Amedisys Inc (AMED) 2011 Q3 法說會逐字稿

Good day. Welcome to the Amedisys third quarter 2011 earnings conference call. Today's conference is being recorded. (Operator Instructions).

I would like to turn the conference over to Mr. Kevin LeBlanc, Director of Investor Relations, please go ahead sir.

Thank you Anna. Good morning and welcome to the Amedisys investor conference call to discuss the third quarter ended September 30th 2011 results. A copy of our press release is accessible on the Investor Relations page on our website. Speaking on today's call from Amedisys will be Bill Borne, Chairman and Chief Executive Officer,Ronald LaBorde, President, Jim Robinson, Executive Vice President of Home Health and Hospice, and Dale Redman, Chief Financial Officer. Also on the call today during our Q&A session will be Tim Barfield, our Chief Development Officer.

Before we get started with our call, I would like to remind everyone any statements made on this call today, or in our press release that express a belief, estimation, projection, expectation, anticipation, or intent, or similar expressions, 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 a number involve risks and uncertainties that may cause the Company's results our 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 the information provided during this call, other than as required under applicable Securities laws. Our Company website address is Amedisys.com. We use our website as a channel of distribution for important information, including press releases, analyst presentations, and financial information regarding the Company. We may use our website to expedite the public access to time-critical information regarding the Company in advance of 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 Kevin. I will now turn the call over to Bill Borne.

Good morning and welcome to our third quarter earnings call. We appreciate the opportunity to update you regarding the Company's performance, and other important Company information. This was a difficult quarter for the Company. We experienced declining operating performance on both year-over-year and a sequential basis, primarily driven by the declining volumes and margin pressure in the Home Health division. We also recorded an estimated goodwill impairment charge of $574 million. Dale Redman will provide more specifics concerning this charge.

With third quarter results below expectations, we are lowering the guidance for the year to $1.90 to $2.00 earnings per share on an adjusted basis. Given our weak operating performance, and in the face of further cuts to Medicare reimbursement in 2012, we have made a number of strategic decisions aimed at realigning the Company to better address performance and position the Company for long-term success. For starters, we have again taken a hard look at our portfolio of care centers, we have determined that approximately 50 care centers with poor historical performance, are located in regions where our ability to capture necessary market depth is limited. As a result we are targeting these care centers for closure, consolidation, or sale. These agencieshave annualized revenue of approximately $34 million, and contribution losses of approximately $10 million. We don't expect to see much of an impact from this initiative until the first quarter of 2012.

We are also reorganizing our divisional leadership to adjust to the portfolio changes and better align our operations for the future. We believe we can better drive marketing and operational synergies, by more closely aligning our Home Health and Hospice operations. And are therefore realigning our reporting structure based on geographical coverage, as opposed to service line. Further we are announcing today that Mike Snow is leaving the Company. We want to thank Mike for his service at Amedisys, and we wish him well in his future endeavors.

As announced earlier in the quarter, Jim Robinson is leading both our Home Health and Hospice business units, and now will be reporting directly to me. Separately as part of our cessation planning we are announcing today that Ronald LaBorde has been appointed President of the Company, and will assume the additional role of Chief Financial Officer beginning in 2012. Dale Redman is expected to retire some time in the first quarter. Ronnie has served on the Company's Board for 14 years, and as Lead Director since 2003. He will remain on the Board, and Donald Washburn will become the Board's Lead Director. In his position as Lead Director, Ronnie has become very knowledgeable of the Home Health and Hospice space, and the operational aspects of our Company. He has previous public company CFO experience, and will be a strong addition to our Company's leadership.

Now I will return my comments to go to legislative and regulatory issues. On October 3rd the Senate Finance Committee issued their report on therapy practices in the Home Health industry. At this time we don't have any further requests from the Senate Finance Committee, and we believe the Committee's inquiry has come to a close. CMS released a 2012 Home Health final rule yesterday afternoon. Although we are still going through it in detail, it looks more favorable for 2012 than the proposed rule.

While CMS estimated that the proposed rule would have a negative 3.3% impact on the industry in 2012, the final rule is estimated to have a negative 2.3% impact. Which CMS estimated that the proposed rule would have a 4.7% impact on freestanding proprietary agencies, the final rule is estimated to have a negative 3.5% impact.

Based on our analysis of the proposed rule, we estimated that the impact on Amedisys would be greater than the amount estimated by CMS for freestanding agencies. We have not yet had time to do same the analysis on the final rule, and so cannot provide directional guidance at this time. We are waiting to see what proposals come out of the Joint Select Committee, also known as the Committee of 12, with regards to the deficit reduction initiatives. We are working with the industry groups in Washington to help draft legislation responsible to the government's cost cutting needs. But fair to Home Health and Hospice patients, and are hopeful that this positive approach in Washington will generate better results for the industry, and the patients we love and serve.

Now I will return my comments to the Company's quarterly operational performance. Dale will discuss the overall Company's performance, my comments will focus on same-store divisional results. For Home Health,same-store episodic revenue in Home Health division was down 15% year-over-year, including a10% drop in revenue per episode, and a 5% drop in episodic volume. The main drive is impacting revenue per episode were the approximate 5% reimbursement cut in 2011, and a 2% drop related to nonbillable visits associated with the new functional assessment rule. The remaining decline is mainly associated with a reduction in our case mix weight.

Turning to volume. We are disappointed in the same store episodic admissions which fell 6% during the quarter. We believe the face-to-face rule is contributing to our poor admissions, as in the overall weakness in the healthcare market. That said, our internal growth numbers are unacceptable. We are determined to improve the performance and growth. Jim will describe our initiatives in this area.

We have a targeted strategy for managed care, and it is showing positive results. Our non episodic same-store admissions retention were up during the quarter 11% on a year-over-year basis. With this business, we are seeking our deepen relationship with referral sources,offset fixed administrative costs, and diversify our revenue model by engaging hospitals, health systems and managed care providers regarding the value of Home Health care and Hospice for their patients.

Turning to Hospice. We have continued to experience very solid performance in our Hospice business unit with same-store revenue and census up 18%, and admissions up over 15% compared to the third quarter of 2010. We have now recorded double digit same-store admissions growth in six of the last seven quarters. This growth is positively impacting margins, with year-over-year same-store contribution margins increasing almost 300 basis points.

We are very pleased with our acquisition of Beacon Hospice. Its revenue and marginscontinue to be positive. Amedisys and our industry in general are being confronted with many challenges and headwinds. As this call makes it clear, this is leading us to make significant changes in how we operate the business. What stays constant is our focus on delivering quality care to the patients entrusted to our service.

With the most recent outcome scores released by CMS for the 12 months ending in June of 2011, we continue to see the positive results of this approach, as we again meet or exceed the industry in all quality scores within our footprint. Our customer satisfaction surveys also convey the positive view our customers have about care. In the second quarter survey results, 98% of our patients would definitely or probably recommend our care. We have a greater proportion of our care centers named to the 2011 Home Care Elite, a list jointly published by OCS, a leading provider of Home Health information, and Decision Health,the publisher of Home Health Line. It recognizes the Top 25% of agencies in the industry, ranked by quality outcomes, quality improvement, and financial performance. 257 Amedisys care centers were recognized on this list, a little over 50% of all of our agencies. Eight of these care centers were recognized as being in the Top 100.

Delivering quality care to our patients has been, is, and will remain our number one focus. We have great employees at Amedisys who understand our commitment to the patients that we serve. I am confident that even in these changes and challenging times, that commitment will not falter. At this time I would like to turn the call to Ronnie for some introductory remarks, and then I would like Jim to add some color to our organizational changes and focus areas, before turning the call over to Dale Redman for specific comments on our quarterly financial performance. Thank you.

Thanks, Bill. I would just like to say that I am very excited with the change in my role with the Company. I have been on the Board of Amedisys for 14 years, and have experienced all of the changes the Company has been through during that time. I truly appreciate the long-term potential for Home Health and Hospice in general, and for Amedisys in particular. There is is a lot of work that needs to be done to unlock that potential, and I am very excited about joining this management team, rolling up my sleeves and helping to get it done. I look forward to future conference calls when I can update you on our progress.

I will now turn the call over to Jim.

Thanks, Ronnie. As Bill said, I have been in my expanded role of managing both the Company's Home Health and Hospice business unites since early September. I originally started with Amedisys in April of 2010 as Executive Vice President of Hospice, and have been very pleased with the positive performance we have been able to achieve in that business unit over the past year and a half. I am now very excited at the opportunity of leading both our Home Health and Hospice operations.

The prospect of combining the strength of the country's largest Home Health organization with expanding presence of the country's fourth largest Hospice team, has been very well received by both our hospital and physician partners, as well as our employees across the country. Our go forward operating strategy is a simple back to basics approach that will improve our base Home Health business performance, while positioning our Company for the future. Our planhas three components. Clinical superiority, operational efficiency, and differentiated growth. We are already implementing changes to drive results in these three areas.

To have improved operational efficiency, we have reorganized our field organization into five geographic regions built around our largest regional markets. Our Home Health and Hospice care centers now report up to the same leadership team in each region. In addition we are working with some of our top hospital partners, to offer palliative care services, as the logical bridge between our Home Health and Hospice Care programs. Our strategy is to focus on diving deeper in our key markets, and to offer a full breadth of post-acute care services to our patients and their families in select communities across the country.

To improve our growth, we are pursuing a number of initiatives, including one, enhancing our business development team training across the board. Two, utilizing our new SFA CRM tool to one, monitor the quality and quantity of our business team, development team, interactions with our top customers, and using the CRM side of the program to start integrated marketing and educational campaigns, to increase our awareness in our target markets. Three, we are reorganizing our sales structure in each region to provide better accountability and more practical span of control for our business development leaders. In addition in some communities we have already cross0trained our Home Health and Hospice sales teams, to better educate referral sources on the benefits of the continuum of care from Home Health right through to Hospice.

However, the most important core strategy for the Company is establishing clinical superiority. To that end, we have made two key additions to our clinical leadership team. Doctor Kevin Henning, a nationally recognized leader in Hospice and Palliative Care medicine, has joined Amedisys as Chief Medical Director, to lead our development of evidence-based outcome-driven clinical protocols for our Home Health, Hospice, and Palliative Care services. Doctor Henning and Doctor Fleming, our Chief Medical Officer, will be teaming up with Bridget Montana, who joined Amedisys as our Chief Nursing Officer for our Hospice organization last month. Bridget is also a nationally recognized Hospice and palliative care leader, and brings a wealth of at-home and facility-based clinical care expertise to our clinical leadership team. Both of these additions underline our commitment to delivering the highest quality of care.

All of these initiatives I just described are designed to streamline the substantial resources we have around the needs of our key referral partners, such as hospitals, physicians, health systems, and managed care organizations. It is clear to us that these important referral sources, want easy access to our full continuum of care services, and need us to deliver these services across their entire geographic network.

In conclusion, our back to basics approach is designed to get us back on track as quickly as possible. With that, I will turn the call over to Dale.

Thank you, Jim. I will begin by comparing our performance for the third quarter of 2011 and the third quarter of 2010. Total revenue was $375 million compared to $405 million. We had net loss the third quarter of $424 million, or $14.73 per share, compared to net income of $22 million, or $0.76 per share.

As detailed in our earnings release included in the third quarter results for the current year are a noncash goodwill impairment and certain other items. Excluding the impairment charge, these certain items totaled $300,000, or $0.01 per share. Regarding the noncash goodwill impairment charge, as of September 30th we concluded that impairment indicators existed based on the third quarter decline in our market capitalization, third quarter results, and recent forecasts, which prompted us to perform an interim impairment test. As a result of our preliminary assessment, we recorded an estimated noncash goodwill and other intangible asset impairment charge of $574 million in our Home Health reporting unit. The impairment charge produced a deferred tax benefit of $140 million. The difference between the benefit recorded in the statutory tax rate is due to the allocation of the impairment between deductible and non deductible goodwill for tax purposes.

We are not fully complete on the measurement of goodwill. Therefore any adjustments to our estimate will be recognized in the fourth quarter. The impairment charge is noncash in nature, and does not affect liquidity, debt covenants, or cash flow from operations. Included in the certain items is a benefit due to the utilization of state NOL losses, resulting from a reduction in our effective tax rate. For the fourth quarter we estimate our effective tax rate to be 40.5%. The impact to certain items on the third quarter results for the prior year is approximately $3.8 million decrease in net income, or $0.13 per share. We have excluded these items for the remainder of our discussion this morning.

Comparing third quarter results to the prior year we saw a decline in revenue of approximately $30 million,primarily as a result of the 2011 CMS rate cut of 5.2%, lower Home Health volumes, a reduction in the therapy needs of patients, and continued difficulties with the new therapy regulations. The impact of the therapy regulation was a $5 million reduction in revenue for the quarter, which was higher than we anticipated.

We did see a significant decline in nonbillable therapy visits in September. However we had expected to see this improvement earlier in the quarter. We anticipate the reduction in nonbillable therapy visits to continue into the fourth quarter, thereby reducing the impact to renew as we close out 2011. As for the face-to-face component of the regulation. We wrote off 154 Home Health episodes, and approximately 1,300 Hospice days during the quarter. As an estimate of the impact of future write-offs of episodes which do not meet the face-to-face documentation requirement, we have recorded a balance sheet reserve of approximately $2.8 million.

Gross margin is down from 49% to 45% primarily because of the current year rate cut, which was offset by continued improvement in our cost per visit, which is down $1.64 over the third quarter of last year, and from the improvement in our Hospice margins. I have a cause for a disappointment on a sequential basis. In the second quarter we saw cost improvement in the face of declining volumes. We were unable to hold that trend in the third quarter as we reached a point in a number of our agencies, where normally variable direct costs are becoming fixed.

Other operating expenses increased from 40% to 41% primarily due to declining revenues, as expenses decreased by $9 million, due to a decrease in salaries, benefits, and rent expense. Adjusted EBITDA was $29.4 million, or 8% of revenue, compared to $51.9 million, or 13% of revenue in 2010. Adjusted net income was $10.6 million compared to $25.5 million in 2010.

We ended the third quarter of 2011 with days revenue outstanding at 36 days, which is up three days from year end. The face-to-face requirements have had an impact on this metric. A provision for estimated revenue adjustments and doubtful accounts remained flat at 2% of revenue, and our cash collections as a percent of revenue were 104% for both the third quarter of 2011, and the third quarter of 2010. We reduced our outstanding debt $29 million to $153 million at the end of the quarter, compared to $182 million at the end of the year. Our leverage ratio at the end of the quarter was 0.9 times, compared to 0.7 times for the same period in 2010. Our weighted average interest rate on our debt was 4.5% for the quarter.

From a liquidity standpoint, we ended the quarter with $29 million in cash, $231 million available under our revolving credit facility. Our cash at the end of the quarter decreased by $91 million from the end of 2010, as we generated $104 million cash flow from operations, spent $39 million on capital expenditures,$126 million for the Beacon acquisition, and made debt repayments of $30 million.

This morning we are lowering our earnings guidance for 2011. We anticipate that earnings per share will be in the range $1.90 to $2.00 per share, based on an estimated 29.3 million shares outstanding. We are reaffirming our revenue guidance, as we anticipate revenue to be in the range of $1.475 billion to $1.5 billion. This guidance excludes the effects of the estimated impairment charges and any future acquisitions if they are made. In addition this guidance does not include the effect of any share repurchase, any certain items that may be incurred during the remainder of 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 will open the call to questions. Please limit to one question and one follow up, so that we may allow question time for everyone. Operator, please open the lines.

Thank you sir. (Operator Instructions). Our first question comes from Darren Lehrich with Deutsche Bank.

Thanks. Good morning. I have really two questions. My first is just around Ron's appointment as President, and my question to Ron maybe, is why did the Board not engage an outside search for this change? I just want to get a little more perspective on that?

There is Bill. Thank you for the question. Really the question is for me. First of all, if you would go and look back at Dale's contract, it telegraphed his retirement last year when we resigned it. When When I was talking with the Board about that intention was to go out and look for a search firm. I have been working with Ronnie for 14 years, he is a strong and as detailed oriented as anybody that I have seen, so I felt that Ronnie would be a great addition to the Company. He knows the industry very well, the Board and I discussed that on multiple occasions and we debated that. I was able over a period of nine months to convince Ronnie to join the Board. So instead of taking the chance of some unknown, I decided that I wouldn't mover forward to what I knew that I had, and the value of that Ronnie could drive. So it was really my recommendation to the Board, and my push forward, and to be hones, the Board was sorry to lose him as the Lead Director.

Thanks. My follow-up on just the management changes will Dale be certifying the financial statements?

Yes, for the third quarter I will sign the third quarter 10-Q. Let me make one other comment here. When I signed on at Amedisys five years ago. I committed to Bill that I would stay for five years, and that five year period is up. So I am very comfortable with this transition. I have also known Ronnie for a long time, and I think Amedisys is in good hands.

I know we got the final rule yesterday from CMS. You have commented before in your analysis, that the impact to you because of therapy would be greater than the freestanding agencies and the impact table. What was your analysis originally pointing to in the proposed role, if you give us some numbers to bracket that please?

The answer is the same thing we told you when we did our second quarter call, that we believe that the impact to us on the proposed rule would be more than the 4.7% on freestanding agencies. We got the thing last night, and we are looking at it. It is obvious that a piece of the case mix creep has been moved to 2012, and it looks like there have been some adjustments to the therapy reimbursement. We are not in a position at this point to make a definitive discussion about what the impact to us will be. Because we just got it last might.

Darren, it moved all over. Literally every single table has changed. Obviously they moved the baseline up a little bit, all of the wage indexes have moved, the weighting has moved, the way they weight therapy at 14 and 20, all of that has moved back and forth. The way they look at the case mix has moved. We need a little more time to look at it, before we saw a pretty huge change in the 14 and 20 thresholds, and the way they have mixed, and the look at the fact that we were high in therapy, led us to believe we would be impacted more than the average company. So we don't know what that looks like now, but we be happy to share that information once we get it.

Okay. Thanks.

Next question from Brian Tanquilut with Jefferies.

Good morning guys. Bill, just going back to the Darren's questions about the management changes. Can you talk about what prompted you or the Board to finally make a decision to make some changes, not just with Mike, but also with the divisional leadership, and all of the restructuring that you are doing. Because I know that you have been looking at the operations, evaluating it over the last two years. But what was the point where you said, this is the time to do it, or was it a Board induced decision?

Well, collectively I get a lot of advice from the Board, so we have made it collectively. The bottom line is that we evaluated the performance of the Company against the trends in the industry. We feel like that were not keeping up with the trends and we were losing some value as a result of overall performance. As we took a look at it, we decided that we would make some changes. It is not just Mike. I like Mike, he has provided great services to the Company, we were both disappointed in the Company's performance, and we both agreed that the best path for us to move forward was to separate.

We have some great line inside of the Company as far as skills, with Jim Robinson who is now over both divisions. Patrick Thompson, who is our Executive Vice President of Administration adds a lot of bench strength to what we are doing. Ronnie's focus as he comes in until Dale transitions will be on business unit finances, so we will tap that down, and then we want to focus on public finances. He will be a big and, and then maybe Ronnie will also look at picking up some administrative responsibility as we move forward. I think we have got a good team, and we are all working together, and we have all got the same purpose in mind, which is to offer the best patient care we can, and move forward with our strategy.

Bill, just a follow-up to that. Was this something that happened or that started in Q3, or was this in the works over the last couple of quarter, three quarters?

It is a long trend. Again I will go back to the performance of the Company. We measure performance of other companies, we measure our performance, despite the changes in reimbursement, and we just felt that we weren't keeping up equal, and we needed to move forward, and make changes that were necessary.

My second questionis for Dale. Quickly, you talked about the G&A, and how you were not able to hold it down like you did in the previous quarters. Is this the new run rate we should think of for the G&A line, or is this something that will continue to grow as you said some of the variable costs have now become more like fixed costs?

No, I think the answer is we will focus on improving internal growth as time goes on. I think you will see G&A margins improve over time but not in the absolute near term. If you look at Q2 and Q3, there was some volume impact there was some rate impact. I think face-to-face and the FA issues had an impact to us, and there were some cost issues that you are talking about. But you also need to look at the issue of the fact that we had 4.7% CMS bonus that we recorded in the second quarter, which had an impact on the ratios that you are looking at. In the fourth quarter we have some holiday pay and some margin issues. But I think margin generally will be flat in the fourth quarter.

Thanks, guys.

(Operator Instructions). Our next question comes from Eugene Goldinberg with BB&T Capital Markets.

Good morning guys, and thank you for taking my questions. This is a question for Dale. Given the results that were materially below expectations. What is the thought process behind not preannouncing this?

Thank you for question. The issue really comes down to, there were a lot of moving parts here, including the issue related to goodwill, and we thought about that issue, and concluded that the best path for us was the one we chose here.

Okay. Got you. Two follow-ups on that. As far as 2012 outlook. I know you guysare at a disadvantage, because you have basically less than 24 hours to look at the rules, but with Ronnie taking over starting Q1 of 2012, do you guys still expect to put up 2012 guidance in the Q4 call?

I think that is a decision we will make at that point, but assuming we have some clarity on what reimbursement is going forward, this is something that we will consider as we get closer to that fourth quarter call.

Okay. Got you. Then the last question I have is, can you just run the number again for me for the revenue and operating loss associated with the 50 agencies that were identified for closure? I missed those two numbers.

$34 million in revenue and an operating loss on an annualized basis of $10 million.

Now are those agencies in a particular geographies across the country, or is it kind of all over?

We selected agencies that were separate, a lot of standalones in small markets. At one time, it made a lot of sense to geographically just take whatever we could and grow it. With the way that the reimbursement trends are, we are now looking to cluster markets. So if it wasn't in the cluster long term, it was a standalone outlier small agency as a result of the startup of our branch. Those were initially targeted, and then moved right along with our long-term strategy.

So it is mostly denovos, not legacy acquisitions?

It is a combination. But I would say that it is a lot of the startup activity that just didn't pickup the revenue that we needed with the new reimbursement trends.

Got it. Thank you for taking my questions.

Next question from Kevin Campbell with Avondale Partners.

Thank you for taking my questions. Dale, I was hoping you could follow-up just on the question about G&A. I know you talked about it as it relates to margins. As we think about it from an absolute dollar perspective, when you make all of the adjustments here in the quarter it was around $140 million or so. Looking at it from the dollar perspective, should we expect there to be savings from that $140 million at some point, or should we expect it to trend up from here over time? Can you give us some color on that?

I think in the short run it will be relatively flat. We do have cost levers that we are looking at and probably will pull as time goes on. Going to 2012, I would expect to see some improvement in the dollars associated with that.

I know you are not giving here guidance on 2012. Can you give us a sense of magnitude of dollars, are we talking a few million, or $10 million or $20 million? Is there any sense that you can give us there?

No, I think that it is premature to try to put numbers around that at this point.

Okay. Then as we think about your cost of service per visit, it had been declining on the Home Health side for a couple of quarters in a row, and then picked back up here in the third quarter. Is there any reason as we think about that number going forward, whether or not it should trend up, should trend down, should stay flat? How should we think about that from a modeling perspective?

Well I think that generally we would be looking for an improvement in margin going into the fourth quarter. We have got some holidays, extra holidays in the fourth quarter. As I mentioned earlier, I would expect gross margin to be relatively flat in the fourth quarter from the third quarter.

As we look out into next year, is that a line where you can drive some savings on, or really you can't because of therapists and clinicians sort of cost what they cost, and you have shifted the model as far as you can in terms of variable versus fixed costs. Is there still some savings that you can squeeze out there going forward?

I believe there is some opportunity for us in the gross margin, and the costs associated with the costs of revenue going forward. We are not going to quantify those at this point. But I believe that there is both overhead and cost of revenue opportunities for us to improve our operations.

Kevin, if we get the functional assessments and the face-to-face as we continue to tap that down, that will give us some pretty significant improvement. We actually saw some improvement in September. So we feel very positive about that, and that also will give us some better margins as we move forward.

One last issue. The third quarter includes the first full quarter of G&A related to our Beacon acquisition, which was closed in the first week in June. From a dollar standpoint, there is an uptick in G&A just because of the acquisition of Beacon.

That makes sense. I had forgotten about that. Lastly, and I will get back to the final ruling. I know you can't comment on its specific impact. Had you run the analysis, and said it would be worse on the preliminary rule than the 4.7%, did you every finalize a number and say okay, it was going to be 5.5% or 6%, 5%, can you give us a sense of at least what the initial proposal was, after you ran all of the math?

No, we have not disclosed that number. It is probably old history now. I think that the issue from our standpoint is evaluating the rule going forward. And as we mentioned earlier, it looks like the case mix creep is a little better, or has been put-off until 2013. At least part of it is I think 1.3%. It looks like there has been movement in the therapy, which may end up being better than the preliminary rule. We haven't disclosed a number that we on the preliminary rule at all.

As a reminder it is generally, Kevin, our acuity is generally a little bit higher than as an average across the industry. That may fare a little better, it may not. We don't know, but we will see once we run the numbers.

Do you anticipate a press release interquarter when you run the numbers or not?

We haven't made a decision on that issue at this point. I think it is more likely that we would disclose fourth quarter when we normally do, but we haven't made a decision on that.

(Operator Instructions). Next question from Matthew Gilmore with Robert Baird.

Good morning. I wanted to ask a follow-up to some of the cost questions that have been asked. You referenced some fixed costs that normally were variable. Can you give us a flavor for what those were? Was that in the Home Health, or was that in some of the Hospice costs that you were talking about?

No, it is mostly in the Home Health, and as your revenue declines there is a practical limit to how much impact those variable costs can have. The issue here from our standpoint while we believe that there are improvements that can be made in the cost base of the Company across the entire spectrum. The real issue here is volume. That is where a lot of our focus is going to be going forward. Jim Robinson and the operating units is entirely focused on building that internal growth volume, and the partnership that we can have with external referral sources. So I think our focus is on volume, and on being efficient and right-sizing the organization.

Okay. And just with some of the discussions that are going on in DC. Could you talk about the current state of play, and then your expectations for the Joint Committee process?If you could give us a flavor for what the industry is potentially offering up to avoid some of the proposals that have been put out there?

It is a good question. It is a challenge to get a consensus across-the-board, and our first focus is on fraud. We have a major campaign to eliminate fraud first, and protect the benefits for our seniors. We have put some initiatives that look at tightening some issues on new entries in oversight, and again, none of that is conclusive but we are moving forward with that.

The others ones are around utilization or overutilization, and it touches everything from outliers, research, and that type of activity. None of it is in the final form. All of itis in the form of debate. I have think it would be forward for us to go and make any claim on how that is going to be accepted. I can tell you that is very receptive in reference to the Washington and the circuits and the Super Committee. At least we are an industry that has a plan, and has addressed these issues. We have been working on this plan for a year. It is not like we just came to the table and we recognized that there would some changes. We are excited about that.

Some of the other issues we are looking at is value based, and how Home Health can actually add value to the whole healthcare delivery system, and we feel that once you get a good consensus, that we can maybe get some results with the Committee, and they will consider our proposal to reduce the impact that it could have on Home Health and Hospice, and maybe prevent the impact to sequestration might have as well. But the jury is out. We are working hard and collectively. We have got good representation, the industry is working collectively to do that, which I think is good. We don't have a large degree of separation, there is always debate, and we are happy with the progress.

Okay, thanks a lot.

There are no further questions. I would like to turn the conference back over to Mr. Borne for any additional or closing remarks.

Thanks Operator. Again we look forward to being able to share our year end results with the investment community. I think we have all of the practices and protocol preliminary in place, to provide better results, and to continue to serve our patients that we love, and look to serve every day. We appreciate all of the help from our employees over the years, and we look forward to continuing to work with our shareholders hopefully to provide better results at our year end. Thank you very much for the call.

Once again, that concludes today's conference. We thank you for your participation.