Amedisys Inc (AMED) 2011 Q2 法說會逐字稿

Good day, and welcome to the Amedisys second-quarter 2011 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Kevin LeBlanc, Director of Investor Relations. Please go ahead, sir.

Thank you, Lauren. Good morning, and welcome to the Amedisys investor conference call to discuss the second-quarter ended June 30, 2011, earnings announcement and related matters. A copy of our press release is accessible on the Investor Relations sub-page for our website. Speaking on today's call from Amedisys will be Bill Borne, Chairman, Chief Executive Officer; Mike Snow, Chief Operating 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, estimation, projection, expectation, anticipation, intent or similar expression, as well as those that are not limited to 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, uncertainties which may cause the Company's results or actual outcomes to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K, 10-Q and 8-K. The Company disclaims any obligation to update information provided during this call other than as required under applicable securities laws.

Our Company's website address is www.amedisys.com. We use our website as a channel of distribution for important information, including press releases, analyst presentation, and financial information regarding the Company. We may use our website to expedite public access to time-critical information regarding the Company in advance of, or in lieu of, distributing a press release or filing with the Securities and Exchange Commission disclosing the same information. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website on the investor relations page.

Thank you, and now I'll turn the call over to Bill Borne.

Thanks, Kevin. Good morning, and welcome to our second-quarter earnings call. We appreciate the opportunity to update you regarding the Company's performance. For the quarter, we recorded net revenue of $374 million and adjusted net income of $19 million, or $0.67 per share. This compares to the second quarter of 2010 when we recorded net revenue of $422 million and adjusted income of $33 million, or $1.15 per share. The decline in performance versus last year is attributable to our home health division, with our hospice division showing strong year-over-year results. On a sequential basis, revenue increased by $9 million versus the quarter, and our EPS increased $0.05 on an adjusted basis.

Our home health division's performance was impacted by the new face-to-face and therapy functional assessment regulations that went into effect on April 1. We believe the face-to-face requirement had a negative impact on volumes during the quarter, as physicians adjusted their referral behavior in light of the additional burden required by the face-to-face documentation. With the material number of our referrals coming from hospitals, we also believe the overall volume weakness reported in that sector contributed to our results. Operationally, our team has done an excellent job of responding to the new face-to-face encounter documentation requirements. We found that almost all of our patients do see their physicians within a required encounter period.

As a reminder, we support the fundamentals of the rule, especially in respect to our care transitions initiatives, and we are hopeful that time and physicians who refer will turn back to their normal activity in time. The functional assessment requirement had a bigger impact on the quarter than we expected. We saw the impact through a continued decline in therapy utilization and challenges, operationally, with functional assessments. Mike will discuss in more detail.

Turning to our hospice division, we had another quarter of strong organic growth in revenue and stable margins. We continue to focus on growing our hospice division to match the footprint to our home health business. In the second quarter, we made two acquisitions that combined to add 50% to our top line. Beacon, with annual revenues of $80 million and 23 locations will greatly expand our hospice operations in the Northeast. It is a well-run business with many clinical and operational best practices that we believe will benefit our legacy hospice division. We are also excited about our Hackensack Hospice, which we expect to close shortly pending certain regulatory requirements. It represents our first hospice location in New Jersey and builds on home health operations in the market.

Moving to our 2011 guidance, as disclosed in our press release this morning, we have lowered our guidance for full-year 2011 revenue and EPS. Home health volume during the quarter was significantly weaker than we anticipated coming out of the first quarter, and our earlier guidance did not contemplate the reduction in revenue per episode we are experiencing from the functional assessment requirements. Dale will provide more information on our assumptions underlying this guidance.

Turning to activity in Washington, as you know, it appears that legislation to increase our national debt ceiling and reduce spending will be enacted shortly. Our understanding is that the decision on specific Medicare savings will be further discussed in the upcoming months. To assure our voice is heard in Washington, we have been working with the National Association of Home Care and the Partnership of Quality Home Healthcare to craft legislation that helps address the home healthcare spending issues facing our nation, but does so in a manner fair to our patients.

This legislation is aimed at reducing inappropriate practices, specifically targeted areas of fraud and abuse for reimbursement cuts. This approach is designed to minimize the impact that across-the--board cuts and co-pays would have on patients' access to care. The industry is supporting this through grass-root efforts to benefit seniors, disabled persons, and chronically-ill Americans who rely on home care.

Turning to the regulatory front, in July, CMS proposed 2012 rules on home health, which would result in a 3.4% cut to reimbursement for the industry. The proposed rule also shift case mix points from high-case mix, high-therapy episodes to low-case mix, non-therapy episodes. And free-standing proprietary agencies have a greater proportion of these episodes, CMS estimates this group in total will see a larger cut of approximately 4.7%. With our higher percentage of these types of patients, we believe the impact to Amedisys will likely be more negative. We are analyzing the impact of these cuts on our business model and performance going forward.

Despite the regulatory challenges posed on our industry this year, Amedisys continues to focus on delivering high-quality care to our patients. In the second quarter, we were awarded the bonus payment from CMS of $4.7 million under the Medicare home health pay-for-performance demonstration. This is the second and final year of the program. In 2010, Amedisys received a $3.6 million payment. As in 2010, this represents the highest amount awarded for any program participant. The program was undertaken to determine whether financial incentives can have a positive impact on both the quality of care being provided and the overall cost to Medicare spending. Bonus payments were made only if total system savings were realized. This further supports our premise that high-quality home healthcare is part of the solution to our nation's chronic care disease epidemic and fiscal challenges.

Last Friday CMS issued its 2012 final rule for hospice and that rule of reimbursement will be increased 2.5%, effective October 1 of 2011. Additional changes will be made to the hospice face-to-face rule and to the hospice calculation methodology. Other than the positive reimbursement change, we do not believe any of the other changes will have a significant impact on our hospice operations.

In the face of many issues we confronted in the second quarter, we remain focused on quality patient care. We continue to enhance our clinical initiatives to achieve measurable improvement in outcomes, such as hospitalization rates. To develop our IT infrastructure as a vehicle to improve quality and efficiency, [and these 4] partnerships and managed care -- with managed care and health systems to expand our services beyond traditional Medicare fee for service. We continue on these paths because we know that the healthcare at home is where the nation is heading. The demographics are in our favor. Patients want to be cared at home and home health offers significant economic advantages to the overall healthcare system.

I'd like to conclude my comments by welcoming the employees of Beacon and Hackensack Hospice. You are now part of a team of 17,000 individuals dedicated to providing the highest quality of services to the patients entrusted in our care. I will now turn the call over to Mike Snow, our Chief Operations Officer.

Okay. Thanks, Bill. I'll start my comments by focusing on our divisional operating performance, first in home health. Operating revenue in our home health division, adjusting for the Medicare bonus payment, fell $63 million compared to the second quarter of 2010, or about 16%. Care center closures and mergers drove $14 million of this decline. The 2011 Medicare reimbursement cut drove another $18 million reduction. The remainder is largely due to a fall in same-store admissions and a decline in patient therapy utilization, both impacted by the new face-to-face and functional assessment requirements.

Same-store episodic revenue was down 15% year over year, including a 10% drop in revenue per episode and 5% drop in volume. Our same-store revenue per episode during the quarter averaged $3,032, a $346 decline from the second quarter of last year. The main drivers impacting revenue per episode were the approximate 5% reimbursement cut in 2011, or about $170; a drop of $40, or 1% related to non-billable visits associated with the new functional assessment rule; and most of the remaining $135, or 4%, is associated with a reduction in therapy utilization, an ongoing trend since the second quarter of last year.

As Bill said, the functional assessment had a much greater impact on the quarter than we expected, as implementation proved operationally difficult. If a functional assessment is not done on specific visits, generally the 13th and 19th, or the assessment is not done every 30 days, any subsequent visits are non-billable to Medicare until the assessment is completed. Multi-discipline therapy episodes prove even more challenging.

Adding to the complexity, CMS issued a number of transmittals during the quarter that made changes to how the functional assessment needed to be accomplished. This required us to make numerous changes to our operating procedures and IT support systems, contributing to the write-off of 30,000 visits in the quarter. These visit write-offs had an average $40 negative impact on revenue per episode for the quarter, or $4 million on total reported revenue. Without the write-off of these visits, our adjusted EPS for the quarter would have been $0.08 higher. We expect to have higher-than-historical non-billable visits again in the third quarter, with improvement through year end.

We continued to see a gradual reduction in therapy utilization in the second quarter. The percent of completed episodes with 14 or more therapy visits declined from 31% of episodes a year ago, to 28% in the first quarter of this year, to 27% this quarter. Since the functional assessment was only applicable to episodes started in the second quarter, the impact it is having on these completed episode statistics is somewhat muted. In other words, we ended the quarter on a lower run rate of therapy utilization.

Now, let's turn to the face-to-face requirement. While this new rule negatively impacted overall volume levels in the quarter, we wrote off very few face-to-face admissions. The patients that were referred and admitted largely satisfied physician encounter requirements. Using April admission encounter metrics, our data showed that 76% of our patients saw a physician within 90 days prior to admission and 23% of our patients saw a physician within 30 days after admission. We have received appropriate documentation in 93% of all patients, but not without some distraction to our local sales teams, the group responsible for obtaining the documentation. We estimate that less than 1% of patients did not meet encounter requirements and these episodes have either been written off or reserved.

Turning to volume, our same-store episodic admissions growth in second quarter of this year was a negative 4% versus negative 2% in the first quarter of 2011. We believe the new face-to-face rule contributed to this decline, as physicians reacted to the new documentation requirement by referring fewer patients to home health. We also saw that the implementation of our sales automation tool negatively impacted volume in June, as our sales staff were out of their markets for multi-day training during the month. Same-store certifica -- recertification volume also fell about 5%, in line with admission volume, as our recert rate continued to hold constant at around 43%.

Now, turning to costs, we are pleased with the positive results of our cost control initiatives to date. Given the large reimbursement cut in 2011, a sequential comparison provides additional perspective on operational performance. On a sequential basis and adjusted for one-time items, our gross margin in the home health division improved from 47.5% to 47.9%. Further adjusting for the face-to-face and functional assessment write-offs, our gross margin would have been closer to 48.6%, 100-plus-basis-point improvement. Home health SG&A costs declined sequentially from the first quarter by over $3 million, to $79 million. Our positive cost control efforts resulted in home health contribution in the second quarter, actually increasing $2 million from the first quarter, even though revenue decreased $4 million. These numbers are all adjusted for one-time items.

Wrapping up my discussion on our home health division, I'd like to take a moment to comment on our new behavioral health program, Empowered for Life. This program was recognized in June for our advancement in providing behavioral care at home by earning an integrated healthcare standards accreditation from ACHC, our accrediting body. This is a good example of our continued effort in developing high-quality clinical programs for patients entrusted to our care.

Now, turning to the hospice division, we continued to experience very solid performance. On a same-store basis compared to the second quarter of 2010, Medicare revenue and average daily census both grew about 22%, while admissions growth was around 17%. Our average length of stay remained flat at 88 days and revenue per day was also flat at $133 per day. We continue to experience healthy organic admissions growth, with double-digit same-store growth in 5 of the last 6 quarters. The leveraging effect of growth on our field administrative infrastructure is having positive impact on margins. At the same time, however, we are investing in our hospice capabilities. We have increased our hospice clinical support personnel and are currently in the process of hiring a Chief Medical Officer and a Chief Nursing Officer for our hospice organization.

As in home health, leading the industry in quality care is an objective of the hospice division. To measure that quality, our division contracts with a third-party research company to administer satisfaction surveys. We continually generate strong relative results in all survey categories. In the benchmark question of overall quality care, Amedisys hospice was rated with the highest mark of excellent 74% of the time versus the national average of 71%. We're proud of these results. With the addition of Beacon and Hackensack Hospice, we are now one of the largest hospice providers in the nation and growing. Given the strength of our legacy hospice business, we think the timing of these 2 acquisitions could not have been better.

Turning our attention briefly to 2012, although the Medicare home health reimbursement changes are just proposals, we realize that significant reimbursement cuts are coming. We will need to adjust our cost structure in light of the declining reimbursement environment and are considering various alternatives. Once the rule becomes final, we will be in a better position to comment on our expectations and initiatives for 2012. More immediately, our focus in the second half of the year is on volume growth. To that end, in June, we fully implemented Smart Book, a robust sales force automation tool. We made this investment to provide better resources to our sales force in terms of market intelligence, scheduling, and account management. We also expect it to maximize productivity of our sales staff.

We also started a business development initiative to grow market share in key territories focused on a better coordination of our clinical, business development, and marketing efforts. We do this through strengthening our relationships with health systems and managed care providers in those markets, better identifying the clinical strengths of the care centers in coordinating marketing business development efforts around those programs, and enhancing our brand reputations in the communities we serve. We are fully focused on organic growth and totally understand how crucial it is for our future success, especially in the face of future reimbursement cuts.

At this time I will turn the call over to Dale Redman to discuss our financial results in more detail.

Thank you, Mike. As Bill and Mike have already mentioned, this was a challenging quarter for the Company. Comparing our performance for the second quarter of 2011 and the second quarter of 2010, total revenue was $374 million compared to $422 million. Our net income for the second quarter was $22 million, or $0.75 per share, compared to $32 million, or $1.13 per share. As detailed in our earnings release, included in the second quarter results for the current year are certain items, the net effect of which is approximately $2 million increase in net income, or $0.08 per share. These items are inclusive of a $4.7 million CMS bonus award.

The impact of certain items in the second quarter results for the prior year is approximately $1 million decrease in net income, or $0.02 per share. This is also inclusive of a $3.6 million CMS bonus award. We've excluded these items for the remainder of our discussion this morning.

Comparing second quarter results to the prior year, we saw a decline in revenue of approximately $50 million, which consisted of $63 million decline in home health division offset by $13 million increase in our hospice division. The revenue decline is driven by the 2011 CMS rate cut, which reduced our revenue by approximately $18 million; $26 million from the lower admissions and recertifications and the remainder due to a reduction in the therapy needs of our patients and the impact of new therapy regulations. As Mike mentioned, managing the new functional assessment requirements was challenging and resulted in revenue and -- a reduction of revenue of approximately $4 million.

As for the face-to-face component of the regulation, we wrote off 14 home health episodes and approximately 350 hospice days during the quarter. Additionally, we have recorded a reserve of $900,000 as an estimate for the impact of future write-offs of episodes which do not make the face-to-face documentation requirement. While the initial indication regarding our compliance with face-to-face requirements appears to be positive, it's still early in the implementation and measurement of this regulation.

Gross margin is down from 50% to 48%. This is primarily because of the current-year rate cut, which was offset by continued improvement in cost per visit, which is down $3.71 over the second quarter of last year. Other operating expenses increased from 36% to 38%, primarily due to declining revenues, as expenses decreased by $11 million due to a decrease in salaries, benefits, and rent expense.

Adjusted EBITDA was $44 million, or 12% of revenue, compared to $65 million, or 15% of revenue in 2010. We ended the second quarter of 2011 with days revenue outstanding at 36 days, which is up 3 days from the second quarter of 2010 and year end. Our provision for estimated revenue adjustments in doubtful accounts decreased from 1.4% to 1.3% of revenue and our cash collections as a percentage of revenue were 102% compared to 99% in the second quarter of 2010. We have particularly seen an increase in the collection of our non-Medicare revenue.

We reduced our outstanding debt by $41 million, to $163 million, as of the end of the quarter, compared to $204 million for the same period in 2010. Our leverage ratio at the end of the quarter was 0.9 times compared to 0.7 times for the same period in 2010. And our weighted average interest rate on our debt was 4.3% for the quarter. From a liquidity standpoint, we ended the quarter with $28 million in cash and $231 million available under our revolving credit facility. Our cash at the end of the quarter decreased $92 million from the end of 2010, as we generated $77 million in cash flow from operations, spent $26 million on capital expenditures, $126 million for the Beacon acquisition, and made debt repayments of $20 million.

This morning we are lowering our revenue and earnings guidance for 2011. We anticipate that revenue will be in the range of $1.475 billion to $1.5 billion, and earnings per share will be in the range of $2.20 to $2.40 per share based on an estimated 29.3 million shares outstanding. Our home health volume during the quarter was significantly weaker than our expectations coming out of the first quarter. In addition, our earlier guidance did not contemplate the reduction of revenue per episode we are experiencing from the functional assessment requirement.

Our revenue guidance for the remainder of the year includes some gradual improvement in the same-store volume trends and stabilization of our revenue per episode through reduced non-billable visits. This guidance includes the effects of the Beacon acquisition; however, it excludes the effects of any future acquisitions, if they're made. In addition, this guidance does not include the effect of any share repurchases, any nonrecurring costs that may be incurred during the year, and the impact of the final 2012 Medicare rate changes for home health that may impact our December episodes in progress.

At this time we'll open up the call to your questions. Please limit yourself to 1 question and 1 follow up so as we may allow question time for everyone. Operator, please open the lines.

Thank you, sir. (Operator Instructions).Our first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Good morning, guys. First question just on the guidance change. Obviously it's about a dollar of cut -- or, I'm sorry, you're basically implying you're going to do a dollar of EPS on the back half of the year. If you were to break down the different buckets, what drove the guidance change? I know, Dale, you alluded to these, but if you would give -- just -- if you would rank them, which ones were the biggest drivers of the guidance change relative to your old guidance? And also, it seems like there's margin deterioration, obviously, baked into that new guidance and you've done a good job holding the costs, so just wondering what else you're baking into the guidance assumptions?

Thanks, Brian. The primary issue that we're dealing with is volume, and as you can see, we've had recent weakness in the volume issue and we're reducing revenue guidance by over $100 million. That by itself probably accounts for what you were talking about. In addition, we anticipate some additional improvement in that. But given the recent weakness that we've had that's a little more difficult to prognosticate. Secondly, revenues per episode has been coming down and we are making an assumption built into this revenue -- this EPS guidance that, that decline will stabilize and that the face-to-face and therapy issues will mitigate over the last half of the year. But as Mike pointed out, there will be some impact, we believe, in the third quarter, particularly of the therapy issues.

And lastly, we anticipate there will be some continuing efficiency gains during the quarter. So this is a soup of all of those things that went into our thought process around that issue. We intend to see therapy visits continue to decline, particularly at the high end of therapy utilization. So all of those things are part of that process.

Got it. And then, Mike, just wondering, obviously the volumes in admission growth trends have been pretty weak consistently over the last year and change and I know you've talked about trying to get that re-ignited. I'm just wondering if you can give some specifics as to the strategies that you guys are putting in place to drive admissions growth and episode growth again, maybe in the back half of the year or early next year?

Yes, feel like we have been swimming upstream a little bit, giving the -- given the overall environment out there. What's difficult for to us quantify, Brian, is how much of this truly is the face-to-face pushback by doctors. We believe it's tangible and we believe part of this is an education with the physicians and will that normalize over time. That's unclear to us, whether this is permanent or whether this is a bit of an aberration that will normalize. That's unclear, number one.

Number two, as Bill alluded to in his comments, you've got a bit of headwind with -- a significant part of our business comes out of hospitals and most of the public companies have reported soft volumes, and so is that part of what's contributing to? Maybe, maybe not, it's difficult for to us ascertain. But one of the things we did to ourselves, by making an investment in a sales force automation tool we pulled all our sales teams out in the month of June and for multiple days on training for this new sales force automation tool, and boy, you can track it like -- it's easy to track that when those teams were in training, the referrals into those regions where they pulled that out went down materially. We knew it was going to be an investment, we knew it was going to probably hurt us from a volume perspective, and it did, primarily in June. But this is -- you put all that together we're making that investment. We think that, that investment will give us better market intelligence to be make -- to be smarter about our prospects and who it is we go call on. So, that's kind of the whole story, I guess, there on the volume issues.

So going forward you think these investments are going to pay off. Is there anything other than the rollout of the system that you're doing with the sales force?

Well, we have done -- we've got new leadership in the home health division, we've got new incentive plans. We're always trying to tweak what's working and what's not working, and piloting different initiatives in different areas, focusing on our clinical programs, what clinical programs respond in which markets. That is -- I think in my comments, also, I talked about a business initiative. We went to some select markets and went with a little more strategic information around market share data, who is referring to what groups of physicians, what institutions are referring to which entities. So we've targeted some selected markets to be a little more strategic about how we -- what services we offer, how we approach those markets. We're piloting that in a few markets to see if we can replicate that in any other areas.

Got it, and one last question. I'm sorry, I know we're limited to two, but how would a co-pay actually impact you guys? What's your view of that in case that's one of the things that they decide to do to home health?

Brian, obviously we think there'll be a negative impact but we're not ready to discuss the impact of that. We hope with our legislative activity this year and all of the action that we're doing and the new legislation that we introduce that we can say that, and hopefully the government and the regulators will understand the cost to access that, that will create for the most vulnerable patient population.

All right. Thanks, guys. Good luck.

Our next question comes from Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everybody. I wanted to just focus first on the 93% number you gave us here and what you're receiving the documentation. Mike, if you could help me just understand that relative to what looks like a -- sort of a 99% plus type of number for your patients that have met the criteria and how that fits with the $900,000 reserve for the period for face-to-face? I'm just trying to square those numbers.

Yes, sure. So 99% of the folks qualified, right, so they actually met -- we believe that they saw the doctor within the prescribed time period. We actually have documentation for 93%, which means the other 6% we're still -- we believe the documentation is there. We have -- we are pursuing the documentation, believe the documentation is there, but we have put up a reserve in case we're unsuccessful, so that's how it's working. Does that answer your question?

And, Darren, we have a six-month timeframe to go and capture that information, so frequently if we get documentation and it's not adequate, it doesn't meet the initiative, we can go back and capture that. So in those instances, we just need to go back with a little more time to revisit the physician and make sure we clarify the documentation that we need.

And as we mentioned in a previous discussion, we have about a $900,000 reserve that we put up at the end of the quarter; that's about $300,000 in Hospice and about $600,000 in Home Care. That's based on our statistics primarily coming out of April and early May because you have to have some period of time to get some decent statistics on that. That's our best estimate at this point and we believe that there's a reasonably good possibility that will get better from here.

Right, so the 93% number you'd expect to get better over time I guess is what you're saying.

And what we wanted to -- what we wanted to do, Darren, was give you a snapshot in time so that you look back, say -- so this thing moves, right, so it's like a waterfall. So you just take a point in time and say looking back, how did we do, so that's what we're trying to give you some insight on, first off, were the patient's on the front end or the back end seeing their doctor. Second, getting some comfort that a very high percentage of these we've gotten documentation. I will say, as an editorial comment to Brian's question about volume, one of the drags is that our sales team is out getting this documentation instead of out calling on doctors and that's a bit of a drag on our efforts, also. But obviously, we're having some success in these getting documentations.

All right. My other question here, probably more importantly, I guess, is relative to the functional assessment and I think most of the market was more concerned about disaster from face-to-face and it seems like you really struggled that over the course of the quarter. So, Mike, in your objective view, how much of the operational issues that you've talked about, reacting to some of the regulatory things that were coming out from the [FI's] do you think you can overcome over the next few quarters? And then just to help us really understand this issue, what was -- just from beginning to end of quarter, what was your revenue per episode? We're just having trouble modeling what we saw in the second quarter, which was a margin close to 12% versus second-half margin implicitly of about 10%.

Okay. Well, first, let me give you a practical viewpoint of what happened. So we get into early -- right at the end of March there's some FAQs that come out from CMS that are different -- their answers are different than what we had worked with in the first quarter so we had to adopt to that. And then as we get in deeper in the quarter, they further clarified -- I think the most troubling for us was that a visit had to be done on the 13th to the 19th, the FA had to be done on the 13th or 19th visit, right, and if you missed the 13th and you did -- you went a couple more visits, let's say, and then you did the FA, okay, you had to write off write off those previous two visits. I get that, but the impact then of the 19th visit was, what counts towards the 19th? Was at the 15 number of visits you actually did, or do those two other ones not really count, and so they provided us clarification. So we didn't have a chan -- it was mid-way through the quarter before we had that hindsight clarity to be able to go back and by then a lot of the patients were discharged and we couldn't go back and correct whether they had a functional assessment.

We were kind of stuck and so what you find in the second quarter is that we had to actually do a retrospective review of our inventory of not only completed but episodes in progress and make an estimate of how many missed visits or how many what we call breaks occurred on those episodes and how much of them -- how many of them contributed to a revenue decline versus how many would have not had a revenue decline, so we're still doing some work around that but it was very complex. There were other rule interpretations also, particularly around multi-disciplinary, because multi-disciplinary when the other therapists have to show up almost has to be in a sequential order, and it's very complex. So it caught us unawares, and it shows, obviously, in our second-quarter results.

But, yes, I do believe -- the other part of your question was do I believe it is -- this is something we can overcome and yes, I believe our systems have now been updated. Our scheduling system's working properly highlighting these functional assessment needs. We have kind of the air traffic control reports, if you will, over what episodes we have to go pay attention on and when in our offices. So I think that we can manage through this going forward.

And most of the effect -- I think another part of your question was how did that work out during the quarter? Well, most of the effect was late in the quarter, but that's logical because in April we had very little impact because we were starting with new episodes, so therefore there weren't that many therapy visits that had been done in those new episodes in April. So it basically snowballed through the quarter.

Thank you.

(Operator Instructions).Our next question comes from Whit Mayo with Robert Baird. Please go ahead.

Thank, good morning, appreciate all the color. Just -- Dale, on the 2012 impact, I'll maybe put some words in your mouth, but I think you basically said that you expect the impact should be worse than the 4.7% decline in the impact file. Can you confirm that and also maybe if you'd be willing to provide a tighter bracket range for us?

Well, as you know, the preliminary rule that came in had a market basket update of 2.5%, a rate -- a statutory rate cut of 1% and about a 5%, call it case mix creep. It also became clear in reading the rule that not only that issue, but the therapy-related issues and moving from high-therapy utilization episodes to low-therapy utilization episodes were going to have a bigger impact on companies that did a significant amount of therapy. So I think Mike's comment earlier was that -- or I think Bill's comment earlier was that the CMS predicted the free standing would be about 4.7% and the comment was we believe we will probably be worse than that given the magnitude of therapy that we do. Beyond that we're really not going to go much further because, A, this is a preliminary rule, we don't have a clear view at this point what our census is going to look like at year end. Frankly, our therapy utilization, particularly at the high end plus 14%, has been declining for a number of quarters, so to give you specifics at this point is probably not where we want to be.

All right. Maybe ask the question a different way, but can you give us a sense for what percentage of your total episodes do have therapy now?

I think we made that in my comments. I think it was like -- we're down to 27% now, but that's 14% plus. I will tell you this, Whit, that we're -- the overall visit number you see in our -- in the table there with our release, we're about half. It's may -- a little bit -- about half our visits or visit related.

Okay, maybe we can follow up after the call on that. But maybe, Mike, just -- one other question I have is, just considering and given some of the unknowns with 2012 and we've got some time until the final rule comes out, as you mentioned, can you maybe talk just how you're thinking internally about budgeting and the planning process? The rule on the surface clearly, as you said, isn't exactly great for therapy, so just maybe give us a sense for how you're thinking about what you're doing for -- are you hiring more therapists, just looking at programs, any read into how you're working on planning for the second half of the year?

I think, Whit, the first thing you want to sit back and say, okay, CMS is clearly sending a message, right, that contrary to four years ago when they put in the current benefit and said we really wanted these more acute patients, make sure they're taken care of, they're clearly now saying we want them taken care of just not -- we just don't want as much therapy used on them, right? So I think how we use therapy, the appropriateness of therapy, I think is called into question. We want to take care of patients. This doesn't mean therapy goes away, it just means that how we apply therapy, how we think about it and who benefits from a lot of therapy within an episode, I think, is called into question. But as I think about going forward, I think we have to start talking -- thinking about it programmatically and how do our services match up in the markets we serve and what makes sense, right?

And then from an internal perspective, how do we staff for that and how do we think about -- I mean, obviously with this kind of rate cut, as I said in my comments, we're going to have to address our cost structure. It was -- the level of cut for the industry was disappointing, frankly. It's almost -- we almost feel like it's an acceleration of rebasing in some respect. We hope it is. So as I think about for 2012, it's got top-line implications around what -- programmatically and where CMS is leading us, but also internally around what cost initiatives do we have to undertake. We have to figure out how to do it better, faster, cheaper.

Okay. Thanks a lot.

And our next question comes from Eugene Goldenberg with BB&T Capital Markets.

Thanks for taking my question, guys, and for all the additional color that you guys provided around the face-to-face and the therapy. I just have several quick ones. One, can you guys just let me know what your case mix was in the quarter and how that compares year over year and sequentially?

Eugene, I don't think we point to any one indicator as for acuity. Do you have something in mind?

No, just acuity case mix. I know some providers report that on a quarterly basis, just wanted to see if you guys were able to disclose that?

No, we have not historically reported our case mix on a quarterly basis.

Okay, got you. And actually, Dale, the next question's for you. On the bad debt expense line, that came in about 0.6% of revenue, this is the lowest we've seen you guys post in a very, very long time. How should we think about that going forward especially considering some of the difficulties you guys are having with the face-to-face provisions?

Well, I think we had a benefit of the first six months of this year and in the second quarter, primarily, as I mentioned in my comments, related to our non-Medicare revenue. Our collection percentages are up and they've been doing very well in terms of collecting that revenue, so we ended up with a benefit from that. I would expect it to be stable to slightly up in terms of an expense going forward.

Got you, got you. And then the last question I have is really on the Hospice front, this is actually -- anybody can answer this. Can you guys give us any commentary to some of the recent scrutiny we've been seeing on Hospice, particularly in the nursing home setting, and would you be willing to share with us how much of your hospice revenue is currently provided from nursing homes?

We've obviously seen the recent press on some Hospice of which I think those are isolated events, certainly not indicative of the industry overall. We have historically had a low percentage of nursing home business and our legacy operations had more from the Beacon acquisition that we just completed. I think overall as a portfolio now on an adjusted basis, we're -- something like 30% of our business is in nursing homes.

Got you, got you. Thanks, Mike. What about the patient mix as far as Cancer or Alzheimer's or Dementia?

I can't answer off the top of my head there, Eugene. Our length of stay is probably a pretty good indicator there, but I'll do some work. If you want to give me a call back or an e-mail I can get that detail for you.

Absolutely, will do. Thank you for taking my questions.

Okay.

Our next question comes from Kevin Campbell with Avondale Partners.

Good morning, thanks for taking my questions, just a couple quick ones on guidance. Just to be sure, the guidance for this full year does that include the $0.67 from the second quarter, or the $0.75?

$0.67.

Okay. And then as we think about the outlook for the remainder of the year on volumes, how should we expect that to trend throughout the course of the year. Should it be down in 3Q because hospital admissions generally are softer and then back up in 4Q, do you expect that to be stable from here going forward? So first on volumes. And then second, on the G&A salaries and benefits you saw the salaries and benefits come down, the other go up in the quarter, how should we think about those costs going forward? Are these good, normalized numbers to you at this point or are they going to continue to be volatile?

I think we will see a general -- a gentle uptrend in volume over the year. Now that, obviously, is different than the trend that we've had recently, but our expectation is that we'll see a mild uptrend in admit volume as we go through the last two quarters of the year. From a cost standpoint, I think we will see relatively stable cost numbers with the exception of we will have more holiday and holiday pay in the third and fourth quarter.

And, Kevin, I'd only quantify that -- qualify that a little bit in that on that improving trend, I would say it will be a gradual improvement, so it'll be a little bit better in third quarter and better in the fourth quarter is how we're thinking about it.

And one other thing that would offset that to some extent, particularly in the third quarter, is continuation of any of the trends we've seen in FA assessment or the face-to-face. We obviously are anticipating and desiring to reduce the impact of that over time, but that will be some impact in the third quarter.

Okay, and then last question on the hospice side. The cost of service for the per-patient day was up 3% sequentially, was that driven just by mix of business and you had acqui -- Beacon added there for a month, or --?

Yes, it's primarily the impact of Beacon. You'd see that in some of the detail statistics under the acquisition in terms of revenue per day and also expense per day and that's primarily because of Beacon.

Okay. So presumably then in the third quarter we should -- because you'll have a full quarter of that, that gross margin might compress a little bit more there, that fair to say?

On the -- yes, there could be some impact to that in the third quarter.

We'll say that we're going very slow there on our integration plans. We're not looking to go jam out but synergy on the front end. We're making sure this integration goes very smoothly. We're not going to -- don't expect some big drop off. We're going to take our time, make sure we do this right.

The wage index is higher in the northeast where Beacon is, and you'll see both the reimbursement and the expense numbers are higher in that acquisition category and that's primarily Beacon.

Okay, great, Thank you very much.

And our final question comes from [Nick Laventis] with CRT Capital.

Good morning, thanks for taking my call. Question for you. Are you changing your strategy at all around admissions with the face-to-face in terms of not admitting the patient until you have the okay?

No, our philosophy has been to admit the patient until we determine whether or not the patient is willing -- or first off, had they been to the physician and if they haven't, are they willing to go to the physician? So our position has been we're going to accept the patient. We've gotten -- like I said, 99% of the patients have complied either pre or post, so we think that's been the right strategy.

Okay. Is there anything you can do on your end to mitigate the face-to-face issues? Are you doing anything in Washington? Are you trying to get doctors? What I'm getting at is, if you have most of your patients who had seen the doctor trying to draw that disconnect between they saw the doctor but the volumes have tailed off, just trying to wrap my head around that.

Nick, there's legislation that was proposed and legislation that really cuts across the whole gamut. Face-to-face, as far as us being able to manage that hasn't had that significant of an impact, really it's more the behavior of the physicians. I think it's a timing thing, I think it's education, I think it's comfort, I think it's being relentless and continuing to show the value to these physicians. It's a whole approach to our whole sales dynamics that were asked earlier. We have good leadership, great incentive program that's in place, we're putting a lot of education to our sales force, we're educating the physicians on our care programs that are out there. We have more oversight with our sales management, too. A lot of that's going to drive volumes. It's not just about a Face-to-Face.

The other thing is, we're going a lot deeper in the markets where we have a higher level of relationships, we're moving toward with the hospitals. They're paying more attention now to the issues that they're going to be confronted with (inaudible) evens and re-admissions and all of the challenges that they will have. More than anything, we mentioned last quarter about the addition of Bob Young, really looking at picking up a lot of managed care business. And what we've found in some markets that we don't that managed care contract sometimes we don't get the Medicare referrals and this is new to us. So we have a lot of initiatives that is going to drive revenue growth that we feel very comfortable with. And it's not just a Face-to-Face issue, we feel we have the dynamics as far as the way to functionally approach that in check and now we have to educate the physicians and get them more accustomed to moving back to their normal behavior.

Got you, and then just a housekeeping question. That $900,000 reserve, that's in the bad debt line?

No, it's not.

Where is that?

It's netted against revenue.

Netted on the top line.

Yes. The concept there is if we don't get the documentation, we don't get the revenue so we netted it against the revenue.

Okay. So then in terms of a modeling perspective we shouldn't model that debt higher in the second half of the year?

No --

Or we should give up that as kind of flat?

Not from that perspective. We did benefit in the second quarter from the increased collection rates on our non-Medicare revenue, so I would see that expense being stable to slightly up during the rest of the year.

And any effect with weather during the quarter?

No.

Excellent. Thanks, guys.

Okay.

And I think that is going to bring our conference call to a close. I think we're out of time. I want to thank everybody for calling in this morning. We certainly look forward to the third-quarter results. As a whole, we're a little disheartened in reference to the challenges and, of course, the rule that we're looking at for 2012. We think we're going to have, hopefully, a positive impact in all of the activities that we're putting forward. When it's all said and done a company like Amedisys with our distribution, with our capital position, with our technology and our infrastructure and our focus on quality, as evidenced by the pay for performance, we think as things start to settle in over the middle of next year there's going to be a huge opportunity for to us take advantage and continue to drive growth, especially deep in markets. So as disheartened, again, as we are about the recent changes, we are optimistic about what the future brings for the organization. So thanks for everybody's call and we look forward to chatting with you all in the third quarter.

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