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LIFEPOINT HOSPITALS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) We recommend that you read this discussion together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report on Form 10-K"). Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations. Additionally, unless the context indicates otherwise, LifePoint Hospitals, Inc. and its subsidiaries are referred to in this section as "we," "our," or "us." We make forward-looking statements in this report, other reports and in statements we file with the United States Securities and Exchange Commission and/or release to the public. In addition, our senior management makes forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include: projections of our revenues, net income, earnings per share, capital expenditures, cash flows, debt repayments, interest rates, operating statistics and data or other financial items; efforts to reduce the cost of providing healthcare while increasing quality; descriptions of plans or objectives of our management for future operations, services or growth plans including acquisitions, divestitures, business strategies, core strategies and other initiatives, including our relationship with Duke University Health System, Inc. through Duke LifePoint Healthcare; interpretations of Medicare and Medicaid laws and regulations and their effect on our business; and descriptions of assumptions underlying or relating to any of the foregoing. In this report, for example, we make forward-looking statements, including statements discussing our expectations about: future financial performance and condition; future liquidity and capital resources; future cash flows; existing debt; changes in depreciation and amortization expenses; our business strategy and operating philosophy; effects of competition in a hospital's market; costs of providing care to our patients; our compliance with new and existing laws and regulations as well as costs and benefits associated with compliance; the impact of national healthcare reform; other income from electronic health records ("EHR"); anticipated capital expenditures, including routine projects, investments in information systems and capital projects related to recent acquisitions and the expectation that capital commitments could be a significant component of future acquisitions; implementation of supply chain management and revenue cycle functions; the impact of accounting methodologies; industry and general economic trends; patient shifts to lower cost healthcare plans which generally provide lower reimbursement; reimbursement changes, including policy considerations and changes resulting from state budgetary restrictions; the amount of reimbursement payments under the New Mexico state program; patient volumes and related revenues; claims and legal actions relating to professional liabilities; governmental investigations and voluntary self-disclosures; and physician recruiting and retention. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "can," "could," "may," "should," "believe," "will," "would," "expect," "project," "estimate," "seek," "anticipate," "intend," "target," "continue" or similar expressions. You should not unduly rely on forward-looking statements, which give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. We do not undertake any obligation to update our forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. There are several factors, some beyond our control that could cause results to differ significantly from our expectations. Some of these factors, as well as other factors such as market, operational, liquidity, interest rate and other risks, are described in Part I, Item 1A. Risk Factors and Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk of the 2013 Annual Report on Form 10-K. Any factor described in this report and in the 2013 Annual Report on Form 10-K could by itself, or together with one or more factors, adversely affect our business, results of operations and/or financial condition. There may be factors not described in this report or in the 2013 Annual Report on Form 10-K that could also cause results to differ from our expectations. -------------------------------------------------------------------------------- Overview We operate general acute care hospitals primarily in non-urban communities in the United States ("U.S."). At June 30, 2014, on a consolidated basis, we operated 62 hospital campuses in 20 states, having a total of 7,442 licensed beds. We generate revenues primarily through hospital services offered at our facilities. We generated revenues of $1,047.0 million and $894.9 million during the three months ended June 30, 2014 and 2013, respectively, and $2,054.2 million and $1,826.0 million during the six months ended June 30, 2014 and 2013, respectively. We derived revenues from the Medicare and Medicaid programs, collectively, of 45.3% and 46.2% during the three months ended June 30, 2014 and 2013, respectively, and 45.3% and 47.1% during the six months ended June 30, 2014 and 2013, respectively. Payments made to our hospitals pursuant to the Medicare and Medicaid programs for services rendered rarely exceed our costs for such services. As a result, we rely largely on payments made by private or commercial payors, together with certain limited services provided to Medicare recipients, to generate an operating profit. The hospital industry continues to endure a period where the costs of providing care are rising faster than reimbursement rates from government or private commercial payors. This places a premium on efficient operation, the ability to reduce or control costs and the need to leverage the benefits of our organization across all of our hospitals. Competitive and Structural Environment The environment in which our hospitals operate is extremely competitive. In addition to competitive concerns, many of our communities are experiencing slow growth, and in some cases, population losses. We believe this trend has occurred primarily as a result of recent challenging economic conditions because the economies in the non-urban communities in which our hospitals primarily operate are often dependent on a small number of larger employers, especially manufacturing or other facilities. This causes the economies of our communities to be more sensitive to economic downturns and slower to rebound when the overall U.S. economy improves. Our hospitals face competition from other acute care hospitals, including larger tertiary hospitals located in larger markets and/or affiliated with universities; specialty hospitals that focus on one or a small number of very lucrative service lines but that are not required to operate emergency departments; stand-alone centers at which surgeries or diagnostic tests can be performed; and physicians on the medical staffs of our hospitals. In many cases, our competitors focus on the service lines that offer the highest margins. By doing so, our competitors can potentially draw the best-paying business out of our hospitals. This, in turn, can reduce the overall operating profit of our hospitals as we are often obligated to offer service lines that operate at a loss or that have much lower profit margins. We continue to see the shift of increasingly complex procedures from the inpatient to the outpatient setting and have also seen growth in the general shift of lower acuity procedures to physician offices and other non-hospital outpatient settings. These trends have, to some extent, offset our efforts to improve equivalent admission rates at many of our hospitals. Our hospitals also face extreme competition in their efforts to recruit and retain physicians on their medical staffs. It is widely recognized that the U.S. has a shortage of physicians in certain practice areas, including primary care physicians and specialists such as cardiologists, oncologists, urologists and orthopedists, in various areas of the country. This fact, and our ability to overcome these shortages, is directly relevant to our growth strategies because cardiologists, oncologists, urologists and orthopedists are often the physicians in highest demand in communities where our hospitals are located. Larger tertiary medical centers are acquiring physician practices and employing physicians in some of our communities. While physicians in these practices may continue to be members of the medical staffs of our hospitals, they may be less likely to refer patients to our hospitals over time. We believe other key factors in our competition for patients is the quality of our patient care and the perception of that quality in the communities where our hospitals are located, which may be influenced by, among other things, the technology, service lines and capital improvements made at our facilities and by the skills and experience of our non-physician employees involved in patient care. -------------------------------------------------------------------------------- Business Strategy In order to achieve growth in patient volumes, revenues and profitability given the competitive and structural environment, we continue to focus our business strategy on the following: · Measurement and improvement of quality of patient care and perceptions of such quality in communities where our hospitals are located; · Targeted recruiting of primary care physicians and physicians in key specialties; · Retention of physicians and efforts to improve physician satisfaction, including employing a greater number of primary care physicians as well as physicians in certain specialties; · Retention and, where needed, recruitment of non-physician employees involved in patient care and efforts to improve employee satisfaction; · Targeted investments in new technologies, new service lines and capital improvements at our facilities; · Improvements in management of expenses and revenue cycle; · Negotiation of improved reimbursement rates with non-governmental payors; · Strategic growth through acquisition and integration of hospitals and other healthcare facilities where valuations are attractive and we can identify opportunities for improved financial performance through our management or ownership; and · Developing strategic partnerships with not-for-profit healthcare providers to achieve growth in new regions. As part of our ongoing efforts to further manage costs and improve the results of our revenue cycle, we have partnered with a third party to provide certain nonclinical business functions, including payroll processing, supply chain management and revenue cycle functions. We believe this model of sharing centralized resources to support common business functions across multi-facility enterprises provides us efficiencies and is the most cost effective approach to managing these nonclinical business functions. Regulatory Environment Our business and our hospitals are highly regulated, and the penalties for noncompliance are severe. We are required to comply with extensive, extremely complicated and overlapping government laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our hospitals conduct their operations, from what service lines must be offered in order to be licensed as an acute care hospital, to whether our hospitals may employ physicians, and to how (and whether) our hospitals may receive payments pursuant to the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil sanctions, and the loss of our ability to receive reimbursements through the Medicare and Medicaid programs. Not only are our hospitals heavily regulated, but the rules, regulations and laws to which they are subject often change, with little or no notice, and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require our hospitals to make changes in their facilities, equipment, personnel or services, and may also require that standard operating policies and procedures be re-written and re-implemented. The cost of complying with such laws and regulations is a significant component of our overall expenses. Further, this expense has grown in recent periods because of new regulatory requirements and the severity of the penalties associated with non-compliance. Management anticipates that compliance expenses will continue to grow in the foreseeable future. The healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting practices, cost reporting and billing practices, medical necessity, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focal areas of the Office of the Inspector General ("OIG"), the Department of Justice ("DOJ") and other governmental fraud and abuse programs. -------------------------------------------------------------------------------- Health Care Reform The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively the "Affordable Care Act") dramatically altered the U.S. healthcare system and was intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, providing additional funding for Medicaid in states that choose to expand their programs, reducing Medicare and Medicaid disproportionate share hospital ("DSH") payments to providers, expanding the Medicare program's use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, and instituting certain private health insurance reforms. Although some of the measures contained in the Affordable Care Act do not take effect until 2014 or later, certain of the reductions in Medicare spending, such as negative adjustments to the Medicare hospital inpatient and outpatient prospective payment system market basket updates and the incorporation of productivity adjustments to the Medicare program's annual inflation updates, became effective prior to 2014. During the first half of 2014, and primarily as a result of the expansion of health insurance coverage, we experienced an increase in revenues from providing care to certain previously uninsured individuals. While we expect this trend to continue, the future impact and timing of such expansion remains difficult to predict, will be gradual and may not offset scheduled decreases in reimbursement. There have been and likely will continue to be a number of legal challenges to various provisions of the Affordable Care Act. For example, in 2012, the U.S. Supreme Court upheld the constitutionality of the Affordable Care Act, including the "individual mandate" provisions of the Affordable Care Act that generally require all individuals to obtain healthcare insurance or pay a penalty. However, the U.S. Supreme Court also held that the provision of the Affordable Care Act that authorized the Secretary of the Department of Health and Human Services ("HHS") to penalize states that choose not to participate in the expansion of the Medicaid program by removing all of their existing Medicaid funding was unconstitutional. As a result, at June 30, 2014, only seven of the states in which we operate are currently implementing expansions to their Medicaid programs. Accordingly, some low-income persons in other states that are not expanding Medicaid may not have insurance coverage as intended by the Affordable Care Act. In addition, on July 22, 2014, the U.S. Court of Appeals for the District of Columbia and the U.S. Court of Appeals for the Fourth Circuit issued conflicting rulings on whether premium subsidies may be made available to individuals residing in the 36 states that have federally-run health insurance exchanges. The unavailability of premium subsidies for individuals purchasing their insurance through federally-run health insurance exchanges would result in many of those individuals dropping their coverage and increasing the number of uninsured. The Affordable Care Act changes how healthcare services are covered, delivered, and reimbursed. The net effect of the Affordable Care Act on our business is subject to numerous variables, including the law's complexity, lack of complete implementing regulations and interpretive guidance, gradual implementation and possible amendment, as well as the uncertainty as to the extent to which states will choose to expand their Medicaid program and the extent to which individuals will elect coverage. In addition, a number of the provisions of the Affordable Care Act that were scheduled to become effective in 2014, such as the employer mandate, the Small Business Health Option Program, and the state run exchange verification of income and Medicaid agency electronic notification of eligibility for tax credit and subsidy requirements, have been delayed until 2015 or 2016, and additional delays in the implementation of these or other provisions of the Affordable Care Act could be imposed in the future. As a result, we are unable to predict with great certainty the net effect on our business, financial condition or results of operations of the expected increases in insured individuals using our facilities, the reductions in government healthcare reimbursement spending, and numerous other provisions of the Affordable Care Act that may affect us. We are also unable to predict with a high level of precision how providers, payors, employers and other market participants will continue to respond to the various reform provisions because many provisions will not be implemented for several years under the Affordable Care Act's implementation schedule. Furthermore, several bills have been and may continue to be introduced in Congress to delay, defund or repeal implementation of or amend all significant provisions of the Affordable Care Act, and the results of such legislative efforts may impact our business in the future. --------------------------------------------------------------------------------Medicare and Medicaid Reimbursement Medicare payment methodologies have been, and are expected to continue to be, revised significantly based on cost containment and policy considerations. The Centers for Medicare and Medicaid Services ("CMS") has already begun to implement some of the Medicare reimbursement reductions required by the Affordable Care Act. These revisions will likely be more frequent and significant as more of the Affordable Care Act's changes and cost-saving measures become effective. Additionally, the Middle Class Tax Relief and Job Creation Act of 2012 and the American Taxpayer Relief Act of 2012 require further reductions in Medicare payments, and the Budget Control Act of 2011 ("BCA") imposed a 2% reduction in Medicare spending effective as of April 1, 2013. On March 4, 2014, the Office of Management and Budget released President Obama's proposed budget for federal fiscal year ("FFY") 2015 (the "Proposed Budget"). Among other things, the Proposed Budget would reduce Medicare spending by $400 billion from FFY 2015 to FFY 2024. The Proposed Budget would achieve these reductions by, among other things, reducing payments to Medicare providers, reducing payments for prescription drugs covered under Medicare Part B and Part D, and increasing financial liabilities for certain Medicare beneficiaries. We cannot predict whether the Proposed Budget will be implemented in whole or in part or whether Congress will take other legislative action to reduce spending on the Medicare and Medicaid programs. Additionally, future efforts to reduce the federal deficit may result in additional revisions to and payment reductions for the amounts we receive for our services. On May 15, 2014, CMS published its hospital inpatient patient prospective system ("IPPS") proposed rule for FFY 2015, which begins on October 1, 2014. Among other things, the proposed rule provides a payment rate increase of 1.3% for hospitals that successfully report the quality measures for the Hospital Inpatient Quality Reporting ("IQR") Program (formerly the Reporting Hospital Quality Data for Annual Payment Update Program) and are meaningful EHR users. The rate increase is based on a proposed hospital market basket increase of 2.7%, which is reduced by (i) a multi-factor productivity adjustment of 0.4%, (ii) a 0.2% reduction required by the Affordable Care Act, and (iii) a 0.8% documentation and coding recoupment adjustment required by the American Taxpayer Relief Act of 2012 ("ATRA"). Hospitals that do not successfully report quality data under the IQR Program will be subject to a one-fourth reduction of the hospital market basket increase prior to the application of any applicable statutory adjustments. In addition, hospitals that are not meaningful EHR users are also subject to an additional one-fourth reduction of the hospital market basket increase. With respect to the documentation and coding recoupment adjustment required by the ATRA, CMS indicated that it expects to make similar adjustments in FFYs 2016 and 2017 in order to recoup the entire $11 billion that it is required to recover by the ATRA to offset the additional increase in aggregate payments to hospitals that Congress believes occurred from FFY 2008 through FFY 2013 solely as a result of the transition to the MS-DRG system and that was not recaptured by the adjustments that were mandated by the Transitional Medical Assistance, Abstinence Education, and Qualifying Individuals Programs Extension Act of 2007. In addition to establishing the payment rate update, the IPPS proposed rule for FFY 2015 also makes a number of other changes to the Medicare program's IPPS. Among other things, the proposed rule implements a 1.0% payment decrease required by the Affordable Care Act for hospitals that rank in the top quartile for the rate of hospital acquired conditions, updates the factors used to determine the amount and distribution of Medicare DSH payments to hospitals, and updates the measures and financial incentives in Medicare's hospital value-based purchasing and readmissions reduction programs. Overall, CMS estimates that under the proposed rule, total IPPS payments to hospitals will decrease by 0.8% or $241 million in FFY 2015. -------------------------------------------------------------------------------- On July 14, 2014, CMS published its hospital outpatient prospective payment system ("OPPS") proposed rule for calendar year ("CY") 2015, which begins on January 1, 2015. Among other things, the proposed rule provides for a payment rate increase of 2.1% percent for hospitals that meet the reporting requirements of the Medicare Hospital Outpatient Quality Reporting ("OQR") Program and a payment rate increase of 0.1% for hospitals that do not. The proposed rate increase is based on a proposed hospital market basket increase of 2.7%, which is reduced by a multi-factor productivity adjustment of 0.4% and an additional 0.2% reduction required by the Affordable Care Act. The proposed rule also makes several other changes to the Medicare program's OPPS, including implementing (with modifications) the policy for comprehensive Ambulatory Payment Classifications ("APCs") that was finalized in the OPPS final rule for CY 2014 and that would create 28 comprehensive APCs that combine certain items and services that are related to the performance of a primary service into a single payment for the comprehensive service under the OPPS, revising the requirements for physician certification of hospital inpatient services such that a physician certification is only required for outlier and long-stay cases of 20 days or more, and requiring hospitals and physicians to provide additional information about services provided in off-campus provider-based departments on their claim forms. "Two Midnight Rule" In the Medicare program's hospital IPPS final rule for FFY 2014, CMS issued the "two midnight rule," which revised its longstanding guidance to hospitals and physicians relating to when hospital inpatient admissions are deemed to be reasonable and necessary for payment under Medicare Part A. Under the two midnight rule, in addition to services that are designated as inpatient-only, surgical procedures, diagnostic tests and other treatments are generally appropriate for inpatient hospital admission and payment under Medicare Part A when the physician (i) expects the beneficiary to require a stay that crosses at least two midnights and (ii) admits the beneficiary to the hospital based upon that expectation. Conversely, hospital stays in which the physician expects the beneficiary to require care that spans less than two midnights are generally inappropriate for payment under Medicare Part A, and should be treated and billed as outpatient services under Part B. While the IPPS final rule for FFY 2014 became effective on October 1, 2013, CMS initially indicated that, for a period of 90 days after the effective date of the rule, it would not permit recovery auditors and other Medicare review contractors to review inpatient admissions of one midnight or less that began between October 1, 2013 and December 31, 2013. CMS subsequently extended that delay to inpatient admissions that occur on or prior to September 30, 2014. CMS did, however, instruct Medicare Administrative Contractors ("MACs") to review, on a pre-payment basis, a small sample (approximately 10 - 25) of inpatient hospital claims relating to admissions that occur between March 31, 2014 and September 30, 2014, and that span less than two midnights after admission in order to determine each hospital's compliance with the new inpatient admission and medical review criteria. Hospitals can rebill denied inpatient hospital admissions in accordance with the rule. On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 ("PAMA") into law. Among other things, PAMA extends the delay of the enforcement of the two midnight rule by recovery auditor and other Medicare review contractors through March 31, 2015, and authorizes CMS to continue to allow MACs to review, on a pre-payment basis, a small sample of inpatient hospital claims relating to admissions that span less than two midnights and that occur between March 31, 2014, and March 31, 2015, in order to determine hospital compliance with the new inpatient admission and medical review criteria. On May 15, 2014, CMS solicited comments in the IPPS proposed rule for FFY 2015 regarding the development of an alternative payment methodology under the Medicare program for short inpatient hospital stays. Among other things, CMS is seeking input on how to define a short inpatient hospital stay for Medicare payment purposes and how to determine the appropriate payment amounts for short inpatient hospital stays. -------------------------------------------------------------------------------- We cannot predict whether Congress or CMS will further delay the review of inpatient admissions of one midnight or less by recovery auditors or other Medicare review contractors or the impact that any such reviews will have on our business and results of operations and when they are allowed by CMS. In addition, legislation has been introduced in Congress that, among other things, would generally prohibit Medicare review contractors from denying claims due to the length of a patient's stay or a determination that services could have been provided in an outpatient setting and require CMS to develop a new payment methodology for services that are provided during short inpatient hospital stays. Federal lawsuits have also been filed challenging the two midnight rule primarily on the grounds that the implementation of the rule itself, and the payment reduction associated with the rule (i.e., 0.2% IPPS payment reduction to hospitals) violate the Administrative Procedure Act. We cannot predict whether the legislation that has been introduced in Congress will be adopted or, if adopted, the amount of reimbursement that would be paid under any alternative payment methodology that is developed by CMS. We also cannot predict whether the federal court challenges to the two midnight rule will be successful. Physician Services Physician services are reimbursed under the Medicare physician fee schedule ("PFS") system, under which CMS has assigned a national relative value unit ("RVU") to most medical procedures and services that reflects the various resources required by a physician to provide the services relative to all other services. Each RVU is calculated based on a combination of work required in terms of time and intensity of effort for the service, practice expense (overhead) attributable to the service and malpractice insurance expense attributable to the service. These three elements are each modified by a geographic adjustment factor to account for local practice costs then aggregated. The aggregated amount is multiplied by a conversion factor that accounts for inflation and targeted growth in Medicare expenditures (as calculated by the sustainable growth rate ("SGR")) to arrive at the payment amount for each service. The PFS rates are adjusted each year, and reductions in both current and future payments are anticipated. The SGR formula has resulted in payment decreases to physicians every year since 2002. However, all but one of those payment decreases has been averted by Congressional action. For CY 2014, CMS issued a final rule that would have applied the SGR and resulted in an aggregate reduction of 20.1% to all physician payments under the PFS for CY 2014. The Pathway for SGR Reform Act of 2013, which was enacted on December 26, 2013 (the "Pathway Act") delayed the application of the SGR and provided for a 0.5% increase in PFS payment rates through March 31, 2014. PAMA extends the 0.5% increase in PFS payment rates established by the Pathway Act through December 31, 2014. It also provides that there will be no increase to the CY 2015 PFS from January 1, 2015 through March 31, 2015. On July 11, 2014, CMS published the PFS proposed rule for CY 2015. Since updates to the PFS are pre-determined based on a statutory formula that cannot be changed by CMS, the proposed rule did not include any proposal or announcement regarding updates or changes to the PFS. However, in March 2014, prior to the enactment of PAMA, CMS estimated that payments to physicians in CY 2015 would be reduced by 20.9%. We cannot predict whether Congress will pass legislation, such as the SGR Repeal and Medicare Provider Payment Modernization Act, to avert the rate cut for the remainder of CY 2015 and/or otherwise adopt a permanent fix for the issues that are created by the application of the SGR. If the payment reduction to the PFS is not averted prior to March 31, 2015, the reimbursement received by our employed physicians, the physicians to whom our hospitals have provided recruitment assistance, and the physician members of our medical staffs would be adversely affected. --------------------------------------------------------------------------------Protecting Access to Medicare Act of 2014 As previously noted, on April 1, 2014, President Obama signed in to law the Protecting Access to Medicare Act of 2014, or PAMA. In addition to delaying the enforcement of the two midnight rule and extending the PFS payment rate increase provided by the Pathway Act, PAMA made changes to a number of payment and other provisions of the Medicare and Medicaid programs. Among other things, PAMA: · Extends the Medicare dependent hospital program, which provides enhanced payment support for rural hospitals that have no more than 100 beds and at least 60% of their inpatient days or discharges covered by the Medicare program, through March 31, 2015; · Extends the Medicare low volume hospital program, which provides additional Medicare reimbursement for general acute care hospitals that are located 15 road miles from another general acute care hospital and have less than 1,600 Medicare discharges each fiscal year, through March 31, 2015; · Extends the Transitional Medicare Assistance Program, which provides Medicaid insurance coverage for families transitioning from welfare to work, through March 31, 2015; · Establishes a value based purchasing program for skilled nursing facilities that, beginning October 1, 2018, will withhold 2% of the Medicare program's payments to skilled nursing facilities and re-distribute between 50% to 70% of the amount that is withheld to high performing facilities with reduced hospital readmissions; · Delays until October 1, 2017, the Medicaid state DSH allotment reductions required by the Affordable Care Act that were scheduled to become effective on October 1, 2016, and extends those reductions through FFY 2024; and · Realigns the Medicare sequester for FFY 2024 so that there will be a 4.0% sequester for the first six months of FFY 2024 and a 0.0% sequester for the second six months of FFY 2024, instead of a 2.0% sequester for the full 12-month period. Adoption of Electronic Health Records The Health Information Technology for Economic and Clinical Health Act (the "HITECH Act") was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009. The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. EHR meaningful use objectives and measures that hospitals and physicians must meet in order to qualify for incentive payments will be implemented in three stages. Stage 1 has been in effect since 2011; however, on September 4, 2012, HHS released final requirements for Stage 2, which took effect on October 1, 2013. We strive to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available incentive payments. Our compliance has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing our EHR solutions along with costs associated with the hardware and software components of the project. As we complete our full implementation of certified EHR technology in accordance with all three phases of the program, our EHR incentive payments will decline and ultimately end. We currently estimate that at a minimum total costs incurred to comply will be recovered through the total EHR incentive payments over the projected lifecycle of this initiative. An important component of the effective implementation of our EHR initiatives involves our uninterrupted access to reliable information systems. In late 2011, we entered into an agreement with a third party technology provider to design and operate a hosted data center for our critical third party information systems. In addition to providing a hosted data center, the third party technology provider offers help desk end-user support for certain clinical information systems, provides help desk and support functions for certain clinical information system applications, performs backups and recoveries of certain critical data, and monitors critical systems to facilitate the identifications of and rapid responses to certain system issues. We believe this agreement provides us with a single technology platform for the delivery of critical third party information systems for the majority of our hospitals and will improve the effectiveness and efficiency of key information support functions in a cost-effective and high quality manner. --------------------------------------------------------------------------------Privacy and Security Requirements and Administrative Simplification Provisions We are subject to the privacy and security requirements of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the HITECH Act, which are designed to protect the confidentiality, availability and integrity of health information. The HIPAA privacy and security regulations apply to health plans, health care clearinghouses, and healthcare providers that transmit health information in an electronic form in connection with HIPAA standard transactions. The HIPAA privacy standards, which apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally, impose extensive administrative requirements on us, require our compliance with rules governing the use and disclosure of this health information, and require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf. They also create rights for patients in their health information, such as the right to access and amend their health information and to request an accounting for certain disclosures of their health information. The HIPAA security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic health and related financial information. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. Also, in January 2014, the Federal Trade Commission (the "FTC") ruled that Section 5 of the Federal Trade Commission Act gives the FTC the authority to regulate as unfair business practices companies' inadequate data security programs that may expose consumers to fraud, identity theft and privacy intrusions. The HITECH Act, among other things, strengthened the HIPAA privacy and security requirements, significantly increased the penalties for violations of the HIPAA privacy and security regulations, imposed varying civil monetary penalties and created a private cause of action for state attorneys general for certain HIPAA violations, extended HIPAA's security provisions to business associates, and created new security breach notification requirements. The HITECH Act also created a federal breach notification law that mirrors protections that many states have passed in recent years. In 2011, HHS initiated a pilot audit program that ran through December 2012 in the first phase of HHS implementation of the HITECH Act's requirements of periodic audits of covered entities and business associates to ensure their compliance with the HIPAA privacy and security regulations. On February 24, 2014, HHS announced its plan to survey 1,200 organizations as a first step in selecting organizations for the next round of HIPAA audits. We cannot predict whether our hospitals will be selected in the future for an audit or the results of such an audit. On January 17, 2013, HHS issued a final HIPAA omnibus rule (the "Final HIPAA Rule"), which became effective on March 26, 2013, that modified prior HIPAA regulations and implemented many of the provisions of the HITECH Act. Our facilities were required to comply with the applicable requirements of the Final HIPAA Rule beginning on September 23, 2013, except that some existing agreements with business associates may qualify for an extended compliance date of September 23, 2014. The Final HIPAA Rule modifications include, among other things: making our facilities' business associates directly liable for compliance with certain of the privacy and security rules' requirements; making our facilities' liable for violations by their business associates if HHS determines an agency relationship exists between the facility and the business associate under federal agency law; adding limitations on the use and disclosure of health information for marketing and fundraising purposes, and prohibiting the sale of health information without individual authorization; expanding our patients' rights to receive electronic copies of their health information and to restrict disclosures to a health plan concerning treatment for which our patient has paid out of pocket in full; requiring modifications to, and redistribution of, our facilities notice of privacy practices; rules addressing enforcement of noncompliance with HIPAA due to willful neglect; an increased and tiered civil money penalty structure; and modifications to the breach notification rules that replace the "risk of harm" standard with a "low probability of compromise" standard, which would require our facilities to prepare a four factor risk assessment for impermissible uses and disclosures of health information. We cannot predict the financial impact to our hospitals in implementing the provisions of the Final HIPAA Rule. -------------------------------------------------------------------------------- In addition to the privacy and security requirements, we also are subject to the administrative simplification provisions of HIPAA, which require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. In January 2009, CMS published its 10th revision of International Statistical Classification of Diseases and Related Health Problems ("ICD-10") and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the coding for the services provided in our hospitals and clinics will require much greater specificity. While providers were previously required to begin using the ICD-10 coding system on October 1, 2014, PAMA delayed the effective date of the ICD-10 transition to October 1, 2015. Implementation of ICD-10 will require a significant investment in technology and training. We may experience delays in reimbursement while our facilities and the payors from which we seek reimbursement make the transition to ICD-10. If any of our hospitals fail to implement the new coding system by the deadline, the affected hospital will not be paid for services. We are not able to predict the overall financial impact of our transition to ICD-10. Revenue Sources Our hospitals generate revenues by providing healthcare services to our patients. Depending upon the patient's medical insurance coverage, we are paid for these services by governmental Medicare and Medicaid programs, commercial insurance, including managed care organizations, and directly by the patient. The amounts we are paid for providing healthcare services to our patients vary depending upon the payor. Governmental payors generally pay significantly less than the hospital's customary charges for the services provided. Insured patients are generally not responsible for any difference between customary hospital charges and the amounts received from commercial insurance payors. However, insured patients are responsible for payments not covered by insurance, such as exclusions, deductibles and co-payments. Revenues from governmental payors, such as Medicare and Medicaid, are controlled by complex rules and regulations that stipulate the amount a hospital is paid for providing healthcare services. We must comply with these rules and regulations to continue to be eligible to participate in the Medicare and Medicaid programs. These rules and regulations are subject to frequent changes as a result of legislative and administrative action and annual payment adjustments on both the federal and the state levels. These changes will likely become more frequent and significant as the provisions of the Affordable Care Act are implemented. Revenues from health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs") and other private insurers are subject to contracts and other arrangements that require us to discount the amounts we customarily charge for healthcare services. These discounted arrangements often limit our ability to increase charges in response to increasing costs. We actively negotiate with these payors in an effort to maintain or increase the pricing of our healthcare services; however, we have no control over patients switching their healthcare coverage to a payor with which we have negotiated less favorable reimbursement rates. In recent years, an increasing number of our patients have moved to lower cost healthcare coverage plans, and such plans generally provide lower reimbursement rates and require patients to pay an increased portion of the costs of care through deductibles, co-payments or exclusions. We expect this trend to continue in the coming years. -------------------------------------------------------------------------------- Self-pay revenues are primarily generated through the treatment of uninsured patients. During the first half of 2014, our self-pay revenues decreased primarily as a result of a decrease in admissions as well as a result of healthcare reform and the expansion of Medicaid coverage in certain of the states in which we operate. These reductions partially offset trends our hospitals have experienced in recent years, including increases in self-pay revenues due to a combination of broad economic factors, including high levels of unemployment in many of our markets and increasing numbers of individuals and employers who choose not to purchase insurance or who purchase insurance plans with high deductibles and high co-payments. Additionally, certain of our hospitals participate in federal, state and local programs that provide for supplemental support and funding for the care of indigent patients and changes in these programs can impact our financial position and results of operations. For example, as a result of changes made to one such program in New Mexico, the Sole Community Provider Program ("New Mexico SCPP"), we recognized revenues of approximately $2.5 million and $5.1 million during the three and six months ended June 30, 2014, respectively. In contrast, during the three and six months ended June 30, 2013, we recognized a net reduction to revenues of approximately $4.8 million and revenues of approximately $2.3 million, respectively. This represents a net period over period increase in revenues of $7.3 million and $2.8 million during the three and six months ended June 30, 2014, respectively, as compared to the same periods of the prior year. This change primarily impacted our hospital, Memorial Medical Center of Las Cruces, New Mexico. Currently, for 2014, we predict annual reimbursement under the New Mexico SCPP to approximate between $9.0 million and $11.0 million. Changes to the New Mexico SCPP, for whatever reason, could have a material adverse effect on our financial position or results of operations in the period the changes occur. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Our provision for doubtful accounts serves to reduce our reported revenues. -------------------------------------------------------------------------------- Results of Operations The following definitions apply throughout the remaining portion of Management's Discussion and Analysis of Financial Condition and Results of Operations: Admissions. Represents the total number of patients admitted to our hospitals and used by management and investors as a general measure of inpatient volume. bps. Basis point change. Continuing operations. Continuing operations information includes the results of our hospital support center, our same-hospital operations and our recent acquisitions completed in 2014 and 2013. Effective tax rate. Provision for income taxes as a percentage of income from continuing operations before income taxes less net income attributable to noncontrolling interests and redeemable noncontrolling interests. Emergency room visits. Represents the total number of hospital-based emergency room visits. Equivalent admissions. Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the outpatient factor (the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue). The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. Medicare case mix index. Refers to the acuity or severity of illness of an average Medicare patient at our hospitals. N/A. Not applicable. Net revenue days outstanding. We compute net revenue days outstanding by dividing our accounts receivable net of allowance for doubtful accounts, by our revenue per day. Our revenue per day is calculated by dividing our quarterly revenues by the number of calendar days in the quarter. Outpatient surgeries. Outpatient surgeries are those surgeries that do not require admission to our hospitals. Revenues. Revenues represent amounts recognized from all payors for the delivery of healthcare services, net of contractual discounts and the provision for doubtful accounts. Same-hospital. Same-hospital information includes the results of our hospital support center and the same 57 hospitals operated during the three and six months ended June 30, 2014 and 2013. Same-hospital information excludes the results of our recent acquisitions completed in 2014 and 2013 and our hospitals that have previously been disposed, with the exception of Scott Memorial Hospital, which we acquired effective January 1, 2013 through our joint venture with Norton Healthcare, Inc. and which is included in our same-hospital information. --------------------------------------------------------------------------------For the Three Months Ended June 30, 2014 and 2013 Operating Results Summary The following table summarizes the results of operations for the three months ended June 30, 2014 and 2013 (dollars in millions): Three Months Ended June 30, 2014 2013 % of % of Amount Revenues Amount Revenues Revenues before provision for doubtful accounts $ 1,246.2 119.0 % $ 1,075.7 120.2 % Provision for doubtful accounts 199.2 19.0 180.8 20.2 Revenues 1,047.0 100.0 894.9 100.0 Salaries and benefits 488.5 46.7 422.1 47.2 Supplies 162.5 15.5 144.1 16.1 Other operating expenses 258.3 24.6 222.9 24.8 Other income (21.0) (2.0) (11.0) (1.2) Depreciation and amortization 60.9 5.9 55.9 6.3 Interest expense, net 31.3 3.0 22.6 2.5 Gain on settlement of pre-acquisition contingent obligation - - (5.6) (0.6) 980.5 93.7 851.0 95.1 Income from continuing operations before income taxes 66.5 6.3 43.9 4.9 Provision for income taxes 24.7 2.3 16.7 1.9 Income from continuing operations 41.8 4.0 27.2 3.0 Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests (2.7) (0.3) (0.1) - Income from continuing operations attributable to LifePoint Hospitals, Inc. $ 39.1 3.7 % $ 27.1 3.0 % Revenues The following table presents the components of revenues for the three months ended June 30, 2014 and 2013 (dollars in millions): Three Months Ended June 30, Increase % Increase 2014 2013 (Decrease) (Decrease) Continuing operations: Revenues before provision for doubtful accounts $ 1,246.2 $ 1,075.7 $ 170.5 15.9 % Provision for doubtful accounts 199.2 180.8 18.4 10.2 Revenues $ 1,047.0 $ 894.9 $ 152.1 17.0 Same-hospital: Revenues before provision for doubtful accounts $ 1,116.5 $ 1,075.7 $ 40.8 3.8 % Provision for doubtful accounts 180.6 180.8 (0.2) (0.1) Revenues $ 935.9 $ 894.9 $ 41.0 4.6 -------------------------------------------------------------------------------- Our revenues before provision for doubtful accounts by payor and approximate percentages of revenues were as follows for the three months ended June 30, 2014 and 2013 (in millions): Three Months Ended June 30, 2014 2013 % of % of Amount Revenues Amount Revenues Medicare $ 325.0 31.0 % $ 289.4 32.3 % Medicaid 149.8 14.3 124.4 13.9 HMOs, PPOs and other private insurers 577.6 55.1 466.6 52.2 Self-pay 172.3 16.5 176.5 19.7 Other 21.5 2.1 18.8 2.1 Revenues before provision for doubtful accounts 1,246.2 119.0 1,075.7 120.2 Provision for doubtful accounts (199.2) (19.0) (180.8) (20.2) Revenues $ 1,047.0 100.0 % $ 894.9 100.0 % Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the three months ended June 30, 2014 and 2013: Three Months Ended June 30, 2014 2013 Increase % Increase Revenues per equivalent admission - continuing operations $ 8,012 $ 7,648 $ 364 4.8 Revenues per equivalent admission - same-hospital $ 7,842 $ 7,648 $ 194 2.5 Revenues Before Provision for Doubtful Accounts The following table shows the key drivers of our revenues before provision for doubtful accounts for the three months ended June 30, 2014 and 2013: Three Months Ended June 30, Increase % Increase 2014 2013 (Decrease) (Decrease) Continuing operations: Admissions 52,670 49,220 3,450 7.0 Equivalent admissions 130,680 117,017 13,663 11.7 Medicare case mix index 1.36 1.36 - - Average length of stay (days) 4.9 4.5 0.4 8.9 Inpatient surgeries 14,070 13,292 778 5.9 Outpatient surgeries 52,420 45,860 6,560 14.3 Total surgeries 66,490 59,152 7,338 12.4 Emergency room visits 327,683 288,516 39,167 13.6 Outpatient factor 2.48 2.38 0.10 4.2 Same-hospital: Admissions 48,174 49,220 (1,046) (2.1) Equivalent admissions 119,336 117,017 2,319 2.0 Medicare case mix index 1.36 1.36 - - Average length of stay (days) 4.5 4.5 - - Inpatient surgeries 12,846 13,292 (446) (3.4) Outpatient surgeries 48,282 45,860 2,422 5.3 Total surgeries 61,128 59,152 1,976 3.3 Emergency room visits 299,238 288,516 10,722 3.7 Outpatient factor 2.48 2.38 0.10 4.2 -------------------------------------------------------------------------------- For the three months ended June 30, 2014, our same-hospital revenues before provision for doubtful accounts increased $40.8 million, or 3.8%, to $1,116.5 million as compared to $1,075.7 million for the same period last year. This increase was primarily driven by increases in our same-hospital equivalent admissions, higher contracted rates from HMOs, PPOs and other private insurers as well as the favorable impact of healthcare reform. For the three months ended June 30, 2014, our same-hospital equivalent admissions increased 2.0% as compared to the same period last year, primarily as a result of a 3.3% increase in total surgeries and a 3.7% increase in emergency room visits. Additionally, we experienced a payor mix shift from self-pay payors to Medicaid and HMOs, PPOs and other private insurers for a portion of our patient population, which primarily was a result of healthcare reform and the expansion of Medicaid coverage in certain of the states in which we operate. Provision for Doubtful Accounts The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the three months ended June 30, 2014 and 2013 (dollars in millions): Three Months Ended June 30, % of % of Increase % Increase 2014 Revenues 2013 Revenues (Decrease) (Decrease) Continuing operations: Related key indicators: Charity care write-offs $ 20.1 1.9 % $ 39.5 4.4 % $ (19.4) (49.0) % Self-pay revenues, net of charity care write-offs and uninsured discounts $ 172.3 16.5 % $ 176.5 19.7 % $ (4.2) (2.4) % Net revenue days outstanding (at end of period) 57.6 N/A 57.7 N/A (0.1) (0.2) % Same-hospital: Related key indicators: Charity care write-offs $ 16.8 1.8 % $ 39.5 4.4 % $ (22.7) (57.3) % Self-pay revenues, net of charity care write-offs and uninsured discounts $ 154.8 16.5 % $ 176.5 19.7 % $ (21.7) (12.3) % Net revenue days outstanding (at end of period) 59.5 N/A 57.7 N/A 1.8 3.1 % For the three months ended June 30, 2014, our provision for doubtful accounts increased by $18.4 million, or 10.2%, to $199.2 million on a continuing operations basis but decreased slightly by $0.2 million, or 0.1%, to $180.6 million on a same-hospital basis as compared to the same period last year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. Our same-hospital provision for doubtful accounts decreased as a result of reductions in self-pay revenues during the three months ended June 30, 2014, partially offset by increases in other amounts due from patients enrolled in insurance plans with high deductibles and high co-payments. Same-hospital self-pay revenues decreased by $21.7 million over the same period last year as a result of a shift from self-pay payors to Medicaid and HMOs, PPOs and other private insurers for a portion of our patient population, which primarily was a result of healthcare reform and the expansion of Medicaid coverage in certain of the states in which we operate. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates," in the 2013 Annual Report on Form 10-K. -------------------------------------------------------------------------------- Our net revenue days outstanding at June 30, 2014 improved slightly to 57.6 days compared to 57.7 days at June 30, 2013 on a continuing operations basis. However, our net revenue days outstanding at June 30, 2014 included just 30 days of net revenue for Rutherford Regional Medical Center ("Rutherford"), which is a 143 bed acute care hospital located in Rutherfordton, North Carolina. Effective June 1, 2014, Duke LifePoint Healthcare, a joint venture between us and a wholly-controlled affiliate of Duke University Health System, Inc., acquired an 80% interest in Rutherford. After normalizing for a full quarter of revenue for Rutherford, we estimate that on a continuing operations basis our net revenue days outstanding would have been 56.9 days at June 30, 2014. On a same-hospital basis, our net revenue days outstanding at June 30, 2014 increased to 59.5 days compared to 57.7 days at June 30, 2013. Our net revenue days outstanding increased on a same-hospital basis primarily as a result of the transition of a number of our hospitals into our shared centralized resources revenue cycle function, an increase in the payment lag times for certain of our payors and the overall impact of higher levels of prepayment Medicare audit withholdings. During the three months ended June 30, 2014, our same-hospital net revenue days outstanding improved by 1.9 days as compared to 61.4 days at March 31, 2014. Expenses and Other Income Salaries and Benefits The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the three months ended June 30, 2014 and 2013: Three Months Ended June 30, % of % of 2014 Revenues 2013 Revenues Increase % Increase Salaries and benefits (dollars in millions) $ 488.5 46.7 % $ 422.1 47.2 % $ 66.4 15.7 % Man-hours per equivalent admission 106.4 N/A 106.0 N/A 0.4 0.4 % Salaries and benefits per equivalent admission $ 3,733 N/A $ 3,608 N/A $ 125 3.5 % For the three months ended June 30, 2014, our salaries and benefits expense increased to $488.5 million, or 15.7%, as compared to $422.1 million for the same period last year primarily a result of our recent acquisitions and the impact of an increasing number of employed physicians and their related support staff. Supplies The following table summarizes our supplies and supplies per equivalent admission for the three months ended June 30, 2014 and 2013: Three Months Ended June 30, % of % of 2014 Revenues 2013 Revenues Increase % Increase Supplies (dollars in millions) $ 162.5 15.5 % $ 144.1 16.1 % $ 18.4 12.7 % Supplies per equivalent admission $ 1,243 N/A $ 1,231 N/A $ 12 1.0 % For the three months ended June 30, 2014, our supplies expense increased to $162.5 million, or 12.7%, as compared to $144.1 million for the same period last year primarily as a result of our recent acquisitions. -------------------------------------------------------------------------------- Other Operating Expenses The following table summarizes our other operating expenses for the three months ended June 30, 2014 and 2013 (dollars in millions): Three Months Ended June 30, % of % of Increase % Increase 2014 Revenues 2013 Revenues (Decrease) (Decrease) Professional fees $ 37.4 3.6 % $ 35.6 4.0 % $ 1.8 5.0 % Utilities 20.8 2.0 17.2 1.9 3.6 21.1 Repairs and maintenance 28.5 2.7 24.1 2.7 4.4 18.5 Rents and leases 9.5 0.9 9.9 1.1 (0.4) (2.7) Insurance 13.8 1.3 9.4 1.1 4.4 45.7 Physician recruiting 5.8 0.6 6.8 0.8 (1.0) (13.8) Contract services 77.0 7.4 63.5 7.1 13.5 21.2 Non-income taxes 29.1 2.8 24.5 2.7 4.6 19.2 Other 36.4 3.3 31.9 3.4 4.5 13.6 $ 258.3 24.6 $ 222.9 24.8 $ 35.4 15.9 % For the three months ended June 30, 2014, our other operating expenses increased to $258.3 million, or 15.9%, as compared to $222.9 million for the same period last year primarily as a result of our recent acquisitions. Additionally, our same-hospital other operating expenses increased primarily as a result of increases in same-hospital contract services. Our same-hospital contract services expense increased primarily as a result of increased fees and expenses related to the implementation of our shared centralized resource initiatives at several of our hospitals. Other Income We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the three months ended June 30, 2014, we recognized $21.0 million in Medicare and Medicaid EHR incentive payments, collectively, as compared to $11.0 million recognized in the same period last year. Depreciation and Amortization For the three months ended June 30, 2014, our depreciation and amortization expense increased by $5.0 million, or 8.8% to $60.9 million, or 5.9% of revenues, as compared to $55.9 million, or 6.3% of revenues for the same period last year. Our depreciation and amortization expense increased primarily as a result of our recent acquisitions as well as a result of significant increases in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. Accordingly, we anticipate that our depreciation and amortization expense will continue to increase in future periods as a result of these factors in addition to the impact of capital expenditure commitments associated with our recent acquisitions. -------------------------------------------------------------------------------- Interest Expense, Net Our interest expense increased by $8.7 million, or 38.5% to $31.3 million for the three months ended June 30, 2014 as compared to $22.6 million for the same period last year. On December 6, 2013, we issued in a private placement $700.0 million of 5.5% unsecured senior notes due December 1, 2021 (the "5.5% Senior Notes") with The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from this issuance were partially used to repay $100.0 million of our senior secured incremental term loans (the "Incremental Term Loans"). Subsequently, on May 12, 2014, we issued $400.0 million of additional 5.5% Senior Notes with terms substantially identical to those of the initial offering. The additional notes were issued at a premium of $12.0 million for total net proceeds from the issuance of $412.0 million which were used to fund, in part, the cash-settled portion of the maturity or conversion of our outstanding 3½% convertible senior subordinated notes due May 15, 2014 (the "3½% Notes"). Including the impact of the premium, the additional 5.5% Senior Notes were issued at an effective rate of 4.9%. The increase in our interest expense is primarily attributable to an increase in our total debt outstanding during the current period as compared to the same period last year. For a further discussion of our debt and corresponding interest rates, see "Liquidity and Capital Resources - Debt." Gain on Settlement of Pre-Acquisition Contingent Obligation In connection with an acquisition completed in 2012, we made reasonable estimates and recorded an estimated obligation representing the fair values of our potential contingent obligations to the seller pursuant to the asset purchase agreement. Subsequently, the seller finalized its settlement of certain of these obligations at an amount that was less than we originally estimated. As a result, during the three months ended June 30, 2013, we reduced our originally recorded contingent obligations and recognized a gain of approximately $5.6 million. Provision for Income Taxes Our provision for income taxes was $24.7 million, or 2.3% of revenues, for the three months ended June 30, 2014, as compared to $16.7 million, or 1.9% of revenues, for the same period last year. The $8.0 million increase in the provision for income taxes was primarily attributable to an increase in our income from continuing operations before income taxes for the three months ended June 30, 2014, as compared to the same period last year. The effective tax rate increased slightly to 38.7% for the three months ended June 30, 2014, as compared to 38.1% for the three months ended June 30, 2013. --------------------------------------------------------------------------------For the Six Months Ended June 30, 2014 and 2013 Operating Results Summary The following table summarizes the results of operations for the six months ended June 30, 2014 and 2013 (dollars in millions): Six Months Ended June 30, 2014 2013 % of % of Amount Revenues Amount Revenues Revenues before provision for doubtful accounts $ 2,429.0 118.2 % $ 2,175.9 119.2 % Provision for doubtful accounts 374.8 18.2 349.9 19.2 Revenues 2,054.2 100.0 1,826.0 100.0 Salaries and benefits 963.3 46.9 855.3 46.8 Supplies 319.5 15.6 288.8 15.8 Other operating expenses 501.8 24.4 444.4 24.4 Other income (34.9) (1.7) (16.7) (0.9) Depreciation and amortization 122.0 5.9 111.7 6.2 Interest expense, net 65.2 3.2 46.5 2.5 Gain on settlement of pre-acquisition contingent obligation - - (5.6) (0.3) Debt transaction costs - - 4.4 0.2 1,936.9 94.3 1,728.8 94.7 Income from continuing operations before income taxes 117.3 5.7 97.2 5.3 Provision for income taxes 37.8 1.8 37.0 2.0 Income from continuing operations 79.5 3.9 60.2 3.3 Less: Net income attributable to noncontrolling interests and redeemable noncontrolling interests (3.3) (0.2) (0.8) - Income from continuing operations attributable to LifePoint Hospitals, Inc. $ 76.2 3.7 % $ 59.4 3.3 % Revenues The following table presents the components of revenues for the six months ended June 30, 2014 and 2013 (dollars in millions): Six Months Ended June 30, Increase % Increase 2014 2013 (Decrease) (Decrease) Continuing operations: Revenues before provision for doubtful accounts $ 2,429.0 $ 2,175.9 $ 253.1 11.6 % Provision for doubtful accounts 374.8 349.9 24.9 7.1 Revenues $ 2,054.2 $ 1,826.0 $ 228.2 12.5 Same-hospital: Revenues before provision for doubtful accounts $ 2,214.0 $ 2,175.9 $ 38.1 1.7 % Provision for doubtful accounts 349.5 349.9 (0.4) (0.1) Revenues $ 1,864.5 $ 1,826.0 $ 38.5 2.1 -------------------------------------------------------------------------------- Our revenues before provision for doubtful accounts by payor and approximate percentages of revenues were as follows for the six months ended June 30, 2014 and 2013 (in millions): Six Months Ended June 30, 2014 2013 % of % of Amount Revenues Amount Revenues Medicare $ 641.8 31.2 % $ 607.6 33.3 % Medicaid 290.0 14.1 251.2 13.8 HMOs, PPOs and other private insurers 1,114.2 54.3 924.2 50.6 Self-pay 339.5 16.5 357.9 19.6 Other 43.5 2.1 35.0 1.9 Revenues before provision for doubtful accounts 2,429.0 118.2 2,175.9 119.2 Provision for doubtful accounts (374.8) (18.2) (349.9) (19.2) Revenues $ 2,054.2 100.0 % $ 1,826.0 100.0 % Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, 2014 2013 Increase % Increase Revenues per equivalent admission - continuing operations $ 8,155 $ 7,821 $ 334 4.3 Revenues per equivalent admission - same-hospital $ 7,980 $ 7,821 $ 159 2.0 Revenues Before Provision for Doubtful Accounts The following table shows the key drivers of our revenues before provision for doubtful accounts for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, Increase % Increase 2014 2013 (Decrease) (Decrease) Continuing operations: Admissions 104,736 101,469 3,267 3.2 Equivalent admissions 251,890 233,480 18,410 7.9 Medicare case mix index 1.37 1.37 - - Average length of stay (days) 4.8 4.6 0.2 4.3 Inpatient surgeries 27,547 26,832 715 2.7 Outpatient surgeries 98,254 89,896 8,358 9.3 Total surgeries 125,801 116,728 9,073 7.8 Emergency room visits 625,115 580,600 44,515 7.7 Outpatient factor 2.41 2.30 0.11 4.8 Same-hospital: Admissions 97,631 101,469 (3,838) (3.8) Equivalent admissions 233,631 233,480 151 0.1 Medicare case mix index 1.37 1.37 - - Average length of stay (days) 4.6 4.6 - - Inpatient surgeries 25,582 26,832 (1,250) (4.7) Outpatient surgeries 91,179 89,896 1,283 1.4 Total surgeries 116,761 116,728 33 - Emergency room visits 580,330 580,600 (270) - Outpatient factor 2.39 2.30 0.09 3.9 -------------------------------------------------------------------------------- For the six months ended June 30, 2014, our same-hospital revenues before provision for doubtful accounts increased $38.1 million, or 1.7%, to $2,214.0 million as compared to $2,175.9 million for the same period last year. This increase was primarily driven by higher contracted rates from HMOs, PPOs and other private insurers as well as the favorable impact of healthcare reform. We experienced a payor mix shift from self-pay payors to Medicaid and HMOs, PPOs and other private insurers for a portion of our patient population, which primarily was a result of healthcare reform and the expansion of Medicaid coverage in certain of the states in which we operate. Provision for Doubtful Accounts The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the six months ended June 30, 2014 and 2013 (dollars in millions): Six Months Ended June 30, % of % of Increase % Increase 2014 Revenues 2013 Revenues (Decrease) (Decrease) Continuing operations: Related key indicators: Charity care write-offs $ 51.2 2.5 % $ 72.2 4.0 % $ (21.0) (29.1) % Self-pay revenues, net of charity care write-offs and uninsured discounts $ 339.5 16.5 % $ 357.9 19.6 % $ (18.4) (5.1) % Net revenue days outstanding (at end of period) 57.6 N/A 57.7 N/A (0.1) (0.2) % Same-hospital: Related key indicators: Charity care write-offs $ 44.9 2.4 % $ 72.2 4.0 % $ (27.3) (37.7) % Self-pay revenues, net of charity care write-offs and uninsured discounts $ 314.0 16.8 % $ 357.9 19.6 % $ (43.9) (12.3) % Net revenue days outstanding (at end of period) 59.5 N/A 57.7 N/A 1.8 3.1 % For the six months ended June 30, 2014, our provision for doubtful accounts increased by $24.9 million, or 7.1%, to $374.8 million on a continuing operations basis but decreased slightly by $0.4 million, or 0.1%, to $349.5 million on a same-hospital basis as compared to the same period last year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. Our same-hospital provision for doubtful accounts decreased as a result of reductions in self-pay revenues during the six months ended June 30, 2014, partially offset by increases in other amounts due from patients enrolled in insurance plans with high deductibles and high co-payments. Same-hospital self-pay revenues decreased by $43.9 million over the same period last year as a result of a shift from self-pay payors to Medicaid and HMOs, PPOs and other private insurers for a portion of our patient population, which primarily was a result of healthcare reform and the expansion of Medicaid coverage in certain of the states in which we operate. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates," in the 2013 Annual Report on Form 10-K. -------------------------------------------------------------------------------- Our net revenue days outstanding at June 30, 2014 improved slightly to 57.6 days compared to 57.7 days at June 30, 2013 on a continuing operations basis. However, our net revenue days outstanding at June 30, 2014 included just 30 days of net revenue for Rutherford, which we acquired effective June 1, 2014. After normalizing for a full quarter of revenue for Rutherford, we estimate that on a continuing operations basis our net revenue days outstanding would have been 56.9 days at June 30, 2014. On a same-hospital basis, our net revenue days outstanding at June 30, 2014 increased to 59.5 days compared to 57.7 days at June 30, 2013. Our net revenue days outstanding increased on a same-hospital basis primarily as a result of the transition of a number of our hospitals into our shared centralized resources revenue cycle function, an increase in the payment lag times for certain of our payors and the overall impact of higher levels of prepayment Medicare audit withholdings. During the three months ended June 30, 2014, our same-hospital net revenue days outstanding improved by 1.9 days as compared to 61.4 days at March 31, 2014. Expenses and Other Income Salaries and Benefits The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, % of % of 2014 Revenues 2013 Revenues Increase % Increase Salaries and benefits (dollars in millions) $ 963.3 46.9 % $ 855.3 46.8 % $ 108.0 12.6 % Man-hours per equivalent admission 108.0 N/A 107.0 N/A 1.0 0.9 % Salaries and benefits per equivalent admission $ 3,819 N/A $ 3,675 N/A $ 144 3.9 % For the six months ended June 30, 2014, our salaries and benefits expense increased to $963.3 million, or 12.6%, as compared to $855.3 million for the same period last year primarily a result of our recent acquisitions and the impact of an increasing number of employed physicians and their related support staff. Supplies The following table summarizes our supplies and supplies per equivalent admission for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, % of % of 2014 Revenues 2013 Revenues Increase % Increase Supplies (dollars in millions) $ 319.5 15.6 % $ 288.8 15.8 % $ 30.7 10.6 % Supplies per equivalent admission $ 1,268 N/A $ 1,237 N/A $ 31 2.5 % For the six months ended June 30, 2014, our supplies expense increased to $319.5 million, or 10.6%, as compared to $288.8 million for the same period last year primarily as a result of our recent acquisitions. -------------------------------------------------------------------------------- Other Operating Expenses The following table summarizes our other operating expenses for the six months ended June 30, 2014 and 2013 (dollars in millions): Six Months Ended June 30, % of % of Increase % Increase 2014 Revenues 2013 Revenues (Decrease) (Decrease) Professional fees $ 74.4 3.6 % $ 67.4 3.7 % $ 7.0 10.3 % Utilities 40.7 2.0 34.1 1.9 6.6 19.2 Repairs and maintenance 55.5 2.7 47.7 2.6 7.8 16.4 Rents and leases 20.0 1.0 19.1 1.0 0.9 5.1 Insurance 23.9 1.2 18.8 1.0 5.1 26.8 Physician recruiting 11.8 0.6 14.0 0.8 (2.2) (15.6) Contract services 148.8 7.2 128.0 7.0 20.8 16.3 Non-income taxes 57.8 2.8 49.6 2.7 8.2 16.7 Other 68.9 3.3 65.7 3.7 3.2 4.7 $ 501.8 24.4 $ 444.4 24.4 $ 57.4 12.9 % For the six months ended June 30, 2014, our other operating expenses increased to $501.8 million, or 12.9%, as compared to $444.4 million for the same period last year primarily as a result of our recent acquisitions. Additionally, our same-hospital other operating expenses increased primarily as a result of increases in same-hospital contract services. Our same-hospital contract services expense increased primarily as a result of increased fees and expenses related to the implementation of our shared centralized resource initiatives at several of our hospitals. Other Income We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the six months ended June 30, 2014, we recognized $34.9 million in Medicare and Medicaid EHR incentive payments, collectively, as compared to $16.7 million recognized in the same period last year. Depreciation and Amortization For the six months ended June 30, 2014, our depreciation and amortization expense increased by $10.3 million, or 9.2% to $122.0 million, or 5.9% of revenues, as compared to $111.7 million, or 6.2% of revenues for the same period last year. Our depreciation and amortization expense increased primarily as a result of our recent acquisitions as well as a result of significant increases in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. Accordingly, we anticipate that our depreciation and amortization expense will continue to increase in future periods as a result of these factors in addition to the impact of capital expenditure commitments associated with our recent acquisitions. -------------------------------------------------------------------------------- Interest Expense, Net Our interest expense increased by $18.7 million, or 40.3% to $65.2 million for the six months ended June 30, 2014 as compared to $46.5 million for the same period last year. On December 6, 2013, we issued in a private placement $700.0 million of our 5.5% Senior Notes. The net proceeds from this issuance were partially used to repay $100.0 million of our Incremental Term Loans. Subsequently, on May 12, 2014, we issued $400.0 million of additional 5.5% Senior Notes with terms substantially identical to those of the initial offering. The additional notes were issued at a premium of $12.0 million for total net proceeds from the issuance of $412.0 million which were used to fund, in part, the cash-settled portion of the maturity or conversion of our outstanding 3½% Notes. Including the impact of the premium, the additional 5.5% Senior Notes were issued at an effective rate of 4.9%. The increase in our interest expense is primarily attributable to an increase in our total debt outstanding during the current period as compared to the same period last year. For a further discussion of our debt and corresponding interest rates, see "Liquidity and Capital Resources - Debt." Gain on Settlement of Pre-Acquisition Contingent Obligation In connection with an acquisition completed in 2012, we made reasonable estimates and recorded an estimated obligation representing the fair values of our potential contingent obligations to the seller pursuant to the asset purchase agreement. Subsequently, the seller finalized its settlement of certain of these obligations at an amount that was less than we originally estimated. As a result, during the six months ended June 30, 2013, we reduced our originally recorded contingent obligations and recognized a gain of approximately $5.6 million. Debt Transaction Costs In connection with the issuance of the Incremental Term Loans and repurchase of the 3¼% convertible senior subordinated debentures during the six months ended June 30, 2013, we recorded $4.4 million of debt transaction costs. Provision for Income Taxes Our provision for income taxes was $37.8 million, or 1.8% of revenues, for the six months ended June 30, 2014, as compared to $37.0 million, or 2.0% of revenues, for the same period last year. The $0.8 million increase in the provision for income taxes was primarily attributable to an increase in our income from continuing operations before income taxes for the six months ended June 30, 2014, as compared to the same period last year, partially offset by a decrease in our effective tax rate to 33.2% for the six months ended June 30, 2014, as compared to 38.4% for the six months ended June 30, 2013. Our effective tax rate was lower in the current period as a result of the reversal of a $6.0 million previously established valuation allowance against our deferred tax assets for federal net operating losses generated by our Michigan physician practice operations which were previously thought to be unrecoverable. --------------------------------------------------------------------------------Liquidity and Capital Resources Liquidity Our primary sources of liquidity are cash flows provided by our operations and our debt borrowings. We believe that our internally generated cash flows and the amounts available under our debt agreements will be adequate to service existing debt, finance internal growth and fund capital expenditures and certain small to mid-size hospital acquisitions. The following table presents summarized cash flow information for the three and six months ended June 30, 2014 and 2013 (in millions): |