LHC Group Inc (LHCG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group's Second Quarter 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Eric Elliott.

Thank you, Jevon, and welcome, everyone, to LHC Group's Earnings Conference Call for the second quarter and six months ended June 30, 2011. Hopefully everyone has received a copy of our earnings release. If not, you may obtain a copy, along with other key information about LHC Group and the industry, on our website at lhcgroup.com.

In a moment, we'll hear from Keith Myers. Chief Executive Officer; Don Stelly, President and 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 2011 and beyond. Actual results could differ materially from those projected in forward-looking statements, because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

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

Thanks, Eric, and good morning, everyone. We are pleased with the overall operating results in the second quarter, especially given the challenges we faced in the first half of this year. The 5.2% reimbursement cuts for 2011 coupled with the face-to-face requirement have understandably resulted in significant pressure on volume growth, revenue, and internal resources.

In the first quarter, we committed resources toward education in the field to ensure that our staff fully understood the requirements of the new face-to-face rule and had the proper training and tools to manage through what the significant change that we had to comply with on relatively short notice would bring.

We also invested financial resources to get down to two revenue systems and significantly reduce the complexity of dealing with these new requirements.

As a result, not only have we adapted to the new rule and are in compliance but still manage to turn in organic growth in admissions of 4.8%.

This quarter, we emphasized cost containment and efficiency, and our operating results demonstrate that this was the right strategy. We have been able to reduce overhead costs while, at the same time, continuing to improve overall quality scores, patient satisfaction scores, and acute care re-hospitalization rates.

Our continued success and ability to overcome challenges acknowledges the long-term commitment to excellence that is ingrained in our culture and in every member of LHC Group family.

Now I'd like to take a few minutes to share our views on potential future reimbursement challenges affecting the Medicare home health benefit as a result of the recent debt ceiling deal. It's clear that the joint select committee on deficit reduction called for in the deal will be looking for savings across the board in all areas of spending including Medicare and Medicaid as they seek to identify the $1.2 trillion savings they will be charged with.

As most of you probably know, LHC Group is one of the founding members of the Partnership for Quality Home Health Care, a coalition that includes a number of the nation's leading public, private, and nonprofit home health providers as well as the National Association for Home Care and Hospice.

Through this partnership, the home health industry is represented today by a strong and diverse team of industry advocates including LHC Group lead independent director and a former US congressman, Billy Tauzin, LHC Group independent director and former US senator, John Breaux, NOF president Val Halamandaris, and the highly respected D.C.-based firms of Patton and Boggs, the Podesta Group, Alston & Bird, Liberty Partners Group, Stanton Park Group, and [Frowe Clark].

In addition, the partnership has commissioned a number of detailed research projects from well-respected D.C.-based analytics firms like Avalere Health, Dobson Davonso and Douglas Holz-Eakin, former director of the Congressional Budget Office.

Collectively, over 60 professionals now represent the home health community in Washington, D.C. on a daily basis in a coordinated and unified effort directed on a day-to-day basis by Eric [Berger], who serves as Chief Executive Officer of the partnership.

We believe that through this strong and well organized effort, the home health community today is as well, if not better, positioned than any health care provider community to address both the risk and opportunities that lie ahead.

So first let me address the risks. CMS has issued a proposed regulation that could further reduce Medicare reimbursement for home health care services in 2012. Following its review of comments, the regulation is scheduled to become final on November 1st and take effect on January 1, 2012.

According to CMS, the proposed rule would, on average, negatively affect home health agencies by 3.35%. After crosswalking our current patient population with the proposed rules, we have estimated that the effect on LHC Group would be approximately a negative 2.16%, which is well below the national average.

We expect to experience a lesser impact because of our overall low percentage of patients that utilize therapy as compared to national averages.

Our team in Washington, D.C. is working with both CMS and Congress, offering alternative solutions to achieve savings through a more strategic and targeted approach that I'll talk about in a few moments.

Next -- the Joint Select Committee on Deficit Reduction could possibly include home health reimbursement cuts and/or even another attempt to implement a home health co-payment in their proposal. We consider the co-payment risk to be low, however, due to the impact it would have on beneficiaries resulting in strong opposition to it among leaders in both the House and the Senate.

And, finally, if the Select Committee's recommendations do not save enough money or are not enacted into law, the sequestration adjustments that would be triggered could reduce reimbursement to all Medicare providers across the board up to 2%. It's important to note, however, that under this scenario, co-payments and coinsurance could not be imposed on Medicare home health beneficiaries.

So these are the risks, and they're risks that must and are currently being monitored and addressed in a very serious and organized approach by our advocacy team in Washington, D.C. on an ongoing basis.

There are three important factors to keep in mind. First, neither accelerated home health rebasing nor a home health co-payment was enacted as part of the Budget Control Act. We believe this is noteworthy for a few reasons. This year, both accelerated rebasing and a home health co-payment were recommended by MEDPAC. Both were also recommended by Simpson-Bowles Deficit Commission, and they were closely considered by the Bayh Working Group.

Finally, the Congressional Budget Office included home health coinsurance in its Budget Options book. As a result, accelerated rebasing and a home health co-payment were expected by many to be included in the Budget Control Act. In the end, however, neither were. As a result, there is currently no requirement for accelerated rebasing or a co-payment.

Second, we have reason to believe that officials in the administration and Congress are concerned by the impact these provisions could have. It is worth reflecting on the fact that the Budget Control Act establishes a few restrictions on the sequestration process, and one of them is the specific prohibition on provisions that would directly impact beneficiaries.

As a result, even if sequestration is triggered, a home health co-payment cannot be established. We are grateful for the extraordinary efforts of AARP, Easter Seals, the Leadership Council of Aging organizations and many other valued stakeholders who joined with us in helping to achieve this outcome for the seniors we serve.

Although a co-payment remains a risk, its exclusion from sequestration is reassuring. For instance, we recognize that the leaders who included this protection in the sequestration process will themselves serve on the Select Committee or play a key role in choosing those who do.

Third, we have been gratified by the attention that has been paid by the White House and congressional committee staff in both the Senate and House to the reforms that the partnership has proposed. It is our conviction that everyone who has a stake in the Medicare program must help secure its future. That is why we developed what we call the Skilled Home Health Care Integrity and Program Savings Act, a legislative proposal that focuses on program integrity and quality improvements in order to achieve sustainable savings without impacting beneficiaries.

We have commitments from members in both the Senate and House to introduce and co-sponsor this legislation in September. According to both Douglas Holz-Eakin and Dobson Davonso, our proposal would save $23 billion over 10 years without accelerated rebasing or a co-payment.

Due to its substance and potential savings, our proposal has been highlighted by governors and members of Congress alike as a preferred alternative to further cuts and co-pays.

So where does all of this leave us? As we all know, the administration and Congress will be seeking significant savings in the coming months, much of which could come from spending cuts that may be politically challenging. As a result, key players will be looking for ways to reduce spending without impacting patients or providers. Those sectors that can deliver savings without inflicting harm could, therefore, achieve positive outcomes.

We believe the home health community today is in a unique position to do so given the clinical and fiscal benefits of serving more patients in their homes.

While it's premature to come to any conclusion, it is repeatedly reported by our team of consultants in Washington that key lawmakers now understand that skilled home health services offer a lower-cost alternative to facility-based care.

This has been further supported by the release of an updated Avalere report in June that show that home health services generated over $2.8 billion in savings for the Medicare program between 2000 and 2009 in a sample of patients with CHF, COPD, or diabetes where there was intervention with skilled home health services following hospital discharge.

As our elected representatives work hard in the coming months to achieve significant federal savings, our team in Washington will be hard at work as well. In fact, they already are. We are cognizant that home health is now well positioned for consideration as a tool that can help lawmakers meet their twin goals of reducing Medicare costs while improving the care their constituents need and want.

So while we remain at risk for more cuts during the deficit negotiations this fall, we are guardedly optimistic because it appears that our efforts to educate members of Congress on this point have been successful as many members of both the Senate and House from both parties have publicly stated their support for home health care over the summer.

We all know that people are living longer. Every day there are more seniors because of the coming of age of the baby boom generation. This huge new population will demand quality health care that allows them to remain active in the home setting rather than being institutionalized. There is simply no question that skilled home health remains the best option to avoiding more expensive inpatient care.

Now I'd like to turn to acquisitions. At this time, we have 11 transactions with $62 million in trailing 12-month revenue in our active pipeline under consideration. There is no question that the reimbursement cuts in the ongoing discussion about co-pays have impacted the ability for everyone in the industry to price and close transactions. However, we are very clear that both acquisition growth and internal growth will remain key components of our long-term strategy to mitigate current and potential future reimbursement cuts.

Therefore, we are continuing to aggressively pursue and evaluate transactions and believe we are well positioned to take full advantage of the accelerated consolidation, which we believe is inevitable in our industry as the full impact of the cuts is realized by smaller and less efficient providers.

In preparation for the unique period of opportunity ahead, we engaged Russell Reynolds & Associates several months ago to assist us in a national search to add a seasoned, senior-level, business development executive with extensive experience in mergers and acquisitions to our growth team. I am pleased to announce that we are in the final phase of this engagement and expect to have the successful candidate announced in the near future and in place by the end of this summer.

Also, as announced earlier this week, Cathy Newhouse has joined our team as Senior Vice President of Clinical Program Development and Innovation. Cathy is an accomplished health care executive with more than 25 years experience in home health management. In her role, Cathy will be heavily involved in a number of clinically driven internal growth initiatives that Don will expand on further in a few moments.

We could not be more excited about Cathy's decision to join our management team and our LHC Group family.

Before I turn it over to Pete, I do want to once again thank our employees and entire management team for their extraordinary efforts during the first half of 2011. We have faced many challenges during this period as an industry. And despite these challenges, our team outperformed expectation once again, as they always do.

I am proud to be a part of the LHC Group team and believe that we have assembled a group of dedicated caregivers, employees, and leaders who are prepared to succeed regardless of the hurdles that may be put in their way.

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

Thank you, Keith, and good morning, everyone. For the second quarter of 2011, our consolidated net service revenue was $161 million. Net income attributable to LHC Group was $9.8 million and diluted earnings per share were $0.53, which includes approximately $0.03 per fully diluted share after tax and legal and consulting fees associated with our ongoing investigations.

Home-based segment revenue was $142 million in the second quarter, which consists of $134.6 million in organic revenue and $7.4 million in revenue from acquisitions. Total organic home-based revenue was down 0.8% than the same quarter last year, and organic Medicare revenue was down 3% from the same quarter last year. The primary causes for the decrease in organic revenue in the home-based segment was the CMS rule for 2011, which reduced home health Medicare rates by 5.2% along with a 3% decrease in our patient acuity.

Our revenue per episode on home health Medicare completed episodes decreased to $2,340, approximately 8% in the second quarter of 2011 compared to the second quarter of 2010. This reduction was offset by growth in our home health commercial revenue and in hospice.

The facility-based segment revenue was $19 million in the second quarter, which consists of $16.1 million in organic revenue and $2.9 million in revenue from acquisitions.

Our consolidated gross margin was 46.5% in the second quarter, which was an increase of 1.5% from last quarter and a decrease of 2.3% in the second quarter of last year. The increase in gross margin compared to the first quarter is due to lower payroll taxes and lower clinical contract labor utilization.

The decrease in gross margin compared to last year was caused primarily by the 5.2% reimbursement rate cut, which went into effect on episodes as of January 1st this year.

G&A expense was 32.4% of revenue, a decrease from 34% last year. And when factoring in the 2011 5.2% reimbursement rate cut, a decrease compared to the second quarter of last year. The decrease from the first to the second quarter in 2011 was primarily caused by costs incurred in the first quarter when we completed the conversion of all legacy billing systems to home care home base, severance expenses that were recognized related to our personnel reduction, and education that we provided our clinicians and caregivers on face-to-face requirements and the new therapy regulations, which became effective April 1st. We discussed each of these items on our last earnings call.

For the remainder of 2011, we expect gross margins to be in a range of 45% to 46% of revenues and that G&A will be in a range of 31% to 32% of revenue.

Bad debt expense in the quarter was $3.1 million, or 2% of revenue compared to 1.6% in the first quarter. The increase in bad debt expense was caused by the increase in commercial receivables both in dollars and as a percent of total receivables at June 30th. Commercial claims are not collected as efficiently as Medicare or Medicaid claims, and as our commercial payor revenue increases, these claims will continue to increase in significance in our receivables aging.

We expect bad debt expense to remain in the range of 1.5% to 2% consolidated net revenue for the rest of the year.

Non-controlling interest in the second quarter of 2011 was $2.9 million, or 1.8% of revenue compared to $2.4 million or 1.5% of revenue. We expect this number to remain in the range of 1.5% to 2% of consolidated net revenue for the remainder of 2011.

As far as the financial effect of face-to-face we have recognized approximately $150,000 related to adjustments because of the face-to-face requirements. We record these adjustments as contractual adjustments to revenue, and this includes an estimate for active patients for whom the requirements had not yet been met at June 30th.

We can drill down into these results further in Q&A. Now I am pleased to turn the call over to Don Stelly. Don?

Thank you, Pete, and thanks to all of you for joining this morning. I, too, want to begin by recognizing our 8,000 LHC Group family members for their excellent performance during this past quarter. Our industry faced incredible challenges during these past months. Our team, however, prepared for and tackled those challenges with extreme fortitude and along the way has delivered strong clinical and operational results on behalf of our stakeholders. I am truly honored and fortunate to work with these professionals.

I'll begin my remarks by addressing our internal growth, even with the operational challenges stemming from the face-to-face requirements that took effect in April, we were able to generate a home health organic admissions growth rate of 4.8% inside of the quarter. And total new home health admissions growth was 10.6% when compared to the second quarter of 2010.

New home health Medicare admissions growth was 6.4% in Q2 as compared to the same period prior year, while organic growth for new home health Medicare admissions was 1.2%. No doubt we experienced headwinds that affected our growth inside of the quarter. In fact, if you'll recall my comments from our last call held May 5th, I was clear as to what we were experiencing since the inception of the face-to-face requirement.

Since that time, the tremendous work done by our sales, marketing, and operations team has produced a rebound of our growth rates, and it's in that light that I want to reiterate our expectation for 2011 to yield total new admissions organic growth in the range of 5% to 8%.

I can further expand on the subject during Q&A later, but now, because of face-to-face and therapy assessment requirements were such factors and still are, I want to spend just a few moments putting details to our processes and report a few associated metrics.

First, for both requirements, part of our preparation was to custom build software programs that swept every episode in our systems, the two that we converted down to on a daily basis and then yield exceptional reports that identify each at-risk episode for non-compliance in either realm. These reports are then systematically sent to our field operators on that same daily basis and serve as a guide for corrective action.

More simply put, every day every leader knows which patients have had or not had a face-to-face encounter and have workflows that we designed to address it. So a couple of relevant stats reflected inside of the quarter. 71.34% of our admissions had an encounter in the 90 days immediately preceding; 24.63% of our admits had this encounter within 30 days after admissions; 3.3% are in the process of our workflows to be determined but are under 30 days, and 0.73% did not meet the face-to-face requirements and tied back to the number Pete mentioned earlier.

So in relation to therapy -- I think the first thing to critically note is that only 48.3% of our Medicare patients had at least one therapy visit. This compares to 47.4% in Q2 of 2010. Additionally, 32.8% had 13 therapy visits or less, and this compares to 29.6% same period prior year.

These stats continue to demonstrate the consistency of our care delivery model, the generalist nature of our patient population, and the lack of necessity to change either.

My last comment regarding the therapy rule is that only 8% of all therapy episodes in the quarter had visits out of sequence. So what does this mean? That only 8% had any issue at the 13th, 19th, visit or with the 30-day assessment parameters.

Any net revenue effect of required unbilled visits was inconsequential in the quarter. And, again, I can expand, if needed, but I'd like to now turn my attention toward pay for performance.

In July we were notified by CMS that we were the recipients of approximately $789,000 for seven of our agencies that participated in the Medicare home health pay-for-performance demonstration project. The award is based on improving the quality of care provided to home health patients and the subsequent impact on overall Medicare cost with savings being shared with agencies that participated.

The project began in January of 2008 and ended in December of 2009 and was opened to only select states. At the time of project start, we signed up every location that we had eligible. For us it was 16 agencies in the states of Alabama, Georgia, and Tennessee. Of those 16, CMS put seven in what was called the treatment category, meaning they were eligible to share in the payment, and nine that were in the non-treatment, just the opposite, of course, not eligible to share.

I congratulate our participatory agencies for a job well done and would welcome the opportunity for our LHC Group to demonstrate further quality improvement and savings initiatives throughout our entire footprint.

Next I'm pleased to report we are seeing expected results from the agencies that we converted to home care home base in the latter part of 2010 and first part of this year. The margin improvement from those locations has positioned us to move forward with further conversions beginning in September. The rollout schedule will remain on that sliding scale that I discussed last call, will be budget-neutral and has been factored into our decision to affirm our EPS guidance for fiscal year 2011.

Touching on LTAC and hospice briefly -- CMS has also released these service line regulations for the 2012 rate year. Both final rules were positive to the respective industries with hospice reimbursement rates increasing 2.5% and LTAC reimbursement rates increasing 1.8. Both rules become effective October 1st of 2011.

And, lastly, I also would like to welcome Cathy Newhouse to our LHC Group family. She brings a wealth of knowledge and a fresh-eyes approach to our quest for differentiation. We see an opportunity to drive national health care improvement through home and community-based services, and we intend to seize the opportunity.

Cathy's addition to our best-of-class clinical leadership team positions us well in order to grow through innovation and thereby create long-term value for all stakeholders. We are really excited for the road ahead.

And now I'll turn the call back over to Keith.

Okay, thanks, Don. As you saw on our earnings release, we are reaffirming our previously stated guidance issued on March 2nd of this year of fully diluted earnings per share in the range of $2.15 to $2.25 but lowering our annual net service revenue from the original range of $660 million to $670 million down to a range of $640 million to $650 million.

This guidance does not take into account the impact of any future acquisitions or share repurchases if made, de novo locations if opened, legal or other expenses associated with the Company's ongoing investigations or future reimbursement changes, if any. Specifically, this guidance does not take into account the proposed 2012 rule issued by the Centers for Medicare and Medicaid Services, which, if adopted, would apply to episodes of patients on service at December 31, 2011.

We estimate the impact to the fourth quarter 2011 operating results would be to decrease revenue approximately $1.2 million and decrease fully diluted earnings per share of $0.04 after tax if the proposed rule were to go into effect as proposed in the final.

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

And, Operator, at this time we are ready to take questions.

(Operator Instructions) Ralph Giacobbe, Credit Suisse.

I just wanted to, I mean, the volumes are obviously strong relative to concerns around the face-to-face and even just the general macro weakness that we're seeing. Maybe can you talk about that volume growth? Do you think it's your [hostile] JV strategy that's sort of a significant differentiator that's allowing you to show those results? And maybe if you can actually tell us what the volume numbers were from the hospital as well?

Ralph, this is Don. Actually, that number has hovered around the 50% to 55% range that we get from hospitals, whether they're a JV partner or not -- and then from the community. That's touching on about 55% inside of the quarter. But, actually, I do not think, candidly, that our uptick and the rebound, as I said, came because of our joint venture approach.

I really think this is a result of the intense preparation. We spent a lot of money in that first quarter, and we did some things that, honestly, I feel were innovative. I think that we came out in front, and we educated our sales staff in a method that allowed them to get ahead of the curve here and prevent -- I think -- and I don't want to go back -- Eric, maybe you can quote me -- I think at the call last time I had said that we were down about 8.7% on our run rate through April.

And I think what happened is that that was the trough. At that time, I told you all I didn't know if that was the trough, of course, because I couldn't predict it, but what we saw was a steady uptick from then and was probably about three to four weeks ahead of what I really expected. So I think that, in addition to the [recognition] for us that we had bounced off of what we call the blocking and tackling. We had used some of our sales team members to get documents signed and, actually, that was the wrong approach, if you want to know the truth.

So I think there were several factors, nothing that was a silver bullet, and I do not think it was related solely to the JV approach. I think those were the main things that helped us rebound and, honestly, last week we turned in the best week in the last 17 on our admissions. And as I say that, I don't want to get ahead of myself. None of this is easy, and it's a daily fight and a sometimes hourly execution that allowed those numbers to be posted.

And I want to go back to that comment, though. It sounds like you certainly think that level is at least sustainable. But it sounds like -- is it fair to say that maybe as you move through the quarter, it got better so that the most disruption was obviously early on? And then as you moved through it, it got better, or is that unfair?

No, that's exactly right.

Okay. And then mix, you know, the mix aspect, down a little bit? Could you just get into some of the details there? I mean, I would think maybe the mix component would be a little bit higher. Is there anything driving that?

Can you explain and define mix for me?

Yes, you guys had it just in your release down on the year-over-year basis, the Medicare mix of the patients. So sort of seeing a lower kind of acuity level? I think you had the numbers in the release.

Yes, and you know what? You're right. Now I understand what you're -- I thought you were talking about the payor mix at first. That's just a product of the type of patients, and I mentioned that earlier about mitigating the therapy rules and our percentage of patients receiving therapy. We are generalist, and I've also said that before we've really put a lot of emphasis on our congestive heart failure and diabetes management programs, and I think that's what's affecting it because, of course, those weren't therapy-driven patients.

And then just my last one -- you obviously did a good job on the cost side this quarter. And as we think ahead to potential cuts, can you just frame for us what other opportunities there would be if you had to take more cost out of the system? Any areas that you would focus, or ways you can adjust the infrastructure?

Yes. We are actually looking at some of those things. The way I look at it is like this -- I see three different pots of cost -- the initial pot is the direct cost that we have given care out to the patients. And then I sort of break G&A into two pieces. One is the field unit G&A and one is home office G&A. I think each one of those has different strategies to save money, going forward. Obviously, when you're dealing with the direct patient care group, if you think about it from a perspective that every minute that those individuals spend that's not actually with the patient, is time you ought to look at to try and reduce. And so that would be administrative time and writeup time and draw time.

So clearly the effect of going to point-of-care and moving to home care home base is going to be significant for us. And I think you'll see a little bit of that in 2012.

In the field unit G&A, we are really looking very closely at bricks and mortar, and whether or not you have to actually have an office in a particular area in order to provide service in that area. And so consequently, one of the strategies is to increase the coverage area but not actually have an office. And I think that's a critical strategy, going forward, where you can reduce costs that are absolutely not patient-related, like fax cost and utilities, things like that.

And then, finally, when you look at the home office group, we look at it from the perspective of services that we provide to all the individual agencies. And so consequently the -- you know, sometimes when you build as quickly as we've built over the last five years, sometimes there is some overlap within your departments, and by that I mean that some services are performed by more than one department. That's not only inefficient, but it doesn't make sense. And so we're looking at the services that we provide and where there is an opportunity to reduce the overlap and possibly change the internal cost structure.

Across the board, SWB is our biggest cost, and so we monitor that very closely, look for opportunities to increase productivity and look for opportunities to reduce the amount of time that we pay for. So I think that's kind of the strategies for costs, going forward.

Yes, Ralph, this is Don. I think the only thing that I would add to that is out of full disclosure is that we've had a long history of bringing in partners and firms to try to create best-of-class futuristic looks. We did it with Simeone, we've done it with Deloitte, and we've engaged Grant Thornton to come in and do exactly what Pete is talking about -- take a look under every rock and assure that we're as efficient as we possibly can be today and considering where we want the Company to go and how we want it to look in the next three-, five-, and seven-year period create efficiency throughput programs to get us there.

And so I do echo what Pete said. We've got direct costs, and we've got home office, and we're going to look at everything. And I think we have some things that we call low-hanging fruit that we can enact and have done so since the end of Q2. But I don't think that's going to ever stop with us. I just wanted to add that to Pete's commentary.

Darren Lehrich, Deutsche Bank.

Just a couple of things here. I guess, just, Keith, a question about the acquisition outlook. And I think you guys have said many times before that the M&A environment usually picks up about a year after cuts go in, and now we're obviously looking at two consecutive years of reduction. So I would be interested just to get your thoughts about where you think we are in that timeline and lifecycle of the acquisition activity. And then I have one other question for you.

Okay, sure. And it's a question I'll always answer with complete honesty given everything I know at the time you ask the question. And so right now the full effect of the 5.2% cut that went into effect on January 1st was actually affecting episodes in the last quarter of last year, is now being fully felt and realized by those in decision-making positions with the home health providers that are either hospital-based agencies or those in, let's call it, a $10 million range or whatever.

So what happens when you get to that point where they realize that impact, then the gap between their expectations and the fair market value as we see it on our forward-looking performance basis starts to close. And so we're starting to see ourselves come to terms with pricing on sellers moreso than in the first quarter of this year.

In the first quarter of this year, a complete disconnect. We looked at some great assets and everything was great except we were just so far apart on pricing. Regardless of what the outcome is in the fall, and even with the CMS proposed rule on the table for next year, if it did go in effect as it stands now, that cut is not significant enough to cause that huge disconnect between buyers and sellers that we experienced in the last quarter of 2010 and the first two quarters of 2011.

So -- we believe that the outlook is -- we are much more bullish on the outlook, going forward. And as I explained, that's why we're beefing up here from systems to staff in our growth department to fully take advantage of all of those opportunities. And we are also working now to really sort through all of those assets that we believe are going to be available and come to market and go at them in a very targeted approach as opposed to just taking whatever is being offered when the phone rings.

We are looking at certain geographic areas and metrics around those areas that have proven to be successful for us and identifying where we want to be and going after those targeted assets.

And is Daryl's team still in place? Maybe just put the hire that you've described in context for us.

Yes, great, good question. Thanks for that. Yes, Daryl is still in place. In fact, he's sitting right here in the room. Daryl has been real key in our hospital JV strategy, and Daryl continues to do that, to work with existing JV partners. We now have over 100 locations and, don't forget, that once you bring on a JV partner location, it's not the end, it's the beginning. You have to continue to work with those relationships.

But Daryl also has oversight over our LTAC operations as well. And we have dedicated team members who are analysts who go through all of the data and provide all the analytics and support and then project management that bring things to closing. All those assets are in place in addition to -- Daryl, how many consultants in the field -- 12?

Eight.

Eight? Eight now -- eight consultants in the field that are outsourcing deals with hospitals and all. But we're talking about something at a higher level, senior level executives that comes with new contacts in different areas that can just help us to accelerate the volume of deal flow inside the pipeline. So it's just additive to the team that we already have.

Great. And then my other question, just, policy-oriented, I guess. What exactly does your legislation do -- the $23 billion saver that you mentioned? Just trying to get a couple of bullet points on what you think it does or how it achieves that type of score?

Yes. Rather than get into all the specifics with it, I'd probably like to take that offline with you, and I might even suggest that you contact Eric Berger at the partnership in Washington, D.C. only because I want to make sure I don't miss anything. But, broadly, it addresses areas of fraud and abuse within the industry.

When we started to put this legislation together, the leading providers that I mentioned that all members of the partnership, including [NOF] and Chairman Tauzin, Senator Breaux and all the leaders, the thought leaders and assets we brought together. We had about 40 people in the room in that first day, and we started by taking a list of every concern that was on record that had been listed by MEDPAC RCMS about the home health industry.

And that was the -- we went down the list and looked for ways to address every one of those concerns and build it into legislation in a way that would both address the concerns from a fraud and abuse perspective and generate savings without continuing this insanity of across-the-board cuts, which really punishes the providers that are doing it the right way.

Okay. I'm going to pick up offline with you on that, because I do have other questions, but thank you.

All right.

Ellen Spivey, Stephens.

I just wanted to go back to one of the things you said in your prepared remarks -- that you expect their proposed cut in regulations in 2012 to have an impact of negative 2.16% on your business, is that correct?

Yes, that's correct.

Can you just kind of walk through that calculation and just let us know if that includes the rural add-on?

It does include the rural add-on, and I can tell you how we got there. The assumption is in the calculation that the patient mix will stay the same next year as it is now. And so we took our current patient mix, and we ran it through with the new rates, and because some of the HHRG changes, the reimbursement changes, have to do with how many therapy visits you have as opposed to just simply the HHRG itself. It causes a different mix amount, or a different reimbursement amount, just based on what mix you have.

So when we took those costs -- and I think what they advertised is the 3%, and that's sort of across-the-board sort of a number. When you take the actual reimbursements and apply it to our patient mix, the end result is 2 -- I think 2.16%, is that what -- ? Yes. So it's not a calculation that in the way I think maybe you were thinking about it. It's more an application of those reimbursements against our actual patient population.

Okay. And a lot of investors are concerned about, obviously, therapy assessment and therapy utilizations and, again, you said that, so, 48 -- about 48% of your patients have at least one therapy visit, and is it of that 48% 32 only have 14 visits or less -- 32%?

No, no, the 32% is an apples-to-apples comparison. I'll tell you what, I'll give you a couple of more numbers. If you just look -- and you know what's interesting, I remember the last call, too -- no one was really concerned about the therapy, and I came out pretty strong that I was more concerned about that than I was face-to-face and, lo and behold, here we stand.

Here is the stat -- out of about 325,000 therapy visits that we performed in the quarter, only 4,000 for us were problematic. And so that kind of puts that in perspective as to what I told you.

I'm sorry -- 4,000 out of how many?

325,000.

Okay. And then do you have any numbers on what percent of your patients are in that zero to five visit bucket?

You know what? We do track that. I do not have in front, so what we'll do is, Eric, we'll make a note to get offline with Ellen and walk her through that.

All right, that's fine, thank you.

Okay, thanks for the question.

One follow-up -- does your 4Q 2011 impact -- if the proposed regs go through as you expect. So you said that you expect a negative hit to revenue of about $1 million and EPS at $0.04. Where is that coming from?

You mean how did we calculate it?

Yes. Just what part of that rule is causing that impact for you?

It's just the application of that 2.16% decrease.

Okay, I didn't know if it was any type of therapy in there as well.

Oh, no, no.

Okay, okay. Yes, I know the recap, but okay. And just, lastly, going back to your M&A outlook, obviously, you guys have been able to sort of very healthy growth and volume numbers over the last several quarters, which you have attributed in large part due to your historical M&A activity and acquisition strategy. So can you just discuss your competence and ability to sustain this type of level, that 5% to 8% if that M&A flow doesn't pick back up over the next year or so?

If the M&A activity -- if we went through 2012 and M&A activity didn't pick up from where it is right now, it would be difficult if not impossible to hold the same rate. Because -- you are exactly right, I mean, that -- we focus on acquisitions with significant upside potential. So the blend of those new acquisitions where we have much higher growth in the early years helps to bring that average up.

Now, that being said, you just have a demographic growth within the markets we serve that would get us to the 4% to 5% range. But maintaining a higher level than that without any acquisition growth -- and you're asking an extreme question. If it were just flat through 2012, I can't see that happening under any circumstances based on the facts in front of me now.

Eugene Goldenberg, BB&T Capital Markets.

First off, congratulations on the (inaudible) you've been able to make a second quarter in a row that you guys managed to buck the trend in a very challenging operating environment. So hat goes off to you guys on that front.

I'm just trying to figure out, because I know you guys have been working on several issues to kind of mitigate some of the challenges you experienced early on in the year. And from my understanding, your competitors have been doing it about in the same timeframe. So I'm just trying to figure out where is the disconnect? Because it seems like the scale is all of a sudden not that important in this business, but I think it was a misconception in the first place because perhaps (inaudible) providers are more nimble and able to adjust? I mean, is that a fair statement to make?

This is Don. I think we were as nimble as we possibly could be with what we had in front of us. But, again, I think that, at the same time that we, candidly, took a lot of heat at the latter part of last year and early 2011, our plans were in motion. And now what we're seeing is the results of those.

So that's the best answer I can do to that. There is nothing easy about this, and that's what we're trying to say. But it's about execution and it's about, for us, and it's about concurrent execution and not being stale. And I think that's what we're seeing, and that's what's allowing us to do this, and we plan to continue. But, again, it's not an easy task.

Got you. And, Don, just to follow up on some of the margin improvement that you're seeing in the agencies that you converted in Q4 and Q1, you said that you are seeing some of the improvement. But can you, perhaps, quantify whether it's a basis-point improvement on margin prior to the systems being implemented? Just so we can get an idea of exactly the benefits from these systems.

Yes, I'll let Pete maybe clarify the numbers. What I was speaking of is when we do convert, and we see a lull in productivity, and we also see what we call care optimization issues, in which you have skill mix issues between RN and LPN, those all affect salary, wages, and benefits, and contract labor, by the way, on a per-patient date basis. We are seeing and, by the way, us and with our consultants at home care home base think that the throughput time is approximately 12 months to shake all of that out.

When I say we're seeing improvement, the first thing that I want to mention is that the agencies that we converted, the 38 that we accelerated that conversion through -- we have now 59 on it, but we really accelerated 38. They were already some of our lower-margin agencies. So the basis was already low compared to our same-store expectation.

Where I'm trying to be clear with you is we are now seeing those margins up to same store, and therefore the previous drag that they were giving us has now improved enough to where we can invest those back into future conversions that have a higher starting point and, therefore, we don't think we'll see as drastic of a decrease in that. Did I confuse you more or make any sense at all?

I got you. Okay, so you basically implemented those systems in kind of the most underperforming agencies first?

And it just so happens they were the ones on the old legacy systems that we knew we couldn't be in face-to-face in therapy, so that's correct.

Got you. And then the last question I have, Keith, and I apologize because I missed some of the prepared remarks on the M&A front -- should we read anything into the lack of M&A in this particular quarter? I know the cash balance of about $10 million to $11 million is probably (inaudible) 15% time and just some additional commentary on the senior addition I guess you're looking to make on the M&A front?

No, so the -- I don't think you should read anything other than this -- through the second quarter we continue to see just a gap between seller expectations and what we consider to be fair market value given what we know. In other words, factoring in the proposed rule cuts for 2012. And that in itself -- there are sellers that would choose not to want to factor that in, and it makes a big enough difference in today's world to cause a deal to just get into gridlock.

The only thing that changes that for us is if in the geographic area that we are acquiring, if it's a CON state, if there is enough upside potential to get us over that hurdle and to maybe get a little more aggressive with our pro formas. But then in our process, that goes to sales and operations, and there are actually six people that sign off on these acquisitions. So everyone has to take ownership in the process, and so it will kind of fall in the gridlock. That's all there is to that.

But what I said was is that I see that gap closing, and we're actually starting to now see things move through to the closing process. I'm real encouraged about it. The hiring of additional seasoned senior level person and bringing that onto the team is -- you should read into that optimism about increased volume in the future. I see that coming. I'm starting to see providers feel the pain of that 5.2% cut. And, don't forget, the 2.79% the year before.

All in, it's about an 8% cut over an 18-month period. That's starting to show up in financial statements now. They're starting to feel that pain, and I'm seeing that volume coming, and I want to make sure that we have everything we need in place to take advantage of that unique buying opportunity. And I think it will be a two- or three-year window.

Due to time, we will take Dan [Stumps] from Avondale Partners as our last question.

Just had a quick modeling question for you. You kind of talked about G&A and cost of services trending down over the course of the year. I'm just wanting to know are your fourth quarter G&A and cost of services as a percent of revenue? Do you think that will probably hold throughout 2012 before applying cuts? Or do you expect any further reductions in those categories before applying the 2012 cuts? What do you kind of see going on there?

This is how I would do it. I think that the -- I believe that we're going to be able to reduce costs in 2012, but I just don't think at this point in time, I would model that in. I think that the things that we're looking at are long lead type of strategies that we'll be able to apply. If I was going to initially model 2012 right now, today, I'd use a growth number on admits incentives, and then I'd keep all of those costs in line with that revenue number, and then I'd back off at 2.16% Medicare revenue.

All right, well, thanks, everyone, for joining us this morning. On behalf of everyone here at LHC Group, we want to thank you for listening in on 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 our LHC Group family.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.