LHC Group Inc (LHCG) 2008 Q4 法說會逐字稿

Good day and welcome to the LHC Group year-end 2008 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. [Eric Elliott], Vice President of Investor Relations. Please go ahead, sir.

Thank you, Erica and welcome, everyone to LHC Group's 2008 fourth quarter and year-end earnings call. In a moment we will hear from Keith Myers, Chief Executive Officer of LHC Group; John Indest, President and Chief Operating Officer; Don Stelly, Senior Vice President of Operations; and Pete Roman, Senior Vice President and 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 2009 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events. Before I turn it over to Keith, I want to point out that in this call we have elected not to review all the financial and operational statistics which we have included in a table in our earnings release. Now I'm 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, 2008 was a great year for the Company. Our management team and caregivers continue to prove that they are truly best of class. During 2008, we added 63 locations in 13 states through acquisitions with combined annual revenue of approximately $73 million. We also opened 20 de novo locations in eight states during 2008. We ended 2008 with 250 locations in 17 states, as compared to 172 locations in 11 states at the end of 2007. Also at the end of 2008, we had 206 home nursing agencies across 17 states serving 656 counties with a population of 45.3 million in which about 14% is over age 65. At the end of 2007, we had 144 home nursing agencies across 11 states. We have also grown our hospice division from nine locations in 2007 to 19 locations at the end of 2008.

Our continued ability to deliver a strong return on assets, return on capital and return on equity was recognized in 2008 when we were named number 8 on Forbes 2008 list of Best Small Companies in America. The second year in a row that LHC Group made the top 10. We saw great improvement in our DSOs in 2008. DSOs improved 22 days in 2008 as compared to 2007. This improvement is a credit to our hard working staff and the continuing relationship with our consulting partner [Simeon] Consultants.

During 2008, we made great progress in preparing LHC Group for the future. We made significant investments in quality through our joint commission accreditation strategy and enhancements to our performance improvement team. We also made a significant investment in our revenue cycle department, which accounts for improvements in DSOs. Throughout the organization, we also strengthened the quality and depth of our management team. However, despite our strong 2008 results, at LHC Group we are always focused on our long-term goals and objectives. Therefore, in 2009 we intend to continue making significant investments in people and technology to become even more efficient and delivery even higher quality outcomes to every patient we serve. We believe these investments and our future will allow us to provide the highest quality of care to our patients, adapt to the changing reimbursement environment and continue providing the return on assets, capital and equity that our shareholders are come to expect.

One of the tools we intend to leverage more in the future is point of care technology. We currently have 23 locations on point of care in Maryland, Tennessee and Virginia. These locations are generating financial results comparable to our other nonpoint of care locations and are serving as good beta testing sites for our point of care valuation. Compared to five years ago, when 30% to 40% of home health agencies and only about 5% of hospices utilized point of care technology, today 65% of home health agencies and 30% of hospices utilize point of care. Five years ago, point of care tool did not have predictive or disease management capabilities built in. Today they do. Today 55% of all Americans already have broadband access at home, up 47% in 2007, according to a July The Pew Internet & American Life Project report. The study also found that 38% of rural Americans have broadband at home, an increase of 23% from the previous year. $7.2 billion of the $787 billion federal stimulus package is set aside to expand the reach of broadband to rural areas. This supports the increasing ability for realtime transfer of information from the field to the office and presents a more compelling quality and efficiency ROI.

I know that many of our shareholders are focused on the proposed budget outline that President Obama unveiled on February 26. We know that in 2009 we will receive a 2.9% market basket adjustment, which will be offset by 2.75% case creep adjustment to the base rate. The result being that Medicare reimbursement rates in 2009 will be effectively flat over 2008. In 2010 we know the overall proposed cut in home health is $550 million. At this time, the manner in which the $550 million savings will be achieved has not been fully explained by the administration. However, based on the information we know today, we believe we are well prepared to adapt to the potential 2010 reimbursement changes. In 2011 and beyond, the proposed cuts in home health reimbursement are more significant. Again, we do not have full details on how those cuts were calculated, but if the proposed budget follows the MedPac recommendations, it would involve a rebasing of rates by CMS to reflect the average cost of providing care.

According to the National Association of Home Care, if the proposal is adopted as is, over 60% of home health agencies in the country would have negative margins in 2011. I think we should all remember that this is just a budget proposal and if history tells us anything, we expect there to be many changes in this budget proposal between now and 2011. It is also worth reiterating that much of the proposed budget appears to be a recitation of this year's MedPac recommendations that have not been adopted or endorsed by Congress. Historically, we have seen positive modifications between the MedPac proposal and what is ultimately adopted. Medpac remains an advisory body of nature and its recommendations do not carry the force of law. Further, we believe that the home health industry has strong data to counter MedPac's inaccurate average margin calculation. Something else to consider, it's not clear in the broad outlines of the plan that we have seen how Medicaid would be affected. We do know that Medicaid today represents the largest single item in each state's budget. On average, it accounts for $1 out of every $5 of state budget, increasing to 25% or more in some states. Long-term care under Medicaid constitutes one of our health care systems' greatest challenges.

Despite the fact that all states in 2004 or earlier began a program to rebalance Medicaid, moving patients from institutional care to community based care, the burden is now untenable for states who rely on property tax revenues. Were this proposal to pass in its current form, we believe that it would dramatically shift billions of dollars to state Medicaid programs in what would become an unfunded mandate. It would shift onto the backs of the states the crushing burden of 3.5 million of the sickest Americans suffering from a myriad of chronic diseases. It would be undermining the infrastructure the governors and members of Congress know we need more of rather than less of.

With all that said, as you are aware, this is not the first time that our industry has faced proposed reimbursement changes and our Company has a proven track record with regard to our ability to adapt to changes in reimbursement. First, we will continue to focus our efforts on operations, quality patient care and internal growth during 2009 and 2010. Second, we will continue implementing and focusing on operational strategies that will build our foundation for the future and allow us to adapt to whatever changes are ultimately adopted. Johnny and Don will discuss our 2009 operational strategies in a few minutes. Finally, we will work with the President, Congress, other members of our industry and the National Association for Home, Health and Hospice to development reimbursement changes that reflect the value and importance of home care, but at the same time reflect the need for this country to improve the quality and efficiency of our national health care system.

2007 data shows that the Medicare program paid $5,765 per day for hospital stays, $544 per day for skilled nursing facility stays, contrasted with an average cost of approximately $57 per day for home health services based on 2008 data. As over 78 million baby boomers age, it's critical that we find ways to lower the cost of accessing health care. Before leaving this topic of the proposed budget, I wanted to read a quote to you from Senator Blanche Lincoln of Arkansas. This quote was made yesterday during a senate Finance Committee hearing in which Peter Orszag, the Director of The Office of Management and Budget was answering questions about the proposed home health budget.

Senator Lincoln said "I've been a longtime supporter of home health care as an option for seniors. I think it's cost-effective and it's patient preferred and it's been my understanding and certainly witnessing that because of home care more patients are getting rehabilitation services, they are gaining independence and they are staying out of more costly institutional care. How has OMD assessed the impact of these cuts on access to home care especially in rural areas? States like mine that are predominantly rural, we are getting estimates that 56% of home health agencies in my state will have a negative margin by 2010 and 73% have a negative margin by 2011 if the president's proposed budget cuts go through. I understand the need to be fiscally responsible here in tightening our belts. We all have to do that. But is there some way we can ensure that these changes wouldn't adversely affect patient access or that the policy won't have the opposite of intended effects with higher costs to Medicare due to beneficiaries that are going to be moving to something more costly." end of quote.

I thought this quote was important for everyone to understand that our representatives in Washington understand the value of home care, particularly in rural communities and understand that home care is part of the solution. I have received many questions during the past week about our acquisition strategy in light of the proposed reimbursement changes. We do not intend to in any way discontinue our strategy of growth through appropriately-priced acquisitions that yield a strong rate of return. In fact, if history repeats itself, we expect for the proposed budget cuts to result in greater acquisition opportunities at lower prices. Obviously, our pricing on acquisitions must take into consideration the proposed 2010 cuts and the unpredictable reimbursement environment beyond 2011.

At this time, we are in active negotiations with 10 acquisition candidates that have been approved at the senior management level. These 10 current opportunities include 13 existing locations in seven states and approximately $36 million in annual revenue. With our $75 million unused line of credit, we are well positioned to finance our acquisition strategy. In this environment, we believe our strong balance sheet is a huge asset for our Company, and we intend to maintain our strong balance sheet position during 2009 and beyond. And now I'll turn it over to Pete for a more detailed review of our financial results.

Thanks, Keith and good morning, everyone. Our consolidated net service revenue for the December 2008 quarter was $111.5 million, an increase of $30.3 million or 37.3% from the fourth quarter of 2007, and was $383.3 million for the year ended December 31, 2008, an increase of $85.3 million or 28.6% compared with 2007. Net income for the December 2008 quarter was $10.5 million or $0.58 cents per diluted share. For the year net income was $30.2 million or $1.69 per diluted share. Revenue for the home based segment was $96.7 million for the December 2008 quarter, an increase of $28.9 million or 42.6% compared to the same quarter in 2007. For the year, revenue for the home based segment was $326 million, an increase of $81.9 million or 33.6% as compared with 2007.

Revenue for the home based segment for the December 2008 quarter consists of $81.1 million in organic revenue and $15.6 million in acquired revenue. For the year, revenue for the home based segment consists of $289.2 million organic revenue and $36.8 million in acquired revenue. Revenue for the facilities-based segment for the December 2008 quarter was $14.8 million, an increase of $1.4 million or 10.2% over the same quarter in 2007. For the year, revenue for the facility-based segment was $53.9 million, an increase of $3.3 million or 6.2% compared with 2007. The increase over the prior year in both the December quarter and for the full year is primarily due to an increase in patient days and higher acuity patients be treated in 2008.

Medicare revenue was 83.8% of consolidated net service revenue in the December 2008 quarter and 83.1% for the entire year. During 2008, we reemphasized cost controls, efficiencies in our mature agencies, and close monitoring of acquired companies in de novo locations. To do this, we increased the amount of time taken to review the operating results of every business we operate and reviewed them in a more comprehensive manner. The effect of these procedures is evidenced in the financial results. Consolidated gross margin increased 3.2% as a percent of net revenue in the December 2008 quarter over the same quarter in 2007. For the year ended December 31, '08, consolidated gross margin increased 1.9% compared to 2007.

Gross margin for the home based segment increased 2.2% as a percent of net revenue in the December 2008 quarter over 2007, and increased 0.6% in all of 2008 as compared to all of 2007. The increase in the gross margins for both the quarter and the year is due primarily to a reduction in salaries and its applied percentage as a expense of revenue. In part this is caused by the operation reviews I referred to above and in part to improve margins on revenue from acquisitions and de novo locations in 2008 compared to 2007. For example, the gross margin in the December 2008 quarter was 4.1% higher than the 2008 de novo locations and 4.9% higher for 2008 acquisitions than the gross margin contributions to the December 2007 quarter that was made by the 2007 de novo and 2007 acquisition locations.

Beginning in late 2007 and throughout 2008, we invested in our billing and collections process. The investment included additional people, training, and engaging Simeon Consultants to manage the billing and collections operation, to assist in collecting older claims, and to help design the department to support a billion dollar Company with 500 locations. Throughout 2008, we added resources to the acquisition department including the senior vice president and increased our transition teams and care management teams as we continued to grow through acquisitions. Including this internal investment, consolidated G&A expense decreased as a percent of net revenue for the December 2008 quarter as compared to December of 2007 and only increased 20 basis points for the entire year of 2008 compared to 2007. As a result of the investments in billing and collections and the development of that department, our day sales outstanding or DSO at December 31, 2008 was 51 days. This is down from 73 days at December 31, 2007 and down from 52 days at the end of the third quarter.

DSO adjusted for about $600,000 in clients that can be be billed until the approval in the change of ownership obtained is 50 days at 2008 compared to 63 days at December 31, 2007 and 49 days at the end of the third quarter. Our continued strong collection on receivables has also resulted in lower bad debt expense. Consolidated bad debt expense is 1.2% of net revenue in the December 2008 quarter, and was 3.1% for the year ended December 31, 2008. Both percentages are lower than the same periods of 2007 and have been coming down each quarter during 2008. We expect that debt expense to be between two and 3% of consolidated net revenue in 2009.

Our effective tax rate for the December 2008 quarter was 36.4%, as compared to 34.8% in 2007 and 37.9% for the year ended December 31, 2008, as compared to 36.4% in 2007. 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 in to new states. The WOTC tax credits were extended in the fourth quarter of 2008 for businesses in the core Katrina zone and we expect the tax rate to be 39% throughout 2009. Cash provided by operations for 2008 was $84.6 million with $25.2 million provided in the December quarter.

CapEx, which is primarily expenditures on information technology for the year, was $8.5 million and was $1.2 million in the December quarter. During 2008 we acquired existing operations of 11 entities operating a total of 43 agencies and a majority ownership in 13 entities operating a total of 20 agencies. The total purchase price for these acquisitions was $62.6 million including $2 million of acquisition-related costs. These investments were funded through operating cash flow and at December 31, 2008, we have nothing drawn on the $75 million line of credit.

Just as we have in 2008, in 2009 we intend to continue making additional internal investments in people and technology. We believe these investments are necessary and will help build a strong foundation for the long-term future of our Company. The cost of these investments are reflected in our updated 2009 guidance. We can drill down on these results further during Q&A if anyone desires. Now I'm very pleased to have Johnny Indest, our Chief Operating Officer, take over to review the details of our operations. John.

Thank you, Pete and good morning, everyone. First I would like to speak about the acquisitions and de novos that were added to our family in 2008. As with any growing company, in many instances our best teacher has been the experience that we have gained from the past. This is certainly true as we continue to expand our Company. More and more, we are fine-tuning the integration of new agencies into our model. I would like to compliment our business development team, our legal team, transition team, all departments within our home office, our startup teams, and our operations team. All of these personnel have formed a superior work group and processes that enable us to integrate our new agencies into our Company quicker and more efficiently. Also, as is customary in my updates, I would like to update you on our continuing quality initiatives.

In this last home care compare reporting period, July '07 through June '08, we have shown improvement of 10 of 12 outcomes over the last reporting period. This includes improvement in our acute care hospitalization rate, unplanned emergent care rate and percentage of patients staying home after an episode of care. We are currently meeting or exceeding five of 12 national reported outcomes. Without acquisitions, same stores as this time last year, we have shown improvement in 10 of 12 outcomes over the last reporting period and have stayed unchanged in one. It's important to note that we have shown continuous improvement in these home care compare scores over the last seven reporting periods.

As discussed in our last call, we have been working with Outcome Concept Systems, Inc., the nation's leading post acute health care information company for independent benchmarking and analysis. The Standard Outcome Index or SOI, is an index score developed by OCS that focuses on patient improvement in completed cases of care. It's designed to reflect overall quality of care through one number. Several clinical and functional measures are included in this calculation, including pain, [disnia], urinary and bowel incontinence, pressure ulcers, surgical wounds, infusion, dressing, bathing, toileting, transferring and ambulation. Each measure is weighted and the calculation takes into consideration the amount of improvement to augment the more straightforward perspective of improved, stabilized or declined. At December 31, 2008, our SOI as calculated by OCS was 1.839, while the national norm was 1.67. 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.

In 2008 our LHC Group interdisciplinary quality council continued its active involvement in all areas of operations. With oversight from this council, we are well into our roll-out plan to have all of our home care and hospice location 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. 2008 also saw the formation of the LHC Group incorporated clinical quality committee. The 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 home health industry. This committee is comprised of both board and non-director members. We could not be more pleased with the results of our quality initiatives and we will continue to strive for excellence in this area as we do all things.

I would also like to take time to publicly acknowledge and thank our sales and marketing team. At no time in the history of our Company have these areas been as focused as they are now. The leadership of these efforts has made 2008 a banner year for LHC Group. Our divisional sales leaders took the initiative this past year to travel throughout our Company conducting small group sales training meetings. I'm pleased that I was able to attend a majority of these sessions. I was particularly pleased with the tone and direction of the meetings which was educating referral sources on those Medicare patients that comprise the very backbone of the home care benefit, specifically those in need of teaching and training and observation and assessment. These patients significantly benefit from our services. These are the patients that are most often forgotten when discharged from an acute care facility or when they leave the physician office. In many cases these patients are not a highly reimbursed HHRG, but they form the basis for the patient population that we serve. In 2009, I intend to continue working closely with our sales and marketing team to continue growing the top line of our business.

As Keith mentioned in his opening remarks, our operations are well prepared to address the Medicare reimbursement environment in 2009, '10 and beyond. As we do every year, we will continue to focus on key operational strategies to be certain that we are providing high quality care as efficiently as possible and that we are ready to adapt to any future reimbursement changes. As operators, we understand that reimbursement will continue to change and time and again our management team and commissions have proven their ability to overcome and prosper during these times of change. I want to now turn the call over to Don Stelly, Senior Vice President for Operations, to discuss our key operational objectives for 2009. During 2008, Don was instrumental in developing and implementing the strategies that allowed us to successfully adapt to the changes in reimbursement. As I mentioned earlier, Don has done an outstanding job in creating an environment of operational consistency and accountability throughout the organization that will allow us to continue producing strong operational results as we continue our rapid growth. Don.

Thank you, Johnny and good morning, everyone. Before discussing our 2009 operational objectives, I also want to thank the entire LHC team for their hard work and dedication during the past year. It was the collaborative effort of our home office, sales, and operations team members that truly allowed us to achieve the 2008 successes. This entire team also understands that we must continue to improve as we implement our aggressive growth strategy and adapt to the change in political and reimbursement environment. With that in mind, then we have developed these key operational objectives for 2009, and we intend to focus our efforts in these and other areas in order to achieve our short and long-term objectives.

For this year, we have grouped our objectives into broad categories and I'll briefly touch on a few high points. A primary objective under the category of efficiencies is to leverage our home office overhead. A short statement but an important objective. Also falling into this category is our use of technology. This relates to both field operations and decision support from management. Our existing relationship with OCS and Simeon continues to add tremendous value as we move forward with this strategy. A third objective classified under the category of efficiency is that of shortening our time line for what we call operationalizing our acquisitions and de novos. Other objectives fall under our organic growth category. Certainly de novo mapping, market development, and sales initiatives are all grouped here, but we are also focused on process changes that will support our organic growth efforts. Examples of what I'm talking about include customer service initiatives as well as our intake procedures.

In a final category that I'll mention is portfolio management. We are executing strategies geared to improve operations and existing service lines such as hospice, private duty and waver business while at the same time we are keeping the momentum that has yielded consistent and predictable operational results from our long-term acute hospitals. Throughout 2009 we will continue to keep you updated on these and other efforts in regards to these operational objectives and again, I would like to thank our clinicians and leaders throughout this Company as you truly are best of class. I will now turn the call back over to Keith.

Thanks, Don. And before we open the call up for questions, I want to take this opportunity to reiterate the increase in our guidance, which was outlined in our earnings release yesterday afternoon. We are increasing our guidance for full-year 2009 which was initially announced on December 2, 2008. Full year net service revenue is expected to be in the range of $480 million to $500 million as compared to the initial guidance of $450 million to $470 million. Fully diluted earnings per share is expected to be in the range of $2.00 to $2.10 as compared to the initial guidance of $1.90 to $2.00. The increase is primarily due to the acquisitions that we acquired toward the end of the fourth quarter after giving the initial guidance. The guidance does not take into account any future acquisitions or de novo locations but does take in to account the investments in our future that Pete Roman and I have discussed. At this time, operator, I think we are ready to open the call up for questions.

Thank you. (Operator instructions). And we will go first to Arthur Henderson of Jeffries & Company.

Hi. Good morning. Very nice quarter. A couple of questions. First, back on the point of care technology that you talked about in the early part of your script there, Keith, you mentioned that 23 locations currently have it, you're using those as beta testing sites. It sounds like this year you might start ramping that up a bit more, and if so, how should we think about the CapEx expenditures?

I'll take the first part of that. I'll ask Pete to jump in and perhaps Don or Johnny. I think the ramp-up for us in this fiscal year, the effective deployment of additional units will come in the second half of the year after we complete the testing in these existing locations. I think if that is successful, we will have a larger deployment in 2010. Those are my early thoughts on it and as far as CapEx and as far as what we think about that, Pete, I'll let you take that.

I mean, we are evaluating this and so where we are right now is we have gotten some preliminary numbers on licensing and equipment. We are trying to determine how we are going to deploy -- how we would deploy that equipment but nothing is really finalized, so we would even look at that for at least another quarter and I think what the -- what has to happen first is we have to be comfortable with these sites that we have on hand right now and then just continue to develop how we are going to roll this out. I think where we are right now is right there.

So, Pete, in the interim, what should we use in terms of CapEx? What should our expectations be at the moment?

Yes, I don't think our current run rate is going to be any different in the first quarter.

Okay. That's fair. And are there -- Keith, I know you mentioned that -- a statistic about the number of rural Americans that have access to broadband. Does that impede your ability to roll out some of this technology and some of your markets?

Yes. Rural is a broad term. We actually operate in bedroom communities really outside of metropolitan areas that have a rural designation and there's no access limitations there, but I'm not going to call anyone out here and name any really small towns but there are some out there that it may be a while before they get point of care technology. So it's really market specific. But we are encouraged by the commitments made by the administration to -- and the dollars that will be spent in those areas, so we do see that as the future, and we do believe that area market will be there at some point in the future.

Last question and I'll get back in the queue. Obviously the budget is on everyone's mind. Have you been able to ascertain why it was singled out in the manner that it was? It strikes me that Congress, --the way the quote you gave seems pretty positive on the space and yet certain areas of the administration either can't see the opportunity or are overlooking something. I'm just curious what you've been able to find out in terms of how they were -- why this particular area was targeted and then more importantly -- at least from my perspective, it seems like the national association of home care has failed in many ways in highlighting the value that this space brings to--provides more solutions than it does problems and I'd love to just get your thoughts on that.

Sure, sure. I think I'll try to answer that and structure that in two parts. First of all, I think it's important to understand that the efficacy of the home health benefit is not what's under attack. What's at question is what should the margins be, and the debate is over MedPac's margins, are they accurate or not. We believe they are not accurate because of the way they calculate it. They do not consider all costs. They only consider Medicare costs and it's based on cost report data, and the -- but there's an ongoing debate about what are the margins and what should the margins be.

So to sum that up, and you can read the transcript from the hearing we are citing yesterday and Mr. Orszag actually points to some of that. I won't read that all out here. But they believe that we should be able to tighten our belts as an industry and we should have lower margins than we have today and that's where the debate is. And we don't want to push those margins down so much that it would create an access issue in the industry and push people into more costly settings. I think there is some truth to both of it. And in our statements, we see 2010 as something that would not have a huge impact on us. We believe that we can tighten our belts and we have some efficiencies that are low hanging fruit, if you will. So that's what that's what I think about the battle. I think it's important to -- some people think it's an attack on home health.

Now let's talk about how we -- how this budget got there, my opinion. I think the administration did nothing more than take the MedPac recommendations absent any real time to dig into this issue themselves. Remember, we had no HHS secretary. There's really no staff to lead this. In that vacuum, I think they just took MedPac recommendations and loaded that in. The national -- to your comment about the national association maybe falling short-- we'd like to see things different too, but I kind of understand the landscape there and I understand their budget and -- they stay in defensive posture 100% of the time. They don't have the opportunity to apply resources to -- proactively.

One of the things that I've been pretty excited about in the last year has been the formation of an alliance of some of the larger home care providers that also includes, though, the National Association for Home Care and VNAA all working in concert and the purpose of the alliance is to fund research and proactive initiatives to shape the future of home care where not concentrates their efforts on reimbursement and short-term defensive posturing. So I hear you and I agree that there should have been more done earlier. There's not much to do about that right now, but we are doing something about the future and I can already see a difference in the landscape in Washington.

I appreciate it. That's very good color. Thank you, Keith.

And we will go next to Kevin Ellich of RBC Capital Markets.

Following up on those comments, Keith, do you guys know or does the industry have a sense as to what cost information the government is using? Is it updated information or is it stale data?

My understanding is that it's 2006 cost report data that MedPac is using.

Okay. And again --

Which is a good point.

Right. And I -- again, that's only Medicare. Do you think if indeed they do go through and kind of realign the cost in 2011, we could see a new cost survey come out? Have you guys picked up any chatter about that?

I have not.

Okay. And then hypothetically speaking, if the cuts go unchanged in 2011 and you're left with about a 10% cut, have you guys gone through and calculated how that will impact the business and thought through strategically what you would do to counter act those effects?

No. We haven't taken that down to a budgeting process for 2011. For one, I think there's a very low probability that that 2011 budget arrives as it's presented now. That's almost never happened in history. So really what would -- our view is--we maybe get to the same end, but we are constantly focusing on efficiencies here because it's just the right thing to do regardless of what's going on in Washington. To be as lean and mean as we can, if you will, the one thing that I do know, I'm quite certain of is when we look at our Company five years from now, I think we are going to be serving a much larger patient population. I see the home care industry as being much more involved in chronic disease management, and I think there will be opportunities for us to serve a larger patient population, but I also think we are going to see lower margins. I think we make it up in our -- we will make it up in our absolute earnings, but our operating margins I think will come down from where they are today. I think that's a reasonable expectation.

And I know it's kind of tough to go out on a limb and answer this, but any idea as to what the optimal or where do you think margins will go for what time frame?

No. I wouldn't go there. I think we would all just look at other health care providers, and look at where their margins settle in over time. There are always going to be -- I think the good news for us is that at the size and scale we operate at today, there are certain advantages that we have through leverage that will be hard for others to attain and I think the same holds true in all industries. What the overall industry margins would settle in at, I don't think I would want to speculate on that.

Okay. No. That's helpful. And then, given the pressures coming from Washington, have you picked up any chatter again or what do you think the likelihood of getting the 5% rural add-on this year?

I feel like I've said I feel good about it about 100 times, but, it's -- we can't find anyone who's ever opposed to it. It's always a question of what vehicle does it get in. It was interesting and encouraging for us to hear that mentioned in Senator Lincoln's comments yesterday. I'll just say this. Everything I hear continues to be very positive and Senator [Bro] who's on our board who I think you all know is very close on that issue tells me he feels strongly that if a Medicare bill passes, that we are at the table and have a very good chance at it getting in.

Okay. That's helpful. And I just had a quick question for Pete. Obviously, cash flow was strong. You kind of talked about that a little bit. But can you talk about the changes in working capital and what we should expect in 2009.

Sure. We have been kind of going back and forth on that. I really think that the operating cash flow, it makes a lot of sense to stay at EBITDA. I think what we see in the current year at year end are a couple of things. We have got a little bit of an increase in payables and accrued expenses. Part of that has to do with just timing of payroll. We had a couple more days accrued at December of '08 versus '07 so that's part of it, and the growth of the Company. But we also had with Katrina legislation that was signed in October, they suspended all the payments on taxes for -- through to January, so we had about $9 million of accrued income taxes payable also in that number. So to normalize it, I would kind of take that out at least. The other items in working capital actually are moving pretty nicely. I think that the collection side receivables ought to stay right around where it is was right now. I still expect it to go down a little bit and then we managed the accrued liabilities, so my recommendation would be just to stay with EBITDA for the operating cash flow.

Okay. Sounds good. Thanks, guys.

Thank you.

And we will take our next question from Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Just a couple things. I guess one, just given the reimbursement concerns and potential pressure on the home health side, any thoughts of expanding and maybe continuing to diversify, whether that be bigger in hospice or LTAC or even some other service line.

Ralph, it's Keith. I'll take that. I think we were already going there. We have talked about the expansion on hospice. One of the things that is very encouraging for us is that we have developed a very predictable model in hospice over the past year that's really comparable to what we have had in home health for a long time that raised our confidence level so I think we will expand the hospice -- our hospice locations but not as a result of the legislation. It's just something that we were going to do.

Also with regard to LTAC there, because of the credit crunch, we do see some smaller LTAC operators that are facing challenges, especially, small one or two-shop places that are located in areas where we have significant home health presence, and if those come to market, we would be interested in those. All of that, though, things that we would do regardless. I guess what I'm saying is we don't -- there's nothing in us that causes us to want to back away from home health. We believe that that's core to us and that's always going to be our biggest presence. It just -- what it does is it causes us to take a harder look right now at pricing and to be much more particular about acquisitions.

Okay. And just on the hospice side, I think you got -- you went from nine to 19. Any idea of how fast the sort of growth in that area is going to be in 2009?

No. Nothing that we have plotted out. And part of the reason is that when we -- we go back and we backfill hospices in areas where we are already basic in home health and there's an opportunity in the market, so -- and then when we acquire locations, we try to acquire the hospice with the home health agency if there's one. So a little bit of an unknown. I don't think we have specifics on that.

And then in the fourth quarter just looking at the margins-- a pretty nice spike and I think you've talked about better and faster margin capture at some of the acquisitions you've made. Is there anything else in the fourth quarter we should consider that caused sort of that little bit of spike and maybe why shouldn't we be -- assume that you'll be able to put up similar margins in 2009?

No, I think you should assume that. The -- what's happened is in the -- throughout 2008 the improvement in margin of acquisitions and de novos had a greater solarity than it had in 2007 so I think that trend is going to continue. We made some significant acquisitions right at December, about $40 million in revenue and in all of the announcements, in all the press releases that we had, we really don't see them contributing a significant bottom line amount in 2009. That may be -- I think that may be what you're trying to reconcile back to. I think our historical operations are going to continue to operate right where we are for 2009.

Okay. And the only reason I ask, obviously-- in 3Q and 4Q I see from the EBITDA margin line 17.5 % margin, 19.5% margin in 4Q and everything below the EBITDA line should be fairly steady and your guidance range is 2 to 2.10 on the EPS line, and I sort of struggle to keep the margin, just up slightly in 2009 to get to kind of a mid $2.00 number, so I wasn't sure if I was missing something there, so you're saying that, you expect continued, kind of strength in that EBITDA margin for 2009 similar to what we saw and kind of the third and fourth quarter as opposed to what we saw in the first half of the year?

Yes. That's exactly what I'm saying. And then you have to factor in that additional $40 million.

Right.

You have to factor that in and then you sort of have to damp it a little bit more for these investments that we are talking about. We are investing internally and those are really P&L investments. They are not assets that we are talking about. They are infrastructure and development of costs here at home office and so I think that if you consider all of that, it's pretty easy to get back to the numbers that we are looking at in our guidance.

Okay. And then, some of your peers, have put a focus on specialty programs. Can you remind us if you have anything similar. You don't talk about them much if you do and if you don't, do you expect anything to roll out, anything like that, near term?

Ralph, this is Johnny. We have disease management programs, as a matter of fact, we tout that we have 50 plus disease management programs that we have available for care of our patients. To say that we focus on any specialty specific programs, you're absolutely right. We are working very hard on establishing a base of patients who fit right into the core of what home health is all about and those are the patients that have the core chronic diseases of congestive heart failure, diabetes, COPD, hypertension, those most prominent diseases that we take care of every day that these patients benefit from the teaching and training, the observation and assessment, etc. Now, is that to say that we don't have specific programs for rehabilitation services or for (inaudible) therapy and other conditions? The answer is no, but I can't say that we are going to roll out any great specific program that is going to -- that we are going to focus on totally because I think it basically takes our eyes off of the things that we want to focus on and that's the care of any geriatric patient who is Medicare reimbursed or similarly Medicare reimbursed and take care of their general needs.

Okay. Great. Thank you.

We will go next to Darren Lehrich of Deutsche Bank.

Thanks. Good morning, everyone. I've got a few questions here. Pete, I just had one specific question about bad debt for the fourth quarter we saw, some pretty nice improvement on that line. Is there anything, any number or amount that you would attribute specifically to the collection of aged AR that was outside the period just to try to isolate the impact of the bad debt number?

Yes. Once the 10-K comes out you're going to see that the balances that are over 240 dropped in half compared to 2007. Clearly we had a great emphasis on those older claims and getting them in. Yes, that definitely had an impact on it. At the third quarter I said I thought that bad debt expense is going to be between 1.5% and 2%. It came in at, I don't know, 1.3% or something like that and so we were expecting it to come down a little bit. It came down -- it was actually a little bit better and in the quarter, in the December quarter there were weeks in there that we collected 150% of revenue and-- on a monthly run rate. You can't keep that kind of thing up, but those are the kinds of weeks that drive the calculation of bad debt reserves way down and so what I think you're seeing is that as our agings improve, the ultimate reserve that we calculate and put on the books -- the change from the prior period to the current period results in a lot lower number, a lot lower expense number.

That's great. Did I hear you correctly that you basically have the revenue cycle infrastructure now for $1 billion of revenue? Is that kind of where you are at this point?

No. I think what you heard me say was that we -- that's how we evaluate ourselves right now. When we are putting any kind of system in place, we are not looking at the current state. We are really looking at what kind of processes and people and networks do we need to be at $1 billion dollar revenue run rate.

Got it. And DSOs, is there any updated target there-- if we think about the next year or two?

I like where we are at and, if it turns out that it comes down a little bit, which I fully expect it will come down a little bit, that would be great. But I've got no problem staying right in the low 50s. That's a fine number for us.

Okay. Good. And then revenue per episodes, I was hoping to get some commentary from Donny or Keith on that. We did see (inaudible) I believe decline year over year and so I'm just trying to reconcile that. I'm assuming maybe you've got some urban mix in there. I'm not sure if you benefit from nonroutine supplies or something like that, but could you just help me reconcile the growth in revenue per episode against the casements?

Yes. Are you comparing the case mixes from last year to the current year? Is that what you're talking about? Because the case mix itself has been growing on a quarterly basis and it is going up. It's not going up a great deal, but it is going up and our revenue per episode is also going up slightly. But if you compare to last year prior to the final rule, that's not a very good comparison. And clearly our case mix has dropped, I think it was like 1.35 last year and it's dropped down to into the 1.28, something like that so I mean -- and that was all expected. That was what the final rule was meant to do.

Sure. Okay.

To try to answer your question, we managed that process as best we can, but the fact of the matter is that's generated by the patients that you get and the treatment that you provide those patients. So, I mean, what you're looking at is really a result of the marketing efforts that Johnny talked about, of the patients that we have on hand right now, ultimately the effect of the final rule.

Okay. My last question here is just as it relates to the regulatory side, as opposed to the legislative that we spent a lot of time on this call on. Just in terms of the OIG work plan, I guess there seems to be--one of your competitors made a comment that they are internal audit process is focused a little bit more on physician relationships and I'm just wondering if you can give us some commentary about whether you're seeing DFIs, additional review process around that, or whether you think that's an area of regulatory concern that we ought to be thinking about and then, I guess just from an operational standpoint, can you give us a sense for how much of your admissions are coming directly from physician referrals as opposed to hospital days discharge.

As physician referrals and relationships with physicians being a compliant issue, that's really old news in home care. That's always been the case. And as part of our compliance program, we monitor everything about conversations and relationships with physicians in great detail and we always have. I think that's an important part of any home care provider's corporate compliance plan. But generally speaking about compliance, I think we can read the tea leaves and know that there will be more emphasis on compliance in the future and so one of the -- when we talk about investments in infrastructure, one of the areas that we will be also investing in is -- are our compliance monitoring metrics and I mean to the point of bringing in some of the best compliance experts in the country to review what we believe are solid processes and all but to take another look and to see what we can do to add to that always with the goal of being absolute best of class and compliance just as we are in everything else. So I think we hear the chatter and we know that -- and believe that there will be a greater focus on compliance. I wouldn't say that I agree with that physician focus, not for our Company anyway because it's always been a very much top of mind issue for us.

Okay. Thank you.

And we will take our next question from Eric Gommel of Stifel Nicolaus.

Good morning.

Hi, Eric.

Before the budget proposal came out, there was some talk about, concerns about a JOI report I think due out of [Grasley's] office. Do we have an update on whether the timing of that, any idea what might be in that report?

Eric, this is Keith. No, I don't have anything -- any knowledge of that other than what's out there. Everyone knows that there's something supposed to be coming out. I don't think anybody expects it to be a favorable report. I think it's going to -- that's what I hear. I hadn't heard of anyone in the home care industry that's excited about the report coming out as going to be very complimentary.

And may not be that important given sort of the budget stuff that's out there. I just wanted to change gears and maybe talk more about the LTAC business. It seems the acuity on the LTAC is growing but maybe is a little less than one of the public companies out there. I'm interested in whether or not now, given, some of the -- you're potentially going to invest more dollars or maybe do more improvement -- I guess invest more time into that business to drive higher acuity or is it really just a matter of continuing to operate this business segment as you have in the past just, promote the profitability of the existing sort of operations, just run it, blocking and tackling? I'm just curious if -- it sounds like this might be an area that you're going to increase more effort on and I would like to get some color on that.

Don, you want to --

Eric, this is Don. Good question. First you're absolutely right that our case makes insight of the LTACs has been extremely consistent throughout 2008 and it is the blocking and tackling and keeping the momentum in the margins there and I don't think we are going to see any severity change in the seven that we have. I mean, remember that only two of those hospitals right now are in other than rural markets so our ventilator patients and some of the higher acuity wound patients truly reside there and I think if you look at our percent occupancy, quite candidly we don't have a lot of room to change that dynamic.

Turning the attention toward any future. Number one, it would be anticipatory to say where they would be if they do come, but secondarily you can assume that in those bigger markets you would have a bigger draw and a different patient population to draw from, so theoretically those could possibly have a higher case mix but again it's just something we don't know right now.And if you look at the margins that we have sustained in the last 18 months, we are very proud of where these things are and to truly keep them where they are is a big win for us going forward in the next couple of years.

So you're not really investing additional, I guess, funds or making big CapEx changes or anything to these units? They are just running the existing ships sort of as you have been over the past few years?

That's absolutely fair to say in the existing same store LTACs. Now if we do come up one, certainly there may be Cap Ex need, but we don't know that.

Okay. Thank you.

And we will go next to Newton Juhng of BB&T Capital Markets.

Good morning, gentlemen. I did have a follow-up on just the LTAC side. Do you have generally what the occupancy rate is in those facilities at this point and kind of where it's been trending as of late?

Newton, this is Don. I'll take that. It's around 85% and has been for almost two years.

Okay. So running at a very high efficiency level there. I guess the one thing that-- I guess bigger picture-- in the past I've talked to you guys about the potential for selling that business. You said you didn't really want to do it, that the corporate overhead is shared amongst these two business and so on, but considering the fact that your margins are getting looked at very closely by, the powers that be and so on, is there any chance that you might be willing to sell that piece off in order to try and rebase where your mortgage profile is coming from these days?

No. Our position hasn't changed at all, Newton. Again, it's more than -- it's so much more than that. In the communities where we operate these LTACs, they are communities where we are very basic in home health and hospice and they are woven in and about the fabric of who LHC Group is in these communities, the same patients, same referral sources.

Okay. I see. And then just with regard -- we -- the case mix on the home health side was brought up earlier and I was just curious as to how we should look at that. Obviously, the last quarter couples, couple, three quarters it's been trending northward trying to get back to a level that you had seen prior to the reimbursement changes. I'm just kind of curious as we move into 2009 and beyond that, should we continue to see that trending upward, as a function of just the patient acuity?

This is Keith. I'll let John and Don get in on that in a minute but the one thing that you said, I think that we had a goal of getting back to where we were, pre-cut and that's not a goal because the effect of the final rule, the intention was to bring those down so if you have the same patients, there's really nothing we can do differently to move that number northward. So we don't have that goal. I want it to be clear on that. But now whether or not it will continue to go up, Johnny, do you want to -- Don?

Yes, I'll go ahead and take it, Newton. The answer is, I think Pete alluded to a 1.28 case mix and we can expect that to continue. That is extremely reflective of the diverse patient population we have and our strategy as Johnny mentioned isn't changing to target any different base any differently. So I think you're accurate in saying that we can expect exactly what you see today.

Okay. So a continuation of that level. I was just thinking that with increased use of-- this disease management program is trying to pick up more of the chronically ill that that might actually cause it to creep upward a little bit just as a function of dealing with sicker patients but I guess you're saying that for right now keep it at a flat line level?

Actually, Newton, it is Johnny. Looking at those patients, that's the reason why it's going to stay flat. Just because you're targeting and it's really not targeting, caring for a more chronic population, that does not increase your case mix. Increasing case mix goes more towards specialty programs and et cetera and we are basically -- I think it would be wise to look at us at pretty flat.

Okay. Poor word choice on my part, I guess, using the word target. But, Johnny, obviously appreciate the fact that your operational data came in here this quarter in the release, that was really helpful and I do have a few more questions for Pete but I think I'm going to take those off-line. Thanks.

Thank you.

We will go next to Sheryl Skolnick with CRT Capital Group.

Thank you so much, gentlemen. Okay. I need to go back to the question of margins and what you said about the Medicare budget proposals as well as the Medicare cost report data and the MedPac margin recommendations and I don't know how to ask this question any other way so forgive me if it is not politically correct or polite but you're generating very high margins in your business. If I calculated the operating income from home-based services at 18.6% in this quarter-- I think that would be the right number. It's certainly a mid-teens number. So if you're that high after all costs are in, what would you be on a Medicare cost report basis? And doesn't that make you very vulnerable?

Sheryl, this is Keith. When I was talking about MedPac margins, I was talking about industry margins, not our margins. Obviously, we are operating at a higher margin than smaller operators, but I was really talking about the industry margins all in.

Okay. So, then, they are going to have to argue that their margins look a lot more like your margins or that their margins look even worse relative to your margins when you put all the costs in and that's why they are the ones who are going to go out of business if this proposed law is enacted?

Right, exactly. Yes Remember that we -- as far as LHC Group, we represent only, what, 1% of the industry and, I think public companies altogether, about 8%. But because of our scale, we have certain efficiencies not available. There's still the vast majority of providers are just small one or two shop operators.

Right. No. I understand that. I guess, I would be feeling very vulnerable reporting numbers like this in advance of a discussion about Medicare reimbursement for home health because be that as it may, we don't see, and I don't think Washington actually sees, in a public forum searchable on Google margins for the home health agencies that are not publicly traded companies. So it puts you and the others in an interesting almost leadership kind of position to have to justify why the rest of the industry shouldn't be cut when your margins are so much higher. I guess how do you -- my question, if there is a question here, is how do you deal with that, one. And two, is there any data that you can use to support the contention that -- well, no, I'm going to back away from that because you've already conceded the had the point that your margins are going to come down. But doesn't it put you in a somewhat difficult position here to go forward and lobby when you're just so profitable?

No. I mean I guess it depends what you're lobbying for. When I'm asked about margins and are the industry margins -- can we afford to tighten belts in the industry, my answer is yes. Obviously, I look at our margins and I know that those can come down when we compare to other sectors and I expect them to in the future. The question is how far can they come down and we can't -- if [Knock's] numbers were correct and in 2011 if 60% of the providers in the country had negative margins, we couldn't consolidate all of that quickly and you would have an access to care issue, the result being the institutionalization of people at a higher cost. So I think when the debate is finished, the right answer is going to be somewhere in the middle.

Okay. That's fair enough. And then, Peter, thank you very much for clearing up those timing differences on the cash flows so that I don't have to be a nag and ask those same questions over and over again. (laughter). Because it does disturb me when he see 85 versus 12 and then I see roughly $30 million of the delta being pretty obviously timing differences, but fortunate ones because you were able to generate that much to buy your acquisitions, which leads me to my next question, which is, you have made very significant acquisitions.

I suspect they were a little -- and you've said they are more accretive in the nature of margin improvement than you thought. But it also results in a pretty big buildup of minority interest and a pretty big buildup on goodwill on your balance sheet. I guess in this environment, isn't that a little bit troubling? You don't own all the cash flow? And when we think about the -- we think about cash flow from operations, shouldn't we be looking at minority -- at EBITDA less minority interest or the cash portion thereof?

You always come up with an awful lot of questions and I'll try get those in order.

Okay.

I think you're correct. I think that if you're looking at operating cash flow from a real sense, that you have to consider the minority interest distribution, you have to do that. But when I was speaking earlier, I was actually just going right off of the cash flow statement and that's -- and it's below that. So if you were trying to model the Company's cash flow and determine how much would be available to the Company from operating profits, then, yes, you'd have to distribute the minority interest component.

Right. Because the rest of it's down in the financing activities?

That's right, that's right. So talking about goodwill and minority interest. One of the ways that we have developed and gotten to this point is to enter into joint ventures and it's been a very successful strategy for us. Although the -- when you look at the total cash flow of the operation on a 100% basis versus on minority interest basis it looks like you're getting something a little bit less. There are a great deal of intangible benefits associated with that.

When we move into a geographic area that has a significant hospital in that area and we partner with that hospital, we have the hospital's name and the goodwill that is associated with it, I think that's all a benefit to us. In general those home healths are not operated very efficiently so we go in and we can turn them around pretty quickly. We have great relationships with our JV partners in that they like us to come in there and partner up with them. So that -- if you think of it in terms of a partnership as opposed to a joint venture, I think you end up -- you end up a little bit closer to what the reality is with us.

Okay.

On the goodwill side, I think we are conservative about the way we go out and develop our companies. We don't necessarily pay highest dollar. We don't get in a lot of bidding wars. If it's a brokered deal, chances are we are not going to be in there.

I think Keith said it, almost every call that I have been involved in and what that does is it damps down the goodwill that goes on your balance sheet and puts it on a little bit more realistic basis. If you look at the equity or the tangible net worth that we have we clear our debt covenants significantly every quarter when we put that together, so from where I stand, I think our strategy has been successful and I don't think that we have a high risk of the goodwill that's sitting on our balance sheet right now because of some disciplined acquisition strategies that we have applied in the past.

Okay. And forgive me. I just have two more little things. Did you give out average episodes per admission, so getting at the question of recertifications? I'm not sure I can calculate it actually from the operating statistics. I'd be afraid that I would make a mistake there because I have completed episodes, I don't have total episodes.

Yes.

Someone can get back to me with that number if we want to look for it off guideline.

I think it's going to be somewhere around 1.6. That's where it's been in the past.

About 1.56. I think you're about right.

Okay. That's reasonable. And then the other thing that I wanted to try to go back and clean up is this. We have talked a lot about the home health piece. I assume the $37 billion mentioned in the Obama budget. We have not talked about bundling. Is it your expectation that as part of their post acute bundling proposal, which looks like they ran their finger down the CBO list of options and said, oh, I like that one.If you look at the bundling one, do you expect that home health would be considered part of that 30-day bundle payment?

I mean, reading from Mr. Orszag's comments yesterday, they are specifically targeting the 18% of Medicare beneficiaries that are readmitted within 30 days, and so I think they are trying to bundle all post acute expenditures for those patients in that first 30 days.

Okay. I thought they were two separate line items.

That's what I think they are trying to do.

Yes. Okay. Well, we can discuss that another time. And then finally, have you resolved most of your issues with your managed care customers and are you now continuing to recontract with them?

We are. That's a good question. Thank you for that one. I took that one on last year kind of headed it up and everyone is involved, but I couldn't be happier with where we are with that right now and not only because we have cleaned it up and we have acceptable rates from those that we are contracting with, but because of -- we were successful in educating them as to the value proposition that we deliver so that they are contracting with us for the right reason because we deliver value, not because of any type of outside pressure. So, yes, we are happy with that and we are continuing to make progress.

Excellent. Thank you so much.

We will go next to [Tony Perkins] of [First Analysis].

Yes, just a couple quick ones. Keith, you already gave us your thought on the rural add-on payment for 2010. Can you give us your thought on the market basket update? Is this an either/or, the market basket update or the rural add-on, or do you see there are a possibility for both?

No. I think they are mutually exclusive but I think the market basket update, I don't think any reasonable person would tell you you should -- we should expect a market basket update. I don't think it's an either/or. I just think the signs are that we are not going to get that update and maybe the best we can hope for is flat reimbursement overall. But the rural add-on does have real traction because the numbers support it. The disparity in payments between rural patients and urban patients is much greater than that 5%, so -- and everyone is aware of that.

And one clarification, a question. The organic growth of Medicare completed episodes for Q4 was 28.6%, yet the organic growth for Medicare net revenue grew only 22.5 %. Can you explain that six-point difference?

Yes. Can we take that one off-line also?

Sure.

Okay. Let's do that.

Okay.

When we can explain that.

Sounds good. That's all I have. Thank you.

Thank you.

We will take our next question from Greg Williams of Sidoti.

Good morning, gentlemen. Thanks for taking my call. I wanted to continue the dialogue of the solid operating margins you had in the fourth quarter and EBITDA margins and so what we look at going forward. I know you said that you're making $40 million or you've made $40 million acquisitions since December. You also mentioned internal investments and I think we began our example of compliancing one. Can you give us more detail on what sort of internal investments or infrastructure that would affect your P&L and why we should be really excited about the margins going forward? What sort of run rate?

I'll give a little bit of color to it, but I think that you have to look at the way the Company performed in 2008 and part of the operating results was damped by additional costs that we incurred for consulting fees and additional people and growth of startup teams and internal investment associated with future revenue, and so to tell you these are the things that we believe that we are going to do in 2009 and this is what the costs are associated with all those things, I can give you what I said and that is that we continue to invest in our Company, in our internal systems, general and administrative costs as if it was an asset and I think you have to look at the benefits that the Company has had at the end of 2008 versus the end of 2007 and see the return on that investment.

I don't think it's something that we can go forward and say, this is what's going to happen next year, but that is how the Company invests and that's what we think is the appropriate building of shareholder value for us. Now, if you look at the $40 million revenue number and you adjust that back out of the guidance as having no net income effect, that's about half of the difference between the current quarter run rate and what our guidance is. The other half is this internal investment that I'm talking about.

Thanks.

I think Keith talked about compliance. There's some compliance in there. I think that we are still continuing to develop our internal system. So I just don't think that there's--I don't think that any additional color will get you any closer to what you're trying to look for. It's just that -- it's a philosophy that the Company has of investing through P&L.

And switching gears, just talking about the acquisition pipeline. With everything going on in the last few weeks, so many unknowns, and multiple contraction, (inaudible) in the public and I imagine private companies as well, how does that change your pipeline in recent weeks? Are you slowing down until more is known or are you speeding up and taking advantage of multiple cracks? How can we look at that?

This is Keith. The very first thing we did was to factor in the impact that the budget would have as proposed on valuations and it had -- as you would imagine, it had a significant impact so as we talk to potential candidates, we test their expectations and we have let them know where we see pricing now. So early on we decide if -- we determine if they are up to speed and realistic about their expectations given the uncertainty now or not, and what we have -- what we found, I guess, so far, it's early on, but probably 50% of those that were active in the pipeline, I guess, knew about the budget, they understood that the -- an adjustment had to be made and we are still moving forward at a significantly reduced price from where our initial discussions began prior to the budget being released.

So I think short term it will -- I think it will have some impact. There's no question. Because I think it takes a while for expectations to catch up with reality, but we are under no pressure to make acquisitions that are not at the right price given where we are now, we can pull de novos off the shelf and focus in other areas. So to sum that up, I'll just tell you if we make acquisitions, they are going to be made at the right pricing in today's environment.

Okay. And the right pricing as in the latest budget cut proposals?

Right. Absolutely. When we -- so to be specific, when we calculate the IRR thresholds that we have to have, we pro forma out five years and when we pro forma out five years, we are pro forming those cuts come into play just as they are proposed.

We will take our next question from David MacDonald with SunTrust.

Good morning, guys. Hey, Keith, just wanted to drill down a little bit more on the acquisitions. My quick question is, should we expect nothing on the acquisition side that's overly material until you get some visibility on what 2011 looks like since it looks like that's the cut that could be much more material if they rebase? I guess my question is how difficult is it to price when the real reimbursement ugliness could be kind of 18 months down the road? Just a little color there. And then, kind of in the same vein, should we expect an acceleration in de novo development, given some of the lack of visibility on the reimbursement side?

Yes. Great questions. Thank you. You're exactly right on the larger acquisitions. Following this Company, that we don't roll dice very much and this is not an environment where you want to do that so I think our sweet spot has been just smaller acquisitions that have a smaller revenue base with a significant potential for upside that we can build without a lot of risk going in and I think that's where you'll see our focus. I don't see anything material coming through the pipeline nor would I expect anything short term in there.

But to the de novo strategy, you're absolutely right there too. Through all of the acquisitions we have done-- and the shelf, if you will, of de novo opportunities that we have, that's the reason that we do that when we get into times like this where the pipeline could shrink somewhat, we can keep our transition teams busy and focused on accelerating our de novo development. Don, do you want to add a little bit?

Yes, David, this is Don. It's a real good question and Keith has traditionally talked about how many de novos we have held on the shelf, and as you can tell, we have opened up about 20 of them for the last couple of years each year and I tell you we have already-- and I alluded to de novo mapping and this is exactly what I was talking about. We have already mapped out 102 locations that we could put agencies in and we have really done a good job of refining the criteria and associating their profitability, but with that I would caution-- I wouldn't want you to build in any tremendous acceleration in these next six months because as Pete alluded to, there are also infrastructural changes that we are doing, process development, but I do think that -- I know that we are going to accelerate that pace in the last quarter of this year.

Okay. And are you guys seeing any delays at all in terms of getting de novos approved?

Yes. This is Don. As a matter of fact, we have opened 38 from January '07 to '08 and 14 are still pending approval so, yes, it ranges some FIs as quick as three months and some as 13 months so it varies.

Okay. Thanks, guys.

We will take our last question from Whit Mayo with Robert Baird.

Hey. I think 90 minutes is long enough for a conference call. You've earned your pay. I'll follow-up with Pete after the call.

Okay. Great.

Thanks.

Thanks.

And with no further questions, I'd like to turn the conference back over to Mr. Keith Myers for any additional or closing remarks.

Thank you, operator. And as always, in closing, we want to thank our shareholders and our employees. We can't say thank you enough for the confidence and support that you have in the Company. We know that we have to continue to earn that every day. So on behalf of all of us here at LHC Group, thank you for taking the time to listen in and participate in our call this morning. As always, we are available to answer any questions that may come up between our quarterly earnings calls. Have a great day and thank you for supporting and believing in the LHC Group family.

Again, this does conclude today's conference. You may disconnect at this time.