LifePoint Health, Inc. (NASDAQ:LPNT)
Q3 2017 Earnings Conference Call
October 27, 2017, 10:00 ET
Executives
William Carpenter – Chairman CEO
David Dill – President COO
Michael Coggin – Executive VP CFO
Analysts
Frank Morgan – RBC Capital Markets
Benjamin Mayo – Robert W. Baird Co.
Ralph Giacobbe – Citigroup
Anagha Gupte – Leerink Partners LLC
Christian Rigg – Deutsche Bank AG
Gary Taylor – JPMorgan Chase Co.
Operator
Ladies and gentlemen, thank you for standing by and welcome to LifePoint Health Third 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 filings with the SEC. The company encourages you to review these filings. LifePoint also asks that you please review the cautionary language under the caption Important Legal Information in the company’s press release issued this morning. The company undertakes no obligation to update or make any other forward-looking statements, whether as a result of new information, future events or otherwise. Also, please visit LifePoint’s website for links to various information and filings.
Importantly, non-GAAP financial information will be used on LifePoint’s call today. Comparable GAAP numbers, reconciliation, 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 recorded on Friday, October 27, 2017. It’s now my pleasure to turn the conference over to Bill Carpenter, Chairman and Chief Executive Officer of LifePoint Health. Please proceed, sir.
William Carpenter
Great. Thank you, Thelma. Welcome, everyone, to LifePoint Health’s Third 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 third quarter. After that, I’ll hand the call over to David Dill, our President and Chief Operating Officer, for some additional perspective on our operations. And then Mike Coggin, our Chief Financial Officer, will provide a closer look at our financial performance and discuss our 2017 updated guidance. Following our prepared remarks, Mike, David and I will be available to answer your questions.
For the third quarter, revenues from consolidated operations were approximately $1,576,000,000. Adjusted EBITDA was approximately $176 million, and diluted earnings per share, as adjusted, were $0.80.
I want to begin by offering some perspective on the factors that most significantly impacted the quarter. Our adjusted EBITDA results were $14 million short of our expectations. We’ve previously discussed our transitioning hospitals, which, as you know, we define as our 2014 through 2016 acquisition classes. These hospitals represent the greatest opportunity for margin expansion within our organization, and the classes of 2014 and 2015 are performing according to plan.
Excluding the class of 2016, all of our other hospitals are performing well. In fact, margins across the rest of the company improved 20 basis points to 13% in the third quarter compared to the same quarter in the prior year. In order to give you greater transparency into this quarter’s results, we’re going to do something we would not ordinarily do and provide greater detail on the class of 2016 specifically, which accounts for $10 million of the variance. Of that, $6 million was driven largely by integration-related decisions that were necessary for these particular markets and that impacted volumes. The other $4 million relates to revenue-related adjustments that Mike will discuss in greater detail. The last 1/3 of the variance relates to volume softness and payer mix shifts that we experienced across the company and are seeing industry-wide.
As we said before, the hospitals we bring into our system requires significant support in order to improve margins from low single digits to low double digits. We have a strong track record as disciplined operators in successfully achieving this transformation in about 3 years. The 2016 class of hospitals represents approximately $900 million in annual revenue and are located in attractive, growing markets. While we remain confident in their potential, the timing to bring their margins up to company levels will extend beyond our 3-year average.
In order to drive improvements in these hospitals, we made certain necessary business decisions that David will detail for you in a little bit. Given the competitive dynamic in these markets, these changes, coupled with the macro environment, had a greater impact on volumes than we had experienced in other integrations. That being said, we should not lose sight of the fact that the remainder of our portfolio performed well in the quarter. It is in this environment where our operating discipline really shines.
Overall, our operators, again, did a great job managing cost during the quarter without compromising patient care and quality. We will continue to look for opportunities to leverage our size and scale to further improve our operations and reduce operating expenses. Our proven tactics with each strategic priority, quality and service, growth, operational excellence and talent development, will continue to be implemented at every location and are critical factors in driving long-term shareholder value.
During the quarter, we continued to generate strong cash flows and maintained a solid balance sheet. We repurchased stock in the third quarter, and as of today, we have approximately $32 million remaining under our current authorization. Additionally, our Board of Directors recently authorized another $200 million for share repurchases, to be available upon completion of the current authorization.
With respect to health care reform, we’re pleased with the bipartisan efforts that Senator Alexander and Murray have led, and we’re encouraged that 22 other senators chose to cosponsor their proposal. We continue to believe that this approach by Congress of working in regular order to produce a bipartisan deal is the right one. Similarly, we’re optimistic that there is bipartisan support to include individual insurance market stabilization, rural Medicare programs, a delay in DSH cuts and CHIP reauthorization in a large package in December. This week, I spoke directly with Senator Alexander and thanked him for his efforts to stabilize the marketplace, which is good for patients and providers. I was encouraged by his resolve and the belief that there is support for a bipartisan plan. Regardless of the outcome of these efforts, we continue to believe that staying focused on our strategic priorities will allow us to be successful in any environment.
Looking ahead, we’re concentrating on what we can control, and our long-standing and proven operating discipline will continue to be key to our success, even while the market remains challenging. While there’s always work to do, we believe that our commitment to delivering high-quality care and service, growth, cost management and developing high-performing talent will enable us to deliver on our objectives and drive value for shareholders.
At the beginning of this year, we committed to giving you greater transparency into our base business. Given the impact that the 2016 class had on our third quarter results, I asked David to address this topic in more detail.
With that, I’ll turn it over to him. David?
David Dill
Thanks, Bill. Let me start with a brief reminder about how we think about integrating hospitals and the strategies to increase margins from low single digits up to low double digits. The class of 2016 is still operating at low single-digit margins, and we remain confident in our ability to execute our plan as we have done historically. Clearly, it will take us a little longer than we had expected.
When we acquire a new hospital, we typically expect about 1/2 of the overall margin climb to come from topline revenue growth as a result of targeted investments, growing service lines and improvements in payer contracts. The other half of the increase comes from the disciplined management of the income statement and using our size and scale to create more efficient organizations while improving quality and patient safety. I am proud of what we have accomplished on the second part of the equation over the last 6 quarters. This is where we expect to get returns earlier in the integration process. Our operators are tackling the opportunities head-on by reducing staffing variation, supply utilization and effecting change in other contractual relationships that better align the success of our physicians and employees with the long-term success of the hospital.
Unfortunately, with respect to our 2016 class, we have not seen the increase in EBITDA and EBITDA margins that we would have expected at this point. This is primarily a result of some short-term volume disruption that has negatively impacted certain surgical volumes and other related outpatient revenue. In addition to this disruption, we have not yet seen the benefits of our investments in physician recruiting aimed at growing and expanding service lines. In light of these results, it may be helpful to provide some color around a couple of decisions that we made that will prove to be great long-term decisions but are having some near-term impacts that are different than what we had expected and planned as we came into this year and even when we put the guidance together leaving the second quarter.
First, we’ve invested in significant physician recruiting and physician employment and did not see the expected ramp-up of their practice performances during the quarter. Our teams are working closely with these practices to make the necessary changes to ensure both short-term and long-term success. This is an example of volumes, revenue and related earnings not ramping as we had expected leaving the second quarter.
Second, as part of our integration work in these specific markets, we are making changes in the contracts of certain hospital-based physicians that will result in higher levels of service and lower cost. We have experienced some near-term disruption in volumes with surgical cases that we believe are being shifted to other locations in the market. As a reminder, the class of 2016 are in competitive markets with at least one other acute care hospital. These competitive dynamics give us a clear ability to grow market share over time as we create stability, develop more efficient organizations and make targeted investments. We estimate that these decisions have negatively impacted our results by approximately $6 million in the third quarter and will remain for the balance of 2017.
While we are not where we want to be with our 2016 class at this point, we are excited about the growth prospects across the class. Our strategic move to bigger and faster-growing markets where we have the ability to build networks will provide long-term growth as the delivery system continues to evolve.
I’ll now turn the call over to Mike, who will take you through our financials in greater detail and provide an update on our guidance. Mike?
Michael Coggin
Thank you, David, and good morning, everyone. During the quarter, the industry volume environment continued to be challenging as we experienced declines in admissions, equivalent admissions, surgeries and emergency room visits across many of our markets. As Bill said, we reported an EBITDA shortfall of $14 million compared to our expectations of $190 million, with more than 2/3 isolated to our 2016 class of acquired facilities. As a reminder, the 2016 class includes St. Francis Hospital, Frye Regional Medical Center, Central Carolina Hospital and the 2 campus Providence Hospitals system, representing combined annual revenues of approximately $900 million.
Given our third quarter results as well as the divestiture of Rockdale Medical Center in Conyers, Georgia, we are revising our guidance for the full year of 2017. Starting with volume. For the quarter, admissions and equivalent admissions were down 2.6% and 2.2%, respectively. Approximately 1/2 of our admissions decline was the result of a decrease in inpatient surgeries, and the remaining decline was due to fewer, lower-acuity medical admissions. Equivalent admissions were impacted by the reductions in admissions in addition to a 3.7% decline in emergency room visits and a 3.1% decline in outpatient surgeries. Excluding the 2016 class, much of our outpatient surgical decline was the result of lower-acuity procedures.
Total surgeries for the company declined 3.4% in the quarter. The surgical declines in our 2016 class were concentrated in high-acuity cases such as neurology, orthopedic and general surgeries, largely resulting from the integration decisions we made in these specific competitive markets. Volumes in these hospitals negatively impacted EBITDA in the quarter by approximately $6 million, as David referenced.
Consistent with the past several quarters, we continue to experience declines in self-pay volumes during the third quarter of 2017. Self-pay admissions were down approximately 8% and represented 4.6% of total admissions, which compared to 4.8% in the third quarter of 2016. Additionally, self-pay emergency room visits were down approximately 8.5% and represented 12.4% of total emergency room visits compared to 13.1% in the third quarter of last year. The decline in emergency room visits consisted almost entirely of self-pay and Medicaid patients.
Our revenues in the third quarter were $1.58 billion, down 0.6% over the same period of the prior year. This decrease is the result of the previously discussed 2.2% decline in equivalent admissions, partially offset by 1.6% improvement in our net revenue per equivalent admission. Our 1.6% increase in net revenue per equivalent admission was driven by the positive impact of commercial pricing, offset by a shift in payer mix.
We continue to see growth in our Medicare revenue base and, more specifically, a higher percentage of managed Medicare participation. Contributing to the $10 million EBITDA shortfall from the class of 2016 was an additional $4 million of period-over-period revenue adjustment items that negatively impacted our results, including cost report settlements and certain payments related to supplemental payment programs. As a reminder, throughout the first 9 months of 2017, we contributed 29 of our home health and hospice agencies to our recently formed post-acute partnership in 3 separate phases. Effective on the date of each of these 3 contributions, we no longer include these operations in our consolidated results and account for our share of this partnership as an equity method investment. When adjusted to exclude the impact of contributing these agencies to our newly formed partnership, our revenues per equivalent admission growth rate of 1.6% would have improved 80 basis points to 2.4%.
Now turning to costs. During the quarter, we continued to manage our costs efficiently. Salary, wages and benefits were 47.5% of revenues, down 10 basis points, offsetting pressure associated with the volume environment and higher wage rates. As a reminder, in the same quarter of the prior year, we recognized a stock-based compensation benefit of $3 million due to the departure of our previous CFO. As a percentage of revenues, supply costs were up slightly by 10 basis points to 16.6% during the third quarter, driven primarily by growth in our oncology programs. This increase was partially offset by improvements in our supply costs as a result of better pricing through participation in our group purchasing organization. During the third quarter of 2017, our other operating expenses increased by 60 basis points to 24.8% of revenues as a result of higher contract services due to system implementations at several recently acquired physician practices as well as the outsourcing of certain hospital support departments to third parties in a number of our markets.
Finally, we continued to experience higher subsidies under certain of our professional arrangements where we guarantee minimum levels of service. These increases were partially offset by improvements in other expenses as a result of favorable claims development under our self-insured professional liability program and the positive financial performance of certain nonconsolidated businesses.
Meaningful Use income, as reported in other income, declined to $1.9 million in the third quarter of 2017 from $3.4 million in the prior year period. Adjusted EBITDA for the third quarter of 2017 was $176 million with a margin of 11.2% as compared to adjusted EBITDA of $188 million and an 11.9% margin in the same quarter of the prior year. As previously discussed, our 2016 class contributed approximately 2/3 of our EBITDA variance as compared to our internal expectations. As Bill mentioned, excluding this 2016 class of hospitals, our margins improved to 13% in the third quarter as compared to the same quarter of the prior year.
Excluded from EBITDA are 2 additional matters which impacted our quarter-over-quarter financial performance. During the 3 months ended September 30, 2017, we recognized a nonoperating gain of $16.4 million or $0.20 per diluted share in connection with our transfer of home health and hospice agencies into our partnership. Additionally, we recognized an impairment charge during the quarter of $12.7 million or $0.33 loss per diluted share related to the divestiture of Rockdale Medical Center. Both of these transactions included an allocation of goodwill, a portion of which is nondeductible for tax purposes.
As a result, during the third quarter of 2017, our effective tax rate was 48%, up significantly when compared to 37.5% for the same period last year. When adjusted to exclude the negative impact that these 2 transactions have on our effective tax rate, we estimate that our rate would have been approximately 37.1%. When adjusted to exclude the two nonoperating charges, adjusted diluted earnings per share were $0.80 in the quarter, down $0.12 compared to $0.92 in the same quarter of the prior year.
Cash flows from operations for the quarter was $91.1 million as compared to $177.6 million in the same quarter of the prior year. As a reminder, our cash flows from operations for the third quarter of the prior year was positively impacted by the collection of outstanding accounts receivable that had previously been building because of pending authorizations at certain facilities acquired in 2016. Additionally, cash flows were impacted in the third quarter by the amount and differences in the timing of payments for income taxes and decreases in the amount and differences in the timing of cash collections of other receivables.
Our debt-to-EBITDA leverage ratio as of September 30, 2017, remains essentially unchanged at 3.63x on a net cash basis as compared to the June 30, 2017 amount and is well within our targeted range. Our net days in accounts receivable were 53.4 as of September 30, 2017, compared to 53.3 as reported in the same quarter of the prior year. When compared to the prior sequential quarter, days were up 1.5 days primarily as a result of the lower revenue period-over-period.
We invested $108.5 million in capital expenditures during the quarter, bringing the year-to-date total to $266.2 million. As a reminder, we expect the full year spend on capital expenditures to be in the range of $475 million to $500 million. Additionally, we repurchased approximately 600,000 shares of common stock for $35 million in the quarter. Including subsequent additional repurchases in October, as of today, we now have approximately $32 million remaining under our $200 million authorization that expires in March of 2018.
Turning to guidance. We now expect our revenue to be in the range of $6,335,000,000 to $6,385,000,000 for the year, which translates into net revenue growth rates for 2017 of down 0.5% to up 0.3%. However, when adjusted to exclude the 1 additional month of Providence in the first quarter and the fourth quarter sale of Rockdale, we estimate that our full year 2017 total net revenue growth rate, as normalized, will be down 0.1% to up 0.7%. We expect adjusted EBITDA to be in the range of $740 million to $760 million.
Finally, we expect adjusted diluted earnings per share to be in the range of $3.48 to $3.78 for the year. Adjusted diluted earnings per share for the full year of 2017 excludes a $0.28 gain recognized in the first quarter of 2017 related to the settlement of certain self-disclosure matters with CMS at our hospital in Marquette, Michigan; a $0.34 in year-to-date gains in connection with the home health and hospice agency transfers to our partnership; and $0.33 of loss in the third quarter related to our divestiture of Rockdale.
Additional information regarding our third 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.
William Carpenter
Thanks, Mike. While the class of 2016 acquired hospitals will require more time to integrate, they represent the greatest opportunity for margin improvement across the portfolio, and we are confident they will have a positive financial impact on the company over the longer term. We are pleased that the rest of our portfolio, including the 2014 and 2015 classes of acquired hospitals, is generally performing on plan. We are disciplined operators with a track record of solid performance, even against the backdrop of challenging industry dynamics. Despite certain near-term challenges, we continue to apply the same discipline to our business that has driven results.
Finally, I’d like to recognize our talented employees and providers who help us continue to differentiate LifePoint as we lead quality improvements in our communities. As you know, everything we do is built upon our delivery of high-quality patient care and service. We’re committed to enhancing shareholder value as we continue to fulfill our mission of Making Communities Healthier.
With that, we’ll now take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Frank Morgan with RBC Capital Markets.
Frank Morgan
I was hoping to go back to that class of ’16. I guess I’m not following exactly. It sounds like something must have happened. Was there like a big doctor group move or defection in one of these more competitive markets? Just any more color on kind of what happened. And specifically, did something you did precipitate that change? And then given this, how does this make you think about capital deployment going forward into, really, the MA or versus, say, buybacks?
David Dill
Thanks, Frank. This is David. I’ll take that. So I was talking broadly about the class of 2016. While we’re going to give you some more transparency that people have been asking for around the class, there are a handful of hospitals in this class, 4 different hospitals. And so there are decisions that we make on a daily basis, that will possibly or negatively impact our operations. And so even within this specific class of acquisitions, much less all the other integration work that we’ve been doing for the last 5 or 6 years, there are similar decisions that we make that have little to no impact, certainly negative impact on the operations, but they positively impact the long-term performance of the hospital.
The same type of decisions here but based on market dynamics, there were a couple of hospitals in this class where we took on some tough discussions, made some changes and then had some short-term volume implications. It’s not a large group of doctors moving from one location to the other. But in these competitive markets where you have at least one other acute care hospital in these markets, and in the case of Providence, you have a couple, we’ve seen volume shift in the short term to other provider locations, not just to the hospital but to competing provider clinics or surgery centers. And I’m confident that we have the teams in place in our hospitals to be very successful in these hospitals over the long term. As it relates to longer-term capital deployment, Bill, I’ll turn that over to you.
William Carpenter
Sure. Frank, here’s the way we think about it. We are absolutely proud of each of the hospitals that we’ve added over — to the company over the last several years. They have great opportunities, and we’re excited about the prospects that they bring. The class of 2016 is where we see the greatest opportunities for margin expansion. So our strategy of entering into bigger, faster-growing markets that have the ability to build networks of care and provide long-term growth as we continue to build out the delivery system continues to evolve. We have opportunities to acquire hospitals, but we are being highly selective as we think about that. Buying bigger hospitals in faster-growing markets is the right thing to do, and our acquisitions have delivered solid results. So we’ll continue to be disciplined. We’ll continue to be opportunistic.
And I’m proud that we’re the buyer of choice for many community hospitals around the country. I think it’s also worth noting that we bought a lot of stock back over the course of this quarter, and we have bought a lot of stock back in recent quarters as we’ve been opportunistic in that regard, too. Our capital deployment strategy remains to make sure that our hospitals are well funded, state-of-the-art places where physicians want to practice and people want to come for care. And we’ll look at opportunities to grow the company. If there are compelling strategic opportunities to acquire hospitals, we’ll look at those with the discipline that we apply to it every time. And we’ll buy the stock back in order to return value to our stockholders, as we did during this quarter. So I hope that’s helpful to you in the way we think about it.
Operator
And our next question comes from the line of Whit Mayo with Robert Baird.
Benjamin Mayo
Maybe just want to step back for a second and look at the improvement on the acquisitions. I think the expectation coming into this year was $55 million of EBITDA improvement from improving the margins on the $2.3 billion of acquired revenue. So what’s in the plan this year? And what do you think will be in the plan for next year?
Michael Coggin
Whit, this is Mike, and I’ll start with that. You’re right. So when we talked about $55 million over the course of the calendar year 2017, we started that conversation talking about transitioning hospitals, and those include the hospitals in ’14, ’15 and ’16. As we’ve talked about today, we’ve now carved out the ’16 group, and we’re talking specifically about them. The ’14 and ’15 group of hospitals are included in the operating results of everything else that we’ve established are growing at 20 basis points in this quarter on a margin basis compared to the third quarter of last year.
So those hospitals that generated the $55 million are those transitioning — that transitioning group. The majority of the year-over-year increase was concentrated in the ’16 class. The majority of the $55 million was in the ’16 class. And so we’ve established today that that group is behind plan. And so when we look at bringing our guidance down, we brought it down $15 million in Q2. We’re bringing it down $35 million here, for a combination of about $50 million. Most of that decline in that $50 million reduction in guidance relates to the 2016 class. And we’ll provide more color as we get into the — towards the end of the year. We’ll obviously provide more color on what we expect for 2018. But that’s how we’re thinking about it, and that’s the reconciliation of what we had talked about at the 1st of the year versus where we’re at today.
David Dill
Mike, the only thing I’ll add, Whit, and I’ll also stop short of commenting on ’18 and we’ll have another time to do that, but coming into 2017, when we built our plans from kind of the bottom-up, working through strategic planning at the hospital through the guidance that we issued coming into the year, we expected margins to improve approximately 300 basis points in that class. I’m talking about the class of ’16 acquisitions now, through a combination of revenue growth and cost reductions, both of those. Leaving 2017, I would have expected, in that case, the margins to be in the mid- to high single digits generally on that 3-year plan that Bill has talked about. And historically, we’ve been able to demonstrate through, really, all the integration work dating back to 2011 from mid- to high single digits heading into ’18.
So these hospitals and the margins of these hospitals, they have not increased as we had expected, driven by many of the things that we’ve talked about here, coupled with just the soft environment that we’re operating in today that everybody’s experiencing. And not only have they not increased, they’ve actually declined by a couple hundred basis points. So that 500 basis point delta across the $900 million of revenue that Mike talked about is roughly the $45-ish million that results in that EBITDA walk that Mike talked about from where we started the year to where we ended the year.
So the good news is it’s on a small group of assets. And my focus is on this group of assets. And these are in markets that have the size and the ability to grow market share over time, and I’m convinced that we’ll do that. And so let’s don’t forget kind of the broader picture of the rest of the organization, all the integration work, all the legacy hospitals generally performing in line with the plan coming into the year even in this environment that we’re operating in, and I couldn’t be more proud about it — from our teams.
Benjamin Mayo
Okay. So of the $55 million that you originally targeted, it sounds like $45 million to — you’re $45 million to maybe $50 million short of your expectation on the 2016 class. Is that fair?
Michael Coggin
Yes. And I’m saying that — that is very fair. I’m saying that the 2016 class was the majority of the $55 million. It’s not all of it, but that’s a fair statement, Whit.
Benjamin Mayo
Okay, okay. And a lot of this is just timing, and you think that that $45 million, $50 million, you have visibility into that next year after you’ve made all these difficult decisions in the third quarter?
William Carpenter
So Whit, this is Bill. It is about timing. We have every confidence that we have strategies in place in order to allow us to take these hospitals to double-digit margins over time. I’m not going to — like Mike and David, we’re not going to get into ’18 this morning. But we have a plan to take these hospitals from the low single digits, where they remain today, to the upper — to low double digits over the next couple of years. And I’m encouraged that this is a discrete group of hospitals. The rest of the company is doing fine. This is a discrete group of hospitals, where we will apply the operating discipline that we have shown over the years in order to get these results, and we look forward to doing that.
Benjamin Mayo
Okay. Maybe one last just on the — David, I think you referenced in your prepared remarks some changes in the hospital-based physician contracts. I mean, what are you referencing? Is this call coverage, subsidies? Are you doing something new with contract groups in the ED? Just any more color.
David Dill
Yes, this is — it’s no different than any other decision that we make, so I’d just broadly — I used an example. Hospital-based physicians, so call coverage goes into that plus just coverage of other hospital-based departments, whether it’s anesthesia, ED hospitalists, so those type of discussions that we have with local doctors. And yes, some of those discussions are easier than others. And in the case that I laid out for you is one that had a bigger impact than what we had anticipated. When we gave our Q2 guidance, Whit, we knew of these decisions and these discussions that were going on, and we tried to estimate the impact of that and just underestimated what the impact of that decision was going to be. But I have no doubt that it’s the right thing to do to best position the hospital for long-term success.
William Carpenter
Yes, I think that’s right, Whit. These are hard decisions, but they’re decisions that you make when you operate a business, maybe the decisions that any of you would make if you’re operating the business to the right decisions. But because these decisions impacted higher-revenue areas like surgery in this quarter, they had an impact on the quarter that is making it necessary for us to address them on this call. Ordinarily, we might have had the ability to work through these things and issue like David has described, might not have been called out in a call like this. But in this case, it was necessary for us to do it, and so we’re addressing it head on.
Operator
And our next question comes from the line of Ralph Giacobbe with Citi.
Ralph Giacobbe
I just want to go back to the physicians. It sounds like some of this is sort of self-inflicted, integration-related decisions. I guess I’m still trying to understand, are these physicians still referring to you? Are they employed docs? Can you just give some background there? Or based on these decisions, that volume has dried to basically 0 and/or are they no longer employed?
David Dill
Yes, Ralph, it has not — referrals and the use of our hospital and related services have not gone to 0. These are relationships in competitive markets where you split between different hospitals and gives us the ability, through our relationships and working with doctors, to get this business back. So I have every bit of confidence that we’ll be able to do that over time. Some of it is self-inflicted in terms of making hard decisions that need to be made to best position this hospital for long-term success, and we knew it was going to have an impact. So to the extent that that’s self-inflicted, it is self-inflicted. But we knew with our eyes wide open what the potential impact of any of these decisions are. We make these decisions across 72 hospitals every day, and so that’s just part of our integration planning that we tackle these issues.
Ralph Giacobbe
Okay. And then — and maybe can you help us think about — I mean, what can you do? I mean, you can’t force a physician to refer. So I guess, what are ways you can combat that? Can you give us any sense of that, I guess? And then second, I think there’s been sort of other situations. You mentioned in the past where you had a physician group leave, and I understand this sounds like it’s a little bit different. But as you think about additional MA, are there things you can do to sort of prevent this from happening again on a go-forward basis?
David Dill
Yes, I mean, there’re a lot of things that we can do. And one of the things we can do is just continue to have an open and honest dialogue with our partners in the market, and that’s what our teams on the ground are doing. But we have the ability to invest capital, to build service lines, to recruit doctors into the market if that’s necessary. Every market is different, and the needs of those markets are different. So there are a lot of things that we can do to build service lines over time.
William Carpenter
And Ralph, we operate hospitals in competitive markets every day, where physicians admit patients to our hospital or the other hospital. And most of these hospitals, as we said, are doing great, and they’re contributing to our success. And frankly, we’ve made the same types of decisions that we’ve made in the integration of this sort of compressed timeframe that we’re talking about with respect to the class of ’16. We’ve made those same types of decisions across our portfolio of hospitals for years, including bigger competitive markets that are leaders for us in the company.
So I agree with David and his comment a minute ago. We’ve got to stay focused on the bigger picture. We’re going to do the things that are needed to build these relationships back with doctors. We’re creating places where people want to come for care because of the reputation and results we have in achieving high-quality care and clinical outcomes for patients and creating places where physicians want to practice because we have the ability to give them the state-of-the-art tools they need to get great outcomes for their patients. You also asked about MA, and I think I just said a minute ago — if I didn’t, let me say, we think these are the right kind of markets. Our strategy of entering into bigger, faster-growing markets with a more diverse employer base that has the opportunity to network in order to provide care across the continuum for a population of people gives us a greater opportunity to grow and expand EBITDA over time.
Ralph Giacobbe
Okay. All right. And then one more, and I may have missed it. Could you give the impact on the same-facility growth from those 4? So same-facility revenue was down 60 basis points. If you exclude those from the same-facility base, what would have same-facility revenue been?
Michael Coggin
Ralph, we did not give that out in here, so we just talked about specifically on the EBITDA margin component, that excluding this group of 2016 hospitals, EBITDA margins would have been up 20 basis points on the balance of the business. But we did not give anything on the revenue component.
Ralph Giacobbe
Can you help at all on that front? Because I think the question is sort of the sustainability. That’s — I get it that you improved sort of the underlying margin, which is great. But on a go-forward basis, I think it’s becoming increasingly important to understand sort of what the baseline revenue is growing at a certain level to be able to sort of leverage that top line.
Michael Coggin
Yes. I’ll say this, I mean, the revenue piece for everything excluding the 2016 class was up slightly. So we’re still seeing revenue growth on everything, excluding the ’16 class. The ’16 class, obviously, as we’ve talked about here, particularly the surgical volume declines that we’ve mentioned, the revenue there was down much more than the rest of the business. And you saw the figures that we gave for the overall revenue growth rate at minus 0.6%. So a little bit up on everything else, and this one was down. And that’s the help that I can give you.
Operator
Our next question comes from the line of Ana Gupte from Leerink Partners.
Anagha Gupte
My question was just outside of this issue you’ve had with this 2016 class. Your surgery volumes are pretty weak. The ED volumes are weak. And I’m just wondering, how are you thinking about potentially just turning around the top line and the volumes? Are you thinking — rethinking the physician recruitment service lines, access point, hub-and-spoke, anything around potentially behavioral or whatever? Or will you just continue along this path and integrate your existing acquisitions and then resume MA activity?
David Dill
Yes, Ana, this is David. I’ll start with it. Mike may want to chime in. So when you think about the capital deployment plan of the organization, we will continue to deploy capital to fulfill a lot of the capital commitments that were made as part of our MA work. Those are targeted to growing service lines, not a specific initiative of one service line everywhere but making sure that we are growing the service lines that are the most important to the success of each and every one of our hospitals. In some cases, that’s behavioral health. In other cases, it’s more advanced cardiology, as an example. So our targeted capital investments, I think, aim at growing service lines.
Looking at other settings of care in some of our competitive markets, whether it’s urgent care centers or other care locations, we just opened a freestanding ED up north of Nashville, in Gallatin, Tennessee, about 30 miles north of Nashville. We don’t have a strategy of building out freestanding EDs. We don’t need them in most of our markets. But in those markets where it makes sense, we’ll allocate our capital spend to the building out of those outpatient care centers. We’re doing the same up in Johnstown, Pennsylvania. So very targeted physician recruiting to drop service lines and expand volumes, very, very targeted capital investments of either building out new service lines or outpatient centers of care based on the needs of the markets. And the whole quality program is something that we feel confident over time, really differentiates us in these markets. I mean, those are kind of 2 or 3 things as I think about the continued growth of service lines for us, of where those investments will be made.
Michael Coggin
The only thing I would add to it — this is Mike. I know there’s been some questions around capital. We’ve talked about — the majority of our hospitals are performing in accordance with our plan. They’re growing. There’s revenue generation in that. I mentioned that on Ralph’s question just a few minutes ago. So as we deploy capital, we’re deploying it strategically in places that are growing. And we know we’ve got great opportunities to deploy it and help it grow other areas, especially the ’16 class. We know that it’s going to take capital to grow in every area. So we’re very disciplined in our approach. We’re focused, and we’re making good decisions to make sure that what we do is going to drive the growth of the business. And so I just want to make — I just wanted to kind of set the record on that, that capital deployment is extremely important to us. And we’re very disciplined in the way that we evaluate it and the decisions that we make around the capital deployment.
Anagha Gupte
Okay. Just one follow-up. Can you update us on the Duke LifePoint brand and how that’s resonating and how that’s contributing overall and if you’re boosting the efforts along that? And then just another separate question on the rest. So adjusted admissions growth, is it a mix-related issue? Or are you seeing some specific pressures in any one category?
David Dill
I’ll take the Duke LifePoint. Mike can take the comment around — kind of the mix of adjusted admissions, I think, was the question. You were fading out just a little bit, but I think that was the question. On the National Quality Program, really, thank you — first of all, thank you for asking that question. We didn’t really address it that much in our opening comments because we knew most of the focus was going to be on the class of 2016 and just the operating results. But this is such a core component to what we wake up and do every day. And so we have on-boarded all of our hospitals into the National Quality Program. By the end of this year, we’ll have about 8 or 9 of our hospitals that have achieved a very high level of designation, with more to follow in 2018. That makes an impact. That makes an impact on our ability to recruit, to retain and to grow service lines in these communities.
So it is a core component to our strategy, and I’m really excited about the progress that we have made. And these standards that we’ve set for our hospitals to achieve it, we could have a lot more if we set lower standards that were there. But this is a high standard that Duke set, that we set with Duke, and then will prove to be a basis for how we grow. Quality is the winds by which we grow this organization over time, and this National Quality Program is certainly the centerpiece of it.
Michael Coggin
And Ana, I think — if I understood your question correctly, I think you were asking about the mix of our admissions and just more along the lines of what the payer mix has done. We commented in our prepared remarks that the payer mix has shifted. The shift that we saw in the third quarter of this year was consistent with the first couple of quarters, and you’ll see the actual reported payer mix in the 10-Q that we’ll file later today. Specifically, what we continue to see is an increase in the portion of our revenue that’s coming from Medicare and Medicaid payers and a decline in the commercial payers. Specifically, on a year-to-date basis, you’ll see Medicare was up about 140 basis points and commercial declined at about 100.
Inside the Medicare and the Medicaid, the managed Medicare and managed Medicaid components of that payer mix continue to climb a little bit. For example, this year, through the year-to-date period, we’re at — about 22.7% of our Medicare revenue comes from managed Medicare, and inside of Medicaid, it’s about 54%. Both of those figures are up a little bit. Obviously, this payer mix shift impacts our revenue per equivalent admission statistic, and it’s been growing somewhere around 1.5% to the low 2s, and those trends do have an impact on revenue per equivalent admission. So I hope that’s helpful, and I hope that addresses the question that you were asking.
Operator
And our next question comes from the line of Chris Rigg with Deutsche Bank.
Christian Rigg
Just a lot of numbers being discussed, but I’m still a little confused on the revenue side. When I think about, call it, a roughly $100 million reduction in guidance, how much of that was due to the class of 2016 versus divestitures versus core growth? If you could sort of break that down, it would be helpful.
Michael Coggin
Okay. Chris, this is Mike. So we’re providing our revised revenue. You see the numbers of $6,335,000,000 to $6,385,000,000. Those growth rates, on a same-store basis, are down on the low end 0.1% to up 0.7%. And so what that assumes is in the fourth quarter, at the midpoint of our guidance, we’ll see total revenue decline on a same-store basis at 0.9%. So those are the assumptions that we’ve got going into the fourth quarter, and that’s how the revenue shapes out. And it’s predominantly in those class of 2016 hospitals where we’re seeing the decline in revenue, probably 2/3 of it there and another 1/3 in the balance of the company. But that’s our — those are our revenue assumptions for guidance. Is that helpful?
Christian Rigg
Yes. And then just on the class of 2016, so is it likely to get a little worse before it gets better? Or do you think those facilities are already stabilized and will begin to show sequential improvement, profitability-wise?
David Dill
Yes. So Mike laid out and we broke it out into 2 different components. But of this $10 million shortfall, less than our expectations for the class of ’16, about $4 million of that is really onetime in nature. So from a sequential standpoint, I fully expect improvement between Q3 to Q4 because of those onetime items. The other issues, well, I won’t comment on ’18 at this point, but we have built into our guidance, and the expectation is that it holds steady with what we saw in Q3. And I have every belief, based on all the work that we’ve done, that to be the case. But we don’t see the improvement in Q4. And then we will launch into our guidance and talk more about it, I’m sure, when we get ready to talk about 2018 on our next call.
Operator
Now due to time, our final question comes from the line of Gary Taylor with JPMorgan.
Gary Taylor
I kind of wanted to follow up on Frank’s question, not just because he hit a really nice 3-wood, but when I look at just kind of the progression, it does seem like maybe something changed just more dramatically in the quarter that I’m not understanding. So in the first quarter, EBITDA was up $10 million year-over-year. In the second quarter, it was up $17 million year-over-year. Third quarter, down $12 million. In the fourth quarter, midpoint of the guidance would be down $11 million. So are we to conclude that this class of ’16 issue was not really an issue in the first half of the year, and now it’s much more of an issue now? That would explain that progression?
Michael Coggin
Yes, Gary, so that’s right. So the class of ’16, again, in the first quarter and the second quarter, performed slightly — they performed slightly below our internal expectations. They weren’t performing all the way up to where we expected them to be. But our guidance, our adjusted guidance and our original plan included a fairly significant ramp for those as we moved into the back half and to the third quarter and the fourth quarter. So when we — as David talked about, when we made our decisions around the second quarter, we knew that there were certain decisions that were made that would impact us on the balance of the year. We did not properly calculate the full impact of what it was going to be. We assumed there was going to be some impact, but we didn’t properly calculate the full impact. And that’s what’s increased this bring down of guidance, so it’s predominantly in that group of hospitals as you move to the back half of the year.
William Carpenter
Mike, can I add on to this a little bit? Because, Gary, I appreciate the focus of the question. We made decisions in these hospitals, and we knew that they were going to have some immediate impact. And we knew these decisions are good for the long term. And as Mike said, these hospitals were operating within a band, within a range through the first half of the year that didn’t concern us. So we made these decisions, and we make them all the time, and we carefully evaluate the potential impact that these decisions will have. When we revised Q2 guidance, we knew there was potential for an impact, but we didn’t fully anticipate the magnitude of that impact. In these cases, in these markets, the hospital-specific, the market dynamics of these decisions were more pronounced and are more pronounced in the second half of the year than we anticipated them to be.
All that having been said, I have no doubt that the strategies that we’re implementing, the decisions that we’ve made are right, and they’re going to lead us to success in these markets. And success in these markets means continuing to provide high-quality care and service, working closely with our doctors in order to achieve double-digit margin expansion that we’ve discussed. It’s just going to take a little longer than we had originally anticipated.
Gary Taylor
Okay, that’s helpful. And then one — just last quick one. Is the north of $400 million of revenue that was acquired in 2013, is that really kind of normalized margins now? You talk more about the class of ’14 to ’16 now. Does that mean ’13′s really reached average margins?
Michael Coggin
Yes. This is Mike. The ’13 class is in prior. We haven’t really spent a lot of time talking about those. We’ve always spent time talking about that transitioning class. Again, the ’14 class that we mentioned earlier today has progressed nicely. It is meeting our internal expectations of progressing. There are still opportunities. I mean, there’re opportunities throughout our organization, and those — that class is no different. But it is achieving our internal expectations in terms of margin progression, and we’re pleased with the results there.
Operator
And now, Mr. Carpenter, I’ll return the presentation to you to continue or your concluding remarks. Thank you, sir.
William Carpenter
All right. Well, Thelma, thank you, and thanks to all of you for participating in our third quarter earnings call. Looking ahead, I’m excited about the future prospects for our company. We have meaningful opportunities for growth. This, combined with our operating discipline, will continue to drive value for shareholders. Of course, all of this is rooted in our in ability to deliver quality care and service. When we create a foundation of quality care, we create opportunities for growth, operate more efficiently and attract high-performing talent.
We look forward to seeing you at upcoming investor conferences and discussing our results and the future further. Mike and David and I all intend to be with you at these investor conferences that are coming up, and we want to make sure that we answer your questions fully. So thank you for being part of today’s call, and thank you for your interest in LifePoint Health.
Operator
Thank you, Mr. Carpenter. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day.
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