Amedisys Inc (AMED) 2012 Q4 法說會逐字稿

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amedisys fourth-quarter and year-end 2012 earnings 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 would now like to turn the call over to Kevin LeBlanc, Director of Investor Relations. You may begin.

Thank you, Sarah. Good morning and welcome to the Amedisys investor conference call to discuss the results of the fourth quarter ended December 31, 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 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 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 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 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 Bill Borne.

Thanks, Kevin. Good morning and welcome to our fourth-quarter earnings call. I'm pleased to report that we generated $1.00 in earnings per share for the year, which is within the range of the guidance we issued at both the beginning of the year and the fourth quarter. This is after adjusting for $147 million in a goodwill impairment and one-time costs which impacted earnings that Ronnie will discuss in more detail.

In addition to achieving guidance, we have a number of accomplishments that we have positioned for the future. We stabilized Medicare Home Health admissions after seeing decreased admissions in 2011. We grew our non-Medicare Home Health revenue with admissions up 26%. Our Hospice business generated same-store admissions growth of 2%. We demonstrated an ability to lower operating costs, responding to a reduction in volume in the second half of the year.

We improved our capital position by reducing debt over the course of the year and completing a new multi-year bank credit facility with added flexibility. We continued development of our next generation operating system, AMS3.

We have been very active in Washington, communicating the message of Home Health as a highly-qualified and low-quality cost-effective solution. With the growth in our non-Medicare business during the year, our operations have evolved in three distinct lines. We have reorganized our presentation of results in the following three categories -- Medicare Home Health, non-Medicare Home Health, including payers such as managed care, commercial, private pay, and Medicaid, and Hospice.

Shifting to 2013, our focus will include the following -- admissions growth in all of our business lines; completing the development and beginning implementation of AMS3; improving clinical outcomes, in particular, hospitalization and readmission rates; reducing overall system costs and delivering carry efficiently; exploring new care delivery and payment models such as ACOs and bundles, which have expanded our opportunities for strategic relationships with physicians, hospitals, health systems, and managed care payers; expanding our Continuum of Care services, including palliative care, telemonitoring and greater deployment of nurse practitioners; further growing our managed-care portfolio where opportunities and reimbursement levels allow; and more broadly, preparing the Company for continued reimbursement pressures such as sequestration and rebasing, as well as positioning for future acquisition opportunities that these changes may bring.

Let me expand briefly on a few of these areas of focus.

Regarding admissions growth, from the latter part of the fourth quarter through February, we have seen positive Medicare Home Health admission trends. These trends are a pointing to a 3% to 4% same-store admissions growth for the first quarter. We believe our refined strategic approach and our sales efforts are having a positive impact on these results.

As discussed on previous calls, we will begin rolling out our AMS3 at the end of the fourth quarter. We expect to complete the rollout within 24 months. Once rolled out, we expect the new technology to generate a minimum net savings of $10 million to $15 million annually or in the neighborhood of 70 to 100 basis points improvements to our net margins.

To deliver care more efficiently during 2012, we tested a new organizational structure centered around a shared service model. In this model, multiple care centers within close proximity will share certain office functions and will be managed as a unit with one location acting as the lead care center for back-office and administrative services. Billing, clinical support, scheduling and other functions such as on-call staffing and intake will be shared across the care centers, creating more office efficiency and consistency in care delivery.

AMS3 brings functionality to support this organizational structure. Ultimately we plan on most of our 530 care centers to be organized into 70 shared service centers across our system. This also positions us well for future integration efficiencies of acquisitions in nearby markets.

I'd also like to take a moment and discuss in more detail our growing managed care business. As I mentioned, our managed-care operations had strong growth in 2012, even when accounting for the decline in our Humana business. We believe growth in non-Medicare Home Health is fundamental to the Company's long-term success for a number of reasons.

First, we believe it supports our Medicare business by making us a preferred partner by referring physicians and hospitals. Second, we are being selective to enter into contracts that contribute positively to our bottom line. Third, managed care is growing at a faster rate than traditional Medicare. For example, in 2012, most, if not all of the new growth in Medicare beneficiaries, was absorbed into Medicare Advantage plan. This trend appears likely to continue. And fourth, while differences exist today in pay models, margins, and even how we measure value, we see these differences converging over time. At the end of the day, all payers have the same goal. They want to do business with providers that can deliver cost-effective care. We are building a home care company that will deliver this result.

Next, I would like to discuss our interest in CMS's bundle initiative, which we have mentioned on previous calls. On January 31, CMS announced the providers selected to participate in the bundled payment for care improvement initiatives.

Amedisys was one of a number of organizations participating in this program. To be clear, there are a number of steps remaining before we sign an actual agreement with CMS, including receiving from CMS updated historical patient cost information and proposed cost targets.

That said, we are optimistic that we will move forward through these next steps successfully. At this point, CMS is targeting a go-live date of July 1 for this program.

There are many advantages to Amedisys participating in the bundle initiative. We believe that with our patient care protocols, focus on outcomes, and technology platform, we can have a meaningful impact on cost reduction. We also see the value this effort will have in deepening our relationship with hospitals, health systems, and managed care payers that are seeking strategic post-acute care providers to help them manage readmission rates, enhance patient satisfaction, improve clinical outcomes, and lower costs. We believe the benefits of being an early adopter in this area outweighs the risks.

As a reminder, we have precedent in being paid for delivering quality care at a cost savings. As you may recall, the CMS pay-for-performance program paid us a total of $8 million in bonus payments in 2010 and in 2011 under a program to reward quality outcomes at lower costs.

Preparing the Company for this effort had a impact on our current operations. During the fourth quarter, we believe adjustments to our care management practices, as well as operational disruptions associated with staff reductions, impacted our recert rate and are influencing trends in revenue per episode in 2013. We're managing through these issues.

I would now like to take a moment to provide clarity regarding our business strategies, highlighting where our strategy is similar, but more importantly, different from that of our competitors. The similarities are apparent -- a focus on Medicare growth, acquisitions, and joint ventures where appropriate. On the other hand, we believe the differences in our strategy are meaningful and position us for the long-term success of the Company, our investment in technology and our evolving Continuum of Care model.

Our focus on leveraging healthcare technology is critical to build a collaborative Continuum of Care. We have made a major investment to upgrade our IT infrastructure, and with an emphasis on high trust certification, our new system will improve documentation and will allow efficiencies for our shared services model discussed earlier. AMS3 will also provide greater ease of connectivity and information sharing capabilities with physicians and other providers caring for our patients.

Second, the needs of our target populations have changed dramatically. We are moving from a treat and cure practice to a chronic care management model. Amedisys is responding to that call by delivering Care Transitions on a national scale, aligning Home Health and Hospice seamlessly with palliative care bridging both together in a continuum that can manage the entire post-acute care needs of a patient from diagnosis of complex illnesses through the end of life; a focused managed-care strategy with new care management processes that meet both patient needs and managed care payer expectations; and partnering with physicians, hospitals, and health systems and managed care payers for bundles and ACOs.

The healthcare industry is changing, and we plan to change with it. We believe these investments will yield positive long-term results for our patients, our partners, employees, and share holders.

Shifting to governance, we announced in the press release on Friday the appointment of an additional board member. I am pleased to report that Linda Hall has joined our Board of Directors. Linda is the Entrepreneur-in-Residence at the Carlson School of Management at the University of Minnesota and works as a private consultant with several companies, including healthcare leaders such as the Mayo Clinic, Blue Cross/Blue Shield of Minnesota, the Children's HeartLink. She has significant management experience in the healthcare industries, including previously as the CEO of MinuteClinic; the CEO of Accurate Home Care; and as an interim executive at UnitedHealth Group. She is a great addition to our Board of Directors and with a wealth of experience brings benefits from her valuable insights and leadership as we evolve to meet the demand of the new world of healthcare.

Before returning the call over to Ronnie, I'd like to thank our employees who cared for over 380,000 patients in 2012. Our patients are elderly and frail, many living alone with limited resources. Our services help them stay in their homes, and when delivered efficiently and effectively, we believe our care model can generate enormous healthcare savings for our nation. We are well positioned to deliver on this opportunity.

With that, I will turn the call over to Ronnie to discuss our fourth-quarter and full-year results in more details.

Thank you, Bill. In my comments, I'll first note certain charges and other one-time items impacting operations. Then I'll discuss full-year results and fourth-quarter results both year over year and sequentially.

There are four items impacting earnings in the fourth quarter that were not considered in our guidance. These include a $3 million charge in severance related to workforce reductions and lease termination costs; $5 million in debt costs associated with the refinancings during the quarter; and a $4 million gain on a settlement of a decade-old lawsuit with National Century Financial Enterprises; and finally, $147 million of intangible asset impairment.

The first impairment was $141 million related to our Home Health goodwill. Our core operating results, coupled with our market capitalization specifically and industry valuations generally resulted in an impairment charge for the second year in a row. The remaining goodwill recorded on our balance sheet reflects $18 million relating to our Home Health segment and $191 million related to our Hospice segment.

The (technical difficulty) impairment was related to a subsidiary that we own a minority interest in. While we own 28% of this company, it is consolidated in our financial statements. The consolidated impairment to intangible assets was $21 million. This was offset by a $15 million recovery related to the noncontrolling interest. The net impact to Amedisys was a $6 million charge.

Adjusting for these select items, we generated $0.19 in net earnings per share in the fourth quarter and $1.00 in earnings for the year. This is in line with our guidance.

I would also like to add more detail around certain changes to our financial reporting. As Bill described in his comments, we have reorganized our results into three specific categories, which include Medicare Home Health, non-Medicare Home Health, and Hospice.

Additionally, in our segment reporting, we have increased the allocation of corporate overhead directly attributable to our business lines. And finally, going forward, my comments on quarterly and annual EBITDA, net income and EPS will be on an adjusted basis.

In addition to the items I just discussed, we will adjust for other items, including legal costs associated with our governmental obligations. While these legal costs have been incurred in each of the last eight quarters, the variability of the charges in each period could cloud core operating results. On this basis, our fourth-quarter and full-year earnings per share were $0.23 and $1.08, respectively.

Now I'll discuss annual results. For the year, we generated revenue from continuing operations of $1.488 billion. This was an increase of $20 million, or 1%, over 2011. Growth in our Hospice and managed care revenue offset a decline in Medicare Home Health revenue. Adjusted net income for the year was $33 million, or $1.08 per share, compared to $67 million, or $2.29 per share last year. Adjusted EBITDA for the year was $103 million, or 6.9% of revenue, compared with to $157 million, or 10.7% last year. This margin decrease was largely the result of an approximate 4% cut in Medicare Home Health reimbursement.

General and administrative expenses increased $10 million, or 2%. Our provision for doubtful accounts was $22 million, up $8 million from 2011 on greater non-Medicare revenue.

Cash flow from operations for the year was $69 million compared to $141 million in 2011. This decrease in cash flow for the year was mainly driven by a decrease in earnings and an increase in accounts receivable outstanding as our DSO increased from 35 to 41 days.

Turning to year-over-year fourth-quarter results, we generated revenue from continuing operations of $363 million, a decrease of $7 million or 2%. Positive revenue in our Hospice and managed care business was offset by a decline in revenue in our Medicare Home Health business.

In addition to the impact from the 2012 reimbursement cut, the comparison with last year was impacted by a drop in our recert rate, which averaged 40% during the quarter. Our gross margin declined 230 basis points, mainly on the reimbursement cut leading to adjusted net income for the quarter of $7 million, or $0.23 per share, compared to $0.49 per share last year. Adjusted EBITDA for the quarter was $23 million or 6.4% of revenue compared to $36 million and 9.7% of revenue last year.

Turning to results sequentially, we recorded revenue declines in each of our business units, are Medicare Home Health business had lower revenue of $3 million or 1% on the decline in our recert rate. Admits were flat.

Our non-Medicare Home Health revenue declined $8 million, or 12%, mainly on the changes to our Humana contract.

Hospice revenue declined $2 million, or 3%, on lower average daily census. Our gross margin was essentially flat. We have normally seen margin pressure in the fourth quarter because of added holiday pay. The cost-cutting measures we implemented at the end of the third quarter helped to offset these negative pressures and better match costs with declining volume. Over the course of the quarter, we reduced headcount by over 900 positions.

To recap, we earned $0.23 in the fourth quarter versus $0.27 in the third quarter. Three items largely explained the difference -- the change in our contract with Humana was negative $0.06; the drop in our recert rate was negative $0.03; and these were offset by cost savings from staffing reductions, which had a positive $0.05 impact on the quarter.

Now let me comment on our balance sheet and liquidity. We generated cash flow from operations for the quarter of $13 million compared to $22 million in the third quarter. We ended the quarter with a cash balance of $15 million, down $25 million from the previous quarter. After cash flow from operations of $12 million, we repaid debt of $19 million and incurred $16 million in capital expenditures. The decrease in cash flow for the quarter is largely the result of an increase in receivables as reflected in a three-day increase in our DSO, largely attributable to our Hospice operations. Specifically the conversion of our Hospice care centers to our point-of-care technology during the quarter slowed Hospice billings. This issue has largely been resolved.

We ended the quarter with $103 million in debt and a leverage ratio of 1.1 times EBITDA.

Finally, I will turn to guidance for 2013. We anticipate revenue to be in the range of $1.425 billion to $1.450 billion. We expect our earnings to be in the range of $0.60 to $0.70 per share from continuing operations on an estimated 31.5 million fully-diluted shares outstanding. This guidance anticipates that a 2% Medicare sequestration cut goes into effect April 1 and will impact reimbursement on any admission starting on or after that date. We are projecting capital expenditures to be approximately $50 million during 2013.

And finally, this guidance includes an estimate of legal costs associated with the ongoing government investigation similar to the $8.5 million in costs incurred in 2012.

This concludes our prepared remarks. We thank you for your attention, and Sarah, would you please open up the call for questions?

(Operator Instructions). Ralph Giacobbe, Credit Suisse.

I was hoping you can go through the recertification rate again in the fourth quarter. I guess I'm still a little confused at why you would see such a dropoff. I think in your prepared remarks, you had talked about -- I thought it was bundling or IT related, and I just wasn't clear on exactly why we would see that and then help us think about that as we go into 2013.

Ralph, this is Bill. Thanks for your question. A couple of issues.

One is that recerts are patient specific, and each patient in the criteria really determines the recerts. But we think there are a couple of things that aided with that.

One is the pretty significant reduction in force that Ronnie mentioned, which is around 900 employees. And when you go through that transition, sometimes you get a knee-jerk reaction, and the pendulum swings a little too far.

In addition, we put in a care management process, which is targeted to make sure each patient gets the right care at the right time all the time. And we think a combination of the reductions, the care, and patient-specific needs all combine to a slight reduction in recerts. And we are looking at that issue, and where appropriate, we will make changes to make sure that each patient gets the appropriate care they need.

Okay. And then when I look at the non-Medicare and see the falloff in episodic at that jump and non-episodic on a sequential basis, I am assuming that is largely the Humana deal.

Ralph, this is Ronnie. Yes, that is what it is.

Okay. And is that the right run rate would you say going forward, or is there more to come out of the episodic and move into non-episodic?

That should be -- absent any other change, I think that for the most part reflects the change in Humana.

Okay. And then the way somebody would go into episodic versus non-episodic, is that just based on your contract terms with the payers, and do you have a preference of one versus the other?

Ralph, first of all, we are still focusing on our episodic growth on Medicare. As we mentioned earlier, we saw a nice growth, internal growth on Medicare admissions, which are all episodic. Most of the managed care that we are contracting with is per visit, although we are looking at the bundles and we think that if we can achieve the right level of success with that, there will be a new way to associate and contract with managed care going forward.

Okay. And just one last one, if I could squeeze one in. Just staying on that non-Medicare, I guess and to your point now, when I look at the episodic, it looks like visits per episode, even in the non-Medicare side, in the 22 range. If I look at overall Company, certainly in the 18 range. And when I look at non-episodic, it seems like it is around 13 or so, plus or minus, in terms of visits per admission.

So can you just help us understand that wide variation? One, in terms of how much pressure is being put on managed care from managed care? And then, two, maybe even more importantly, the economics on how we should think about episodic versus non-episodic from a profitability and margin standpoint? Thank you.

So in reference to the utilization, understand that in many instances managed care helps to determine what the utilization for that patient is, and that is why we are putting our patient care management processes in place. And we think eventually that utilization, as we mentioned, will coincide with that as long as you are achieving the results and if the patients have the same condition that overall that will blend out. But for now, some of it is driven by the managed care, and some of it is just simply driven by the care that is required by the patient.

And just the economics?

Ralph, the economics -- if you look at -- as we look at what has been presented there, the revenue per visit actually went up from the third quarter to the fourth quarter of this year from about a $118 to $120. And so the economics will still reflect a little bit tighter margin on our non-Medicare business, but that is something we're very attentive to, and the efficiency that demonstrates in the fourth quarter is certainly directionally where we want to go.

Okay. Thank you.

Sheryl Skolnick, CRT Capital Group.

Thank you for all of the detail you gave the conversion to the new reporting basis. That was very helpful to be able to look at the apple to apples. It has been very much appreciated.

I want to focus on a couple of things that you said, Bill. You talk about the convergence of the payer models, and I'm wondering if we can explore this a little bit. I agree with you, I think that the world is converging. Unfortunately, maybe we have different definitions of where it is going.

As I look at your business and as I look at the metrics and the trends, what I'm seeing, and correct me if I'm wrong, is the convergence to a lower margin business, not to a convergence to something between managed care per visit margins and utilization patterns and revenue patterns and the historic episodic model.

So help me to understand why it is that your margins -- already, guidance is substantially below where the street started for 2013, why it is that as your model transitions as the world changes around Home Health, we are not going to be moving much toward a high teens, maybe low 20s margin on the business as opposed to the high 40s margin we've seen with the Medicare business.

All right. Well, first of all, Sheryl, as you are aware that Medicare margins, not just for Home Health, but for all of healthcare are coming down.

Yes.

Sequestration drove all the margins down by an additional 2%. I really do believe from our ongoing conversations with managed care that they are starting to understand the real value of home care and what we can do for the post-acute side.

And then I think if you look at your traditional business of episodic Medicare Home Health and pay-per-visit managed care and you stay in that one snapshot, in time I think we can make some improvement there simply from the cost efficiencies that we mentioned. But we also think there's huge opportunities in bundles and ACOs.

And as a reminder, when we participated in a pay-for-performance project with CMS, we had 22 of our care centers that participated, and we saved an extraordinary amount of money from the reduction of hospitalizations and emergency room visits. So I think that there'll be significant margins that we'll be able to get out of our bundles and our ACO partners.

So it's just not the traditional business. I think there will be compression there.

Now with that being said, we think that there will be additional critical mass that we'll be able to develop in our markets, and part of our shared service centers will allow us to focus on each market and go deep and have high concentrations. So we think more business, lower costs, and then the evolving landscape will all contribute to a more, not only a better bottom line, but also greater revenue as we move forward.

Okay. I can understand that the ACL and bundling model may represent some new contract terms and new kind of opportunities there, but it is still very much in its infancy, and quite frankly, it could go either way.

But what I'm really hearing is with all due respect is a business whose top line is already pressured; it's already under transition; you've made a lot of efforts to make the business more efficient. Why should we not look at this as a situation where you are just basically running really, really hard and really, really fast and arguably, really, really smart just to stay in place to prevent deterioration from accelerating?

Well, as we mentioned, we saw a positive trend in our internal growth for our Medicare admissions for the first time in a couple of years. We feel very comfortable with that. We think our strategy, actually our bundles and our care continuum has fared well with our relationships, not only with our physicians, but with our hospital relationships that we are having. Our care transition program has been received very well. We have multiple requests from multiple hospitals to provide Care Transitions for non-home-bound patients. So we see an excellent revenue opportunity there. And I think that the whole space of healthcare in general is going to converge, and whoever can care for this target population, which is 5% of the patients that consume 50% of the dollars, in a more cost-effective way, are going to be able to drive savings and get a return for their savings.

And while you think that is a distance away, it is starting in July, and we have several test sites. And we think by the end of this year, that will be pretty comfortable with the proof-of-concept model that not only will other relationships be developed with health systems, but we think that managed care might embrace that model, as well.

Okay. So, as I said, there's many opportunities potentially under the new payment arrangements and I will grant you that, but we don't really yet know what they are. They haven't started yet. We don't have the updated data yet. So we are still -- the basic business is still the basic business with this additional opportunity to change.

And I guess what I'm getting at is, as I -- and help me understand this -- as I look at your business, you've done a lot to keep it as steady as you possibly can, but everything you are telling me suggests that the traditional business that you've got, which is still the bulk of your earnings driver, is deteriorating pretty much as rapidly. Because your recerts are down 12%, even if your same-store admissions are up 1%. And part of that you're telling me is because of the care management model you have put in. So, again, please help me to understand how it is that you can run so much faster and not just stay in place.

Well, again, the bundles reimbursement information is out there for you to look up. It is significant reimbursement for a 90-day period. We believe that we can reduce hospitalization with those patients that we care for as we have proven in multiple states in the past, and we think that's a substantial bottom-line. And we think that the whole market is going to eventually in real-time move in that direction. And hospitals, health systems and physicians, as well, are going to look for a partner that they can align with that can provide that continuum of low-cost care. And we think our volume will return as a result of that, but we also think that we're going to drive more Medicare volume. Now we're no different than any other provider, I believe, with pricing pressure on Medicare, no matter what industry you are in.

Yes, right.

But we are seeing very good progress in reference to being able to drive our costs down and provide care and get excellent results for our patients. We've got a huge amount of interest with hospitals, health systems, payers, and physicians across the board, unlike any other interest that we've seen before. So we're very positive that the Company will be moving in the right direction, not only in the top line but also on the bottom line, and we are excited about that.

Well, I thank you very much for giving me the time you've given me today.

Thank you, Sheryl.

Darren Lehrich, Deutsche Bank.

A couple of things here. First, just thinking about your 2013 outlook, Ronnie, I'm just wondering if you can give us a sense for revenue growth on a same-store basis in the three segments. Any help there in framing that, what's in the outlook?

So it sounds like you have an expectation for positive admission trends, which I heard in your commentary, in the prepared remarks, but given your comments about recerts, I just want to understand where you think it all nets out from a same-store revenue perspective.

Right. Well, on the -- first, thanks, Darren, for your question. On the Medicare side, we are looking and we're seeing this early on, we are seeing positives admits and anticipate in the year positive Medicare admits on Home Health.

With our the drop in our recert rate that we experienced in the fourth quarter, our guidance reflects that continuing into 2013. So while we are working on the issues, certainly our guidance reflects a somewhat lower level of recerts in 2013.

On the non-Medicare side, we are looking for, again, some -- it will probably be in total probably negative on the admit side. And, again, that is going to be primarily as we enter the year, the change in the Humana contract. As we know, not only did it shift from episodic to non-episodic, but not all markets participated going forward. So we will see that absent growing through that, but we certainly are anticipating that effect through the first nine months of the year.

And then finally on Hospice, we are looking for positive growth in our Hospice admits for the year, and we will be working to also grow average daily census.

Okay. So if you put all that together, is it basically organic revenue growth, slightly down, say low single digits? Is that how that nets out, Ronnie?

Darren, I'll tell you, we'll get back to you on that, putting those pieces together from a revenue side. But the fundamental issue is growth on all fronts, except for the lower revenue per visit, non-Medicare business. So that will be probably lower revenue there until we go through with it.

But secondly, on the Medicare again, the math of that would be the increase in admits, but the reduction in the recerts should that trend continue.

Okay. And then --

And, of course, I just want to say, all that, of course, will be on the tide of 2% sequestration.

Right. That's what I'm getting at. We can understand the pricing element, but I think it would be helpful just to have a sense for your view on total organic growth, netting all those elements together. But it sounds like it is slightly negative. You've given us a revenue guidance range. There's been some closure and exits and whatnot, so it's hard to really get a clean year-over-year comparable with what you are guiding to. So that's the question.

Sure.

I do have a question specifically about your recerts. The comments were that there's some disruption around just the turnover and the reductions in force and some care management processes that you have put into place. How are the MACs playing into this? Is any of it in response to any kind of ADRs or reviews by the MACs specific to recert?

No, Darren, it is not.

Okay. And then if I can ask you about goodwill, the one question I have is just around the potential tax benefit that you might have, if at all. Can you just remind us at year-end where that stands?

We did -- with that, there was a deferred tax benefit recorded from that writeoff of goodwill.

Okay. And what is the year-end position for that?

Of the deferred taxes?

Yes.

Let me look at the balance sheet, see if I have that. I'll get back to you on that.

Okay. And then my last thing here is just on Hospice. Your discharge length of stay is up about 15%, if my numbers are right, from the first quarter. So a couple of questions there. Number one, what is the cap liability for the quarter, and what was it for the year? And then just operationally, can you help us think about how you will be managing length of stay going forward?

On the cap, Darren, we have $4.8 million recorded for our Hospice cap. And that has been pretty consistent for the last several quarters and certainly in that zone, so no big change we have experienced there on this volume.

Okay. So I get $4.8 million of Medicare cap recorded in the fourth quarter. What was your discharge -- I'm sorry, your live discharge rate in the quarter?

I don't have that for you, the live discharge rate.

Okay. All right. I'm just observing a very sharp increase in length of stay. So just the last part of this is maybe, Bill, can you talk to us how you think you'll be managing length of stay going forward, given the trend?

I think what's important, Darren, it is understanding our growth strategy. We think we have alignment with Hospices and most of our Home Health agencies, and we think they work well together. We have cross-trained our Care Transitions coordinators to be aware of both products, and they are moving forward. So I think it's about growth, and it's about making sure that we admit the right patients and that you have the right mix of patients and that you monitor caps along with that. That is really the science and the art of it.

Okay, well, that's fair. I just want to make sure that the trend is under control as far as length of stay goes. You have a couple of hundred million of goodwill left, and most of it is Hospice. So I just want to make sure we've got a plan there to bring length of stay down.

And Darren, let me just for clarity, we have $4.8 million recorded at December 31. That was not all recorded in the fourth quarter.

Okay. So what was the fourth quarter?

It was very low. It's a very low number. From the third, less than $100,000.

Okay. So what was your cap accrued for 2012?

We ended the year at $4.8 million.

Okay.

And that was about, just shy of a $2 million increase from the reserve at the end of last year.

All right. Okay. Thanks very much.

Certainly.

Brian Tanquilut, Jefferies.

Bill, just more on the MA stuff and you are focused on in answering Sheryl's question, you talked about how your fee-for-service business is still growing. Just wanted to hear your thoughts -- obviously, you've got the side or the angle where care delivery ACO is a driver, but as you think about balancing your efforts on growing the business or focusing your salesforce, is it shifting more toward the Medicare Advantage or the managed care portion of the business, away from the fee for service stuff, or is it still fee for service with a focus on recerts? If you don't mind just giving us some thoughts on that one.

Well, Brian, I think that, first of all, our primary focus is Medicare episodic. And I was trying to drive that message to Sheryl, as well. And we have a significant rebound, in my opinion, in the Medicare episodic. We've realigned our salesforce; we are targeting on who we hire; we have extensive training; we're disciplined; we are moving from what we call B, C, D to A accounts. And also, we take more managed care business. And the managed care business we are taking now is contracted business. It is big, large volume of business that we have electronic connectivity. It's very efficient. We are actually going to probably eliminate a lot of the one-off managed care businesses that we get in what we call letters of agreement.

So we're actually going to reduce a significant portion of the less profitable managed care business and retain and focus on the contracted, electronic connected, more highly profitable managed care business.

And you've already seen some of the results Ronnie mentioned in the revenue per visit, and we think that trend will actually continue.

We also have some strategies in reference to the way we're going to manage those patients. So I'm not going to get into too much detail on the phone there, but we think we can provide very effective outcomes to the managed care companies.

With that being said, we're looking to really provide proof of concept on a bundle. The bundles are 90 days and includes all costs. And we think that if we can be effective, as we have been in many markets, reducing our hospitalization and our ER visits, we have a clinical model that we are introducing with that, we are going to couple that with some nurse practitioners, we think that we can provide quite a bit of savings in these bundles.

We also think this methodology of reimbursement is something that managed care will be very attracted to. So the bottom line is having managed care in selected markets, eliminating the one-offs, being more efficient and being able to manage that business, allowing us to better serve our preferred providers such as large physician and hospital facilities that want to discharge all of their patients for us, has allowed us really to grow Medicare. And we think that with the right cost constraints in place and the right management, that we actually you can turn managed care, even in the pay per visit, into an effective business.

Remember that each time we provide managed care services, we provide it, and it does add contributions to our margins. But we use our staff, first of all, to service the Medicare patients, and then we fill as much managed care in every market that we can.

So we think it's a good, balanced strategy. The Medicare market is moving that way, as far as patient population, and also, the reimbursement is going down. And that is the convergence that we're talking about at some point in time with additional pressure. And we don't know what rebasing looks like, but I don't think it's going to be a positive number.

So I think as we get more efficient and effective and come up with a new care delivery model, which has some risk components to it, and we look at managing the whole post-acute care continuum, that there will be opportunities to really grow this business. And I'm not talking about in a little way, but I'm talking about a big way. Our technology perfectly positions us to do that. And the establishment of our shared service centers not only allows us to have a more manageable business from 530 to approximately 70 centers, but allows a lots of local backup and resources, we think we can go much deeper in those markets and be better providers.

So I hope in that dialog I have given you some of the answers that you were looking for.

Yes, thank you for that. And then, Bill, the recerts obviously have been weak going back almost two years now. And I know you said that a lot of it is patient specific, but is there anything that we can really do, after anniversarying it for two years, is there anything the Company can do to address that situation, or is this really something where we don't know yet where the bottom would be?

Well, we think a recert is appropriate for patients that need them. In our bundles areas, we will be really focusing there initially but in the home market as well. Each patient is evaluated in what we call patient care conference. We have a series of information that we look at for each patient. And where a patient is appropriate for research and can benefit from the care, we will provide it. But we will not provide a recert just because we can or we can justify it, if we don't feel that it adds value to the patient in the care that they receive.

So I can't really tell you where recerts are going to go with the exception that our intention is to provide recerts for every patient where it's appropriate and that can benefit from the services.

Got it. And then last question, Ronnie, in your guidance, have you assumed any impact from the rebates? Because normally your Q4 should be impacted by the 2013 rebates. Just wondering what your assumption or what you baked into that guidance for Q4 on the rebates? Thanks.

Sure, Brian. Good question. And clarifying, no, our guidance does not have a rebasing impact in it for 2013.

But is it right to think that there should be a Q4 impact?

Well, as is the custom, certainly rates that will go into affect January 1 could impact episodes that are in progress, so there could be an impact in the fourth quarter.

Okay. Got it. Thank you.

Kevin Campbell, Avondale Partners.

Just had one clarification I wanted to start with. The data in the key statistical data reports under Medicare, you listed admissions and recerts and episodes, are those the total numbers for admissions, recerts and episodes, or are those just same-store statistics?

That is the total.

That's the total, okay.

Yes.

I wanted to confirm that, and I think you gave a Humana impact in the fourth quarter of $0.06. Was that the right number?

Yes.

Okay. And what are your thoughts on the full annualized impact because wasn't it only a partial impact in the quarter?

I think that is a pretty good run rate there, Kevin, that we see for the next three quarters.

Okay. And what about sequestration? What's the annual EPS impact you think that is going to have or revenue impact that will have, not just this year but on an annualized basis?

Let me go back to -- I'm thinking here about the response on Humana. The $0.06, just for clarity per quarter, that is at the gross margin level. So that is what I'm speaking to when I speak to that $0.06. That's the gross margin, not below that line.

And so on with respect to sequestration, of course, it is 2% of our Medicare revenue. And that is --

That I think is in the press release.

Yes.

I can certainly look at that. And then Hospice in general, what are your thoughts on the slowing organic growth there? I mean the same-store growth had been in the mid to upper teens and then dropped to 3% in the fourth quarter. Why do you think that is? Maybe a little bit more clarity on that.

Well, I appreciate that. It gives me an opportunity to go back and respond to an earlier question by our business line and what we're looking for.

And on Hospice, while that has slowed, we still have plans to increase Hospice admits year over year in the low to mid-single digits. So that's certainly our plan, and we think that's achievable.

And going back up on non-Medicare, again, rolling through the Humana change just in participation there, that would be, we are anticipating a low single-digit decline in non-Medicare admissions. And then going up to Home Health Medicare, we're anticipating positive admit growth offset by lower recerts, and that should be slightly positive for the year. All-in, our volume growth is pretty flattish over all.

And Kevin, I mentioned earlier on Hospice that we've recently trained our Care Transitions coordinators to both focus on Hospice and Home Health, and we have a dual strategy for that. And we think our Home Health position and strength in many markets will help to grow our Hospice business, which is smaller. And again, we are focusing on a different type of patient, but as the question was asked earlier about the length of stay increasing, we have to be careful because we're getting in, obviously, more non-cancer patients, and when you get those patients, the length of stay is typically a little longer. It has pushed that length of stay over the year eight to 10 days.

So we have to be very careful on the type of patients that we bring and making sure that they are appropriate for the benefit. But it is really about a collective activity between Home Health and Hospice on making sure that each patient gets the right benefit because that is what is more important, and we think that will help to grow our Hospice business as well.

Is there any reason why that changing length of stay would impact that same-store revenue growth? And if not, again, why do you think that slowed -- because it was pretty dramatic, if you look at the third quarter, 13%, and then the fourth quarter was only 3%. And they were both up against tougher comps, 17% in the third quarter and the fourth quarter of 2011.

Kevin, I think that -- as you get discharges, you have some months where you have a lot of patients unfortunately that expire. When they do, that reduces your overall volume of patients. And when your volume of patients goes down, that drops you revenue.

Again, healthcare is cyclical, right? And we do our best every day to go out and grow our business. But more importantly, it is to take care of the patients and provide the needs and the services that they require. So on months where you have a lot of patients that pass away, you're going to have sometimes a reduction in your census. And that is what is really driving the revenue down, although the admissions are holding.

Okay. Thank you very much.

You're welcome.

John Ransom, Raymond James.

Do you have any thoughts, insights, feedback, et cetera on rebasing in CMS? Have you heard anything?

John, to be honest with you, your guess would probably be as good as ours, and we haven't heard anything. It could be a pretty wide variation from 1 point or 2 points a year to 3 points, 3.5 points. I believe that, as you know, rebasing was a legislative function in the 2010 Affordable Care Act. And I think CMS from the regulatory side has taken initiatives to case mix creep and all the additional adjustments, as well as a sequestration that they have a much lower basis to work on. The industry has just prepared a document using most of the public companies and large private companies that is going to be provided to MedPAC. And hopefully he'll get that. That shows the real margins of the home care today, in 2013, home care industry, and not the margins that MedPAC speaks about in 2010.

So I think the rebasing, whatever it is, will be less today than obviously it would be if we were using 2010 data.

Okay. And then secondly, if you look at your managed care business in total today on the Home Health side, what percent of your -- and I'm excluding Medicare for a minute, I'm sorry, including Medicare, what percent of your managed care is now episodic versus per visit? And I know you've had a change in the Humana contract.

John, I would think that it's a very small percent that is episodic. Of all the managed care business, I would guess it's around 10% or less.

Episodic, so the rest is per visit?

The rest is per visit.

Okay. And lastly, at this point, do you have any more -- you guys have taken some pretty big reimbursement hits. Do you have any more costs you can take out at this point? Do you have any branches that are EBITDA negative, et cetera, or are we where we are on costs?

John, we always have portfolio pruning that we can do. Our mission was -- obviously, when the reimbursement was hired, we had a pretty heavy startup strategy, as you are aware, and we bought anything, anywhere that made financial sense. With the compression that we've seen in the margin, we have agencies that aren't performing like they can. We believe that it was prudent for the Company and also for the employees that are there to allow these agencies an opportunity to be successful. Some have actually converted and turned around. But to be candid, there are several that have not. Every one of them have a very specific action plan and timeframe. And to answer your question in a very direct way, yes, there are other costs that we can reduce in the system by focusing on these underperforming care centers.

Got you. Okay. Thanks a lot.

And John, just one other comment. There is also costs in these shared service centers that we haven't talked about that we think would be substantial once we get these up and running, not to mention the ease of managing them. So we see some opportunities to continue to reduce costs.

Okay. Thanks a lot.

Well, I think, Sarah, that is the last call, and I want to thank everyone who joined us today on the call. We sincerely appreciate your interest in the Company. We also would like to recognize and thank all our caregivers for their excellent care that they provide 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 next year's results of the first quarter and hope everybody has a great day. Thanks.

And this concludes today's conference call. You may disconnect.