LHC Group Inc (LHCG) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 LHC Group, Inc. earnings conference call. My name is Erica, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Eric Elliott, Vice President of Investor Relations. You may proceed, sir.

Thank you, Erica. And welcome, everyone, to LHC Group's third quarter 2008 financial results conference call. In a moment, we'll hear from Keith Myers, Chief Executive Officer of LHC Group, John Indest, President and Chief Operating Officer, and Pete Roman, Chief Financial Officer.

Before that, I would like to remind everyone that statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include but are not limited to comments regarding our financial results for 2008 and beyond.

Such statements are subject to a number of risks and uncertainties, such as changes in reimbursement, changes in government regulations, changes in the Company's relationships with referral sources, increased competition for its services, increased competition for joint venture and acquisition candidates, and changes in the interpretation of government regulations. Therefore, actual results may differ materially from any financial outlook presented herein.

Further information on potential factors that could affect the Company's financial results can be found in the Company's Form 10-K for the year ended December 31, 2007. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now I am pleased to introduce the CEO of LHC Group, Keith Myers.

Thanks, Eric. And good morning, everyone.

We are very happy this morning to present another very strong performance from the LHC Group family. Without question, the third quarter of 2008 was our best quarter in the history of the Company, by every measure.

Our continued ability to deliver our strong return on assets, return on capital, and return on equity was recently recognized once again when we were named number eight on Forbe's 2008 list of "Best Small Companies in America." This is the second year in a row that LHC Group has made the top 10.

As a result of the hard work and dedication of our revenue cycle management team and the engagement of [Simeon Consultants] over the past year, we continue to see improvement in DSOs, which are at our historical low this quarter, down 33% from this time last year.

Given our significant financial strength and flexibility, the current strength of our back office, and the continued consistent performance of our clinical operations team, which is second to none in terms of industry knowledge and experience, we could not be better positioned to take advantage of the current cycle of consolidation in our industry, which we expect to continue for several years.

I'll touch on some of the highlights of the quarter first, and then turn it over to Pete Roman, our CFO, to review financial results, and then John Indest, our President and Chief Operating Officer, will provide an update on operations.

So starting with acquisitions since our last earnings call. On July 1st we entered into a joint venture relationship with Grant Memorial Hospital, a 61-bed hospital located in Petersburg, West Virginia, to provide home health and hospice services in Petersburg and the surrounding areas. The primary service area has an estimated total population of 33,000 with almost 17% over the age of 65. The combined net revenue for the most recent 12 months for these agencies was approximately $554,000.

Then on August 1st through our partnership with the University of Tennessee Medical Center we acquired 100% of the assets of Morristown-Hamblen Home Health and Hospice, located in Morristown, Tennessee, from Morristown-Hamblen Health Care System. The primary service area has an estimated total population of 1.2 million people with nearly 15% over the age of 65. The combined net revenue for the most recent 12 months with these agencies was approximately $2.8 million.

On September 1st we acquired 100% of the assets of Mountaineer Home Health located in Charleston, West Virginia, and we acquired 100% of the Home Health assets of the Jackson County Board of Health located in Ripley, West Virginia. The combined primary service area of these agencies has an estimated total population of 600,000 with almost 16% over the age of 65.

The combined net revenue for the most recent 12 months for these agencies was approximately $1.3 million. With these two acquisitions, LHC Group now operates 12 home nursing agencies covering 31 counties and 49% of the total population in the COM state of West Virginia.

On September 17th we announced that we entered into a home health joint venture with West Tennessee Healthcare, recently listed as one of the top 10 largest public nonprofit health systems in the United States. This joint venture includes three agency locations in the certificate of need State of Tennessee. These locations are located in Jackson, Bolivar, and Trenton. The primary service area of this joint venture has an estimated total population of 500,000 with almost 15% over the age of 65. The combined net revenue for the most recent 12 months for these agencies was approximately $3.8 million.

On September 25th we announced that we entered into a joint venture with Cape Fear Valley Health System in Fayetteville, North Carolina, to provide home nursing and hospice services. This joint venture represented LHC Group's initial entry into the certificate of need State of North Carolina. The primary service area of this joint venture has an estimated total population of 1.2 million, with almost 12% over the age of 65. The combined net revenue for the most recent 12 months for these agencies was approximately $5.3 million.

On October 1st we added another home health joint venture in our home state of Louisiana, with Beauregard Memorial Hospital, a 60-bed hospital located in DeRidder, Louisiana. The primary service area of this joint venture has an estimated total population of 300,000, with almost 13% over the age of 65. Net revenue for this agency for the most recent 12 months was approximately $600,000.

On October 21st we entered into a definitive stock purchase agreement to acquire 100% of the outstanding capital stock of HomeCall Incorporated, located in the certificate of need State of Maryland. HomeCall is headquartered in Frederick, Maryland, and has 12 locations throughout Maryland. This acquisition will expand LHC Group's geographic footprint to 15 states. The service area of this acquisition spans 19 counties in Maryland and has an estimated total population of 5.4 million, with almost 12% over the age of 65. HomeCall had net revenue for the most recent 12 months of approximately $15.6 million. This acquisition is expected to close in the fourth quarter of 2008.

So far in 2008, not including the HomeCall acquisition, we have added 34 locations in 10 separate states through acquisitions with combined annual revenue of approximately $44.2 million.

Denovo locations continue to contribute significantly to our growth. Through the first three quarters of 2008 we opened nine new denovo locations in seven states. We have 11 additional denovo locations scheduled for opening in the fourth quarter of 2008.

Turning to our pipeline, our pipeline remains very robust. Our stringent criteria results in only a small percentage of the opportunities looked at by our business development team being presented to senior management for consideration.

The opportunities that make it to our pipeline have been well vetted and determined to be a cultural fit with significant potential for growth, which are two of our most important considerations.

With that said, we have never had a higher quality group of opportunities in our pipeline, and we could not be more pleased with the results of our business development team. At this time, we are in active negotiations with 17 individual acquisition candidates that have been approved at the senior management level. These 17 current opportunities include 45 existing locations in eight states, with approximately $70 million in current annual revenue, all with very impressive up side potential in geographic areas that we are not currently licensed to serve.

And now I'll turn it over to Pete for a more detailed review of our financial results.

Thanks, Keith.

Net revenue for the quarter ended September 30th, 2008 increased 26.7% to $98.2 million compared with $77.5 million in 2007. For the three months ended September 30th, 2008 and 2007 83.2% and 82%, respectively, of net service revenue was derived from Medicare. For the third quarter Home-Based services accounted for 86.1% of revenue compared with 81.6% for the comparable prior year quarter.

Net income for the third quarter of 2008 totaled $8 million or $0.45 per diluted share compared to $6 million or $0.34 per diluted share for the third quarter of 2007.

The effective tax rate for the quarter ended September 30th, 2008 and 2007 was 39.5% and 35.1%, respectively. The increase over last year's rate relates primarily to the absence of the WOTC employment credits in the current year and increased state income taxes as a result of our growth and expansion into new states.

On October 3rd, 2008 the Emergency Economic Stabilization Act of 2008, the Energy Improvement and Extension Act of 2008, and the Tax Extension and Alternative Minimum Tax Relief Act of 2008 were signed into law. These acts extend the period of WOTC credits available for businesses in the core Katrina zone. Although we have not calculated the affect of the extension it will certainly reduce the effective tax rate for the fourth quarter of 2008.

Net service revenue for Home-Based services for the three months ended September 30th, 2008 increased 33.7% to $84.5 million compared with $63.2 million for the three months ended September 30th, 2007. Internal growth in net service revenue and in Medicare net service revenue for the Home-Based services for the three months ended September 30th, 2008 is 16.8% and 21.1%, respectively, as compared to the same period in 2007.

We define internal growth as the combination of organic growth and internal acquisition growth. Internal acquisitions' growth is the revenue growth over the historical average achieved in an acquired company in the first 12 months after an acquisition. Internal acquisition growth in net service revenue and in Medicare net service revenue in the three months ended September 30th, 2008 was 4.3%.

For our LTACHs, net service revenue in the three months ended September 30th, 2008 decreased 4.4% to $13.7 million compared with $14.3 million for the same period in 2007. The decrease is due to the decrease in patient days of 2.4% to 10,930 in the third quarter of 2008 as compared to 11,202 in the third quarter of 2007.

Now, turning to the nine months ending September 30th, net service revenue increased 25.4% to $271.8 million compared with $216.8 million for the same nine month period in 2007. Medicare revenue for the nine months ended September 30th, 2008 and 2007 was 82.9% and 82% of net service revenue, respectively.

For the nine months ended September 30th, 2008 Home-Based services accounted for 84.4% of revenue compared with 81.3% for the comparable nine month period in the prior year.

Income from continuing operations for the nine months ended September 30th, 2008 was $19.9 million or $1.11 for the per diluted share compared to $17.7 million or $0.99 per diluted share for the same period in 2007.

Net income for the nine months ended September 30th, 2008 totaled $19.7 million or $1.10 per diluted share compared to $16.8 million or $0.95 per diluted share for the same period in 2007.

Net income for the nine months ended September 30th, 2008 includes $171,000 after-tax loss from discontinued operations, which resulted in approximately a penny decrease in the earnings per share.

The effective tax rates for the nine months ended September 30th, 2008 and 2007 was 38.6% and 36.7%, respectively.

Net service revenue for the Home-Based services for the nine months ended September 30th, 2008 increased 30.1% to $229.3 million compared with $176.3 million for the same period in 2007. Internal growth in net service revenue and in Medicare net service revenue for the Home-Based services for the nine months ended September 30th, 2008 is 17.1% and 20.5%, respectively, compared to the same period in 2007.

Internal acquisition growth in net service revenue and in Medicare net service revenue in the nine months ended September 30th, 2008 was 2.3% and 2.5%, respectively.

For our LTACHs, net service revenue in the nine months ended September 30th, 2008 increased 4.8% to $42.5 million compared with $40.5 million for the same period in 2007. The increase relates to higher acuity patients in the nine months ended September 30th, 2008 as compared to the same period in 2007.

Cash provided by operations for the nine months ended September 30th, 2008 was $59.4 million, with $27.4 million provided in the current quarter. Due to Hurricane Gustav, the IRS in most states extended the payment dates for the third quarter estimated tax payments from September 15th, 2008 to January 5th, 2009.

As a result, we have a recorded payable for income taxes in the September 30th balance sheet of $4.5 million, which increased operating cash flow in the quarter. Adjusting for the affect of the payment extension, operating cash flow was approximately $23 million in the September quarter.

CapEx for the nine months ended September 30th was $7.4 million, of which $884,000 related to the September quarter. The third quarter CapEx is primarily related to expenditures on information technology.

During the nine months ended September 30th, 2008 we acquired the existing operations of eight entities operating a total of 19 agencies and a majority ownership in 6 entities operating a total of 9 agencies. The total purchase price for the acquisitions was $36.7 million including $1.6 million of acquisition related costs.

Days sales outstanding, or DSO, at September 30th, 2008 was 52 days, as compared to 69 days at September 30th, 2007 and 60 days at the end of last quarter. Included in accounts receivable at September 30th, 2008 are $3.8 million in receivables generated by acquired agencies and which remain unbilled, awaiting approval of the change of ownership for the fiscal intermediaries.

After adjusting for these unbilled accounts receivable, adjusted DSO at September 30th, 2008 is 49 days, compared to 64 days at September 30th, 2007 and 55 days at the end of the last quarter.

Our partnership with [Simeon & Associates] continues to positively affect the overall collection process. Simeon & Associates provide additional resources to support collecting claims, including the older commercial claims, and continues to guide the overall organizational structure and development of the revenue management department.

With that assistance and a lot of hard work on the part of those in the department, itself, we reduced adjusted DSOs six days between June and September quarter ends. This six-day reduction in DSO represents approximately $6 million in cash flow to the Company.

Bad debt expense in the three months ended September 30th, 2008 was $3.2 million or 3.2% of revenue compared to $2.2 million or 2.9% of revenue for the same period last year.

For the nine months ended September 30th, 2008 bad debt expense was $10.5 million or 3.9% of revenue compared to $6.1 million or 2.8% of revenue for the same nine month period last year.

Our allowance for uncollectible accounts at September 30th, 2008 was $10.8 million, which is approximately 16.2% of patient accounts receivable. At December 31st, 2007 the reserve was $9 million or 11.3% of total patient accounts receivable.

Collection efforts have certainly exceeded all of our expectations. Therefore, I expect to reduce the accrual of bad debt expense to 1.5% to 2% during the fourth quarter.

We can drill down on these results further during the Q&A if anyone desires. Now, I'm pleased to have Johnny Indest, our Chief Operating Officer, take over to review the details of our operations.

Good morning, everyone. And thanks, Pete.

First, I would like to touch on the operational data from the third quarter of 2008. Total new admissions to home nursing climbed 24.2% to 13,925 in the three months ended September 30, 2008, from 11,216 in the three months ended September 30, 2007. New Medicare admissions rose 34.8% to 10,537 in the three months ended September 30, 2008, from 7, 819 in the three months ended September 30, 2007.

Internal growth on total new admissions was flat, while new Medicare admissions increased 9.2%. The reason that internal growth in total new admissions was flat in the third quarter of 2008 compared to the third quarter of 2007 is due to our reduction of new commercial admissions into the Company.

For the third quarter of 2008 our Home-Based average weekly patient census was 21,733, an increase of 28.9% as compared to 16,862 patients for the third quarter of 2007. Average weekly Medicare patient census rose 39.5% to 17,810 in the three months ended September 30, 2008 from 12,767 in the three months ended September 30, 2007.

Internal growth on Home-Based average weekly census and Medicare average weekly census for the third quarter of 2008 was 13.1% and 21.5%, respectively.

We had 29,703 completed Medicare episodes in the third quarter of 2008. Total growth in Medicare episodes was 44.9% for the three months ended September 30, 2008, as compared to the same period in 2007, while internal growth in Medicare episodes was 31.7%.

Our average case mix for completed Medicare episodes in the third quarter of 2008 was 1.27, up from 1.25 last quarter, with an average reimbursement of $2,322 per episode. We calculate our average reimbursement per episode on a rolling 12-month basis. In the third quarter of 2008 we had 551,129 total home nursing visits, of which 435,513 were Medicare visits for an average of 14.7 visits per completed Medicare episode.

Touching briefly on our seven LTACH locations, patient days decreased 2.4% to 10,930 in the three months ended September 30, 2008 from 11,202 in the three months ended September 30, 2007. Patient acuity mix increased in the three months ended September 30, 2008 to 0.992 from 0.956 in the three months ended September 30, 2007. These seven locations in Louisiana continue to be stable, consistent contributors to earnings, sharing operational synergies with our home health agencies and the markets they serve.

Earlier Keith referred to our acquisitions of Morristown-Hamblen and Mountaineer Home Health, and our joint ventures with Grant Memorial Hospital, West Tennessee Healthcare, Cape Fear Valley Health System, and Bureaurgard Memorial Hospital. We're truly excited that these locations have been added to the growing LHC Group family. Our highly capable startup teams have been assigned to each of these locations, and the assimilation process has been started.

As our expansion plans have unfolded in 2008 and as we look forward to 2009 I am pleased to report that we have successfully added qualified startup team members that have handled not only our new acquisitions but have been able to assist in other LHC locations requiring their expertise. I know that this team looks forward to our continued growth.

Along with our active acquisition pipeline, we continue with our denovo locations. In the third quarter of 2008 we established denovo locations in Martin, Tennessee, Owensboro, Kentucky, and Fayetteville, Arkansas. As Keith alluded to earlier, our plan is to open 11 denovos in the fourth quarter of 2008.

I would like to update you on our quality initiatives. First, and in relation to our Home Care compare results, we continue to show consistent improvement in our nationally reported outcome scores. In this last reporting period we continued to show consistent improvement in the measured outcomes.

Of particular note, is that in 2007 we began work with Outcome Concept Systems, better known as OCS, the nation's leading post acute healthcare information company for independent benchmarking and analysis.

OCS' standard outcome index is an index score developed by OCS that focuses on patient improvement and completed cases of care. It's designed to reflect overall quality of care through one number. Several clinical and functional measures are included in the calculation, which include pain, [dysnea], urinary and bowel incontinence, pressure ulcers, surgical wounds, IVs and infusions, dressings, bathing, toileting, transferring and ambulation. Each measure is weighted and a calculation takes into consideration the amount of improvement to augment the more straightforward perspective of improved stabilized decline.

Our scores are significantly higher than the industry averages. But, more importantly, we are continuing to improve each quarter, and continue to widen the gap between our overall quality scores and the industry mean.

Our LHC Group Interdisciplinary Quality Council continues its active involvement in all areas of operations. With oversight from this Council we are well into our rollout plan to have all of our homecare and hospice locations joint commission accredited by the end of 2010. In addition, the Council continues to develop our Corporate wide education programs and maintains oversight of our external and internal auditing functions.

I'm also pleased to report that based on recommendation from our Founders Advisory Board and our LHC Group Board of Directors that we have developed a charter forming the LHC Group Incorporated Clinical Quality Committee. This Committee's purpose will be to provide oversight to the measuring, disseminating, and improving of clinical practices, with the goals of sustaining leadership in and setting best practices for the homecare industry. This Committee will be comprised of both Board and non-Director members. We cannot be more pleased with the results of our quality initiatives, and we will continue to strive for excellence in this area, as we do in all things.

I would also be remiss if I didn't offer my congratulations to our Operations Team. This Team has proven its ability to manage through many challenges over the years, ad they have proven themselves once again.

In particular, I would like to highlight those Gulf Coast locations that were recently impacted by Hurricanes Gustav and Ike. These storms hit the Louisiana, Mississippi, and Texas Gulf Coast lines in the early and middle part of September. Thirty of our homecare locations, three of our hospice locations, five of our LTACHs were affected by one or in many instances both of these hurricanes.

I cannot offer adequate praise to our Operations Team and our home office staff for their tremendous response to the challenges presented by these two storms. Our home office staff worked long hours, making certain that we did not miss a beat related to [palow], human resources matters, billing and collections, and et cetera.

Our Operations Team in all affected homecare and hospice locations put into action our proven and tested hurricane preparation procedures. Our office locations were secured and each patient under our care was contacted to make certain that their needs were being taken care of, whether they chose to remain in their own home or chose to travel to a safe location.

In addition, as soon as it was safe to venture out our homecare and hospice personnel were contacting patients, hospitals, physician offices and shelters, letting them know that we were up and running and prepared to care for those in need.

I also want to acknowledge the extraordinary efforts of our LTACH Team. As Hurricane Gustav took aim, aimed directly at our five locations located in south Louisiana, this team banded together and performed to the highest standards that we expect at LHC Group. Our LTACH Team effectively transferred a total of 30 patients to sister facilities. All of this was accomplished with no injuries or untoward outcomes.

In addition, our other LTACHs were able to provide a safe refuge for patients that were transferred from other parts of the State to their care. The efforts by our LHC staff in such a trying time are a testament to their living up to our motto, "It's all about helping people."

As Keith reported earlier, the third quarter of 2008 was the best quarter in the history of LHC Group. I could not be more proud of our Operations Team. We are focused on making the fourth quarter a successful one and are diligently preparing for the opportunities and challenges that lie ahead.

Like Pete, I'll gladly take any questions you may have concerning operations in a moment.

Thanks, Johnny.

I want to take this opportunity to formally invite each of you to LHC Group's second Annual Investor Relations Day to be held at NASDAQ MarketSite in New York on November 5th, 2008, from 10:30 a.m. to 2:00 p.m. The presentation will include discussions by keynote speakers on corporate strategy, market factors, the political landscape and financial metrics, and will be followed by an opportunity for questions and answers.

I also want to take this opportunity to reiterate our guidance, which is outlined in our earnings release. We now anticipate revenue for 2008 of $360 million to $380 million, an increase of 3% from previous guidance of $350 million to $370 million. And fully diluted earnings per share of $1.50 to $1.60, from previous guidance of $1.35 to $1.45. This guidance does not take into account any future acquisitions or denovo locations.

In closing, to our shareholders, on behalf of the entire LHC Group Team, I want to say thank you once again for your investment, confidence, and support.

Operator, we're ready to take questions at this time.

(OPERATOR INSTRUCTIONS.)

Your first question comes from the line of Art Henderson from Jefferies & Company. You may proceed.

Hi, good morning. Thanks for taking the question, and very nice quarter. I was struck by the dramatic reduction in the cost structure of your business. It looked to me like the case mix number stayed roughly about the same, the revenue per episode was not materially different. What are you doing differently now or what have you done in the quarter to really accelerate the margins through cost reductions, if you would be so kind to describe that?

Sure, Art. This is Johnny.

Hi, Johnny.

Good morning.

Good morning.

I continue to brag on our Operations Team. I really think they hit their stride. We did tremendous preparations prior to January 1 of '08 to prepare for the significant changes brought about by the reweighting of the [HIRMS] and the reduction in reimbursement that we experienced.

But of particular note, that I think we need to look at, is number one our efficiencies have not been gained on the backs of our employees or on the backs of -- or on the expense of patient care. As a matter of fact, if you look at the third quarter, similar quarter in 2007, our revenue per completed episode was $2,504, and actually in this completed quarter, for the quarter, itself, it was $2,398. We're actually showing less revenue on that end of things.

But also where the efficiencies are coming from truly, to get right down to it, is we are becoming much more efficient and effective in bringing on new acquisitions and converting them to a profitable position. Our startup teams are doing a phenomenal job, and our operations people are bringing them along a lot quicker. We're also getting more efficient at developing our denovos and being more tactical in where they develop and in turning them around.

The other thing that I think is real important to note is that on commercial pay, we said over a year ago that we simply could not continue to take commercial pay business at less than Medicare. We terminated, I think we said approximately 289 contracts over a year ago.

We have been successful, number one, in renegotiating new contracts that are paying us right at Medicare rates, which has been great for the patients we serve and for us. And also we have just developed a discipline that we cannot accept business at 40%, 45% less than what Medicare pays.

I think when you take all of those into consideration it adds up to the answer to your question.

Okay. That's very helpful. And, Johnny, are more of those former managed care entities coming back to you and saying, "Can we talk, can we work through a different sort of pricing arrangement going forward"?

Yes, in limited, in certain states, more so in some than in others. It's a negotiation process, Art. When we talk to managed care companies and we start-off with a statement that all we want to do is get Medicare rates, it's like, "Well, sure." That's where we base all negotiations from.

And I think the education process is what truly are Medicare rates, because unfortunately for us and I think the industry as a whole, commercial payers don't pay on a [HIRD] like Medicare does and, therefore, negotiating and transferring what HIRD is as to a per-visit-rate is where the rub happens. But we've had several successful contract negotiations. We're in the process of several contract negotiations, and certainly the managed care industry I think more and more is starting to learn the value that homecare brings to the table.

Yes, I would agree. Last quick question, I guess I'll just toss it out to whoever -- any update on a potential rural add-on benefit? And any sort of thoughts as we move into a new administration what might be opportunities for the home nursing industry? What might be some challenges? Anything that you could provide on that end to prepare us for 2009 and beyond?

Yes, Art, this is Keith.

Hi.

I'll take that. Well, as you -- as I think you know, the rural add-on continues to be the number one priority on the National Association for Home Care and Hospice legislative agenda. And according to NAHC and to our own sources, we believe that any additional stimulus package in the fourth quarter of this year would most likely be a potential vehicle. That would be our shot at it for this year.

If that doesn't happen, then NAHC plans to push aggressively for the reinstatement of the rural add-on next year. And we do think conditions will be more favorable for the rural add-on in Washington, D.C. regardless of who wins the presidential election, just the entire landscape seems more favorable.

The numbers that NAHC is producing continues to support the need. Their most recent numbers which do not include the impact of the 2008 reduction show that on average rural providers are operating at a negative 3.99% margin and national and urban providers are at 7.6% profit. That's an unweighted average that NAHC tracks.

Whenever you -- if you move it to a weighted average the weighted average is 9.7% margin for all rural providers compared to 13.8% weighted margin for urban providers. So we're regardless of which numbers you choose, the disparity is relative, I mean it's greater in the unweighted. So we feel really good about it, and especially if it's the number one item on NAHC's agenda, that's important for us.

Yes. Okay. Thank you very much.

Okay.

Your next question comes from the line of Eric Gommel from Stifel Nicolaus. You may proceed.

Good morning.

Good morning, Eric.

I want to focus in on sort of your acquisition strategy and just a couple questions. It looks like the pipeline is accelerating the potential candidates. And if you could talk a little bit about funding these acquisitions, given your organic, sort of your operating cash flow and your revolver? How do you look at funding them? Do you see any constraints there from that standpoint? And then, also, kind of on that same subject, can you talk about the valuation of these acquisitions? Is there any change in the valuation given some of the economic issues, capital issues, and credit issues out there?

Eric, this is Keith. I'll take the last half of that, and I'll let Pete kind of chime in on the funding. Valuations, we see -- we've seen valuations come down for same assets, but in our pipeline we're paying roughly the same price that we did for trailing revenue a year ago but we have a much higher quality asset mix in the pipeline, much greater up side potential and just greater fundamentals. So for the same money we're getting a higher quality, that's what we're seeing.

And, Pete, you want to talk about--?

Yes, Eric, we have -- of course, we have grown our cash to about $11 million at the end of the quarter, and clearly there's a lot of potential on the balance sheet to generate enough cash to continue our acquisition track.

We had a meeting just last week about the -- with all of our banks in the syndicate, and primarily what they were doing was a sedulous analysis of whether or not we were -- what was going on with the Company, and how that would look going forward. And the result of that was excellent.

And we talked to them about additional capacity, we talked to them about things going on in the market nowadays. And we really have an excellent relationship with all of the banks. We have a nice relationship with not just the agent but also the other ones.

The -- an interesting point in our financials is that if you look at just the acquisitions that we've had, in the third quarter they've generated about a million dollars of gross margin, just the most recent acquisitions. So while you're talking about acquiring a company and funding it out of debt, we really are able to operationalize those very quickly and get that funding back out of the acquisition and pay it back.

So I mean from my perspective, I think we're really well positioned to take care of our acquisition strategy going forward.

And kind of switching gears here and focusing on sort of third quarter operation, John, you talked a little bit about the impact of these storms in September, since they were late in the quarter, how should we think about how they -- it sounds like they had very little impact on operations? I mean obviously your Operations Team did a great job, but I mean how should I think about that kind of flowing into the fourth quarter? Is there any impact in the fourth quarter from these storms?

The answer is, and that's one question I kind of anticipated, Eric. I usually don't anticipate many. But particularly I can say on the homecare end there will be no residual impact going into the fourth quarter.

On the LTACH end of things, all additional expenses related to the storms, related to transfer of patients, et cetera, are included in our September numbers, so they're all included in the third quarter.

There is a -- there could be less than $20,000 to $30,000 of expenses that might flow from the third quarter into the fourth quarter, but that would be the most. But all of the overtime that we paid, some of the transfer expenses that we paid for ambulance services, et cetera, were all -- are all included in our third quarter numbers.

And there's no sense of slag from the hospital side?

No.

Okay. Thank you.

Your next question comes from the line of David MacDonald from SunTrust. You may proceed.

Good morning, guys. Just wanted to follow-up on a couple of points that were made earlier. One on the DSOs, Pete, can you talk a little bit about electronic billing and the benefits there and how much lower can we go from here? And also just I missed the bad debt number that you said we should be thinking about in the fourth quarter, if you could just run that by me again?

Okay. The bad debt number is going to be somewhere between 1.5% and 2% in the fourth quarter. We had 3% in the third quarter, and I just really think that the collections that have happened, it's just happening much faster than I anticipated, so we're in much better shape there.

The -- on the electronic billing, it's a very significant impact, not just to the Medicare or Medicaid billing, but really where it's helping us most is in the commercial billing. We're able to -- at one point in time we were generating a lot of paper claims on commercial, and it was taking two or three days to get all those in the mail. There was no confirmation of receipt, and then when the commercial payer would receive it they'd have to actually input that into their system.

So you're talking about a lot of wasted days over that period. Now we're able to generate the claim and file it, and our actual turnaround time on some of the commercial claims has dropped to about 25% of what it had been a year ago. So I mean just really significant decrease just in the processing of that claim, of those claims.

The -- we have generated -- well, we've implemented the electronic claims scrubber on all of our servers effective really the beginning of October. It was in use for the entire third quarter on one of our servers, which is -- which handles all of the Louisiana claims, and we saw a significant dramatic decrease in the process to the billing to collection time on that server. So I expect that in the fourth quarter we're going to see that type of a decrease on the other service that we have and across the board, see it (inaudible).

The question is where is it going to get, and I think that that's a very legitimate question. And I can tell you that I don't know, and I think that if we get into the mid 40s, I believe that's a pretty good number to hit. I don't know that we'll get there by the end of the year, but I think that's a good target. I don't know if we can get any lower than that, and that seems to be kind of an industry average.

Okay. And then, Pete, just a couple of numbers questions. One, tax rate bounced up a little bit in the third quarter, it sounds like it's going to bounce back down in the fourth. Is there any reason to think that '09 tax rate will be a whole lot different than what you're seeing in '08? Will any of that stuff spill-over into next year?

Yes, I think the [WASI] credits are the wildcard in all that, and the problem is that the person that qualifies for that credit has to have been living in the Katrina zone at the date of the hurricane. So how many people we hire that are still living in the same place and things like that, that kind of muddles it up a little bit. I really expect next year to be 39%, and I wouldn't go too much off of that, really.

Okay. And then just can you once again give us the numbers in terms of on the internal growth number how much of that -- I missed the number -- was year-over-year from improvement in the acquisitions you did?

On revenue are you talking about?

On same store revenue, internal revenue?

Okay. On same store revenue, the internal growth was 4.3%.

Okay. And then just a final question. Keith, can you talk a little bit about the managed care re-pricing initiative? I mean how much headway is there still to be made there, how much more up side can you possibly get out of the piece of your business that hasn't been re-priced? Can you just give us a sense of kind of where we are in the game on the managed care re-pricing side?

Yes, that's a good question. I think quite possibly that could be one of the greatest opportunity areas for us and for all homecare providers in the years to come. I mean we're making progress and, as Johnny said, I mean it's an education and a negotiation process. And, unfortunately, you have to start the negotiations by saying, "No," to that unprofitable business.

But we're very encouraged by the outcome of the negotiations we've been in. In simple terms, I mean we don't see any great push-back to our services. They're very open and receptive to learning about what we do and how we can reduce their overall cost.

So I think there's -- I think we've only just begun that process. Right now, our admissions in commercial business are substantially down from where they were last year, but the revenue per patient is right there with our Medicare revenue per patient, so it's profitable business for us now. And the payers that are paying us those rates are happy with the results that they're seeing.

Can you give us any sense of what percentage of your managed care book is still kind of in that unacceptable level that you guys are right now working through and trying to renegotiate?

No, I mean I would -- I'm just going to -- I don't know what that number is exactly, I'll tell you that I think it's less than 10%. The only business we would have that would be at rates below Medicare would be in new acquisitions where we go in and for some period of time we don't want to rock the boat, so we may be in a period where we're offering them to negotiate rates before we terminate the contracts, but that doesn't last long, I mean maybe a six-month period or something.

Okay. Thank you.

Your next question comes from the line of [Kevin Eeley] from RBC Capital Markets. You may proceed.

Good morning, and thanks for taking my questions, guys.

Good morning.

Keith, going back to the acquisition pipeline, you guys obviously have -- you've closed a number of acquisitions, but can you help me think about how many deals you closed this quarter and how many you provided on the call were continuations from the 19 candidates you guys were talking to last quarter, and I think it was a $63 million revenue opportunity at the time?

Yes, well, I could just back and do the math, its just -- let me just ...

I mean is it that simple to just take the differential from what you closed versus what you've got in the pipeline now?

On the -- from the acquisition candidate, yes, from the number of candidates we're talking to. Because the -- those two functions are mutually exclusive, if you will. There's the business development team that's out, bringing candidates into the pipeline, and they're being loaded. And then a separate team is closing and transitioning those acquisitions. And so what we're reporting is the net change in the pipeline.

Okay. Excellent. Thank you for that. And then in the pipeline are there are any sizable deals bigger than like even the HomeCall deal you're looking at? And then has your stance changed on using your -- [on your] levered balance sheet?

Well, we -- the first part of the question, are there any larger transactions in the pipeline? I think you specifically asked larger than HomeCall? In the numbers we're reporting this morning there are no transactions that are larger than HomeCall.

Keep in mind that we have other conversations that are ongoing that are not being reported in this pipeline, because they haven't been approved at the senior management level. So but of the -- in the pipeline this morning, no, there aren't -- there's an accumulation of I guess you would say smaller transactions.

With regard to funding, we've said previously that we would be comfortable operating at a leverage of two times EBITDA if we were presented with acquisitions that met our criteria for up side potential and cultural fit. So we have the ability to bring on and to transition those type acquisitions.

Fortunately, because of the performance of our billing and collections efforts and that turnaround, we've been able to fund all our acquisitions out of cash flow. And the banks are very favorable in wanting to go with us wherever we want to go, but I guess the hardest part for us is to find those acquisitions that meet our criteria, and there's so many opportunities there right now in this cycle of consolidation. We just don't see any need to make a bad acquisition.

Okay. No, that's helpful. And then, Pete, a couple questions. Could we get your thoughts or your outlook on future cash flow and CapEx going forward? Are there any major items that we should be thinking about?

No, not really. I think that the -- what, we run about $700,000 to $900,000 a quarter in CapEx, and that's primarily IT related, and that's -- what normally happens is when we acquire something their systems, their IT systems don't support our programs, so we have to go in and replace all that. It's not a big expenditure, and we keep up with that like that.

The -- what was you other question?

Oh, cash flow?

Oh, yes. You know the -- I looked at the cash flow in the current quarter and if you had taken EBITDA and backed out the, or taken the actual operating cash flow and backed out about $6 million or $7 million related to the DSO reduction, you'd be real close to EBITDA. So I mean I think that's -- I don't think that's a bad number going forward.

Okay. And then that tax payment extension you cited for the hurricane ...

Right.

... it might be [done flashing] but is it safe to assume that that (inaudible) in the fourth quarter?

It -- we'll pay it in January, and I don't, honestly, I don't know if it extends to the December 15th payment.

Okay.

Yes, I really don't know.

Okay. And then a last question, maybe for John, is do you guys provide the number of recertification's for your patients? Or did I miss that?

No.

You care to give that, or not really?

Are you talking about our average length of stay?

Yes, exactly.

I'm trying to understand what you're saying. It's right at 1.58, 1.6.

Okay. Excellent. That's all I had. Thanks, guys.

Okay.

Your next question comes from the line of Darren Lehrich from Deutsche Bank. You may proceed.

Thanks. Good morning, everyone. We'll look forward to getting into more detail I guess in your Investor Day. But my one question for you is just about denovos, and I wanted to get your thoughts on whether you're putting more on the boards related to the earning anticipation I guess of a moratorium.

And if you are was there any impact, at all, to your costs or startup costs? I know that you have some scheduled to open in fourth quarter, but I just want to get your thoughts on whether you've got more kind of behind the scenes?

Number one, it is getting a little bit more difficult in the current environment to get approval for denovos, although we're still proceeding with our strategy. As an alternative denovos, we can open up drop sites where -- and we are in various instances opening up drop sites, but we plan on continuing on with our denovo strategy and fully penetrating the markets that we're licensed to serve. And are planning it out through 2009.

And do you -- can you give us a sense for what '09 will look like in terms of the denovo pipeline, larger or similar to what we saw in '09, or fewer?

I think you can see, probably, I don't think we've given any kind of thoughts as to, put out anything as far as to exact number of locations, but I think you can say it'll be a little bit higher than 2008.

Okay. Fair enough. Thanks. We'll see you next week.

Okay. Thanks.

Your next question comes from the line of Newton Juhng from BB&T Capital Markets. You may proceed.

Thank you. I was just wondering if you could revisit your response to Art's prior question on your cost structure? You're (inaudible) make a lot of sense on a year-over-year basis, but I am kind of struggling with the up tick that happened on a quarter-over-quarter basis. We've seen a pretty big sequential increase in margins or visa-versa, the reduction in cost.

Was there any additional costs in the second quarter that we kind of strip that out so that kind of explains the jump there, or I guess another way of looking at it is I'm really looking at going forward, your margin profiling, whether or not you can replicate what you've done in the third quarter in the fourth and beyond?

Newton, let me tell you a little bit about the third quarter. If you look at our gross margin on the home health in the second quarter it was about 51%. If you use that margin and multiply it by the third quarter revenue, that gives you about $43 million of expected margin at second quarter margin rates. The actual number was $44.5 million, so I mean it's $1.5 million that you're talking about on the home health side.

Of that $1.5 million a million came from improved margins in the acquisitions. So if you pull that out you're talking about $500,000 on about $73 million worth of revenue. I mean it spreads, and that is the affect of operational tightening down of the costs in our monthly meetings.

Okay. So it sounds like two-thirds of that was coming from acquisition improvement, and then one-third just on the other stuff that Johnny was talking about?

That's right. And two-thirds -- you know, when you're talking about acquisition improvement, it's really two things, it's operationalizing acquisitions that were not doing real well, as well as the improved quality of the acquisitions that we're getting. So there were some that actually came in and that were profitable, and that's a good situation for us, and we operationalize them even quicker when they're like that.

Well, and I guess it builds off of Keith's comments earlier, is that you're looking at a higher quality of acquisition at this point?

Right.

Exactly, and that's what I was about to say.

Hey, sorry for taking words out of your mouth. The other thing that I was just wondering about was on the Medicare Advantage front, are you seeing an increase in that within your base book of business in terms of more potential there, or is that something that you've been pretty much able to avoid, so to speak?

Well, of course, because of our diversity as far as the markets we're in, the answer to your question is yes. We are seeing increased activity on the Medicare Advantage front in selective locations. While most rural areas are somewhat insulated from that, the more metropolitan areas, you see more of that activity.

The good news is that many of these Medicare Advantage plans are paying right at Medicare rates, and our billing department and the work that's being done in there, we're doing an excellent job of getting the documentation and getting the billing and collection done on a prompt basis.

Okay. So, Johnny, you are willing to take on more of that business as it comes along?

We're willing to take on any kind of commercial Medicare Advantage business that pays Medicare rates.

As long as it pays Medicare rates. Okay. All right. I'll follow-up with you guys after the call. Thank you.

Your next question from the line of Whit Mayo, from Robert Baird & Company. You may proceed.

Thanks. Good morning. I guess we're over the hour mark, so I'll keep it short. Pete, just wanted to confirm you guys are not releasing any balance sheet reserves with your bad debt changes in your accrual?

In the third quarter or in the fourth quarter?

No, in the fourth quarter, going forward?

I don't expect to, and that's why I'm reducing the expense side. I think we're at 16% reserves to receivables, and I think that's a nice spot to be. But I can tell you that at the second quarter I truly thought we were going to run at 3% for the rest of the year.

What's really happening is the collection efforts have just gotten a lot faster than I expected. So if we measure our reserves at December 31st and based on that measurement we're -- we are -- we have too much then, yes, we'll take that down.

Okay. So you may make an adjustment at yearend?

I'm not saying that we will, and ...

If you did?

... all I'm saying is that if the measurement that we always apply to the aged receivables at the end of the period ends up having us, ends up measuring a reserve lower than the amount that we'd have recorded at that point in time, we'll adjust to that amount.

Okay. And just one other question, Keith, just when do we get an update on the recent lawsuit that was filed against CMS for the potential repeal of the code (inaudible)? Just any thoughts around that? Thanks.

Okay. Well, I think the best thing I can do is direct you -- do you know [Bill Dombie] at NAHC?

I do.

I think I'd refer you to Bill, because Bill is the point person for NAHC and the industry on that.

Okay. All right. Thanks, guys.

Okay.

Your next question comes from the line of Sheryl Skolnick from CRT Capital Group. You may proceed.

Thank you very much, and an excellent job, Pete. This was one of the more spectacular turnarounds of a balance sheet and cash flow issue I've ever seen. Your team really should be congratulated here.

I just wonder if you would indulge me in probing a little on that important issue, especially given that you're relying on those cash flows to fund the growth of the business going forward?

When you say collections are you talking about collecting and the improvement in the pace, it's not the rate per dollar in receivables, then certainly the pace sounds like it's improved -- are we talking old, old receivables from managed care or are we talking about on a current basis, that you're better able to collect from the maybe not old, old, but say 60 to 90-day old category as opposed to older than 90 or 180 days? And then I have a follow-up.

Yes, that's exactly the risk that we have been trying to balance. We outsourced to Simeon & Associates some of our older aging buckets, and we did that because it, honestly it's a distraction to go back in and collect those. So by outsourcing them those buckets, I mean the collectors can stay focused on those older ones and collect them in at honestly a fairly nice rate. So we are seeing the older buckets go down based on that effort.

So the not so old buckets, the ones that are maybe 240 and younger, the -- we by implementing the [MDON] program and the claim scrubbing program we've actually gone back and resubmitted some of the commercial claims in those aging buckets and have collected them. So you're also seeing that happening with the electronic scrubber.

On current claims it's really dramatic. We have about a 30-day, 30 to 45-day period billing to cash receipt on commercial claims, which is just unbelievable.

Yes, that's great.

Excellent for me. So to answer your question, I am worried about the older buckets kind of getting out of sight and out of mind, but I think that we've been on top of that, and so I mean across the board if you -- when you look at the Q we'll have the aging buckets in there, and you'll see it's improved across all aging buckets.

Okay. That's great. Now as we look at the fourth quarter then, since you are installing the scrubber on the next server, which I assume you have two?

Yes, we have five.

Five, okay.

It's the next four.

I didn't want to just assume it was just two, so it's on the next four.

Right.

All right. So for the rest of your revenues that need to be scrubbed, once that's done they will be scrubbed?

That's correct.

And is that a majority of your revenues then that will then be scrubbed?

Yes, the -- yes, let's just talk about this scrub.

Yes, please, because I don't want to get carried away here.

Yes. The -- every claim that we have goes through this scrubber, and what the scrubber does, the reason that it's able to reduce the billing to collection dates is because historically what you do is you'd submit a claim to a payer and if you had some problems with that claim like a, I don't know, punctuation in the wrong place in the name, they would deny it and send it back to you. And then you'd fix that and send it, and resubmit the claim, and you could have another punctuation mark in the wrong place and they'd send that back to you. So those iterations really lengthened the time between the billing date, the initial billing date and the date that the payer received the claim to be paid.

What a scrubber does is it allows you to make all those edits and correct them in a few days, because you just keep running it through that scrubber, correcting them based on the criteria of whatever payer it is, so that when you submit the claim it's a clean claim and the payer accepts it.

Right. So these would be edits as opposed to anything clinical?

Oh, yes. Oh, there's no -- there's absolutely nothing going on clinical there. It's just ...

Okay. These are purely edits?

... it's purely data that is included in various fields on a claim so that the payer will accept it.

Okay. Thank you very much. And then I have another follow-up on a different side of the business. If I understood Johnny correctly, your revenue per episode for Medicare went down year-over-year, is that right, to about $2,300?

Yes, that's correct, yes.

Okay. So it's not so surprising given where the Company was on 10 visits per therapy episode before, and given where initial guidance of where the PTS changes would take the Company.

Right.

But I guess what I'm a little bit concerned about is what is the Company doing to increase the -- or can the Company do anything to increase the Medicare revenue per episode through either specialty programs or seeking out higher acuity or maybe looking at different referral sources? Or is just simply this is the population that you serve?

Because it seems like given what others in your industry have been reporting this last couple of days, that there are revenue opportunities legitimately out there and needs that legitimately can be served by maybe tweaking your service offering, and I'm wondering if you've done that?

Yes, Sheryl, we're constantly looking at ways to service more of a population base. Certainly, we think there are opportunities on the speech therapy front. Speech therapy by its very nature is a longer term therapy, and but if -- so there are various programs that we are looking at to be able to service our full patient population. Because of our diverse nature, some of our programs might work very well in a more metropolitan area but have little traction in a more rural area.

Sure.

But we are in the process of cotinuing to not only develop new programs but to do a better job with the disease management programs that we have right now. But I mean we are improving on the revenue and at the end of the second quarter we were at $2,194 and, of course, at the end of the third quarter we reported we were at $2,398.

Right. Can you do that effectively and acquire as many -- and build as many new agencies as you're doing? Can you do both?

Yes, I think we definitely can. I'm -- Don has worked with our startup team manager -- we're well positioned as far as growth into 2009 with our transition teams. As a matter of fact, we have teams out in the field right now that they are not deployed in new acquisitions because we have some extra teams onboard. And what we're doing is putting them working in agencies where we can use our expertise in tightening up some of our operations.

So the answer is, yes, we will work on both fronts in bringing in new acquisitions as well as developing, tweaking and developing new protocols out in the field.

Great. Thank you so much.

Your next question comes from the line of Greg Williams from Sidoti & Company. You may proceed.

Good morning. Thanks for taking my call, guys. Just had a question, Johnny, you mentioned in the dialogue of denovos that certifications are getting tougher or (inaudible) tougher, are you alluding to just the delays or is there something else going on there?

No, it's delays related to CMS.

Okay. And, again, that's just a bandwidth issue at CMS, still? And I guess how do they prioritize? Is it really as simple as first come, first serve, in terms of certifications view?

And I'll say CMS, realizing when I say CMS I'm truly talking about the fiscal intermediaries. And every fiscal intermediary is different when you deal with that.

Fiscal intermediaries are being -- their resources are being tightened down, and I think it's more an issue of just having the man, woman power within the office to be able to handle the volume of what's coming in. And they're handling, I would assume it's on a first come, first serve basis.

Okay. Fair enough. Thanks, guys.

and your last question comes from the line of Derrick Dagnan from Avondale Partners. You may proceed.

Thanks. One quick one, Keith, when you look at the acquisition pipeline is there anything different in the mix of urban versus rural in comparison to the existing portfolio?

No, nothing notable, Derrick. I mean it's the same mix. We're no more focused in -- we haven't changed our focus, at all.

Okay. So good quarter. Thanks a lot.

Okay. Thank you.

This concludes our question and answer portion of the call. I would now like to turn it over to Keith Myers for closing remarks.

Okay. Thank you, Operator.

Once again, on behalf of all of us here at LHC Group, we want to thank everyone for taking the time to listen in and participate in our call this morning. We'll be available to answer any questions that may come up after this call and between quarterly earnings calls. So, to all, have a great day, and thank you for supporting and believing in the LHC Group family.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect, and have a wonderful day.