Amedisys Inc (AMED) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Amedisys fourth-quarter conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to the conference over to your host, Mr. David Castille. Thank you. You may begin.

Thank you, Operator. Welcome to the Amedisys investor conference call to discuss the results of the fourth quarter and fiscal year ended December 31, 2016. 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 Chief Executive Officer, and Gary Willis, Chief Financial Officer.

Before we get started with our call I would 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 will turn the call over to Paul Kusserow.

Thank you, David, and welcome to the Amedisys fourth-quarter 2016 earnings conference call. On a GAAP basis, we generated $366 million in revenue and earnings per share of $0.26 in the quarter. For the year, we generated $1.44 billion in revenue and earnings per share of $1.10. On an adjusted basis we reported revenue of $365 million, EBITDA of $31 million and EPS of $0.44 for the quarter, with EBITDA and EPS well ahead of consensus for the quarter. In 2016 we reported revenue of $1.44 billion, EBITDA of $110 million and EPS of $1.55.

We are pleased with these results, particularly considering the self-imposed disruption caused by our rapid Homecare Homebase implementation, which was completed during the fourth quarter of 2016. As we transition into 2017, we are moving past the many changes of last year, with our primary focus on delivering improved results by improving our already excellent clinical numbers, growing our Company organically and inorganically and controlling costs.

I would like to recap some of the great work delivered by our team last year. In home health, our clinicians completed over 7 million patient visits, all while undergoing significant workflow and IT conversion changes. Our patient census was over 55,000 at year end and our quality of patient care star ratings continued to rise. Congratulations to our home health team for their perseverance and continued improvement in delivering quality care.

In hospice we finished a tremendous year, in which we grew average daily census by 16%. We completed over 1 million patient visits and ended the year with approximately 6,400 patients on census. I like to congratulate our entire hospice team for their outstanding performance and a job well done again in 2016.

In our new personal care segment, we have been aggressively building our platform in Massachusetts and are now the largest provider in the state, caring for over 15,000 patients annually. In the past 12 months we have completed three acquisitions, Associated Home Care in March 2016, followed by Professional Profiles late in the year and finally closing Home Staff last month.

Closing the Home Staff acquisition with Fallon Health made us the largest provider of PACE, or Program for All-Inclusive Care, for the elderly in Massachusetts. In addition, many of our patients are enrolled in SNPs, or special needs programs and are dual eligibles with multiple chronic conditions. Our personal care segments will have a patient on service for an average of three years. During this time, if they need skilled home health care or hospice services, Amedisys can provide the full continuum.

In Massachusetts, we have purposeful overlap between all three of our business segments. We are working towards building a more integrated care model that enables our patients to age in place, while removing as many barriers as possible between different funding models. Our goal is to have all three segments working together daily to ensure that all patients have access to the right care at the right time. We believe our ability to serve the needs of this population gives us a unique opportunity to begin working on at-risk models with innovative payers like Fallon Health, as well as ACOs and other health plans and providers.

Transitioning to 2017, please remember our strategic plan consists of four basic pillars, clinical distinction, being the employer of choice, operational excellence and driving organic and inorganic growth across our three business segments. In clinical distinction, we are very pleased with our progress in CMS's Quality of Patient Care star ratings, improving our average each quarter in 2016.

We are driving further improvement in 2017. Our April preview scores yielded an average of 4.03, a 15% increase over last year, making us one of two publicly traded companies with an average of four stars or above. We are working hard to have all of the care centers at or above four stars by the end of the year.

CMS also signaled their intent to create similar ratings for hospice providers and we expect to be at or near the top of the hospice rankings once these measures are finalized. Beyond the basic fact that providing great care is fundamental for us and the right thing to do for our patients, we believe this is the most important area that distinguishes us from our competition and is a major driver of future growth. Our goal is to be the clinical partner of choice by providing the highest quality of care.

Our strategies for becoming an employer of choice and operational excellence are very closely tied together. We have made significant progress in 2016 in lowering voluntary turnover and retaining our most valuable resources, our people. Our software conversion is complete and is being supplemented by development, testing and implementation of our new internally developed productivity tool.

We now have the ability to deploy our resources more effectively and have created additional capacity among our existing staff. At our core we are a clinical staffing company and we need to efficiently put the right people in the right places to deliver the appropriate high-quality care. We will continue to innovate and push the envelope here.

However, creating an additional capacity on it's own will not drive improved financial results, which is why organic revenue growth is a central part of our 2017 plan. In hospice and in personal care we have seen strong and consistent organic growth and our teams are performing well.

In home health, growth was disrupted in the second half of 2016. While we expect to see a positive year-over-year growth in the first half of the year, our plan is to return to mid-single-digit organic volume growth in the second half of the year.

On the inorganic side, this morning we announced that we signed a definitive agreement to acquire the home health and hospice assets of Tenet Healthcare. With think that this transaction further demonstrates' providing growing interest in aligning with skilled home health, hospice and personal care providers. The growing interest in our sector represents validation of the value we can bring to ACOs, bundled payments initiatives or other arrangements, where providers are reimbursed based on the quality of care and the outcomes we deliver.

Through its subsidiaries and joint ventures, including United Surgical Partners International, Tenant operates 79 acute care hospitals, 20 short stay hospitals and approximately 470 outpatient centers. We looked at the home health and hospice asset of other large hospital systems, but we like Tenant, as a have a great presence in both the acute care hospital and fast-growing ambulatory surgery center market, where we believe there is lots of opportunities. We are very excited about the potential of this relationship moving forward.

We remain focused on acquisition growth opportunities and we have seen lots of activity this past year, with our pipeline of opportunities collectively representing well over $100 million in EBITDA. Completing the right strategic deals at appropriate valuations requires a lot of hard work, restraint and prioritization. The good news is that we have ample liquidity and the capital markets are healthy and accessible.

We also expect to generate significant free cash flow in 2017. We have the flexibility to act on strategic transactions across each of our business segments. With our operating team and infrastructure now in place and scalable, we are well positioned as an industry consolidator in a highly fragmented market.

As I'm sure you noticed, we have not issued formal 2017 guidance in our earnings release. For those who have followed our Company for some time, you recall that we have not issued guidance in recent years.

Our plan projects we will produce results within the range of current analyst estimates. That's being said, several members new to our leadership team, including our Chief Operating Officer, Chief Development Officer and Chief Financial Officer and President of Home Health are weighing in on the initiatives in our operating plan.

Their feedback, first blush, has been optimistic. After accessing the decision internally and discussing options with the investment community, we felt it was prudent to refrain from issuing earnings guidance at this time.

The change in administration has probably sparked the most questions from investors in the past few months. At this stage, we are working closely with our peers in the industry to communicate our view with the Trump administration that the current regulatory environment is overly burdensome for our clinicians, other providers and ultimately our patients. Given the administration's initial executive actions we believe we have a real opportunity to work with regulators on lessening that burden.

One of the initial areas we are targeting is the CMS pre-claim review, or PCR, demonstration, which we believe is the wrong way to address potential fraud in the industry and it doesn't benefit patients or taxpayers. We're looking for to looking alongside the new administration in recommending more effective ways to fight fraud and abuse in our industry.

That being said, we are still preparing for the PCR rollout in Florida on April 1. Our experience in Illinois, although initially painful, ended up working relatively well once we understood the information that the MAC, Palmetto, needed. We started with affirmation rates in the mid-50% range and ended the last few weeks above 90%.

We did occur some increment a cost that was handled largely with our existing staff. As it turns out, Palmetto is also the MAC that we will be working with in Florida, so we are hopeful the process will run smoother initially than in Illinois. We have plans in place that will utilize approximately three FTEs already on staff to handle the incremental workflow in Florida.

Before I turn the call over to Gary, I want to think our team of 16,000 employees that made 2016 a great year in spite of all of the changes and have positioned us well for continued future success. Regardless of the regulatory changes or other unforeseen impacts, there is no doubt that the combination of consumer preferences, aging demographics and the cost advantages of home-based care will continue to drive growth in our industry. Our singular focus remains simple, to drive the highest quality healthcare in the home and become the aging-in-place solution for our patients and their families.

With that, I will turn over to our CFO, Gary Willis.

Thank you, Paul. During my first two months at Amedisys, I spent much of my time learning our business, our history and our initiatives. I learned that this Company has been evolving over the last couple of years and now has a solid platform to build an increasingly successful business. We have a committed group of professionals focused on providing top-quality care to our patients wherever they call home.

Now let's review our financial results. During the fourth quarter 2016, on a GAAP basis we generated $366 million in revenue, an increase of $28 million, or 8%, as compared to 2015. Diluted earnings per share $0.26 in a fourth quarter, compared to $0.38 per diluted share in the prior year. For the year, we generated $1.4 billion in revenue and diluted earnings per share of $1.10.

Slide 18 of our supplemental slides provides detail regarding income or expense items adjusting our GAAP results that we have characterized as non-core, temporary or one-time in nature. This a schedule also details the income statement line items each adjustment impacts.

As it relates to these adjustments, in the fourth quarter of 2016 we incurred an asset impairment charge of $4.4 million related to mobile technology used previously with our old operating system, a settlement charge of $2.5 million related to previously divested care centers and $2 million of restructuring activity expenses.

Adjusted EBITDA for the fourth quarter of 2016 was $30.5 million, an increase of $2.9 million from the fourth quarter of 2015. Adjusted diluted earnings per share were $0.44 in fourth quarter of 2016, an increase of $0.04 from the prior year. For the year ended December 31, 2016, adjusted EBITDA was $109.9 million and adjusted diluted earnings per share were $1.55.

Our consolidated financial results in the fourth quarter were impacted by $2 million of disruption cost from our implementation of Homecare Homebase. We also experienced an increase in bad debt expense of $1.2 million in the fourth quarter of 2016 as compared to 2015 as we saw deterioration our accounts receivable aging during this system implementation.

Now turning to our home health segment performance for the fourth quarter of 2016, revenue was $269 million, up $6 million over the prior year. Our Medicare same-store admissions were up 2% as compared to the fourth quarter of 2015, with a total episodic admissions up 4% over the same period. Our Medicare recertification rate was 37%, excluding our Infinity acquisition in the effect of the Homecare Homebase disruption.

Non-Medicare per-visit admissions were down 9% versus the fourth quarter 2015 as we enhanced our focus on Medicare fee-for-service volumes. Despite the Medicare reimbursement cuts that we faced in 2016, our Medicare revenue per completed episode only decreased $4 due to patient mix. Segment EBITDA in our home health segment was $37 million, down approximately $2 million.

Our cost per visit increased $4.76 over the fourth quarter of 2015. This increase was driven by salaries and wages, our health insurance cost and disruption cost associated with the Homecare Homebase implementation. These amounts are slightly were offset by decreased contractor utilization in the quarter.

Now turning to our hospice segment's performance for the quarter, revenue was $85 million, up $9 million over the prior year. Our same-store admissions were up 16% and same-store average daily census was up 13%. Our hospice segment EBITDA was $22 million, an increase of $3 million. Revenue per day was down slightly and cost of service per day was down 3%, resulting primarily from decreased salary and pharmacy cost per hospice day.

Our personal care segment generated $36 million in revenue for 2016, with over 1.5 million billable hours. In the year, we served over 50,000 clients and grew billable hours by 43% in the fourth quarter as compared to the first quarter of 2016. This includes the impact of our acquisitions.

Turning now to our general and administrative costs for the quarter, I would like to refer you to slide 5 in our supplemental slides. On an adjusted basis, total G&A was $117 million in the quarter. This total includes approximately $8 million related to acquisitions not reflected in our 2015 financials. Total G&A was down 150 basis point as a percentage of revenue in the fourth quarter of 2016 as compared to 2015.

Our home health G&A was up $1 million to $67 million, or 25.2% of home health revenue, up 10 basis points year over year. Hospice G&A was up $1 million to $18 million, or 21.1% of hospice revenue. This was a 130 basis point decrease compared to last year.

Our corporate G&A was $29 million in the quarter, down almost $2 million over the prior year. As a percentage of revenue, total corporate G&A expense was down 120 basis points from the prior year. This decrease is the result of planned corporate costs reductions in the year.

Our cash flow from operations in the fourth quarter of 2016 was $29 million, with free cash flow of $27 million. While days sales outstanding and accounts receivable stabilized at 40 days during the fourth of 2016, we have a significant amount of working capital that is tied up in accounts receivable, driven by our system conversion.

We have reallocated internal resources to address the backlog of our billing and collection processes. We expect to see the level of accounts receivable reduced to more appropriate levels in the next few quarters. Despite these changes in working capital in 2016, we generated $51 million in free cash flow for the year and deployed $48 million towards acquisitions and share repurchases.

Our balance sheet remains in great shape, with net debt of $66 million, or 0.6 times our last 12-months adjusted EBITDA. Capital expenditures for the quarter were $2 million and $16 million for the year, $7 million of which were routine in nature. We are estimating our capital expenditures of between $10 million and $12 million for 2017. At December 31, 2016, we had a cash balance of $30 million and $173 million available on our revolving credit line, providing total liquidity of $203 million.

In terms of deployment we will continue to prioritize accretive acquisitions over other capital allocation options. On the reimbursement side, our analysis of the home health rule resulted in a reduction of approximately 2%, or a $17 million headwind, in 2017. This was offset by a reimbursement increase of $5 million in hospice for a net negative impact of $12 million in 2017 due to these reimbursement changes.

On the regulatory front, we wanted to address the disclosure in our 10-K that will be filed today. We have received requests for records associated with a ZPIC audit in Florida for four care centers acquired in our Infinity transaction that closed on December 31, 2015. The review covers time periods before and after the transaction closed. As we state in our filing, at this time we cannot predict or quantify our potential repayment obligations and we will update our disclosure of this matter as necessary during this audit assess.

As Paul discussed earlier, we are not issuing formal guidance at this time, given that much of our operational leadership is new and are still weighing in on our 2017 initiatives. We are confident our plan will deliver results within the range of analyst estimates for the year. We will update our view on guidance in subsequent earnings calls.

Now, at this time we are prepared to take your questions. Operator, could you please open the call for questions.

(Operator Instructions)

Brian Tanquilut, Jefferies.

Hey, good morning, guys. Congrats. Paul, just wanted to ask first on the Tenet acquisitions that you announced this morning, any color or any details you can give us in terms of trying to size the revenue or the amount paid for the deal?

We are very excited about the deal, first of all. We think it is a wonderful opportunity for us. Obviously, they have some assets that we have acquired. The issue with Tenet is that they didn't want to disclose the price on this or some of the revenues. I think I'll have Gary weigh in, in terms of how you can kind of come to at least some range on this.

Certainly. Good morning, Brian, and thanks for the question. We are excited about the opportunity we have with the Tenet transaction. This is a step in the right direction for us but as you are thinking about this, this is six care centers for us in key markets that opens the door for us for future discussions; so as you think about the size of the purchase price on this, just keep in mind that we are talking about six care centers in these geographies.

Equally divided between home health and hospice. I think the key thing that is important is, yes, we did this acquisition, yes, I think it is a good deal. Most importantly, though, when you look at the composition of Tenet in the ambulatory space as well as the hospital space, when you look at the overlap that we have with Tenet facilities and our facilities, I think what we are most encouraged by, when we've had discussions with their management, has been places to partner with them so that their patients are well taken care of and that we can coordinate and deliver really outstanding outcomes for them.

I think we are really excited by this. I know there was other deals done before, but we've been holding out for this and it we are glad we're able to bring it to a close actually yesterday.

One thing that I would add, Brian, as you take about that, we think we can fund this acquisition purchase price with cash on our balance sheet and really would not need to tap into our revolver [a lot] to do that.

Got you. That's very helpful. Paul or Chris, as I think about the success you had so far with Homecare Homebase, the savings flowed through pretty well during the quarter. Is there any kind of color that you can give in terms of -- I know you have the ramp already the slide deck, but just anecdotally or Chris, from your experience at Kindred, how should we think about the ramp, especially in the volume side, at the local agency level as we plan for models for 2017?

Sure. Thanks, Brian. Good question. I think the most important thing to take away from the fact that we have Homecare Homebase transition kind of in our rear-view mirror is the fact that it really does create some additional capacity with your existing staff that you have at your care center. As we are able to really be very proficient with the system, we had the ability to take on more business as our field team, our sales team in the field, are having more and more success out there.

Capacity is oftentimes a limiter in this business and it makes it difficult for you to grow your centers based on either disruption or the system that you are using. But Homecare Homebase really unlocks that capacity, so as we have more and more of these care centers that have been on the system for some time, we expect to see a corresponding ramp in volume and our ability to take that volume as we move in 2017.

Just add, Brian, on this. We are hoping to banish the words post-implementation, chopped, disruption and all of this from our vocabulary, hopefully in the next couple of months, so we are excited by that. The other thing I think that we did mention, we talked about is that we have developed a proprietary tool that we been using that fundamentally is a capacity estimator. And we've been working, we've been rolling it out. We're almost complete in our rollout and it is been incredibly successful [along] and concurrently with Homecare Homebase.

What it is basically able to do is we can go out and figure out levels of productivity in care centers with the various clinicians that are out there and then we are able to -- it is really cut down on what we thought were some of our staffing needs. Also, when have reduced turnover, you reduce turnover at the level we have reduced turnover, we find that we're in very good shape. We've have been getting some question on labor, if we have seen issues there. We haven't, but largely we've been pushing turnover down we will really working on the productivity of our people and making sure that we can maximize the capacity in a way that is good for everybody. We've been very encouraged by this.

Just to piggyback on that comment that you just made in terms of the capacity of your people, as I think about your business development group, your integration groups, I noticed that you threw in a $100 million pipeline in your slides for M&A. How should we think about the pace of deals this year, considering (technical difficulty) deploy about $1 million or so of capital over the last year, but you clearly have a lot of capacity, so how should I be thinking about that?

I think the way we are looking at it is, is there's tremendous capacity. We obviously have tremendous capacity. We have got some big deals the we are looking at.

We found that over the past two years we have done nine deals, spent a little over $100 million for about $150 million in revenue. We are thinking at this point is that we would like to do something bigger. We think in personal care we are still going to play by the ones and play -- move very judiciously to build up presence where we think we can combine all three businesses.

We like the hospice business a lot and we find we are really good at it, so I think we'll be aggressive in that space. We like the bigger deals that are out in hospice. We are seeing a lot of hospice deals come out.

We're seeing less in home health that we haven't seen before and the pricing is still -- we are getting more competition from sponsors. We haven't seen much strategic competition, but the sponsors are now looking to try to do this. We are seeing less sophistication in the marketplace in terms of home health. But we want to do bigger deals and we have been focused on bigger deals.

The deal we announced today is a little bigger deal than obviously what we normally do, so we are going to try to move up that food chain. I would love to deploy a lot more capital because we clearly have the capacity and with the free cash that we anticipate will start to build up once we get our AR issues under control in the next couple of quarters, we're going to be generating a lot of free cash and so we need to start to deploy that.

Last question, if I may, for Gary. On that last point you made, Paul, anything you would call out in AR like where do you think you bring DSOs down and what you need to do to get there? Thanks.

Sure. Great question, Brian. Part of the AR issues is at the care center level. We're just making sure that the documentation is all in place, that we are working with our referral sources to ensure that documentation is complete and accurate and timely. We deployed extra internal resources that are really a focus swat team to help us attack that and catch up on any documentation that we need in order to get bills processed appropriately.

The other side of that is with our revenue cycle team and just making sure that we are working through the edits and being able to drop clean claims and then the opportunity to really have the lack of distraction of a new system and the ability to focus in on working with our payers to make sure that we are moving those forward. We have a very concerted effort now on our AR days and we would hope it will be in the low- to mid-30s on DSO over the next couple of quarters. It is not a lay up. It takes some heavy lifting, but we are focused on getting that done.

All right. Thanks, guys.

Thanks, Brian. Appreciate it.

Bill Bonello, Craig-Hallum.

Good morning. Thanks, guys. Just a couple of follow-up questions. Just trying to understand on Tenant, given what you said, is the goal here that this becomes more of a strategic relationship with Tenet across a broad number of markets? I know more than a decade ago you had acquired some centers from them and now you've added some more. Is that ultimately what you are trying to move to here?

You talk about you prefer them to some of the other hospital systems. Just trying to get some sense of the opportunity.

The opportunity, this was an acquisition of their -- as you know Tenet had announced last year that they were going to get out of the health plan business and they were going to divest their home health and hospice assets. We've been in conversations with them for a while. What we saw there and what we see and what we have been having conversations around is, yes, they have some assets and these are good assets and we are going to take these assets and the people with them.

We are very excited. These are well-run assets. They are producing good results. The star ratings are good. We need to get them on a common technology platform, which we need to do, but they have good basics.

They are profitable and so we want to do a very good job where there's facilities associated with them and we think there's a lot of opportunity there. There's a lot of Medicare folks within the geographic footprint of these hospitals. We are excited by that.

But obviously, what we are most excited by is working with Tenet in the acute side and the ambulatory side. We believe that as ambulatory becomes more important and sicker folks go into ambulatory that there is a real opportunity for us in the home health business to partner with some of these folks. Then also, we like the focus in terms of hospitals. With 79 hospitals there is a large overlap with where we are, so we want to go in and we get a seat at the table and we want to figure out what we can do to help these folks and help ourselves in the process, as well.

So we are quite excited about this. We believe this is a toehold. This gets us in there. This gives us an opportunity to show what we can do and then we move forward and we build a bigger partnership.

Excellent. That is very helpful. Then just a second question. Can you just talk a little bit more, beyond obviously getting through the operating transition and the fact that the quality scores continue to go up, just from an initiative standpoint, what other actions you are taking to drive accelerating organic growth on the home health side?

Let me talk to it a little and then I will turn over to Chris Gerard, who is really focusing on this. I guess the way I look at our performance is I think that we got all As and we got a B minus on growth. I think the idea is we understand that what we need to do is to reinvigorate the growth.

We have brought in a very good experienced team that understands how to do that. We have taken initiatives as we've talked about before, Project Redwood, which has restructured our business development group so that we can more efficiently deliver and incentivize our folks to bring business in. We have changed our mix. We have been very focused on growing Medicare, because, as you all know, that is where the profits are and that is where we can deliver the best care.

I think we have the right strategy in place. I think we have -- I think what we've done is we're going to start to recover from our -- as I said, I don't want to use the word chop and self-induced pain and all that sort of thing, but I think you will see descent growth in the next two quarters on a year-over-year basis and then we expect to really start to outperform the industry and expectations in the second half of the year. I will turn over to Chris and he can tell me I am full of it or continue this process.

You are not full of it, Paul. In my two months that I've been here I've spent a good deal of my time really evaluating our sales efforts and our strategy around sales. The good news is, is we're doing a lot of things very, very well. I think we have a very nice presence in the hospital facilities and the ability to really actually generate a very consistent flow of home health volume out of the hospital facilities.

We see some opportunities to diversify a little bit in terms of some focus with our strategic team in the field. The one thing that I've kind of noticed that we've been spending some good bit of time around is it seemed like we have had some pretty broad range of initiatives and we are trying to narrow our focus and really go after where we know the business is, using data and really directing our sales force in the right direction. We are already starting to see some early wins from that and I anticipate as this year goes along we're going to have a very, very kind of focused and narrow strategy to diversify a little bit of our referral stream, but at the same time to take advantage of the capacity that we have in our care centers.

Great. Thank you, guys, very much.

Thanks, Bill. Appreciate it.

Sheryl Skolnick, Mizuho Securities.

As if you didn't know it was Sheryl Skolnick, but thank you. It is a hard name to pronounce. Good morning, everybody.

Let's get a couple of things taken care of here, if we might. On this acquisition, I am perplexed and somewhat dismayed that what could be a material acquisition to Amedisys, because of out of deference to the seller, you're not giving us terms and you're giving us the best you can in terms of guidance, but it's not a whole lot to go on. So walk me through how is it not material to your business and if it is material, then how and when are we going to figure out how material it is?

Cheryl, I'm going to pitch to Gary on that one. Then I will come back in it.

Good morning, Cheryl. It's Gary. As we mentioned in the previous response, we are talking about six care centers that we are starting this transaction with Tenet. We believe that we'll be able to evenly fund the transaction when it closes in a few months with cash on our balance sheet. As a reminder, we had $30 million of cash on our balance sheet at the end of the year. We don't expect this would require us to tap into our revolver.

We really -- this isn't transformative type transaction that we are talking about doing as the year progresses, but this is a step in the right direction. This is a beginning point for us to show that we're being able to execute on some of our inorganic growth strategies. We would love able to continue to partner with Tenet in the future as they look to do different things with home health and hospice assets. This is simply a starting point.

I think one of the things I recall when we were out seeing you, Sheryl, in New York is we talked a lot about the potential of the ambulatory world and we think that as the world -- as more and more seems to be fitting into that, we like the opportunities we saw when you combine the hospital world with the ambulatory world in overlap areas. We saw that as a real potential to start to build up on our skill set in not only the hospital world and gain from what Tenet has there and there is very good overlap there, but also in the ambulatory world where we believe we can partner with folks because a lot of the things that used to go to hospitals, the procedures are now going into ambulatory; and we believe we can start work to with them on protocols to really start to drive some volume into the ambulatory world.

So we are optimistic about that and we're also excited about -- our conversations with Tenet have been very good about where they need some help, particularly where their facilities are full. We are very excited to possibly bring in some of our (inaudible) home ideas, hospital at home ideas, and start to help alleviate some of their pressure on their capacity.

That is interesting. Could I just ask a follow-up? (Multiple speakers) Good. As you should because if you're not optimistic when you buy the thing, it is kind of disappointing.

Very good point. That sounds good, yes.

The second thing that I would say is, on [edge] you think through how when you receive a patient from ambulatory, and this I think is very important, as you point out correctly, a lot of things that used to be done in hospital now being done at ambulatory. It may be a different set of protocols to be -- appropriately treat that patient. But have you thought through the length of stay issues? Because I wonder and maybe we can do this off-line, but it just seems to me you might be running the risk of, you can add a lot of value over a very short period of time and that is a LUPA.

We have thought about and we -- we're obviously, as we started to understand these issues, the last thing that we want to do is generate a lot of LUPAs. There's places to play, that for us are particularly interesting. One is at the front door of the hospital to divert people from coming in as we have these protocols for taking sicker patients that we have developed through clinically home. So our belief is that if we can start to drive some folks, particularly in facilities that are full, into home health and partner with a large hospital system like Tenet to do that, that's one thing.

The other piece is when people are going for more severe type and more acute type procedures in an ambulatory setting, home health makes a lot of sense because if you look at some of the discharge patterns that come out of ambulatory, most of those, in my opinion, should be going to the home whereas some of them are going into SNFs and ERFs and some of these other places. So that is where we really hope to sit down and understand that. The last thing that we are going to do, though, is get into LUPA situations. That's just -- we won't go there.

I didn't think you would, because you have successfully avoided it, to your credit. I think we have beaten that one pretty well.

On the other side, the thing I think perhaps we've not talked about is $45 million run rate in cost savings. Your slides are very helpful. Thank you. As we think about that, that number has been pretty solid since you first announced the transition from old system to Homecare Homebase and you've not, to your credit, backed off on that number and now we are on the door sill of the number that being realized and you're starting to see that impact.

The slides are good because I think that is the one piece of guidance you're giving us is kind of laying that out. I hate to be Debbie Downer here, but I have to just ask this question. What would prevent you from realizing the full positive impact of the run rate of $45 million, the potential for absolutely $41 million in 2017?

Based on what we are doing now, frankly, this has been a real area of focus. We meet -- the Management Team meets and does a round pound every Thursday on two things, the $46 million, and we have our trackers here -- the guys who are teeing this up, Scott Ginn and Steve Seim, here, so they can answer this as well. We focus on the $46 million and obviously generating growth.

Thus far, we track it every single week. We go over it. We watch the numbers. The only place that I think that we always have to be watching is on contact labor utilization. You always have to make sure that, that's staying down and mix, and making sure that we are always aware that skill mix is something that is a big driver. Steve, you have any additions?

Yes, I would just say that in part of those conversations we are pretty specific in what we look at. If you think about the way that staffing flows through the system post Homecare Homebase implementation, we have got many of the care centers that have been walking through that. We are very comfortable that we have been pulling those out of those each of the individual care centers and there is no reason to believe we won't continue to succeed in doing that. Then as Paul indicated, we have got some utilization metrics, contracts, staffing, things like that, that we monitor very closely every week and have prescriptive targets for, that again, we are comfortable we are on the glide path towards. Things could change, I guess, but I really am struggling seeing how that is going to happen.

All of the trends show they're going really well and we watch them every single week and we have a little line and when things go above the line, we pull out the outliers and then Chris gets on the outliers and the outliers come back into the fold; so that is the way we have been working. The key now obviously that we are also spending weekly round pounds on is the growth and we're starting to see some decent results there. We are cautiously optimistic about what we are seeing there but it is clearly -- the field clearly understands where our emphasis is and now that we are using data to really drive down to a very specific level, we're finding it is effective.

Okay. Finally, this issue with Infinity and the review that you are under, can you just -- what are they looking at? Anything -- a specific issue or a general inquiry? How targeted is the -- what is the target is on it?

Certainly, Sheryl. This is Gary. We have received a notification from the ZPIC, as we talked about in our 10-K disclosure, around four care centers in Florida that were acquired by Amedisys as part of the Infinity transaction at the end of 2015. We continue to have those conversations. The inquiries have escalated somewhat in the last couple of months and that is why we felt it appropriate that at any point that we have a regulatory development and that we share that in a very transparent way with our investors and that is why we chose to talk it on today's call.

But those four care centers, to just give that some frame of reference, represents only about 20% of our Florida market, which is 7% of our home health revenues, so while it is concerning and we are going to continue to aggressively work with the ZPIC auditor because we believe that there are some errors in the way that they are approaching some of this, we don't know the outcome of that. They have found some things that we have developed an internal team to focus on. We are reviewing all their claims in those four care centers. We take these things very seriously.

We are focused on this. We will continue to move this forward and expect that we'll continue to discuss it with our investors as we progress.

Okay. That is great. Thank you so much.

Thanks, Sheryl. Appreciate it.

Ryan Halsted, Wells Fargo.

Thanks. Good morning.

Hey, Ryan.

Maybe to touch on the non-Medicare book of business, you continue to shift away your mix from the commercial payers. Just curious, do expect this trend to continue for much longer before it starts to improve, before you start to maybe shift back to commercial payers? Or do you think you're currently making some meaningful progress with your discussions with payers that could potentially usher in more favorable mix shift towards commercial in the near future?

That is a great question, Ryan. I think that our methodology is pretty simple here. We've taken our managed care business, about $0.25 billion of it. We put into a separate business unit and what we are doing is we are doing two things.

On the same game -- we call it same game, new game. On same game, what we are doing is we are cleaning up our contracts to make sure that we have good contracts, that we are being paid appropriately, that the contract terms are good. We are developing a lot of initiatives that we believe will drive out the cost, particularly the back office cost. We should be talking about that the next couple of months.

We have some very specific initiatives that we are looking to really drive those costs out and get clean, good contracts, drive better adjudications, better authorizations, better reauthorizations, so that we can drive cleaner business. We're looking at utilization management, trying to make sure that we can generate good profits on what we are getting paid and in some of the situations we aren't. We are doing a cleanup job there and we believe that is important.

The next thing we are trying to do is, as you saw on our slide deck on the state of Massachusetts, is we want to start to take risk. We believe that managed care is going to only increase. Managed care penetration will increase and for us to get out of the commoditization game with the large payers that we have to start to, one, start to cut into other elements of the post-acute continuum, which we are doing, which is to basically take business out of SNFs and ERFs and [LPACs] and so we believe we can do that.

The other things is how do we start to take more risk and get paid more for taking risks, particularly on rehospitalizations, and then how do we get paid for quality and why is it worth it for the plans to pay us for quality? So we have been having very good conversations with all of the large players out there and starting to say, let's find a place where we can understand what you are looking for, cut some elements out of what are the normal protocols, and then have just home health do the majority of it, start to take some risk on aging in place, start to take some risk on rehospitalization rates, and then we can do that.

The other thing we have been doing, which we are very excited about, is we have a project here called ACE. ACE is our database. As you know, a lot of people here are from the payer world and one of the things we learned is you need two things to take risk. You need to provide great care and then you need to have data.

We've been building our own proprietary database and are starting to experiment now building algorithms so that we can judge based on certain elements of the Oasis, which is a start-of-care plan, starting to basically say, what is the risk of hospitalization of this person? How do we minimize that? What is the risk of rehospitalization? What's it going to cost to age in place?

So we are starting to build these databases and starting to try to use these so that when we do take risks, we can bring data into this and some comparative data so that we actually can say with a straight face, we think we can keep this person out of the hospital or whatever else sort of metrics the payers would want to deal with. So we are very aggressive in this space. We understand the payer world. We understand that it is going to continue to grow.

But right now, same game is not really of interest to us. We will play because we have to in a lot of places, but what we want to do is transform the dialogue with the payers.

That's helpful. I'm sorry if I cut you off.

No, you got me worked up on it so I'm just taking a breath.

Very helpful. I appreciate all the color. My other question, just on the pre-claim review, it seems like the industry is somewhat confident that maybe an alternative proposal could be received by the new administration. Just curious if anything has actually been presented so far in terms of alternative solutions and if there's any sort of indication of that receptivity towards other proposals?

Yes. We've been spending a lot of time, and I'll let Dave Kemmerly address this as well, but we've been spending a lot of time in Washington. We've been fairly forthright in believing that pre-claims review doesn't accomplish what it's supposed to. We believe it is an incredibly burdensome from an administrative perspective. It doesn't add to -- it basically assumes you're guilty right at the start, versus is innocent until proven guilty which was the prior methodology, so it means that we have to go through a lot of administrative work to move past this.

We've figured out how to do it. We get it, but it is not helping anybody, and so what we have offered to CMS, we've gone in with our friends at the partnership level, at the Partnership for Quality Home Health, with other big players and we have gone in and said, if you want a fraud detection tool, we will build one for you. This is ridiculous.

Thus far CMS hasn't taken us up on it because we believe we can do it very efficiently. We don't like fraud. We don't want it. We know where it occurs. We know where the hot spots are.

We think it is relatively easy to detect, so you don't need these nuclear weapons in there just destroying everything to look out for fraud when it is easily recognizable and can be detected in a much more effective way. So that is the conversation we are trying to have on PCR.

The other thing is, we are optimistic because Secretary Price was one of the folks introduced the bill to put PCR off for a year; and also what we have also seen is the two senators from Florida, Nelson and Rubio, have sent a letter in to Secretary Price asking him to reconsider PCR as well as delay it or kill it. We are hopeful that given Price's orientation and dislike of this initially, that we can move forward and get this thing either sidelined or killed.

But thus far, we are preparing for it to we believe we are adequately prepared for it. We believe since we've been through it before we can get through it okay. Not happily, but that we believe it will be very difficult for, particularly people that don't have the system in place to do this. Dave, I don't know if you have anything.

Not much to add on that. Very well done, Paul. I guess I would just recap and say that we are working closely through the Partnership for Quality Home Health, our trade association, or really, I'd call it more of a coalition then a trade association. We're working very closely with LHC and with Kindred and Encompass as we go to CMS and do two things, propose alternatives to this to really root out fraud and abuse rather than PCR, and also we are continuing to push for a delay [very much] which Paul talked about.

We think there's a much more hospitable environment now for potentially delaying this and a more hospitable environment or open environment to listening to our other ideas. With the change in administration we think there's potentially some opportunities there. Again, we are pushing for a delay, as are Senators Nelson and Rubio from Florida, which we think is key. We will continue to push for a delay, but we also are going to continue to push for an alternative method to root out fraud and abuse that we think we can propose as an industry.

Lastly, but most importantly, we are continuing for payer to be ready on April 1, for a pre-claim review in Florida and we think we are well positioned to do that. We had experience in Illinois. We learned there, albeit we only had a couple of care centers there, but throughout the process we were able to perform well by the end of it. So we feel like we are in a position to perform well in Florida as well, if need be.

That is great. Thank you for taking my questions.

Thanks, Ryan.

Bill Sutherland, The Benchmark Company.

Thanks and good morning, everybody. Most of mine have been asked. I am curious, Paul, as you look at hospice and how well it is doing, I'm just curious about how you're looking at the sustainability of this level of growth and kind of what are the key things that are differentiating you the most, do you think, in the market as you get these volumes?

I think the key thing what we did -- I have to think Ronnie Laborde, who is here with us and I'll let Ronnie talk a bit about it, but I think that what we did initially is, we just separated out hospice and home health. We really fantastic team with it's [will to break] culture that just doesn't say no to anything and they just move forward. They have done this thing organically and it has been really inspiring to watch this group come together and then move forward in the way that they have.

I think the benefit is also something that is incredibly valuable. I think it is a nice business, it's a clean business. We understand the rules. They're pretty upfront. There is a demographic interest in this.

We see a natural very strong wind at our back and as well, the government seems to very much like it. If you look, obviously we got some gains in terms of we have offset $17 million of headwinds in home health and what we've got is we were able to bring it down to $12 million because we got a positive on hospice. So we see that opportunity there. Obviously, to grow it at the levels we have, at some point we are predicting it will come into the low-double digits, the high-single digits, but thus far folks keep outperforming, so more power to them. We will take it all day.

From what you guys hear from --

I'm just going to say, Ronnie do you have any questions? Sorry, Bill.

No. Thank you, Paul.

Comments, sorry.

I think you teed that up well. Basically, I would say the team has just performed just magnificently. I think we're very bullish about the continued growth. Obviously, the rate of growth will, more likely over time moderate, but just generally I'd say we feel very good about sustaining growth and what the opportunities are. The team has done everything that Paul described and very, very positive outlook.

Ronnie, while I've got your ear, from what you're hearing from CMS, either directly or indirectly, do you think the star application for hospice is near term or out further?

Maybe medium term. It is coming, but I think we'll be well poised to participate there and perform very well. I think it is coming. We anxiously await it, actually, and it helps bring a quality conversation that we like. I think it is a good development for the hospice segment.

Yes. That is it for me. Thanks, guys.

Thanks, Bill.

Whit Mayo, Robert W Baird.

Hey, thanks. We are over the hour mark so I will try to keep it really quick. I've just got to ask the Tenet question one other way. Any reason that the size of these agencies would be any different than your corporate average?

No, it's about -- I'm looking at Gary.

This is Gary. I think they are decent sized agencies. We're not talking about small agencies. I don't think they would be much larger than our average.

Okay. That is helpful. The conditions or participation rule, are there any costs associated with complying for that program this year?

Whit, it's Gary. We know those rules have been in development for some time. They have been discussed at length.

We're the process of working through those. We believe that the timetable that we were provided was pretty short, so there are some things we have to cover relatively quickly in order to be prepared. We don't see that as a heavy lift. We think our team is on target there and that we don't encounter seeing any disruption from that.

Okay. Maybe just one last one here. The slide deck shows the corporate overhead down a couple million dollars year over year, but when I look at the reported results from 2015, it looks like the corporate overhead is actually up $2 million. I didn't know if I'm missing something.

Sure. I would be happy to walk you through that and take those off-line with you. Basically, it's nonrecurring charges, so the items that we have detailed as the add-backs to EBITDA, we try to detail which line item those impact for you and many of those will show up in that corporate segment. When you bridge those two together then I think you'll see where the differences are.

Awesome. Thanks, man.

Thanks, Whit.

Brian Tanquilut, Jefferies.

Hey, guys, it is Jason Plagman on for Brian. Just one quick follow-up. I think you gave some details, actually, on the Tenet deal in your press release and based on the previous deals you've announced and the cumulative numbers in that press release, my math would say about $35 million of annual revenue for today's deal. Is that in the right ballpark? Lastly, just any estimate on timing of the close?

Great, great question and your calculator works like ours does, so we would not say that you are off base there. As it relates to timing, we are going to be focused on getting these deals over the finish line. We would think in a couple of months we will have these done and a part of our portfolio.

Great. Thanks, guys.

Thanks, Jason.

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to Mr. Paul Kusserow for closing remarks.

Thank you, Tim. I appreciate it. Before we close, I'd like to thank, congratulate and wish the very best to our Vice Chairman, former CFO, COO, Interim CEO, Board Member, Ronnie Laborde. This is his last Amedisys earnings call. On April 2, he is slated to retire.

We wouldn't be here today and be where we are today without him. His sage counsel and calm presence have made a huge difference to me and our teams as we've partnered together to turn Amedisys around. Ronnie will be sorely missed, so on behalf of our 16,000-member Amedisys family want to think Ronnie for his credible service to our Company. Thank you very much, Ronnie.

Thanks to everyone who joined us on our call today. We sincerely appreciate your interest in Amedisys and we look forward to updating you on our next quarterly earnings call. Take care, everybody.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.