Leading Rural Hospital Provider Weathering 2-Midnight Change

End-of-year financials for LifePoint Hospitals Inc., the leading public company operating rural community hospitals, reveal both the challenges and opportunities in health care reform. Although admissions declined, LifePoint’s revenue increased more than expected, and on the fourth-quarter earnings call with investors, LifePoint leaders made clear that in their review of the reasons admissions declined, the Centers for Medicare and Medicaid Services (CMS) new 2-midnight rule was not the primary culprit.

Indeed, a silver lining to the challenge of managing rural community hospital systems in a time of complicated regulatory change is that such change creates an incentive for smaller hospital systems to merge with larger companies and aids LifePoint’s potential for future growth through acquisitions, the company’s CEO said.

Answering a question about the 2-midnight rule — which aims to save the government money by cutting down on inappropriate short-term hospital admissions for Medicare patients — Bill Carpenter, chairman and CEO of LifePoint, noted that adjusting to regulatory changes is merely part of the job of being a good hospital operator.

“[The 2-midnight rule] continues to put pressure, but it’s just a further regulatory change,” he said. “Quite frankly it’s one of those things that is causing more hospitals to consider looking for a partner, who look for the resources of a large partner like LifePoint Hospitals who can come and help them deal with all of this change.”

In 2013, LifePoint acquired Fauquier Health System in Virginia as well as Bell Memorial Hospital and Portage Health in the upper peninsula of Michigan. Carpenter noted that LifePoint also is on track acquire North Carolina hospitals Wilson Medical Center and Rutherford Health in 2014.

Overall, LifePoint’s one-day admission rates were down 14.4 percent in 2013 compared to 2012. However, although many have blamed the 2-midnight rule for declining short-term admissions for all hospital operators, Leif Murphy, LifePoint’s chief financial officer, noted that their analysis of the decline in one-day admissions at LifePoint hospitals had more to do with the overall trend toward greater use of outpatient services than the 2-midnight rule regulatory change. They also saw a decline in emergency room admissions compared to this time last year because of a less severe cold and flu season.

“Sequential decreases since the implementation of the rule have been small and we will report on any changes that impact our current perspective,” he promised.

In total, LifePoint ended 2013 with revenues from continuing operations bringing in $3,678.3 million, up 8.4% from the $3,391.8 million it earned in 2012. Adjusted EBITDA for the fourth quarter ended December 31, 2013, increased 10.1 percent to $148.5 million compared with $134.8 million for the same period a year ago. However, when looking at the whole year, adjusted EBITDA for 2013 decreased 1.6% to $537.0 million compared with $545.6 million for the same period a year ago.

Income from continuing operations attributable to LifePoint Hospitals, Inc. stockholders for 2013 decreased 15.9% to $127.8 million, or $2.68 per diluted share, compared with $151.9 million, or $3.14 per diluted share, for the same period last year.

Through its subsidiaries, LifePoint now operates 60 hospital campuses in 20 states. Among these states, seven have currently expanced Medicaid eligibility as part ot the Affordable Care Act's implementation, a benefit to LifePoint, which is the sole community hospital provider in the majority of the communities it serves. LifePoint is headquartered in Brentwood, Tenn.