Amedisys Inc (AMED) 2013 Q3 法說會逐字稿

Good morning, my name is Kyle. I will be your conference operator today. At this time I would like to welcome everyone to the Amedisys third-quarter earnings conference call.

(Operator Instructions)

Mr. Dolan, you may begin your conference.

Thank you, Kyle. Good morning, and welcome to the Amedisys investor conference call to discuss the results of the third quarter ending September 30, 2013. 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 the press release that expresses 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 Form 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 law. 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 a 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 Investors Relations page under the tab Financial Reports Non-GAAP.

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

Thanks, Tom. Good morning, and welcome to our third-quarter earnings call. Let me start today's call by commenting on our disclosure relating to our preliminary DOJ settlement. As we stated in our earnings press release, we have reached an agreement, in principle, with the United States Department of Justice associated with their investigation of the Company which commenced in 2010.

Under this tentative agreement, which is subject to a number of contingencies, including successful negotiations and execution of the final settlement documents, the Company would pay $150 million. Amedisys has agreed to this tentative settlement, without any admission of wrongdoing, in order to resolve these matters and to avoid the uncertainty and expense of ongoing litigation. In connection with the settlement, Amedisys will enter into a corporate integrity agreement with the Office of the Inspector General of the Department of Health and Human Services.

We are pleased to see an end to this issue, which has occupied the Company's energy and resources over the past few years, and limited our flexibility to address the current challenging environment in post-acute health care. We now look forward to being able to focus, without distraction, on our mission, providing superior quality care to our patients and referral sources, doing so with efficiency, and leading the industry's transition to comprehensive care management for the post-acute elderly population of this country.

To accommodate the preliminary DOJ settlement, we have just completed an amendment to our credit facility. Ronnie will provide more details on this in his prepared results.

Moving to third-quarter results, Amedisys incurred a loss of $0.01 per share on an adjusted basis, a step back from the $0.18 earned on an equivalent basis in the second quarter and $0.15 in the first quarter. Operations were impacted by lower volume and higher cost per visit.

On a year-over-year basis, same-store Home Health admissions were down 2% and same-store Hospice admissions were down 7%. After declining in each of the last three quarters, we saw a slight sequential increase in our recertification rates to 37.1%.

Let me add some perspective on the increase in our cost per visit. A large part of the increase was related to additional holiday pay and an increase in health benefit related costs. Additionally, the volume decline resulted in lower clinical staff productivity, largely associated with salaried clinicians, which we are addressing.

We have also made incremental investments in our bundle sites. We have shifted certain clinicians from a per visit to a salary pay structure with reduced productivity expectations. In this role, the nurses are taking on patient-care management responsibilities.

We have also added care coordination and program management positions to bundle locations. We have made these investments to drive down overall bundle costs, largely related to hospitalizations, in order to generate total patient-care savings.

The bundle structure allows us to share in these savings. We are seeing some positive signs resulting from this investment. For instance, our 30-day hospitalization rate in Home Health has continued to trend downward.

In fact, according to OCS data, our rate dipped below the national average in the third quarter and has dropped 130 basis points since the first quarter of 2012 to 15.2%. More specifically, this improvement over the last quarter was largely driven by bundle site care centers that benefited from these investments and our focus. As we have stated in the past, we believe referral sources are more tentative than ever to quality and outcomes, and believe this will be a key differentiator to drive future volume growth.

To address our third-quarter performance and to better position the Company heading into 2014 reimbursement pressure, we are undertaking the following three initiatives. First, to improve volume growth, we are increasing our business development staffing levels in certain markets, adding over 35 positions during the third quarter. We are targeting a similar net increase during the fourth quarter.

Second, to improve EBITDA we are again reviewing the negative contribution care centers within our portfolio. On a combined basis, all care centers with negative contribution in the third quarter generated revenue of almost $40 million and losses of $5 million. Of these care centers, we have identified 19 that we will close or consolidate in the fourth quarter. In the third quarter, these locations generated revenue of $4 million and losses of $1 million.

With these closures, we expect to end the year with approximately 450 care centers. Additionally, we have identified 35 care centers that are just too small to become profitable in the current reimbursement environment. They either need to grow meaningfully or we need to exit the markets. For these care centers, we will be making incremental business development investments to drive that growth.

Locations that don't show meaningful, positive performance will likely be closed or consolidated in the coming year. We are restructuring our field leadership from 5 to 10 regions. This will allow us to flatten the structure and better align it with our 63 shared-service centers.

Now, leadership of each shared-service center group will report directly to one of our 10 regional leaders. We think this will better leverage the shared-service center structure and drive improved results.

We continue to move forward with our long-term strategic plans. All our care centers will be organized into 63 shared-service centers by December. We are continuing to refine our patient-care management process with a utilization management and review focus to reduce variability of care while improving quality and patient outcomes. This is imperative for both our bundle sites and Company-wide cost initiatives and quality improvement.

We are also completing the development of our AMS3 next-generation operating system in this quarter. The rollout will start in the first quarter of 2014. We have elected to go live on January 1 with two bundle sites, including 29 of our care centers. We expect to go live with the remaining three sites in April, which will include 28 of our care centers.

Finally, we are pursuing other partnerships with hospitals to enhance collaboration and quality patient care in several forms. An example -- over the course of 2013, we have completed joint ventures with three different hospitals or health systems. We anticipate that the home health final rule from CMS will be issued in the next couple of weeks after being delayed due to the governmental shut down.

With continued budgeting negotiations over spending issues, home health care could be impacted, particularly in the SGR, if it's addressed. We are working with our industry partners to communicate our belief that home health reimbursement cuts will negatively impact patient access to care and may have the unintended consequence of driving patients to higher cost settings, ultimately resulting in increased cost to CMS.

In conclusion, I would like to address our workforce of dedicated employees. This quarter marks a milestone for the Company as we move clear of the distraction associated with the DOJ investigation.

Despite some of the headwinds we have faced, our employees have continued with their mission to deliver superior quality care to our patients. Healthcare reform is still largely in front of us, particularly in the case of post-acute care. Amedisys continues to be in a prime position to lead and benefit from these initiatives and the inevitable industry trends.

Thanks and I will now turn the call over to Ronnie for his comments.

Thanks, Bill. Before I review the details of our results, let me clarify changes to previously reported results from continuing operations for our first and second quarters of this year. Plans to close our divest care centers results in their inclusion in discontinued operations. However, during the third quarter, we moved six care centers previously identified as discontinued back into continuing operations.

As such, we have restated continuing operations for the first and second quarter to reflect this change and have provided these restated quarters in our press release. All key statistical data has also been revised. Of note, the 19 care centers Bill identified as planning to close or consolidate in the fourth quarter have not been moved into discontinued operations in our third-quarter results.

Now, for results for the third quarter, Amedisys incurred a loss of $2.89 per share on a GAAP basis. This was impacted by several one-time items, including a pretax reserve for the $150-million preliminary DOJ settlement. My comments going forward will be on an adjusted continuing operations basis and focused primarily on sequential changes. In the third quarter, we generated $302 million in revenue, a decline of $15 million due to lower volumes in both Home Health and Hospice.

Adjusted EBITDA for the quarter was $8.7 million, a drop of $11 million. Approximately half of the shortfall is a result of lower volume, with the remainder a function of higher cost of revenue, mainly in our Home Health division. Our adjusted EBITDA margin fell to 2.9% from 6.1% in the second quarter. Our adjusted net loss was $202,000 compared to $5.6 million of income for the second quarter.

Cash flow from operations for the quarter was $28 million. Cash flow benefited from a continued drop in DSO to 32 days compared to 34 days at the end of the second quarter and 42 days at the end of 2012.

Capital expenditures were $9 million, and we reduced debt balances by $4 million during the quarter. We ended the quarter with $44 million of cash on the balance sheet, up from $30 million at the end of the second quarter.

Turning to our business segments, Home Health revenue dropped to $237 million in the third quarter from $251 million in the second quarter, mainly due to lower admissions. Admissions were down 5% sequentially.

Home Health division contribution was $16.5 million, or 7% of revenue. This is a decline from the $25.5 million, or 10% of revenue, for the second quarter. The increase in our cost per visit added $5 million of cost for the quarter.

The components of this increase include the additional third-quarter holiday of $1.5 million, health benefit cost of $500,000, and investments we made in our bundle sites of approximately $500,000. As Bill mentioned in his remarks, the remainder is due, in part, to a drop in productivity as our volume declines. Hospice revenue declined $1 million, to $64 million for the quarter. Hospice division contribution was $12.2 million, or 19% of revenue, a decline from $12.8 million, or 20% of revenue, in the second quarter.

We are seeing an impact in admission volume from the removal of debility and failure-to-thrive diagnoses per CMS guidelines. Although its effective implementation by CMS has been delayed until October 1, 2014, we have already changed our processes and discontinued assigning these primary diagnoses to patients in May of this year.

As a result of this, we no longer are admitting patients with these diagnoses, which accounted for almost 20% of our admits. In the third quarter, no patients were admitted with these diagnoses, compared to approximately 900 in the first quarter of this year.

Overall, admissions were down approximately 600 from the first to the third quarter. Ultimately, we believe that many of the patients previously assigned these primary diagnoses are eligible for the hospice benefit and can be appropriately admitted with another primary diagnosis.

Turning to the financing of the preliminary DOJ settlement, we anticipate making two payments -- one payment of $115 million once the agreement is finalized and the remaining $35 million payment to follow six months thereafter. These payments will be funded through a combination of cash on hand and our revolving credit facility.

Our credit facility has been amended to accommodate this settlement. The facility's size remains the same. While there are tighter restrictions on the use of capital, we think the facility fits well with our near-term strategic plan. Finally in connection with the credit facility amendment, we repaid our $20 million of senior notes that were scheduled to mature in March of 2014.

We continue to proceed with our divestiture plan, announced on the first-quarter call. As of today, six of those care centers are being retained. 6 have been sold, 11 have been or will be closed by the end of the fourth quarter, and the remaining 11 are either under a letter of intent or a definitive agreement and will be divested by the end of the fourth quarter.

Finally, we are updating our guidance for 2013. Our guidance is adjusted for one-time items, but does include legal costs associated with certain legal proceedings, which are $4.5 million year to date, and we expect these costs to be in the $5 million to $6 million range for the year.

On this basis, which is inclusive of legal costs, we lost $0.02 for the quarter and earned $0.23 for the year, year to date. Therefore, we are reducing our 2013 EPS guidance to $0.20 to $0.25 per share. We are also adjusting our revenue guidance to a range of $1.24 billion to $1.25 billion.

This concludes our prepared remarks. Operator, please open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Kevin Campbell from Avondale Partners.

I wanted to follow-up on the last comments you had about the guidance. So, you've earned -- I want to make I understand it -- with all the changes, $0.23 year-to-date based on your guidance your and guidance is $0.20 to $0.25 so we should take that to mean for the fourth quarter you're looking at a loss of $0.03 to a gain of $0.02?

That's correct, Kevin. It's essentially a break-even quarter with that kind of range around.

That's what I wanted to make sure that I understood. Help me to understand the deterioration in Home Health results when you look at admissions and recertifications sort of sequentially throughout this year after all these adjustments you've made here. Why is it that those are going down sequentially from Q1 to Q2 to Q3, sort of across the board?

Kevin, a lot of these are associated with underperforming care centers. We find in markets that we are doing well, we are doing well and markets that we are struggling, it's more of a challenge to grow that business. So that basically is the driving force. There is a lot of pressure out there.

One of the things that we have done, as I mentioned, to offset that is added business development staff in these low performing care centers. I think that management was historically more inclined to hold back on expenses instead of spending money on business development staff. Over the next quarter we really want to ramp that up, as I mentioned, and we think we can get some of that volume back. If we can't, then we need to make other decisions.

Instead of thinking of it like a bell curve, it's almost like a barbell where you have a lot of under performing on the one end and the rest are high performing on the other end?

You could look at it that way. You have to understand kind of the DNA of the company. Over the years we did a lot of acquisitions, small, medium and large. We did a lot of start ups. So, we had agencies that just entered into markets before we started with the reimbursement cuts. That's kind of what we have, if you look at it that way.

Again, where we see a lot of struggles is in the smaller markets where we haven't been there a long time, where we are up against players that are more ingrained in the community. That's one of the reasons why we followed the strategy of bundles in post-acute care management because hospitals seem to be paying more attention now to readmissions, which is why we focus on that quality as well. We think over the long term that our strategy would help us to establish relations, not only in the smaller markets but also mid-size and larger markets.

Okay. I know you guys had made some cuts on the GNA line in 2Q. Do we have a full impact to that in the third quarter or are there still some other benefits to come from that in Q4 and beyond?

Kevin, we still have some benefits to come as we take -- we close the care centers targeted for divestiture. So, all of that is not out yet. We still think we can make headway there.

Sorry, I'm jumping around a bit. The settlement with the DOJ, does that also include any review by the SEC or is the SEC still -- is there still some overhang from that group?

Yes, it doesn't include anything with the SEC but the SEC inquiry has been quiet for some time. Hopefully this will help to bring that to an end as well, but we can't speak for that at this time.

All right. Last question, I want to make sure I heard you, Bill. Maybe you can repeat in your prepared remarks the financial impact that the 19 centers that you've identified here for additional closures or consolidation -- what was their financial impact in the quarter.

They had $4 million of revenue and about $1 million of negative EBITDA.

Okay. Thank you very much.

Thank you, Kevin.

Your next question is from the line of Brian Tanquilut from Jefferies. Your line is open.

Good morning, guys. Bill, first question for you, this settlement that you guys entered with the DOJ, or you're about to sign with the DOJ, does this cover everything including hospice? Basically, is this every single DOJ investigation out there for the company?

No, Brian, the Department of Justice doesn't work that way. This is instigated around the 2010 initiative, following the Senate financing inquiry. So, they limit that, but, again, as a reminder, the settlement is without admission of any wrongdoing. So, we can hope we move on. We will still have compliance issues from time to time that we will address independently, but we don't have any reason to believe that there will be any more investigations.

Okay. For me, Ronnie, from sort of an EBITDA run rate perspective, you guys outlined a lot of moving parts between reduced legal expenses, I'm guessing going forward, but you're spending more on the sales force. How should we think about what the different moving parts are, if you don't mind outlining that for us?

No, we do think, if we get to this settlement, which we are hopeful to consummate here, there will be reduced legal costs with that. There are other ancillary costs associated with that whole process that we think will help improve EBITDA. We haven't quantified that previously and we will do that as soon as we can, but that is a benefit. With the added BD staff, we are trying to be very kind of surgical with that, but really in an intense way.

When we do that, there is really -- probably easy say hard do -- but it's fairly low threshold or admit quotas required, better said, to pay for themselves. That would take about 15 admits a month to be cost neutral. Of course, generally, for our business development staff, after a ramp up period, we certainly set objectives and quotas at a higher level than that. We think it can be value added when we do it right, we get into the right markets and realize market potential. While it will be front end costs, we think we can get them -- the plan would be to get them productive at a level that would certainly make them break even in fairly short order, but we'll try to phase this in and be smart about it.

Ronnie, with your amended credit facility, what sort of EBITDA limitations are we looking at and how are the banks looking at this on a leveraged basis? What levels are they looking at.

Sure. The kick off leverage that we will have, it's going to be about 2, 2.7 times coming out and when we -- after we pay off -- reflecting in the fourth quarter this reduction from the senior note payment it will be a little bit below that. So, the bank EBITDA, it's on a trailing 12 months. From a bank definition, we do add back -- we do have certain add backs such as non-cash comp related to equity compensation and also the benefit of adding back restructuring charges and disk ops to get to that.

Got it. Then, Bill, last question for you. You talked about the DNA of the company and having followed you guys for a long time, you were very acquisitive at one point. With the changing environment in home health, with upcoming rate cuts and likely consolidation, how does that change your view on M&A when you are closing down presumably acquired locations from the past?

Right. Brian, if you think about that we are looking at a certain amount of shared service center and groups, these are the markets that we are focused on and we want to go deep there. You probably won't see the company doing small acquisitions nor will you see us doing acquisitions that are scattered across the board. Our interest and appetite would be more for condensed larger home health agencies, maybe a home health agency that a large health system or hospital owns as well where we can partner and not only bring home care to them, but bring the ability to manage post acute care which will be increasingly more important as we get new changes from regulations and policy as well as an opportunity to work with managed care. That is where we will spend our resources. Where we find a wonderful opportunity, we think we can access the finance to do that.

Got it. Thank you, guys.

Thank you.

Brian, thanks for your question. This is Ronnie. Let me follow-up a little bit, because there may be other questions surrounding the credit facility, but the leverage is limited to 3.5 times EBITDA in the facility. Certainly from the calculation it will come out -- kick off leverage will be less than that. Some of you may be thinking that, well, on a run rate there will be a higher leverage profile and that is true.

So, we will certainly, as we build into next year, we need to rebuild that run rate. We do get some relief, we think, while we haven't forecast this going forward yet, but we are anticipating generally lower CapEx expenditures in 2014 with the completion of the AMS 3 development calls. So, that is some of the dynamics around the credit facility I thought I might add. Thanks for your questions, Brian.

Thanks, Ronnie.

The next question is from the line of Kevin Ellich from Piper Jaffray. Your line is open.

Thanks for taking the questions. Bill, I was wondering if you could -- other than the SEC investigation -- could you give us an update as to what else you are looking at and how confident are you that this DOJ settlement's going to lead to conclusions to some of these other investigations?

Well, you know, it's kind of hard to comment on what the government may or may not do. Everything that is going on is stated in our Q and we are pretty explicit about that. We think, we hope, since the DOJ is going to be done without any admission of wrongful doing that we will be able to bring that to a close, but it can't be predicted. What we are trying to do is reduce the distractions that are against the company and this is one of them. It's the biggest one, and we think that it's the leader. Hopefully with this going away, some of the other residual tag-alongs will go away. We have resolved some suits associated in that area like derivative suits and that type of activity as well. You should see some of that in the filing. Most of it is there.

We will look for that. Ronnie, I wanted to clarify, did you say that you have $5 million to $6 million of legal expense for the remainder of the year that's included in guidance?

Not for the remainder. We expect that to be for the year.

For the year, $5 million to $6 million is the total amount.

$4.5 million year-to-date, $5 million to $6 million for the year.

Got it. Thanks for that.

Sure.

Bill, you talked about adding business development staff as a way to offset some of the volumes and strategically, I think that is a good idea. I'm wondering are these guys going to be out mainly looking for new business with hospital partners or are they actually going to be looking for acquisitions, going back to Brian's question, any color on that front?

Yes, I think it's everything, Kevin. We are in a position where we are adding both account executives which focus on physicians and groups like that, also facilities. We're adding care transition coordinators that begin our care transition process that are typically based in hospitals. So, we are adding a mix of both. We have an enterprise sales division that goes and has those high level relationships with facilities for joint ventures and potential risk related activity. We are being very cautious of that. We want to make sure that we get these bundles right and we think if we do that, that will open up many opportunities for us.

Got it. Ronnie, you made a comment that you moved six centers back from discontinued ops to continuing this quarter. Just wondering, why did you keep those centers or decide to do this and how often does that happen?

It doesn't happen very often. These were -- the six we're talking about were productive and had positive performance that we thought strategically, we were going to go ahead and divest of them. We did not receive the interest that we had hoped on these care centers and so we brought them back into operations. They are positive contributors. It's a -- general comment, this doesn't happen often.

They weren't losing money.

No, they were EBITDA positive.

Got it. Last question on my end, just a financial. Your share count guidance went up just a little bit, but that does imply about a 1 million share increase in Q4 sequentially from Q3. Just wondering is that related to option grants or is it something else in that increase.

Kevin, good question. I think that has to be the case. If it's different than that, we will let you know.

Okay, thank you.

Your next question is from the line of Darren Lehrich from Deutsche Bank. Your line is open.

Good morning, everybody. A few things here. As far as the settlement goes, can you inform us what period of time it covered?

Yes, Darren, we are not disclosing that. As a reminder, the investigation started in 2010 so it would be years prior to that.

Okay. Years prior to 2010 and does it include years after 2010?

Darren, we won't get into that detail. We still are working on the documents. We don't want to do anything that could trip the opportunity to resolve this in an amicable way. We feel comfortable that we can. We are not going to provide those details.

Okay. Just so I'm clear, a prior questioner had asked, but you said in response to what the matters were of focus in the investigation, it was stemming from the 2010 and post finance. Can you confirm that it was limited to your home health division? Is that an accurate statement?

Yes.

Okay. All right. As far as the corporate integrity agreement goes, what kind of incremental costs would be associated with building out that capability and whatever requirements you have under the CIA.

Right now, in our compliance programs, it meets all the requirements of the OIG. So, we don't see any additional cost and we feel very comfortable that we will be able to get to an agreement that we can manage in line with our current expenditures and processes.

Okay. Ronnie, you mentioned a number of things that you have done with the amendment. You gave us the max leverage. Can you confirm on restricted payment baskets, how much you could have for M&A, for CapEx and for buy back -- I'm assuming none, but can you lay those out for us?

Yes. There are baskets for that. On acquisition limitation it's $10 million. We have a CapEx -- I'll have to look -- CapEx limitation. Darren, I'd have to think back what it is, but it's something certainly we can operate within looking forward. We have some other baskets around, just the flexibility of doing certain things to disrupt the -- that could potentially change the profile here. That will all be detailed with our filings.

You made the statement in your prepared remarks that the amendment fits within the company's strategy. I guess a $10 million dollar M&A limit per annum, the message here is that the strategy is that you are not going to be consolidating much going forward. Is that a fair statement?

It is fair. I think it fits with our view in the near term and the obvious is, we will still consider opportunities and if there is an appropriate opportunity we want to act on that doesn't fit within this credit facility, we will seek to find the capital to respond to that.

That's helpful. The last thing, we are obviously looking at an adjusted EBITDA margin that is very low. Even if I make the adjustments for the incremental labor cost that you've identified, we are still talking about a 4% margin. You are making some investment in sales and marketing. So when you think about your margin structure on a go forward basis, what would you think is a reasonable target based on what you are doing with your center, branch consolidations and whatever else you have in store to adjust to the new revenue dynamics that you are seeing. Can you help us think about margin? It looks like to me that your EBITDA is about half of what consensus is for 2014 on a run rate basis. Any way to bridge that outlook would be helpful at this point.

Darren, one of the things that has happened, of course, is we've had a step back here in the third quarter. But we really haven't changed our view as to where our targets are. That is to get in line with what our peers are doing. We think that is very achievable. We stepped back some.

When we talked about that before, one of the things that -- I should say the things that we focus that will help, is volume. We have lost a little momentum in our admits. They turned negative this quarter, flat the second quarter in home health to negative this quarter. A lower recert rate -- that's impacted volumes. We think and are still focused on, especially with the BD staff investments to improving volumes and recapturing that momentum. That needs to happen and we are focused on that.

The thing that happened in this quarter was a little bit -- that impacted was the increase in the cost per visit. We think we still have gross margin expansion opportunities, certainly from the third quarter. We will get that back on track, probably back in the channel of where we had been and what we think would be appropriate here. We will be focused on that and then the cost outside of gross margin and more of the GNA line. What we are talking about here, besides those specific -- when I say those specific, those general areas of focus, of course it's to help bring up margins, we will look at the lower performing care centers, either improve them or we will make decisions about those.

Bill commented on those. We have 19 identified that will close or consolidate in the fourth quarter, and then another 35 that we are focused on. Focus on those care centers, the portfolio in general, and then specifically our operating metrics still guide us to -- we think we can get back in line with our peers despite this step back in the third quarter.

To add some color, if you take a look at the $15 million shortfall that we had over the portfolio and you divide that by 450 care centers that's not a heavy lift. Our initial response is not to go and eliminate as much cost as possible because sometimes that's damaging. We really are going to focus on getting some of that revenue back and making sure our patients get care the right way. We believe we can do that.

If we can't, then we are going to take the next step and make additional cuts and most of that are going to come to actual operating units that are under performing. While we see a lot of efficiencies from our AMS 3 and we've talked about that as well as the shared service centers having some aggregated efficiencies like grouping these agencies together, consolidations will allow us to eliminate a lot of additional overhead. So, our expectation, as Ronnie said, is to get up to where our peers are. There is no reason why we can't do that. We have that focus in the midterm range.

Okay. Got it. Thanks for the comments.

All right. Thank you for your questions.

Your next question comes from the line of John Ransom from Raymond James. Your line is open.

Good morning. As we look forward, when do you think the acute pressure from the recertification slowdown is going to elapse?

John, we mentioned that we put a patient care management process in place and we put that in place at the beginning of the second quarter. That is a central overview of all the activities that are going on clinically and we do that through exceptions. What we find is that the patient acute in mix has not changed. What we equate the drop of recertifications to is behavioral. That started in the third quarter of last year when we made a pretty big reduction in force to cut costs.

As we did that and reduced some of the clinical staff, we saw a pretty significant drop in recerts and through the centralized oversight we see that inching back. Again, it's behavior, it's education. We want to make sure that every patient gets the care that they need. We can't tell you where that's ultimately going to go, but when we look at the industry averages, we find ourselves below the averages with acuity levels that's least equal to that. Hopefully with the processes we put in place, we will find the right spot for our research and patient care.

Do you think you were at the right level of research before and now you're being overly conservative or were you being a little too aggressive on research before and now you're about right?

John, I think we were probably closer to the right level before and, you know, it's not about being conservative. It's about education. It's about staff and availability of resources. That's why we are targeting adding staff and approaching some of that differently. We want to be able to grow our way back into the profitability and not just necessarily cut it. It has to be two sided. As Ronnie mentioned, we are being very surgical about where we add staff and where we add business development and if we think we do both concurrently with the right timing that we will get positive results. Hopefully our recert rate will move back into probably the industry average, but it has to be the right care for all patients.

My other question is your sales force, do you have -- given some of the investigations and some of the issues around research, do you think -- has this started to affect your brand name a little bit when you go out and market for referrals from hospitals? Have you had any unusual sales force turnover or anything like that that would indicate that.

John, when the investigation first got announced, we had some pretty good noise around that. That has subsided. We haven't seen any with that, with this disclosure. What we found is that most of the sophisticated health systems or providers have been there before and understand the process. It has created a distraction. There is no denying that. We hope that now that we have this behind us, that everybody can focus on the proper perspective, which is growing the market and taking care of our patients in the right way.

Okay. Thank you.

Thank you, John.

Your final question comes from the line of Sheryl Skolnick from CRT Capital. Your line is open.

Good morning, gentlemen. Thank you. Can we go back to the question of the patient care coordinators, the implementation of best practices. I'm very confused by your commentary on this call as I compare it to what you said in the second quarter. I do have the transcript, but I'm not going to insult you by reading it back to you. I'm sure you know what you said. Maybe you can help me to understand the transition or if there is a transition in thought process.

At that point you went through the history, you were kind enough to go through the history, Bill, with me about how it began with Humana, how you ended up looking at your recerts and finding out implicitly that even though you had fewer recerts you had better quality and you were doing better things for the patient, you clearly making important customer happy by having these programs in place. You decided third quarter of last year it was such a good idea you were going to roll it out to everyone. We talked about the decline in research in the second quarter and the context of that and you suggested that it was such a good idea to improve the quality and give patients what they needed in a more consistent way that you would be rolling it out. Now you are beginning to tell us well, wait a minute, now we think our recerts were find before and they're not so fine now and yes, it's very patient dependent. Now are you going to go out and re-educate those clinicians you just spent time educating not to do a recert unless it's absolutely in line with clinical best practices and patient needs? Are you now going to go back to them and say it's okay for you to go ahead and do that recert. I'm very confused. And then I have a follow-up.

So, Sheryl, what is your question?

My question is what's right. You said before that the reason your recerts were down was because you were doing these reviews using evidence based practices and it came out that recerts are down and quality is up. Now you're saying your recerts are too low and you need to get them back up to where they were. What is the right answer?

Sheryl, I thought I said that the recerts were down as a result of behavioral issues from the cuts in reimbursements. I think that has been pretty consistent. I don't want you to confuse patient care management which is the central focus with care management and care coordinators that you mentioned at the beginning. The care coordinators we are focusing into the bundle site and it's additional staff to focus on delivering care in a much more comprehensive way and we are seeing some pretty good results. If we get good benefits there, we think we can take some of that, once we get it as efficient as our current system into the rest of the organization.

I think the question John asked was that I feel that it was too high then or too low now. The answer was that if you look at the patient acuity and our acuity hasn't changed. If you look at the industry averages, it's higher than where we are at. If you look at the patients that are discharged with activity, that could justify the need for another recert. This is what our patient care management, which is our centralized corporate group, is focusing on. That is what I said and I understand your confusion and would be happy to talk to you about it off line if you would like.

Okay. Let me move onto another question. As you look at your portfolio, I am a bit concerned that with each sequential quarter there are additional units that need to be divested. I would imagine it's very difficult to manage a business from a corporate cost perspective and investment and strategic initiatives perspective when the base units of operations are constantly changing. Can you walk me through what the advantage is of the constant or seemingly frequent or quarterly reduction in number of agencies as opposed to taking a look at your entire portfolio, forecasting out 12 to 24 months what your reimbursement environment's likely to look like, what your business model's likely to look like and then taking preemptive action instead of what is colloquially called death by a thousand cuts.

That is probably a good way to look at it, Sheryl. The bottom line is that we put a lot of money and resources in getting these providers and numbers established, getting approval with CMS. What we find that even in the low margin businesses, sometimes it's one or two key people that you need to make a change in and you get the volume that you need. What we have is an ongoing focus on these under performing care centers, being very clear and surgical, as Ronnie mentioned earlier, on how we are adding resources. In the past, I don't think we were necessarily putting all the resources that could have been put.

Before we close or consolidate these agencies, we want to give them a chance with some resources to see if they can be successful. We hate to close agencies that can be successful so we are being very methodical about that. The focus of reducing these agencies is not going to go probably past the second quarter. We hopefully will bring that chapter to an end.

Okay. I guess I will figure out why the second quarter is right, but I imagine it has something to do with reimbursement changes that are coming in the fourth quarter and first and a better visibility as to the exposure on the [dock C6]. Now, going back to what you just said, which is clearly, and I would agree that building volume has got to be a priority as opposed to acquiring, because it doesn't seem like you have a stable base of operations. So acquiring, to me, would be an anathema, but that is just me. If I look at your internal growth efforts to build the volumes, you listed a number of initiatives, the enterprise wide sales, the business development, some of these initiatives were announced on calls like this over time. Given that recerts are down, given that admissions haven't gotten traction to be steadily growing or even stable, can you give us an assessment of how well these things are functioning, how much more money it's going to cost for you to build your volume growth initiatives to a level that they'll be successful and how long it's going to take.

Ronnie mentioned in his comments that if we add BD staff, it's a relatively low threshold to get them paying for themselves so it becomes cost neutral. Reflected in the guidance that we've given and the guidance that we will give, those costs will be anticipated. We are looking at markets that we think could be viable because of the demographics being population to population growth. We'll also look at the competitive analysis and then we're taking a hard look at local leadership and business development to make sure they have the resources and support they need. Once we do that and we are comfortable that we have done as much of that as we can, then we make the very difficult decision to either consolidate, close or sell some of these care centers. What we are dealing with is people in their jobs who have been devoted and dedicated to the company and working their heart out to allow us to be successful. We want to give them a chance.

The resources that we want to put into getting these to turn around are not going to be meaningful in the big picture and I think that we will have a pretty decent success rate on these. For the agencies we can save, in the long term, will help our growth. So, that is a method to the madness, for lack of a better term. Again, we have a time frame that we want to stop this slicing. We want to get this behind us and move forward with a totally profitable portfolio.

Okay. Then one final question, the bundled initiatives obviously are very interesting and timely. A lot of people have talked about them in the past. You are making a significant investment in being a capable partner on that score. Are there any contracts or partnerships that you have today? Have any upstream providers of yet engaged you to be a post acute care manager for them?

Well, you know, in the bundles we have to have contracts with hospitals. So, we have a lot of that activity going on. There is a lot of interest in dialogue, talking about post acute, not just in the bundles but, you know, in D.C. and the legislative side of it. So, we think that this exercise and this practice in developing this infrastructure will pay off. We are getting a lot of interest in post acute care management and not only looking at home health but looking at the whole post acute care continuum. We will have an opportunity, I think we have around -- I can't give you an exact number, but about 8 or 10 partners that we will have an opportunity to move into the full post acute care continuum beginning of October of next year, should we choose to go forward. We want to see some success in this current bundle program before we bite a bigger piece of the apple.

Okay. Just to put on the guidance, fourth quarter admissions and episodes, assuming that we ever get a final rule, would typically be affected by the rebasing amount, correct? Is that in your guidance?

It is not, Sheryl, in our guidance. The rebasing is not reflected nor the 19 that we've talked about divesting, moving into our discontinued ops effective. That is not reflected in our guidance. No rebasing.

Okay. Those 19 are currently profitable or no?

No.

That's right. Those are the ones that have the loss.

$4 million revenue and $1 million loss for the third quarter.

That's right. Those are the ones with the four plus and one minus. We don't have rebates.

We mentioned the ones that were unprofitable has about a $40 million run rate for the third quarter with about a $5 million loss at quarter. That is some additional opportunities. We would like to see these guys go profitable.

I'm sure you would and I'm sure they would, too. Thank you very much for all the answers to the questions.

Thank you for your questions, Sheryl. With that, that concludes our conference call for today. We appreciate you guys calling in and we look forward to chatting with you all in our year end conference call. Thanks.

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