LHC Group Inc (LHCG) 2009 Q2 法說會逐字稿

Good day and welcome to the LHC Group Second 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, Kristen, and welcome everyone to LHC Group's second quarter of 2009 earnings call. Hopefully everyone has received a copy of our Earnings Release. If not, you may obtain a copy of this along with other key information about LHC Group and the industry on our website at www.lhcgroup.com. In a moment we'll hear from Keith Myers, Chief Executive Officer; Don Stelly, Chief Operating Officer; and Pete Roman, Chief Financial Officer of LHC Group.

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

Thanks, Eric, and good morning, everyone. We are very happy this morning to present another strong performance from the LHC Group family. LHC Group continues to provide fundamentally strong opoerations in both business reporting segments, which is a tribute to the hard work and dedicated employees of LHC Group. Our continued success acknowledges the long-term commitment to excellence that is engrained in our culture and in every member of the LHC Group family.

First, I would like to welcome all of our new employees that have recently joined the LHC Group family. In the first half of 2009 we've acquired six home health agencies located in Kenner Louisiana; Raceland, Louisiana; Hamilton, Alabama; Moses Lake, Washington; Henderson, Kentucky and Auburn, Alabama, two hospice agencies located in Hot Springs, Arkansas and Moses Lake, Washington; and one long-term acute care hospital located Kenner, Louisiana.

Then on Monday we also released that we've entered into two home health joint ventures, one with the Northeast Washington Health Programs Association to provide home health services in [Tuwalla], Washington and the other with Coosa Valley Medical Center to provide home health services in Sylacauga, Alabama. We are honored to have you as part of the team and we welcome you sincerely.

Turning to Washington DC, I'd like to touch on some of what's going on there in coordination with the National Association for Home Care and Hospice, or NAHC, and the other members of the home care industry, both for profit and non profit, we have conducted a grass roots effort to educate congress in the administration or the important role home care will play in healthcare reform and on the disproportionate and harmful nature of the proposed cuts to the home care industry and ultimately the patients we serve. Although it would likely be this fall before any final decisions are made, I am encouraged by the response we are receiving in Washington and by the unity and work ethic of the industry during these discussions.

During my time in home care I have never seen the industry this unified and focused in delivering the message that home care is the most cost efficient and dignified manner in which to provide quality health care services to the elderly population. Although the process in Washington is changing constantly and we do not expect the final outcome to be determined until the fall, I believe the proposed rule issued last week by CMS is a step in the right direction for 2010.

As you know, the cuts issued in the President's initial budgets proposal earlier this year included the MedPac recommendations for 2010. Those MedPac recommendations included a 2.75% case creep cut, no market basket for 2010 and an acceleration of the 2011 case mix creep adjustment into 2010. According to NAHC, the MedPac recommendation was estimated to result in a 5.46% cut to the base rate in 2010. In their proposal last week CMS has recommended a 2.2% market basket increase for 2010, an increase in the base rate of 2.5% to reflect the decrease in the total out layer targets from 5% to 2.5% and to 2.75% negative case mix creep adjustment, but no acceleration of the 2011 adjustment into 2010.

Since in 2009 LHC Group's outlier episodes versus total episodes are only .025% the proposed reduction in outlier payments will have no impact on us. CMS also identified 1.81% in additional coding creep leaving 6.89% in total cuts that could be implemented. The proposal lays out three scenarios for addressing the coding creep.

One, maintain the current 2.75% reduction for fiscal 2010; two, redistribute it over two years 3.5% cut in both fiscal 2010 and fiscal 2011; or three, accelerate the entire 6.89% into fiscal 2010. Each of these scenarios would be offset by the 2.2% market basket increase and the 2.5% increase in the base rate for the outlier adjustment. This proposal goes into a 60-day comment period and a final rule is expected out thereafter. We understand that the CMS proposal included a number of provisions that go beyond 2010. Given that two years is an eternity when dealing with payment reform issues in Washington, I don't want to speculate on where those proposals will end up this morning.

However, we will continue our efforts ongoing with NAHC and other members in the industry to address those provisions in a manner that reflects the appropriate balance between the need to control the cost of healthcare in the United States and the important role that home health must play in lowering overall costs. As the Avalere study indicated, it is estimated that home health could save Medicare over $31 billion over the next ten years if greater access to home health is provided, especially to chronically ill patients. As an industry we will continue to deliver this message and the same focus and unity that has been displayed throughout 2009.

Turning now to our acquisition pipeline, at this time we are in active negotiations with 12 acquisition candidates that have been approved at the Senior Management level. These 12 current opportunities include 17 existing locations in seven states and approximately $47 million in annual revenue. With our considerable access to capital and our strong balance sheet, we remain very positive about our acquisition strategy and are ready to aggressively take advantage of future opportunities as they become available.

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

Thank you, Keith, and good morning, everyone. Our consolidated net service revenue for the second quarter of 2009 was $132.8 million, an increase of 47.4% from the second quarter of 2008. Consolidated net revenue for the six months ended June 30th, 2009 was $257.2 million, an increase of 48.2% from the six months ended June 30th, 2008. Net income attributable to LHC Group for the second quarter of 2009 was $10.3 million, or $0.57 per diluted share, compared with $6.3 million, or $0.35 per diluted share, for the second quarter of 2008.

For the six months ended June 30th, 2009 net income attributable to LHC Group was $21.3 million, or $1.19 per diluted compared with $11.7 million, or $0.65 per diluted share for the same period in 2008. Revenue for the Home base segment was $117.6 million for the second quarter of 2009, an increase of 53.9% compared to the same quarter in 2008. Home based segment revenue is made up of $95.1 million organic revenue and $22.5 million acquired revenue.

For the six months ended June 30th, 2009 revenue for the Home based segment was $227 million, an increase of 56.8% over the same period in 2009, and is made up of $184.8 million organic revenue and $42.1 million acquired revenue. Revenue for the facility based segment was $15 million for the second quarter of 2009, an increase of $1.3 million compared to the same quarter of 2008. For the six months ended June 30th, 2009 revenue for the facility based segment was $30.3 million, an increase of $1.5 million compared to 2008.

Medicare revenue was 82.6% of consolidated net service revenue for the quarter and 82.7% for the six months and the Home based segment made up 88.7% of total revenue in the quarter and 88.2% for the six months.

Day sales outstanding, or DSO, for the three months ended June 30th, 2009 was 45 days as compared to 60 days for the same period in 2008 and 47 days at March 31st, 2009.

Consolidated bad debt expense was 1.4% of net revenue in the second quarter and reflects continued strong cash collections and improved receivables aging. Year-to-date bad debt expense was 1.2% of net revenue as compared to 4.2% in 2008. We expect bad debt expense to be between 1.5% and 2.5% of consolidated revenue for the remainder of 2009.

The effective tax rate for the second quarter was 38.3% as compared to 38% in 2008. We expect the tax rate to remain around 38.5% for the remainder of 2009.

Cash provided by operations in the second quarter of 2009 was approximately $6 million and $21 million for the six months ended June 30th, 2009. In the June quarter we paid $14.5 million for income taxes, which equals about $8 million more than the income tax expense in the quarter and resulted in lower cash provided by operations in the quarter.

In addition, CMS recovered approximately $3 million in the June quarter in over payments previously made on an LTAC. The Company reflects these payable amounts on the balance sheet as amounts due to government entities, which is a current liability.

During the six months ended June 30, 2009 we acquired the existing operations of one entity operating a total of two locations and a majority ownership in six entities operating a total of seven locations. The total purchase price of the acquisitions was $14.1 million with cash paid of $12.7 million. These investments were funded through operations.

At June 30th, 2009 we had nothing drawn on our $75 million credit facility. As we discussed during our last earning call, in the remainder of 2009 and into 2010 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 investments will come primarily in the areas of compliance, quality, education and the IT foundation necessary to support the software and hardware needs related to these investments.

We included in our 2009 guidance G&A expense in the range of $4 million to $5 million for these investments. In the June 2009 quarter included in G&A is $650,000 related to these initiatives, primarily related to compliance. None of the costs to date are capital expenditures. We expect to have G&A expenses in the third and fourth quarters of $1.5 million and $2.5 million respectively related to these initiatives. Additionally, we expect to incur capital costs of approximately $4.5 million over the remainder of the year to support the initiatives, primarily in assets with five-year lives, which we expect to increase depreciation expense for the rest of the year by approximately $365,000.

On July 13th, 2009 the Company filed a current report on Form 8-K regarding an administrative subpoena from the Inspector General of the Office of Personal Management, or OPM. At this time there is no clear indication from OPM as to the scope for the purpose of the review other than a focus on third-party quality improvement audits performed on the Company's behalf from 2005 to present.

[Simeon] has been engaged to review each of our external quality improvement audits received from 2005 to present to determine if any amounts need to be repaid to the government for actual records audited. Thus far, [Simeon] has audited two years' worth of reports for ten home health agencies. The total pay back was approximately $28,000. Simeon will complete its full review by the end of the third quarter and any amounts owed will be repaid on an ongoing basis and reflected in our financial statements.

In the second quarter of 2009 we accrued $500,000 as a reduction to revenue to cover any amounts that need to be repaid in connection with this review by Simeon. Following the completion of Simeon's work in the third quarter, we will make any necessary further adjustments to reflect the actual results of that work. We do not expect any such adjustments to have a material impact on our results for the third quarter.

Going forward, we have now engaged Simeon to serve as our independent compliance and quality auditor. Simeon serves as an independent review organization for CMS and the OIG so we have a high degree of confidence in their finding. Further, internally we have developed processes so that any payment adjustments noted in the records audited by Simeon will be addressed immediately.

We will update you on the final results of the Simeon work and any material changes in the OPM subpoena during our third quarter earnings call. We can drill down on these results further during the Q and A if anyone desires.

Now, I am pleased to turn the call over to Don.

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

On our last call I discussed some of our key operational strategies for 2009 and now will take a moment to update you on them. First, in the area of quality I want to comment inside of three areas. First, our standard outcome index score, our SOI, as calculated by an OCS, or Outcome Concept Systems, for the period ending June 30th, 2009 we were at 1.92 with the national norm of 1.7. Our scores are significantly higher than the industry average but more importantly, we are continuing to improve each quarter.

Secondly, as I discussed in our last earnings call, we are making considerable investments in our performance improvement department. During 2009 thus far we have added 22 new clinicians to our PI team. With the addition of these new clinicians we expect to continue seeing consistent improvement in our quality scores and overall patient satisfaction.

Thirdly, as previously discussed, it is our intention to have each of our existing home health agencies joint commission accredited by the end of 2010. We currently have 48 of our home care agencies accredited and will go through surveys and an additional 52 agencies throughout the remainder of this 2009 year. 31 of those surveys have already been scheduled to start in September. As they're scheduled we are ahead of our own internal expectations and remain on track to have all agencies accredited by the end of 2010.

I will now turn toward technology. In this area we continue our analysis with our point of care strategy. With the assistance from Simeon and Associates we are currently developing a clinical delivery model utilized in point of care and in the fall beginning October 1st we will intend to pilot our point of care delivery model at two existing locations. As a result of these efforts, we will solidify our plans regarding point of care to include a potential rollout to existing locations as well as the integration to new acquisitions beginning in 2010.

Right now we're in the evaluation and development stage and will keep you posted on that progress. As Pete alluded to earlier, we've also made other key investments in technology. One critical investment that we've completed and will be integrated by the end of the year is a new payroll system. This new payroll system will allow us to more easily manage our payroll processes, provide enhanced analytics, improve acquisition integration which will all provide a platform for future growth.

Next I'll discuss internal growth. In the second quarter of 2009 our organic growth in new Medicare admissions was 8.6% compared to 0.8% in the first quarter of this year. The rebound in admission growth is attributable to the outstanding efforts of our sales team and also the quality of care being provided by all of our care givers. During the quarter we also focused on projects that will pay future dividends in our internal growth numbers and these include but aren't limited to areas such as disease management programs, our fall prevention program, our low vision program and our physician web portal integration.

I also believe that our Medicare admission growth is also a function of our improvements in our managed care negotiations. Because of our outstanding efforts in these new negotiations within managed care providers, we are seeing both an increase in more profitable managed care business, which also leads to new Medicare admissions.

At the end of June 30th approximately 4.1% of our total home base revenue was from commercial to managed care as compared to 3.2% in the first quarter of 2009 and 2.5% at the year ending 2008. Even more importantly, the new managed care business is at better rates and on terms that allow us to provide better care with less administrative burden.

I would expect to see the internal growth numbers for the rest of this year remain consistent with internal growth experienced in the first six months of this year.

Lastly, now turning to de novo growth, thus far this year we have opened ten de novo locations in the states of Alabama, Tennessee, Washington and Virginia. We have two additional locations slated for the remainder of 2009. For the states in which we have a presence, four of them are what we call tier four status. This means is that they are not approving branch locations at this time and these states are Louisiana, Texas, Arkansas and Oklahoma. We are shifting our organic growth strategy within these states and beginning to intensely focus our de novo growth in non tier four states.

In closing, I would like to sincerely thank each of our home office and field team members. Your hard work and dedication to be best of class have allowed us to achieve these second quarter results and position us well for the future.

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

Okay thanks, Don, and, Don, I couldn't agree more. The LHC Group family of healthcare providers is well positioned for the future and all the credit for that and all of the recognition for our success goes to the nearly 7,000 employees that make up the LHC Group family. The results we report quarterly and the high quality care we provide daily are possible because of the culture we've created together, which is based on service to others before self.

Systems and processes may change and evolve over time. They have to but our founding mission, vision and values will never change. Thank you for all that you do every day and for the difference you make in the lives of the many patient's families and communities we serve.

I want to take this opportunity to reaffirm our guidance issued on May 6th of this year, a full year net service revenue in the range of $500 million to $510 million and fully diluted earnings per share in the range of $2.15 to $2.25. This guidance does not take into account the impact of any future acquisitions if made or de novo locations if opened.

And finally, to our shareholders, as always we say thank you. Thank you for your investment, your confidence and your support.

We are ready to take questions at this time. (Operator Instructions). We'll go first to Art Henderson with Jefferies & Company.

Good morning. Very nice quarter. Couple of questions for you -- first, have you quantified or could you quantify what percentage of your revenue comes from outliers? Pete, I guess that's for you. Sorry to do that to you.

Yes right at this moment I really can't.

Okay is it -- I mean, is it less than say 2% or 3% or --?

Yes I think it's less than 2% or 3%. I mean you're talking about honestly, Art, I think maybe I ought to just go research that.

Okay that's fine. That's fine. I didn't mean to catch you off guard there. Just was curious if this threshold issue that CMS referenced would be meaningful to you in a negative sort of way as opposed to getting the benefit of a redistribution.

Really no. I mean I think that we think that with the numbers that are being put out there right now that we're well below that threshold and so we have no added to us.

Okay. That's fine, that's fine. You know, you guys did have a good quarter. I know you didn't raise your guidance this time. You did at the last quarter. We saw pretty significant earnings speed and guidance raises from a couple of your competitors. I am just curious are you seeing anything that's particular to your business maybe on the rural side that's giving you some hesitation maybe with the revenue guidance or the earnings guidance to step that up a bit? I was wondering if you could make any comments on that?

Art, this is Keith. I guess I'll take that. I want to start by saying this is a hard quarter to apologize for.

No it -- that's right. That's right. I agree. Don't misinterpret my question. it's more or less just it strikes me that the revenue seems sort of conservative and I just was wondering if you're play -- you know, sort of hedging a little bit?

Well yes no, not. Let me take that head on. It's no secret that our business model and the areas we serve are quite different than some of our public competitors. You know, I mean we're all home health providers but there are some differences that will always make us look different statistically and in other areas, probably none greater than the rural distribution of the patients we serve and the cost associated with that.

We -- it does have an impact on our revenue because the rates are lower in rural markets and it has an impact on cost, especially as we grow more in rural areas. When we look at our cost in rural markets, the difference in travel and mileage reimbursement cost alone, not counting the cost of the time the nurses spend in the homes, but just looking at travel and mileage costs alone, the difference is as great as $23 per visit in just travel and mileage costs from the most rural areas to the most densely populated areas, so that depending on how your mix looks from quarter to quarter that will have an impact on cost.

And but that being said, this Company has always focused in those markets. We're comfortable there. It's a niche for us and we'll stay there. We are encouraged though because in our discussions with congress it's very clear that they understand the discrepancy in these costs and the impact that population density has on the cost associated with providing home health services. I mean I think that's evidenced in -- there's a pending Bill at this time that I know of in Energy and Commerce. Matter I think I think it's sponsored by Braley that calls for a 3% rural add on for six years. I think that's a positive signal. I mean it's certainly nothing that's been voted on.

And I'd also note that we continue to see strong support in Senate finance. As you know, Senate finance is made up of members from predominantly rural areas. Chairman Baucus is from Montana, which is probably the most rural state and the ranking member, Senator Graffy from Iowa. So, as a result, we're confident that they continue to understand this issue and believe that they'll be very open to finding permanent solutions to this issue as the healthcare reform debate continues.

Keith, and that's very helpful. You know, we've talked to a number of rural providers and they have echoed just how difficult it is to manage in this environment and I am wondering who is really pushing for them? Is it the NAHC? I mean, obviously you're right the Senate Finance Committee is comprised of a lot of politicians from rural markets but do you think there's enough emphasis behind the need for better reimbursement in these very important areas that people may have trouble getting access to care because it strikes me that you're capturing some share here at the expense of those others that are really hurting and I just was wondering I mean do they have a voice that's outside of sort of the back halls of some of these chambers?

You know, it is a priority on the NAHC legislative agenda and the entire industry is unified. I mean there aren't a group of urban providers predominantly who are fighting against the need for adjustments in rural markets. So it's -- the need is too obvious and I think the industry is unified behind it. I do think that when you look at a lot of our growth the home health utilization, the number of beneficiaries utilizing home health in rural markets is not growing. The growth you see coming for us in rural markets is market share that we're taking away from smaller providers that have been forced out of business in those markets.

Okay that's great. One last question and I'll jump back in the queue. In light of the uncertainty on the reform side in Washington, the 12 companies that you're sort of in active negotiations with, is there some hesitancy to move forward with those in any way, just until you get some visibility on reimbursement or are you kind of just full speed ahead?

Yes I mean we're full speed ahead with those acquisitions but let me say that the candidates that come across the table are being vetted more thoroughly than in the past. I mean they're perfect fits when they get to this point.

Okay great. Thanks very much, very nice quarter.

[Ralph Jacobi], Credit Suisse.

I was just wondering, so margins came down a little bit sequentially and you talked about some incremental costs in the third and fourth quarter, Pete, so wondering going forward shall we continue to see sort of margin declines on the sequential basis because of sort of the hiked up costs?

Yes I think that's what we're saying. The -- if you're talking about the first quarter to the second quarter clearly we had additional investments. I think the first quarter as far as G&A as a percent of revenue was a little bit lower because of some of events that occurred in the quarter. I do think that we've normalized back up and I think that a standard run rate on G&A at 33% is probably what I would think would go for the rest of the year. On top of that 33% I think you have to add the G&A additional investments that I talked about, $1.5 million in Q3 and $2.5 million in Q4 to get to a 2009 run rate.

Okay and then just staying on the cost side, bad debt, I think you had made the comment that you expected sort of 1.5% to 2.5% of revenue for the remainder of '09, yet well below or below 1.5% sort of for the first half of the year so what's causing sort of that tick up in the bad debt?

Yes I mean I think - you know, I think I've said a couple of times that I really expect to be at the low end of that range and certainly the move from the first quarter to the second quarter from -- I don't know -- I think it was 0.9% up to about 1.3% or 1.4%. What you're seeing there is really the effect of increased commercial business and in the quarter I believe it went up to almost 14% and that's really where the bad debt comes from. It doesn't come from Medicare or Medicaid. The timely filing rules on Medicare and Medicaid we've been pretty good at getting back current on all of that so what you're looking at really is the effect of additional commercial claims as we work our way through that process and through that system.

So to finish, I think for the year I'd really stay around 1.5% for the year, which means I'd expect the third and fourth quarters to be a little bit higher than 1.5% so that on an annual basis we come in right at that number.

All right that makes sense. Just wanted -- do you guys give recertification numbers, like what's your sort of recert growth?

Yes I don't we've really done that and I think that the -- I think you can get to a reasonable estimate of the recerts off of the data that we put out there in our tables. And I think that's about as far as we want to go at this point with that.

Okay and then visits, I think visits perhaps though came down a little bit sequentially. Is there something seasonally to that or is it just not -- I mean, it's just a minor tick and something that you guys would expect?

Ralph, this is Don. You're right. There is no specific trend there. They came down from 14.5 to 14 over prior quarter and it's just based on the patient mix.

Okay and then just my last one real quick, in going back to sort of Art's questions on the acquisition side, I know that sort of you've done a number of deals you mentioned that there's a number sort of in the pipeline. Is there any way you can help us think about valuation and just your approach, given all the sort of reimbursement uncertainty out there?

Yes I'll -- this is Keith. Ralph, I'll take that. I mean, I think we said in our last call that we've brought -- we're trying to lower expectations on the seller side and so I think we're having to go through a larger number of targets to get deals that will close, to get people that are willing to accept or we're willing to pay. We've brought our pricing down. I don't know if I'm able to give you a specific number like, you know, 80% of revenue, 90% of revenue, because it really -- the trailing revenue to us in many cases is not as important as the geographic location and the upside potential of the market that we're looking at so there are a lot of factors that come into that pricing. But we are being more conservative in our approach to acquisitions with regard to pricing and value in that relationship.

Kevin Ellich, RBC Capital Markets.

Hey, Keith, just to follow up on that topic, so have you actually seen valuations start to come down? I guess I am still kind of unclear on that.

Yes. I mean yes I think I have clearly because if on an apples to apples comparison when we look at the same quality asset, we're able to buy those for less today than we would have been able to buy them for two years ago.

Okay. Can you quantify how much it's come down or --?

You know, I haven't gone through that exercise and I really don't want to just throw out a gut feel. I just -- it's just so hard because there's not really many apples to apples comparisons. You know, and the only way you could do it is if you based it on trailing revenue but if you don't bring into consideration the upside potential and the potential for geographic expansion in license areas, it's just not a fair comparison.

Got it, got it. And then of those twelve deals, are those all just pure acquisitions or are any of it joint ventures that you guys do included in that mix?

I'm looking at Daryl that's here with me. It's about half and half.

Half and half, okay thanks. And then going to Pete, I was wondering if you could walk us through some of the moving parts on the working capital changes that's affecting the operating cash flow?

Sure, sure, sure. You know, we a couple of quarters ago we talked about EBITDA being a reasonable measure for operating cash flow and probably for a couple of quarters we were lucky in that that came out because we had the hurricane legislation that allowed us to not pay taxes for a period of time and consequently when you get back to EBITDA it was something fairly close to the operating cash flow. I think there are -- I think if you remove all the working capital effects and just look at two specific account groups, one of them is taxes payable.

If you go back to the end of the year we were like $10.2 million accrued on taxes payable and that had to do with the legislation that allows you to not pay your estimated taxes until January 5th. If you look at the March quarter I think we were about $6 million taxes payable and then if you look at the June quarter it turned to a $2 million prepaid taxes, so over the period if you start with net income and add back depreciation and any amortization that you have the real thing that causes the change between net income and operating cash flow is how much you pay in that particular quarter in taxes so the relationship between tax expense and cash taxes affects the -- it affects the difference between EBITDA and cash flow from operations.

Got it.

And then the other piece is the non working capital account, the due to and from government. That's something a little bit unique. You know, it's not receivables, it's not payables, it's not accruals. It's something different and it relates to overpayments by the government and when they choose to take them back or it relates to a cost report settlement and when they decide to pay us. So those are also unique so if you look at the relationship between tax expense and cash taxes and then the relationship period to period on the net due to and from government, that almost gets you back to operating cash flow.

Okay that's helpful. And then, Pete, you also made a -- you know, on one of the previous questions you made a comment about an increase in commercial claims. Should that also have an effect on DSO over time?

Yes it definitely does and I think that our DSO -- one thing that's happened in the last I would say 12 to 18 months is that the -- we've done a really good job of moving all of our claims to electronic filing and it had no more significant impact than it did on commercial claims but I really think that we're down around 85 to 90 days outstanding on commercial claims. I just don't see how that's going to go much further down than that. So, as the commercial business increases, I do think that has a negative effect overall on DSO.

Where I guess, you know, with that, where do you see DSO shaking out for the rest of the year?

Yes I mean I said last time I thought it was going to kind of vibrate between 47 and 51 days. I still think that. I really think that the drop to 45 was an aberration. I don't think we can hold it at 45. I think it will go up a little bit more as the year extends.

Okay and then could -- do you also have any I guess guidance or expectation on operating cash for the year?

Nothing more than I just said. I mean I think that's the best I can give you.

Okay and then just one quick question for Don, I was wondering if you could give us the acuity mix or the case mix?

Yes, Kevin, our case mix on this quarter as compared to last in 3/31 ending was 1.27 and it's 1.26 for this quarter.

1.26, got it.

That's correct.

Newton Juhng, BB&T Capital Markets.

I did have a question on the technology rollout and one of the things I was kind of curious about is how you're preparing your staff for said rollout because it sounds like the pilot is going to be starting shortly but then you're expecting to roll it out pretty aggressively over the course of the next year or so and beyond that, so I'm just trying to get an idea for how you're communicating it to your staff and, you know, because obviously the fear is and, Keith, I think we talked about this about three or four years ago that there might be some of your providers that might not be so keen on it.

Newton, this is Don. I'll take it and I actually want to address the keenness observation and I think you're right. And when we say that we want a roll out point of care, I also want to caution that that is not going to be done expeditiously throughout the spectrum of the Company but when and Keith talks about this being a long-term strategic initiative we want to make sure that we have a platform that utilizes point of care, that is as effective in our quality parameters that we have now, if not better, and as well has extremely predictable operating results and so what we're going to do there is we want to grow the next half or however many agencies we add in the next two, three, five, seven years inside of that domain and once we do that, as with anything, repetition, you get very efficient.

Then we will look back to the same store and roll those out. So that will tie into the staffing question. The first thing to note is that there is no tremendous pressure to get this out in front of staff right now because of what I just said. By the time our existing same store agencies get point of care this will be common ground. But June, July, August and September are geared toward just what you alluded to. We're not only developing a model that ties to every metric that we have inside our weekly report but we're also bringing in a multi disciplinary staff group every two weeks to go through our existing processes and map that over to point of care. So we're training a small group that will be our super users going forward and the pilot that's going to start in October is really about looking to return on investment in different categories.

And then my last point is that regardless of what we do with a laptop in the hands of our clinicians, we also have a strategy circled around electronic health records and electronic health technology and we will be able to do that even if we don't have a laptop in the hands of our same store clinicians.

Okay so obviously I was misinterpreting the speed at which you were looking to do this but also you're not looking to create too many ways in terms of your provider base. Okay, very helpful comments there, Don.

I did want to ask Peter one question on the bad debt expense on the facility side of the business. It came in at a zero and in the past it had been as high as $0.5 million a quarter. I know it had been trending down but can you help us understand why there was nothing in this quarter and should we be modeling that going forward?

No I wouldn't model it. I think you kind of have to look at the way we accumulate that number and the way we prove it out at each quarter. We just simply look at the age receivables. On the facility sides we look at specific claims because the claims over there are a lot bigger individually so you can get a good handle on what's uncollectible by looking at a claim-by-claim basis. At the end of any period we measure what reserve we need to cover the claims that we have outstanding at that point in time. At this particular juncture there was no real change from the reserve from period to period so consequently there's no real bad debt expense that needs to be accrued. I really don't think that that's a normal situation. I just think that happened this particular quarter.

I see, okay, helpful. Peter, I also saw in Q2 versus Q1 and this is again on the facility base side, so forgive me for talking about the small piece of your business but is there a seasonal trend Q2 to Q1 on operating margin fall off and I am wondering if that is kind of occupancy related, one, and then two, if you could provide us where your occupancy levels were for your LTACs this quarter?

Yes it is occupancy related. It is seasonal. The fourth and the first quarters are usually the two best for LTACs. We have another little piece that comes into this one in that we acquired an LTAC in Kenner and when we acquired it I think it was in early May maybe that we did the deal. They only had two patients so we've been building that business during the quarter so that had a negative effect on margins. I think it was about $0.5 million or $550,000 was the revenue number and on that $550,000 I want to say their operating margin was something like 70 so I mean just no real significant business. So you had both of those facts occurring in the second quarter, the effect of the new LTAC and building the business plus you had the seasonal drop.

Our occupancy in the first quarter was about 84.4% and that's pretty good and if you remember back the LTAC facility side did pretty well in the quarter. In June that occupancy dropped down to 79%. Our case mix also went down just a slight amount quarter-over-quarter, so you had both of those affecting operating margins. I think the third quarter I probably would model it like the second and the fourth quarter I think I would look back to last year's fourth quarter. Probably Kenner will development and have a positive impact but I don't know that I would model that in just yet.

This is Don. I'll tag onto Pete's comment. He is absolutely correct that the decrease in occupancy was related to Kenner number one and secondarily our costs reported year ends for all of our LTACs is 831 and you have to look very carefully at your length of stay and we had one hospital in [Momu], Louisiana that was touching on that 25.1 day and so you really have to scrutinize the admissions and, as a nurse, I can say this. It's very difficult to manage certain admissions because these take care of the sickest of the sick and when patients pass away or die within that period it dramatically decreases length of stay so honestly you've got to manage that parameter and I wanted to make sure you knew that but I also agree with Pete that I think what you see historically is a pretty consistent trend on a case mix of one and occupancy of 85% and you're going to see that going forward.

Okay very helpful. Lastly, I just wanted to ask a question about the deal that you announced yesterday in Washington State, these federally qualified health centers, you know, getting a little bit better understanding for that. Can you just describe to us how this model is going to be a little bit different from your kind of traditional deal that you've been doing and how you're going to be servicing that population?

Newton, this is Don. I'll take it and come out and say I don't think it's going to be different from our joint venture relationships. We've always said that those are done to extend the goodwill and the good name and the communities from which we go into. What is different about that though is the territory that that acquisition covers. Keith talked earlier about I think he used the $23 per visit number in trial and knowledge. Of all the acquisitions that we've done in profile, this one has longest travel time to and from visits that we've ever seen. And so while the JV in itself isn't going to operate it differently what we have had to do is look and be very clever in how we keep costs down in this acquisition. So it really isn't going to change and we see it as a good deal for us in territory that we've already been successful for in Washington.

You know, just kind of on the bigger picture side, I'm sorry I've got one more question for you here, but on the bigger picture side Keith made a comment that the beneficiaries in the rural settings is not really growing and one of the things that I was wondering about was considering your mix of business.

Has there been any renewed desire to kind of shift it more to some -- you know, you have your footprint in the rural areas and you may want to continue to expand that somewhat but to shift the mix a little bit more towards urban setting in order to -- I mean you know, we're talking about costs, increased costs. We're talking about lower profitability. We're talking about beneficiaries, the pool of beneficiaries not necessarily growing and you're only grabbing market share in that regard. I'm just trying to get a better idea as to how you're focusing your capital towards opportunities.

No, well the short answer is no. There's really no discussion to shift the mix more towards urban markets. You know, some of the positives in rural markets are your -- there's less competition and the market share that we are picking up is from just that, I mean less competition in those markets. But I also believe that in some of the urban markets -- let's just take, for example, right now one of the real sweet spots in home health reimbursement is in congregate living facilities that you get the same reimbursement even if you have a nurse that doesn't drive at all, that just walks from room to room in an assisted living facility let's say, for example.

But over time those things surface and the reimbursement equalizes so I mean I think our strategy is sound and I think we're going to stay focused in rural markets but the number of home health users over the last decade not only has it not grown in rural markets, it's not grown nationally. In 1997 there were 3.6 million home health beneficiaries and in 2007 there were 3.1 million home health beneficiaries and that's all in. That's nationally. So I guess my point is that the growth that you hear reported, the organic growth, from the public companies especially, much of that is attributed to the fact that we're consolidating the market and by technology and more sophisticated disease management programs and all of those things that we're able to leverage because of our size I think we're grabbing and I'm not sure generally people understand that that the industry is not growing at the rate you see reported by the public companies.

Keith, thank you very much for those comments.

Greg Williams, Sidoti & Company.

Keith, can you help me out with your dealings in Washington DC and CMS coming out with decent rates last week and how it relates the congress. I mean is congress and the Senate Finance Committee and CMS, are they really working in silos or are they talking to each other and is it safe to say that we should really be looking at what congress is doing in health care reform policy because they could supersede anything that came out with Medicare last week?

You know, I really don't think I can add any value there. I mean it would all just be guesses on my part. I think I know as much as you know. I mean the information I get is from through our National Association. That's how I stay updated and I would -- I'm not trying to pass you off here. I just think the best advice I could give you is to stay in touch with the National Association to get the most recent updates from them.

Okay fair enough and can I just talk a little bit about the acquisition conversation that was going on earlier? Just, are the size of acquisitions in your pipeline changing or is this strategy, acquisition strategy, towards acquisition sizes changing to maybe larger ones if multiples come down?

I can just -- you know, I would just say now I'll let maybe Don say a little bit on this too but right now I am seeing smaller base revenue deals in areas where we have larger opportunity for geographic expansion. So it depends on what you call a small deal versus a large deal and let me give you an example of what I am talking about. I don't remember when. I guess it's a couple of years ago we made an acquisition in Tennessee that was an extended care West Tennessee and if you looked at it from a trailing revenue standpoint it probably looked like a pretty small deal. I mean it was about $5 million in trailing revenue but what we were really buying were 22 licensed counties in that Certificate of Needs state so from an opportunity standpoint when we pro forma'd that out over five, seven years, it was a huge opportunity for our Company but on a quarterly reporting basis I mean you would have probably referred to it as a small deal. So, Don, you want to --?

Greg, I'll just add a little color to that. In the lion's share of what Keith alluded to in the number of acquisitions we have in the pipeline, nearly all of them average around $2 million to $2.5 million and that's been consistent with what we've done and I think Keith is exactly correct that a lot of times when we say that it falls in our sweet spot these people have one provider, one location and a whole lot of service area and, even if it's in a tier four state, I talked about our strategies having to shift into different sales approaches and different organic growth initiatives in those states. We're in that land grab with those providers and we still have a w ay to go take care of those Medicare beneficiaries. So while that $2 million to $2.5 million number is correct, there is one that's a little north of that but other than that you can pretty much model that as consistent.

Okay great. That was very extremely helpful there. My final question I guess, Peter, I didn't -- I wasn't sure if I heard correctly. You said $4.5 million in CapEx. Is that infrastructure CapEx in addition to what we'd see as normal agency CapEx from de novos etcetera or is it just $4.5 million for the remainder of the year?

No it's the additional CapEx related to the initiatives so we'll continue to have I think the normal -- even though this quarter was $1.8 million I think or $1.9 million CapEx and it was probably about the same in the first quarter, that's really high for us. I expect that the normalized back around $1.2 million. The $4.5 million that I referred to, that will be on top of that normal quarterly $1.2 million for the last half of the year in each quarter.

Whit Mayo, Robert Baird.

Two quick questions -- I guess first for Pete I just wanted to clarify I think you said in your prepared remarks that you had a $3 million unfavorable cost report settlement, just any color around that, just what segment did that come from? Or did I hear you correctly?

No it's not exactly -- I'm not sure exactly what a negative cost report settlement is. I don't know what that means. What happens is -- and it came off the facilities' side. What happens is they pay you on a charges and cost ratio and they were paying on an incorrect ratio. We identified it. We contacted them back. We accumulated all the overpayments in a liability account and then they settled that in -- just in the normal course.

I mean, it happens all the time. They hold back money. They tell you that they will pay you this receivable of $100,000 but they don't pay you any money and the $100,000 is actually a hold back, so it's something that we knew it was coming. We had it sitting on the balance sheet and when they finally took it it was just primarily in this quarter so the reference that I had I wanted to make sure that you didn't think that the relationship between operating cash and net income was just a farago, that there was a real relationship that you could get and I kind of felt like the to and from government had to be placed in there to get that to work.

Okay, okay got you. And then maybe second question for Don, I just wanted to get a little bit more color on the volumes, just nice rebound on admission sequentially but just wanted to get a little bit more color about some of the sales and in market efforts. I mean, you alluded to a few initiatives but just, you know, any progress on some of the investments that you've added recently, just you know, maybe some comments around [Steve Lepley] and the addition, you know, the benefit that he's added, just any comments around that would be helpful.

Whit, thanks for the question. As you know, in strategic planning you can't execute and expect the results to happen immediately and, as I told our sales force about six, eight month's ago, I said the things that we're going to do today are going to prove to be effective six, 12 and 18 months down the road and you need to stay dynamic in doing so so that trend continues. And Steven has been instrumental to that.

Like many in America we look at people strategy and the yield's operating process and so I guess what we've done initially for the last eight months is center around the people issue, whether it had been training, whether it's teaching them exactly what to say in a consistent message on selling our disease management protocols, whether it's telling them and educating them on what clinically goes on into the home because let's not be confused. I mean we can sit around a table and we can talk about niche selling and we can talk about programs but at the end of the day we've always said we take care of patients that are 65 years and older in their home and they have to be first on a plethora of disease processes so it was about people.

Now specifically, we've centered on two specific programs and that's pelvic floor dysfunction because of our extremely high number of patients with urinary incontinence and we've also done the same with low vision because of our extremely high population of diabetic personnel, I mean diabetic patients. It's still the number one diagnosis for our Company. So I guess that the answer to sum up is two fold. We've concentrated on people first and now we're actually doing the execution for it and I think that, as I said in the prepared comments, even with that we needed to do that very effectively to keep our same organic growth trend of that 5% to 7% number intact.

Okay no that's helpful. Thanks a lot, guys.

Darren Lehrich, Deutsche Bank.

It's actually Prabhdeep Singh in for Darren. I just have one question here, guys. Just going back to the comment you made about stealing share, I was just curious kind of in your markets where you are stealing share, I guess to what extent is the JV approach helping with that? I am just curious if you can compare market share gains in JV markets versus markets where you're not in a JV with a hospital.

Don, do you want to take that?

Yes I'll actually take that and you may be surprised that those numbers are consistent in both free standing and JV locations. Again, when you're looking at the competition we need to first look at who is providing the care. It sounds like a very simple thing to say but part of our initiative is to truly go get the best nurses and therapists in the market and it's because we focus in more intensely than ever on employee satisfaction initiatives and we want them to get to a place where we become the employer of choice so to get the market share you need to get the clinicians that are effective and taking care of the patients and you do that whether it's a JV or not. It's irrelevant and so I think the basis of your question is do we see that joint venture approach has some type of advantage in getting that market share and the answer is no.

This will conclude today's question and answer session. At this time I'd like to turn the conference back to Mr. Keith Myers for any additional or closing remarks.

Okay thank you, operator. And thank you, everyone. 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 and thank you for your questions. As always, we are available to answer any questions that may come up between quarterly earnings calls, so have a great day and thank you for supporting and believing in the LHC Group family.

This does conclude today's conference. Thank you for your participation.