Amedisys Inc (AMED) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Amedisys Second Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now turn the conference over to your host, Mr. David Castille, Managing Director of Finance. Thank you, Mr. Castille. You may now begin.

Thank you. Welcome to the Amedisys investor conference call to discuss the results of the second quarter ended June 30, 2017. 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. Also joining us are Chris Gerard, Chief Operating Officer; Scott Ginn, Chief Accounting Officer; Steve Seim, Chief Strategy Officer; Dave Kemmerly, General Counsel and Senior Vice President of Government Affairs; and David Pearce, Chief Compliance 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 also be available in our Forms 10-K, 10-Q and 8-K.

Thank you. And now I'll turn the call over to Paul Kusserow.

Thank you, David, and welcome to the Amedisys Second Quarter 2017 Earnings Conference Call. Before we begin, let me first address the 2 questions that I believe are on everyone's mind: one of them external to our company and one of them internal.

The external question is the Home Health Groupings Model, or HHGM, that was proposed in the CMS 2018 home health rule. Let me begin by saying that we, like you, just received the 388 proposed rule late Tuesday afternoon and are not in a position yet to comment on the specific impact to Amedisys and our patients. HHGM, as proposed, is a complete redesign of the home health payment system. We need information and data from CMS in order to properly and accurately model the impact of HHGM in all the 34 states in which we deliver home healthcare services.

Having said that, our team is working on modeling the impact if HHGM were to be implemented as presented in the proposed rule. This is challenging as there are still big gaps in information within the rule.

It is obviously very early and we and the industry still have a lot of work to do, but here is what we know. HHGM is a total payment redesign for home health with the stated intent of better aligning resources and outcomes with reimbursement. HHGM has an effective date of January 1, 2019, less than 18 months from now. HHGM shifts payment from a 60-day episode to two 30-day periods and eliminates therapy visit thresholds currently used to adjust reimbursement.

This potentially discourages home health providers from taking care of higher acuity patients requiring therapy as part of their treatment, and it sends them to higher-cost settings. HHGM is a product of the Affordable Care Act and the previous administration. It is an extension of ObamaCare.

We were told HHGM was created to be budget-neutral, but the proposed rule seems to indicate otherwise. HHGM was crafted and proposed by CMS without meaningful input from home health providers.

Providing the industry only 60 days to comment on a total payment redesign after no prior collaboration with the industry seems to run counter to the current administration's goal of transparency and reducing the regulatory burden for clinicians, providers and patients in a way that increases quality of care and decreases costs.

First, I want to assure you that we will adjust and adapt to any changes in policy made by the government as we have successfully done in the past. We have the clinical and operational expertise, resources, experience and leadership to do so in an effective and efficient manner.

As a recent example of how we have reacted to regulatory changes coming from CMS, you can look to last year's rollout of the preclaim review demonstration. It was conceived by CMS staff without industry input. Amedisys and the industry advocated against the implementation of PCRD, as proposed, and offered alternative approaches. At the same time, our care centers in the impacted areas trained and ramped up for the demonstration project. We saw our affirmation rates under PCRD in Illinois surpass our industry peers, and we ultimately experienced a 96% affirmation rate on all claims prior to CMS, suspending PCRD in Illinois.

We anticipate our experience in preparing for HHGM will be similar. Every time there is a change in this industry, those with scale, resources and grit, win out. We have plenty of each.

Second, while we believe in and support payment reform that seeks to better align resource use and outcomes with reimbursement, we strongly urge CMS to leverage the experience and expertise in the industry to craft a new and viable payment model. It appears that this proposed payment model contains many uncertainties and carries with it the tradition of increased regulation and complexity of the Affordable Care Act. We need to be at the table to play the implications through with the policymakers. Otherwise, unintended consequences will invariably gum this up.

Third, we are concerned that this payment system overhaul could restrict access to care for Medicare's most vulnerable home health patients. In the worst case, we believe that this could lead to increased utilization of higher-cost institutional settings and ultimately lead to higher healthcare costs overall. Home health is a significant and growing part of the long-term healthcare cost solution. We believe that current healthcare policy and patient preference support that view.

We will be aggressively working with our industry allies and state and national trade associations to share our views and solutions with CMS, members of Congress and their staff over the next 60 days and over the following 16 months, if necessary. As such, Amedisys remains fully committed to working closely with the administration and CMS leadership to develop viable solutions that fulfill the goal of aligning reimbursement with resource use without compromising access to high-quality care. Please also remember, it ain't over till it's over.

The second internal question is our home health volume growth. As we mentioned last quarter, we expected a tough environment for home health volume growth in the first half of the year because of the loss of productive business development employees. Through the first half of the year, while we have been aggressively back filling this gap in our business development staff, we have delivered good financial results through strong cost control and continued hospice and personal care outperformance.

Our message this quarter is similar to last: We are hitting on all cylinders except for home health volume growth. We believe we have fixed the issues and delivered financial results in line with our expectations for the quarter.

Our business development hiring and retention initiatives are taking hold, and we are now targeting 2% to 3% episodic admission growth in the third quarter and 4% to 6% episodic admission growth in the fourth quarter. However, our continued cost management initiatives will help us reach our EBITDA targets for the year in the event that our growth ramp is slower than expected.

Just to be clear, we do expect growth. For us, growth is not a question of if, but when.

Now turning to our financial performance for the quarter. We performed well despite lower-than-anticipated home health volumes. We generated $379 million in revenue, adjusted EBITDA of $36 million and adjusted earnings per share of $0.62. Our home health segment revenue was $274 million for the quarter, down $2 million compared to prior year. This was primarily due to continued softness in Medicare volumes. On a same-store basis, Medicare admissions were down 4% in the quarter and total episodic admissions were down 1%.

On a consolidated basis, same-store home health admissions were flat. EBITDA was $37 million.

In our hospice segment, revenue increased $14 million or 18% as compared to the second quarter of 2016. Same-store admissions grew 11%, representing the ninth straight quarter of double-digit same-store admission increases. Segment EBITDA was $26 million, an increase of 34% from the prior year. Hospice continues to outperform our expectations.

Our personal care segment is continuing to grow significantly with billable hours up 53% compared to prior year, including the impact of acquisitions. The team has performed well as they have proven to be excellent integrators. When adjusting for acquisition and integration cost, personal care is ahead of our targeted pace for them to achieve segment EBITDA margins of 8% to 10%, which would be industry leading.

Having already discussed growth across our segments, I'd like to update you on the other strategic focuses of our company. First, clinical distinction. Our primary goal is to deliver high-quality care to our patients in the home that will distinguish us from our competitors. We continue to improve our clinical quality, outcomes and patient satisfaction metrics across the board.

In the July 2017 release of quality of patient care star ratings, our average star rating was 4.13, and 82% of our healthcare agencies were rated 4 stars or better compared to just 36% in the July 2016 release. I am extremely proud of these results as our average scores have increased incrementally each quarter and are among the leaders in the industry.

Additionally, our patient satisfaction STAR rating results also increased in the July release with an average score of 4.08, about 8% above the industry average. On the value-based purchasing front, we fully expect to be the net recipients of funds. And we'll know more about our performance later this year when CMS releases the additional data.

Second, employer of choice. We continue to see a voluntary turnover rate of 22%. The main focus in recent months has been to drive down turnover, increase retention and ramp-up hiring efforts with our home health business development staff. The end of July will be the first time this year that we have seen more people in business development roles compared to the corresponding month last year.

In the last 3 months, we have reduced our vacancy rate for business development hires from almost 9% to below 5%. As we continue to look for new talent, we have 3 key objectives. First, we must onboard and train our new hires and ensure they are fully supported as they ramp up to full productivity. Second, we must continue to retain quality business development team members. And finally, as these efforts bear fruit, we must coordinate at the care center level to ensure we have the appropriate clinical staffing levels to support growth across our company.

Our last area of strategic focus is operational efficiency. We remain on target to achieve our full run rate of $46 million in operating efficiencies by the end of the year. To date, we have achieved almost 90% of the targeted cost efficiencies we identified in the beginning of 2016. These efficiencies have driven substantial growth in adjusted EBITDA and EBITDA margins from 8.2% in the second quarter of last year to 9.5% this quarter.

On the M&A front, we continue to actively source deals and remain focused primarily on larger hospice assets and personal care tuck-ins. Although home health is still a key piece of inorganic growth, we need to find out more about the ultimate impact of HHGM on Amedisys and the industry before deploying any capital in this space. We are hopeful it will create buying opportunities.

Though we have seen a number of actionable prospects in the first half of this year and our pipeline remains full, value expectations are high. Our main focus is to be good and thoughtful stewards of the company's capital. And as such, we have taken a very disciplined approach to valuation. Acquisitions remain a key piece of our strategy, and we will continue to actively seek out high-quality assets at valuations that provide our shareholders with optimal returns.

Before turning the call over to Gary, I have a few updates I'd like to share on Amedisys and the industry overall. Aside from HHGM, the CMS-proposed rule included a net 0.4% reduction in payments to the industry for next year. As is usually the case, it will take some time for us to analyze the specific impact to Amedisys. Generally speaking, this was in line with our expectations. Additionally, the proposed hospice rule for 2018 should be finalized soon, and it will result in a 1% reimbursement increase to us.

We are also disclosing further developments associated with our zone program integrity contractor, or ZPIC audit in Florida in our 10-Q. We originally received a request for medical records from the ZPIC in July of last year, and we have been cooperating fully. This matter relates to services provided by 4 of the care centers acquired in our Infinity acquisition, and the review period covers a time period both before and after these care centers were acquired by Amedisys. Gary will outline the financial impact in his remarks.

Overall, we remain encouraged by the performance and prospects for our company across all business segments, and our primary goal is to return to organic volume growth in home health. We are confident in our plan to address the issues driving these trends.

In closing, thanks to our team for another solid quarter and remaining dedicated to our mission of helping those we care for to age in place.

With that, I'll turn it over to our CFO, Gary Willis.

Thanks, Paul. During the second quarter of 2017, we generated $379 million in revenue, an increase of $18 million or 5% as compared to 2016. On a GAAP basis, diluted earnings per share were $0.13 in the second quarter compared to $0.32 per diluted share in the second quarter of 2016.

Our diluted earnings per share were impacted by a number of items this quarter. In addition to the certain items we have adjusted our diluted EPS to reflect, we had an impact this quarter to diluted earnings per share for an accounting standard change as it relates to stock compensation that was effective at the beginning of this year. This accounting change requires the realized tax benefits associated with stock compensation to now be included in our income tax provision on the income statement instead of the historical presentation in the equity section of the balance sheet.

For the second quarter of 2017, the benefit from stock compensation recognized in our income tax provision as required by this accounting change was $3 million, which increased our diluted earnings per share by $0.08 in the second quarter.

Slide 15 of our supplemental slides provides detail regarding income or expense items adjusting our GAAP results that we have characterized as noncore, temporary or onetime in nature. This schedule also details the income statement line items that each adjustment impacts. As it relates to these non-GAAP adjustments in the second quarter of 2017, we incurred net pretax adjustments of $28 million, as detailed in our slides and our 8-K filing.

These adjustments were mainly driven by our previously disclosed securities class action lawsuit settlement reached in the second quarter. The settlement amount was $44 million, of which $15 million will be funded by our insurance coverage. We will fund the remaining portion of this settlement of $29 million, and expect this to occur in the third quarter.

Adjusted EBITDA for the second quarter of 2017 was $36 million, an increase of $6 million from the second quarter of 2016. Adjusted EBITDA margin was 9.5% in the second quarter as compared to 8.2% in 2016.

Adjusted diluted earnings per share were $0.62 per share in the second quarter of 2017, an increase of $0.20 from the prior year, inclusive of the $0.08 income tax benefit resulting from the accounting change for stock compensation.

During the second quarter, we continued to show solid cost control in all of our operating segments and corporate overhead spending as reflected in our increased adjusted EBITDA margins. As a result of soft home health volumes, our overall home health financial results were impacted.

On an adjusted basis, in our home health segment during the second quarter of 2017, revenue was $274 million, down $2 million compared to the prior year. Revenue was impacted by the lower volume trends and the 2% Medicare rate reduction in 2017. This was partially offset by increased case mix of our patient base.

Medicare same-store admissions were down 4% as compared to the second quarter of 2016, with total same-store episodic admissions down 1% over the same period. Our Medicare recertification rate in the quarter was 36%, up 1% over the prior year. Same-store per visit admissions were up 2% and segment EBITDA was $37 million in the second quarter of 2017, down approximately $4 million from 2016. Cost per visit increased $1.49 compared to the second quarter of 2016, driven by increased health insurance cost.

Our hospice segment continues to perform exceptionally well and again exceeded our internal expectations. On an adjusted basis for the second quarter of 2017, revenue was $91 million, up $14 million over 2016, an increase of 18%. Same-store admissions were up 11%, and same-store average daily census was up 16% over prior year to 6,717. Hospice segment EBITDA was $26 million, an increase of $7 million over the second quarter of 2016, with net revenue per day up approximately 2% to $148.39. And cost of service per day was down 3% to $73.08, primarily driven by lower staffing and supply cost.

Our personal care segment generated approximately $14 million in revenue in the second quarter of 2017 with approximately 618,000 billable hours. The segment generated operating income of $1 million in the quarter. We're beginning to see this segment stabilize as they integrate recent tuck-in acquisitions and are performing consistent with our expectations.

Turning to our general and administrative expenses. Please refer to Slide 6 in our supplemental slides. This quarter, we performed well at controlling G&A spending and driving our operational efficiencies and related cost savings. On an adjusted basis, total G&A was $119 million or 31.5% of total revenue. Total G&A was down 230 basis points as a percentage of revenue compared to the second quarter of 2016.

Home health G&A was down $2 million from the second quarter of 2016 to $69 million or 25.2% of home health revenue, which is down 70 basis points year-over-year. Our hospice G&A was up $2 million to $19 million or 20.9% of hospice revenue. This was a 170 basis point decrease compared to last year.

Our personal care G&A increased slightly less than $1 million to $3 million or 20.8% of personal care revenue. This is a 370 basis point decrease compared to last year.

Our corporate G&A was $28 million, down $3 million over the prior year. As a percentage of total revenue, our total corporate expense was down 110 basis points from prior year.

We will continue to stay focused on proactively controlling our G&A expenses as we progress through the remainder of this year. From a cash flow perspective, we generated $36 million in cash flows from operations for the quarter, an increase of $22 million from the prior year. Total capital expenditures were $3 million, which is flat compared to the prior year and in line with our expectations. Our balance sheet is in great shape with outstanding debt, net of cash, of $34 million or 0.3x last 12 months adjusted EBITDA.

Our provision for doubtful accounts was $4.7 million in the second quarter of 2017, which was an increase of $400,000 as compared to 2016. Our days sales outstanding remained flat at 40 days from the first quarter of this year.

As Paul mentioned, we have an update to provide on our ZPIC audit in Florida. We've received letters from safeguard services, our ZPIC, placing 4 legacy Infinity care centers under prepayment review or payment suspension. We have also received request for repayment from [Palmetto] based on [safeguard's] audit activities. At this time, we've repaid some of those requests for repayment and are appealing many of the claims identified, but we are unable to predict the outcome of this audit. We're hoping for resolution of this matter soon.

Approximately $8 million of net receivables are delayed with our payment suspensions in Florida related to this ZPIC review, adding 1.5 days to our DSO at the end of this quarter. Excluding the impact of these payment suspensions, our net DSO would have been approximately 38.7 days, which reflects that we are making some progress in collecting our accounts receivable backlog.

At June 30, 2017, we had a cash balance of $59 million and $170 million available on our revolving credit line providing total available liquidity of approximately $230 million under existing credit facilities. We expect that approximately $29 million of our cash balance will be utilized in the third quarter of this year in connection with our securities litigation settlement.

At this time, we're prepared to take your questions. Operator, please open the call for questions.

(Operator Instructions) The first question is from Brian Tanquilut of Jefferies.

Paul, just a quick question first on the growth side. For the back half of the year, it sounds like you -- you've given your goals for organic admissions growth for Q3 and Q4 but just trying to figure out where do you get that confidence or visibility in terms of being able to drive Medicare growth? And then kind of like in addition to that, how should we be thinking about the strength in non-Medicare admissions in the quarter? I mean, is that a shift in strategy or a shift in the sales focus? I mean, what drove that 12% admissions growth?

Sure. Well, what I'm going to do, Brian, is give you an overview, and then I'll have Chris Gerard jump in. But it's basically a mathematical exercise the way we figured it. The -- we lost 50 folks while we were doing Project Redwood, and we didn't rehire them in the way that we should have. And so each of these folks brings in a specific amount of -- we track their productivity very carefully. So what we saw when we lost these folks, we actually so what we had hoped for was increased productivity of the existing folks, but we needed another 50 folks to bring in to start to drive more of this volume. And what we've seen thus far, which has been good, is the folks we've brought in, so the BD hires that we've brought in, particularly, we've been tracking those since April, May and June. They've been well ahead of what we've been projecting. So we have -- the underlying 700 group is more productive. And the people coming onboard are now ramping up at a good rate and are producing more than we initially had thought. I think what we did see is slight slowness in getting to the 750 number when we had initially predicted it. And therefore, with that's – that we're playing a little bit of catch-up. By the end of this week though, we will have 750 reps out there, again ahead of production and then people out in the field producing much better results. I'll turn it over to Chris, see if you have anything to add.

Sure, yes. Thanks, Paul. Brian, as Paul mentioned, we've got a pretty dialed-in model that's measuring our new hire ramp -- productivity ramp, our existing tenured BD staff productivity. Turnover was one that caught us a little bit and slowed us down a little bit in Q2, which we were able to curb later in Q2. And if you look at the graph on Slide 9 of the supplemental deck, you'll see that's when we started in June is when we started to see the significant ramp in our FTEs. So what we do is we monitor all of these indicators: the new hire productivity, BD, FTE growth, our turnover and our tenured staff productivity. And all of those support our goal of the 2% to 3% episodic growth in Q3 and as well as our 4% to 6% in Q4 because we will continue to take the FTE ramp-up to about 775 FTEs throughout Q4.

Got you. My next question, I figured everyone's going to ask about HGHM (sic) [HHGM], so [regrouper] models. I'll just ask a more fundamental question for Gary and Paul. So as we think about your cost side, you're starting to realize all the Homecare Homebase benefits. You're beating numbers on G&A, it seems like. Is there more to squeeze from an operating expense perspective and efficiency? Number one. And number two, as we see volumes ramp up, I mean, should we expect that to pretty much flow through to the margin and earnings line as we go into the back half into next year?

Brian, it's Gary. Great question. And you know, we are very pleased with our cost performance this quarter and this point in the year, but -- and we do believe that there's other cost efficiencies that we can continue to take out of the business. So we've identified things that are not -- are going to change our long-term strategy for the company where we can reduce some spending and continue to get more efficient in how we provide care to our patients. So we think that we'll continue to see some continuations of the trends around strong cost control and cost management. So as we think about this returning of growth in the 2% to 3% in episodic growth in Q3 and then 4% to 6% in Q4, coupled with the continued cost control measures we have in place and that we're identifying and implementing, we do think that, that will help us deliver on our promises for this year and continue to see us maintain our margins.

One of the things, Brian, that we saw that we're very happy with is the productivity numbers of our clinicians have increased, which is what we all were betting on for Homecare Homebase. We think it's around a 5% number, but we've been able to see that those existing clinicians that we have are being able to do more visits. And therefore, we're hoping to continue to do -- to push those productivity numbers. So we feel good about that on the productivity side. On the cost side, I agree with Gary, we've identified more cost we're going to go after. And then when the growth comes in, we anticipate we'll be able to push that through in a meaningful way without incurring incremental costs.

The next question is from John Ransom of Raymond James.

[Guess] this is probably an unfair question, and I think I know the answer I'm going to get, but I thought I'd ask it anyway. As we look back over time, whenever CMS estimates the effect on the industry of X, we look at the for-profits, and usually the effect is greater than X. Do you know enough even at this point to say that 4.3 for Amedisys might be a little worse than 4.3? Or is it too soon?

Yes, I'd say -- John, it's Paul. I'd say, it's too soon. We're still -- as you know, one of the things that we've seen with this and as I mentioned in my remarks, we didn't think this was going to be in the -- initially in the rule. And then about 2 months ago, we kind of were up at CMS and got a good idea that this was looking like it was going to be in the rule. As we've been working through it and we've been modeling it and the partnership which we're a remember of, which is a lot of the other big companies' for-profit and non-for-profit had did some modeling on it. And there's still a lot of holes in it, and there's still a lot to be resolved in terms of the accuracy, in terms of what we can do. One of the things we have seen is there's, by states, some pretty strong swings in what I would call equitableness or inequability, the sense that we -- there's some states that really seem to get hammered in basically our calculation. So we need to go back and confirm this and make sure that -- because the implications in places like Utah, Michigan, Florida would be pretty severe. And so we're trying to understand what that means, but yes, we're building models on this. And as soon as we know something, we'll be out and predicting that impact. The good thing for us is diversity, geographic diversity seems to be a modulating factor here, and the -- it seems like certain states are just getting pounded and other states aren't. I know, Dave -- I have Dave Kemmerly here who can maybe opine a little further on that.

Now I wouldn't disagree with that. The -- as Paul mentioned, the partnership engaged a firm to do some modeling on the information and data that they had at that time, but I think they didn't have access to all the information that CMS had as they developed the rule. So there's still some holes. So I think it's, as you said John, too early to say how the for-profit versus the nonprofit is going to play out, but we did -- I'll reiterate what Paul said, our early look is there are some geographic disparities. Of course, over the next 60 days, we'll be talking to CMS through formal comments and also in reaching out to them individually and as for 2 national trades we belong to knock in the partnership. And we'll be working with some of our other industry colleagues and trying to understand the -- do some modeling, understand the rule and work with CMS and Congress over the next 60 days. And of course, we'll work with them all the way up for the next 18 months into implementation, which is as you know in the rule is on or after January 1, 2019. But as Paul said in his remarks, we will also simultaneously be working very diligently to prepare for implementation as if it's going to be implemented as proposed. We certainly hope it's not implemented as proposed what we know today, so we'll be working hard on that. But that's a long-winded way of saying I don't know the answer of that disparity, that specific question of yours at this point between for-profit and not-for-profit. You're right, historically, there has been a divide there.

Okay. And my other just kind of Captain Obvious question, and I'm sorry if I missed this, but I would assume that you would put Medicare home health acquisitions on the back burner until this is clarified. It wouldn't be impossible to model these things? Or is that not accurate?

I think that's a -- if you look at our priorities, our priorities pretty much now are hospice and personal care. We do like -- we are having some good conversations with what I would call super regionals that are out there. But obviously, the problem now is pricing is valuation on these to understand what the proper valuation is. And obviously, the issue will be we'll go -- we'll take a worst-case scenario and go, and then will we still be at the table under a worst-case scenario as we're looking things. If -- once this does settle out, though, I think the interesting thing is it'll present probably some very interesting buying opportunities.

And what are the -- I mean, just first cut, what percent of your either agencies or visits are in states that you think are particularly problematic that you went through very quickly before? Do you have even that information?

We do -- yes, we see based on what we've seen. There's Tennessee and Florida. But once again, these -- my sense is they're going to have to flatten this out a bit. Particularly, otherwise they're going to get Congress folks from these states in Congress that are probably going to be fairly aggressive about saying, why us.

Well, I congratulate you on keeping your balance sheet clean, so that's (inaudible) for that.

The next question is from Sheryl Skolnick of Mizuho.

First of all, if all you had to do is report the quarter, I think that obviously the tone of my questions would be pretty much different, but so let me just try to engage you a little bit, and I know it's difficult on this CMS stuff. So first of all, I mean, I think it's pretty obvious if you actually read what they said that they look for -- the data that they use, the level where they started from the -- in terms of the level of payments versus where they want to get to, which is eliminating the overpayments not related to actual patient need. It seems pretty clear that geographically, you've got big error rates, to use the dreaded phrase, and you've got big overpayment issues in areas with high degree of fraud. And we know South Florida has got a high degree of fraud, this is not rocket science. Okay, so right. So let's just sort of level-set that a little bit. Also as part of all of this, I guess what I'm coming down to is in the context of mistakes, errors, whatever happens in billing that get you into the ZPIC situation through the acquired agencies, the overarching perception on the part of Congress that the industry is still fraught with gamers if not fraudsters and not helped by headlines of all these people who are turned out for billing for patients who don't exist as opposed to legitimate agencies. Aren't you starting from a position of weakness here? Can we kind of explore where -- just how tough or easy you think it's going to be to gain momentum among your supporters in Congress for payment levels to remain the same? And no one's [astuting] the value of the benefit when done right but for payment levels to make -- be made the same. So if we could have a little dialogue about that, that would be really helpful.

Sure, I'll start off, and it'll be kind of 100,000 footnote, probably a little banal, but I think the -- I think there's pretty strong -- I think there's a bit of a dichotomy out there between what we hear in Congress and what we hear from our Congress folks and what we hear at CMS. And then also, I think there's also a bit of a dichotomy and a bit of a difference between what CMS under Trump is saying and what CMS under Obama said. So I -- my sense is that's where we're trying to figure out, and therefore, we have the Tower of Babel. I think the idea is what we're trying to do in our process is just to find a working model and then to understand that model and then to see what -- to see where the impact is and to see what they're trying to get at. If they're trying to get -- and you're right, Sheryl. Most of these things have the underlying piece of trying to root out fraud. And I guess, our feeling is as we've been to CMS before and we said, "Listen, you want fraud? We'll show you how to -- we'll build a calculator." They know how to calculate for fraud. This I think what it's going to do is if they're really after over-therapy utilization by people who do that. I think what's going to happen is they're going to push it into more institutional settings, and I think the cost is going to go up. And then what they potentially could do here is try to limit us in terms of the types of patients we take care of, and what we're trying to do is move up the acuity scale, not go back down the acuity scale. So again, where we're seeing the desire to push us up the acuity scale is places in managed care. The issue, as you know, in managed care, they don't pay us enough. So that's what we're -- that -- we're kind of in that sort of pickle, and we're having very good dialogue in managed care with that. So I think that might be a possibility in terms of driving more, getting paid better in managed care for taking more risk for higher-acuity patients. It seems like the government's going backwards on this one. So I don't know, Dave, you've read this thing. I don't know if you have any additional comments? Or Chris?

Yes, I'd -- first off, I'd agree with Sheryl. We certainly do face a challenge, and we continually face that challenge because the lens that CMS and Congress tend to look through is this high error rate. And I think it's around 42% now. And we've had the challenge of trying to delineate what's that error rate. And that error rate, the overwhelming majority of it, in our view, is documentation errors versus the type of fraud that Sheryl referenced earlier. So that's been a challenge to get to that, to get beyond that 42% error rate and dig in and explain that to policymakers. So the next step is then if you identify how can you go about detecting fraud and kind of rooting out the fraud in the industry and rooting out the bad players while not harming the compliant and the quality providers. And the danger of just going to a payment overhaul to get there seems to be kind of a very broad-based approach rather than more of a rifle shot of trying to -- we believe there are other ways we could present to detect and deal with fraud. I did notice it, I believe yesterday, Sheryl, CMS extended a moratorium, to your point, in Florida and Illinois and Texas and a few others on new home health agencies. So yes, it's an acknowledged uphill battle that we as an industry have to overcome. I think the rule has done something interesting in the last week or -- in the last few days, especially, but as we anticipate it coming out, perhaps, and you've had some galvanizing effect and kind of united the industry where it's not been that way before. I believe it's been fairly fragmented on the advocacy front. So out of every crisis, comes some silver lining. Perhaps the industry is going to really align around this and have to come up with some solutions for fraud that CMS and Congress could adopt rather than this method. But it's just -- Sheryl, you're right. It's something we have to overcome. So with that, Chris, if you have anything to add or Paul or any follow-up, Sheryl?

I don't really have any follow-up. I think that we've can kind of talked this thing through. The only thing I would say is this is kind of a movie that we've seen in this industry before with the [VVA] of '97. And even though that was a Congress-enacted bill, once it got into CMS' hands, it all became about rooting out fraud and abuse and minimizing or eliminating the number of agencies -- or minimizing the number of agencies that were within the system. It's kind of ironic, here we are, almost 20 years later, and we're still talking about the same thing. It didn't meet the antenna of rooting out the fraud and abuse because, frankly, fraud -- people that are out there committing fraud and abuse find ways to commit fraud and abuse, and that's what they're focused on. I think the challenge for us as an industry is that we've got to make sure that -- as David mentioned, that we don't equate 42% error rate with fraud. An error rate in a technical area is not fraud. It is an unpayable, an unreimbursable service, and we have to as an industry get better at that. But really, a laser focus on rooting out fraud, I think, is what's best for our industry and what's best for CMS. And then the last pieces is that, unlike the VVA of '97, I don't think that this rule creates very many winners at all. So we have a good opportunity as an industry to be galvanized and really kind of all arm-in-arm to go out and really support each other in our fight to get this thing either killed or get it modified to where it does make sense.

Yes, that's very, very helpful, that insight of the galvanizing the industry because, I will confess I was a little bit worried that you might have AMED or 1 or 2 other leaders and not a unified voice. So that typically has been effective, but I do have to laugh when you say you've been fighting this fight since -- with the agency since they started implementing [VVA] '97. I'm laughing because that's right, and they haven't gotten it right yet. And -- but -- so in the absence of that, just slash $1 billion out of your payments, and you'll feel better about it. So clearly, there are things to push on here, and I'm sure you all will do the work on this. But if we can just sort of move off that for a second. I know investors were very curious about if the worst-case scenario happened, if this thing were to be implemented, and I know you said you'd see some cases go to inpatient. And I'm not sure that's true or that's not true. But what could you do to mitigate? What would you have to do to reorganize the business? And based -- and what could you do to mitigate sort of right off the bat, because I think it's important for us to understand whether or not there are mitigation strategies. I'm pretty sure there are, but whether or not there are mitigation strategies and what impact that might have not only on the way you look at your business, but those entities that don't have something like a Homecare Homebase or don't have access to resources and the ability to recruit it and retain and train the way you do.

Chris?

Sure. Sheryl, it's Chris again. I would say, from experience as well, on the mitigation front, we really need to understand all of the nuances of the proposed rule and where that is actually focusing the reimbursement on. So knowing the characteristics of the patients, we do have some flexibility in terms of who we are marketing to and who we're trying to generate our referrals from, and there may be some nuances there within that. I think the biggest concern and the biggest challenge for a big change like this is going to be more internal with your processes and finding out ways that you can effectively and efficiently deal with these major changes within your organization so that it's not a cost additional -- unintended cost to the organization, but you actually become efficient. So I think it's going to be primarily kind of a makeup of your referral sources and a makeup of the characteristics of the patients that you're bringing on. But it's so early for us to really even understand where this is leaning. We'll have to really almost kind of black belts in this rule before -- between now and implementation so that we understand how this is going to impact us.

But I think to your point, Sheryl, that companies -- the public companies with scale and with data analytics capabilities are going to be much, much better positioned to work through this than the mom-and-pops. Certainly, through the Homecare Homebase implementation and other work we've done, we have the ability to get very granular around the utilization of our resources and around how we look to position our capacity moving forward. And the ability to do that, I think, is going to differentiate the larger public entities from the mom-and-pops, so that we are probably going to be better positioned as they're trying to squeeze a little.

And I look at it, Sheryl, just briefly, I look at it this way, which is we're going to look to do things by service line and certain service lines as they come out of the sluice and they come out of the hospitals and the physicians. If some of them require, i.e., we're trying to move up and, obviously, steal from SNFs and IRFs and LTAC. So the point is, we have to use high -- the high therapy utilization for this as we try to move up on this. Also, there is high therapy utilization in certain service lines. So the key is if that's going to be limited, that -- what it's going to mean is we'll have to restructure ourselves around -- if they're going to discourage us from doing that. And I think that's going to be part of the big debate. Do you want to push more acute types of care into the home and create these environments where, fundamentally, we're the lowest-cost setting? And do you want to limit our ability to do that? And that's what fundamentally it's trying to do. And -- or because invariably what's going to happen is these patients are going to end up in SNFs and IRFs, and that's -- and therefore, it's -- and that's double, triple the price. So I think they need to think that through, and again, I think one of the things we've seen with CMS is because they don't have the industry at the table, what they don't do is think -- they -- because they -- they don't -- aren't in the business, they can't think these through 2 or 3x removed from what that actual move means. So I think when we start to show them the service lines, the types of people we take care of and the types of care that's required and then where these people ought to go and then start to put some of that math to work, I think it'll be actually quite convincing.

That's enormously helpful. I have no doubt with the way that you all -- when you sink your teeth into an issue and a problem, you become masters at it, and clearly, the execution on the cost savings shows that you're really good at doing really hard things. So thank you for that, even just this first high-level 48 hours later explanation is very useful. I appreciate it very much.

The next question is from Whit Mayo of Robert W. Baird.

Maybe just quickly, if you could talk a bit about the Tenet deal, just the integration, how that's progressing with your expectations. I think a hospital-based agency business is maybe a little bit different than a normal deal. So any insight would be helpful.

Sure. I'm going ask Steve do it because Steve's in-charge of the...

Steve Seim. So what we're doing is we're working through. As you said, you typically have some different staffing and some different just a historical model, and we've contemplated that in the way that we're looking at the integration efforts. So we've got an understanding of where we expect there to be opportunities on both the cost side. And then there's been a fair amount of work done by our business development people to put some sales folks around the Tenet facilities, because we believe one of the other opportunities there is to diversify the business away from just those particular facilities. So as we're working through that, when we think about our internal expectations over the first full year, the second year, we're not seeing anything that's really scaring us in a way that's shaken out.

Yes, I think the idea, Whit, as we talked about, is on Tenet, you're going from an in-house hospital agency that fundamentally was there to serve one place. And so we've had some interesting transitions to benefits. We've now added business development functions to bring in other types of business. I think, in general, Tenet's been a very good partner, though. We've had some very good conversations moving forward about how we can be of use in an ambulatory environment, so with the USPI asset. And then we -- using our hospital-at-home model, we are going to start to look at some places where they have capacity issues where they don't have enough capacity, so that we can alleviate some of that and start to make some of our hospital-at-home models work and free up the bed capacity for better business for them. So those are the areas we're focused on.

That's helpful. Do you have any sense for what percent of surgery center -- Medicare surgery center patients end up discharged to home health after a procedure?

Yes. I mean, I think a lot of it depends on the type of -- I mean, a lot of these folks, if they're doing ortho or things like that, there's clearly a lot of those folks go to an IRF quickly and then go home. Some of the other types of surgeries, I -- what we're going to explore is what are the protocols afterwards, so we're just in the beginning of that. So we think it's a real opportunity because, once again, they're doing the same thing. I mean, what's interesting about Tenet is they actually are investing in a company that's fundamentally -- could take business away from their hospitals. And therefore, they're going to be more acute, and therefore, that presents a real opportunity for us. So that's what we need to do is say what are their protocols? Where can the home come in instead of a rehab or a SNF or something like that? And what can we -- where can we participate in this?

And the first conversations have been around total joints.

Yes, exactly.

Very cool. Gary, when do you fund the DOJ settlement? I see the liability on the balance sheet, I just wasn't sure actually when that gets paid. And are you using cash on hand or revolver draw?

Great question, Whit. We plan on paying that in the third quarter of this year. It requires that the settlement agreement be presented to the courts for approval, and we think that, that will occur in the third quarter.

Got it. One last one. Just the $2.4 million of equity earnings in the quarter, is that a good run rate? I know that bounces around and can have some gains in the number, so...

I don't know that I would consider that run rate. We had some strong activity there this quarter that's a little nonrecurring, and that's why you've seen us adjust some of that back out through the gain section, but I would think a number a little lower than that would be a typical run rate.

I should know this, but can you remind me what is running through that number what unconsolidated business you have?

Yes, we have an investment in the heritage fund, right. So it shows up there.

And our final question comes from Kevin Ellich of Craig-Hallum.

A lot's been talked about already, so I'll try to keep it very limited. But I guess, the first dumb question I have is with HHGM, what's in the proposed rule? It's not budget-neutral. Can that even be implemented or passed not being budget-neutral?

That's a great question. We're going to bring you with us to Washington. Dave?

Yes, I think certainly we're looking at that. There's some questions to whether CMS has the unilateral authority to make such a proposed change without congressional authorization or action. So yes, that's -- that question's already been raised in a lot of quarters, so we'll be exploring that. We certainly don't want to get to that. I want to follow-up on something Paul said earlier. He said he was up at CMS along with some other industry leaders a couple months ago. And obviously, CMS can't tell you what's going to be in the rule, but they perhaps got a sense that HHGM may be under consideration. And so I'm encouraged now that the -- not that the rule's out and it's in it. But I'm encouraged now we'll have an opportunity to enter into some -- hopefully, some very meaningful dialogue with CMS around HHGM and how you might modify that and implement that, or maybe there's an alternative payment model. So I'm encouraged. As I said to Sheryl, that I believe the industry is galvanizing and united here, and we'll be presenting some really -- using our expertise and our experience and all of our knowledge around the industry to bring to CMS. And hopefully, that'll be a very fruitful and open and constructive dialogue over the next 60 days, if not beyond, certainly, beyond all the way up until implementation. So yes, always -- there's always the opportunity of worst-case scenario people resort to litigation and things of that nature, but you may not have to litigate it and certainly hope not to. But I think that's something you might -- Congress may exert that that's our purview, and you can't act without our authorization. So good observation and good catch. Hopefully, that doesn't have to be part of this. That help you?

Got it. That's helpful -- yes, absolutely. And then just one -- following up on that, it seems like they kind of threw this out there. There's more work that even Medicare needs to do. In your mind, what else do they need to do? I've heard there needs to be a quoting [crafts block] for ICD-10. How long do you think something like that would take?

Scott?

I mean, it's a lot of -- it's a huge effort, big lift. I mean, we've had trouble just getting payment updates before done in a timely manner from them. So it's a big effort. A lot of details in this that had to be worked through in how payments flow, so it's going to be a big lift. I'm not even sure of their time line, so we'll have to learn more about that because that will impact how we put our systems in the place.

Yes, and if we take our lessons from PCRD, which that -- it was -- they weren't ready for us. There were a lot of problems in the beginning, and it really was a very bumpy road initially. So eventually we got it figured out, but I think we -- I think for them to do something like this, I guess, one of the things that I'm very interested in, and this is kind of a -- this -- I'm very interested to understand the political will behind this, the motivation and the desire behind this one, this pushout from what was an Obama rule. Because it will require a lot of lifting on their behalf, certainly for the industry, but the amount of work they're going to have to do to drive this is going to be extraordinary and have to be -- and they have to be starting this very, very quickly. And I think a lot of these efforts will be, first of all, they have to fill in the blanks, so I think it's going to be difficult. So where we -- that'll be very interesting to see, what the political will is. Because once they get -- if there's a dog that catches the car and then they actually see how much work there is to be done, we faced it, and it's going to be a lot.

Sure. And then can you just remind us what percent of your home health agencies are partnered or JV-ed with hospitals or healthcare systems? And are they considered facility-based then?

We probably have about 7 JVs out there. Yes, small group for us so it's not certainly a big issue.

Yes, so it'll be very small portion.

Thank you. I would now like to turn the conference back over to Mr. Kusserow for closing remarks.

Great. Thank you very much. I appreciate it. I want to thank everyone who joined us today on our call. We really appreciate your interest in Amedisys, and we look forward to updating you on our progress on our next quarterly earnings call and when we see you all out on the road. Thanks, again. Have a great day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.