than about 110 basis points of the decline from the normalized number of 37.5%. Again, that's going to be subject to vesting, stock option activity, things like that, that are a little less than predictable. But I would circle 37% to 37.5% for modeling purposes over the balance of the year.

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Operator [30]

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Our next question comes from the line of Gary Taylor, JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [31]

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Almost all of my good questions have been asked, so I just had one tidbit. I just wanted to go back to Mike. The disclosure around the deconsolidating activity, again, just for modeling. I think, your comments, you kind of combined the LHC deal with Providence. So I'm just wondering if you could tell us what impact, just the deconsolidating activity had on the quarter? And since there's no equity in subsidiary income, I'm presuming there's not a lot of EBITDA impact, but maybe just what the revenue impact of the deconsolidating activity was?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [32]

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Sure. So the LHC transaction, and just to kind of set the stage here, Gary, the LHC transaction will occur, and I mentioned this in my opening comments, will occur over the course of the year. There's currently planned 2 additional contributions of home health and hospice agencies and business lines into the partnership over the balance of the year. There's one and then there's 2 more that will occur. In terms of the first quarter, the contributions that we made reduced revenue somewhere in the neighborhood of $8 million to $10 million. And the margin on that business was very, very small, it was almost immaterial. So you can assume that revenue and expenses that were deconsolidated moved over into the non-consolidated equity method-type business that we have. So on the revenue side, call it, $8 million to $10 million. And the impact on that was about the 60 basis point addition to same-store revenue per equivalent admission that I talked to you about previously. So that would -- that's how I would frame it up for the first transaction that we did in the first quarter.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [33]

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And then -- so annualized, that's maybe $40 million, but then you're saying there's some more deals. So is the -- is that larger annualized impact that's encapsulated in the revenue guidance and that was contemplated? Or...

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [34]

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Yes. It is. We contemplated that. So when we provided guidance that I mentioned a few minutes ago, we contemplated in those rates the transaction with LHC throughout the full year, all 3 levels of contribution, yes.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [35]

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Okay. And just one final point, I might be a little dense this morning. So the 1.5% same-store revenue growth that you disclosed that hasn't been adjusted for this, so absent this deconsolidation, it would have been 2.1%?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [36]

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Yes, right. So I'll just give you the numbers. So we -- same-store grew on the volume side, 0.5%. Same-store grew on the rate side, 1%. But when you adjust for LHC -- and the combination of the same-store is 1.5% in total. When you adjust for LHC, the 1.5% moves up to 2.1%, and all of it is in the rate part of it.

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Operator [37]

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Our next question comes from the line of Joshua Raskin with Barclays.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [38]

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Just a follow-up on the payer mix changes. I guess, I understand the flu and some of the other factors. But was there a difference, I guess, one, on just the surgeries? I guess, it suggests that surgeries are more heavily skewed to the Medicare side and I would just want to confirm that that's right, if that makes sense. But is there a payer mix shift inpatient versus outpatient? Are you seeing more impact, Medicare growth, commercial down, is that more on the inpatient side or outpatient?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [39]

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I would say it's really -- it's probably across both inpatient and outpatient. For the quarter, our inpatient revenue was roughly 39%. Our outpatient was 61%. That's been fairly consistent with what we've seen in the past. It might have ticked -- outpatient may have ticked down just 100 basis points there and inpatient up 100 basis points, so it's very -- the changes there are consistent across both in and out.

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Joshua Richard Raskin, Barclays PLC, Research Division - MD and Senior Research Analyst [40]

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Okay. And then are you seeing -- Mike, are you seeing any impact from sort of this proliferation of new outpatient facilities? And I know it's different in rural markets, but I'm just curious, are there new urgent care centers? Or I can't imagine there's a lot of freestanding EDs, but any other growth in competitor outpatient businesses in your markets?

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David M. Dill, LifePoint Health, Inc. - President and COO [41]

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There is not. This is David. We do see some urgent care centers that have opened up over the course of the last several years, but as we've talked about, the only volume impact that we're seeing are self-pay volumes coming down. I don't see any meaningful impact on that side. Freestanding ED, we opened -- we just opened one up in Sumner County. And so to the extent that freestanding EDs are in market, the things that we are doing as we move into bigger, more competitive market. Keep in mind, we're the only hospital in these communities and there's competition everywhere. But I don't see any meaningful changes in the competition that are putting pressure on payer mix or the results of the company.

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Operator [42]

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Our next question comes from the line of Ana Gupte with Leerink Partners.

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Ana Gupte, Leerink Partners LLC, Research Division - MD, Healthcare Services and Senior Research Analyst [43]

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My first question on the surgical volumes as you say, ex the least date, is down a lot less than what the reported numbers show. But as you're investing in service lines and you've talked about this, do you see that accelerating? And should we assume that for the rest of the year in ortho and cardio and neuro, whatever?

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David M. Dill, LifePoint Health, Inc. - President and COO [44]

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Yes. So in cardio and neuro, one of the markets that we talked about last year we had a disruption in service line. Much of that was focused on the cardiology service line, and so we have rebuilt that service line. So we expect some momentum on that front. And then you're right, our investments that we've made in targeted physician recruiting, we do expect these service lines to grow as an organization. And so it's a big focal point for us, especially on the outpatient side, where more and more business is moving from inpatient to outpatient. We have the physical plan already there. We have most of the investments already there. Just continuing to work on throughput and operational issues around physician recruiting give us a lot of visibility around the growth in that service line over time.

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [45]

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And Anna, as we -- let me just add to that. As we continue to integrate the new hospitals in faster growing markets so that larger facilities with a little bit higher acuity and services, we expect -- and as we continue to make investments in those communities, we expect to see the benefit there as well.

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Ana Gupte, Leerink Partners LLC, Research Division - MD, Healthcare Services and Senior Research Analyst [46]

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And from a competitive standpoint, is repeal and replace either in your markets or nearby and selecting competitively, are there any facilities that you see that are shutting down or coming up for sale at more attractive multiples that (inaudible)?

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [47]

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I don't really think we've seen much in that regard at this point. Clearly, change does have an impact on determinations that community-based hospitals make. But I don't know that we've seen much change at this point because the noise has been there for a while. It could have an impact down the road. I think, clearly, hospitals are making decisions that being a part of something bigger with more resources that can help them deal with change, particularly when those resources include quality resources that we bring to the table. I do think that they are making those kinds of determinations. But whether or not it's a result of repeal and replace efforts, I don't know.

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Operator [48]

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Our next question comes from the line of Kevin Fischbeck, Bank of America Merrill Lynch.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [49]

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I just wanted to go back to the margin discussion because, I guess, obviously, we are seeing improvement year-over-year and sequentially. But guidance for the year is up 50 basis points and in Q1 it was up 20. Is there something we should be thinking about as far as the progression around margin improvements? Should it be more back-end loaded? Was there anything unusual in the quarter?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [50]

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Kevin, this is Mike. I think you're right that as we put our plan in again, we don't guide quarter-to-quarter. But as we talked about our 2017 plan, when we provided guidance, we talked about a component of that was related to our transitioning hospitals. And as you can imagine, transitioning -- and we transition our hospitals typically over a 3-year period. And going back, those hospitals are hospitals we acquired in '14, '15 and '16. The plan that we put together contemplated more back-end calendar success and implementation of our strategic plans around those hospitals. So there is a little more towards the back end of the year where we should start to see more of the margin improvement. But you're right, we put a plan together that, last year, we were at 11.7% on margins. This year, the midpoint gets us to the 12.2% number. We were at 12% this quarter, and we feel like our plan that we put together still allows us to get to where we need to, where we said we would be.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [51]

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Okay. So does that mean then that from your perspective, the run rate margin in Q4 should be, I guess, something closer to 70 or 80 basis points? As you head into 2018, that's -- that's that new base that we should be thinking about for further improvement?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [52]

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Yet. It's directionally towards what you just mentioned, yes. It would be, obviously, a higher margin as we end the year.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [53]

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Okay. And then just on your pricing commentary and I guess the mix commentary, because I think some of the people who are more concerned about long-term structural pricing in hospitals look at this mix towards Medicare and away from commercial as structural headwinds to pricing. I guess, you're saying that your guidance of 1.5% to 2.5% pricing really already kind of reflected a payer mix shift like this? Is this 1.5% to 2.5% kind of your view of what medium to long-term pricing is for hospitals even given the mix shift headwind? Or is there anything we should be thinking about there?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [54]

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Yes. I think the guidance that we've given for 2017 has contemplated and is very consistent with what we saw in terms of the payer mix in the first quarter. So yes, that 1.5% to 2.5% on the pricing side contemplates this level of payer mix shift. And as I pointed out earlier, we're on the -- we're at 1.6% when you adjust for everything. So we're -- for the first quarter, we're at 1.6% and we gave the guidance 1.5% to 2.5% for the full year.

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Operator [55]

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Our question comes from the line of Justin Lake with Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD and Senior Healthcare Services Analyst [56]

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My question was on cash flow. I just wanted to see if you guys can give us an update there on what you're expecting for cash flow from operations for 2017 as well as CapEx?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [57]

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Sure. Thanks, Justin. We have never given actually guidance on operation -- cash flow from operations, but I'll give a little color around what happened in the quarter and some things to think about for the balance of the year. Operating cash flow was just -- was about $92 million for the quarter. It was very comparable to where we were in the first quarter of last year, I think we were $88 million last year. Free cash or CapEx was $68 million, generating about $23 million of free cash flow in the quarter. The -- in the first quarter, there were a couple of things that impacted us. If you think about, compared to last year and how they're comparable year-over-year, last year, we had some buildup in accounts receivable that consumed some of our operations cash flow as we acquired some of the hospitals and they built up in the first quarter. This year, we talked about it earlier on the call. We funded the majority of our cardiology claims that were accrued in the P&L in the first quarter of last year. So we settled the substantial portion of that. And when you look at the cash flow, you'll -- I think in the Q later today, you may see that. We also had a higher year-over-year tax payment this year versus first quarter of last year. So $91 million of operating cash flow is -- the only thing there that I would consider a little out of period or unusual for this quarter was the payment on the cardiology-related matter. And so as we move forward, for the balance of the year, and we talked about free cash flow, we've got CapEx, an expectation around CapEx to spend somewhere around $475 million to $500 million, we spent $68 million in the first quarter. And so you can see there'll be a ramp on free cash flow over the balance of the year. We also have Q2 and Q4, are periods where we will see a large amount of debt service around our interest payments, on our notes. And so Q2 and Q4 have to consider those types of payments. So that's -- those would be the comments that I would make around our cash flow at this point.

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Justin Lake, Wolfe Research, LLC - MD and Senior Healthcare Services Analyst [58]

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Do you have a -- a thought process around how -- like, is there a free cash flow number you can share with us for the year?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [59]

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Well, I haven't -- yes, we haven't said this -- I've said this in the past and I'll just go ahead and reiterate this particular point. Free cash flow based on our projection for 2017 will look comparable to 2016. And so we will drive higher EBITDA and higher operating profits, but our CapEx is expected to go up from about $400 million last year to the $475 million to $500 million range is what we guided to for this year. And therefore, year-to-year, we would be somewhere in the -- be somewhat comparable in '17 to what we did in 2016.

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Justin Lake, Wolfe Research, LLC - MD and Senior Healthcare Services Analyst [60]

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And then just last question on this. The -- it looks like, looking at your 10-K, that your commitment spending in terms of the M&A that you have for CapEx will moderate by about, by some number because it's not exactly specific in the 10-K, but it looks like it moderates in '18 versus '17. I'm just wondering if there's any other kind of moving parts that you can make us aware of in terms of thinking about your CapEx from '17 to '18 in terms of big projects and that M&A number?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [61]

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Yes. That's right. So as we've talked about on the calls in the past, we have to large construction project up in Marquette, Michigan, where we're building a new hospital campus. That project will continue on through most of 2018, creating an elevation in terms of the amount of CapEx that we spend. The way that we think about it today is that 2017 and 2018 remain elevated periods of CapEx, moderating more towards the end of '18 and as we get into '19 back to more normalized CapEx numbers.

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Justin Lake, Wolfe Research, LLC - MD and Senior Healthcare Services Analyst [62]

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And what do they moderate by in '19? Because it feels like that -- it looks like it might be $75 million alone just in the new facilities. Is that -- what that the -- is there anything else there? Or is this $75 million a reasonable number to think about?

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Michael S. Coggin, LifePoint Health, Inc. - CFO, CAO and EVP [63]

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Well, I think they would moderate to back to our historical levels. I mean, if you go back and look at where we were as a percentage of revenue over the past couple of years, we will moderate back towards those levels.

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William F. Carpenter, LifePoint Health, Inc. - Chairman and CEO [64]

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Okay. Well, we've reached the top of the hour. I really want to thank all of you for participating in our first quarter earnings call. We're really pleased with our start to 2017. Our focus during the quarter and for the remainder of the year is unwavering. Our first priority will always be to deliver high-quality care and service to our patients. As we do, we can grow in every market and successfully integrate our recently acquired assets. We are constantly finding ways to improve upon our track record as efficient operators. And all of this is accomplished through our demonstrated ability to develop our high-performing talent. While certainly the regulatory environment continues to evolve, our attention to these strategic priorities is not changing and these are the strategies that have and will continue to drive shareholder value.

We appreciate your interest in LifePoint Health, and we look forward to continued discussions with you over the course of the next few quarters. Thanks very much, and have a great day.

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Operator [65]

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