Chemed Corp (CHE) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Chemed Corporation earnings conference call. My name is Celia and I will be your operator for today.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Sherri Warner with Investor Relations. Please proceed.

Good morning.

Our conference call this morning will review the financial results for the third quarter of 2013 ended September 30, 2013. Before we begin, let me remind you that the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the Company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements.

Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 28, and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the Company undertakes no obligation to revise or update such statements in the future.

In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the Company's press release dated October 28, which is available on the company's website at Chemed.com.

I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Tim O'Toole, Chief Executive Officer of Chemed's VITAS Healthcare Corporation Subsidiary.

I will now turn the call over to Kevin McNamara.

Thank you, Sherri.

Good morning. Welcome to Chemed Corporation's third-quarter 2013 conference call. I will begin with some of the highlights for the quarter, and David and Tim will follow with additional operating detail. I will then open up the call for questions.

During the quarter, VITAS experienced significant volatility in terms of admissions as well as our mix of patients within the three levels of hospice care. This resulted in VITAS' net revenue for the quarter totaling $254 million, which is a decline of 5.2% when compared with the prior year. Our admissions were impacted by significantly fewer patients entering hospice with a terminal prognosis of failure to thrive or debility unspecified. Tim will go into greater detail on the impact later in this presentation. Our average daily census was essentially equal to the prior year, however Medicare reimbursement rates decreased approximately 1.1% and our percentage of high acuity days declined 85 basis points.

This mix shift negatively impacted revenue in the quarter by approximately $6 million. Medical decisions, including levels of care are determined by our field based physicians. These doctors are no doubt aware of the federal government's examination of individual patient charts concerning the factors that go into the doctor's decision to prescribe high acuity care. It's not surprising that this hindsight scrutiny has modestly impacted our physicians' medical determination of when a patient enters or exits high acuity care.

A doctor deferring the decision by a single day on average reduces aggregate high acuity days of care by roughly 20%. We estimate the mix-shift in the high acuity days of care negatively impacted gross profit by approximately $2 million. Our inability to forecast prescribed high acuity days of care has resulted in excess cost and inefficiencies within these care segments.

Some of these excess costs will be mitigated over the next several quarters as we better anticipate prescribed high acuity days of care. Longer-term, we will need to balance inpatient capacity and utilization between short and long-term contract facilities. This will allow for reasonable margins and still have adequate capacity to appropriately manage the inevitable episodic crises that impact a small percentage of our patients on any given day.

VITAS incurred a $3.2 million Medicare cap billing adjustment in the quarter related to one provider number. This is a large program on the West Coast that currently has a gross profit margin, including this Medicare cap limitation of 29%. Of VITAS' 37 unique Medicare provider numbers, 32 provider numbers have a Medicare cap cushion of 10% or greater during the 2013 Medicare cap year. Three provider numbers have a Medicare cap cushion between 5% to 10%, and one provider number has a cap cushion of between 0% and 5%. VITAS generated an aggregate cap cushion of $259 million during the trailing 12 month period, which by the way is an all-time high for what it is worth.

In October of 2013, VITAS reached a tentative settlement, subject to court approval, with a class of California employees, related to wage and hour litigation. As a result of this tentative settlement, VITAS recorded an after-tax litigation expense of $6.5 million.

Now let's turn to our Roto-Rooter business segment. Roto-Rooter is having an excellent year. During the third quarter of 2013, Roto-Rooter's plumbing and drain cleaning business generated sales of $87 million, an increase of 0.6% over the prior year. More importantly, this revenue translated into a $16.2 million of adjusted EBITDA, an increase of over 27% and equates to an adjusted EBITDA margin of 18.6%.

On a year-to-date basis, Roto-Rooter has generated total revenue of $276 million, a 3.1% increase, which translated into $52.5 million of adjusted EBITDA, an increase of 28%. At this rate, 2013 has the potential to be a record year for Roto-Rooter in terms of revenue and operational profitability.

With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.

Thank you, Kevin.

As Kevin mentioned, the net revenue for VITAS was $254 million in the third quarter of 2013, which is a decrease of 5.2% over the prior year period. During the quarter, our revenue growth was significantly constrained by a mix shift from continuous and inpatient care, which we refer to as high acuity care, into routine home care. Historically, VITAS has averaged between 7.5% and 8% of total days of care being high acuity.

This high acuity care declined 85 basis points to 6.7% in the quarter. Since routine home care per diem averages $160.76, and high acuity care averages $689.76, this mix shift negatively impacted revenue by approximately $6 million. The third quarter of 2013 gross margin, excluding the impact of Medicare cap, was 23.2%, which is a 104 basis point improvement when compared to the third quarter of 2012. Our home care direct gross margin was 52.5% in the quarter, essentially equal to the prior year quarter.

Direct inpatient margins in the quarter were 1.7%, which compares to 9.2% in the prior year. Occupancy of our 37 inpatient units averaged 68.1% in the quarter and compares to 73.4% occupancy in the third quarter of 2012. Continuous care had a direct gross margin of 14.8%, a decline of 420 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care was 18.8 in the quarter, a tenth of an hour decline when compared to the average hours build in the prior year quarter.

Now let's turn to Roto-Rooter. Roto-Rooter's plumbing and drain cleaning business generated sales of $87 million in the third quarter of 2013, an increase of 0.6%. The gross margin for Roto-Rooter in the quarter was 47.3%, which is a 303 basis point increase when compared to the prior year. Adjusted EBITDA in the third quarter of 2013 totaled $60.2 million, an increase of 27.6% and the adjusted EBITDA margin at 18.6% was an increase of 393 basis points.

Total unit for unit job count in the quarter did decrease 4.9% when compared to the prior year period. This consisted of a residential drain cleaning job count decline of 6.3%, and residential plumbing jobs declining 7.6%. Residential jobs represented 67% of our total job count in the quarter. Commercial drain cleaning declined 0.7% and commercial plumbing and excavation job count increased 1.8%.

Now let's look at our consolidated balance sheet. As of September 30, 2013, Chemed had total cash and cash equivalents of $83.2 million and debt of $181 million. Chemed's total debt equates to less than 1 times trailing 12 month adjusted EBITDA. Our capital expenditures through September 30, 2013 aggregated $18.9 million and compares to depreciation and amortization during the same period of $24.2 million.

During the quarter, the Company repurchased $71.2 million of Chemed stock. This equates to 1,032,754 shares of Chemed stock repurchased at an average cost of $68.91. Chemed currently has $25.1 million remaining under our current share repurchase plan.

Our 2013 full-year guidance is as follows. On October 1, 2012, Medicare increased the average hospice reimbursement rates by approximately 0.9%. Then on effective April 1, 2013, Medicare reduced the hospice reimbursement rates 2%, resulting in a 1.1% decline in Medicare rates when compared to the prior year. On October 1, 2013, Medicare increased the average hospice rate approximately 1.4%.

VITAS estimates revenue will continue to be constrained in the fourth quarter 2013 as a result of mix shift from high acuity care to routine home care. As a result, full year 2013 revenue, prior to Medicare cap, is estimated to be approximately 1% below the prior year. Admissions in 2013 are estimated to decline approximately 3%. And full-year adjusted EBITDA margin, prior to Medicare cap, is estimated to be 14.5% to 15%. Medicare cap is estimated to be $1.8 million in the fourth quarter of 2013.

Roto-Rooter is forecasted to achieve full-year 2013 revenue growth of 2.5%. This revenue estimate is based upon increased job pricing of approximately 3.2% and job count essentially equal to the prior year. Adjusted EBITDA margin for 2013 for Roto-Rooter is estimated in the range of 19% to 19.5%. Based upon this, management estimates a full-year 2013 earnings per diluted share, excluding non-cash expense for stock options, non-cash interest expense related to the accounting for convertible debt, litigation and other discrete items, will be in the range of $5.60 to $5.65. This compares to Chemed's 2012 reported adjusted earnings per diluted share of $5.29.

I will now turn the call over to Tim O'Toole, Chief Executive Officer of VITAS.

Thank you, David.

As we noted earlier, admissions were difficult during the quarter, aggregating 14,555, which is 6.3% below the prior year. On a year-to-date basis, our admissions aggregated 47,413, which is a slight decline of 0.8%. As most of you are aware, CMS has begun the process of discouraging the hospice industries use of failure to thrive and debility unspecified disease classifications, when determining if a patient has a terminal prognosis.

This was done with the proposed rule which would have eliminated using these two conditions as the primary reason for a terminal prognosis effective October 1, 2013. The final rule issued in August 2013 eliminates failure to thrive and debility unspecified effective October 1, 2014. The proposed rule clearly disrupted our current admission process. In the third quarter of 2013 combined quarterly admissions for failure to thrive and debility unspecified declined 1,374 patients or 59%.

Total admissions, excluding failure to thrive and debility unspecified, actually increased 3% in the quarter. CMS will continue to allow admissions under these two categories through fiscal 2014. We anticipate that patients who would have been admitted as a failure to drive and debility unspecified will be admitted under other, more specific disease categories.

VITAS is in the process of refining its admission criteria that will eliminate the number of patients admitted with a diagnosis of failure to thrive or debility unspecified as we get closer to the October 1, 2014 rule change. As of September 30, 2013, VITAS employs approximately 1,150 admissions personnel as compared to 1,113 in the prior year quarter. This consists of 345 sales representatives, 162 admissions coordinators, 387 admission nurses, 84 community liaisons, 13 long term care liaisons and 75 admissions liaisons.

During the third quarter of 2013, admissions from hospital referrals decreased 3.5%, nursing home admissions decreased 8.4%, assisted-living facilities decreased 12.7% and home-based referrals decreased 6.9%. Our per patient, per day pharmaceutical costs averaged $7.52 in the quarter and is 7.3% favorable to the prior year. Our medical equipment per patient per day cost in the quarter totaled $6.67, which is 5.1% below the prior year period.

VITAS' average length of stay in the quarter was 82.2 days, which compares to 78.5 days in the prior year quarter and 84.8 days in the second quarter of 2013. Average length of stay is calculated using total discharges during the period. Median length of stay was 16 days in the quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market. Our days of care totaled 1,310,147 days in the quarter, a decline of 0.3%.

Non-nursing home routine home care days increased 2.5% in the quarter, and nursing home routine home care declined 5.2%. At September 30, 2013, we had two programs classified as startups. All of these startups are state licensed, CHAP accredited and certified by Medicare. Operating losses for these two start ups totaled $380,000 in the quarter and compares to losses of $748,000 for locations classified as startup in the prior year period.

With that, I would like to turn the call back over to Kevin.

Thank you, Tim. I will now open this teleconference to questions.

(Operator Instructions).

Darren Lehrich, Deutsche Bank.

Thanks. Good morning everybody. I wanted to focus some questions here on VITAS and I have got a few. Tim, if you could help us think a little bit more about the debility and failure to thrive topic. Would you consider these to be lost patients, or how do you think you can get them into hospice under different diagnoses?

I think you mentioned some things that you are working on with your admissions process, but I'm just wondering how you are thinking about these patients? Are they now just lost patients?

Before I turn it over to Tim, let me start by saying that as I understand it, I invite you to read the Federal Register just to provide some context. What Tim has said on this -- the issue really relates to the fact that CMS did not intend this debility, failure to thrive to be primary diagnosis initially. They observed that the industry, including VITAS, were saying that about 15% of hospice patients were coming in with one of these two as a primary diagnosis and they said look, let's be more specific and they proposed their rule.

They specifically said they did not see anything that they were saying or proposing reducing the universe of hospice patients. They were basically talking about coming up with coding changes. So, I guess what I wanted to reply, Darren, is yes, I think the whole industry is going to do what they are suggesting. That is, they are not going to be kicking people out of hospice.

The universe is not going to long-term. There's dislocation presently, but the intention is not to reduce the universe of hospice patients, but change the coding, and you have to remember that well over 93% of our patients come to us with a diagnosis that none of our employees, part-time employees had any hand in making that diagnosis.

Until the industry, the referring industry comes to terms with what this proposed rule change means and how it affects the coding, we're going to probably see these effects. Having said that, the only reason I wanted to lead with that preamble is to say yes, I expect VITAS and the industry to do exactly what you say, and that is to come to different coding decisions, but in no way does that imply something improper or getting around any CMS proposed rule.

I would just follow up on that. I think absolutely there is no intent that there would be a reduction in patients and I would not expect that. We are doing a really good job educating our internal physicians about the issue. You have to educate your referral sources, your external physicians that work with you as well and that may take a little longer as these things roll out. I think it is good that it was delayed for a year. Again, what it is really tying into is transparency around eligibility, which we are in full support of.

And if you just think of it historically, if you have a patient that maybe was with you for a short period of time, it is pretty clear they are eligible, they are terminal and you may have to do some additional detailed work or some observation or some testing to find out exactly which disease was the one that's causing the major issue to cause the patient to be terminal. It is really just a function of incorporating that into our process, which we are doing and again to reinforce, it did cause disruption in the period, but we expect that to be well understood on an ongoing basis and not reduce the opportunity for eligibility for hospice.

And just let me give you another context, just order of magnitude. As this coding has changed, even though it is not required for another year, in the last two quarters we have seen the percentages of our patients who come under this -- come into hospice with this primary diagnosis go from 15% to under 7%. I am saying there is --

What it means is we're doing a better job already of identifying these underlying -- ( Multiple speakers )

That's exactly right. It shows that we observe that there is a lot of noise and delay as we come into these -- there is additional work necessary to come to the, not really alternative diagnosis, but the primary diagnosis with failure to thrive and general debility being additional factors leading to the eligibility for hospice.

Now, Darren, I would like to point out a couple of things. One, on these patient categories, the median length of stay historically has averaged about 38 days. That means half of these patients pass away in 38 days or less and the average length of stay is basically around 110 days or so for this category. So it really means these patients are very sick and half of them are dying very quickly. Clearly, they are terminal.

What basically is, what CMS is now putting out explicitly, which was always implicit, is for these very, very sick patients who maybe for a specific disease category fall outside of the guidelines for traditional terminal prognosis, they want the secondary diagnosis of failure to thrive or debility to be one of the underlying factors that explains why the terminal prognosis is outside of the guidelines for a specific disease category. Said differently, sick patients are dying and they are dying very quickly and it's the documentation issue that CMS wants to see us be doing differently.

Okay. So I follow you, but you did lose a lot of patients, I think, this quarter as you mentioned, just given the admission trend. So just to recap what you are saying, you think that the intent wasn't to necessarily reduce the universe of patients, but now the onus is on you to make sure that you are capturing the right diagnoses, and that may not have happened in the quarter.

CMS specifically said there is no intention by this proposed rule to reduce the universe of patients.

But clearly this disrupted the admissions pattern. Our referrals fell off for these type of patients. So now our admissions fell off as well, so it is a matter of training the referral sources, educating them, as well as different procedures on our end.

And keep in mind, let me say we are well underway in training our internal people. You can imagine a little more difficult to get the training out to the referral sources.

I mean it came out as a little bit of a surprise to the industry, since it was published in the annual wage regulation. And I think because it came out in that and the original date for implementation was pretty quick. So I think people had to get on top of it, which we did, and everyone else.

And again the good news is it has been delayed for a year and it shows that the regulators did not want it to make a negative impact on the industry and listened to the issues from the industry. So again to reiterate, our systems are changing, we will work closer with the referral sources to get more information about specifics, and we would not expect that this would reduce our admissions long-term.

Having said that, the thing we are living on or living with, is more than 100% of our decline in admissions is -- you're apples and oranges a little bit, but shows up in the decline just in the category for these debility and failure to thrive. If we said, where are we having admissions problems? Well, more than 100% of our problems are in this category.

Okay. Got it. And then going back to the inpatient and really, the high acuity shifts that you have been seeing, it does look like there is a fair amount of embedded cost that you have on the inpatient units. And to the extent that you are seeing this trend continue, how do you take capacity out? Can you help me think about what kinds of actions you can take to deal with what might be a lower occupancy overall.

Well, we are in the middle of that constantly, and all I can say is that each unit -- if a unit is not efficient over a longer term period of time, we would not want to have it. At the same time, when we have occupancy that is below our targets in a certain time of the year or whatever, we work very hard to minimize expenses to the extent we can there.

I always like to focus also on the blend. And keep in mind our gross margin for this quarter was 23%, which was a full point higher than the year before, even absorbing 2% reduction of sequestration. With all the issues involved, with the inpatient, the home care did very well and some of our other areas of spending, like ancillary cost with pharmacy supplies, equipment is doing very well. We are tightening down our management level expenses throughout the company.

Yes, if we have an inefficient inpatient unit we will monetize it over time to have inpatient contract beds, as opposed to that unit. And we work always to minimize expenses and this is a good time of the year, as the census is growing. Summer is always more difficult. We will get things in order as we move into the next few quarters, I am sure.

And that applies, the rationalization we are doing also applies on the continuous care. It is clearly the government, in the lawsuit has indicated at least at one level, just the fact that we provide more continuous care than the average, that is going to draw a lot of scrutiny. When you start by saying 55% of hospices provided zero hours the last three years, the comparison to the average standard is a tough one.

But there are costs and we are rationalizing there too, to the extent that we are anticipating, as I say, just the fact that if our average length of stay for continuous care falls just one day, from five days to four days, that is a 20% cut in hours. The infrastructure surrounding that, we expect to fall 20% as well.

Yes. And the last thing here, on the investigation, since you bring it up, do you have any more insights at this point whether it is more narrowly focused on continuous care?

Let me say, if you read the complaint there is 36 provisions of the complaint semi-related to continuous care and there's two generalized allegations that -- and also patients have been recertified improperly. It is hard to say. There have been no development in the case with regard to, of any type, of any significance since the filing of it. There is still what would be considered the motion practice; we filed a motion to dismiss, the government has until the middle of November to respond.

There has been no ability for us to discern a change in strategy by the government. To answer your question, we are just preparing to defend VITAS and their activities. Let me just say, the area where we seem to be a statistical outlier is in the continuous care. And I think there is reasons for it. And when you go back to this call, I know we have had some questions saying well, the operating metrics of VITAS were a little tougher this quarter. Are you struggling as a result of the US versus VITAS on that litigation?

We'd say well, it's never a good idea to have litigation like that pending, but when you look at the fact that we are basically, we were the last hospice standing, so to get one of those -- and there aren't many healthcare companies that have not had a whistle blower case or action like this. We don't see that as too significant. The only significance that we see in regard to operating has been something that we've talked about and talked about today and that is human nature.

We are making subjective, our doctors are making subjective determinations in the field. There is now a general allegation of fraud that they're making these decisions for patients and making it too easy for them to get in or stay in continuous care, and you can imagine, making no corporate change whatsoever with regard to direction or policy. We are seeing a slight reduction in the continuous care days of service. If you ask me what the effect of that is, it's that, and I would say, at this point, maybe luckily, so far it is limited to that. Would you agree with that, Tim?

Absolutely. I'm very encouraged by what we're seeing in the business and the comments Kevin made, I would echo those.

And Darren I would say the interesting we have found that we never looked at before, relative to the industry is, a lot of the hospices provide zero to almost no zero high acuity care. We found those hospices have an exceptionally high live discharge rates. Hospices that provide significant high acuity care have much, much lower live discharges. There is an interesting thing going on throughout the industry relative to the level of care provided and the amount of patient satisfaction, and patients you retain through the point of death.

And there's one point I want to make, although it's not really responsive to your question, but allow me to get on my soapbox. To the extent that you are talking about, as Dave said, if you don't provide high acuity care, the patients revoke hospice, go into the hospital and go back into the curative setting, running up pretty big bills. If you do provide it, usually it's episodic and continuous care, our average is a five-day period and they go back to the curative care section or category.

Let me say one thing, that if you look at historically we have provided curative care, we have provided continuous care in every one of our programs. The answer, well that must be -- is that important to our profitability and strategy? You have to remember that we have consistently, now and previous to the lawsuit, lost money in continuous care at about a quarter of our programs. In other words, the driving rationale for doing it is because, number one hospices are required to provide continuous care, even though 55% of them don't, it is good for the patient.

Our view is, ultimately, that's good and it also rebounds to our benefit with referral sources. The reason that people don't provide as much continuous care, is it is hard to do so and earn money doing it. And even VITAS, in a quarter of their programs do not and have not earned money doing it. In many respects, what I like to say is, regardless what happens in continuous care, it is not seemingly going to have much of a long-term impact on our profit model.

There is some short-term, as we just demonstrated. To the extent we do less than now and we have the same infrastructure, there is a negative comparison, but we'll provide whatever level the government says and probably have an easier model for earning money doing so.

And we talked about it, it is the model that is appropriate for the patient and it is very critical to the system right now, because as you know, one of the critical issues is re-admissions in the hospitals. They are looking for hospices to care for the patients in their home and of course they come back in the hospital setting if necessary. But if no continuous care is done and it is going back in the hospital, which is surely not what the regulators or policymakers --

They will come up with something in their next meeting I am sure. They've already raised the red flag on this as a significant cost issue to them, so we'll see. I'm sorry, I got a little off point there, Darren.

I appreciate the responses. Thank you.

Jim Barrett, CL King.

Good morning, everyone. This may be for Dave. Dave, can you provide us the current run rate for legal expenses related to the US government lawsuit?

I wish I could. Unfortunately they come in very chunky, Jim. So, it is very difficult to predict on a regular basis. Extremely difficult.

I would say, Jim, at this point there are not a lot of depositions and they are just kind of, it is not a -- compared to some litigation like when you have some class actions where you are taking depositions all over the country and whatnot. It is not that type of thing. It is motion practice at this point. Filing, the government will file a reply to our motion to dismiss and then we'll provide supplementary information to that. So it is that type of back office legal expense more so than racing around the country on some national enterprise.

Understood. And Tim, the one program that had a Medicare cap billing adjustment of $3.2 million, I could guess, but can you provide what were the specifics that related to that adjustment and what your outlook for eliminating it or fixing that problem.

Let me just start generally, and I will turn it over to Tim and he will talk about the last part of your question. Let me start with by saying, it is West Coast, we don't usually mention the names in progress. But it is big, it's profitable, as we said. It is a lot of profit margin of 29% after the cap liability. One of the problems of course, it erodes, in large part in the third quarter of the year, which is the last quarter for the cap year so there's not much we can do about it.

It was a program that is very profitable. The problem also is how reimbursement is very geographically higher in the high cost areas. Well, the problem is the Medicare cap is not adjusted as well. So to the extent that this particular program has a reimbursement rate that is 30% above the national average, it has the same cap as the other program. It basically has to be, just to be even, has to be 30% under the cap on a normalized basis. It's tough in that regard. This particular program had some regulatory issues.

Again, it's the West Coast, and by West Coast I mean California, and by California, I mean it is difficult to deal with the regulatory people there. We really, I'll just say generally speaking, I want to say it erodes quickly. Regulatory issue, we actually pulled salespeople from a significant county just to make sure. We didn't want to get in a war with the bureaucrats. And the people whose job it is to regulate and oversee these things; I don't want to be dismissive, but it had a significant effect on what we were doing in this program.

I was going to turn it over to Tim, because it is obviously something that is getting a lot of attention at the highest levels of the company. And let me start at the end and say, do I expect by the end of next year it to be completely -- by the end of next cap year to be completely eliminated? I think that is a reasonable expectation. It is not a certainty, but that's, from my lofty vantage point, that is my conclusion. But Tim, why don't you talk about some of the things you might be doing.

I think that is right. Keep in mind that sometimes in the marketplace you have relationships with customers and customers keep some of the business for themselves and hospital systems, sometimes. Sometimes they dole it out to you. Keep in mind when the census drops they keep a little more of their business. We have seen over the summer and this quarter the hospital census across the country has dropped a little bit.

There is a lot going on with outpatient work and they are all preparing for the influx of new insured beneficiaries coming in next year. That was the issue. We had some bad execution by our local management team. Sometimes you have to call it like it is. We are working on those issues. We've re-engaged a lot of marketing efforts.

We are making sure our staffing is at the highest opportunity to have the best opportunity for rapid intake and high quality care and we are building the program back up again. So again, tough survey environment, Kevin mentioned. Customer turmoil in a couple of locations, management execution was not there. But I feel very confident we are back on track. We are seeing better referrals, everything is clarified, and I echo Kevin's view that we will work our way out of this.

It's one of the advantages, Jim, of when you have a cap limitation issue you can throw money at the issue, because if you don't you are providing service for free. It gives us a good opportunity to say we literally, it's one of the few opportunities in business when you can say if cost was no object what would you do to resolve the situation? With a cap limitation, that's where you are.

Understood. And, Tim, the failure to thrive and debility unspecified would seem to be an industry challenge that's short-term in nature. Do you have a sense as to how the industry's admission rates are performing relative to VITAS in that kind of environment?

I do not really. Just anecdotal information would be that it is affecting others in a very similar way that it's affecting us.

I mean who knows, Jim? I guess Gentiva and Amedisys will report in a week or so and we will see what they say. I will say if you look at the last couple of quarters they have seen what we have seen, as far as some toughness on the admissions front. But again, one of the biggest hurdles we face is the fact that you have to remember, we get the referral.

If there's something that CMS has done that presents some dislocation or noise to the referral process, you remember, we don't self refer. We have to wait until somebody throws a rock in that pond. We have to wait until the ripples kind of settle down by themselves. We are limited in what we can do. As you said, is there any reason based on what CMS has said to assume this is some type of long-term dislocation? Again, literally you would not draw that conclusion.

Correct. And finally, Kevin, are you sufficiently, or is the company sufficiently preoccupied with the challenges at VITAS to put on hold any high level of interest in seeking out hospice acquisitions at this point in time?

I would say, Jim, no. We have an acquisition department at VITAS. We seem to have a technical difficulty. We have an acquisition department that basically reviews pretty much every acquisition that comes to market. If you look at our activity the last three years, it hasn't been that all our forces and all our men have been busy doing something else, it has been that the price at which they are offered and some of the comparisons, the returns on buying our own stock would be more of -- have put a hold on our acquisitions department.

At the right price, a hospice that fit the right criteria, everything we are talking about wouldn't have any inhibition on our efforts to proceed at all. But again, it is not something, when I look at the pricing that I still hear about and the few acquisitions that are being talked about out there, pricing still looks high. Our hurdle rate of the return that we would still get on buying in our own stock makes me conclude that I don't anticipate any big acquisitions in the short run.

Good. Thank you both.

Okay. I think that is the end of the questions. So I thank everybody for their attention and apologize for the technical glitch there a minute ago. In any event we will see you at the end of another quarter and we hope to report on good results.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.