Amedisys Inc (AMED) 2006 Q2 法說會逐字稿

Good morning. My name is Tony and I will be your conference facilitator today. At this time I would like to welcome everyone to the Amedisys second-quarter 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you. It is now my pleasure to turn the floor over to your host, Brian Ritchie of Noonan Russo. Sir, you may begin your conference.

Good morning and thank you for joining us today for the Amedisys investor conference call to discuss recent corporate developments relative to this morning's second-quarter 2006 earnings announcement. By now you should've received the press release. If for some reason you have not received the press release or were unable to log into the webcast, please call me Brian Richie of Noonan Russo at 212-845-4269 and I'll be happy to assist you.

Speaking today, we have the Company's Chairman and Chief Executive Officer, Bill Borne; the Company's President and Chief Operating Officer, Larry Graham; and the Company's Principal Accounting Officer and Treasurer, Don Loverich.

Management will give you an overview of the quarter highlights and then open the call for questions and answers.

Before we get started, we would like to remind you that this conference call may contain forward-looking statements regarding future events or the future financial performance of the Company, including, without limitation, statements regarding operating results in calendar 2006, earnings per share in 2006, growth opportunities and other statements that refer to Amedisys' plans, prospects, expectations, strategies, intentions and beliefs. These forward-looking statements are based on the information available to Amedisys today and the Company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statement included in Amedisys' most recent Form 10-Q or other public filings filed with the Securities and Exchange Commission.

At this time, I'll turn the conference call over to Bill Borne. Please go ahead, Mr. Borne.

Thanks, Brian. Good morning. We want to welcome our shareholders and we appreciate the opportunity to share the Amedisys vision with the investing public. Management will continue its commitment to ensuring and maintaining its strategic direction while generating appropriate returns for our investors. The future of home nursing is very bright and we at Amedisys intend to take full advantage of future growth opportunities.

The Company continues to focus on our core strategic initiatives, which we have outlined over the previous year. Internal growth is our primary focus, followed closely by expansion through our disciplined acquisition and start-up strategies. Our overall revenue growth for the second quarter of 2006 is 66% as compared to the second quarter revenue of 2005. Internal revenue growth is 24% as compared to the second quarter of 2005. While we are pleased with our top-line revenue growth, we believe there are significant earning opportunities that will be fully realized as the year progresses. We believe our gross margins can be improved and in fact the gross margin in our acquired agencies have improved from 50% in quarter four of 2005 to 53% in quarter one of 2006 and is at a current rate of 56.4% in quarter two of 2006.

Secondly, we expect the acquired agencies' contribution margins to continue to improve over the remainder of the year. Larry will comment on this significant operational trend among others in a moment.

Finally, we will continue to focus on achieving leverage by driving down our corporate expenses, with this quarter laying a solid foundation for our improvements through the rest of the year and beyond. Based on this information, we are optimistic about our full earnings potential towards the last half of this year.

Last year, we experienced 60% top-line growth, 50% growth and nearly doubled our operating locations, of which went through a substantial operational integration process. This growth was extraordinary and was demonstrated mostly but not entirely by our acquisition of Housecall. We anticipate that the acquired agencies will be operating at the same performance level as our legacy agencies over the next few quarters.

This year, we will complete the integration by focusing on sales and site administration. We believe there is a high unrealized potential in these markets that is becoming clearly evident in our record revenue.

I would like to give you an update on our CFO search. This search is critical for us and we will take our time to find the right combination of technical skills and personal leadership qualities to fit our rapidly growing organization and helping (inaudible) long-term. As a reminder, Korn/Ferry has been retained to help search for our new CFO and we continue to interview candidates to succeed Greg Brown, whose last day was June 7th.

In the meantime, Don Loverich, who has performed his controllership responsibilities admirably, has been promoted to Principal Accounting Officer and Treasurer to lead in our accounting and financial functions.

I want to emphasize we are aggressively searching for a new CFO. However, we are not at a standstill in covering our bases. We have a high level of confidence in our financial reporting under Don's supervision. As a reminder, Don joined Amedisys in October of 2005. Prior to his tenure at Amedisys, he was Controller and Principal Accounting Officer for seven years at U.S. Unwired, a NASDAQ listed wireless communication service company with a market cap of over $1.3 billion that was acquired by Sprint Nextel in August 2005. In addition, Don has held numerous executive-level finance and accounting positions for a variety of companies, such as Waste Management Inc. and also worked for Ernst & Young. We're comfortable at this time with Don's managing the financial helm.

In addition, our public relation efforts are ongoing. In fact we've recently been picked up by two additional analysts, SunTrust Robinson Humphrey and Avondale Partners, bringing our total coverage to seven analysts.

We will continue with the strategic approach we have outlined over a number of years of which the key elements are as follows. Grow into the leading Medicare home nursing Company. Emphasize outcome driven patient care. Utilize technology where possible for efficiencies, such as the rollout of our point-of-care system. Build disease management capabilities and deliver appropriate returns to our shareholders. And we will continue this approach in 2006.

I always like to welcome the employees of our new acquisitions. I would like to recognize all the employees of the hospital-based South Carolina acquisition and the three branches of West Virginia Home Health in West Virginia, our first entry into that certificate of need state.

In conclusion, I want to emphasize the enthusiasm and commitment of our Amedisys employees is by far our greatest strength in ensuring our competitive advantage in the markets we serve. Because of this, I would like to extend my heartfelt thanks to all of the Amedisys staff, whose dedicated efforts have helped each and every one of us every day to carry out our mission.

I will now pass this call to Don for his financial overview, after which Larry will then follow with a brief operational update. Following Larry's update, we will open the call to the Q&A session. Thank you.

Thanks, Bill. I'll now discuss the financial highlights for the three and six-month periods ended June 30, 2006, both with respect to the income statement and the balance sheet.

Our revenues for the quarter of $132.9 million represent an increase of 66% over 2005 and reflect both strong internal growth and the impact of our acquisitions. Acquisitions accounted for approximately $33.6 million of the $52.8 million increase in revenue over 2005.

For the six-month period, our revenues of $260.1 million represent an increase of 73% over the previous year and again are reflective of both internal growth and acquisitions. Of the $109.6 million increase, acquisitions totaled $68.2 million.

Our hospice revenue was $9.3 million for the quarter and $18.4 million for 2006 year-to-date as compared to $1.2 million in Q2 2005 and $2.6 million for the first six months of 2005. The increase is primarily acquisition driven.

For the second quarter, our reported gross margin of $76.2 million is 57.4% of revenue, an improvement from 56.2% for the first quarter and 55.8% for the fourth quarter of 2005.

Our overall revenue per episode was $2655 in the second quarter as compared to $2654 in the first quarter and up from $2579 in the second quarter last year.

Amedisys completed over 42,000 episodes of care in the second quarter compared to 39,000 in Q1 and 27,000 in Q2 of last year. Included in our Q2 completed episodes of care were 8,000 episodes related to our acquisitions.

For the quarter, our general and administrative salaries and benefits of $34.6 million were higher than the first quarter of $32.7 million and our G&A other expense of $23.5 million was comparable for both periods. However, on a percentage of revenue basis, G&A salaries, benefits and other expenses inclusive of depreciation and amortization in Q2 were 45.6% of revenues slightly lower than the first quarter at 46.2%.

Included in our G&A is approximately $800,000 in nonrecurring salaries related to staffing reductions and other payroll matters. In addition, we incurred approximately $1.3 million in incremental health insurance claims in Q2 over Q1 and we anticipate our run rate in health insurance costs to be down about $500,000 in each of the next two quarters.

For the quarter, operating income of $15.7 million was substantially above the $12.7 million reported in Q1 and the six-month period totaled $28.4 million or 17% higher than the $24.2 million recorded for the comparable period of 2005. For the quarter, we recorded net other expense of $900,000. Interest expense of $1.1 million was offset slightly by $200,000 in interest income. These numbers are consistent with the first quarter. And for the quarter, our net income of $9.1 million or $0.55 per diluted share is after a tax provision of 38.8% and compares favorably to $7.9 million or $0.50 per share in Q2 of last year. For the six-month period, our net income was $16.3 million or $1 per diluted share as compared to net income of $15 million or $0.95 per diluted share for the comparable period of 2005.

With reference to the balance sheet, cash balances totaled approximately $8 million at June 30th and for the quarter reflects the repayment of $10 million of our revolver, $1.2 million against our senior credit facility and $8 million in capital expenditures.

Our year-to-date 2006 expenditures for our new corporate headquarters totaled $7.1 million and we anticipate spending $11 million in the second half of 2006. During the quarter, we spent $260,000 on our point-of-care deployment, bringing total year-to-date expenditures to $730,000 and are on track to spend a total of $3.7 million for the year. Additionally, we're continuing to project spending between 6 and $8 million on routine CapEx in 2006, having spent $4.7 million year-to-date.

Our days revenue outstanding decreased to 48.9 days from the 55.2 days reported at March 31 and include the effect of writing off $5 million in bad debts totaling 3.4 days. The remaining reduction of three days is reflective of strong cash collections. During the quarter, we updated our collection policies to include a provision to write off all outstanding balances once they age 365 days unless we have information supporting collectibility. All write offs in the quarter were fully reserved and had no impact on our earnings in the three or six-month periods ended June 30th, 2006.

Looking ahead to the third quarter, we want to remind you that Medicare will not make any payments to home care or hospice organizations during the nine-day period from September 22nd to the 30th due to a provision in the Deficit Reduction Act of 2005, which passed earlier this year. Based on our current run rates, this will have an impact of about $10 million to cash an may add approximately five days to our DSO at September 30th. These numbers should self correct in October when the payment cycle is resumed.

At June 30, we had full availability of our revolver and owe $45 million on our senior credit facility. Our cash projections include two installments of $1.9 million on our senior at each of the next two quarter ends.

Cash flow is strong with EBITDA at $18.2 million as compared to $15.2 million in Q1 and $14.2 million in Q2 2005. Cash flow from operations in Q2 was $21.3 million.

With respect to reimbursement, CMS recently issued draft proposals regarding 2007 home health Medicare reimbursement. The draft proposals provide for a 3.1% market basket update to home health agencies, which would set the base 60-day episode payment to approximately $2334. It is important to note that Congress may review the proposed change and either modify or rescind it. As a reminder, Congress rescinded the CMS proposed 2.5% market basket increase for 2005.

We are maintaining our earnings per share guidance for 2006 to be in the range of $2.25 to $2.35 per share on revenues of approximately $520 million. Our guidance is that diluted shares will total approximately 16.4 million for the full 2006 year.

With that said, I turn the call over to Larry for a discussion of our operations.

Thank you, Don. Our operational strategic plan continues to center around our internal and external growth strategy. Due in part to our strict adherence to these strategies, our second-quarter internal growth rate over last year in Medicare admission is 14%. Our total growth rate over the second quarter of last year in Medicare admission is 48%.

For the remainder of 2006, we continue to expect double-digit internal growth in Medicare admissions. However, as mentioned on the first-quarter call, Housecall becomes internal growth beginning in quarter three and we believe that this may have a short-term drag on our internal growth rate of 3 to 4%. We are confident that this should begin to improve by the beginning of 2007 as we start to grow the Housecall agency. We will continue to focus on growing our business through the implementation of a dual strategy centered on internal growth initiatives via same-store sales, startups and external growth opportunities via acquisitions that meet our strategic criteria.

Startups continue to play a significant role in our expansion. In 2005, we opened 25 new locations. In 2006, we plan on opening 35 to 45 new home health locations. During the second quarter, we opened six locations and year-to-date we have opened 13 locations. In quarter three, we should open at least 10 new locations. Our plan is to continue with our strategic branch expansion based upon local market opportunities. On the acquisition front, as previously announced, we made two acquisitions in the second quarter.

We acquired a home health agency business in South Carolina on April 1st and additionally we acquired a West Virginia home health agency on June 1st.

During the second quarter, we continued implementing our cost reduction plan that was initiated in the first quarter. We have looked at corporate as well as field expenses and reduced cost both in relation to salaries and wages and nonsalary related items. We are pleased with the EPS improvement recognized in the second quarter from our cost reduction plan. And while we are continuing our policy of not providing quarterly guidance, all things being equal, we believe an additional $0.05 to $0.06 improvement will be recognized in relation to cost reduction efforts in quarter three.

As we did last quarter, in an effort to allow investors to more easily gauge our progress and operational strength, we have broken our quarter two revenue and contribution margin down as follows -- contribution margin is pretax and pre-corporate overhead. Approximately 91 million in home care revenue related to agencies we have owned longer than 12 months with a contribution margin of 33%. Approximately 26 million in home care acquisition revenue that we have acquired since April 2005 with a contribution margin of 23%. Approximately 9 million in hospice revenue with a contribution margin of 19%. As a reminder, industry margins in hospice are generally lower than margins in home care by approximately 5%. Lastly, $6 million in start-up revenue related to the 2005 and 2006 start-ups with a contribution margin of negative 2%. While we're pleased with the improvement in acquisition revenue contribution margin from quarter one, which went from approximately 17% to 23%, we still have improvements to be made. We expect the margin expansions to set scene in the first half of 2006 to continue throughout the remainder of the year.

I certainly want to thank all of the operational management for the results to date in improving the performance of these critical acquisitions and their commitment to meeting or strategic goals. We are pleased with our second-quarter growth and the opportunities that lie ahead in 2006.

We continue to focus on being the premier low-cost, high-quality provider in home health. We believe that focus, execution and commitment to clinical outcomes will separate us from our competition.

I would like to express our appreciation for the continued support of our shareholders, customers, employees and vendors.

At this time, we will open the call to your questions. Please limit yourself to two questions so that we may allow question time for everyone. Time permitting, we will allow for follow-up questions. Thank you.

(OPERATOR INSTRUCTIONS). David MacDonald, SunTrust.

Good morning guys, congratulations. A couple of questions. First of all, Larry, I was wondering if you could just give us a quick update on the hand-held rollout, how that is going, what the original feedback is from the clinicians. And I think we had talked before about that being kind of a 2007 and beyond benefit, if that's still where we are? And then I've got one quick follow-up.

Sure. Dave, this is Larry. Welcome to our call. On the point-of-care rollout, again, I updated this on the last call. We have five agencies that we've done a pilot in that were on the back half of that. Starting in August, we will do a slow rollout and progressively do about 90 locations between now and year-end, with the bulk of our agencies -- there are about 160 more -- happening in 2007.

And your statement about the benefits being recognized in 2007 is correct but the early feedback from the five agencies is positive. Obviously you go through some rough slating early on. We have done some programming to update it but it's doing the things as far as gaining efficiencies and helping with our clinical documentation that we anticipated early on. And in Don's comments, you noted that he said that we were going to spend at least $3.7 million to roll out those 90 locations between now and year-end.

And then just one follow-up is just in terms of start-ups and acquisitions. When we look forward to '07, assuming that there's no changes kind of in the multiples that are out there, is it fair to assume that we should continue to see an elevated level of start-ups? And by the back half of the year, if there was an attractive opportunity, are we kind of in a position now where a sizable acquisition is something that you would potentially entertain?

This is Larry. On the first part with start-ups, yes, that will continue to be a part of our strategy. I have not articulated exactly how many startups that we're going to do but it will be north of the number of start-ups that we did in 2006.

Acquisition strategy has not changed. We continue to have a pipeline of acquisitions. You will continue to see the smaller type of acquisitions as they become available to us between now and year-end. And if a larger acquisition were to come into our pipeline and if it meet our strategic criteria, we would entertain that but no sooner than '07.

John Ransom, Raymond James.

I guess it looks like, I mean these are great margin numbers and the progress is evident. I guess if there is a nit, it doesn't look like Housecall and Spectracare had a whole lot of growth. I know you mentioned the dilution on the same-store metrics as they get rolled in. Could you talk about your outlook for growth in 2007 and beyond for these acquired businesses? And is our number right or are we missing something there? Thanks.

Thank you, John. This is Larry. The 2007 and beyond will be back in line with what we have always articulated with our goal of at least 15% internal growth rate. I articulated that all things being equal, the third quarter Housecall falling into internal growth may have a drag on our 3 to 4%. But if you paid close attention to my comments, I also said we expect double-digit internal growth rates. So if we're at 14, 15% now, that's implying a 10, 11, 12% internal growth rate. We're going to do everything we can to get critically back up to that 15%. But looking at historically, that's where we are at, which is kind of a natural progression because we have to put in our computer systems, put in our clinical protocols, make sure we have the right salespeople, make sure we have the right leadership. And then on the back half of that, you start to see growth and that was a very large acquisition. But our expectations have not changed and we're optimistic about our 2007 potential.

One quick follow-up. Thanks for that. Do you see -- and you have begun to realize some of the same metrics around business per episode (technical difficulty) at Housecall that you have for your core agencies?

In some of our key metrics, meaning revenue per episode, yes. In business per episode, they're still slightly high in the 18.5, a little more than 18.5. I expect that to come down over the next quarters, which is part of the articulation of future improvement. And again, that's on the back half after you put out your clinical protocols and change your clinicians on your disease management protocol. So I believe you will start to see improvement in that in the back half of '06.

Arthur Henderson, Jefferies & Co.

Hi, what your gross margin expectations for the year and where do you see SG&A on an annual basis this year?

Our gross margin for the second quarter was just north of 57; I would say in the 57.5 range, is our expectations for the remainder of the year. And our G&A percentage was just north of 45. I'm anticipating 44 to 45, in that range over the back half of the year.

Okay. And in the quarter, you say there was 800,000 in severance in SG&A?

There were two numbers that Don pointed out in his narrative, was $800,000 in payroll-related matters that will not repeat itself and $500,000 of health insurance accruals. Just to remind everyone, January 1st, Housecall came onto our health insurance plan and we booked an additional expense in quarter two related to that experience factor that we now have six months of, where there will be $500,000 less in quarter three. The two combined are $1.3 million less in expenses, which goes to my narrative of $0.05 to $0.06 improvement, all things being equal, is the cost reduction strategy.

Okay. Just a couple of metrics here. The sort of core Amedisys business, visits per episode, what are you doing these days?

A little shy of 17, between 16.5 and 17.

How much revenue are you guys deriving now from therapy visits sort of 10 or more therapy visits?

To answer that question, I will answer in terms of episodes. About 56% of our total episodes have some form of therapy inside the episode of care and about 35% of the total episodes exceed the 10-visit threshold, which is in line with what I've been saying. So does that answer your question?

Yes, right, okay. It does, thank you. And then the last question I have is on the allowance for doubtful accounts, I noticed that number had come down. Did you say that there were some write-offs in there or was that lower bad debt expense?

In allowance for doubtful accounts, we had $5 million of write-offs in the second quarter and Don mentioned that we updated our policy that when receivables reach a year or greater, we write them off unless we have a strong belief of their collectibility. So you had a lot of write-offs the first half of this year. Again, it's totally gone against the allowance. It has not impacted our earnings. We feel like we're adequately reserved on the allowance but that policy starting in July is going into place.

So a bad debt expense percentage of revenue to use, thinking about you guys going forward, would be what?

It's around 2%

Eric Gommel, Stifel Nicolaus.

Bill, I wonder if you could elaborate a little bit on reimbursement issues facing the industry, what you believe is the likelihood that the cost of living update as proposed will stand? And then when you think longer-term, what do you think the -- when will we begin to hear something about potential changes to the home health reimbursement system, like the rehab threshold or HHRGs. And when do you think any change if any would take place?

Eric, this is Larry. Thanks for your question. When I talk about reimbursement, I like to divide it into two categories. One is the market basket increase, which we got a proposed ruling that would be 3.1%, reminding everybody that that is actually law at this point. If nothing happens between now and year end between the House and the Senate, we will get a market basket increase of 3.1%.

But when we are modeling out 2007, both internally and through the analyst modeling, we are not modeling a market basket increase. We anticipate probably in the fourth quarter maybe even after the election, there will be another deficit reduction act or something similar and they will put a freeze on that.

The other piece of information is right now we have a 5% analog for patients that live in rural areas and for us it's about 21% of our patient base. That will go away December 31st. I believe and this is just my opinion that you will see a market basket freeze but you'll see some form of extension of the rural add-on.

Then the second part of your question is really wrapped up in a case mix review. A lot of people talk about the therapy or the HHRG; all of that is combined in a case mix review. Everything that we hear and talk about and talk to our industry experts, it would be '08 before you would see implementation of that, although the back half of this year, the beginning of next year, you may see literature and more discussion along those lines.

Darren Lehrich, Deutsche Bank.

Just with regard to Housecall, you mentioned your visits per episode; I think we are still in the 18.5 range. Can you just remind us how that has changed since you acquired it? If I recall, it was probably around 21 or 22 and I'm not sure if we have seen much change over the last couple of quarters. And really how much --what exactly do you have to do to get down to the Amedisys levels, if you could just talk us through that.

And then I guess one follow-up would be the Florida programs that you retooled, can you just update us there on that please? Thanks.

Thanks for your question. You were correct, when we bought the Housecall agency, there were right around 21 visits per episode and quarter one and quarter two, they did about 18.5 visits per episode. When we go assess a patient clinically and we determine what's wrong with that patient and we fill out the Oasis data set, we use that information to develop a plan of care, which is based on national standards of care. I use the example of a diabetic patient, we're going to teach them how to self inject insulin, how to rotate their sites, what they can and can't eat, we're going to put them on an exercise program. And we have that mapped out in a visit protocol, what we're going to do on visit one, what we're going to do on visit two, with the goal of making the patient independent as well as being able to verbalize what's wrong with them and demonstrate what they're doing.

As we implement those clinical protocols and train the field on each one of those clinical protocols, our utilization tends to come down in relation to what we have been running historically, which is in the 16.5 to 17 range. You will see that begin to happen in quarter three and quarter four and the first quarter of next year.

As far as Florida, I'm very pleased that profitability of Florida has improved dramatically since the fourth quarter of the Housecall agency. So we have seen some good improvement in profitability as evidence -- as our contribution margin in total going from 17% to 23%. Over the next two to three quarters, we're going to be focusing in on continued improvement in profitability as well as growth in those agencies now that we have been through a lot of the training.

Thanks, and just thinking about the Housecall impact and your internal growth, can you just help us a little bit more there with regard to, will you need to spend more sales and marketing dollars to bring that growth rate up? Should we anticipate that as being a part of the acceleration of growth in Housecall? Thanks.

On a macro basis, we have already spent a lot of the sales dollars by hiring. Nobody (indiscernible) that we hired here and there, but we're pretty much in line with where we need to be from a sales force perspective.

Darren, it kind of ties into the utilization question, as we train our clinicians on the clinical protocols and they begin implementing our disease management protocols, our sales force begins to sell that to the physician community. As you take hold of that concept, we start typically seeing growth in admission. So they're kind of tied to the clinicians getting on board with our clinical protocols so our sales force can go out there and represent that to the physician community. And I have articulated that all things being equal, meaning if quarter three is the same as quarter two admission, our internal growth rate will drop three to four points as a result of our acquisitions. Obviously, we're going to do everything we can to help grow our acquisition admission but I wanted to go ahead and put that out there.

And I also articulated by the beginning of '07, we believe we'll be back on track as a result of the traction of our disease management protocols in Florida. Stated another way, Florida I think it was 29 agencies related to Housecall, most of which had a census of 50 or less. So it was a glorified startup in Florida, if you will, except there were some markets doing extremely well. But overall, so we believe we're going to start to take traction and see growth.

(OPERATOR INSTRUCTIONS). Balaji Gandhi, Oppenheimer.

I had two just kind of metrics I was looking for. Number one is do you have the admissions for the quarter?

And what's your second one?

The second was, Larry, you mentioned your overall mix is now 21%. Was that as a percentage of your overall episodes?

Yes. And that changes, obviously, quarter by quarter. Probably need to update that for you. But historically, it's been around about 21% of our total admission.

Okay well I guess that -- gets an answer to my first question, what the admissions were and maybe you could give some color on how you define an admission?

Admission is for us, for internal growth purposes, is a Medicare admission coming from same-store, coming from start-ups, or if we acquire a single site agency that does less than 30 admits a month, we count that as internal growth, which rarely happens and accounts for less than half of a percentage point of our internal growth. But let me give you the Medicare admissions for the quarter. They were 25,763 in quarter two.

Okay, great. And just maybe some more color. I remember the last quarter, you talked about changing some of the compensation structure in Florida. And maybe this is redundant but I just wanted to understand if that has been completed in terms of what you compensate some of the staff?

The short answer is yes and you're talking about converting people from salary per visit?

Right.

In the 10-Q when we release that, you'll see a metric that has the cost per visit and you'll see the cost per visit on the acquired agencies have gone down I think from the $70 range to like the $63 range; that may not be precise. But that's been a lot of our improvement in gross margin. So that has been implemented.

Pete Enderlin, Titan Capital Management.

Oh, I had a question about the rural add-on but you answered it. Thank you.

Bill Dezellem, Titan Capital Management.

Relative to operating margins, over time, is there any reason that you should not be able to return towards that 16% operating margin level?

Longer term, we believe that that is possible. Obviously, we have to take into account reimbursement changes and case mix reviews. But just all things being equal, the short answer is yes over time.

And do you at this point have a target timeframe that over time would equate to? Is it a year or two, five?

First of all, we've only given guidance through year-end, which you can kind of back into that we'll be approaching the midteens in EBITDA margins by year-end. '07, we haven't given guidance but it's more in the two-year or less timeframe than it is longer than that.

(OPERATOR INSTRUCTIONS). John Ransom, Raymond James.

Earlier this year, you guys had expressed some concern about the effects of Medicare HMOs and the fact people may be signing up for Medicare HMOs when they think they are signing up for the drug bill. A, is there any evidence that that has been occurring in any material degree? And secondly, as the Medicare HMOs get some traction, what's your strategy in terms of contracting with these agencies? Are you still focused more on the pure fee-for-service Medicare? Thanks.

John, that's an excellent question. Let me remind everybody that there was a part D benefit, which is the prescription drug benefit. You have seen a large sign up for enrollment on the part B benefit. We believe now in the next year or two, there will be a lot of efforts for Medicare HMOs to try to convert these people to the Medicare HMO benefit, which is basically giving up your Medicare card and allowing the HMO to administer or become the payor for your service. While to date we have not seen substantial migration in that arena, we have seen slight migration.

What's interesting is that there are certain Medicare HMOs that are actually paying equivalent to the Medicare PPS rate. So we actually have some contracts, which is a very good sign as an early indicator that we believe managed care will start to pay more for home care as they take care of the chronic elderly population because that's where their dollars are going and they are incentivized, obviously, to have a home care agency to keep them out of the hospital.

Also, we will look to contract on disease management with Medicare HMOs on a risk basis in the future. We do that in one small market right now in Birmingham. But again, this is a slow go. Our focus will still be on Medicare, as you've been saying, but we will continue to look at the opportunities in the Medicare HMO arena.

John, this is Bill. We're also seeing a trend and it started a couple of years ago and it was really highlighted through some programs such as the specialty niche providers and the prescription drug benefit, where HMOs are now accepting higher risk chronic patient and getting reimbursed higher. And we feel while there is a transition to the fee-for-service higher-risk patients to Medicare Advantage, that the provider system, the distribution, is not out there.

And we think that the uniqueness of Amedisys with our specialized disease management programs with our disease management call center and our approach to caring for these patients from having an ability to outreach, which is our home care network, that we can really manage these patients as effectively if not more effectively than disease management companies that currently exist. So we actually see a huge opportunity in the transition of the high-risk patient that will be converting from fee-for-service to Medicare Advantage.

My last question is.

My last question is, do you have any sense at all -- as CMS looks across the HHRGs and tries to in theory smooth out the profit streams between the high margin and low margin HHRGs, as you look at your own book, where do you think maybe dollars might be flowing from a clinical standpoint versus maybe dollars being subtracted? And in thinking about that, have you started to adjust or think about your marketing program in the out-years or are you just going to kind of wait and see and adjust, thinking you'll have enough time at that point to make some adjustments?

John, to date, there has been no dollar impact relief. There has been discussion about doing a case mix review but they have not [signed] any dollars that we are aware of to any releases.

I think what we have in our favorite is our acuity level is extremely high and the chronicity of our patients is high. So I believe that's where they are going to migrate dollars to, i.e. the sicker patients that need more care will get more dollars and the healthier patients will get less. So I think we're well positioned on a macro basis. But we have not gotten into specifics on specific diagnosis simply because they have not released anything and it would be pure speculation at this point.

Remember, John, on the pay performance, the CMS will be focusing on keeping patients that are under the service of home nursing agencies out of the emergency room and out of the hospital during that 60-day period. And we feel there will be a greater value to being able to keep a higher-risk patient out of the hospital versus the low-risk patient. So we actually expect the dollars to kind of fall our way.

Speaking of that, would you care to comment on your quality metrics on the CMS benchmarks? And you may have said this but I don't know if I got your Medicare case mix index number for the quarter. Thanks.

John, it's similar to what we released in the past. On a regional basis in the states that we service, we beat the 10 quality educators 10 out of 10. On a national basis, we beat the quality indicator 6 out of 10. So that's an update on your --.

And then on the case mix adjustment -- (multiple speakers)

Yes, what was your case mix?

(multiple speakers) call you back on that because I don't have that number right in front of me.

So the case mix index for the quarter, you don't have that? Okay. Very good Thank you.

Darren Lehrich, Deutsche Bank.

Thanks. I apologize if I missed this earlier in your comments. But can you just share with us some of the metrics in the hospice segment and remind us where you are if at all with regard to Medicare [cat]? And Larry, I know you and I have talked about hospice as perhaps being an area of greater focus in '07. Is that still consistent with your thinking?

To your last point, yes, I still -- you'll see some start-ups in '07 related to hospice and we will look at hospice acquisitions where they meet our strategic criteria. In relation to cats, we have no provider numbers that are in cat-related issues. We review that on a quarterly basis so we are in good shape in relation to cat. And our total census in hospice is just north of 800.

Thank you. At this time, I would like to turn the floor back over to Bill Borne for any further or closing remarks.

Thanks, Tony. We certainly appreciate everyone's call in this morning and we look forward to a great quarter for our third quarter and reporting it to our investors. As mentioned during my presentation, we will stay focused on our strategic initiatives. We are excited about what the future in health care and more specifically the future of home care and Amedisys's role in that future. We look forward to communicating with everybody in our next quarterly conference call and, again, thanks for calling in this morning and everybody have a great day.

Thank you. This does conclude today's Amedisys conference call. You may disconnect your lines at this time and have a wonderful day.