Amedisys Inc (AMED) 2009 Q3 法說會逐字稿

Good day, and welcome to the Amedisys third quarter 2009 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Kevin LeBlanc. Please go ahead, sir.

Thank you, Jessica. Good morning, and welcome to the Amedisys investor conference call to discuss the third quarter 2009 earnings announcement and related matters. If you have not received a copy of our press release, you may access it on the Investor Relations page on our website at www.amedisys.com.

Speaking on today's call from Amedisys will be Bill Borne, Chairman and Chief Executive Officer; Dr. Michael Fleming, Chief Medical Officer; and Dale Redman, Chief Financial Officer.

Before we get started with our call, I would like to remind everyone that any statements made on this conference call today or in our press releases that express a belief, expectation, or intent as well as those that are not historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to Amedisys today, and the Company assumes no obligation to update these statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties, which may cause the Company's results to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K and 10-Q.

Also, the Company urges caution in considering any current trends or guidance that may be discussed on this conference call. The home health and hospice industry is highly competitive, and trends and guidance are subject to numerous factors, risks, and influences which are described in the Company's reports and registration statements filed with the SEC. The Company disclaims any obligations to update information on trends or targets other than its periodic filings with the SEC.

Our Company website address is www.amedisys.com. We use our website as a channel of distribution for important Company information. Important information including press releases, analyst presentations, and financial information regarding the Company's routinely posted on and accessible on the Investor Relations subpage of our website, which is accessible by clicking on the tab labeled Investors on our website home page.

We also use our website to expedite the public [to] access to time-critical information regarding the Company in advance of or in lieu of distributing the press release or filing with the SEC, disclosing the same information. Therefore, investors should look towards the Investor Relations subpage of our website for important and time-critical information.

Visitors to our website can also register to receive automatic e-mail and other notifications of alerting them when new information is made available on the Investor Relations subpage of our website. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during the call today to the most comparable GAAP measures will be available on our website on the Investor Relations subpage under the link Press Releases.

Thank you. And now I'll turn the call over to Bill Borne. Please go ahead, Mr. Borne.

Thank you, Kevin, and good morning. I would like to welcome everyone who has joined us on the call this morning. We appreciate the opportunity to update you regarding the Company's performance and share our vision for Amedisys.

We had an outstanding result for the third quarter, reporting net revenue of $388 million and earnings per diluted share of $1.29. This represents growth of 21% and 48%, respectively, over the third quarter of '08.

Delivering care to elderly patients with chronic conditions will continue to disproportionately dominate our nation's health care expenditures. Today, Medicare spends 69% of its fiscal resources on the 12% of the patients with chronic comorbid conditions. At Amedisys, our focus is on providing care for these complex patients in their home, when home-based care is the most appropriate setting for the treatment of their conditions.

This focus has resulted in Amedisys becoming one of the nation's leading home health and hospice companies. We have a simple three-fold business strategy -- providing high quality clinical services to patients entrusted to our care; focusing on growth; and increasing organizational efficiency.

At the end of my comments, I will turn the call over to Dr. Michael Fleming, our Chief Medical Officer, who will provide information on our clinical initiatives.

Turning to growth. During the quarter, we have opened 10 new home health agencies and have opened 28 for the year. We currently have approximately 170 potential home health startups in various stages, of which approximately 80 are incurring expenses, but have not yet opened. We continue to target 40 new home health locations in 2009.

In addition, we opened two hospice agencies during the quarter and a total of three for the year. We currently have approximately 90 potential hospice startups in various stages, of which 14 are incurring expenses but have not yet opened. We continue to target five new hospice locations in 2009.

Moving to acquisitions. We acquired 10 hospice agencies located in South Carolina and Mississippi in July. This was our largest hospice-only acquisition to date. We also signed a purchase agreement to acquire the home health operations of Hackensack University Medical Center, and expect to close by year-end. We have a healthy pipeline of both home health and hospice acquisition candidates, and we continue to analyze potential opportunities as they become available.

Due to potential reimbursement changes being discussed in Washington, we are being more selective in our acquisition targets and more conservative in our pricing. As a result of the [noble] growth and acquisitions in previous quarters, we ended the quarter with 508 home health locations, 47 more agencies than the third quarter of 2008. We owned 61 hospice agencies, 17 more hospice agencies than the prior year.

For the quarter, our internal episodic-based revenue growth was 18%, with 6% related to volume and 12% related to rate. The volume increase during the quarter was comprised of 12% and internal episodic-based admissions of 4% and 8% re-certifications.

For the year-to-date period, our internal episodic-based revenue growth was 20%, with 8% related to volume and 12% related to rate. The volume increase during the quarter was comprised of growth in internal episodic-based admissions of 5% and re-certifications of 10%.

The increase in our rate both in the quarter and year-to-date periods is driven by our focus on higher acuity patients, including the Balance For Life program. At quarter end, we had launched our BFL program in 308 locations, representing 61% of our total home health locations.

Our Balance For Life program, focused on reducing fall risk in the elderly population by applying advanced treatment modalities related to the re-balancing of the sensory, visual, and musculoskeletal systems, as well as addressing problems in the vestibular system. Balance For Life is one of our 14 evidence-based clinical programs aimed at improving the health of our senior population. We intend to continue rolling out Balance For Life to select agencies in 2010.

We are also working towards enhancing and standardizing our other disease management programs, with an initial focus on our behavioral health and advanced wound care programs.

Commenting on internal growth expectations going forward, we anticipate improvements in our admission growth rate based on the maturing of our TLC agencies. We also expect our focus on higher acuity patients will continue to have a positive impact on revenue per episode in 2010. We continue to believe that a 15% growth rate is an appropriate range for us at this time.

Turning to our business unit performance. Our quarterly revenue and contribution margins are broken down as following -- contribution margin is pretax and pre-corporate overhead. $338 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 30%; $12 million in home health and hospice startup revenue related to startups open less than 12 months, with an 11% contribution margin.

Also in the quarter, we incurred approximately $4 million in costs associated with home health and hospice agencies we plan to open in the future. $24 million in hospice-related revenue to agencies we have owned longer than 12 months, with a contribution margin of 28%; $14 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months, with a contribution margin of 26%.

In regards to Medicare reimbursement, as you are well aware, Congress and the administration have been working on major healthcare reform legislation. We have been following the progress of this legislation very closely, and are supporting our industry trade associations in their efforts to help craft legislation that will be most beneficial to our patients, our Company, and our country as a whole.

With the legislative process being so fluid, and with the process likely to extend into December, we are going to refrain from speculating as to likely reimbursement changes or how we might address those changes. No matter what happens in Washington, we will continue our focus on providing quality care to the elderly suffering and chronic conditions who consume a significant share of our nation's fiscal healthcare resources.

To that end, we are encouraged by some of the new legislation being discussed in Washington, focusing on keeping the elderly in their home longer, and providing better care management and care transition opportunities. We support the general concept of these proposals, as we know there are significant opportunities to more efficiently and cost-effectively manage our nations costly elderly population with chronic conditions.

I continue to be excited about what the future holds for Amedisys, as we are well-positioned to take advantage of the emerging demographic and economic trends. While the potential for negative reimbursement changes remains a concern, such cuts will lead to considerable consolidation opportunity.

We also believe we are very well-positioned, given our size, capital position, efficiency, technological infrastructure, and care capabilities to manage through legislative changes and to take advantage of opportunities these changes may provide. From the perspective of clinical design and scale, I view our capabilities of providing home-based post-acute care services as one that is unmatched in the market today.

To summarize, during the quarter, we achieved record revenue in earnings per share for the quarter. We continued our startup strategy, acquired our largest pure play hospice company, continued to roll out Balance For Life, and were busy positioning ourselves to healthcare legislation reform.

We also had two senior executives leave the Company. While these departures were significant for Amedisys, we have a strong bench of talent in the organization who will keep the Company focused on our core objectives of clinical excellence, growth, and efficiency.

As you know, we have hired the search firm, Russell Reynolds, to identify potential internal and external candidates for both the COO and CIO positions, which we intend to fill by year-end. We have already been presented with a significant list of qualified candidates that I am confident the market will view as a positive addition to our executive leadership team.

I encourage everyone to visit our website where, on a regular basis, we post information relevant to our Company. We will continue to update this site with facts and information helpful to investors in their decision-making process.

We encourage you to routinely visit this section to learn more about Amedisys. As part of these efforts, in the next few days, we will post a report published by the Marwood Group on our website and invite everyone to read it. Several months ago, Amedisys engaged the Marwood Group, one of the nation's preeminent healthcare consulting firms, to provide an independent analysis of the Company's procedures, controls, clinical infrastructure, corporate compliance processes, technology offerings, and future strategies.

Marwood conducted a review of academic research over 11,000 pages of Company-specific documents, interviews with 18 members of Company leadership, and interviews with a cross-section of other home care providers from across the nation, and utilized its home health industry, legislative, and regulatory knowledge to measure industry standards, best practices, and leading practices to evaluate the Amedisys model and infrastructure.

The results show that Amedisys ranked highest compared to other publicly traded home health companies in terms of quality management and compliance processes. Marwood stated, and I quote, Amedisys also employs best practices in the areas of field clinician, coding and accuracy, oversight and management infrastructure, corporate compliance, and care coordination technology -- unquote.

They further state, and I quote -- based on our quality and compliance process [swift card] and information collected during our review of Company documentation and on-site interviews, Marwood believes that, overall, Amedisys has implemented compliance and quality improvement processes that meet and/or exceed the industry average -- unquote.

In conclusion, I extend a warm welcome to all of the employees of Winyah Hospice and Hackensack Home Health. We are very excited that you are part of the Amedisys family, joining employees who bring a passion for servicing our patients, a commitment to clinical excellence, and a culture of hard work are at the heart of what separates us from our competition.

Before I pass the call on, I would like to formally introduce you to Dr. Michael Fleming. He is a physician and was the past President of the American Academy of Family Physicians, representing over 100,000 family care physicians, and is the founding Chairman of the Louisiana Healthcare Quality Forum.

As an active member of the medical quality field, he serves on various boards and panels to healthcare and health information technology industry. In his role as Chief Medical Officer, he will lead all of our clinical quality initiatives and take an active role in shaping our future strategies.

Dr. Fleming, now please provide information on our clinical initiatives. Thank you.

Thank you, Bill. As Bill stated in his earlier remarks, I am a physician; and over my nearly 30 years of practice, I have become an passionate advocate for the importance of patient-centered care, care delivered how and where each patient needs that care. In my experience with homebound patients, the benefit of being cared for at home, surrounded by family and friends who provide additional nurture, is simple -- it's about quality of life.

In a study published by the Archives of Internal Medicine, patients overwhelmingly said that they would prefer homecare over all of the modalities for treatment and management. I'm convinced that home healthcare is a large part of the solution to one of our nation's biggest challenges -- caring for our aging, chronically ill population, while reducing costs and improving patient outcomes through clinical excellence.

Continuing to improve patient outcomes through clinical excellence remains a top priority for Amedisys and one that I personally intend to pursue with passion.

CMS publishes quarterly a review of 12 patient outcomes presented on a rolling 12-month basis. The latest data published shows that Amedisys exceeded or met nine out of the 12 outcomes when compared to the national averages. Amedisys is in the implementation phase of a multiyear plan to improve these patient outcomes.

Over a year ago, we convened a Strategic Advisory Board that is comprised of nationally recognized members in the fields of quality and research. Their task was making specific recommendations for approving and enhancing our quality of care.

One of the key areas of concern is re-hospitalization. The positive results of their recommendations and our new clinical strategies are being seen in the data. Over the last five reporting periods, our re-hospitalization rate to national benchmark spread has reduced significantly. I would like to thank our locations for their continued clinical emphasis on this achievement.

Over the next 24 months, you will continue to see Amedisys improve its clinical outcomes, as we refine and implement new, innovative clinical delivery models focused on our chronic comorbid patient base, all based on national best practices.

Some of the clinical enhancements we have already introduced include the following -- Amedisys has embraced the six national priorities of the National Priorities Partnership, and we are actively engaged in five of the six that are pertinent to caring for patients in their home, including patient and family engagement; care coordination; palliative and end-of-life care; preventing overuse of care; and improving patient safety.

This year, we launched five beta sites for chronic care portals. This program provides for stratification of our highest risk chronic care patients to be managed by a team of advanced clinicians, providing a higher level of best practice interventions to reduce unnecessary re-hospitalizations. We are now utilizing our Encore Call Center for intra-episode follow-up to educate patients on self-management and to monitor patient compliance.

We also increased the deployment of tele-health monitoring for cardiac patients in select markets and we continue to research other tele-health opportunities. We have also introduced a company-wide outcomes education program.

In addition to focusing on clinical outcomes, we continue to look at expanding the clinical programs that we offer. Currently, we have 14 disease management programs, including the Balance For Life specialty program, covering 70 clinical tracks. The clinical tracks are for providing and monitoring evidence-based protocols for high risk patients.

As Bill mentioned in his comments, we are researching the behavioral health and advanced wound care specialty programs. However, before we roll out any programs, the clinical evidence will be reviewed to make certain that they will provide quality outcomes.

Quality care has been the hallmark of Amedisys's success over the years. And as Chief Medical Officer, I am excited about the opportunities to build on this foundation, and position Amedisys for even greater success as the leading provider of high-quality care management for the nation's chronic and comorbid elderly population.

I would now like to turn over the call to Dale for his financial review. Dale?

Thank you, Dr. Fleming, and good morning. The third quarter continued our strong earnings and cash flow growth. As our 2009 performance has reflected, we remain focused on providing quality care to the patients we serve, while maximizing our operational efficiencies, pursuing our startup strategy, and continuing the process of improvement of the operating and financial efficiencies of our acquisitions.

I'll begin by making a comparison of our performance for the third quarter of 2008 to the third quarter of 2009.

Our earnings per share increased 48% from $0.87 to $1.29 as revenue grew $67 million or 21%, to $388 million. This growth was generated from $14 million in acquisition revenue and $53 million from our base and startup agencies.

Gross margin decreased slightly from 53% to 52.7%. EBITDA was $69 million or 18% of revenue for the third quarter of 2009, compared to $49 million or 15% of revenue for the third quarter of 2008. Year-to-date, our earnings per share increased from $2.25 to $3.55, as revenue grew $261 million or 31% to $1.1 billion from 2008 to 2009.

This growth was generated from $108 million in acquisition revenue and $153 million from our base and startup agencies, with the gross margins decreasing slightly from 52.7% in 2008 to 52.4% in 2009.

EBITDA was $190 million, or 17% of revenue in 2009 compared to $126 million or 15% in 2008. Our cash flow from operations increased from $76 million in the second quarter of 2009 to $89 million this quarter. Cash flow from operations more than doubled from $87 million for the nine months of 2008 to $219 million for the nine months of 2009, primarily due to the increase in net income and substantial reduction in accounts receivable.

Looking briefly at the third quarter of 2009 compared to the second quarter of 2009, EPS increased from $1.27 to $1.29 on a revenue increase of $10 million. Cost of revenue remained flat as a percentage of revenue, generating a $5 million increase in gross margin, while G&A expenses increased $4 million. Included in G&A this quarter is a $1.1 million of net severance and non-cash compensation costs associated with the departure of our former President and Chief Operating Officer, and our former Chief Information Officer.

Our days revenue outstanding continued to improve as we finished the third quarter at 33 days compared to 37 days at the end of the second quarter, and is down 18 days from a year ago. Our estimated revenue adjustment in our provision for doubtful accounts totaled $6.4 million or 1.6% of revenue for the quarter, and $22.3 million or 2% year-to-date compared to $8.1 million or 2.5% of revenue for Q3 of '08, and $19.6 million or 2.3% for the nine-month period of '08.

During 2009, we've reduced our debt by $105 million to $223 million outstanding at the end of the third quarter, compared to $328 million at year-end. We've also reduced our leverage ratio from 1.6 times at year-end to 0.9 times at quarter-end, with a weighted average interest rate on our debt of 3.6% at quarter-end.

Our cash at quarter-end was $45 million, up from $3 million at the end of the fourth quarter. This increase in cash was primarily driven by $219 million generated from cash flow from operations; $26 million in capital expenditures; $31 million in acquisition; and debt repayments of $118 million.

Looking at the second quarter of 2009 to third quarter of 2009, our cash increased $44 million, primarily due to $89 million generated from cash flow from operations; $11 million in capital expenditures; $12 million in acquisitions; and debt repayments of $23 million.

From a capital resource standpoint, we have $45 million in cash at quarter-end; $239 million in availability under our lines of credit; and year-to-date cash flow from operations of $159 million after CapEx and required debt payments.

Today, we are reaffirming our revenue and earnings guidance for 2009. Revenue is anticipated to be in the range of $1.475 billion to $1.500 billion, excluding the effects of any future acquisitions if they're made. Earnings per share is expected to be in the range of $4.75 to $4.90 based on an estimated 27.8 million shares outstanding -- also excluding the effects of any future acquisitions, if made.

At this time, we will open the call to your questions. Please limit yourself to two questions so we may allow time for everyone. Operator, please go ahead.

(Operator Instructions). Whit Mayo, Robert W. Baird.

First question, just with internal base admit growth, it came in around 4%. I think that makes two quarters in a row now that that number sort of trended in that area. I'd assume that TLCs probably brought that down some; and just hoping that maybe the introduction of some of your clinical programs will bring that back up. So I guess the question is just, what are your expectations around the admit growth? And just any color around this quarter's number.

Thanks, Whit, for asking the question. As you mentioned, on the second quarter, TLC became part of our internal growth numbers. And as the TLC agencies mature, we expect our internal and mid-growth numbers to increase. Additionally, we believe certain business development changes we made early in the year will ultimately have a positive impact on admit growth as well.

Because of the overlap that we had in certain TLC markets as well as existing Amedisys agencies, we needed to realign some of the sales in the sales territories in certain markets. We employed sales market data to effectively look at these changes. And while realigning some of these territories, at times you have a short-term impact. We believe the changes that we made will better position us for growth in these markets.

Additionally, we use the same market data to better identify what we call the top home health referring physicians in the markets. And in '09, we used this data to identify and focus on the referral sources in the markets that we felt we could get the better return in.

In addition to that, we redeployed and are realigning our relationship-based focus and we think the combination of TLC agencies maturing; the use of targeted sales data; focusing on a higher referring physicians; reassuring our relationships with existing physicians will show a positive trends. And currently, we feel we're seeing those trends now.

Okay. So maybe if we used HouseCall or IntegraCare as a precedent here, how long does it typically take from either acquisition or when you've completed the integration before you think you've made considerable progress on either end market initiatives or at the clinical programs?

I think, you know, you get traction and we're actually seeing traction now. TLC agencies were pretty hard hit, with a pretty massive conversion of first technology and now our clinical programs.

But to answer your questions directly, about two years. IntegraCare is doing real well. HouseCall in most of the markets are doing real well. We still see a few little challenges in Florida but we've just deployed some initiatives that we think will give us some positive results. And we really do feel that we see some internal signs that TLC is really making the turn. So we're enthusiastic about the internal growth in admissions going up over the quarters to come.

Great. And maybe one second question, Bill. Just in light of the recent management departures, could you just refresh us with regards to the internal reporting? Where has the line reporting moved to -- either you or Dale or even Jeff? Just would be helpful to think about the additional responsibilities that have been allocated. And in that response, could you also just remind us who compliance was reporting to? And I'm assuming it was you or probably still is you.

Right. No, thanks, Whit. And you know, we talked about this in the past. But basically we have two Senior Vice Presidents of Operations, Jill and Patti, that report directly to me. And just a reminder, we've had no turnover of leadership in the organization with the exception of Patty and Alice Ann, and Larry's -- I mean, Larry and Alice Ann, and Patty, who is Larry's wife, who retired.

We've maintained all of our leadership, so Jill and Patti report directly to me; Jeff, who is the Compliance Officer, also reports directly to me. And as a reminder, I was an operational CEO before Larry came onboard.

We have a firm grip on all of the activities in the organizations. We're moving forward with all of our basic initiatives, which is quality first, growth second, and efficiency third. In addition, we've ramped up our hospice activity, as you've seen the number that we have in the potential pipeline of startups. And we really do feel that the Company is being managed well and we're not slipping in any categories until we find replacements.

We're all having to put in a few extra hours, but the Company has a deep bench of qualified people. Tasha, as I mentioned earlier, basically backfields Alice Ann's spot on the clinical side. Dr. Fleming is working with Tasha and oversees that, and has filled that position quite well. And we're excited about the future potential of the Company; manage is strong and we've kept all of our senior leadership, and we'll continue to move forward.

Okay, great. Thanks a lot, Bill.

Kevin Ellich, RBC Capital Markets.

Thanks for taking the questions. Bill, I was wondering if you could talk a little bit about the internal episodic-based recertification growth. It came in at 8% this quarter; that's slightly down from second quarter. What's going on with that trend and what are you guys seeing, and what do you expect?

Well, you know, I think the internal episodic admission growth is all a function of TLC and the maturing of TLC. And we've seen that dynamic across the Company, the biggest impact being TLC.

Again, the realignment of some territories I think are all impacting that, but overall, we see positive trends moving in the other direction. So, those are the two main reasons that we see a slowdown in internal episodic admission growth.

No -- so does that have a direct impact on the recertification growth?

You know, it can, but remind you that each patient individually is assessed when they get evaluated for admissions. And they also get assessed as they get reevaluated for a readmission or recertification, if that's needed. It's all about the clinical metrics and it's about the needs of the patient. So they kind of work individually and exclusively of one another. And sometimes the numbers are parallel and sometimes they're not.

Got it. Okay. And then a quick question for Dale. Operating cash flow was pretty strong. Was there anything unusual in the numbers? Any big items in working capital changes?

No, there wasn't anything of any substance. The key driver to that was a continued decrease in our accounts receivable. And going forward, we think there is some ability to move that DSL number down a little bit but probably not a great deal.

If there is any additional room to move, it's probably in our private and PPS side. And I think going forward, we'll see the potential of lower cash flow, but only because of that issue.

I might have missed it -- did you give us the net AR and the allowance for doubtful accounts?

Yes. The net AR is $141 million and the allowance for doubtful accounts is about $35 million, if you add up all the pieces.

Got it. Okay. And then maybe I can throw this in there -- is Hackensack, is that included in the guidance?

No. Hackensack is -- Hackensack, we do not believe will have a material impact on EPS this year.

Got it. Okay. Thanks.

John Ransom, Raymond James & Associates.

Bill, how big is hospice going to be in two years for you? Do you see the possibility of a larger acquisition? Or do you think you'll continue with your strategy of startups and smaller acquisitions?

If you take a look at hospice over the last two quarters, we've really gained some traction. If you take a look at hospice and look forward in one year, we're probably looking at something in the range between $115 million and $120 million, if we do nothing but startups and then add the value of the startups on top of that.

You also see the contribution margin getting relatively close in mature hospice agencies to our home care. You also witnessed the first pure play hospice acquisition this year. We're working very aggressively on all our internal systems and processes; although we see some changes in reimbursement and maybe some requirements and documentation on hospice, we think that hospice will offer us an extraordinary opportunity for growth.

So you will probably see going forward, almost as aggressive as an acquisition strategy with hospice. Probably smaller hospice agencies to start, but maybe by year-end, we might look at some larger ones, once we know our system is in place and are able to accept a larger hospice acquisition.

So, home care is still our primary growth objective but we are fast forwarding, as evidenced by the number of startups we have in our pipeline; our hospice initiatives as well. We think it gives us a broader opportunity for acquisitions moving forward.

To give you an exact number I think would be a little forward, but you can look at the recent activity of hospice, and just kind of calculate what that might look like; but it should be significant.

But it's fair to say the mix will go up -- hospice to home health -- the mix will skew more toward hospice, do you think?

Well, I mean, that's a good comment, but there's still some good home care deals out there. So it's fair to say, though, but because of the relative small size of hospice, that the percentage will go up.

Okay. And my second question is -- as you roll the TLC into the base, would it be likely that recertifications will start to slow down, I guess, what? -- third quarter when you've lapped, including that in the base?

You know, again, recertifications are very patient-specific. A patient has to have the decompensation in their condition. We have to see that we can improve the patient's condition; one of those two have to happen. Physicians have to sign off on that.

So that's hard to speculate. John, you know with our 14 disease management programs, we typically focus on a much more acute patient. Sometimes that opens itself up to higher recertifications, but it really is all patient-specific.

But isn't it fair to say that part of the jump in research is that you are layering in these programs in the TLC agencies, so the number is a little bit skewed, until you've lapped that conversion?

I think one could probably assume that as a conclusion, but we don't have anything that would validate that specifically, that we would be comfortable with sharing.

Okay. And I guess my other -- just trying to peel out the TLC effect -- what do you estimate the organic admission growth is, excluding TLC?

Well, that's the numbers that we hadn't put out in the market. Dale, would you care to comment on that?

Yes. We don't put out that specific number, John, but I can tell you that the internal growth rate would be higher if we didn't add in TLC. And we expect that to continue to improve. TLC's contribution margin this quarter was 26.5%. That's up from 25% at the end of June and probably 20% at the end of the year. So we continue to see improvements in the performance of the TLC agencies and we expect that to continue.

Okay, thank you.

Darren Lehrich, Deutsche Bank.

I had a question just about your longer-term growth outlook. Bill, I think you've commented in your prepared remarks that 15% revenue growth, internal revenue growth was a reasonable range to target. And I just wanted to get your thoughts around how that squares with how you're thinking about the next couple of years? And given what you've said about M&A perhaps slowing down in the context of what's going on in Washington, how we ought to think about growth for the enterprise over the next couple of years?

Right. Well, first of all, let me take the second part of your question first. We think that M&A is only slowing down temporarily as a result of what's happening in Washington. We're really hope and desire that by year-end, we'll have that resolved. And we may start looking at some larger deals in reference to that.

In the past, we stated that our internal revenue growth, which is obviously a component of internal admissions growth, recertification, as well as revenue per episode growth, would be around 15%. This year, we experienced in something a little greater than that, around 20%.

It would be forward for us to make a projection on what would happen next year or the year after, without having the information of legislation and what changes may or may not happen. So right now, the number is 15%; that's what we feel comfortable with. We've beaten that. We do feel once we get some resolution on reimbursement, we can make some statements relevant to growth expectations, and also we think that we may see some increased acquisition activity once that's done.

Okay. And I know you're not commenting on Washington specifically -- I guess I was curious just to get your thoughts about MedPAC. We're going into the annual MedPAC season, and that presented a little bit of volatility for the industry last year, moving into this process.

Can you just comment from an industry association perspective, whether you have seen any change in how MedPAC will evaluate industry margins, whether you've made any progress in your discussions with them?

Right. Well, you know, first of all, MedPAC has made recommendations over the years that in most instances have not been accepted. The recommendation they're making this year I think there will be some acceptance in reference to that. So that would satisfy some of the margin issues.

More importantly, I think we're working with MedPAC through the Association to help them as well as us identify the value proposition of caring for the patients that we can serve. One of the key issues is that not all hospital discharge patients are good patients or target patients for home care.

Some of them may need to go to LTACs or SNFs, or may need to go to rehab facilities. And right now, we're trying to identify barriers to allow us to care for more patients more cost-effectively with less risk. And we think the benefit -- the opportunity we have with MedPAC is really to help educate them on the value of home care with patients more specific that can benefit from home care.

And ultimately how home care can be a cost driver, but down and not up, in that it has a very valuable place in the care of very complex patients in a couple of areas -- one is care transitions, which we know there's been a lot of debate about. And there's a lot of costs related to readmissions in hospitals; medications, reconciliation and management; as well as in education or an engagement of the family members.

So we think the way to work with MedPAC in the future is in a cooperative basis, and to share the value of home care, and then specifically identify the patients that would be relevant to care for.

Okay. And I guess my last question here, just -- I was hoping you could maybe further clarify the circumstances of Larry's departure. I know you've stated at recent conference appearances that there was disagreement over timing of succession; but was Larry's role actually restructured? And if so, why?

Well, there had been actually no restructuring in Larry's role. And as I indicated to the market, I was disappointed at Larry's sudden departure. We worked together for 13 years. I considered him a valued colleague.

Larry had great experience with the Company; and over the years, he had been approached for a top spot at other companies. Larry was slated to become the CEO of Amedisys, and we had established a timeline. The timeline that we had actually was two to four years, when that would occur. The bottom line is that Larry desired a far shorter secession timeline.

Once we realized we couldn't meet his objectives, we engaged him to a severance agreement for 24 months that allowed him not to solicit, compete or tamper in the home health or hospice industry. That was of value of both Larry and us, and it was beneficial to the Company to allow him to depart in a diminution of duty type of clause, which protected both sides of the organization.

There was some potential changes that we were looking at, but they were very small, maybe one reporting structure, but that didn't lead to any departure. It was really about the timeline and the fact that Larry wants to be CEO.

While I'm talking about that, let me just talk a little bit about Alice Ann as well. Her departure was a little different. She had a dual role -- she oversaw both IT and the clinical function. Because of the growth of the Company over the last five years, I felt that the roles needed to be separated, with a single person overseeing each function. And with Larry's departure, I elected to separate the roles. And after some deliberation on her part, Alice Ann elected to leave as well, under a diminution of duty clause.

But I previously stated to the market that we backfilled that with Tasha Mears. She was number two in charge and she has all the capabilities that Alice Ann has, and reporting to Dr. Fleming. We have a wonderful team now put in place on the clinical side. We have strong bench strength on the IS side. So that is running very well.

And with the hiring of Russell Reynolds to conduct the search and the fact that we've seen some really qualified candidates already, we think over this quarter, we'll put that to bed and we'll move forward. But as we stated in the filings and what we've said has been accurate and true. And really, there's no further comment that we'd like to make on that.

Okay. Appreciate the comments.

Arthur Henderson, Jefferies & Company.

Dale, could you discuss the swing factors on your guidance? Just what it takes -- what would need to happen to hit the low end versus the high end?

Well, I think, Art, as you can do the math as simply as we can, we (multiple speakers) --

Is it a revenue issue? Is it a margin issue? That's what I'm trying to get at.

We don't see substantial changes in our margin and we don't see any real diminution in our revenue as we go forward. We've elected to keep our guidance in the ranges that we talked about because we think that's a prudent place to be at this point.

Okay. On the acquisition front, I know that just temporarily, your inclination to do acquisitions maybe tapered a bit while we're waiting on reform. What is it that -- what situations come up that you look for that would allow you to do one now? Is it more on the valuation side? Is it filling in a geography? Could you kind of describe that?

Well, I mean, Hackensack is the perfect example, its Certificate of Need. It was acquired at a good price, around one times revenue. It services two huge counties. We can do many startups around that primary location and that's just a good acquisition, priced right, with a hospital.

We'll continue to do those if we see them; but right now, the sellers haven't quite accepted the reality of a potential reimbursement change. And they kind of want us to pay forward, so to speak, and we're continuing to add a lot into our pipeline. And it's just prudent for us to wait for the next month or two before we start really engaging and solidifying some other pricings.

Okay. (multiple speakers) Yes.

Art, one other issue there -- this is Dale -- one other issue there. We are positioning ourselves, and have been for most of this year, to go into 2010 from a capital standpoint. As I mentioned earlier, we have $239 million available under our lines of credit; $45 million in cash; and probably our cash flow run rate after CapEx and required debt rate, right now is probably around $170 million to $180 million. So we believe that we are very well-positioned to go into 2010.

Okay. So really, taking that a step forward, you're just building cash right now. And we shouldn't expect any more debt repayment. Do you feel comfortable with your leverage ratio?

Well, it's really not the leverage ratio at this point, although, yes, we feel very comfortable with our leverage ratio below one times. But secondly, we have paid down all of our revolving credit facility. And the remaining facilities either we're not going to prepay because there's a prepayment penalty, or alternatively, our term loan with our bank facility is not a revolver. So if we pay it down, we don't get to re-borrow it.

So you will see us doing required debt repayment, which is probably going to average about $10 million a quarter. And in addition to that, we will continue to build cash as we go into 2010.

Okay, that's helpful. One last question and then I'm done. You mentioned Marwood Group and having them do some work for you. What is the timeframe of getting the results back from them? And is that something that you're going to share with the Street? Or is it something that you're just more going to keep internally?

No, hopefully, Art, that is a near timeframe; it's their report, so we're kind of at their mercy as well. But we think we're looking at final draft right now. And hopefully, that will come out this week if not early next week.

And your motivation for doing that was, why? Contracting with them?

Well, the motivation is that we always look for quality improvement and we're always looking for benchmarking. We've used OCS in the past but it provides certain metrics.

The Marwood Group is a good company, it's got a good reputation. I can tell you their analysis was exhaustive. It went over a long period of time. And it's just a way for us to be able to reveal to the market the clarity and the type of quality we have in oversight, in reference to all of the issues that they've been brought up in negative blogs in the past; just to give some reassurance to the market that the Company is doing everything right.

Okay, that's very helpful. Thanks very much.

Newton Juhng, BB&T Capital Markets.

I did have a question, just regarding your Balance For Life programs and specifically, the specialty ones. 61% of your programs at this point -- I'm just curious as to where the saturation point is and in what kind of timeframe do you expect to kind of get there? And I know you're adding on some other ones that could potentially happen in the future, but I'm really just trying to get at how many Balance For Life programs you could get out in the near-term?

Right. You know -- thank you, Newt. You know, I think that when we started at the beginning of the year, our initiative was around 40 per quarter as an average over the year. I think that we'll be in that range at year-end. Obviously, it makes sense for us to look at the most robust markets with the highest concentrations of available therapists in the markets that we opened up the programs in.

I think we mentioned, we have 308 sites out there; a little over 500 home health agencies. We will continue to roll out the Balance For Life program in markets where it's appropriate, so you will continue to see that. The exact rate we will determine in combination with the rollout of some of the other programs, like behavioral health and wound care.

And as a reminder, you know, we have 14 DM programs. We are generalists. We take all patients, but we have not made a focused effort on a rollout of any of these DM programs as we did with the BFL. And we will do that. We think behavioral health has extraordinary opportunities. It's a multidisciplinary approach. And we have a lot of markets right now that have behavioral health, but we want to standardize it and then distribute it throughout the organization.

So it's going to be a combination of BFL, behavioral health, our advanced wound care. And as we move into the end of the year and next year, we'll probably be more forward with coming out with specific growth initiatives. We believe that this will be a significant internal admissions growth driver as well, and we think it's part of our long-term strategy.

Okay, Bill. And Dale, I did have a question just regarding your CapEx, it being up a little bit from last quarter. And looking at last year, it looked like you had kind of a similar dynamic. I was just wondering if there was a seasonal trend there that we should expect going forward in terms of CapEx being higher in the third quarter?

Oh, thank you, Newton. As you well know, our Company has had the reputation and continues to apply technology to the industry and to try to improve the operating efficiencies of what we're doing, both in the field and in the home office. And you've seen that in the trends over the last couple of years, both in gross margin, which has remained relatively flat in the face of continued pricing pressure and a decline in our G&A percentage of revenue over that period of time.

So let me give you a couple of examples. We're rolling out a new payroll system that's going to probably reduce our payroll processing time at our agencies by 50%. We've rolled out video conferencing. Dr. Fleming talked about our disease management programs.

We've got a new procurement program as well as an expense control program in our purchasing department. Probably the biggest initiative that we have going on right now is an implementation of a new human resource system -- it's PeopleSoft. That implementation started in the third quarter and will continue into the first quarter of next year. That by itself is going to dramatically improve the capabilities that we have with our 17,000 -- in communicating with our 17,000 employees.

So, a long-winded answer -- getting back to your question, I expect CapEx as a percent of revenue to be a little bit higher than it's been in the past couple of quarters, over the next quarter or two. So you'll see it as a little bit higher. It was about $11 million this quarter -- $10 million this quarter; probably in that range for the next couple of quarters.

Got you, Dale. One last follow-up here. Bill, I was wondering just with regard to the potential new executive hires that we're looking at. Are we looking at people who have prior home health and hospice experience? Or maybe more like a healthcare person that has dealt with larger P&L's, somebody who has dealt with, I guess, a little bit greater size and scale of business?

It would be the latter, Newton. We look inside the industry. And to be honest with you, I've had at least 10 inquiries from people inside the industry that would be good managers. But we're looking for multi-billion-dollar experience, maybe somebody with large hospital systems or large postacute care provider services. We're not even limiting the search inside of healthcare. It can be other large industry experience.

And like I said, we've had literally over 100 contacts and over 10 already that have a definitive interest. So we're going to have a good opportunity to really find a good addition. We're looking at cultural fits and we're looking at somebody that can bring maybe relationship to the Company as well. But we're going to weigh that all out. Russell Reynolds is doing an extraordinary job in profiling the Company, looking at culture, understanding the strategies of the Company moving forward, and looking at a fit for that.

So we're really excited about the process and what the new year will bring with that leadership. But it's going to be somebody probably outside of the home health industry. We may find somebody in the hospice industry that has some experience, but there's some other things we'll do in the future for hospice, but not for this particular position we're looking for.

Okay, thank you very much.

Andreas Dirnagl, Stephens.

At this point, most of my questions have been answered, but Bill, maybe just a couple of clarifications on comments you've made. Just quickly on the Marwood Group report. You commented on when you expect it to be done. Can you give us an idea of sort of when you retained them and how long they've been working on this?

The retention is -- just as a guess, I'm thinking was either in April or May of '09 of this year. And I think a lot of their interview and process and external work happened in mid-June. And they've put a lot of research -- they've got a lot of references.

And they're actually, in my opinion, creating standards for the industry that go way above the 12 indicators that we get measured on. And we're excited about the report because I think we can use that as a benchmark for standards.

So it's been an exhaustive process. We would have loved to have had it last week, so we could have posted it, so we could have talked more in detail. But again, it's their report. They've had literally dozens of experts working on it and we're excited about the report getting close to be ready to be published.

That's great. So, they've clearly been working on it for awhile.

And then just finally, just trying to square a couple of comments maybe that you made about your long-term growth rate with sort of what Dale's comments were, in terms of where the capital structure is and along with your comments on acquisitions.

Specifically, obviously 15% revenue growth is sort of a medium to long-term outlook. Would we be incorrect in taking the other comments in terms of building up a little bit of cash, holding off on acquisitions now but maybe expecting those to accelerate in 2010? That 2010, that number is probably going to exceed your long-term expectation. How do we sort of mash those two together?

Well, Andreas, when we look at internal growth rate on a long-term basis, we look -- we've talked about 15%. If we were to do a large acquisition or a series of medium-sized acquisitions, as in TLC as an example, we would expect the internal growth rate to go up. But we look at it on a long-term sort of blended rate basis. And without a substantial acquisition, that's pretty much where we expect it to be.

Okay, great. Thank you very much.

Kevin Campbell, Avondale Partners.

Just one quick one here at the end. You mentioned, Bill, about part of the reason for issuing this program for the Marwood Group to look at you was to combat some of the negative blogs. And obviously, there were some negative stories that came out here in the past couple of weeks, talking about additional document requests, et cetera, from Medicare.

And I was hoping perhaps you could touch on that, maybe historically, what has happened when you've received those types of requests, and whether or not the -- those, the requests that you've received recently have at all changed from historical patterns.

Well, I mean, first of all, I don't think we've received any requests from any outside organizations with the exception of routine audits that we go through with the state and inquiries that are made by the fiscal -- or an intermediary.

You know, with the negative bloggers, we really don't comment on that; we don't waste a lot of time on that. We're a leader in the industry and industry leaders typically are targets. We are the most transparent home health company in the nation.

In addition, we've reached out to provide additional resources such as the Marwood Group that's there. We are very confident in our practices, in our controls, in our compliance. We use OIG approved criteria for that. And we're very comfortable and that's all old news. It's just restated in a different way.

We all know the motivation, so we don't spend a lot of time focusing on that. We spend more time on increasing quality and growing our business, and focusing on ways to become more efficient by driving down costs.

Understood. Could you comment -- I think you've given some stats before, if I recall, about when you have a review with a fiscal intermediary and the percentage of times where you're found to be in the right -- if I recall as well, in excess of 90%. And so is that a stat you've provided before in the past or am I misremembering that?

No, we haven't provided that statistic before, but all we get is routine inquiries. We haven't had anything extraordinary; there have been no rack audits, none of that.

Okay, great. Thank you very much.

Donald Hooker, UBS.

With respect to just kind of looking at your guidance, I guess, Dale, you mentioned that you thought that margins might be flat in the fourth quarter. Does that include any kind of -- you mentioned there's a little over a $1 million of one-time costs in the third quarter. Are there any other one-time costs buried in there, in the fourth quarter?

First of all, we don't bury costs; but secondly, I don't think there's anything else in there.

You're correct -- the one-time, the $1 million severance issue will not reoccur in the fourth quarter. We have accrued all of the costs of that. But historically, if you look at our gross margin, it has been relatively flat. It moves around basis points. And we've seen a trend of a positive trend in our G&A expenses.

Over time, we expect that ability to leverage our home office to be continued. We're not going to make a prediction about the fourth quarter or the first quarter, but we expect that trend to continue.

Are there any pressures or any kind of trends in nurse labor costs? I guess it seemed like those were kind of softening a bit in recent quarters. I was wondering if you could comment on that.

We don't see anything significant. We've seen some pressure on hospitals, with managing their fiscal challenges. We've actually seen a little more access to nurses. But pricing hasn't changed anything worth mentioning. We do see our turnover actually going down. Part of that retention may be for the fact that there may be a little more access in some other markets. So, nothing we're commenting on that's measurable.

Okay. Well, thanks so much.

Well, I'd like to thank everyone for taking the time this morning to join us on our third quarter results call. We're excited and passionate about Amedisys and the perspective of the future. We look forward to early next year talking about our year-end results and thank everyone for calling in this morning. And have a great day.

This concludes today's conference. Thank you for your participation.