LHC Group Inc (LHCG) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the LHC Group's Third Quarter 2009 Earnings Results Conference Call. This call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Eric Elliott, LHC Group's Vice President of Investor Relations. Mr. Elliott, please go ahead.

Thank you, Elizabeth, and welcome, everyone to LHC Group's third quarter 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 industry on our website at www.lhcgroup.com. In a moment we'll hear from Keith Myers, President and 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 form those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarter SEC flings. 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. I'd like to begin today's call by thanking the approximately 7,000 LHC Group employees, who work so hard each and everyday to care for the many thousands of patients and families and the growing number of communities that we serve across the country. Thank you especially for your extraordinary efforts in the third quarter and throughout 2009 thus far, as we continue to invest in and prepare for the future. Know that you are valued and appreciated for all that you do. You always answer the call when we are faced with challenges and you certainly deserve all the credit for our continued success. Keep up the great work.

I would suspect that everyone is waiting to hear an update on discussions in Washington DC, at least as we see at this time, so I will begin there. I just returned from DC late yesterday but at the pace in Washington now some of my comments may already be stale. As most of you know, the House and Senate are both continuing to work to secure passage of respective healthcare bills. The next important step that we are preparing for in our legislative strategy will be when the negotiators meet in conference to combine versions and produce a conference report. As I am sure you know, the House version has continued to call for approximately $57 billion in cuts to the Medicare home health benefit over 10 years, while the Senate version calls for $43 billion in cuts over 10 years.

While the Senate version is obviously the lesser of the two, it still goes far too deep and is, therefore, unacceptable and cannot be supported by our industry at this level. Medicare home health spending accounts for only $16.4 billion per year in total Medicare spending, which is $1 billion less than in 1997, a decade ago, and fewer patients are receiving home health services in the US today than a decade ago. As a Company, I believe as an industry, we fully support President Obama in his efforts to pass healthcare reform legislation this year and we believe that all Americans should have healthcare coverage.

As an industry we are willing to make our fair share of sacrifice to make this happen. We also support President Obama in his pledge to preserve existing Medicare benefits. Speaking on home health and hospice services, President Obama has said, "I have the highest respect for them, especially the nurses, aids and therapists who devote their lives to caring for people with disabilities, the infirm and dying Americans. There are few more noble professions."

That being said, the cuts currently being considered in both the House and Senate Bills single out the home health industry with disproportionate cuts that far exceed the level of cuts being imposed on any other sector of healthcare. Home health is currently at about 4.5% of Medicare spending. If the proposed cuts were to go through projected home health spending over the period 2010 to 2019 would be cut 17.6% in the House Bill and 13.6% in the Senate Bill. This is simply unsustainable for 70% of the home health agencies in the Country.

According to latest estimates from the National Association for Home Care and Hospice, if enacted the unattended consequences of these cuts being proposed by the House and Senate could result in the closure of up to 70% of the smaller home health agencies in the Country and as many as 1 million Medicare beneficiaries losing access to Medicare home health services by 2011.

In February the US Census Bureau released a report showing that in the US the population of 65 and older will more than double by 2050 rising from 39 million today to 89 million. Then in May a study released by Avalere Health found that home health use saves Medicare dollars by reducing unnecessary ER visits and hospitalizations. Based on the findings in this study an estimated $30 billion could be saved over the next 10 years by expanding access to home health for chronic disease patients. After the Balanced Budget Act of 1997 cut billions from the Medicare home health benefit Medicare expenditures on skilled nursing facilities and hospitals skyrocketed during the same period of time. With this expected increase in the 65 and older population and solid data now that shows that home health access and utilization are the lowest cost method of providing quality healthcare service to the elderly in their homes, where they want to be, now is certainly not a good time to be cutting these services at this level.

There is good news, however. The home care industry is united at the table and better positioned than in any point in the last decade with regard to credibility, reliable data and quality of our industry advocacy consultants and efforts within the beltway. Members of Congress are listening. They hear our concerns and many have gone on the record committing to work with us as the process continues to bring the level of cuts down to a reasonable level, more in line with the $34 billion that the President requested of our industry in his budget. Various committee staff members have been open to our suggestions and are working with us to incorporate many of the ideas we have offered. We are encouraged by that and will continue to work with them and are hopeful that we will bring the cuts down to a number that we can live with and support as a Company and as an industry.

At the same time we have a business to run and we are preparing for the future. In 2010 and 2011, even if we are successful in reducing cuts to the $34 billion as proposed in the White House budget, we anticipate an unprecedented period of consolidation in the industry. Our Business Development Team is already engaged in conversations with a number of high quality, well established small to mid sized agencies who do not have the financial strength and infrastructure of an LHC Group and who know that change is inevitable, even if the worst case scenario is not realized. They are weighing their options and looking for opportunities to sell or partner with companies like LHC Group that have the infrastructure and scale necessary to be successful in a challenging reimbursement environment.

We believe we have an edge with these high quality established providers because of our Company culture and the fact that we do not come in and change the name of their agencies and the faces of the people who really drive the volume and goodwill in a community. We have been preparing for this in advance throughout this year through significant investments in infrastructure to position our Company, take advantage of the increased consolidation that will occur in the coming years. We've talked about these investments in our previous calls and Pete and Don will talk about these in greater detail in their section.

Now, let me move on to acquisitions. First, I'd like to welcome all of the new employees that have recently joined the LHC Group family. Since our last earnings calls we have added locations in Grants Pass, Oregon and Camden, Alabama. Also, we have signed a definitive agreement to acquire the assets of Feliciana Home Health and have also recently signed a definitive agreement to enter into a joint venture with Twin Lakes Regional Medical Center for a home health agency located in Litchfield, Kentucky. Both of these acquisitions are anticipated to close on November 1st.

With regard to our acquisition pipeline, currently we are in active negotiations with 18 candidates, which include 34 existing locations in 15 states and approximately $68.9 million in annual revenue. It is clear that we are already seeing the impact of the proposed cuts on our acquisition pipeline. A prime example is Feliciana Home Health, which has operated profitably and been considered one of the highest quality providers in Louisiana for the past 29 years. Although Feliciana Home Health certainly could have continued to operate as a standalone provider, the owners of Feliciana believe that with the uncertain future of home health reimbursement they needed to partner with a company that provided the infrastructure and resources necessary to adapt to the changes and one that shared the same commitment to quality patient care and employee satisfaction.

Again, we believe that throughout the rest of this year and in 2010, 2011 and beyond we will continue to see a higher volume of quality acquisition candidates, such as Feliciana, who are not focused solely on maximizing their sales proceeds, but who are looking for a good partner for their employees, patients and the communities they serve.

And now I will turn it over to Pete for a review of our financial results. Pete?

Thank you, Keith, and good morning, everyone. Consolidated net service revenue for the third quarter of 2009 was $132.5 million, an increase of $34.5 million or 35.2% from the third quarter in 2008. Consolidated net revenue for the nine months ended September 30th, 2009 was $389.3 million, an increase of $118.1 million or 43.5% from the same period last year. Net income attributable to LHC Group for the third quarter of 2009 increased 22.4% to $9.8 million, or $0.54 per diluted share, compared with net income of $8 million or $0.45 per diluted share for the third quarter of 2008.

Net income attributable to LHC Group for the nine months ended September 30th, 2009 increased 58.2% to $31.2 million, or $1.73 per diluted share, compared with net income of $19.7 million, or $1.10 per diluted share for the same period in 2008. Net income attributable to LHC Group for the nine months ended September 30th, 2009 includes a $211,000 after-tax loss from discontinued operations, which resulted in $0.01 decrease in earnings per share.

Revenue for the home based segment was $116.7 million for the third quarter of 2009, an increase of $32.2 million, or 38.1% compared to the same quarter in 2008, and consists of $98.1 million in organic revenue and $18.6 million in acquired revenue. For the nine months ended September 30th, 2009 revenue for the home based segment was $343.7 million, an increase of $114.4 million, or 49.9% compared to the same period in 2008, and consists of $293.4 million in organic revenue and $50.3 million in acquired revenue.

Revenue for the facility based segment was $15.7 million for the third quarter of 2009, an increase of $2.3 million, or 16.8% compared to the same quarter in 2008, and consists of $14.2 million in organic revenue and $1.5 million in acquired revenue. For the nine months ended September 30th, 2009 revenue for the facility based segment was $45.6 million, an increase of $3.7 million, or 8.8% compared to the same period in 2008 and consists of $43.5 million organic revenue and $2.1 million in acquired revenue.

Medicare revenue was 82.4% of consolidated net service revenue for the quarter and 82.7% in the nine months. And the home based segment made up 88.1% of total revenue in the quarter and 88.3% in the nine-month period.

Day sales outstanding, or DSO, for the three months ended September 30th was 48 days as compared with 52 days for the same three-month period in 2008 and compared to 45 days in the second quarter of 2009. Part of the increase over last quarter relates to three specific locations where we have health bills either for administrative completion or because of payer system problems. We have begun billing and collecting on two of these locations and expect to begin billing on the third location later this quarter.

In the September quarter we billed approximately $135 million and collected approximately $131 million. Continued strong collection on receivables has also resulted in lower bad debt expense. Consolidated bad debt expense was 0.8% of net revenue in the third quarter of 2009 compared to 3.2% in the third quarter of 2008. Year-to-date bad debt expense is 1% of net revenue compared to 3.9% in 2008. We expect that bad debt for the fourth quarter to be 1.0% to 1.5% of consolidated net revenue.

The effective tax rate for the third quarter was 36.3% compared to 39.5% in 2008. For the nine months ended September 30th, 2009 it was 37.5% compared to 38.4% in the same period last year. The lower tax rate in the third quarter of 2009 is due to utilization of a tax benefit on an NOL, which had been fully reserved previously and the effect of WOTC employment tax credits, which were extended through August 28, 2009. We expect the tax rate to be around 38.5% for the fourth quarter and beyond.

Cash provided by operations was $13.8 million in the third quarter of 2009 and $34.8 million for the nine months ended September 39th, 2009. During the nine months ended September 30th the Company acquired one LTAC, nine home care entities and two hospice entities. The total purchase price of acquisitions was $18.5 million, which was paid primarily in cash. These investments were funded through operations.

During the quarter we issued a $700,000 letter of credit against our $75 million credit facility and that remains the only amount outstanding at September 30th, 2009. In the third quarter of 2009 our gross margin was 47.7% as compared to 49.9% in the second quarter of 2009 and 51.8% in the third quarter of 2008. The margin decrease in the second quarter was caused by an increase in business per episode and the related increase in salary expense for nurses and therapists while census decreased in the quarter. Additionally, in the September quarter 90 of our locations completed Joint Commission Survey and this had a negative effect on productivity. Don Stelly will discuss this further later in the call.

Finally, certain agencies acquired during the last 12 months had lower margins in the quarter compared to the second quarter of 2009. We expect to have margins in these agencies in line with Corporate margins in 2010. For the fourth quarter we expect the gross margin to be between 48% and 49%. In the third quarter of 2009 G&A expense as a percent of revenue was 33.1% compared to 32.8% in the second quarter of 2009 and 31.9% in the September quarter of last year.

The increase is primarily due to internal investments in compliance, quality, education and IT, which we have discussed in previous calls. We included in our 2009 guidance G&A expense in the range of $4 million to $5 million associated with these investments. Additionally, we expected to incur capital costs for these investments of approximately $4.5 million in the third and fourth quarters to support those initiatives. To date we have spent approximately $2.8 million on these internal investments. Of the $2.8 million $1 million is CapEx and the remaining $1.8 million is included in G&A expense. Of that $1.8 million $1.3 million was included in the third quarter. These costs relate to personnel and consulting costs incurred to develop our point-of-care delivery model, design and develop our compliance program, identify, select and implement technology solutions including our state-of-the-art compliance software.

During the remainder of the year we expect to spend approximately $5.6 million related to these investments. Of that amount approximately $3.5 million relates to capital investment and the remaining $2.1 million will go through G&A expense. We expect the G&A margin to be between 33% and % in the fourth quarter of 2009.

CapEx for the quarter was $2.4 million. We expect CapEx to be between $3 million and $3.5 million in the fourth quarter. Depreciation expense is $1.2 million in the third quarter and we expect this to be between $1.4 million and $1.6 million in the fourth quarter.

In the third quarter of 2009 we also spent approximately $200,000 in our efforts in Washington DC. We expect to spend in the fourth quarter of between $500,000 and $700,000. As discussed, in the June quarter earnings call we engaged Simeon Consultants to review each of our external quality improvement audits received from 2005 to present and determine if any amounts needed to be repaid to the Government for actual records audited. We recorded a $500,000 reserve in the second quarter for this exposure. During the third quarter Simeon completed that review and based on those findings we have determined our total pay back will be approximately $320,000. As of today, $162,000 of the $320,000 has been repaid and we expect the remaining $158,000 to be repaid in the fourth quarter. All of the money being repaid to Medicare was the result of incomplete documentation. None of it related to medical necessity failure or the failure to provide documented services.

In the third quarter we spent approximately $300,000 with Simeon to complete their review and an additional $95,000 on outside counsel fees associated with the review and our response the administrative subpoena from the Inspector General's Office of Personnel Management. At this time we are continuing to respond to the subpoena and there have been no additional material developments since our last earnings call. We can drill down on these results further during Q and A if anyone desires.

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

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

First, I'll turn to toward quality. Our standardized outcome index, or SOI, is calculated by OCS, or outcome concept systems, as of September 30th, 2009 was 1.93 while the national norm was 1.76. Again, our scores are significantly higher than the industry averages but, more importantly, we continue to improve each quarter.

With HomeCare compare our outcomes have improved in eight of the 12 categories as compared to this same period last year and we have improved in six categories compared to the last reporting period. Our outcomes are above national average in six of the 12 categories at present. Again, we have made great strides in the home health compare data set and expect outcomes at recently acquired agencies to show sequential gains, thereby aiding and improving overall quality metrics for our Company.

We have just completed the first step in our unprecedented quest to differentiate ourselves and the quality section of our business. 90 of our locations went through Joint Commission Surveys in this third quarter of 2009. We are well ahead of our own internal expectations and remain on track to have all existing agencies Joint Commissioned accredited by the end of 2010. I would sincerely like to thank each of the teams for their hard work and dedication in preparing for and excelling through these surveys, as this takes considerable time, effort and intense resource allocation. However, we are all convinced that this quest will differentiate our Company and enhance its long-term value, not to mention we all believe our patients deserve it.

Last in the area of quality is HomeCare lead. The HomeCare lead is the definitive compilation of the most successful Medicare certified HomeCare agencies in the United States. This Review recognizes the top 25% of agencies based on an analysis of quality outcomes, quality improvement and financial performance. In addition, the HomeCare lead top 100 and top 500 agencies receives special recognition. The data used for this analysis was compiled from publicly available information. The HomeCare lead is the only performance recognition of its kind and is brought to the industry by OCS HomeCare, a leading provider of healthcare informatics and Decision Health, publisher of HomeCare's respected independent newsletter, Home Health Line. 26 LHC Group locations made the top 500 with 21 of those being in the top 100. Huge congratulations go out to those agencies and the people whom which work inside of them.

I'll turn toward technology and now take a few minutes to update you with regard to our electronic health records, or EHR initiatives, as well as point of care. To clear up any confusion between the two concepts, I want to quickly explain what I mean when I say electronic health records. An EHR is a patient medical record stored in digital format that's capable of being shared across different healthcare settings through secure network connected and enterprise wide information systems. Such records may include a whole range of data in comprehensive or summary form to include but not be limited to demographics, medical history, medications and allergies, immunization status, lab results, radiology image and billing information.

Today our systems have the capability to capture EHR information typically used in caring for our patients. Through the use of these appropriate interfaces we can exchange that information among multiple providers and settings as we stand. We recognize that these standards, these EHR standards, information exchange needs and software capabilities continue to evolve. We are developing and implementing processes to stay current with this evolution and to identify and prioritize elements that are relevant to our business. We will partner with our vendors and/or invest in appropriate solutions to meet these emerging needs.

Investment in and appropriate use of point of care technologies also continues to be part of our strategy to streamline our operations and enhance care delivery. Currently 21 of our locations are on point of care and recently the acquired Feliciana Home Health will also remain on their point of care platform when they join our LHC Group family in just a few days. We are presently in the final test stage of the all scripts point of care project that we've been speaking to you about, a process that is led by Simeon and Associates. This phase is where we quantify and qualify the effects on key operating processes and results that range from effects on cash flow to those of quality to those of productivity and many in between.

Also, we're presently preparing to roll this model out to those pilot locations. Live use in our pilot locations is intended to coincide with the start of Oasis C, specifically in upcoming December and we will update you on our associated time lines on our next call.

I'll turn toward internal growth and, as many of you have noticed, our Medicare home health revenue is down approximately $2.1 million between the second and third quarter of 2009. As we discussed previously in the first quarter of this year, our organic Medicare admission growth was 0.8%. The lower admission growth in that first quarter had a lag effect on our average weekly Medicare census, which had a direct impact on Medicare revenue. As you will notice, our average Medicare census in the third quarter of 2009 is down 4.7% as compared to the second quarter of 2009 and, as a result, our third quarter home health Medicare revenue is down 2% versus the second quarter of this 2009.

As we stated in our first earnings call, we have put initiatives in place and are now seeing the results with organic Medicare admission growth in the third quarter being 8.6%. We believe organic admission growth in the 5% to 8% range is where we would like to be and will now have two quarters in a row at the top end of that range. As a result of all of this, we feel that our average Medicare census has rebounded nicely in the fourth quarter and, as of today, is 22,908. It is because of this confidence in our admission growth and a resulting census increase and, as Keith will discuss in a few minutes, we have decided to increase our revenue guidance for the remainder of 2009.

Now, turning quickly to de novo growth thus far, year-to-date we have executed leases and applied for branch approvals for 10 de novo locations in the states of Alabama, Tennessee, Washington and Virginia. We have six additional locations slated for the remainder of 2009. On our year-end earnings call I'll provide you an estimate of our de novo growth and expectations for 2010.

In closing, I would like to sincerely thank each of our home office and field team members. Your hard work and dedication truly never ceases to amaze me. It is you who have allowed us to achieve these third quarter results and position us very well for the future. 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. Keith?

Thanks, Don. Before we open the call up for questions I want to take this opportunity to reiterate the increase to our revenue guidance and reaffirm our EPS guidance issued on May 6th, 2009, which was outlined in our earnings release. We now anticipate revenue for 2009 of $515 million to $525 million, an increase from previous guidance of $500 million to $510 million. We also reaffirm our EPS guidance for 2009 of fully diluted earnings per share in the range of $2.15 to $2.25. As always, this guidance does not take into account the impact of any future acquisitions, if made, or de novo locations, if opened.

In closing, to our shareholders we want to say thank you once again for your investment, your confidence and your support.

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

(Operator Instructions). We'll take our first question from Arthur Henderson with Jeffries & Company.

A couple of just housekeeping questions and I am sorry if I missed the answers to this if they were in your prepared remarks but on the gross margin I noticed that that kind of turned down just a little bit. Is that a result of acquisitions or something that you've done that's creating that and I guess that's sort of applies to the sequential increase we saw in DSOs? Could you make -- could you comment on that real quick?

There were a couple things happening at the gross margin level. One of them has to do with acquisitions and by acquisitions I mean something that we bought within the last 12 months. They in between the second and third quarter we saw a decay in their margins and that decay, if you take it and apply it to the consolidated revenue, represented about 1% at that level. The remaining piece of the cost of sales increase had to do with the JCAHO accreditation process that we're going through right now and the productivity effect that that had. Don talked about how many locations we got accredited or we went through this first survey in the quarter.

And, in addition to that, our visit per episode number increased in the quarter. You can also see that our case [rates] increased in the quarter and that caused some additional salaries, primarily with nurses salaries and with therapist salaries. Those increases also generated the upside of that is the remaining amount of the increase in cost of sales.

Okay, okay so should we expect in Q4 to see a similar level to where we were in Q3 or which directionally which way should we think about that?

Yes I think we expect that the cost of sales to be between 48 -- the margin to be between 48% and 49% for the fourth quarter.

Got it and then, Pete, staying with you did I hear you correctly just that on the SG&A margin for Q4 you're expecting that to fall? I think I -- did I hear you say 33% to 34%?

That's correct yes, 33% to 34%.

So that's kind of returning to a some extent of a historical level that we've seen. I assume that, as you do these internal investments, that the G&A you'll see a bit more leverage in that number, perhaps further into 2010. Is that the way we should think about it?

Yes I think that's how I would think about it. In the fourth quarter we're going -- you know, we have about $2 million that we're going to spend through G&A. Of that it's almost half and half recurring and one time so on the recurring part that's going to continue on but, as you can imagine, if we're loading G&A and costs of a particular department or a particular project today, we're not loading it for the number of agencies that we have today or the revenue that we have today. We're really kind of getting ahead of that curve, so that leverage is what you'll see in 2010 yes.

Okay and then last question for Keith, obviously you've been very active on Capital Hill. The House Bill I guess has emerged here just a little while ago and I assume that the proposed cuts to home care are in line with where they were. The Senate seems a bit more reasonable but I know you're still struggling with that cut. What is the push back that you get on Capital Hill with respect to what they're trying to do specifically with home care? Is it one of those things where they're just -- they're looking for dollars, they're not necessarily thinking just how this particular industry can save on the overall grand scheme of things?

And then tied to that, if there were to be significant cuts to the degree that you've discussed in the 70% of home nursing operators that would be at risk, I imagine that as the CEO of a Company that's obviously going to weather this storm the dynamics of what's going to happen to your business are going to change dramatically so I sort of sense that the growth opportunity, the consolidation opportunity, is significant and so how do you -- if these cuts go into effect how do you foresee LHC changing from being maybe less of a regional provider to something on a much more national scale? Could you comment on those two things for me? That would be great.

Sure. Thanks, Art. Let me take the first part but yes the House Bill is no surprise. That's what we expected. We think the opportunity we have to bring the number down is in conference and so we're working very hard with on the Senate side, the industry is, to get that number down in the merger of the two Bills in the Senate, get it down closer to the $34 billion that the White House asked for in their budget. That's a number that we feel is more appropriate, even though still disproportionate to -- disproportionally high for our industry. So we're working really hard there. We're not really getting any push back to be honest with you. It's what you said. It's really they're just looking for dollars and home health has not had a lot of leverage in the beltway in the past.

This year we have stepped that up with the National Association and through all of the members have come together and have pooled resources to spend more money on research, on data and messaging through professional consultants that represent the industry now at a much higher level than we ever had in the past. So we're getting traction on that. you may have noticed that just this week the Association started running full-page ads in al of the major publications in the beltway that are very positive ads that support President Obama and support healthcare reform but point to the need to take a serious look at the massive cuts being proposed to home health and we are getting traction so we do feel good about the response we're getting. The outcome is still unknown. We have to -- you know, they have to find the money and but we're confident that that needle will move some in conference. That's about all I want to say on that.

Moving on to the consolidation question, as we're blessed to be where we are today, I am really happy with our decisions made over the last two years really and especially this year to continue with investments in infrastructure and hats off to our Board of Directors for having that vision and supporting us in that. We knew that 2009 was not going to be a year where you wanted to be real aggressive on acquisitions because sellers, or quality sellers, were really frozen at the beginning of the year wondering what the outcome would be. So, given that, it made a lot of sense to invest in infrastructure that would bring a long-term value. I don't think we're a regional provider at all anymore. I think we proved that when we reached out to the Northwest and went to that market.

We used to be bound by limits of contiguous growth and now we've seen our systems and processes operate beyond that boundary that existed for a very long time. So now I think we are a national provider. We are looking at operations in every state. The urban and rural distinction that used to be a real bright line for us no longer exists. It's only a difference in reimbursement that we have to deal with, so the Company has transformed over the last two years and I don't think we could be better positioned for the future. I think our reality could be significantly higher volumes and lower EBITDA margins as a percentage but we'll continue to grow attractively at the EPS line I think because of the volume growth.

Okay that's very helpful. Thanks, Keith.

Newton Juhng, BB&T Capital Markets.

Peter, I was actually wondering to get a better understanding as to why the provision for bad debt actually dropped this quarter. You know, in the past we talked about with more commercial business coming on board that we'd likely see an uptick in that and I am just obviously you're planning for that next quarter but I am just kind of curious as to what drove the sequential downtick this quarter.

Sure. Hi, Newton. I think the -- you know, there are so many moving parts in the calculation of bad debt. You have a percentage of revenue that we look at at the end of the period. During the period we generally calculate a valuation measure based on age receivables and so the -- so if we were going to do it flat line and just say every month we have 1.5% of revenue going toward bad debt expense then that would be much more consistent, much more reliable.

The problem with that is that at the measurement dates of the quarter sometimes you can kind of get out of whack and that's what happened to us I guess two years ago when we had -- when we got sot of low on the reserve side. At that point in time all the changes that we made to the reserve were really [adhesion] calculations and not done multiple times during the year. Now what we do is every quarter we go in and we measure the reserve requirement based on agings that we're dealing with right at that point in time and the expense squeezes out as the change in the reserve, so it's not going to be consistent but what it does do is it places reliance on the historical collectability of claims continuing on. It, as the claims age out the reserve increases on those claims and it gives you a more reliable, dependable valuation of the reserve on the balance sheet, which can be inconsistent on the income statement, which I think is what you're seeing.

Where we're improving right now and you can see it, when the Q comes out you'll see the table. For claims over 180 days at December the Medicare component of that was about 50% and the other 50% was split evenly between Medicaid and commercial. Now Medicaid and commercial claims over 180 days get a larger reserve estimate, the commercial particularly. But in the September aging you'll see that 70% of the receivables that are over 180 are Medicare so, while the total number didn't go down that much the quality of the claims that are over 180 improved and so consequently the higher reserves that you'd place on Medicaid and on commercial, those, the balances that you're placing against were small and so that's what you're seeing going on in the reserve as it stays being calculated consistently but generating an income statements effect that is hard to predict. I've been saying all the time that I expected it to be between 1% and 2% and I think ever since I've been saying it it's been below 1% so finally this time I relented and said it's 1% to 1.5%. I really do believe that ultimately that's where it's going to shake out is 1% to 1.5 %.

Okay so that by trimming that down that kind of accounts for all of this that we're talking about here?

Yes it causes the income statement to be a little bit lumpy.

All right are you going to continue giving us kind of like your forward-look for the next quarter if you can? Is that planned to continue going forward?

You mean on all margins or just on bad debt?

Just on the bad debt side because obviously that could have pretty sizable impact a given quarter.

Yes I will. I will but understand that I am no more reliable than anybody else on predicting that. I just can throw a number out there.

Got you. And then, Don, I did have a question on the point of care systems here. It sounded like, especially with Feliciana coming on board, that you have some existing systems already there. Is the plan to eventually migrate everybody onto the all scripts systems once you feel confident that you've got all the kinks worked out and how much cost is associated with kind of bringing that together?

It's a good question, Newton, and let me answer it this way. We're not exactly sure if that's going to be the plan at all yet. We have two things going on you're correct and the 21 locations we have a blend of McKesson, [Acara], and coming up with Feliciana will be HomeCare Home Base and I think it's a very good question that I need to drill down with you just a bit.

The way that the point of care model works is beyond the device in the clinician's hands. It goes into a case management nursing and therapy driven model and our Company since the inception has run what's called a team approach and where I am going with this is is that part of our pilot has nothing to do with the device or the platform or input of data, it has to do with metrics driven around switching from a team approach, which is mandatory in essence, going to that case management approach. So part of this ROI study that we're doing right now is to circle around those productivity pieces and see if essentially those other systems can drop into that model and be as effective as what the parameters of the all script piece is.

Now, with that said, that's also important to Art's question when he talked to Keith about consolidation movements. We do not want to absolutely have to integrate large profitable acquisitions into our existing framework and part of the infrastructure addition that we're talking about right now is to drop a business intelligence tool over any and all existing agencies right now so we can extract like data to make decisions. So when I mentioned earlier that we're looking at metrics and determining feasibility of doing those integrations, that's kind of what I was alluding to so that's a long answer to say that we may end up going to one platform or we may not. It depends how well we integrate our existing systems and how well we learn from the people that we've come aboard. One of our existing groups of agencies, Home Care Solutions in Tennessee, runs as fine of a margin base and quality parameter as anybody in the Country, so we have to take that into account first in the horn.

And, Don, when you're looking at an acquisition I guess does this come into play because obviously you've mentioned four different systems here? I mean, how far are you willing to go on that front in terms of if there's somebody else who is on a completely different system whether you're willing to kind of take that on board as well I guess?

Yes not too far and that's exactly what Simeon is helping us find out because, you know, while you want to have some kind of comfort that you're not getting too big of a multiplicity of platform out there, the other side of it is there are going to be only a couple of players that are going to be in the game and right now candidly if we had to go out there I think McKesson and HomeCare Home Base have demonstrated that we can at least go forward for a short-term and then we'll keep playing with All Scripts right now and making sure that we model that up so there will be no more than four period because we'll get to a comfort zone that we can drop the model in the platform and predictive model that agency and that will depend on size, location, geography and other factors.

Sure. Okay thank you very much, guys.

Ralph Giacobbe, Credit Suisse. And due to no response, we'll take our next question from Kevin Ellich with RBC Capital Markets.

I was wondering if we could -- are you guys seeing any more activity or interest from hospitals? Obviously you guys kind of differentiate yourself on that front but has that picked up at all?

Yes, this is Keith. I thought you had said Pete so I wasn't -- I think you're going with that's a [best debt] question. The -- I don't think we've seen any change in the mix of interest significantly. I'd only say that I do see more interest, as I stated earlier, from high quality free standing agencies that would not have thought about coming to market in the last five years but, as the overall mix of freestanding versus hospital, no I haven't seen any change in that I don't think, not as a percentage, just the overall volume is increasing in both silos.

And, Keith, you made the point about the valuation. You know, it seems like it might be coming down with the healthcare reform issues but have you seen any changes on valuation from the hospital side too?

No, no. I mean we haven't. We haven't at this time. I mean, with some of the -- you know, with hospitals it's such a small piece of their business and it's they're usually performing really poorly, so it's something they haven't focused on so we generally price them off of revenue and we're still seeing that pricing to be somewhere around one-time revenue but in those cases we're really looking at the upside potential in the overall market that they are licensed to serve. On the freestanding side I think the pricing is somewhat unknown.

A lot of the conversations that I mentioned in my prepared comments are conversations about deals that would get done in 2010 once we have clarity from Washington DC that would guide us on the pricing. These long established agencies that have a culture and a presence in the community and owners that care very deeply about the future of the agency, they're -- they seem to be at this point interested in finding the right partner and having conversations with both sides agreeing that we'll discuss fair pricing once we get clarity out of Washington DC.

Got it. That's helpful. Thanks, Keith. And then I did have a question for Pete. You know, going back to the DSO, we saw that uptick sequentially. You said there were some issues at three specific locations. Could you provide a little bit more color behind that?

Yes I can do a little bit. One of the locations was a hospice and a hospice has something called sequential billing so you're required to collect or to submit and they'll pay the bills in order of occurrence, so what happens when you're waiting for the chow to go -- the change of ownership to go through and the electronic funds transfer approval, while you're waiting for that to happen the claims continue to build. In this particular case I want to say it was five or six months before we finally got that to go through and now we're going back in and we're billing those claims, so I would call that an administrative slowdown because the -- just because of the way they pay.

One of the other ones has not yet had the chow approved and that relates to the LPAC that we bought most recently. I want to say the number there is like $2 million or something like that that we have sitting in receivables that we haven't yet been able to bill, so once we get the approval and honestly I can't tell you if it's gone through yet or not. I don't think it has no. So once we get the approval then we'll be able to bill those. Those won't be like the hospice so they won't be -- you won't have to do them sequentially. We can actually bill them all at one time.

And then the third location is just a home health and it's the same issue that we had built up prior to the chow going through. In that one in particular there were some other administrative things we had to get some signatures. It was another new acquisition, you know, putting policies and procedures in place to get that done more timely but you still have to wait. You still have to work through it and wait for the approval and authorization to collect.

Okay got it, that's helpful. And then a question for Don, going back to the organic admission growth and we've seen that accelerate a little bit or at least stabilize. What's going on on that front? I mean, is there -- do you have any color behind what's driving that increase?

I alluded to this last call as well. I think Steven and the team have done a good job of first mining data and it really does sound simplistic but we had to look at the entire portfolio of where referrals could come from in every community that we were in and then put a strategy and subsequent tactics inside of that. Along with that we have done a very good job of refining our sales approach into the disease management programs, specifically our low vision, which attached to some recruiting of occupational therapists, of pelvic floor dysfunction and our fall prevention programs and so I think what we're seeing is the best of both worlds come.

Again, part of the infrastructure additions were platforms that gave us data to make decisions and we're seeing that very crystally right now. And the other part is is that we have the people in the right seats to execute those initiatives and I think that's what we're seeing right now.

Okay that's helpful. Thanks.

David MacDonald, SunTrust.

Just a couple left -- Pete, on the investment spend should we expect any of that to spill over into early 2010 or should we expect that that's pretty much wrapped up by the end of 2009?

I think the G&A side of it will be pretty well wrapped up. There could be some capital that spills over into 2010 and that's just a functional thing. One of the pieces that we're buying is we're replacing our payroll system. The -- you know, we kind of out grew the one that we -- that comes along with Great Plains and we thought we would be able to get that all up and in place by January 1st and now it looks like that's not going to be the case. It's just it's a little more intricate than we -- than maybe anybody thought in the beginning, so now we've sort of moved that date forward to I believe it's April 1st and so some of that capital might go into the first quarter of 2010.

Okay but the actual income statement impact should be pretty much over by the end of this year?

Yes that's right but keep in mind that there's a - of that $2 million that we're looking at spending that's going to go through G&A in the fourth quarter, almost half of that is recurring so that part won't, okay, okay.

And that's people I assume to support some of the stuff that you guys are putting in place right now?

Yes that's exactly right. It's people in the compliance side, in the process improvement teams, call back programs. We have several initiatives that we've grown in the Company that we've all of which we think are absolutely necessary and so that will continue on.

Okay and then can you guys provide a little bit more detail in terms what is involved in these Joint Commission Surveys? It sounded like it's some of these agencies that was maybe a little bit more disruptive than certainly I thought it would be. Can you guys just give us a sense of exactly what goes on and what are the challenges in terms of keeping things humming while these surveys are going on?

What a great question. The first thing of note is that Joint Commission in many aspects mimics or parallels the conditions of participation set forth by Medicare but they're much more geared toward patient safety and outcome standards and part of the issue is we've got to teach and train all of our employees, all of our clinicians delivering that care on what those standards -- they call them Joint Commission Standards -- actually are and how to comply in a different manner. Alongside of that you also have to change your policies to include all of the language set forth and then you have to compile data to prove that you've done the things that you tell them during a survey.

Alongside of that you have to review charts and there are many reports that the Joint Commission wants to go in and look and they range from as basic as a file for a specific patient to your governing Board minutes. And, if you think about it, you also have to operate the business as normal so what we saw and Pete talked about the Joint Commission truly disrupting the operations. When you take 90 different surveys going on at 132 days total time, just your leadership has to focus on something otherwise not in the normal course of the day.

So you combine the necessity to teach, to train and to prove that you actually did what you were supposed to with the business interruption of day-to-day, that's kind of what we saw. And listen I've been doing this for a very long time and did it in the hospitals, 15 different surveys, and I have to tell you when I acknowledged our team I've never seen that disruption be absorbed so very well in the SWB and this is an every three year phase and we really do believe that it was as seamless as anybody in the country could have gone through in this three-month period.

Okay and then, guys, just on that same point, should we think about are there going to be any quarters, whether it's the fourth quarter or in 2010 where there will be kind of more than 90 agencies going through this at any one time because obviously it's going to move the P&L around a little bit? Or should we think about it as being pretty smooth until it's completed?

David, it's going to be smooth because the way we mapped it out and remember one of the things that we came out with a very aggressive time line is to get every existing same store agency right now accredited by the end of next year, so the first part of your question is can we expect it to smooth out? That answer is yes. And the other part is is when we're going to come out at the end of the year and forecast, we're very clear of the effects on the P&L from what we just lived through so we'll kind of put that in our budget and bake that in.

Okay and then, guys, just last question on the point of care system is there any of your markets where there are some limitations in terms of point of care? By that I mean that they are rural enough where there's either connectivity issues of some things like that that might not make it applicable for all of your agencies?

I think a year ago that answer would have been yes but we do not see that as a barrier whatsoever now. Now with that being said, there are certain dead areas just like there are with cell phones but that is not, in our experience so far, a barrier and a problem for us that we'll have to overcome.

Okay thanks, guys.

Darren Lehrich, Deutsche Bank.

It's Prabhdeep Singh in for Darren. I guess the first question has to do with staffing. I think some of your peers have talked about just caregiver staffing and it's not a topic that you guys have talked about a lot and I was just wondering maybe if you could just give us your high level thoughts on caregiver staffing, maybe any metrics you could disclose around hiring or staffing capacity.

I think one of the reasons that we've not talked about it is we're in pretty good position with our employee satisfaction initiatives and people wanting to come to work with us. We certainly look at turnover but what we've done again in mining the data is taken our turnover for same store and acquisitions and kind of broken those out because going into these acquisitions we intend to get a different staffing group in there sometimes.

The biggest piece that we are working through right now is converting what we call contract labor to full-time employees. It's a fairly obvious cost differential that when we use contract labor and what I mean by that is nurses, therapists or other providers that aren't our employees and they contract with us individually for those services, in every single case that we have to date those costs per visit and those employees cost us more inside of that episode, so strategically we have gone out, dealt with specific recruiting firms across from the east coast to the west and replaced that contract labor with full-time employees and it's working well.

But, again, when you look at some of the numbers and the cost of service there's a cost to that. Recruiting fees are usually a percentage of salary so if you have a therapist that's going to make just, for example, $80,000 there will be 15% to 20% of that that you have to also assume and take that into the P&L for that agency. So, other than that, I've got to tell you our recruiting and our retaining numbers are good and we feel that we're well positioned for that. The hard part for us is actually teaching them and training them because we're moving so very quickly in some of these infrastructure additions.

And what typically is the delta between a contract labor rate versus kind of what the rate a full-time employee would get? And I know there's probably differences around kind of benefits as well but any way you could size that up for me?

It definitely ranges. In certain markets it's worse than others but it can range from a 10% increase to to 100% increase and you can have a nurse making $30 a visit and they charge you $60. Or the other, you can them $30 and $35 or $40. It really does just depend on the market and the availability of the staffing and what we look through to our what's called a work force link.

Okay and I guess just the other question I had here with respect to just income to from non-controlling parties. I guess the old minority interest line, as a percentage of revenue that line item or that expense line item was a little bit lower than I had expected. Pete, maybe could you just talk a little bit about kind of what's happening on that line?

Sure. The -- of course, that's not a single number. I mean, that's an aggregation of the minority partner's interest in earnings based on their individual ownership percent so when you add it all up it used to be somewhere around 2.5% to 3% of revenue and I think that's what we modeled in and you're right. This quarter it was a little bit below that so the first thing that happens is where is the income coming from, that if it's coming from wholly owned entities then that minority interest percent of revenue will come down.

If more of the revenue is coming from JVs then it will go up. The percentage of operating profit that they get also changes. We have some venture partners that own 25%. We have others that own 33% and we have others that are at 49% so I think most recently we've been entering into JVs with a 75/25 split so part of the decrease might be that phenomenon that we're actually owning more of the entities going forward but part of it certainly is just where the profit's going.

And are you seeing any sort of material change in the profitability of JVs that are well within your same store mature agency base?

No not really. I mean, I think the things that we said in the script where we talked about nurses' salaries and therapist salaries I think that's having an impact on the margins regardless of if it's a same store or an acquisition. I think for the most part I would say no.

Yes I would agree with that, Pete. The answer is no.

Okay great. Thanks a lot.

Tony Perkins, First Analysis.

I just had a quick question on your MCO business. In Q1 I think it was 3.2% of revenue and in Q2 it was 4.1% of revenue. I'm just wondering has that business continued to increase as a percent of revenue and have you been able to keep the margin profile for the segment?

I'll try that one. The answer to the first question is yes. The number of admits in non-Medicare, non-Medicaid we just -- we kind of group it all together right now and we -- and it's all in other. The number of admits, the number of census, all those things are growing quarter-over-quarter and have actually grown pretty substantially since the same quarter last year so I think that we would say that we are seeing that business grow as we I guess from the bottom of when we cancelled all the contracts to now.

The operations are profitable. It's hard for us to separate the advantage plans from just the straight commercial but I can tell you that we've signed I guess a handful of contracts. We signed a handful of contracts every quarter. For the contracts that we don't have in hand we negotiate those on a letter of -- on a letter-by-letter basis, so we do it on a patient-by-patient basis. We have talked to eligibility, our eligibility group, as well as operations about the kinds of rates that we're interested in and the kinds that we're not interested in.

So it's a, you know, I think that we're holding on the numbers that we look at that relate to a percentage of Medicare I think we're holding profitability very well. On the ones that do not relate to a percentage of Medicare but instead pay per visit or on that method we have priced into the visits or the visit price sufficient revenue to keep to generate profitability out of that. So I would say that I think the business is growing. I think we're much more profitable in it today than we were when we cancelled all those contracts and I think quarter-over-quarter we're going to continue to see that grow.

And, Tony, this is Don. I think Pet summed it up well. The only other things that I would point out is Pete mentioned the case-by-case basis. We do see a lot of that and take those patients forward on acquisitions and in the past 12 months we had substantial acquisitions that had those type patients that you may be looking at.

Okay thank you.

Eric Gommel, Stifel Nicolaus.

Thanks for taking my question. I just had one. You talked about acquisitions in third quarter that you had made over the last 12 months impacting margins. I was curious because you've a pretty good track record of integrating acquisitions. Was there something unique about this acquisition or maybe handful of acquisitions that contributed to the decay in the quarter.

Candidly yes. Their loss runs were bigger than we had experienced but we knew that going in and normally we talk about being able to turn these around. We used to say 12 months, Eric. Now we've really got that down to about a six-month number and the bottom line is we thought it would take that long. What we didn't think when we bought those 12 months ago is we'd have such a poor first quarter organic growth number so those two things diverged and we simply couldn't overcome by stepping up the admissions fast enough so I don't want you to think it wasn't expected. It was but they instead of $200,000 loss in some of these smaller ones we had a couple of them with much more loss run.

And you so you're expecting that to kind of come back here by the end of the year or early next year?

Yes hopefully.

Okay thanks.

Kevin Campbell, Avondale Partners.

Just two quick questions -- I think, Keith you mentioned earlier that you were confident that the needle would move in the right direction when you got to conference and when you say that I am curious. Do you mean just from the House version of the Bill or do you think you can actually move the needle even better than what's been proposed in the Senate?

Yes let me say this. I think it's important that the Senate, the needle move on the Senate side before they go to conference. You know, I think really -- whatever we end up with in the Senate is probably the target so in plain English we would hope that the, as it relates to home health, that what's in the Senate bill would be closer to what survives. So we have tremendous support in the Senate, tremendous support from Senators that understand this issue and, as they merge the two Bills together and get the scoring from CBO, want to see if they can bring that number down.

They understand that it needs to and they understand why it needs to. So that's, you know, we're hopeful. Let me use the word hopeful.

Great and then just a real quick question the LTAC margins for the fourth quarter, should we expect those to improve sequentially from the third quarter?

Yes I think the fourth quarter is always better than the third and second. I think the first and fourth quarters are the better quarters for the LTACs. When we developed our -- when we developed the fourth quarter look, we took last year's fourth quarter actuals with LTACs and then we added the effect of the LTAC that we just acquired. So it's we do think it will go up a little bit and that's kind of baked into those percentages that I gave you during the call.

For the LTAC that you acquired, I mean, how is the acquisition going there in terms of the integration?

Oh, the integration is fine. I mean, I think -- you want to talk about it, Don?

No I think that's absolutely right. It's absolutely on target and we've really gained a lot of ground in these last four weeks, so I think it's going to be right in line with our other margins on our same store LTACs.

Great thank you very much.

[Nick Laventus], [Holly Capital].

Could you please elaborate a little bit for me on why the G&A expenses of the facility based segment surged in the third quarter '09 versus the prior year? And also, what is your view of the moratorium extension, given that it isn't in the House Bill?

Okay, I'll talk about the G&A. There were -- when we calculated the effect on the third quarter of G&A related to our new LTAC, that was about half the difference. I think you're looking at about $1 million I believe would be the number that I would talk about. That was about half of it. And then the other half relates to additional costs within the entities for equipment rental was a large number. Office rental was a larger number than the second quarter of last year.

And then finally, the way we allocate shared services depends on the departments themselves and who benefits from those departments. For example, for the LTACs we've out sourced all the billing so the revenue cycle department that we have here at home office none of that cost gets allocated to the LTACs. However, at one point in time you know that we really hadn't had a lot of acquisitions related to the LTACs so the acquisition department was not allocated over there. It was all held by home base. Well, now we have acquisitions and we are viewing acquisitions on the LTACs. So there's a little bit of a movement that goes on in the allocation of shared services related to the benefits associated with that group and that's about the other half.

You don't see that. When I looked through there I was looking for it in the home health side. You don't see it because it's just too small and the LTAC side is -- you know, a smaller number makes a bigger percent effect down on the LTACs.

And, Pete, I'll answer the second part of the question on the moratorium. We're absolutely in support of that and plus when you look at what helps us do [MMSE] because we're such a hospital within a hospital derived LTAC Company it allows us to set the 75% threshold so we're real happy about that.

Excellent, thank you.

And our last question comes from [Matthew Gilmore] with Robert Baird. Mr. Gilmore, your line is open.

I just had one quick point of care related question. Sorry to beat a dead horse but could you remind us what the actual device is? Is it a laptop? And then also could you -- do you have any early read of feedback from clinicians and or your hospital partner JVs?

The last, hospital report of JVs, we have no feedback right now because what we're doing isn't inside of those. Back to the device question, we're looking at three different options, a computer, a notebook and we also have a PDA or a hand held device that ropes in GPS technology. And those, again, are what we called our independent variables inside of these studies that help us determine what path we're going to go down.

On the feedback I got to tell you it's mixed. I think two years ago we'd have probably seen more negative that we do today but there's still certain clinicians that do not like it, but it is absolutely the minority now. And the other piece that I want to tie into that, when I talked about converting contract labor or contract nurses and therapists to full time, that's also part of this point of care platform because you can't have numerous contract people expected to document on a system proprietary or unique to the LHC Group.

So, all of these factors that we've touched on today point in that direction of going to this point of care device but, again, I think I'll end this with something that I said in the script. We don't feel pressure at a management level to roll the device out because we're ready for electronic health technology and if we have to prioritize our initiatives that's first and we're well on track with it as well as point of care.

Okay great thank you.

And with no questions remaining, I'd like to turn the call back over to Keith Myers for any closing remarks.

Okay thank you, operator. On behalf of all of us here at LHC Group thank you for taking the time to listen in and participate on our call this morning. As always, we're available to answer any follow-up questions that you may have.

Have a great day and thank you for supporting and believing in the LHC Group family.

Once again, that does conclude today's conference call and we thank you for your participation.