Amedisys Inc (AMED) 2015 Q3 法說會逐字稿

Greetings and welcome to the Amedisys third-quarter 2015 conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Scott Ginn, Vice President, Accounting and Finance. Thank you. You may begin.

Thank you, Operator. Welcome to the Amedisys investor conference call to discuss the results of the third quarter ended September 30, 2015.

A copy of our press release, supplemental slides, and related Form 8-K filing with the SEC are available on the Investor Relations Page on our website.

Speaking on today's call from Amedisys will be Paul Kusserow, President and CEO, and Ronnie LaBorde, Vice Chairman and CFO.

Before we get started with our call, I'd like to remind everyone that statements made on this conference call today may constitute 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. The Company assumes no obligation to update information provided on this call to reflect subsequent events, other than as required under applicable securities laws.

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.

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 Paul Kusserow.

Thank you, Scott. Good morning, everyone, and welcome to the Amedisys third-quarter conference call.

This morning, I'm excited to give you all details on our third-quarter performance. We've reported revenue of $326 million, adjusted EBITDA of $26 million, and adjusted earnings per share of $0.34. Compared to the adjusted results for the same period last year, revenue grew 9%, EBITDA grew 11%, and EPS grew by 21%.

We're particularly encouraged by our return to same-store volume growth in both segments and the trends that are driving our business. As you may recall in our second-quarter results, our Medicare volume trends in home health were flat to slightly negative. Returning to Medicare volume growth during the quarter was our primary goal and we made great progress, with 4% same-store admissions growth.

In the last few months, our home health operations and business development teams have been heavily focused on payer mix optimization. We need to strike a balance between being responsive to our referral sources, while being cognizant of the impact of payer mix on our financials.

We're delighted to be partnering with managed care payers that recognize the value in home health, but in today's environment, the economics are clearly superior with traditional Medicare admissions.

For the third quarter, the home health segment in EBITDA -- or EBITDA increased $2 million. As I mentioned, we posted same-store admission growth of 4% in Medicare and 21% in non-Medicare. Our revenue mix for the quarter was 75% Medicare and 25% non-Medicare.

Our cost per visit increased roughly $2 per visit year over year for good and for planned reasons. The majority of these costs relate to growth and preparation for ICD-10 conversion. Ronnie will give more details in his remarks.

As I've mentioned before, we are in the people business. You need great people to deliver great care. Our people represent approximately 85% of our costs, so hiring and retaining great employees is essential, and we are starting to see encouraging trends in employee turnover as voluntary turnover is down 3% year to date. This trend, along with investments in hiring and on boarding, should pay large dividends for increased productivity long term.

Hospice continues to be a strong performer, with segment EBITDA up $3 million over prior year. During the quarter, we continued to build volumes and census, with 26% same-store admission growth. Hospice census reached 5,524 at the end of the quarter, just below the high point our census reached in 2012. Our census at quarter-end has increased 23% since December 31, 2014.

We believe the growth prospects in hospice remain strong as CMS continues to develop programs that will drive increased adoption of the hospice benefits, such as reimbursing physicians for end-of-life planning and a CMS pilot allowing patients to receive hospice services along with continued curative care.

To put our growth in perspective, it represents just over one admit per care center per week. We believe we have more capacity for growth. Our quality metrics are good and we remain focused on continual improvement. We are excited what the hospice team has delivered in only one year since restructuring.

I recently went out on a few hospice visits in Boston and New Jersey as I was curious in how our staff view the tremendous growth in our business, expecting it was putting a strain on our people. I was pleasantly surprised that our growth rates were viewed in a very positive way. Our clinicians are passionate that they can provide service to more people in need of this type of care at a critical time for our patients and their families. This is first a mission and a passion for this team, a business second. I feel privileged to be supporting their efforts.

Turning to M&A, Tuesday morning we announced we had signed a definitive agreement to acquire the operations of Infinity Home Care, headquartered in Sarasota, Florida. Florida is a key market for us. Infinity is a strong operator with excellent quality and outcomes metrics, averaging 3.9 stars in the most recently published CMS Home Health star ratings.

In our initial review of Infinity, we felt strongly about the strategic fit, and our due diligence process has confirmed our initial thoughts. Infinity and its sister brands, Care America and Angel Watch, all have strong reputations and brands in the Florida market. They are also fully integrated on Homecare Homebase, which should aid in our integration process in Florida. The combined companies will represent the third largest home health provider in the state and will cover 83% of the medical -- of the Medicare-eligible population in Florida.

Infinity has developed distinctive clinical programs, such as their patient empowerment programs, which have shown great results. In the programs for COPD and CHF, for example, they have reduced hospitalizations by roughly one-third compared to the state average. These programs are particularly important in a state that will be part of the value-based purchasing pilot.

Over the last few years, Amedisys has closed a number of locations in Florida and we are happy with our core group of care centers that constitute our Florida base. Florida is an extremely competitive market and Infinity has found a way to thrive. We will implement best practices from both companies with the belief that our combined scale and expertise will help to capture additional market share and drive the highest quality outcomes.

We plan on retaining and growing the seasoned management team of Infinity and leveraging their talent and the talent in our existing operations to grow in Florida. We are very excited about welcoming Infinity to the Amedisys family.

In addition to Infinity, we are continuing to review several attractive opportunities in what is becoming a very large pipeline. We like the opportunities we are seeing in home health and hospice. We anticipate we will be doing more deals. Our balance sheet is in great shape and we have the liquidity available to capitalize on attractive opportunities.

As we have seen with regulatory reform, the future of home health reimbursement will be tied directly to quality of care and outcomes. We are performing well in these areas and will continue to push for improvement.

For the first time in January 2016, our patient survey star ratings will be made available on Home Health Compare. In addition to the quality-of-care ratings already available, recently we received our first preview report on these ratings. Based on early results, we have performed even better than we did in the initial quality-of-care star ratings, so we are very optimistic.

We are developing targeted action plans in each of our care centers to improve the quality of care we deliver, as demonstrated by our star ratings performance. While it is too early to correlate star ratings with referral patterns, our conversations with referral sources are increasingly focusing on the importance of quality in making referral decisions.

We spent considerable time and invested significant resources earlier this year preparing for ICD-10 conversion. I'm happy to report that we have not felt any significant impact thus far and the conversion seems to be less of an obstacle than initially contemplated. Our team worked tirelessly to prepare and I'd like to congratulate them on a job well done, particularly our employees focused on coding and revenue recovery. Great job.

We are progressing very quickly with the implementation of Homecare Homebase and our results thus far are quite encouraging. We have 46 care centers live on Homecare Homebase, 30 in home health, and 16 in hospice, and are targeting approximately 40 more for conversion before the end of the year.

Clinicians in this field continue to give the system overwhelmingly positive reviews. The most consistent feedback we are receiving is that clinicians spend less time on administrative tasks and documentation and are freed up to spend more time on patient care.

Yesterday, I spent some time with our staff in Mississippi, one of the first areas to be converted. In four months since implementation, they have seen monthly turnover decrease to almost zero from -- compared to 3.5% that was their monthly rate before. In the quarter, they also achieved 11% Medicare admission growth over the prior year. The conversion to Homecare Homebase will free up capacity and enable productivity and efficiency gain, as we have discussed. Our pace of implementation is aggressive, but based on the initial results I've seen in Mississippi, we are evaluating investing more resources in the rollout to expedite the process.

The results and feedback from the rollouts planned for the rest of the year will inform our pace moving forward.

Last week, CMS issued its final rule for home health. We are working through the details to determine the Company-specific impact, but the net effect is a 1.4% reduction in payments to the industry, slightly better than what was proposed.

It's very clear to us. In the future, money will be made and lost on quality. We are highly supportive of the value-based purchasing pilot programs. We agree that linking quality to reimbursement makes a lot of sense and are investing to win in that environment. Approximately 25% of our Medicare home health revenue is in seven of the nine value-based purchasing pilot states. This opportunity will increase with the acquisition of Infinity.

In our previous comments, we've outlined the four major tenets of our strategy -- clinical distinction, becoming an employer of choice, implementing operational efficiencies, and driving growth. During this quarter, we've made significant progress in all four areas, as demonstrated by our quality, our performance in quality of care and patient satisfaction star ratings, our reduction in turnover, our progress rolling out Homecare Homebase, and our strong organic growth in both business segments and inorganic growth with Infinity.

We will continue to update the markets as we pursue our strategy of expanding our capabilities to take care of patients in their homes.

Finally, a big welcome to our new colleagues from Infinity, Care America, and Angel Watch. I also want to extend a welcome to our new Chief Clinical Operations Officer, Jane Carmody, who previously served as Chief Nursing Officer for CHI Health.

Lastly, thank you to our employees for your dedication to delivering high-quality care to our patients. It takes a special kind of person to go into a patient's home and build trust and relationships necessary to ensure they receive excellent clinical care. I'm proud to work with such a dedicated and compassionate team to provide care for those who need it most.

This was a very good quarter and we are committed to build upon these positive results. With that, I will turn it over to Ronnie LaBorde.

Thank you, Paul.

You heard Paul earlier give some highlights in our quarter, so to start my comments, let me first call your attention to our earnings release in slide nine of our supplemental slides that detail our adjustments to our results and the income statement line items that they impact.

That being said, let me discuss our segment results. In home health, revenue was $253 million, up $16 million over the prior year. EBITDA was $35 million, an increase of $2 million.

Medicare same-store revenue was up 3% and admissions were up 4%. Perhaps most importantly, our total admits increased sequentially, overcoming our typical seasonal trend of lower volumes from the second to third quarter. Our recertification rate was 38%, unchanged from last year's rate and up 2% sequentially. Medicare revenue per episode was up 2% over the prior year.

Non-Medicare same-store revenue grew 22% and admissions increased 21%. Of that group of business, that book, episodic-based revenue grew 18% and per vendor revenue grew 24%.

If we look at our non-Medicare book of business, we are reviewing those payers in detail, as Paul mentioned, and we are evaluating those relationships in the context of our overall home health business. We intend to continue partnering with managed care payers, but only where we are responding to referral source requests, able to deliver high-quality care, and are being reimbursed appropriately for the care we provide.

Our home health gross margin was 40.8% compared to 42.1% last year, a decrease of 130 basis points. This was driven by our cost per visit that was up slightly more than $2, as Paul commented. Much of the increase was for good and planned reasons and not all of this is necessarily permanent.

This increase in the quarter was attributable to three factors. First, about half of the increase resulted from additional costs related to volume growth. We don't expect this to be permanent. Second, anticipated investments relating to ICD-10 readiness of approximately $0.60 per visit was incurred. We also believe this will moderate in coming quarters. And finally, insurance costs above seasonally expected levels, primarily driven by large unexpected claims, accounted for the remainder of the increase.

In our hospice segment, revenue was $73 million, up $10 million over the prior year. EBITDA was $20 million, an increase of $3 million. Same-store Medicare revenue growth was 17%, with admissions up 26% and our ADC up 17%. We also realized margin expansion as our cost of service per day declined 3%, and this reduction was mainly attributable to declines in our pharmacy calls. So our hospice gross margin was 49.6%, up 160 basis points compared to the last year.

And now for a few comments on our G&A expenses. Again, please refer to page 9 of the supplemental slide, which outlines our adjustments to line items of G&A. As a reminder, we are currently operating on three different IT systems and have some overlapping costs, so obviously we have not yet reached our ultimate G&A run rate and the coming quarters will be a little choppy.

We still have a view of achieving G&A saving as part of our identified $40 million to $50 million of EBITDA improvement. That being said, let me comment on some of the moving parts in G&A expense for the quarter.

Total G&A was $113 million and $110 million on an adjusted basis. On an adjusted basis, G&A increased $7 million over the prior year and $5 million sequentially. For the year over year where we experienced a $7 million increase, approximately $5 million was reflected in our home health and hospice segment G&A, while the other $2 million was an increase in corporate G&A.

In our segments, we had higher salaries and wages of approximately $4 million and other infrastructure investments. These were made primarily due to growth, but we also had, as mentioned earlier, an increase in health insurance cost.

In corporate, we experienced a $4 million increase that was due to Homecare Homebase licensing fees and costs associated with outsourcing certain other IT functions, as well as HR functions. All of these increases in costs were offset by a reduction in salaries and wages.

For the sequential G&A increase of $5 million, approximately $4 million was reflected in our home health and hospice segments, while the other $1 million was an increase in corporate G&A. In home health and hospice, again $2 million of the increase was due to health insurance costs and the remainder was due to investments in our infrastructure, primarily driven by the growth of volume in both segments.

In corporate G&A, $2 million of the increase was due to the same Homecare Homebase licensing fees and outsourcing costs. This again was offset by a decrease in salaries and wages.

Turning now to cash flow, cash flow from operations for the quarter before changes in operating assets and liabilities was $30 million and our DSO was 33 days. CapEx for the quarter was $1.3 million and our projected CapEx for the year remains between $20 million and $25 million. We expect our run rate to be reduced below $10 million in 2016.

In late August, we refinanced our senior credit facility and our second lien term loan. Our new $100 million term loan and $200 million revolving credit facility will provide additional liquidity and significant interest savings at current debt levels. Our current all-in interest rate is 2.2%.

At quarter-end, we had a cash balance of $57 million and $179 million available on our revolving credit line. Total available, then, is $236 million. We have $100 million in total debt outstanding and our total leverage ratio of 0.9 times adjusted EBITDA resulted for the last 12 months. Our deferred tax asset balance stands at $130 million at the end of the quarter.

You will note a new line item on our balance sheet, reflecting an asset held for sale of approximately $20 million as of September 30. Our planned headcount reductions at corporate have resulted in excess space in our building. During the quarter, we commenced a program to explore the opportunity to sell our corporate headquarters building located here in Baton Rouge.

We expect the Infinity acquisition to close on December 31 and will finance the $63 million purchase price with a combination of cash on hand and funds from our revolver. As Paul stated, Infinity generates approximately $50 million in annual revenues and recorded LTM-adjusted EBITDA of $6.4 million. We expect the deal to be accretive to the tune of $0.04 to $0.08 in 2016.

Ultimately, we are focused on a smooth transition for Infinity. Our main goal is to approach the transaction and the transition in a measured way that maintains Infinity's outstanding performance and extends that performance to our combined operation in Florida.

In summary, we are very pleased with the progress we have made in our operating performance. The combination of our adjusted EBITDA and our lower capital expenditures is resulting in consistent free cash flow. We have a strong balance sheet with net debt of $43 million and liquidity that will allow us to pursue accretive capital allocation opportunities, including acquisitions and share repurchases.

This concludes our prepared remarks. Donna, would you please open up the call for questions?

(Operator Instructions). Ryan Halsted, Wells Fargo.

Thanks. Good afternoon. First question on the acquisition environment. I was just curious to hear your thoughts on what you are seeing in the environment that's leading you guys to get more aggressive on deals, and in particular with the Infinity transaction, how competitive was the transaction? And any color on some of the synergy opportunity you might be able to see, if there is some.

Sure. Hi, Ryan, this is Paul. We are seeing -- I think if you look at nine months ago, we looked at our pipeline, we had 17 deals in the pipe. We now have over 300. We've been very actively out beating the bushes. With our balance sheet in the shape it's in, we want to employ capital and we want to employ it in very good ways.

We believe Infinity was the first really good-sized deal we've done since 2010, and we are seeing -- I'd say there were definitely other people at the table. We haven't gotten much of a download about who they are or what some of the other bids came in at.

But we are seeing on the mid-sized deals that are out there, they seem to be competitive and we are seeing things probably between the 8 and 12 range that we've seen out there for deals between, let's say, $40 million and up. We also have -- we've also been looking at smaller deals where the prices are going -- are much less. So we felt very good about the price we got this at, that we got Infinity at.

And the second part of your question was, Ryan?

Thanks for that. As far as the value-based pilot, I mean, are you seeing that sort of drive more sellers, especially in Florida? Do you see yourselves becoming more active based on that -- on the regulatory changes?

So I would interpret that as people seeing that it's going to move towards -- reimbursement is going to move towards quality and you will win or lose on quality. Are people -- is that shaking things out of the tree?

I'd say no. I'd say we are getting a lot more, gee, we would like to think this through with you, and I think as people are starting to look at value-based purchasing, what we're seeing is they are starting to look at a world where potentially in 2022 they can get 8% or they can lose 8%. That's pretty high stakes for a lot of folks.

And I think what we're out there talking to them about is we are saying that we believe our scale and our infrastructure in terms of driving quality will be very beneficial, if they choose to come with us. But we believe -- we are saying that you have to have sort of our sort of scale and our sort of emphasis that is going to be -- that is going to drive quality and be able to deliver the quality numbers that are going to maximize reimbursement.

And I think as you'll recall when we sat down with you, a lot of our team here comes out of managed care. We've all been through this show before. We have people from Humana, Anthem, and United, so we understand how this is done, and we are setting up a lot of the same infrastructure that we had there, which will drive up -- our ambition is to drive up our quality ratings into the 4s.

That's very helpful. Maybe one last one for me. Can you talk about the emphasis you put on improving your business mix, what kind of progress you are making? And are you actually turning away some of the non-Medicare business as part of this emphasis? Any more color on that would be helpful.

So to be clear, if somebody has a contract with us and we have availability, we are obligated to take the business.

I think what we've been doing in our -- since we have our strategy is to really understand the profitability of each line of business very clearly and understand what it takes from a back-office perspective to service some of these businesses, and then to ascertain is this profitable lines of business or not.

The other thing we look at, frankly, is in the contract. Can we deliver high quality? Because in some of the contracts we really struggle with is, can we really deliver the quality we need so that we will get the great star ratings, but also, more importantly, that we will do right by our patients? So we like traditional Medicare, one, because it reimburses us best and then, two, it allows us to deliver the type of quality that we believe is going to be important, and particularly it's going to set us up best for the future in terms of our star ratings and our value-based quality ratings.

That's very helpful. Thanks for taking my questions.

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the questions. Paul, I just wanted to go back to your home health Medicare admission growth up 4%, a really good number. Wondering what's driving that, if you could give us any color as to what's behind that number and what we should expect going forward.

I would say what's behind the number is focus. I think, as I told people after we finished second quarter, I think we got a great report card, a lot of As on it. And I thought we got a C- in volume growth on Medicare.

And I think the point is what we did is we -- Dan McCoy, who is here with me, and Steve [Syme] and Caroline Henderson, basically we started to go back and we started to inform and talk with our sales staff, and we started to talk about profitability and line profitability, what we could deliver from a quality perspective where the world was going. And we started to have -- Dan, in his very disciplined way, started to have regular meetings on these issues and I think our staff really understands where we can deliver great care and where we can be the most profitable.

So I'd say that's largely the emphasis and we track this on a very regular basis because it also drives research. In our research, we are up 2% over last quarter, too, so I think that all good things come with volume and I think that's something we all understand and I think we all emphasize this year.

I think we've stated before our goal is to be -- and our ambition is to be above 5%. I can't tell you we are going to do that, but I will tell you we are focused very heavily on doing it, and I think we are putting the mechanisms in place to really drive from volume. And that's very important to us. It shows we are just finding, particularly in this quarter where we had to invest, the volume was very beneficial in terms of our ability to deliver $0.34 this quarter.

Sure. That's helpful. And then, Ronnie, going back to the cost curve as it increased, you provided some really nice detail there. Wondering, I guess, how long do you think you will see these higher costs? I think you said half was due to volume growth, $0.60 from ICD-10 readiness. Obviously, that should roll off over time, but just wondering if you've also baked in the potential for any wage inflation.

We do think that we will continue to work toward how we approach the total compensation of our staff and are mindful of that going into next year and are planning for next year.

Certainly as we try to build staff in this environment, that's what we're talking about is we're trying to ramp up and get people on board sooner and making some investments in our process with outsourcing some of our onboarding and -- recruiting and onboarding efforts. So that's all our front-end cost. To the extent that will get down into ultimately the cost to our clinicians, we are going to certainly be mindful of providing the appropriate compensation for them and market driven and we will see how that bears out.

But this is just some of the infrastructure costs and some front-end costs trying to build that staff and meet these growth demands. That's the volume side of it.

Again, the ICD-10 portion of this, it was as expected. We see it, we will probably endure some of this into this quarter, and we are pleased with the results so far and think that ultimately this can be offset and should be a permanent increase to that.

And can you remind us, I guess, what stage are you at in the Homecare Homebase rollout? What percent of your agencies have it?

There's -- we use roughly 400 -- we say we have 400 care centers. We've got roughly 40 implemented, so about 10%. We're going to get another 10%, so we'll be at 20%. We add on Infinity, another 15%, so that's -- so at the end of the day, we are going to have 95 implemented out of rough rough 415 by the end of this year. We anticipate -- we are aiming very hard to get this done next year.

Okay, in 2016. Great. And then lastly, on the Infinity deal, it looks like a nice transaction for you guys. Big exposure in Florida. Just wondering if they have any presence down in Miami-Dade County and if that's an area that you guys still want to stay away from.

They don't have presence there. If you look at the map, you will see there's a [great] piece there. At this point, we believe there is a lot to say grace over in the existing places. We have the potential to move some licenses in some more strategic areas.

Miami-Dade is a very tough place to do business. I think we'll go there with full armor if and when we are ready to, but we have enough to say grace over right now, frankly, in Florida.

Sounds good. Thanks, Paul.

Sheryl Skolnick, Mizuho.

Good morning or good afternoon and I apologize in advance for this background noise. I'm at the airport and on my cell phone. First of all, a ton of work; really great job to everybody concerned.

Second, can we talk a little bit about why all of a sudden hospice seems to be on fire? You are not the only provider who has produced very significant results in hospice, but clearly yours are superior. And I know that you mentioned some pilot activity on the part of CMS. I'm wondering, is this being driven by changing referral behavior? Is there all of a sudden an increase in terminal illness that we should know about? What's happening here? Or is it Company specific? Are you just simply gaining market share?

Hi, Sheryl. First, thank you very much for that comment.

Hospice, what we've seen is frankly from our perspective, we -- Ronnie in his wisdom before I got here really reconstituted and separated out the hospice group. We've got a really good management team there and they are just really focused on providing good care and it's a very singularly focused group.

So I think we're seeing once again -- I'm sorry to say it, it's simple in terms of focus, but we are finding that we are getting better tools as we become more singularly focused. We find we are getting better delivery. Our quality seems to be going up in a very meaningful way, so I think that's it.

From a regulatory perspective, I think there's a lot of wind at hospice's back. It seems like what we're seeing there with the curative-care pilot that CMS is putting out, I think that's going to be very interesting to see there. I think they want to expand how hospice is potentially utilized.

And then, having the physicians have these conversations and basically be reimbursed for it signifies some sort of acceptance from CMS on this, and we think and are hearing that more and more physicians are starting to have these conversations. And I think the assumption is people might come to hospice sooner.

Okay. So your length of stay might change a little bit, but I assume that good documentation and controls around the appropriateness of admissions will make sure that you guys don't run afoul or get in trouble as a result of that.

Because it seems like it's sort of a halfway change on their part. You are still running under the same rules. You still have got caps; you still have a number of other things. On the other hand, it sounds like they are beginning to understand the value of people returning home and being cared for appropriately in that setting, so it's interesting from a policy perspective, if not from a Company upside perspective.

And I guess the second question, sort of along the same thing, we've had a weak volume quarter upstream in terms of admissions. There's been all sorts of crosscurrents in the acute-care space, yet home health seems to be doing very well. Do you think that we are beginning to see out of those hospital admissions that there were -- so, for example, LTAC volumes were down. Are you beginning to see the kind of behavior that we saw in the initial bundling pilot where home health is the beneficiary and facility-based care is losing the share of the postacute setting? Are you seeing any sense of that? And then, I have one follow-up question.

Sure. I'd say we are starting to -- I mean, that's the value proposition that we are pitching when we are calling on institutions is if we can take best care of people in the home -- and that's what our clinically home asset that we are taking off the shelf and dusting off, which has -- which expands our capabilities towards taking care of sicker people in the home, we are trying to expand those capabilities and we are finding that there seems to be much more interest in the hospitals towards sending people home.

So from an institutional perspective and then a patient perspective, that seems to be -- I don't know if there's any differentiation in terms of patient satisfaction, but my guess is there is. And anecdotally, the hospitals are telling us -- at least the ones that I've talked with, they always try to get people in the home and largely it's a very effective way to prevent readmissions, we believe, frankly.

Interesting. And then, one would think that managed care would see the beauty of this, but I find your argument compelling that if they are still not -- after years not willing to pay you a reasonable price for quality services, you are basically going to exit those kinds of contracts.

How do you rationalize that? There's obviously going to be patients available from managed care, from Medicare Advantage and other kinds of plans. Can you make any progress, given especially that you guys know the arguments for the other side? (multiple speakers). Because it's a little troubling to me that you are backing away from some of the managed-care contracts and I would think that some of them are going to be the biggest drivers of your volumes going forward.

I still think this is probably a longer conversation to have with managed care, which is, what's the value of aging in place? What's the value of being in the home?

And then, can we be more expansive in the types of care we deliver and do we have the tools and the people and the skill sets to be able to ask for more reimbursement by using a different combination of tools and people, which is ultimately what we are trying to do with this business.

You know, one of the delightful things we have with Infinity is they have a small private-duty business in Jacksonville. So we're very interested in seeing how we are going to be able to combine that with skilled care and be able to approach managed-care markets and say, can we do this combination and have a lower cost, so that they can get what they need and we can get what we need.

Yes, but in the meantime, I applaud you for taking the right road, which is that you are not going to do business that costs you money. You are going to do business that's right for the patient and makes money (multiple speakers)

Yes, we are going to do business where, one, we can deliver appropriate care and get the right outcomes because everything is going to be outcome based. We intend on making our money in quality. And then, two, we need to be reimbursed properly so our people can really deliver the right care in the setting [to] take the time to do it.

Great. Thanks.

(Operator Instructions). Brian Tanquilut, Jefferies.

Good morning, guys, and congratulations. Paul, just hitting back on the M&A topic, so am I right in -- did I hear that right that your pipeline has grown from 17 to 300? So that's the first part of the question.

And then the second part is, with Infinity obviously a larger transaction, when we first talked early in the year you said that you want to establish a track record and kind of get a sense of your team's ability to integrate and do these deals. So where are we now in that process and should we expect more deals of this size at a pretty healthy pace over the next 12 months? If you don't mind just giving us some color on that.

Sure. I think our general -- this one came along, and based on the fact that we have -- in Florida, we've had a tempestuous Florida relationship so we were in there very heavily. We exited -- as we've said, we exited places in Florida. We have a good group of 13 care centers in Florida now, but we felt when we saw the Infinity deal -- we felt that the combination in terms of where they were geographically was very complementary.

As we were looking at Florida, we felt this was a place we really needed to do business. We believe there's parts of Florida that are very attractive. We also -- we want to keep playing with private duty and managed care. We believe this is a good place to do it. The quality scores and this is also -- we believe we will need that sort of scale for value-based purchasing markets, so we think that's going to be very important.

So we felt it was a good deal (multiple speakers). Is it perfect timing? Probably not, but our team has been doing well. As you see from our organic results, I think we're focused on the right area. I think the key is that we keep producing, that we don't have a conversation next quarter where our volume declines.

So I think the key is we felt like we're hitting on the right directions. Our strategy is good. Our people are starting to deliver organically, so I felt we could do this and stretch ourselves on this. I think practically it's really going to make a big difference for us in the Florida market. I think it's going to give us the heft, the scale, the quality, the incremental management team that's there. I think it's going to really help us, so we are excited by it.

Okay. And then just to follow up on Sheryl's question, but I'll take a different angle on it, so as we think about Medicare Advantage or commercial managed-care payers and your experience obviously coming from that side, one of the things that you've talked about in the past is try to convince them that they should be more agnostic to the kind of clinician that's delivering the care. So how are we now in terms of -- where are we now in terms of trying to gain traction with that conversation with the managed-care payers?

I've got lots of friends obviously at Humana, and then Dan has lots of friends at Anthem. And we've got friends up at United. I'd say these are the most far advanced folks. Obviously, Kaiser is very advanced in this, but we aren't much in California.

But I think the idea is -- particularly because Humana is a place we understand well, we saw with the acquisition of Senior Bridge there that does private duty and then the combination with HumanaCare is that they could -- if people keeping people in the home, particularly the people with multiple chronic illnesses, was a very effective way to approach cost and care management, and luckily, we have Bruce Perkins who ran that program on our Board. He just joined our Board. So we are very fortunate there.

So we are focused on how can we work better with managed care. But often, a lot of times, we will show up and they will try to commoditize us and put us in a box, and what we're trying to do is not be in a box and say, let's talk about -- let's start with the home, not start with -- let's view us in a pre-acute way versus entirely postacute. I think that's what the conversation we are starting to have with these folks will be.

And eventually, we are going to have to take some risks in this process, but I think that's -- we've got to build some better data and assessment capabilities before we will be able to take that on.

To follow up on that point, Paul, and you also mentioned in your prepared remarks that Infinity has a private-duty business, do you think strategically that private duty is a vital part of the home health strategy going forward?

Yes, I do. I think it's important because if the cost is going to go down, there's a couple of plays that are going to happen. One is -- we talk about cost per visit in one number. We have to be able -- if we are going to deal with managed care, we are going to have to drop that number considerably and that's through variable staffing, and we aren't going to lose -- we have to pay skilled clinicians the appropriate rates to keep them.

So what we're going to have to do is start to change mix in terms of allocations and we understand that, and therefore if we can drive our cost per visit down by utilizing different mixes of skill sets, that's how we believe we can start to approach managed care. So that's what we think is really going to -- that's one of the solutions that we think is going to be there.

So we do think private duty is important. We also think assessment is important, so we need to go after assessment tools. We're also out looking for care management tools that once you do the assessments, you are able to track people and build individualized care management tools so that we can really track -- we can optimize our labor -- our human capital and deliver the most efficient care out there. It's going to be much more variable.

Got it. Last question for me, in terms of -- we are hearing the hospitals and some of the other providers in healthcare talk about nurse wage inflation and a tightening labor market. Are you guys seeing any of that with the nurse workforce that you have?

No, we haven't seen it yet. We did actually a survey of our nurses, over 2,000 of them, and we found that -- I'm not saying that pay isn't important. They said it is important, but equal pay is important than superior pay.

But mainly, we feel that what nurses are looking for is the place that gives them the best tools they need to do their job. That's important, and are they working in an environment where care of the patient is primary? Those are more important than salary at this point.

So we believe that if we can provide all three, that we will be an attractive place for nurses to be and for other clinicians, PTs, OTs, those sort of things.

Got it. Thanks, guys.

Frank Morgan, RBC Capital Markets.

Good morning. I'll also ask another obligatory inflation question. Hospitals also complain and talk about drug inflation and it doesn't seem to be an issue for you. I'm wondering if you can kind of reconcile that. Are you just not seeing the kind of increases or does it just happen to do with the mix of drugs you use?

Frank, this is Ronnie. Are you talking about on the hospice side?

Yes, really, I guess -- yes, on the hospice side.

Yes, and I would say our results on the pharmacy -- you know, we have a program and we've just been focused in the last year -- the team has done a great job of just getting the program that we have and the opportunities that we have. So it's more compliance with an existing program that has helped drive this margin expansion we've experienced in hospice.

So, that program may reflect some inflation downstream, but to date, it's been just more better operating compliance with the program we have in place.

Got you. And to go back to the admission growth in the hospice segment, 26% same store on a base of around 4,500 admits a quarter, that's a huge increase. Was there anything mechanically about how you -- what you count as same store or was it literally 26% admission growth?

Literally 26% admission growth, and this goes back to -- I think what we are seeing in this quarter, what the team demonstrated, was kind of the effort that's been underway and we've finally gotten to the spot and kind of at the level where I would frame it -- our production now, our admit production, is about one per care center per day. So, that's about 400 a week thereabouts that we are achieving.

And I'll tell you, we are very optimistic that that's a sustainable level, and so with the comparison that we have, that level of admit volume gave us a nice comparison this quarter, and then if you look at our history here, that should be some nice comparisons if we maintain this level that we feel very good about for the next three quarters.

So we will see -- if we achieve that, it will be some robust numbers again diminishing as we kind of catch ourselves and lap ourselves next year in the third quarter. But it's just great activity level, great energy, great focus that's achieving this kind of level of production in the hospice segment.

Got you. And it's not like new -- you can't say I've got new referral sources. I'm getting more out of nursing homes. It's something that we are -- a switch flipped on. It's just all the forces kind of came together at the right time. Is that the best way to think about it?

They did, Frank. And it's no bright light as to a new pocket of referral sources. It's the same -- probably the same proportionally, same patient diagnosis proportionally, so no fundamental change there or shift. It's just more of it and that's based on, again, focus and the energy of the group.

I think the -- hi, Frank. This is Paul. I think the other thing we are seeing is real strong focus in terms of -- since hospice has become an independent operating group, just very strong focus on doing the right thing on the mission, on the quality. We're just seeing that resonate very well in the marketplaces, so -- because this is a very passionate group.

You go out to some of the hospice centers and you are there in the morning when everybody is gathering together, it's -- they want to -- they really believe in hospice and they believe what they can do for people. So they really want to expand that mission to as many people as possible.

Okay. Thank you very much.

Toby Wann, Obsidian Research Group.

Hi, guys. Thanks for taking the questions. Just on the higher medical costs you guys incurred, Ronnie, I think you said it was for a couple of high-dollar claims. Anything else in there in terms of -- that you guys have been able to detect -- in terms of maybe higher utilization of specialty pharmaceuticals? I know we've seen that from some of the other healthcare providers out there.

Toby, good morning. Great question and the answer is no. It really was kind of beyond the seasonal increase that was anticipated. We just had some large claims that come periodically and they happened to come in this quarter. So it was more driven by that than any other specific item we'd point to.

Any underlying trend that you guys have been able to determine? Is it a function more of higher deductible health plans? So as people meet their deductible, then -- or anything like that? Just trying to get some more color, if possible. And if we don't have any, we don't have any.

Sure. Really, it was just an occurrence of large claims that showed up in this quarter. We were always anticipating in the back half of the year kind of an elevated claims level as people have gotten through deductible and out of pocket. We expected some of that in the third and then it just went beyond that with the large claims.

I would say looking into the fourth quarter that what we experienced all in in the third is probably our expectation for the fourth, but it would be more expectation, not driven by large claims, so it's (multiple speakers). And fourth quarter, we are expecting that total level as a normal seasonal trend.

Okay. Thanks for the color.

Whit Mayo, Robert W. Baird.

Thanks for squeezing me in. Just a couple quick ones. I guess I wanted to go back to the final rule. I don't think there's been any discussion really on it. And I know you are still working through the moving pieces and what this means, but kind of rough math, 1.4% is, what, like a $10 million cut? And I guess I'm just kind of curious how you feel like you can offset that headwind in 2016.

Whit, thanks for the question. So, yes, besides just a little bit of relief from the final rule, again we are going to have -- the way we would offset it is, first, growth. So as we work on mix and growth, we are hoping to generate more gross margin relatively that way.

The second part is that we will continue on our path of operational efficiencies and we'll see into the year. We will begin to get some better visibility, certainly as we move through the year, on achieving -- getting to achieve and being able to demonstrate some of these savings to the tune of $40 million to $50 million.

Hi, Whit. This is Paul. I think the key is that's one of the reasons I think we are focused on mix and optimizing our mix, our payer mix. So we are going to continue on that front.

I think we are going to continue to exhibit as much discipline as we can on the G&A and on the cost per visit. I think the interesting thing from our perspective is the level of complexity that we have as a Company when we are operating three systems, so AMS3, AMS2, and Homecare Homebase. And as we migrate off of this, we just see a lot of -- from a margin perspective, we are starting to see and anticipate a lot of things will start to drop off as we become a much less complex structure here.

And then ultimately, obviously we are focused very, very heavily and will be focused for the future out of -- in terms of quality ratings. We also believe that once we have better quality ratings that that will obviously influence referrals because we are seeing -- we anticipate the mix is going to get that much better once we have higher quality ratings.

Got it. So in 2015, there were some pretty favorable case weight changes for you, and as you look at the final rule, does it appear like there are any incremental headwinds or tailwinds with the case weight recalibration?

Again, Whit, worked through that detail, so we are not prepared to really frame that just yet as we work through that. But I'll bring back -- and as always, we don't -- we are not giving guidance and we are thinking about now going into the fourth quarter, but with respect to the rule and the implementation, that will -- relative certainly to this current quarter, that's about a $0.02 per share impact those episodes would straddle.

And on your CapEx, is there a way to break out what's sort of recurring and nonrecurring? Again, not trying to pin you down on guidance, but just to get a sense of what the real sort of maintenance plus ongoing growth-related CapEx we should expect going forward when you isolate some of the IT conversion costs and whatnot?

Sure. As this kind of settles out -- again, we are looking next year to get to below $10 million in maintenance or recurring CapEx. And of course in this quarter, we had $1.3 million. So we think all of that is of a recurring nature.

Okay. And sorry, one last one. Goodwill went up $5 million sequentially. Was there -- I didn't think you bought anything. Just curious what drove that.

I think that has to do -- a Nashville acquisition that occurred. I guess we booked that in this quarter. We [recorded] that.

Okay. Cool. Thanks.

The hospice, right?

Yes, the hospice acquisition in Nashville.

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

Great. Thank you, Operator, and thanks to everyone who joined us on our call today. We really appreciate your interest in Amedisys and we look forward to updating you on our visits in our next quarterly earnings call. Thanks. Hope everybody has a great day. Take care.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.