LHC Group Inc (LHCG) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the LHC Group third quarter 2010 earnings conference call. (Operator instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Eric Elliott, Vice President of Investor Relations.

Thank you Javon and welcome everyone, to LHC Group's earnings conference call for the third quarter of 2010. 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 will 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 and in our press release 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 2010 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. I'm extremely proud of the strong and well balanced operating results our team has delivered once again during the third quarter. Pete Roman will discuss our third quarter financial results in more detail. Don Stelly will provide an overview of operations. I'll focus my opening comments this morning on the other fundamentals of our business; the areas of quality, employee satisfaction, technology, compliance and growth.

Beginning with quality, we made a commitment to have all of our agencies, except for those that have been acquired in the past 18 months, joint commissioner credited by the end of 2010. As Don will report, we have fulfilled this commitment. Through this initiative, combined with a company-wide focus on quality, we have seen a 36% overall improvement in quality scores since 2006. As a result we have established LHC Group as a clear leader in the industry with regard to quality.

With respect to employee satisfaction, our Board of Directors and management team are committed to LHC Group being their employer of choice among post acute health care providers in every market we serve. As a sign of this commitment we have maintained our employee satisfaction scores at or above the 94th percentile for six consecutive years. LHC Group is one of only two organizations among the entire Morehead Associates National Client Database that has scored in the 90th percentile or above in the past five consecutive years, placing LHC Group in the top 1% of all employee satisfaction scores.

Turning now to technology, as we have previously reported, we have made the strategic decision to invest in our future by transitioning all of our agencies to point of care technology by the end of 2012. As Don and Pete will discuss, we are on schedule and the results of those agencies which have already transitioned over to point of care are very positive. Point of care technology has evolved and is now considered a best practice in the home health and hospice industry and will be even more crucial in the future in the areas of disease management, clinical decision support, medication management, transitions in care, quality measures, compliance and clinical care improvement and things of the like. Further, all health care providers will soon need expanded capability to electronically exchange key clinical information with hospitals, physicians and other providers of care.

The HITECH Act, or Health Information Technology for Economic and Clinical Health incentivizes hospitals and physicians who refer business to post acute providers such as ourselves to use electronic health record technology. Beginning in 2011, the HITECH Act provides $17 billion for incentive payments in the form of enhanced Medicare reimbursements to physicians and hospitals who are meaningful users of certified EHR technology. In 2015, hospitals and physicians who are not meaningful users of certified EHR technology will be subject to Medicare cuts. Consequently, we expect accelerated adoption of EHR in the next two years. As a result, point of care technology is a fundamental investment that must be made by post acute providers in order to adapt and succeed in the new era of electronic health records.

With regard to compliance, earlier this year we made a commitment to share our compliance program and best practices with all providers in the industry through our national association for homecare and hospice by presenting at three major national conferences in 2010. The March on Washington & Law Symposium in Washington D.C. in April of this year, the NAHC Financial Managers conference in Chicago in July of this year and at the NAHC annual meeting in Dallas in October.

I'd like to take this opportunity to thank our compliance department and our partners at Deloitte and Touche for following through on this commitment. Their presentation is located in the Investor Relations section of our website, along with an article in the November issue of Compliance Today magazine contributed by our Chief Compliance Officer.

And finally growth. Since our last earnings call we have acquired agencies in Harrisburg, Kentucky; Salem, Kentucky and Coeur D'Alene, Idaho and we have also entered into home health joint ventures with Green County Hospital, located in Utah, Alabama and Rock Castle Regional Hospital and Respiratory Care Center located in Mount Vernon, Kentucky. I would like to welcome all of our new team members that have recently joined the LHC Group family through these acquisitions and joint ventures.

In 2010 we have completed 14 transactions, representing approximately 40.4 million in trailing 12-month revenue. Each of these 14 acquisitions fit within our strict criteria of only completing acquisitions that are fairly priced and represent significant potential for growth. At this time we have $83 million in trailing 12-month revenue in our active pipeline. The current active pipeline consists of 39 locations in 19 states, with 11 of these being hospital joint ventures and 28 being 100% acquisitions. Of the 19 states, 7 are new states for us. To give you an example of how selective we are in evaluating acquisitions and how active our pipeline activity has been, during 2010, to date, we have reviewed and considered 113 acquisition opportunities amounting to 870 million in trailing 12-month revenue.

As you've seen in our press release, we have announced our first stock repurchase program in the history of the company. I think it's critical that you not read into this announcement that we are in any way slowing down on growth and acquisitions; nothing could be further from the truth. Certainly large acquisitions have been difficult to price this year, but that is not the type of transaction that has fueled our growth through the years. Our growth has come through hospital joint ventures and smaller free standing deals in markets with considerable upside. Our hospital joint venture pipeline has continued to be robust because those transactions are more about quality patient care and our proven track record and experience in working with hospital partners rather than pricing.

On the smaller freestanding side we are seeing people driven to sell, either for tax reasons or because they can't mitigate the upcoming cuts, given their size. As a result we have a very strong pipeline of deals that has increased over 50% since our last earnings call, from 54 million last quarter to 83 million this quarter in trailing 12-month revenue.

When you combine our strong balance sheet, consistent financial performance, our discipline and approach to acquisitions and investments we have made into areas of quality, employee satisfaction, technology and compliance, it's clear that we have a system that works and have built a foundation for long-term success at LHC Group. These accomplishments are the result of the unwavering commitment of our entire team to excellence in every area of our business.

During the third quarter our Board spent considerable time reviewing and analyzing our stock repurchase program and elected to move forward because they believed it is another tool for us to deliver long-term value to our shareholders. I think it's important for everyone to fully understand the approach we will use with regard to stock repurchases. First, due to our strong balance sheet, stock repurchases will not be an either/or alternative to acquisitions. We will continue to pursue acquisitions, while at the same time executing our stock repurchase program when it makes sense for our shareholders.

Second, we do not have a set price range where we intend to always buy back shares. We also do not intend to forecast to the market the price range or timing of repurchases. On an ongoing basis we will evaluate a number of factors, including among others, stock price, acquisitions in the credit market to determine if a stock buyback is the right option for our shareholders.

Third, we do not intend to factor any certain number of repurchased shares into our guidance. We intend to treat this like acquisitions and on a quarterly basis we will report our shares repurchased and if needed, adjust guidance accordingly.

Finally, we intend to use the same discipline with stock repurchases that we do with acquisitions. We will run a detailed financial analysis and seek approval from the same Subcommittee of our Board who approves our acquisitions.

Overall, I would take away from this announcement the message that our Board and management team are confident about the future of our business and we want to be in a position to benefit our shareholders when we believe that buying back shares will provide the same type of returns that we have seen from acquisitions. And now I'll turn it over to Pete for a view of our financial results.

Thanks Keith and good morning everyone. Comparing the results of the third quarter in 2010 to the same quarter last year, consolidated net service revenue increased 25.4% to $166.6 million. Net income attributable to LHC Group increased 35.3% to $13.3 million and diluted earnings per share increased 35.2% to $0.73. For the home based segment which made up 87.5% of consolidated revenue in the third quarter, revenue was $145.8 million, an increase of 24.5% compared to the same quarter of 2009 and consists of $134.9 million in organic revenue and $10.9 million in revenue from acquisitions. Total organic home based revenue growth was 15.2% and organic Medicare revenue growth was 13.2%.

For the facility-based segment, revenue for the third quarter of 2010 was $20.8 million, an increase of 32.4% compared to the same quarter of 2009 and consists of $17.2 million in organic revenue and $3.6 million in revenue from acquisitions.

Our consolidated gross margin was 47.1% in the third quarter compared to 48.5% in the second quarter and 47.7% in the third quarter of last year. The decrease in gross margin compared to the second quarter was primarily caused by a couple of items. First, revenue per patient day decreased in the September quarter in the LTAC. Medicare case mix and commercial revenue per patient day both decreased from the June quarter, so although the patient days increased, the decreases in revenue per patient day resulted in about $300,000 decrease in the facility-based gross margin.

Second, providers acquired in 2010 have low gross margins in this quarter than the same-store agencies. These providers resulted in about $700,000 decrease in consolidated gross margin. Third, we had 110 agencies work through joint commission accreditation in September quarter. This process affects productivity and resulted in about $1.1 million decrease in home based gross margin in the September quarter. Don will touch more on the joint venture commission accreditation initiative later.

In Q4 we expect the consolidated gross margin to be around 48% of consolidated net revenue. G&A expense in the third quarter of 2010 as a percentage of revenue was 30.6%, which is lower than both last quarter and the third quarter of last year. The decrease was caused by the absence of cost in the current quarters, specifically, last quarter we recorded a worker's comp adjustment and Georgia indigent tax assessment. Last year in the September quarter we had internal investments in compliance, quality and education and in the development of our point of care delivery model.

In Q4 we expect the consolidated G&A expense to be around 31% of consolidated net revenue. This estimate does not include any future legal or other expenses associated with responding to the SEC or Senate Finance inquiries.

Bad debt expense in the quarter was $1.7 million or 1% of revenue. Bad debt expense was reduced by a $478,000 recovery of amounts previously reserved. We continue to expect bad debt expense to be around 1.5% of consolidated net revenue in the fourth quarter of 2010.

CapEx for the quarter was $5.4 million, $3 million of which was an initial payment related to software licensure and rollout of point of care technology across the company. We expect to spend an additional $17 million over the next two years on point of care rollout. We expect CapEx to be between $2 million and $3 million in the fourth quarter. We can drill down into these results further during Q&A if anyone desires. Now I'm pleased to turn the call over to Don Stelly.

Thank you Pete. Before discussing company operations, I too want to acknowledge and thank our entire LHC Group team. Regardless of what challenges come your way, you stay true to our mission and you execute on initiatives with an unwavering commitment. Sincerely, I say thank you team.

Now turning to quality. We have just completed the next step in our unprecedented quest to differentiate ourselves and the quality of our services. Within the third quarter of this 2010, 91 of our homecare agencies and 19 of our hospice locations went through Joint Commission accreditation; all of this inside of a 42-day period. We now have 230 of our 280 homecare and hospice locations accredited by the Joint Commission. The remaining agencies that are not included in the afore mentioned number are those that are newer to the LHC Group family but are on a pace to obtain accreditation within 18 months from their respective change of ownership date.

Also in the area of quality, I want to mention Homecare Elite. The 2010 Homecare Elite is the compilation of the most successful homecare providers in the United States. Celebrating its fifth anniversary, this review names the top 25% of agencies in quality of care, quality improvement and financial performance. The 2010 Homecare Elite also recognizes the top 100 and top 500 providers nationwide. I'm excited to report that LHC Group has 44 agencies that have been named to this listing this year, which represents a 69% increase from the number that were named in making the list back in 2009.

Our firm commitment to quality, to Joint Commission accreditation and other initiatives takes considerable time, effort and intense resource allocations. To successfully fulfill this commitment and turn in these third quarter results is why I can attest to what Keith stated earlier, this has been a very successful quarter. I again want to take the chance to credit those who make this happen and it's our 7,804 employees across this country.

Next I do want to expand a little on what Pete talked about earlier regarding point of care. We previously discussed our decision to move toward the use of point of care technology. We believe this approach is vital to continually sell in key areas such as quality, compliance, market development, education and training, chair coordination, staff efficiencies and I could go on. In fact, our pilot projects and other due diligence have substantiated this belief. As of this day we have 47 locations inside a point of care model and by the end of 2010 we'll have the entire platform converted.

By design, these agencies being converted between now and the end of the year will allow us to move from a homecare portfolio that has six different information systems today, to that of two by year's end; HomeCare home base and Allscripts. The remaining schedule and associated timeline takes a multitude of factors into account; all of this with the design of ensuring quality and consistent margin performance as we go forward to conversion and beyond. As usual, I'll keep you updated along the way, but this is the just of where we are with point of care at this time.

Lastly, I'll direct my comments toward internal growth. Total new admissions growth for the third quarter of 2010 was 21.6% as compared to the third quarter of 2009, while organic growth for total new admissions in the third quarter of this year was 9.6%. New Medicare total admissions growth for the third quarter of 2010 was 21.6% as compared to the third quarter of 2009, while organic growth for total new admissions in the third quarter of this year was 9.6%. New Medicare admissions growth was 19.4% in this third quarter of 2010 as compared to the third quarter of 2009, while organic growth for new Medicare admissions was 11.0%.

We're pleased with our movement and market development. Today we have significant penetration in only 33% of the counties that we are licensed to serve. And while a small number, this is up from the 30% that I reported last call. So whether you're using a de novo, a drop site or through the use of point of care, we are increasing our geographical push. Combine that with our primary market work, we're pleased with the results generated within the quarter and reiterate our expectation to be in the 5% to 8% range for internal growth going forward.

In closing I would again like to thank you for joining in this morning and stand ready to answer questions that you may have in just a bit, but as of now I'll turn the call back over to Keith.

Thanks Don. As you saw in our earnings release, we are raising our previously stated guidance range with respect to full year net service revenue from the original range of $615 million to $625 million, up to a range of $625 million to $635 million. We are reaffirming our guidance of fully diluted earnings per share in the range of $2.75 to $2.85.

This guidance does not take into account the impact of any future acquisitions or share repurchases, if made or de novo locations, if opened. This guidance also does not include any future legal or other expenses associated with responding to the Securities and Exchange Commission or Senate Finance Committee inquiries.

In closing, to our shareholders we want to say thank you once again for your investment, confidence and support. And with that, Operator we are ready to take questions at this time.

(Operator instructions) Our first question is from Brian Tanquilut with Jefferies & Company.

Congratulations. Don, the first question is for you. The organic growth has been pretty strong, especially this past quarter and I just wanted to hear your thoughts and what it is that you guys are doing differently from your peers? Some of your peers obviously are experiencing some difficult or challenging situations when it comes to organic growth. I just wanted to hear what you guys are doing there and also with the background that you have a lot of JVs with hospitals and we're hearing anecdotally that hospital volumes still remain soft, so how are you bucking the trend there? I just want to hear your ideas.

Thanks for the question, Brian. Volumes are kind of soft but I think the first part of what I'd like to say is that the results that we're seeing today are really not anything brand new that we're doing in the last six to eight weeks; this is really a result of what we started about 12 and 18 months ago and it really started when we looked at our total turnover in the seats of sales and marketing, so we really focused on people. Not only did we focus on that, we focused on the approach of gaining knowledge of what they were selling. So you really have a people component that started 12 to 18 months ago that's really driving results today. So that's point one.

Point two, in all candor, I think our product is better. Both Keith and I alluded to us differentiating ourselves in quality and that's fared well in the marketplace. You add what we've done with Joint Commission, add what we've done in the national comparative database scorings as well as our new client disease management, I think that fares well for what our knowledgeable people now have to sell.

And then I think third really is our primary and our secondary market approaches. It's much more well defined because of some of the data that we have, so we know where to go and where to get the business, both in primary and secondary markets. As you've heard me say last time, we've got over 500 counties that we're licensed to serve and we're really not tapping to what we think is a meaningful market impact.

So in summary, I think it's been a long time coming. I do want to say though, Brian that none of this is easy. There are a lot of external factors out there and players in the marketplace that make these barriers larger sometimes each and every day and we can 't get complacent. But I think we have better intel, a better product and I think we've got a better team selling it.

Thanks for that color, Don. Keith, obviously we're having election day, I just wanted to hear your thoughts; what would a Republican win in the House do for the home nursing industry, just your thoughts on that?

I think we view it as a positive, really because of the opportunity to go back to consensus building. I think once the dust settles and Congress gets back to work, the voters will expect and in many ways demand consensus policy making return to government. And nowhere is there a better opportunity to achieve consensus than insuring the continuity of life saving services to seniors and the disabled that we provide in home health care. In fact, you may have seen reference to a recent poll by Greenberg that says that very thing. We've had more than 90 members of Congress that have sent letters to CMS and the White House urging relief against the proposed cuts of late and so we just have broad bipartisan support, so we think it plays out as a positive for us going forward.

Last question for Pete. On the guidance, a couple of things there. I just wanted to ask; is there any reason that seasonality would be different this time around? Normally we see Q4 revenue trends go up sequentially; just wanted to make sure we're thinking of that correctly, the expectation that it should go up sequentially? And then just on the G&A did I hear you correctly when you said it was going to be 31% of revenue for Q4?

Yes, that's correct on Q4 for the G&A; that's where we think it's going to be. As far as seasonality goes, I do expect the fourth quarter to go up a little bit, particularly with the LTAC, I mean that always happens in the fourth quarter. I think this one is going to be damped just a little bit by the new acquisition that we had in June; that one's running a little bit behind the consolidated margin. So I probably wouldn't get to the fourth quarter margin that we saw last year which was actually pretty high; maybe come down on that a couple of percent.

Okay, so bottom line there from an EBIT margin perspective since you're forecasting 48% gross margin; 31% EBIT, it's going to be slightly better quarter in Q4 margin wise?

From the third quarter, yes. Slightly better, Brian.

Sounds good. Congratulations again.

Your next question is from Darren Lehrich, Deutsche Bank.

This is Brian Zimmerman in for Darren. My first question is sort of a high level question for Keith. I was curious to get your thoughts on how receptive you think CMS has been on face to face visitor requirement issue and if they do bend on this issue in the final rule, what sort of range of outcomes do you think could happen?

I'm rally hesitant to speculate on that. I'll say that in the dialogue that we've had with CMS, they indicate strong support for home health and understanding for its importance within the continuum going forward. But I really wouldn't want to go out and speculate on where we think the real -- we expect it's going to be out today, so the suspense won't last much longer.

My next question is on the facility based side of things. It looked like very strong revenue and earnings results. I just was curious to get your thoughts on whether you thought this level was sustainable going forward?

You know, if you look back I think we had a bear in second quarter in the fact that the LTACs produced even better results than we would probably have expected, but I think if you take the third quarter and as Pete said, maybe adjust a little upward on pricing for the severity indices, I think what you see is what you get there really. They've been very consistent for us.

In your prepared remarks you kind of walked through some of the pressures you saw to gross margin. I was wondering if you could elaborate a little bit more on those?

In the third quarter?

Yes.

I can elaborate a little bit. There are two major drivers in there; the first one has to do with the JCAHO accreditation and we ran 110 agencies through in the third quarter; we probably maybe have half a dozen left for the year, not really a significant number. It cost us about $10,000 and it's all at the cost of sales level; it's production decay from the people who are supporting the JCAHO initiative. So you see that going through the third quarter and I think that's very similar to what we saw in the third quarter last year, honestly, we saw a little bit of decay associated with JCAHO.

Then the second piece is if you compare our current year-to-date margins to the current year-to-date last year, you are seeing some cost of revenue increases and they have to do with normal things; they have to do with travel costs increasing, salaries, wages and benefits for clinicians increasing. Primarily, if we looked into the detail on a discipline by discipline basis, the primary increases were caused through increases in RNs, LPNs, nurse's aids, OTs, PTs, PTAs, all really clinically driven. Those are the people with hands on the patient. So primarily what affects our margin is cost associated with increasing salaries and benefits to clinicians.

You know, when Pete was asking Brian's question about margin enhancement, the other thing that I would say is that regardless of what the final rule comes to play as, we've got some education, some training and some nonproductive time that's going to be baked into the fourth quarter as well. So I think when you consider -- if what you're thinking is that cost of Joint Commission and other things will just flush out of that and bake that through, I would caution you in your modeling there to make sure that you do take account for what I just said, and therefore, I do think Pete's accurate. We may have a little improvement but just a little.

I guess my final question is on the M&A side. We're hearing that there are a good number of midsize platform companies for sale. We're just curious to hear your views on those type of deals? You've done a few larger deals in recent years but lately some smaller tuck-ins, so is there any change in your desire to move up, from a deal size perspective?

No, no change at all. The challenge has been pricing, as I mentioned in the prepared comments. Whenever we have something like this proposed rule hanging over us, it just creates a greater distance between seller expectations and what we believe fair value is. I think that will close, but I agree with you that there are a number of those midsize transactions in queue, awaiting the outcome of this proposed rule.

Your next question is from Newton Juhng, FBR Capital Markets.

Keith, following up on that last question, do you have anything in your current pipeline that's of a midsize platform nature?

What are you referring to as midsize?

Kind of like maybe upwards of 10, kind of something along those lines, 10 to 20 locations.

I don't think so. We're sitting here kind of going through it. We don't have the list in front of us of trailing revenue but if anything is above 10 it would be barely above 10. When I think of midsize, for me I'm really thinking in the $25 million to $50 million range and certainly nothing in that range right now.

Okay. One of the other things I was wondering about was de novos this quarter only 3 coming in, 8 for the year it looks like, a little bit light of where you were kind of originally talking about and one of your competitors did back off its de novo strategy for 2011, so I'm kind of curious how you're looking at those investments at this point? Obviously you talked a little bit about share repurchase and some of the other things not affecting your acquisition strategy but I was wondering if you could give us a little bit of detail on that de novo side of things?

I'm going to let Don get into the detail on that for a couple of minutes. First of all, I do want to remind you though, the share repurchase and anything to do with our growth initiatives are mutually exclusive. But with regard to de novo activity, you're going to see us develop licensed counties going forward and hear us talking about that and a whole new approach to doing that. We're able, through point of care and other model initiatives to develop new markets without having to take the expense of opening a physical location. Let me let Don talk a little more about that.

You know, Newton I think it was maybe two calls previous to this, I introduced the term greenfield for this reason; when you look at the 500-plus counties that we're really not substantially as a presence in, we want to look at it in three ways. The most costly way is to go put a physical plant as a branch. I mean, you have a fixed cost threshold that you have to jump over and a substantial patient population with less pricing to cover that. So we'll look at that but it really is dependent upon, you heard me say we have a better intel. We have people that we actually send with objective and some subjectivity to come back and tell us what approach is best.

So the second one would be a drop site that we would use to make sure that at least in the paper model we can still have a continuum of care. But the point of care and why we're really pressing forward with that is that it's the lowest portal of entry into a new market where you have sustainable quality and throughput for financial results. So you'll hear us get away from the number of locations and you're going to hear us talk about covered lives, you're going to hear us talk about presence in counties served and some of those other metrics. So we have absolutely no intent to slowdown our growth organically and I think Keith's already addressed the acquisitive part. So what others are doing, I can't attest to, but I can tell you we're fully going forward and you heard me say we're going to grab more geography that we've already bought and we'll buy more along the way.

So Don, if I'm looking at this correctly, you're revenue per agency should then theoretically continue to rise as you're kind of running through these initiatives with the drop sites and so on, correct?

I think that's very accurate. And you'll hear me start talking more about providers than total agencies and locations, so I think you're absolutely correct.

Last one here, just looking at the press release, the second to last footnote on the last page points out that 2009 admissions data's been revised for patients converted from Medicare to Medicare Advantage and I was just wondering if you could provide us a little more detail as to why that was necessary, one, and then two, how should we look at your prior periods here and would you break out kind of second quarter numbers to give us a little bit of an idea how that trended in 2009?

Newton, I'll ask you to probably get more detail than I'll give right now, get it from Eric off line. It was an internal query on the PFFS run that we were looking at and that caused a change and I'll let Eric give you more color off line.

Your next question is from Kevin Campbell with Avondale Partners.

This is Wes Huffman actually speaking for Kevin Campbell this morning. I just want to quickly move back to growth in the quarter. Sequential growth was really strong. Can you talk a little bit about how sustainable you think that is going forward?

Wes, I think sustainable, yes. I think the 10% range -- I think we just had a really good quarter with a lot of momentum and honestly there was a lot of chatter in the market that we took advantage. We didn't have to change any operating model, any process, we had to reinforce what we were doing and what we were building on. I really wouldn't model in that 10% number though; I'd use a high watermark of about 8%.

And I think that if you look at our company being 16 years old, we have about 50 locations at what we call very mature. So you're not going to see them growing at 8%; I think that 2.5% range according to the Medicare population is a really nice number, but then the newer agencies are going to flush that through at a higher pace and I think you'll settle in right at 8%. So I think it's very sustainable but I just think we had a very good quarter with a lot of momentum when other people didn't have it.

Okay and now as it relates to pricing; if you were to assume say a worst case scenario on the pricing front that CMS cuts go through as proposed, how much of those cuts would you be able to offset and if so, how would you go about doing that?

I'll take the first part. It's tough to offset this, especially when you have clinicians that you've got to give increases to and take care of the workforce that we have. I think we've been pretty open. If you look at nationally, you're looking at about a 5% number if everything goes through. And truly, the offset is only through volume for us; we're not going to change a lot of things that we're doing to decrease visits per episode or take care of the labor force in any different way. So internally if we look at about half of that being mitigated, that would be a good number.

Clearly we're not ready to talk about 2011 or give any kind of guidance associated with it right now; we're working our way through those numbers, but if there is a way to mitigate any of that to the bottom line, it's efficiencies associated with G&A. I don't think there's going to be any ability to mitigate any cost of sales associated with the cost. That portion of the cost will fall directly to the gross margin line.

Thanks for that extra color there. I guess we already talked a little bit about the acquisition front, so for me the final question, I guess I would ask if there are any thoughts on timing regarding the SEC or SSC final rule there?

There's nothing there to report, Wes. You guys know everything we do.

Your next question is from Jerry Dautreu with Stifel Nicolaus.

This is Kirk Streckfus actually in for Jerry. Just a few questions here. First, could you remind us again, do the face to face requirements apply to recerts or is it only start of care?

It's the latter; it does not apply to recertifications.

Okay great and next question; just thinking about the outlook for timing of consolidation in the industry, has the 36 month rule completely gone away or how exactly has that been modified and do you expect that to impact your outlook for consolidation?

The 36 month rule has really never been an issue for us because of the type of acquisitions that we do. To be more specific, we don't target companies that have previously been rollups where there have been a lot of change in ownership, so we rarely come across one of those. So that's another reason that it hadn't affected us as much. But I think there is some easing in the rule, but it hasn't been an issue that we've been actively lobbying. We focus more in the last six months on the physician face to face, the therapy components and the case mix creep issues.

Okay that's helpful. And obviously you're seeing a much larger acquisition pipeline. Have the valuation kind of come down to reflect 5% scenario?

We're pricing that in, but really what you're seeing is the acquisitions that we're completing for the most part they're either sellers that are losing money or breaking even and see another round of cuts coming, people that don't have point of care technology in place or any of those fundamentals. So pricing is not that big of an object for them. And the other is the hospitals and health systems that we joint venture with; they're much more concerned about how their employees are going to be treated and the quality of care than they are about pricing. So we've been able to get those closed factoring in the cuts into our pricing.

Okay. Then one last one and I'll jump off. Has there been any update on [TAHCOs] and do you see this as a major risk going into next year?

The update that I have is that it's been pushed back to July and no, I really don't see, at least for our company, I don't see any exposure and quite honestly very happy to report that, because three months ago when we talked on the call, I did. But we've done a good job of getting our doctors signed up, so for us, I don't see a risk whatsoever and we did get a reprieve.

You actually have to go and get in touch with the physicians and could we see any kind of margin pressure from that?

The physicians that refer to us to date could not be enrolled and we still would not see margin compression, because of the doctors that what we call are tier-one that give us the majority of our business are in fact signed up.

Your next question is from Eugene Goldenberg with BB&T Capital Markets.

I just have a few quick follow-ups. On the M&A front, just kind of piggyback off the last question as far as your JV strategy with hospitals; with increased chatter that we're hearing on the ACO front, are you seeing hospitals take any pause with coming to market with their home health assets or are you in fact seeing the opposite, that they're continuing to basically look for strategic partner?

It's the latter really. The interesting part is every time we go in front of a JV partner, it seems that they have a different ideal of what an ACO is or how it's going to run or affect their business. So we're actually seeing them look to post acute providers to help them nail these solutions down. It comes up a lot, but it's never been a barrier acquisitively. It's really actually starting to help us get to the table with them at a higher level to look at what we can do in the marketplaces now. I really do think though, as if it goes in the direction we think, that this will be a strategic advantage for us because of the intel we have in the management team with our hospital experience.

This is a question for Pete. With you guys holding the line on bad debt expense at 1.5%; I'm just trying to figure out how much of that are you guys doing due to your relationship with Humana? I believe that's working quite well right now and you're seeing an up-tick in your commercial volumes as well. But even if we factor out that $470,000 credit that you guys had in the quarter, you guys are still under that 1.5% so is that just kind of a cushion that you guys are building in on that front?

That's kind of a complicated question. First of all, I'm not going to tell you anything specific about a relationship that we have with any of the contracts so let's not talk about Humana. Although I will say that the national contract is going real well for us; we're real happy with the position that we are with that payer. On the 1.5%, I believe that 1.5% is the right number.

Now, I know that over the last couple of quarters we haven't really gotten to that number and I can tell you that one of the reasons that we haven't is because of really the significant collection efforts going on in the revenue cycle department. Look at the DSO decrease from the end of last year; that's what's causing the bad debt expense to be a little bit lower. It's not really a cushion or any kind of a fudging of a number or anything like that. We simply evaluate where the agings are at the end of the period, we put a reserve estimate on those individual aging buckets and whatever the number ends up being is what we record. So, we've had a benefit in a couple of the quarters of improved collections and improved agings generating a lower reserve.

And then this last quarter we would have been I think at about 1.6 million or 1.5 million, something like that had we not had that $477,000 adjustment. So we're not building anything or doing any cushion or anything like that and the 1.5% is my estimate of what I think we ought to end up on a periodic basis.

Great, thanks for that color. The last question I have also goes back to the M&A front. Are you guys seeing any increased competition from other providers, not so much in the home health space that you're used to seeing but perhaps some other post acute care providers? We are hearing they're also looking to increase their exposure to the home health and hospice markets.

We haven't seen ourselves competing against anyone on an acquisition, but we're certainly hearing about that. For example, we've heard of a couple of SNIP providers digging into the home health market. I think that's to be expected as we prepare for post acute modeling. I mean, I don't want to go too far into this but as LHC Group looks to the future, we see ourselves more and more as a post acute provider than as only a home health provider, which may have been how we thought five years ago.

The truth is that about 50% of patients discharged from hospitals today are going to SNIP units and about 40% to home health and the other 10% spread out to other post acute areas; only about 2.3% to LTAC. So looking forward to a bundle payment environment, we would also then have to be looking at SNIP opportunities, especially within our hospital joint venture partners. So it's getting way ahead of it here, but I'm not surprised by that.

Thanks guys, congrats on the quarter.

Your next question is from Matthew Gilmore with Robert Baird.

Calling in for Whit today. Pete, I might have missed this but were there any costs associated with the accreditation process in the quarter and then what do you think is a good ongoing -- should it reduce going forward, I guess is the question?

If you're talking about registration costs other than delay and disruption in the operating model, I think it's $1,500 for a three-year period or something like that. It's not a big number and it's down in G&A.

But there are productivity costs though?

The productivity effect is what we talked about in the script. It's about $10,000 per agency so we pushed through about 110 agencies, it turned out right at $1.1 million productivity effect in the quarter.

And then you'll push through the other agencies in the fourth quarter and then that effect will go away in 2011?

That's correct. It's just about a half a dozen really that we have scheduled for the rest of the year, so you won't even see it in the fourth quarter. But if you look at the third quarter of last year, we had a similar effect; we had a bunch of agencies going through JCAHO accreditation and it did have a productivity impact.

So you won't really see that go away until 2011?

I think that in 2011 we'll have some more agencies that go through and it will have a similar effect. In the quarters that we don't actually go through the process, you don't have that disruption.

Pete's absolutely correct. We will not see in a short period of time, that 42 days, we're not going to see that in a quarter again necessarily because each year we will always have agencies going through survey, it just will not be as substantial as the initial certifications that we saw here. But for the fourth quarter it's going to be miniscule and it's not going to be a factor for us at all.

And has that helped at all from a marketing perspective, having those agencies accredited?

Unequivocally, yes.

Okay. Then just one question on the point of care, has there been any noticeable financial from a margin perspective, impact on the agencies that have the point of care system versus the ones that do not?

I can't believe that question didn't come before now, but it's a good one. You know, what we've seen is when we're actually doing the conversion, because we still have to see patients while we're training and doing the conversion, we see about a 60 to 90 day blip in margin, it's single digit in nature, but then we see our sales coming out of that in about a six month period. I think our caution and our advice is what we know right now is that once we absorb that blip, we're not going to see margin improvement nor decay when we convert to a point of care. That's really more market specific and state specific based on wage pressures than it is point of care. So kind of in summary, initial conversion within a 90 day period we'll see a little blip but it flushes through in a 12-month period.

Does it have any impact on your admissions on those agencies?

I think when you combine that with some of the efficiencies and some of the quality and the compliance that going to point of care actually produces, then yes. But just having a device in your hand doesn't make a referral source want to admit to you better; it's the product that it causes.

Just one last question on the LTAC. Can you remind us, I think 7 of your LTACs are hospital with an (inaudible). Can you remind us how you stand versus the 25% rule compliance threshold?

All of those had an 831 cost report and we were just fine; we had none that reverted back to the acute care rates.

Our final question is a follow-up from Newton Juhng from FBR Capital Markets.

Just had a real quick question on the sunsetting of those six platforms that you had and moving down to just all STRIPs and homecare home based; is the plan to eventually get onto a single platform or do you see yourselves kind of operating these two distinct ones for the foreseeable future?

Newton, we're not sure. I will tell you, I think it's irrelevant of the actual vendor, because the model that we have now is the same productivity metrics, it's all of the same things, it's just a different teaching methodology. So I think that would come down to some other business principles that at least right now I'm not ready to go out on a limb for.

At this time I'd like to turn the call over to Mr. Myers for any closing remarks.

Thank you operator. On behalf of all of us here at LHC Group, thank you once again for taking the time to listen in and participate in our call this morning. As always, we're available to answer any questions that may come up between our quarterly earnings calls. Have a great day and thank you for supporting and believing in the LHC Group family.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all disconnect.