Amedisys Inc (AMED) 2012 Q3 法說會逐字稿

Good morning. My name is Kyle and I will be a conference operator today. At this time I would like to welcome everyone to the Amedisys third-quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions ).

I'd now like to turn the call over to Mr. Kevin LeBlanc, director of investor relations.

Think you, Kyle. Good morning, and welcome to the Amedisys investor conference call to discuss the results of the third quarter ended September 30, 2012. 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, and Ronnie LaBorde, President and Chief Financial Officer.

Before we get started with our call, I would like to remind everyone that any statements made on the 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 and 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 presentations, 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 SEC 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 under the tab Financial Reports non-GAAP. Thank you, and now I'll turn the call over to Mr. Bill Borne.

Thanks, Kevin. Good morning and welcome to our third-quarter earnings call. Overall we were pleased with bottom line results for the quarter and remain on pace to meet our earnings plan for the year. Our results benefited from job and investment tax credits recognized during the quarter, which had a positive $0.08 impact in operations. Underlying this favorable tax impact, operating results were mixed.

Regarding year-over-year volumes, same-store episodic admissions grew 2%. We continue to see growth in our managed care business with non-episodic admissions up 44% from last year. And our total hospice average census was up 15%. However, admissions in both home health and hospice were lower during the quarter than we expected, with slight declines sequentially in each business unit. EBITDA margin stayed essentially flat at 6.6% in the third quarter from 6.8% in the second quarter. Ronnie will discuss third-quarter operating results in more detail.

Last week we announced that we entered into a new $225 million unsecured credit facility. This credit facility included $165 million five-year revolving credit line and a $60 million five-year term loan. We also amended our senior note agreement to allow for partial prepayment of those notes and to conform certain provisions of that agreement to our new credit facility. These agreements will lower our ongoing interest costs while improving the financial flexibility of our capital structure.

Amedisys continues to build our foundation for long-term growth. First, we are focused on our base business of delivering high-quality and efficient home health and hospice care. Second, we have ongoing efforts around implementing post-acute care initiatives such as bundles, ACOs, and other care management solutions.

In the near term, we are working to generate efficiencies in our base business. We're in the process of reducing staffing levels at our care centers to better align staffing with volume trends. To date, we have reduced more than 180 positions system-wide and we anticipate additional reductions as our review is ongoing. We will have certain severance-related charges in the fourth quarter associated with the elimination of these positions.

Also, on the efficiency front we remain on track to complete our hospice point of care technology rollout by the end of the year. This technology will automate how we manage documentation, compliance, and clinical management in our hospice business.

Now, turning to our growth initiatives. Building our managed care portfolio is a strategic comparative for Amedisys. We recently completed a new contract with Humana, which is important given the sizable population Humana serves in many of our markets. In August, we completed an acquisition of five hospice operations in North Carolina for $5.8 million. While these are all relatively small operations, they have enhanced our geographical footprint within the certificate of need state.

One of the key elements of our growth strategy is to support our hospital partners in their efforts to reduce hospital readmissions. Our care transitions program, where specially trained nurses help patients safely return home from the hospital for post-acute care, are helping us reduce avoidable transmissions. This program includes medication management to follow through with the patient's primary care physician.

Our care transitions coordinators are sought-out resources by our hospitals and physician partners. So we are expanding this program and adding care transition coordinators in those markets where our hospital partners are experiencing challenging-- challenges with readmission penalties.

Turning to Washington. CMS has recently released its 2013 final rule for home health care. The rule was largely similar to the proposed rule issued in July. Reimbursement in 2013 will be essentially flat compared to 2012 prior to any impact from sequestration. Hospice reimbursement changes for 2013 went into effect October 1. These changes resulted in a positive 90-basis-point net impact to reimbursement, again, before any impact of sequestration.

We continue to be active in Washington and through our participation with the Partnership for Home Health Quality, the Alliance of Quality Health Care and Innovation, and the National Association of Home Care and Hospice, we're working to have our voice heard on changes that would affect home health and hospice. I will now turn the call over to Ronnie to discuss our third quarter results in more detail and then we will open it up for questions. Thank you.

Thank you, Bill. First, a reminder that in the third quarter of 2011, we recorded a $574 million goodwill impairment charge. Comparisons to last year in my comments will be adjusted for this charge. With that said, let me provide a summary of our operating results. During the quarter we generated revenue from continuing operations of $376 million. This was up $5 million year-over-year but down $3 million sequentially.

Our hospice operations generated $75 million, a $10 million increase versus last year and flat sequentially. Non-episodic home health revenue of $30 million was up $11 million versus last year and up $1 million sequentially. Episodic home health revenue of $271 million was down $16 million versus last year and down $5 million sequentially.

Net income for the quarter was $10 million or $0.33 per share compared with $0.42 per share the third quarter of 2011 and $0.27 sequentially. EBITDA for the quarter was $25 million or 6.6% of revenue compared to $29 million or 7.8% last year and $26 million or 6.8% sequentially.

I will now provide more detail around these results. Our 16% growth in hospice revenue year over year was driven by higher same store average daily census, up 11%. Acquisitions and startups contributed 4% while pricing made up the remaining 1%. Our 57% growth in non-episodic home health revenue is being driven by our focus on adding managed care contracts.

The 5% decline in home health episodic revenue is mostly due to a 4.7% decline in revenue per episode from a cut in our reimbursement rate in 2012. Lower recerts also contributed to the decline, with our recert rate dropping to 43% compared to 45% in the third quarter 2011. 43% is on the low side of our range over the last 10 quarters and offsetting this decline was a growth in admits, up 2% from last year on a same-store basis.

Turning to margins. We generated a 43% gross margin for the quarter, a decrease of 240 basis points from last year and down 90 basis points sequentially. The decrease from last year was due to our home health operations, largely from their cut in our reimbursement rate but also from a higher cost per visit. This decrease in our home health gross margin was partially offset by improved gross margins in our hospice business.

The increase in our home health cost per visit was 3.3% year over year and 2.8% sequentially. The largest drivers of these increases were the full quarter impact of wage increases granted in the second quarter and additional clinical resources added during the quarter.

General and administrative expenses decreased $4 million versus third quarter 2011 and $5 million sequentially. The largest component of this decrease is the decision we made to reduce the size of our therapy management infrastructure. 60 management positions were removed from G&A, with approximately 60% of these employees transitioned into field clinician roles, contributing to the increase in our per-visit cost during the quarter. We expect these resources to become more productive over time, relieving this pressure on per-visit costs.

Our provision for doubtful accounts was $5.7 million, up $1.3 million year over year in our managed care business. Sequentially, our provision was up $1 million, reflecting a favorable adjustment we recorded in the second quarter results.

Now let me comment on our balance sheet and liquidity. During the quarter, we generated $22 million in cash flow from operations, spent $12 million on capital expenditures and made debt repayments of $8 million. Our cash balance at the quarter end was $39 million, up $2 million from the previous quarter. Our DSO was 39 days, an increase of one day sequentially. We ended the quarter with $122 million in debt and a leverage ratio of 1.24.

As Bill discussed, subsequent to quarter end, we entered into a new unsecured bank credit facility and amended our senior note agreement. Under the bank facility, we borrowed $60 million under a term loan and prepaid a like amount of senior notes, leaving a remaining balance under the senior notes of $40 million. The prepaid senior notes had fixed interest rates of between 6.1% and 6.5%, while borrowings under our term loan are floating and currently priced at LIBOR plus 250 basis points or approximately 2.7%.

We paid fees to the senior note holders associated with this prepayment of approximately $3.6 million. This charge will be reflected in our fourth-quarter financial results. The only outstandings under our new revolving credit facility are letters of credit of approximately $20 million, leaving $145 million in unused availability.

On another matter, we uncovered some apparent improprieties at two of our hospice care centers concerning clinical documentation and patient eligibility. While the review is in its early stages, we have a disclosure on this matter in our 10-Q, which will be issued later today. The review is ongoing and we've engaged counsel to examine this matter.

Finally, I will turn to guidance. This morning we are revising our revenue and EPS guidance for the year. We anticipate revenue to be in the range of $1.485 billion to $1.505 billion. We expect our earnings to be in the range of $1.00 to $1.06 per share from continuing operations on an estimated 30.2 million fully diluted shares outstanding. This guidance implies a fourth-quarter earnings per share range of $0.19 to $0.25. This is reflective of earnings pressure associated with the new Humana contract, a slightly lower view of fourth-quarter volumes relative to our plan.

We are excluding from this guidance charges in the fourth quarter associated with the financing we just closed and severance-related charges associated with eliminated positions. That concludes our prepared remarks. We thank you for your attention. And operator, would you please open the call for questions.

(Operator Instructions ).

Darren Lehrich from Deutsche Bank.

I just wanted to start out to clarify with regard to your pending disclosure on the hospice programs, is this a manner that has been self-reported or is this a matter that was initiated by a government investigation?

Darren, this is Bill. Thanks for the question. It is something that we self-reported. It is isolated to two centers and it is early in the stage so we really can't comment a whole lot further.

The thrust of my question is really just surrounding your cost structure. Obviously your margins are under significant pressure and you've got this Humana re-contract to deal with. I just want to understand how you're thinking about your cost structure. You commented a bit here in the call about lowering staff. But it seems to me that there would need to be more radical change to your organization to manage margins, given the volume levels you have and given the relationships you have with managed care companies. So just stepping back, can you help us think about how you get your margins back to more of a normal level?

Darren, I don't know what a normal level is but I can say this, that our focus is not just on managed care, it's also on Medicare and in the two states that are not servicing Humana at this time have an extraordinary focus on managed care-- or Medicare and we feel very positive about that. Also there is a lot of additional managed care business that we have identified and we have available staff to care for so it's not just a proportion of reduction in staff for the Humana contract, but we are looking at staffing company-wide and making the applicable reductions understanding the pricing pressure that we're going to have from Medicare as well. So it's ongoing, our portfolio review is ongoing, and we will continue to enforce enhancements and opportunities where we see those.

And just in the managed care strategy, obviously we're going to see a lot more non-episodic now. Is this really the new normal in terms of how you'll be structuring relationships with managed care? In other words, we are back to more of the visit-based type of reimbursement and maybe some perspective on why you think that shift has taken place.

Well, again, our focus is on Medicare. We want to continue to push our Medicare and episodic portfolio, however, most of the population that converts into the Medicare population every year now, a lot of those are converting to managed care. So our intention is to be and continue to be the largest Medicare provider, as well as to be the largest managed care provider. And our managed care contracting is going well, we are adding new providers all the time, and the rates that we are getting, although they are per-visit, are good rates and it's helping us with our incremental costs. So our intention is basically to be the largest Medicare and managed care provider which will help us, we believe, to position in the future which is allow us to align ourselves with opportunities in bundles and ACOs, as we mentioned, and we just believe that that overall strategy will give us a more balanced portfolio.

Last thing for me here is there was some discussion in the final rule for home health, the regs recently about rebasing of the market basket and I know some of that was just realignment of the market basket weightings. Can you just talk a little bit about your interpretation of that and whether there is any read through into how rebasing, more broadly speaking, will play out in future roles?

Darren, this is Ronnie. No read through yet on how rebasing will ultimately play out. So we will certainly work through that and see what we learned from that but we don't have any more meaningful read on that looking into rebasing at this point.

Kevin Ellich from Piper Jaffray.

I'm just wondering if you guys have any update on any of the investigations. I'm not sure if you guys saw, but one of your competitors announced the conclusion of the SEC investigation with no action being taken.

Kevin, this is Bill again. Thanks. We've cooperated fully. We have not seen any activity with the SFC or the SEC at this point in time and we are still providing information to the DOJ and cooperating with them fully.

So would you say the SEC investigation is still ongoing or are they still asking for more information?

They have not asked for any information recently, so I cannot tell you if it is still ongoing. But we provided everything they have asked for to date.

And then thinking about the environment that you guys are operating in with the relatively weaker hospital utilization trends, is that what is really weighing on the business in terms of lower admission growth and the negative mid-single digit recertification growth, or is there something else structurally that's going on?

I think as an industry, we see that the hospital volume has had some pressure. I think that directly reflects to us. The majority of our referrals come from hospitals. We are working closely with our hospital partners right now on their challenges. So I think it's just the ebb and flow of the way volumes are moving around right now and that the pressure that we are feeling, we do not feel that there is any underlying issues that are there. We think that the repositioning the portfolios to look at the impacts of Obama care and everybody is just trying to figure out what the next step is. So we are doing the same. And we have initiatives that we put in place, as we mentioned, with our care transition coordinators. We added about 50 of them on the latter part of September and the beginning of October to help partner with these hospitals transitioning into the future. Again, that managed care is important because we think if we can take all of the volume from our referral sources that would help actually with our Medicare business, so we think we are well-positioned one not only for the short-term but for the long-term strategy of the Company and the trends as they evolve.

And then with the care transition coordinators, you said you added about 50. Is that a good number? Do you need to add more in Q4? And I guess how has it gone so far? I know it is still early days with that process, probably.

You are correct, and it's a good number to start. My belief is that we will continue to add them, especially as we identify hospitals that are willing to work with us along with care transitions and these are the ones obviously that are sensitive to the potential penalties that they will have. That will be an ongoing initiative as we move and develop and refine our clinical components of care.

And then last question for me is thinking about the election tonight and obviously the challenges that Medicare faces after the election with sequestration, fiscal cliff and the SGR doc fix, have you guys picked up anything out of Washington on how some of these things will be funded?

Anybody's guess. If I could figure it out I would probably place a bet on it. But we think that nobody is sure something is going to happen in the lame duck or they are just going to kick the can down the road as they talk about it in Washington and try to address in the first session next year. So we really can't comment. I will say this though that our strategy for mid- and long-term I think goes unchanged no matter who gets elected. I think we are all moving to some type of global-based relationships with providers to focus on the outcomes of care and not necessarily get paid in components of care.

And then actually, Bill, have you heard of anything on the regulatory front that could be positive for the home health industry?

Not necessarily on the regulatory front. But in Washington we are hearing all kind of things that could be positive. I think the regulatory front and political environment certainly understands the value of home health. The alliance has put out some good data a couple, three weeks ago showing that admissions to home health actually does in general reduce hospital readmissions. And with hospitals' sensitivity to that, we have seen a lot more interest from hospitals in reference to the impact that home health can provide. I think the regulators and legislators get it, I think there's just a huge pressure from a fiscal perspective as it relates to the population demographics. So we will see what happens and, again, I think we have a good voice in Washington right now that is well received. We are not looked at controversial, we are actually looked at as advisors and we think that will be helpful having that relationship with the regulatory in the political environment.

Ralph Giacobbe from Credit Suisse.

You talked about a little bit the softer volume expected in the fourth quarter. I guess first do you expect or have you baked any disruption in from the storm in terms of guidance in 4Q, or is there something else driving that volume lower, and then maybe if you could reconcile that with your comments about readmission. You would think-- or the expectation would be maybe that you would get more volume. So if you could sort of triangulate those things.

Ralph, this is Ronnie. First, yes, we have seen a little disruption in the Northeast with the storm. Certainly admits in that region are-- reflect the disruption last week. So we will see ultimately the impact that that will have for the quarter. Overall, our view on volumes, they have been really pretty stable throughout the year. They're just-- we are not growing them at the rate that we had planned. But they have been pretty stable. And while our recert rate is reflecting a lower rate than prior year, it's really been pretty stable throughout this year just with respect to the episodic recerts that we have and a growing level of non-episodic recerts.

So overall, volumes are pretty stable. We are just not growing quite at the rate we thought we would do at the back end of the year but still in a positive and stable environment. And you know, that is just all going to continue to work, and our work to be partners with hospitals and be helpful partners to reduce their readmission rates, we think that all just folds in and we are hopeful that our work there will continue to show benefits.

And then maybe remind us what percentage of your revenue is managed care?

It is $29 million of the $373 million.

$29 million of the $373 million is managed care.

Yes.

And then you're obviously seeing big increases in bad debt. Can you maybe help us understand what percentage of the managed care book is typically out-of-pocket and what percentage you collect?

Yes. And, again, we have been-- I think we are approaching-- certainly we are approaching bad debt at this point from what I would characterize as a conservative view. We have been reserving in the 9% to 9.5% range of revenue and then recouping as collections improve and we realize collections. In fact, six of the last seven quarters we have had a little bit of a credit that will flow through that provision because of improved collections. And that is the difference you saw between the-- sequentially between the second and third quarter. Really the reserve we put up was about 9.5% of revenue but we had a little bit bigger credit flowing through the second quarter. So we are focused on-- certainly focused on improving revenue cycle issues with our managed care, and that's critical, obviously, it's a lower margin business and collections are more important and in some cases more challenging. So it will remain a focus. It is stable. We think we are approaching it conservatively, and we will continue to work to improve that.

Is that something that you negotiate with managed care, or do you have limited-- in terms of how much they force onto out-of-pocket onto the consumer, do you have a sense of that? Or do you just see it show up and you have to go and bill and collect yourself?

Well, both. It is still-- largely the issue is still the receivables are going to be commercially related to payor related and a smaller portion of that patient liability. The patient liability is something we are working on to get better at but our fundamental issue is certainly at this point is-- remains with the payor.

And then just my last one. You have talked in the past about JV-ing with hospitals and looking to even do deals with larger systems if possible. Where do you stand with that and what has the reception been, particularly in the context of readmission.

Thanks for the question. We continue to work forward. We have a good strategy that we think works well with joint venturing with hospitals. We have ongoing relations and discussions with many hospitals in reference to that. We think as home care comes under more pressure, if we see sequestration this year, or as we look at rebasing that hospitals would be more and more interested, one, in managing their base business better. But as importantly-- even more importantly in the long run, two, allow their home health agency to be a strategic component of managing that post-acute care environment, because, as hospitals move into some kind of risk arrangement, they are going to have to not only manage the patients more effectively in the hospital, but they're going to have to manage them around the clock and that's where we see the real value with our technology, our systems, our new clinical protocol in aligning ourselves in being partners with hospitals.

Sheryl Skolnick from CRT Capital Group.

I have a few follow-up questions on the Humana contract if I may and also clarification. The $29 million, let's start there, that you quoted that you said was managed care, that's the non-episodic revenue, but isn't the Humana contract currently episodic revenue in the quarter and won't that-- part of the issue be that it's transitioning to visit based?

Sheryl, this is Ronnie. That is absolutely correct. Certainly in the third quarter, the Humana contract is about-- will be about 6% to 7% of that revenue as we transition that into the non-episodic of the managed care. That's where it will be in the fourth quarter predominantly. There will still be some transition at quarter end with episodes in progress. But just as that looks going forward, that will be about a 25% impact-- positive impact to our non-episodic business.

So the $29 million and change you recorded for this quarter would grow by 25%?

Approximately. Yes.

That's very helpful. And just the other follow-up on this. So if I understood your press release on the subject correctly, will there-- will you be covering the same geographic territory? My sense is that there not only is an impact on price but potentially an impact on the scope of customers served and that it might become a smaller contract in terms of the attainable volume as well?

That's correct. And that's all kind of baked in to our-- the numbers we have shared about the reduction of revenue from Humana and that's-- part of it is pricing, part of it is all markets will not go forward under the contract. We do have a national contract but different markets have made different decisions about participation. That is all reflective and into our anticipated revenue going forward.

I don't want to beat the dead horse here, but I am a little bit concerned that perhaps folks get the message that you would like them to send, which is that the challenge going forward is that you're taking something that I presume was a margin comparable to what you were getting on your core Medicare business and you're converting it to something that is potentially a much lower margin business even on the volume that you retain. Is that not correct?

That is certainly the transition. No question about it.

So we are all on the same page. So as we look at the impact on that on the fourth quarter, it is not a pure impact because presumably you had patients on service at the end of the contract who were going to be transitioned under the former terms and so fourth quarter is a mixed quarter sort of partially in, partially out.

Sheryl, that is correct. And we thought early on as we worked through that that the full impact would be seen in the first quarter of 2013. And I would say we are probably going to see a little bit more of an impact in the fourth quarter, just as we have transitioned the business but, again, that's all reflected in contemplating the guidance that we provided.

Sheryl, the only thing that I would add is that I would not assume that the episodic reimbursement was similar to Medicare. Because there was some discounts that we provided there as well.

So you gave them a discount off of-- off your Medicare as part of a negotiated contract?

That's correct.

Because I am obviously concerned that we've got some estimates out there for 2013, including mine which is low, and everyone else's which is much higher. And I am curious as to why you have not chosen to give us some more specific or even general visibility into 2013 versus this year, especially in view of the conversion of the Humana contract and-- as well as now you do have visibility on what final rates are ex-sequestration. I am curious as to what the moving parts and pieces are that are preventing you from giving us better visibility into 2013, because, quite frankly, I'm concerned. Either I'm way too low or everyone else is way too high, but the street really has good visibility into what you potentially could do next year. And that creates a problem both ways for owning the stocks.

Sheryl, we have, as I mentioned earlier, nobody can predict what they're going to do with sequestration, SGR, how rebasing will come out. Hopefully we'll have more clarity with that as we get new legislation and the-- and that process develops. The second thing is that Humana is significant. They have a lot of volume and a lot areas but there are a lot of managed care contracts that we have opened the doors to over the last three months.

I'm not going to get specific, but there are large opportunities for us in the managed care business with decent pricing. So while that's important we see our focus which is basically two states that have elected to go with other vendors in the whole Humana system but our focus in those two states have actually beared fruit. So a new renewed focus on other managed care opportunities as well as other Medicare opportunities. Our future and our whole guidance is not dependent on one single contract.

I understand.

If all those pieces come together and that we have more color and when we do-- then we can provide more certainty or forecasts with more certainty we will provide that to the market.

So if I could just-- it seems like while I heard you say that you are still focusing on Medicare, I would agree that you are getting a lot of conversion of new lives and some of the existing Medicare lives to managed care. My sense is that you're converting from a higher-margin business to something of a different margin business, as well as something that had low DSOs to sequentially likely to continue to see higher DSOs as your business increasingly takes on more of a managed care flavor. Is that fair?

Yes.

Then finally there's one line item on the balance sheet that I hope you can clear up for me. Did I miss a significant joint venture that you've done with-- I think it's a $17 million line item that you disclosed on minority interest and consolidated subsidiaries?

I'm looking Sheryl. You did miss a joint venture.

Okay. It seems like a pretty significant one. For the noncontrolling interest line.

Okay. No, that is an investment we have in another entity that we have had for now 1.5 years or so and that's what that reflects.

But it was not on the December 31 balance sheet.

No, there's been a consolidation of that in this quarter just because of transitioning governance related to that and so we are now in a position to reflect that on a consolidated basis as opposed to realizing our-- the equity in the earnings of that and the details around that will certainly be in the 10-Q.

Did it add anything material to the performance of the income statement this quarter?

No.

Kevin Campbell from Avondale.

I'm curious to ask one more question about the Humana contract. I know you basically said the revenues would be cut in half. Can you give us a sense as to the impact to EBITDA, is that going to be cut it sounds like by more than 0.5 of what it was before? Is that fair?

Yes. A little bit more than that.

A little bit more than 0.5. Okay. So in the call it the 50% to 60% range? Is that fair?

Yes. Kevin, I will do some-- a little more precise math on that to respond to that and get back to you.

And then on the-- obviously we are only a month into the hospital readmission policy being implemented, but have you seen in that month an increase in demand for home health services?

We've seen, Kevin, an increase in discussions and it seems like hospitals have moved very quickly in wanting to have these type of discussions on a national basis. To be honest with you, we were a little surprised the discussions had not happened earlier because they have to have some planning and some ramp up. Also realize that not all hospitals are going to be impacted, right? So we see the ones that feel that they may be impacted having a little more vigor in their step in wanting to have high level of conversations quicker.

So you are having these more at a national sort of system-wide basis with larger entities?

That's correct. And we also put some special tools in to help us identify our readmission trends that aligned with hospital readmission trends. Because, remember, the reporting that we have on CMS is admissions and it's over a 60 day period so there's a lot of confusion out there with competitors that are providing CMS-related information that does not line up with the hospitals' 30-day readmissions that are on very specific diagnoses. So what we've done is we've aligned our reporting and we can do that with our technology to line up with hospitals' challenges so we can do an apple by apple comparison. And that is received very well in the market.

Can you maybe comment about what your readmission rate is relative to peers in your markets?

You can look at the CMS and look at admissions and obviously we are a tad below in all of our markets and we are seeing significant improvements with our care transitions program. But we are not going to get into specific metrics on that.

And then just a couple of modeling questions here. I know you mentioned that salaries and benefits went down by $5 million sequentially, and that was because you were pushing some of the corporate G&A out to the local level, is that right?

That's part of it. Yes. That's part of it. You know we took a layer of therapy management and moved that out into a visiting basis on that so that's come out of G&A. We did enjoy little bit lower legal and professional in the quarter. I wouldn't-- I'm not ready to bake that into the run rate so just the benefit we had this quarter.

And then a run rate going forward maybe is a little bit higher from where we were, $81.5 million, so maybe in the $82 million to $83 million range?

Yes. That's fair and another way to look at it, if you look at the segment note broken out between home health hospice and corporate, I think if a pretty good run rates what we see there on home health and hospice and maybe kind of sequentially split the difference on corporate.

And then the equity comp also you turned it down about $1 million, was that anything unusual there and what should we expect maybe going forward?

I'm sorry, repeat that question, please.

Sure. The stock comp was down about $1 million sequentially from $2.3 million to $1.3 million. Is there anything unusual there? And what's the run rate?

Nothing unusual there. That's kind of a one-time adjustment that we had.

Okay, so really it should be back up with that $2.3 million or so level going forward?

Yes.

Last question on that, the cost of service per visit. How do you guys think about that in terms of the inflation rate there? Is that going to-- is turnover low enough now that you're seeing sort of minimal inflation there in the 2% range or are you still seeing strong demand for home health nurses and that's-- and wage inflation still high because of that?

Bill?

First of all, I think we have seen a reduction in turnover that is significant, which is helpful. And I think there are pressures all over and our competitors are feeling the same pressure, so that's also helpful with managing wage increases going forward.

Brian Paquelat from Jefferies.

Bill, just over the last few years you guys have done a good job really cutting as much as you could out of the expense line, both corporate and field level. As you look down and you have got rebasing coming up, how much more do you have in terms of your opportunity to cut expenses or basically labor costs?

Well, there is always room for improvement, Brian. As we mentioned, we have 180 person reduction that we put into place over the-- literally the last six weeks. We think that there's more there to align staffing with productivity-- with volume. And if you can, as you're well aware of our growth strategy in the past was acquisitions and doing startups. We have a lot of startups out there that are smaller, that are-- that we expect the volume to come back up and we're holding onto them.

So we always have the opportunity to look at our portfolio. Right now we don't have any definitive plans. We are hoping that the volume comes back and our care transition efforts will be fruitful in those markets but you know, we have ongoing room. The question is do we want to sacrifice tomorrow for today, and I think that's the challenge in the art that we have as leaders to making sure that we keep as many of our agencies as viable and give them the potential to be successful. So we have that opportunity, but we haven't discussed taking a look of that portfolio. We are really focused on getting that volume up and in reducing costs where we can.

So Bill, just talk about that portfolio evaluation. Where you stand right now, you are not contemplating any restructuring like you have done in the last three years?

No, I did not say that. I said basically we have a ongoing review of that and our expectations is if we can get volume up in those markets we will be good. If we can't get the volumes up in those markets we have do make other decisions, but we are putting some initiatives in place. Hopefully that will get the volume up as I mentioned, we added about 50 care transition coordinators, and we target the markets we put those in. We put a lot of time and effort and energy into getting those agencies up and running and we don't want a cycle downturn to prevent us from enjoying those opportunities in the long-term.

And then, Ronnie, to your comment on Humana, I hate to go back to the Humana issue but, from a cost perspective, are we correct in thinking that the cost of providing care to a Humana patient is basically the same as a Medicare patient?

Yes, Brian, that's the same. You can look at it as our visits and our cost per visit, it's substantially the same.

Whit Mayo from Robert Baird.

Just a couple last-minute questions here. I guess I will just ask the question a little bit more directly. But as you size up all the headcount reductions and changes that you're making, both at the field level and in corporate there's some additions and some subtractions here, can you maybe just size up for us what you expect to be the annualized net savings that you hope to accrete from some of those changes going into 2013?

Thanks for the question, Whit. We could but for this call we think it's a little early in the cycle. I just want to put a couple thoughts is that the reductions and, again, they are ongoing. So we will probably see additional reductions. You can't take it dollar for dollar, certainly you have the cost of benefits that's a dollar for dollar.

Some of the reductions are in just fee-for-service staff. So you've got incremental costs associated with administration and that type of activity. It's not a dollar for dollar but it's significant. And we were expecting volumes to come up as we had predicted in our guidance and they did not. The Humana contract was another twist that we had to adjust for. So it is work in motion but we are going to do the responsible thing, not only for the market but for our staff and local agencies and be respectful of everyone. So it's a work in progress.

Maybe ask the question-- maybe a slightly different way. Again, it sounds like there's some additions and some subtractions here just with headcount. But what do you-- when you look out-- when you look back over the past three months or so, what is the net change in total headcount at field and in corporate?

That's a good question. It is going down if you net them all together.

So you mentioned that there was-- I'm trying to look back to my notes.

180

180 that was reduced but there's-- you don't have a net number?

Not one that we are ready to share with the market at this time. Again, Whit, it is ongoing and when we get into the-- through the year end we will happy to share all of that information. Some of it will be reflective simply in the severance costs.

And maybe-- I don't think you give an update on IT and the initiative there, can you just remind us, Bill or Ronnie, where you are, what big IT spending items you have coming up over the next year and just maybe remind us how much a year you're spending into your entire IT initiative?

Whit, this is Ronnie. Certainly the biggest initiative we have is our AMS 3 platform, and that's is ongoing. We are-- I think we are looking at a total project cost of the $45 million to $50 million range and so we are about-- I think about 0.5 of that expended in this year roughly and so we expect that platform to-- if things work well it will come on-- begin to come on stream fourth quarter of 2013. So, that's the big spend there. We do other things, certainly we have other spend with our computer and peripheral equipment, some software but by and large it's the AMS 3 that is going to drive that over the next-- this year and next.

So 0.5 of the $45 million to $50 million has been spent in 2012 and you expect to spend the balance of that in 2013?

Yes. I think if you-- if we look at it to date, we spent about $32 million-- a little less than 0.5 of that probably would be at this point on our AMS project by the time we end the year, our projection about $45 million in CapEx, probably about 45% to 50% of that may be-- it will be on the AMS 3 project.

And maybe just one last one. I don't know if you gave this number, Ronnie, I may have missed it. I just wanted to get the G&A numbers per segment, just trying to square my model up right now.

Sure. Home health and hospice was for the quarter $69.9 million-- excuse me, home health was $69.9 million, hospice $14.3 million.

Okay got it.

Corporate was $47 million.

Kyle, we have time for just one more call.

You last question comes from the line of John Ransom from Raymond James.

I'm sorry if I may have missed this. Outside of Humana, is their another Medicare Advantage contact that's of material size that conceivably could convert from episodic to per visit?

Not that we have on a episodic basis right now but there are a lot of MA plans, such as the United that we did on a pay per visit and there are a lot of other opportunities that are out there, John, to pick up some significant volume such as in an infusion side. We are actually pretty optimistic about blending our revenue, about continuing to drive our cost down, and being a leader in that managed care and eventually aligning ourselves with the partners that are taking risk base. So we think that this is a significant strategy to be active on a long-term basis, but without failing to remember that we are focusing on Medicare in a big way, as well, and we actually think that it will enhance our Medicare revenue by having the managed care business, we just make sure that our referral sources need to be aware of that.

Okay. And then, secondly, I think I know the answer I'm going to get to this question but I'll try it anyway. If you were to net the Humana cut and sequestration and the update against your cost cuts, is there a ballpark number we should think about? So if we took your pro forma numbers from 3Q and factored in these things, is there a net number we could be at least thinking about as we plug our '13 models, kind of getting into Sheryl's question?

John, not yet. We are working through that and so we will just hold off on giving that kind of framework.

Is that-- do you plan to wait until you report 4Q, or is there going to be any kind of interim communication?

I'd say, as we said, we will plan till we-- wait till we issue Q4, but knowing the timing there if it is appropriate we-- there is certainly potential for an interim communication but we will weigh facts and circumstances at that time.

We thank everybody for their questions. And, operator, thank you. And I want to thank everyone who joined us on the call today. We sincerely appreciate your interest in the Company. We also would like to recognize and thank all of our caregivers on the excellent care that they provided to our patients each and every day. We appreciate their support and the support of all of our stakeholders. We look forward to sharing our fourth-quarter results with you in March and hope that everybody has a great election day. Thank you all.

This concludes today's conference call. You may now disconnect.