LHC Group Inc (LHCG) 2009 Q1 法說會逐字稿

Good day, and welcome to the LHC Group first quarter 2009 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, Lori. And welcome, everyone, to LHC Group's 2009 first quarter earnings call. In a moment, we'll hear from key members of our senior management team. 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.

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

Thanks, Eric, and good morning everyone. We're very happy this morning to present another strong performance from the LHC Group family. We're pleased with our financial results in the first quarter of 2009. LHC Group continues to provide fundamentally strong operations in both business reporting segments, which is a tribute to the hard working and dedicated employees of LHC Group. Our continued success acknowledges the long-term commitment to excellence that is ingrained in our culture and in every member out the LHC Group family.

At LHC Group, we are focused on building for the future. As discussed during our fourth quarter 2008 earnings call, during 2009, we intend to make key investments in our infrastructure with the goal of creating a standard of excellence in every area of our business. In 2008, we made key investments in our revenue cycle department, and today you can see the results of those efforts in our DSO's, which are down 27 days from the first quarter of 2008. We intend to follow this same model in areas such as information technology, compliance, and clinical support. I will let other members of our team discuss these investments in more detail in a few minutes.

However, I wanted to take this time to briefly discuss a few of the highlights. First, I would like to update you on the progress that we are making with our managed care contracts. As you may remember, in late 2007, as one of our strategies to mitigate the impact of Medicare reimbursement changes in 2008, we focused on payer sources that had historically been lost leaders in our business. Through education and negotiations, we have entered into approximately 35 more comprehensive contracts for home care and hospice. The coverage area of these contracts varies between local, state, regional, and national markets, to include all established LHC agencies.

In addition, we recently signed a national contract with Humana that will become effective on June 1st. Human is one of the nation's largest publicly traded health insurance companies with 10.4 million members enrolled in their medical benefits plans, as well as approximately 6.7 million members enrolled in their specialty products.

Our contract covers all Humana commercial and Medicare plans in every market that we serve. We had several more contracts in process, and are encouraged by the progress we are seeing with managed care payers, understanding both the cost-effective nature of home care and the need to contract at reasonable rates.

In Q1 of 2009, our home-based commercial revenue for commercial patient day increased 55.7%, to $49.74, as compared with $31.94 in Q1 of 2008. Our Medicare net revenue per patient day in Q1 of 2009 was $48.15.

Moving on to Washington, D.C., since our last earnings call, there have been some key events in terms of President Obama's proposed budget. First, the Senate and House markups of the proposed budget did not include a home health cut. Second, the budget resolution class last week did not propose any specific cuts to providers, but, instead, left considerable discretion to the committees on crafting healthcare reform.

We will continue working with representatives in Washington throughout this summer to educate them on the cost-effective nature of home care and the importance of home care to any healthcare reform. In fact, in March, in coordination with the National Association for Home Care, we held a rally in Washington where caregivers from each of our states met with their Representatives, Senators, and Congressmen, to discuss the importance of home care. The reception was outstanding.

As a follow-up, on Thursday of next week, May 14, in coordination with National Nurses Week, the National Association has organized an effort to bring 50 home health nurses from 50 states to Capitol Hill. On Thursday, from 10:00 a.m. to 1:00 p.m., these nurses will have the opportunity to provide testimony before Congressman Jim McGovern and Walter Jones, the co-chairs of the House Home Care Caucus. Each nurse will provide a written statement for the record describing the services they provide and the patients they serve, will give approximately a one-minute verbal opening statement and thereafter respond to questions from members of the panel. The National Association plans to videotape this hearing and make it available to the media. Both Johnny and I will be in Washington, D.C. for this event and other events on the 13th and 15th, that Johnny will discuss in his comments in a few minutes.

We intend to continue these grassroots efforts in close coordination with the National Association and other leaders in the home care industry. We are also working closely with the Alliance for Home Health Quality and Innovation. We believe that work will be very useful in showing that home care plays a critical role in saving significant Medicare dollars.

Overall, I believe the home health industry is more united than ever in their efforts, and I am extremely positive about our ability to deliver our message to leaders in Washington. We will continue that fight.

Turning now to our acquisition pipeline. 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 19 existing locations in eight states, and approximately $37 million in annual revenue. As you can see from the press release, we issued earlier this week regarding our new LTACH joint venture with Ochsner Health System and our new home health and hospice location in Washington state and our new home health joint venture in Henderson Kentucky, our acquisition activity continues to be very strong.

In each of our own home health transactions, we have revised our pricing to reflect potential impact of the proposed budget cuts. Given the recent timing of proposed cuts and the uncertainty about their scope, we have not seen pricing levels out to an industry standard. With our considerable access to capital and our strong operations and acquisition teams, we remain very positive about our acquisition strategy.

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

Thanks, Keith, and good morning, everyone. Consolidated net service revenue for the first quarter of 2009 was $124.6 million, an increase of $41.1 million, or 49.3% from the first quarter of 2008. Net income attributed to LHC Group for the first quarter of 2009 was $11.1 million or $0.62 per diluted share, compared with net income revenue of $5.3 million or $0.30 per diluted share for the first quarter of 2008. Revenue for the home-based segment was $109.3 million for the first quarter 2009, an increase of $41 million, or 60% compared to the same quarter in 2008, and consists of $87.1 million in organic revenue and $22.2 million in acquired revenue.

Revenue for the facility-based segment for the first quarter of 2009 was $15.3 million, an increase of 1.1% over the same quarter in 2008. Medicare revenue was 83% of consolidated net service revenue in the quarter and in the home-based segment made up of 87.7% of total revenue. Days sales outstanding, or DSO, for the three months ended March 31, 2009, was 47 days, as compared with 74 days for the same three-month period in 2008. Continued strong collection on receivables has also resulted in a lower bad debt expense for the quarter. Consolidated bad debt expense was nine -- was 0.9% of net revenue in the first quarter of 2009, compared to 4.4% for the first quarter of 2008. We expect bad debt expense to be between 1.5% and 2.5% of consolidated revenue for the entire 2009.

Our effective tax rate for the first quarter was 37.8% as compared to 38.1% in 2008. We expect the tax rate to be around 38.5% for the remainder of 2009. Cash provided by operations in the first quarter of 2009 was approximately $15 million. CapEx, which is primarily expenditures on information technology for the first quarter was $1.9 million.

During the first quarter, we announced a joint venture which included an LHC Group purchase of 75% of two home health agencies owned by Ochsner Health System, and an Ochsner purchase of 25% of three home health agencies and by LHC Group. The purchase price, included cash of $7.5 million, plus a non-controlling interest in two of the LHC Group's existing home health agencies. These investments were funded through operations. And at March 31, 2009, we had nothing drawn on our $75 million credit facility.

As we discussed during our earnings call -- during our last earnings call, in 2009, we intend to continue making additional internal investments in people and technology. These investments will come primarily in the areas of information technology, compliance, quality, and de novo development. We believe these investments are necessary and will build a strong foundation for the long-term future of this company.

In developing our revised guidance, we spent considerable time budgeting expected range of costs associated with the investments, which we expect to range from $4 to $5 million. We can drill down into these results further during Q-and-A if anyone desires.

Now I'm pleased to turn the call over to Johnny Indest.

Good morning, everyone, and thanks, Pete. For leverage acquisitions, as Pete mentioned, in the first quarter we entered into a home health joint venture with Ochsner Health System. Also in April, we entered into a home health joint venture with North Mississippi Medical Center, Hamilton, an affiliate of North Mississippi Health Services, to provide home nursing services in Hamilton Alabama. And we entered into a hospice joint venture with Levi Hospital located in Hot Springs, Arkansas, to provide hospice services in central Arkansas.

Just this week, we also announced formation of a new welfare joint venture with Ochsner Health System in New Orleans. An acquisition of Central Basin Home Health and Hospice in Moses Lake, Washington, and a new home health joint venture with Methodist Hospital in Henderson, Kentucky.

I would like to take just a minute to welcome all of the employees that have joined the LHC Group family through these acquisitions and partnerships.

In my role as President, one of my key areas of focus is compliance. In February of this year, LHC Group engaged Deloitte LLP, to review our entire compliance structure and to work with our -- with the LHC Group team to design and build a compliance department that will become the leadership standard in the home care industry. We are pleased to be working with the Deloitte in this effort, as they are ranked by numerous authorities as the number one healthcare consulting firm in the area of compliance. The cost associated with these compliance efforts are factored into our revised guidance.

As Keith mentioned earlier, I will be company -- I will be accompanying him and others from the LHC Group on an important trip to Washington, D.C. next week. On Wednesday, May 13, the National Association for Home Care and Hospice will hold an industry-wide, blue ribbon panel that will focus on ethics and compliance issues in our industry. I have been asked by [NAHCH] to participate in this event. I will be updating the participants on the substantial effort that LHC Group is putting forth in establishing a best-of-class corporate compliance program.

Our visit will conclude on Friday, May 15, with another NAHCH-initiated event, the Chronic Care Management Congress. On this day, nationally recognized speakers in chronic disease management will focus their comments on the prevalence of chronic disease in the elderly and the threat that chronic disease poses to our healthcare delivery system. Presenters will address the impediments that currently exist in treatment of chronic disease and the subsequent high cost of treatment.

Finally, expected to present are members from Congress, aging care organizations, and NAHCH, who will all speak about current efforts to care for the chronically ill in a high-quality, yet cost-efficient manner. LHC intends to fully support all of these efforts.

Like Pete, I'll gladly take any questions you may have during Q-and-A. And now I'm pleased to have Don Stelly take over to review the details of our operations. Don.

Thank you, Johnny. I would also like to welcome all of the employees that have joined us through our latest acquisitions, as well as all of the new hires that have come aboard to our existing locations. We sincerely thank you for choosing to be part of the LHC Group family.

On our last call, I discussed some of our key strategies for 2009, and now will take a moment to update you.

First, in the area of quality, I'll discuss our home care compare scores. In this last reporting period, which is reflective of October of 2007 through September of 2008, we have shown improvement in 10 of 12 report outcomes. This includes improvement in acute care hospitalization rates, as well as unplanned emergent care. We're currently meeting or exceeding five of the 12 national outcomes. And without acquisitions, same stores at this time last year, we have shown improvement in 10 of 12 outcomes.

It is important to note that we have shown continuous improvement in these scores over the last eight reporting periods. At the March 31, 2008, our standard outcome index, or SOI, as calculated by Outcome Concept Systems, OCS, was 1.88, while the national norm was 1.71. Our scores are significantly higher than the industry average, but, more importantly, we're continuing to improve each quarter and continue to widen the gap between our overall quality scores and the industry mean. In Q4 of 2008, our SOI was 1.83, and in Q3 of 2008 it was 1.77.

Next in the area of quality is an update on our pursuance over the accreditation status from the joint commission. We currently have 49 of our home care agencies accredited and will go through surveys in an additional 72 agencies throughout the remainder of 2009. As scheduled, we are ahead of our own internal expectations and remain on track to have all existing agencies being accredited by the end of 2010.

Lastly, under the category of quality, I want to give a little detail on one of the investments in infrastructure that Keith and Pete alluded to earlier. Since our last call, and by the end of this month, we will have added 24 members to our performance improvement team. Each and every one of these positions are dedicated to the monitoring and surveillance component of our overall quality program.

I'll now turn to our growth strategy. The first point to make is that we've added a member to our senior management team whose sole responsibility is to lead our sales and marketing efforts. Stephen Lepley, former owner and CEO of our June 2008 acquisition, Home Care Solutions, has joined our management team and brings a wealth of knowledge and 24-year track record of success in home care to our team. He and the entire sales team are committed to the initiatives and expectations set forth for 2009, whether those are related to growth in individual markets or the mapping of de novos.

And speaking of de novos, we have opened five thus far year-to-date, and have 13 additional locations slated for the remainder of 2009. Opening these de novo locations is a key component of our growth strategy and we're committed to staying the course.

The last key operational objective that I will touch on is technology. We are presently in the middle of installing an updated version of the Allscripts application. This is a necessary precursor to our phase one rollout or pilot program for point of care which is scheduled to begin in the late third quarter of this year. Our plans for the use of technology, [when] field related, our decision support in nature, are on track and within the timeline set internally. They are also part of the infrastructure additions as discussed.

In closing, and in speaking to our home office and field team members, your hard work and desire to be best of class have allowed us to achieve these first-quarter results and position us well for the future. We are not confused, and we sincerely say thank you.

I'll gladly take questions later during Q-and-A, but now I would like to turn the call back over to Keith.

Thanks, Don. Before opening the call up for questions, I want to take this opportunity to reiterate the increase in our guidance which was outlined in the earnings release. Full-year net service revenue is expected to be in the range of $500 million to $510 million, as compared with the previous guidance of $480 to $500 million. Fully diluted earnings per share is expected to be in a range of $2.15 to $2.25, as compared with the initial guidance of $2 to $2.10. The guidance does not take into account the impact of any future acquisitions or de novo locations, but does take into account the investments in our infrastructure that we have discussed in this call and are willing to answer questions on in the Q-and-A.

In closing, to our shareholders, we want to say thank you once again for your investment and, more importantly, your confidence and support you continue to place in LHC Group family.

And at this time, operator, I think we're ready to open the call up for questions.

(Operator instructions) We'll pause for a moment. We'll go first to Arthur Henderson with Jefferies and Company. Please go ahead.

Hi. Good morning. Very nice quarter. Keith, in your opening remarks, you referred to a new agreement with Humana. Could you talk a little bit about how that contract works, just in terms of, is it a hunting license? Are you a preferred provider? Could you kind of go over that a little bit? And also, how is the pricing on that contract stacking up relative to historical trends that we've seen in commercial payer business for home nursing?

Art, thanks for your comment, first of all. In response to the question, unfortunately, we are prohibited by the terms of the contract, really, from discussing pricing or any other material terms of the contract. I think what I said in my prepared comments is about as far as we can go. It is a comprehensive contract. It does cover all of the Humana plans and all of our providers in all the markets we serve. But I really can't go further than that into the terms.

Now, it starts June 1st, I think you said.

June 1st is the effective date, yes.

So I guess previously, when you had chosen to sort of rethink your commercial payer strategy and it was an issue on payment terms and things of that nature, clearly, this is an indication that you're feeling better about that aspect, at least with this particular contract?

Yes. I mean, that's correct. I mean, our position that on what fair reimbursement is, has not changed. So with any of the payers that we negotiate with, we really start from a position of negotiating rates that are comparable to Medicare rates.

Okay.

And we achieve that by showing them the value that we bring to the table, how we help save them money in the aggregate by keeping patients out of hospitals.

Keith, you have kind of started -- been moving back. I know you've done a contract again with Blue Cross/Blue Shield of Louisiana, I believe. Are commercial payers now, more than ever, coming back to the table and saying home nursing is really going to be a way to help us save money more than they have been in the past? Is that what's happening?

That has been our experience. But I want to say that it's really not a power play. It's really an education process. It makes economic sense for them to drive their patients, where possible, towards the lowest cost provider group. And now, we've just matured as an industry where we have data that we can present and show our value proposition. So I just think historically the home health agency had accepted these ridiculously low rates and viewed that business as a loss leader. And now we've turned it into a real opportunity, I believe.

Okay. Two small questions, and I'll jump back in the queue. You did an LTACH investment here recently. Have you changed your perspective on building that business a bit further? And then secondarily, just on the organic admissions growth, looked a little lighter than where I thought. But the recertification rate was certainly way up there. Could you kind of comment on what's going on with that? Thanks

I'll take the LTACH part and then I'll ask Don to jump in on the admissions piece. Our strategy on LTACHs has not changed. I think what I've said consistently is that we really like that business. We're really good at it. We have a great operations team, and that we would entertain the opportunity to expand that segment in any market where we had a good partner and that we already had an existing home care base. That was our first -- home care is our first entry to the market. But LTACH is a good add-on to it. So I think it's within our strategy. And if similar opportunities arise in other markets we serve, I think we'd be very open to them.

Art, this is Don. On the organic growth and the re-cert rate, taking the latter first, on our episodes, per admit, on that 12-month roll-in basis, as we normally report, this quarter we had 1.59 versus the same period the prior year of 1.56. And in that 0.8 number, quite honestly is what I alluded to earlier in the prepared comments about bringing Stephen on. We have some different strategies and tactics enacted now, as a matter of fact, and was part of our preparation in the latter quarter of the year.

And just to give one last little bit of color on that is that all factors considered equal right now, is if you take second quarter to date and run that out, that same number of 0.8 to date will be reflective of a 5% to 7% number in Q2.

Okay. Great. Thank you, Don.

You're welcome.

We'll go next to Darren Lehrich with Deutsche Bank. Please go ahead.

Thanks. Good morning, everyone. I want to just touch on briefly again the managed care piece. I know it's a small part of your business, but since you opened up with the remarks there, Keith. How big a volume opportunity do you think there is as you get further into the contracting that's in your pipeline with managed care? I just want to get a sense for how you're sizing up that opportunity. Was this more about getting the economics right? Or do you think this is really more about driving much bigger volumes that maybe you're starting to see? So I wanted to start there.

And then since you talked about accreditation, just want to understand if there's any linkage at all with accreditation with any of the national contracting that's in the managed care organizations might want to see. Thanks

Okay. Thanks, Darren. On the managed care piece, how much upside I think is there, I think the opportunity, the size of the opportunity is unmeasured by the industry right now. I'm not sure I can put my finger on what the potential is. I think it's -- I do think it's significant. But the most, for me, the most promising outcome here is that we have been able to take a group of payers that historically said -- had a take-it-or-leave-it attitude with rates toward home care and we're able to educate them to see the value and now view us as a contributor.

And so, I mean, because of the way we got to the rate, I think the opportunity with all payers is tremendous. I really don't want to try to project what our growth is going to be in that piece of the market. I think we're too early into it now. But I can tell you that we're very encouraged and business that we had historically avoided, now we're happy to receive. So, I mean, that's a good part.

To your question on Joint Commission accreditation, that's a long-term investment for the future. Today, there aren't -- we don't see a strong connection between the contracting and Joint Commission status. I think one contract, Don might be able to talk a little bit more about that. But I think in the future, you will see that as more, more and more as the industry focuses on quality, I think it will be valuable to be able to differentiate yourself as a quality provider and, who knows, maybe get preferential treatment in either choosing you as a preferred provider or maybe even better rates. Don, do you want to add anything they are?

Yes. Darren, this is Don. Keith's absolutely right. There's only one managed care player that we've encountered in the state of Alabama, actually, that requires the accreditation. And I think the important part to note is that our strategy to go with Joint Commission wasn't circled around that piece. It really is to put us in a different light and get the gold seal standard of approval from quality from them. So I don't think it's going to hurt in the future, but it's certainly not something that's precluding us from doing our agreements as we go forth, except for in that one circumstance.

Okay. That's helpful. A couple other things here. Just on the M&A pricing front, I think you had talked about before the pricing going from roughly one times revenue to something below that. Are we in the 0.7 times range at this point or has that held? Can you just remind us where you think we are relative to where we had been?

Yes. I'll just -- I'll give you a best guess. If I can establish that ground rule. I think we're still looking for the -- for where that right pricing line is right now. I think 0.7 might be a little low. We've tested that and have been successful on a couple of those at the 0.7 range, but it's probably somewhere between 0.7 and one, and I don't think we know exactly where that is yet. A lot of it is going to flesh out as we get more clarity on reimbursement in Washington.

Okay. And then my last thing here, just in terms of the G&A expense, and I'm looking really at the segment data, home-based, it was 32%. I know that there was slightly lower bad debt in that number. But what's the right level of G&A, just thinking about it either on a consolidated basis or in the home-based services, given the investment you've been talking about? Thanks.

What we've done -- hey, Darren. This is Pete Roman.

Hey, Pete.

What we did was, clearly, I think we've leveraged our G&A a little bit out in the field, primarily, and that's being -- that's coming true on that percent decrease from last year to this year. In our guidance, though, we build that back up. And part of what our investment is is in people and items that are going to be in the G&A expense line.

So from my perspective, I really think that we're going to stay in the 31% to 32.5% to 33% range. I just don't see it coming down a whole lot more than that through the end of the year. I also believe that we've built into our guidance $4 to $5 million worth of costs that are going to come through the bottom line, primarily through the G&A row from here to the end of the year. So if that -- that's how I would do it. I would factor the current run rate and then add $5 million dollars over the last three quarters, and I think you're going to be pretty close to G&A percents.

Okay. Very helpful. Thanks.

And we'll go to Eric Gommel with Stifel Nicolaus. Please go ahead.

Good morning. On the managed-care side, just I'm curious if you're seeing, I guess the insurance companies embrace more of maybe managing the patients on the front end, meaning you're getting maybe more referrals from physicians versus referrals from hospitals, or is there really no change in the managed care business and sort of the mix of where you're getting those referrals?

Eric, this is Keith. That's certainly where we want to go, but I wouldn't go that far yet. I don't think we're seeing that yet. I mean, it's still -- we're still playing really in the post-hospitalization arena. But that's the logical next step. And when I talk about upside and opportunity, that's obviously one of the things I'm talking about.

Johnny mentioned our participation in the upcoming Chronic Disease Management Conference. If we can help managed care payers to understand the value we bring to the table in managing that chronic -- the chronic population that they are responsible for, that's just a whole other opportunity for us.

But the patients that you're getting from the managed care providers right now are sort of the traditional post-hospital stay, post-acute kind of patients?

Yes, absolutely.

And then just on the LTACH business, I mean, it's been performing very well over the last couple quarters or it's been on an ongoing basis. One thing I've noticed is the certain acuity increase on sort of a year-over-year basis sequentially. Is this really just a product of just the overall population that your caring for is just getting sick? Or is this a conscious effort to maybe drive a higher case mix there?

Eric, this is Don. Actually, I think it's a product of what's appropriate to be inside of the LTACH and the streamlining of that admission criteria in the industry. For example, a larger number of those patients comprised in that case mix today are that of wound care patients and ventilator patients, whereas that mix was more diluted and you saw the case mix just a little bit lower. And we use (inaudible) criteria. I mean, the industry is heading that way, we're supportive of that with our affiliation through ALFA. And so I think that's the answer to the question is, it's certainly not targeting that, it's that that patient base is what's more appropriate for LTACH today and more so than ever before.

And as the product develops with some of the regulatory changes that were put in place?

That's absolutely correct.

Okay. And then just one minor sort of modeling question, and all hop off. Can you just talk, Pete, a little bit about tax rate, and what we should expect for the tax rate going through the rest of '09?

Yes. It does kind of move around a little bit. And what we've done this year is, I think it was in October of last year, the federal government re-upped the Katrina jobs credit and they did it retrospectively. So you were able to pick up credits for people that you had hired since the credit was ended up through the end of last year. And so we had a little bit of a bump in that quarter related to picking up all those historical credits.

In the first quarter, we had about $300,000 come through as WOTC credits and we're expecting for the entire year only about $650,000. That doesn't really move the needle. And so consequently, I think where we are now is about 38.5%, and I think we're going to stay right around 38.5%. What's going to go on -- what's going to change that is simply our state mix. And as it sits right now, the -- where we have forecasted revenue across our states applied to the -- to the effective tax rates in those states, gets us to the 38.5%. So I really don't think you're going to see all the fluctuation that you've seen in the past on our tax rate, and I think that's probably a pretty solid number.

Okay. Thank you.

Okay.

Our next question is from David MacDonald with Suntrust Bank. Please go ahead.

Morning, guys. Just one quick question on some of the investments. Do you expect any spillover into 2010, or will that $4 to $5 million, A., all happen in '09, and, B, be kind of all that you're going to need to do on the investment spending side?

I think the investments that are baked in -- this is Keith, and I'll let Pete maybe drill into more detail. But we expect all of those investments to be made in '09. We expect some of those projects, specifically like point of care, that's not just a one-year rollout. There will be expenses, investments, included in our 2010 budget that will also be related to point of care as that rollout continues. Pete, you want to add a little more?

Yes. Well, when you -- what we're trying to say with this is we're trying to give you some indication of what we think the P&L effect is going to be on those investments for the rest of the year. And that's why we talk about that $4 to $5 million. But you sort of have to apply in epistemic logic when you're dealing with all of these various investment items. And to the extent that they are continuing, like to the extent that they are an asset, obviously, that depreciation will go into the following year. And to the extent that they are infrastructure associated with people, then what we want to get is all the efficiencies or, I guess the learning curve in now so that we'll have the benefit of having that -- those processes and systems in place going forward. So you'll still have a cost effect, but there should be a higher benefit associated with that. They should just have more efficiency going forward.

Okay. And then just two other questions, guys. Are you seeing interest from other national players on the managed-care side, potential -- could their potentially be more of these Humanas down the road? And then final question is, on the handheld rollout, are there any of your markets that are, frankly, so rural that there may be some issues in terms of infrastructure, being able to use handhelds in some of those markets?

Yes. David, it's Keith. I'll take the front end of that. On the national contracts, there are other contracts. We said in our prepared comments there are other companies that we're in conversation with. So I think those opportunities are definitely there. We're not -- I don't think we're ready to comment on how many are out there and what the potential universe of contracts are. We're really right now measuring our success over the last year. And taking the positive response we're getting and then developing the strategy to move forward. And really, I just -- I don't know if I know what that limit is yet.

Okay.

Don, do you want to --

Yes. Dave, this is Don. Good pick up on the handheld question about being rural. I mean, we're 50% rural today as we sit and there are issues with connectivity. So I think for our company, we're going to always have a dichotomous model, so to speak. We're going to have part in some areas on full point of care possibly and then we'll have others on paper with pieces of the point of care, and we'll also have a blend. So, yes, there are connectivity issues in some of these. But our modeling procedure is taking this into account and so is our cost infrastructure associated with it.

Okay. Thank you, guys.

And we'll go next to Whit Mayo with Robert Baird. Please go ahead.

Thanks. Sorry, I have another managed care question. Pricing is now inline on a per-day basis with your Medicare book. So can you put some context around what would that be on a per-visit basis? I just don't know if the per-day is the appropriate way to look at that given the differences in capitated and per diem versus an episodic structure. Just want to make sure we're thinking about the real pricing difference there.

Yes. Whit, this is Keith. No, we don't have that. I mean, really because that's just not how we look at the business. In home health, we're managing the patients on a 24-hour basis. So in our model, we're always looking at our total cost. The visit cost is just not reflective of what the cost of caring for the patient is. So I don't think we have that difference broke out.

Okay. Just because it's now in parity with your Medicare book, does that necessarily mean that the profitability is to where you need it or where you wanted it to be?

Yes. Yes.

Okay. That's fair. And Pete, I had just a question, just the $4 to $5 million of infrastructure investments you referenced, for the year, is that number -- it sounds like that's the number you're expensing, or is that a capitalized amount? I just want to make sure I'm parsing out the cash versus the P&L impact for the year.

Yes, it's mixed in them, Whit. And what happens is, like you say, when we acquire some asset, like let's just -- a server, and we depreciate that over three years, what we've done is we've applied the depreciation rate to that number. So the $4 to $5 million that I'm referring to is going to be expensed in these nine months. And to the extent that there are assets associated with that $4 to $5 million, then the cash outlay is going to be higher than that, but the expense flows through over the service period going forward.

Okay. Is there a good number for CapEx to think about for the rest of the year? Or for the whole year?

No. Why don't we take that offline, because I think where you're trying to get with that number is, you're trying to determine whether or not we're going to be able to cash flow that stuff. We had $1.9 CapEx in the current quarter. That was actually up. We had been running about a million, thereabout. So to some extent, I think were already developing some EBITDA ability to cover a little bit higher CapEx. So why don't we talk about that offline?

That's fine. Thanks a lot, guys.

Okay.

And we'll go to Kevin Ellich with RBC Capital Markets. Please go ahead.

Hey, guys. Just a couple questions. I guess following up on the questions about the investments in the point of care technology, I was wondering if you guys could provide your internal expectations for return on investment or any of your underlying assumptions. I know you had that pilot program and maybe that's -- this is the result of it. But just wondering if you could provide any information there.

Kevin, this is Don. Actually, that's what this phase one rollout is intended to do. I mean, we have a fairly good expectation of what the operating margin can be when we have point of care and those laptops in the hands of our clinicians, because we have that in Maryland and also in some agencies in Tennessee.

But when you look at rolling this out to 210 agencies over a two-year period, I've got to be candid and say we do not have that ROI nailed down yet. And that's exactly what we're doing. I will assure you this, that's what it's for. And then will take that piece of the true return and map that over to the profitability inside of those agencies versus our non-point of care agencies, and we'll have clarity as the year goes.

I see. And I guess how many different phases do you expect? I guess do we have expectation as to the complete timeframe before you might have it rolled out to all the agencies, if you go down that path?

I don't know. I'll tell you what our goal is right now is that to get through the pilot or the phase one, with, again, predictability of the operating results. And then as we turn the year in January of 2010, at a minimum, any agency or group thereof that we acquire on point of care we convert them. But then at the tip of that is that any and all acquisitions could come on at point of care. Right now, this early in this year, I just don't know that question in entirety yet.

Okay. That's helpful. Did someone else have something to say?

Yes. I was just going to add to that. I think -- this is Keith. As a company, we've made a long-term commitment to move in this direction. The timelines have not all been established. I think working with (inaudible), as I understand it, one phase -- each phase builds upon the previous phase in developing timelines. Earlier someone asked a question about connectivity in rural markets. Some of that also plays in our timing, as that -- as those capabilities become more readily available in rural markets, they also factor into our timing of when we go to market with those. I think the best thing for us to do is to continue to provide updates each quarter on where we are with that.

Okay. And I jumped on late. I don't know if you provided this. But just wondering, who, which vendor you're using? Have you guys decided?

Yes, we're with Allscripts.

Oh, with AllScripts, okay. Got that. And then this going back to the legislative front. Just wondering if you could provide any insider thoughts on the potential for hospital bundling, the bundled payment, including the 30 days following discharge. Any idea how that would work out in the healthcare system and maybe impact the business?

No. It's just too early. I mean the bundling is out there a few years and there's going to be -- there's going to be a lot of debate about that. I think in some form or fashion, there's going to be accountability. Someone's going to be accountable for those patients for the 30 days [at] the hospital, because the savings are just too large. But who's going to control the money and what the components are going to be, I don't think anyone really knows that. But I can tell you that we are doing a lot of work to position the home health industry to be at the table and to be a huge player in that post-acute arena.

Okay, sounds good. Thanks, Keith.

We'll go next to Newton Juhng with BB&T Capital Markets. Please go ahead.

Thank you. I was wondering, again, this is, I guess managed care based, and I understand it's relatively small. But with Humana coming onboard, just wondering how we should be looking at AR from the managed care business versus your Medicare business. I'm expecting it to be higher, but I was just kind of curious if you have a delta there of how much more or how much longer it takes to collect from the managed care entities.

Yes. Hey, Newton. One of the things, I mean, you're right, that it does take a little bit longer to collect from managed care than it does from Medicare, little less efficient system. If you just look at the receivables that we have right now, at December, the commercial receivables were about 18% of the total and at March they were about 17% of the total. So I mean, so it sort of grows right along with the total receivables. The days that we have outstanding are driven primarily by Medicare, because that's the biggest payer that we have, and it's in the mid-40s, if you just stripped out Medicare.

So the -- so we're driving a higher number with commercial. I think that I was honestly quite pleased that we were at 47 days. I certainly didn't expect it. So if we move up to 47 -- from 47 up to 50, it wouldn't bother me in the least, and I think that is probably not a bad thing to consider going forward. I think probably we're going to vibrate between 47 and 50 days DSOs on a pretty regular basis going out.

Great. Really helpful there, Pete. One of the other things I was wondering about was it did look like you borrowed down some on your credit line during [the corporate paid it back] in the quarter. And I was just wondering how we should look at or $5 million cash position and what level do you perceive as adequate for your working capital needs?

I don't really look at the cash as being a necessary component of working capital. I know we end up having it. But what we do is we manage based on the money that we have in the bank and the acquisitions, really, as they're coming up. That's what causes us to go up and down in the line of credit. If we stay in the $5 to $8 billion acquisition range, then we usually repay that pretty quickly and don't have anything outstanding, unless we do that right at the end of the period. So I think, from our perspective, the $75 million is available for us for working capital and for acquisitions. And really, the acquisition targets, that's what's going to drive our draws on the line of credit.

Got you. Got you. Been hearing a lot about your JV activity that you've been putting forth recently. I was wondering if you could give us an understanding as to how much of the top line, the revenue, is really coming from these relationships at this point in time and how that's changing, I guess, from where you were last year when there weren't quite as many JVs out there.

Yes. We actually disclosed that in the Q. I'm trying to -- I'm looking around to get the page right now. But we have -- it was -- hang on just a second. It's 50% in the quarter, yes, on the consolidated number. And I think probably it would -- it's been in the high 40s all the way through. So just generally, I would say that we've been growing the business almost equally, JV and wholly owned entities over the entire period we've been in business. It stays in the high 40s and now it at 50 on revenue.

This is Keith. I just want to add that one of the things that contributes to that is market conditions will affect how many freestanding locations come to us and how many hospitals. The hospital flow is pretty even, regardless of market conditions. When there is uncertainty in reimbursement or pricing changes, as we said, we viewed pricing as being lower. So there's a little bit of a gap between seller expectations than what we're willing to pay. That has the larger impact on the freestanding acquisition. So keep that in mind.

Got you. Got you. Okay, Keith. And I guess one last question here, just with regard to the hospital revenue. It actually came in pretty close to what we were expecting. But I was wondering how you see the proposed rule affecting your pricing for the 2010 rate year, if you've kind of ascertained what the impact could potentially be for you.

On LTACH hospital?

On the LTACH side, yes.

Don, you want --

It's essentially going to be flat.

Okay. Thank you very much.

We'll go next to Michael Martin with SmallCap Report. Please go ahead.

Good morning, and thanks for taking my call. I just wanted to focus on the revenue guidance of high end is $500 million, which comes out to $125 million a quarter, which is what you did in the first quarter. Can you give us a little more flavor of, do you expect continued organic growth or is their pricing or seasonal factors?

Well, the high end is actually $510 million.

Oh, I'm sorry. Okay.

Yes. And what we do is we take a look at all the acquisitions and de novos that we have in place at the point in time we're giving the guidance and determine where we think those, all of those agencies are going to be during the current year. So, yes, we have baked in a certain amount of organic growth and we have baked in a certain amount of growth on top of the acquired entities that we have. Like, for instance, I think we picked up about $7.5 million for acquisition since last time we gave guidance to now.

Right.

And that's the -- that's, I believe four or five agencies over the period of time that we own them during 2009.

Thank you very much.

Okay.

And we'll go next to Willis Taylor with Gagnon Securities. Please go ahead.

Hi. You're bad debt experience has been improving for a while now. And in light of that, I'm curious why your allowance for doubtful accounts has been growing and it remains so high.

Well, if you -- I don't know that I agree with that exactly. The receivables, the reserve that we have on receivables at year end was about 14% of the receivables. At March it was 13.8%. So in gross dollars, yes, it's going up. But relative to the receivables themselves, it's really not. It's staying pretty flat.

But it was 9.3% of receivables in Q1 '08.

Yes, it was a little low in Q1 '08. And I think what you're seeing is that over the entire period that we've been evaluating our agings, the calculation of the reserves, how we go about determining what that number needs to be is based on the aging buckets and the payer sources. So as commercial receivables increase, then, quite clearly, your bad debt reserve has to go up. It's a standard methodology that we use. We've applied it consistently since December 31 of 2007. And right now, I think the reserve that we have on the books is reflective of the actual collection experience that we had during 2008. What we do is, twice a year, we go in and we do sort of a retrospective look at our collection rates based on whatever that period -- whatever the prior period is, and we apply those collection rates to the reserve amounts.

Now, what we did in the first quarter of 2009, I think was pretty spectacular. We billed about $127 million worth of claims and we collected $122 million. That, in my opinion, that's awfully efficient and just very good collection and its good organization back in that department. If you -- if we continue to collect at that rate, then I think the reserve percentages will begin to go down. But we're not going to do that prior to getting confirmed experience. And we're going to let the experience and the retrospective calculation drive that number down.

Okay. Thank you.

Okay.

Could you -- separate topic. Could you comment on the whistleblower lawsuit?

Yes. This is Keith. I can -- the update is -- I'm sure you saw our 8K that was filed that I think was pretty self-explanatory. We've reviewed the allegations in the complaint and have determined that everything was done properly. In fact, Johnny personally traveled to that location to review files, speak with employees and the other therapist involved. The allegations were limited to that single agency. So I'll let Johnny say a little bit about that.

But also, the case was not filed under seal as is required by law. So it's clear that the lawyer for this former employee is not experienced in this type of litigation. The government has not intervened or, to our knowledge, investigated any of the claims. However, because they were named as the party to the case, the government lawyers will be involved in the hearings on our motion to dismiss.

Our outside counsel [Halstead and Byrd] has advised us that we have very strong grounds to have this case dismissed and, as a company, we thoroughly reviewed the situation and are confident that none of the allegations are accurate. We're also confident that the case will ultimately be dismissed. John, do you want to talk about your visit there may be?

Sure. Myself and Richard MacMillan, one of our in-house counsel, as well as a registered nurse, visited that agency. We met with the leadership of the agency. I personally reviewed records and -- to assure ourselves that we didn't have an issue that needed internal addressing. And we were satisfied that the agency is providing proper care to the patients entrusted to our care. And with that, just following up with what Keith said on the merits of the case.

Okay. Thank you very much.

We'll go next to Adam Lauer with CRT Capital. Please go ahead.

Good morning. I'm actually asking on behalf of Sheryl Skolnick. Just real quick, can you just comment on your internal unit growth of 0.8%, why that's so low and what would you consider the new run rate going forward?

I can talk a little bit about that. What you're looking at there is a quarter-over-quarter growth rate. And last quarter, if you looked at that same number, I think it was 12.5%. So there is somewhat of a disconnect between the timing of the admit and the effect on revenue. I mean clearly, the admit comes in at the beginning of the episode and the revenue is recognized over the entire episode. So you're -- so that has a delayed effect on revenue.

But like Don said earlier, the level of admits that we have and the way those admits interact with census and interact with revenue has our attention. And we -- the addition of Stephen Lepley onto the sales force as a member of senior management, the continued focus on admits and growth within all of our historical agencies, as well as growth on acquisitions, post-acquisition, definitely has the efforts of the company and the attention of the company and senior management.

So the only comment that I can make is that we all wished that that admits number was higher in the quarter. Right now, looking at the second quarter, it responds a little bit. It responds to about, I think it was 5% to 6%, something like that, growth rate. We'd like to get it back up to the 10% to 12%. But that is -- that's something that has to happen through the sales force and through the continued efforts and concentration of the company.

Adam, this is Don. Just one last point. I think Pete's right on is that we did react, we did execute. And again, that's why I alluded to not only Stephen being here leading that sales force, but also projecting what we've already done quarter-to-date in the second quarter. So I think Pete is right that his below double-digit number is a pretty good month number to land on.

Okay. Thank you.

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

Thank you, operator. On behalf of all of us here at the LHC Group, I want to thank you once again for taking the time --