LHC Group Inc (LHCG) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the LHC Group's 2011 fourth-quarter earnings 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 Elliot.

Thank you, Javon and welcome everyone to LHC Group's earnings covered call for the fourth quarter and year ended December 31, 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 www.lhcgroup.com. In a moment, we hear from Keith Meyers, Chief Executive Officer, Don Stelly, President and Chief Operating Officer and Pete Roman, Chief Operating Officer of LHC group. Before that, I like to remind everyone that statements included in this conference all 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 2012 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.

Thank you, Eric and good morning, everyone. We are pleased with our operating results during the fourth quarter and I am proud of the resiliency and dedication exhibited by our Company throughout 2011. I want to congratulate and thank all of our team members for their unwavering commitment to excellence for consistently delivering the highest quality of care to a growing number of patients, families, and communities we serve.

Looking forward, we are well-positioned to take advantage of future internal and external growth opportunities. We've made the investments necessary to capitalize on the consolidation and growth opportunities that lie ahead for high-quality, post-acute healthcare providers. Our unique joint-venture strategy positions our Company, as well of our existing and future hospital partners, to be at the forefront of change as our country moves towards a more integrated healthcare delivery system.

A perfect example of this is the recently announced home health joint venture between LHC Group and Baptist Health System in Alabama. As announced yesterday, LHC group has entered into a home health joint venture with Baptist Health System, one of the largest healthcare systems in the state of Alabama. With hospitals in Birmingham, Talladega, Alabaster, and Jasper, Baptist Health System deliveries in-patient care to more than 33,000 patients each year.

The health systems has 1,080 total licensed bed and more than 800 credentialed positions. Its 4,300 employees make Baptist one of Alabama's largest employers. The new partnership will result in improved patient care, helping patients recover in the comfort of their homes and preventing costly and avoidable hospital re-admissions, as mandated by the Affordable Care Act. Baptist Health System is nationally recognized for its commitment to improving lives throughout the delivery of high-quality patient care.

A seamless continuum of care from hospital to home is part of that commitment. And we are proud to partner with Baptist to deliver superior home health services to the people of Alabama. With regard to our current pipeline, we are currently in active negotiations with nine acquisition candidates and seven states, representing approximately $79 million in annual revenue. Eight of these are hospital-based opportunities.

Next, I would like to briefly comment on our recent announcement that we have begun a process to evaluate strategic alternatives. As we mentioned in our press release, we do not intend to disclose specific developments regarding this review until our Board of Directors has reached a final recommendation or concluded its review.

We believe this type of review is a prudent step to undergo periodically, and we are fortunate to have an experienced and professional independent Board to oversee the review. I know some of you may have questions about this topic, but I would ask you to please understand that we are not able to address them at this time. I will now turn the call over to Don and Pete, but before doing so, I want to once again commend and thank our experienced leaders throughout our Company, as well as our dedicated hard working employees for their unwavering commitment to those we are privileged to serve in communities across the country.

We faced many short-term challenges in 2011 as an industry, but despite these challenges, our team has continued to provide consistent high quality and cost-effective care to the sick, elderly population we serve. I am proud to be part of the LHC Group team and know we have assembled a group of dedicated caregivers, employees, and leaders who, through their hard work ingenuity and commitment to excellence, have built a foundation for our Company that will serve our patients and shareholders long into the future. And now, I'll turn it over to Pete for a review of our financial results. Pete?

Thank you, Keith. Good morning, everyone. For the fourth quarter of 2011, our consolidated net service revenue was $157.7 million, net income attributable to LHC Group was $7.2 million, and diluted earnings per share was $0.39. For the full year of 2011, our consolidated net service revenue was $633.9 million, net loss attributable to LHC Group was $13.2 million, and the loss per share was $0.73. Included in the net loss is an after-tax charge of $45 million associated with our previously announced settlement with the government.

Home- based segment revenue was $139.2 million in the fourth quarter and $557.9 million for the year. Home-based segment revenue for the fourth quarter consist of $135.1 million in organic revenue and $4.1 million in revenue from acquisitions. Total organic home-based revenue was 7.9% lower than the same quarter last year, and organic Medicare revenue was 8.6% lower.

The primary cause for the decrease in organic revenue in the home-based segment was an 8.6% decrease in organic home health census in the fourth quarter, compared to the fourth quarter of last year. The decline in census year-over-year occurred in the third quarter and was explained in depth in our last earnings call. Another cause 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%.

Our revenue per episode on home health Medicare completed episodes decreased to [technical difficulties] $2,383 or 3% in the fourth quarter of 2011 compared to $2,457 in the fourth quarter of last year. This reduction was offset by a growth in the organic hospice revenue of 8% over the fourth quarter of last year. Our home-based segment makes up 88.3% of total consolidated revenue in the fourth quarter.

The facility-based segment revenue was $18.5 million in the fourth quarter and $76 million for the entire year. Our consolidated gross margin was 43.3% in the fourth quarter, an increase of 0.5% from last quarter and a decrease of 4.9% for the fourth quarter last year. This decrease in gross margin compared to 2010 was caused by the 5.2% reimbursement cut that went into effect on January 1, 2011. G&A expense was 32.2% of revenue, slightly down from last quarter and down nearly 1% for the fourth quarter of last year.

For 2012, we expect our gross margins to be in the range of 42% to 44% of revenue and G&A to be in the range of 31% to 33% of revenue. Bad debt expense in the quarter was $3.4 million or 2.2% of revenue compared to 2.1% last quarter and 1.4% in the fourth quarter of last year.

The increase in bad debt expense was caused by the increase in commercial receivables, both in dollars and as a percentage of total receivables and the reduction of the timely filing period for Medicare claims which began January 1, 2011. For 2012, we expect bad debt expense to be around 2% of consolidated net revenue. Non-controlling interest in the quarter was $2.2 million or 1.4% of revenue, compared to $3.9 million or 3.3% of revenue in the fourth quarter of last year.

In 2012, we expect this number to remain in the range of 1.5% to 2% of consolidated net revenue. DSO at December 31 was 53 days, compared to 47 days in September and 44 days last year. Medicare receivables increased approximately $7 million, related to increased ADR activity at the end of the year, continued delays in the [trial] approval process, and process delays on the new 5010 claim format which the [max] were not ready to receive.

In addition, commercial claims outstanding increased -- which is the result of continued increase in commercial business. The amount outstanding on our credit facility was $34.8 million at year-end, which ended up a little higher than we expected because of the collection delays. In the first part of 2012, we are seeing collections increase. Today, the amount outstanding on the credit facility is a little over $18 million.

Approximately $11 million of the amount paid down was funded with a refund of 2011 estimated tax payments. As reported in our earnings release, the Company is reaffirming its full-year 2012 guidance issued on January 4, 2012, for net service revenue of $640 million to $660 million, and fully diluted earnings per share in the range of $1.45 to $1.65. This guidance does not take into account the impact of any future acquisitions or share repurchases if made, de novo locations, if opened, future reimbursement changes, if any, and future legal and other expenses associated with the Company's ongoing investigations or costs associated with our previously-announced review of strategic alternatives.

We estimate home health Medicare revenue in 2012 will decrease approximately 1.1 % to 1.5% as a result of the CMS 2012 Home Health Rule. We estimate the effects on earnings per fully diluted share is $0.15 to $0.20. Continuing with 2012 guidance, payroll taxes are always higher in the first quarter of any year. We estimate payroll tax expense in the first quarter of 2012 to be approximately $1.2 million to $1.4 million higher than any other quarter in the year. We can drill down on these results further during Q&A. Now, I am pleased to turn the call over to Don Stelly. Don?

Thank you, Pete and thank you to those joining in this morning. I'll start by discussing our current volume and then turn to key initiatives for 2012. During the fourth quarter, and our growth in total new home health admissions was up 3.2% compared to the fourth quarter of 2010, and the organic growth of total new home health admissions was approximately 1% when compared to the fourth quarter of 2010. Growth in new home health Medicare admissions was 3.5%, as compared to the same period prior year, while organic growth for new home health Medicare admissions was 1%.

When you look at the year as a whole, we were able to generate a home health organic admissions growth of 7.5%, which is on the top side of the range that we predicted, and I continually reiterated throughout the year. We expect our home health organic admissions growth on an annual basis this year to fall into similar range, 5% to 7.5%. Staying with volume, but now turning to census, sequentially we grew census from an ADC of 31,311 patients in Q3 to an ADC in Q4 of 31,692, for a growth rate of 1.2% over that third quarter of 2011.

On average, daily home health census thus far in this first quarter of 2012 is 32,611 or just under 3% higher than the ADC in the fourth quarter. During Q&A, I will be happy to answer further questions that you may have on volume. But now, I'll turn briefly to some key focus areas for 2012.

From an external growth perspective, Keith has already mention our current pipeline, and for previously stated reasons, we know 2011 was a slow year industrywide with regards to consolidation. In the first part of this year, however, we are seeing that trend change, particularly because of our joint venture strategy and the transitional care programs that we have as part of it. Combine this with the concern that hospitals and hospital systems have in regards to unnecessary readmissions, we anticipate this increased activity to continue, and we will keep you abreast of our developing pipeline in future calls.

From an internal growth perspective, we have significant upside potential by capturing market share that we ready or licensed to serve. Today, in markets where we have a physical location, on average, we have just north of 20% market share.

In markets where we have a license to operate but have no physical location, we have approximately 5% market share on average. With the benefits of point-of-care technology, program innovation, and strong performance by our operations and sales teams, we are focused on share attainment and secondary markets like never before -- while at the same time -- moving any primary market to that minimum benchmark of 25% if not already there. Between these two approaches, they will be the drivers of my earlier stated and our expected organic growth of 5% to 7.5% during the calendar year of 2012.

Turning toward our point-of-care -- today, we have 73 locations on Home Care Home Base, and we have another 98 locations in the conversion schedule for the remainder of this year. For those agencies that have been on Home Care Home-Based for six months or greater, we are pleased with their overall margin progression, but still see upside as they mature to the 12-month mark.

As well, we are recognizing incremental benefits in other areas such as, but not limited to, compliance, quality, employee satisfaction, and growth. Our conversion of point-of-care is a journey, and I'll keep you abreast of how it's going as we keep on that way.

Turning now to quality. In addition to continuing with our joint commission accreditation mandate, during 2012, we will heavily focus on acute-care re-hospitalization issues. Our rates right now are below the national average at 16% in a 30-day period following discharge, as compared to the national rate of 20%. Given that we are still in an environment where hospitals are not yet penalized for readmissions, we are pleased with these results.

However, going forward, as penalties for readmissions are imposed, we do anticipate our efforts around new clinical programs, and the expanded use of our T3 program can move these readmission rates into ranges as low as 8.5% to 9%. Before addressing questions, let me close with these remarks. 2011 brought unique challenges. But in this Business, and along with our mission of improving health at home, no doubt challenges will always be there. And the question is how do you overcome them, and the extent to which you can succeed along the way?

To my LHC Group colleagues, thank you for your unwavering commitment and thanks for proudly answering these questions countless times this past year. I look forward to an exciting 2012 and beyond. Javon, we are now ready to open up the call for questions.

(Operator Instructions)

Darren Lehrich, Deutsche Bank

I just wanted to first start off with the Health System partnerships -- and Keith, I know you mentioned in your prepared remarks that the majority of the candidates in the pipeline are now of that flavor; no surprise, I guess. But, just curious to know how many of those are actually multi-system hospital groups, versus just single community hospitals? Just to get a sense for how the opportunities similar to what you just announced with Baptist might be in the pipeline, here?

Yes. Thanks, Darren, that is a good question.

So, obviously, if you take the $79 million that we talked about and you divide it by the eight opportunities, that gets you to an average of $10 million per opportunity; and that's much larger than what we would have reported, let's say, a year ago today. You are right -- our focus is on larger, multi-hospital systems, now. Not that we are turning away any larger single-hospital opportunities that have upside potential. But we've been doing this since 1998; so, with as many locations as we have now, we have the credibility to be able to get an audience with larger systems. And it's more efficient for us to grab those if we have the opportunity. I hope that answers the question.

That is perfect.

Then, my other question is -- just as it relates to the volumes -- thanks for the intra-quarter update on -- can you just remind us -- good admissions growth, here -- but how much is the recert impact going to hurt you into 2012? When do you think that will fully anniversary?

Well, I would look at it in two different ways, Darren. On the actual recert rate, we are hovering at that 62% to 54%,which is in line with what we announced last quarter. And so, I don't think you'll see that affect the census more than you've seen that dip happen about two or three months ago because of those discharges that happened mid-2011. It almost put our baseline at a lower trough point, but I think that has resolved. And so, I think what we expect, and what we saw, was that nadir effect, or that lowest point happened right at the last of December. Candidly, we've seen a much steeper ramp-up in the last four weeks that we had in the first four weeks.

And so, the answer is -- I think you'll see about a 50% to maybe as high as 55% recert rate throughout the year. Again, that is indicative our population. If that patient population switches, I'll be very open with you all and tell you what I expect; because if it switches, that would go down and not up, because we are seeing some of our programs more restorative and rehabilitative patients. And so I think we're looking for an incremental census growth from here on out. It will trail pretty much equal with that 5% to 7% of admission growth.

Okay, that is great.

And then just one last thing to follow-up -- I think I heard you say, Pete, that Medicare Home Health rates down 1.1% to 1.5% -- but maybe I missed something. But I had in my notes that it was going to be down closer to 2%. So what has changed in your assessment; or maybe I missed it before?

No, you got it right. Initially, when we came out, we were at 2% or maybe even a little bit higher than 2%, but what we were using is 2011 data. Later in the year, that data changed. Don just alluded to the patient population mix, and it changes all the time. So, as we updated our information with our patient mix later in the year, the analysis came back 1.1% to 1.5%.

If I can tag onto what Pete said -- I will openly disclose -- we were looking at about a 1.24% case mix when we made that projection, and that is up to 1.26%, but I also don't want to give you a false sense of security that we won't revert back. For example, our Maryland group of agencies, candidly -- and if you're listening, team, thank you -- you just knocked it out of the park; but that is a different population than we will see from Alabama, which we expect to produce a little bit more incremental growth in the second quarter. And so, I agree with Pete -- it really is a function of the patient population we are seeing in those marketing events in those specific states.

Kevin Ellich, Piper Jaffray.

Just wanted to clarify that last point -- so the headwind that you faced from Medicare is actually 1.1% to 1.5%? And is that due to less therapy? What is behind that?

Well, Kevin, I'll jump in first on the operational side and then let Pete the color in. If you took an apples to apples comparison, I think that 2% number would still hold. But remember -- that was on the existing population. Now you turn the hands of time and shift that population toward more and different types of diagnoses -- for example, if you have more stroke patients in a period than you did prior period, and less congestive heart failure, you are going to have a different case mix. So the pricing isn't necessarily dictated by the government paying us any differently than we thought, but the government paying different [hurgs] -- differently than we had in the portfolio when we made the prediction.

That is helpful; I understand.

And then did you -- Don, I missed it -- did you provide any reason why you think organic admissions dipped in Q4? And what gives you the confidence that it's going to recover to 5% to 7.5% in 2012?

You have to think about it. We had a lot of moving parts in our Company at that time -- none more important than the mandates that we had inside of our agreement with the government. Simply training 8,000 people in a 30-day window as required by our CIA, bumped what we call nonproductive time up, which yielded some cost issues for us. And then it takes people off of their normal course of business, inclusive of sales. That was a primary reason.

We also had issues at year-end finalizing all of our face-to-face documentation. Again, real pleased with where that turned out. Pete has always said, where the reserves were low there were reasons for it. But we had a lot of work to do with that.

Those were the two primary drivers, quite candidly. As you know, those are both resolved right now; and just to give you -- again, I think I said in my prepared remarks -- if we took where we are right now -- and it's rough, Kevin, but around 2,000 total admits per week -- if we just ran that through 2012 -- as we are today, we would hit that number that I told you. And so, that gives me the confidence to stay with that 5% to 7.5% range.

Would you say the same issues held true on the facility-based side -- the LTACHs -- patients days were down -- was the rationale pretty much the same?

No, I actually wouldn't. Remember -- we have one LTACH that is in a very rural market, and that host hospital -- I don't want to get ahead of myself with our partner there -- but they are actually going through their own process. Sometimes, our average daily census in that LTACH is higher than their average daily census as a hospital. We've seen that hospital -- in itself -- decrease our occupancy percent, and that was related to those patient-day variances. I think it is transient, because we are ready seeing that back on the upswing, but they've gone through some trouble there, and as a good partner, we want to stick with them.

Keith -- could you provide a little bit more color on the JV you announced with Baptist? Did they have home health agencies in those markets? Or how to this agreement work out?

Yes, that is a good question.

It speaks to a trend we're seeing. In their case, years ago they had a home health agency, and they chose to exit the space. They didn't see a need to be in the home health business. But now, with healthcare in general moving toward a more integrated system, especially in post-acute care; and their need to have a hand in controlling their own readmissions going forward, they saw that they needed to be in the home health space. So we began talks with them. We had acquired an agency in the Birmingham market as part of several agencies in a package, and we were able to go to them. They actually bought into that agency and became an equity partner with us.

(multiple speakers) Some of the things that we are trying to do -- Keith is absolutely right. We had two different agencies in Bessemer and Gordondale; and over 16 months ago we combined those with the strategic approach of getting to that day that we announced on Wednesday. So we see this as a significant and exciting opportunity, that when we have non-ventured locations in this new environment of hospitals wanting to be back in the business -- so to speak -- we call them reversed JVs, but they are not -- as Keith said -- they are buying into our existing provider. But we see that as another avenue to partner with people in these markets. It really worked out. My hat goes off to Shane and his entire group at Baptist. They are very good thought leaders and going to be a great partner for us.

Keith, can you give any more detail in terms of what percent of that agency Baptist bought into, and what the dollar value was?

No. I don't think we can give the percentages. We don't typically do that, so I don't think we should do that here.

Okay. Pete -- I heard a comment about collection delays with the 510(k) claim issue with the max. Has this been corrected, or do you think it's going to continue for a little while?

The max -- the issue with the form has been corrected, and we are starting to see that lift a little bit right now.

Lastly, Don -- can you give a little bit more coloring on the T3 program? What is going to drive the readmission rates to the decline to 8.5% to 9%? How big of a deal do you think that is as you look to partner up with more hospitals?

The last part is, I think, it is absolutely a huge deal. I have said this in a couple of conferences during the presentations. But a couple of years ago -- the minority interest distribution -- and just being inside of that service line was primary focus for these systems. It's all about readmissions right now. And that T3 program is essentially something that we are trademarking that deals with Transitions, Triage, and the use of Technology. And really, it is a program where we not only do things in the agency and through our care transition work for that partner; but we also supplement it with telephony calls, with phone calls to patients. There are studies that you can pull up on the effectiveness of each.

It is pulling all of the components into the best practice patterns into one program. Cathy Newhouse and our team have done a real good job of developing and piloting, now, that we can go to these big systems, and we see the results. The number that I talked about -- at 8%, 9% range -- was a real number that we got from the pilot in Mobile, Alabama. Once we see the alignment of incentives or -- should I say --maybe disincentives go away, we really think this is going to be a differentiator for us in our JV model.

Excellent, thanks. Nice quarter.

Whit Mayo, Robert W. Baird.

Pete -- the LTAC segment has become increasingly more important to your P&L over the past two years -- about 20% of your EBIT now. So I guess this is a hypothetical but important question -- if the moratorium is not extended at the end of the year, do you have an idea of what that impact would mean to you with the budget neutrality adjustment and short-stay changes and the 25% rule? There are several moving pieces; just wanted to size up what that could mean.

Pete is giving me the nod to talk about that.

What we said is that through 2012 -- go ahead and bake that in as consistent as it has been in the last couple of years. And when we quantify those, based on certain initiatives we have -- such as program development and possible consolidation of campuses -- we will come out and we will let you know what that impact is -- past this year.

Okay. We can probably talk about that later.

Keith, I had a question for you. What is the largest challenge you face right now, with moving a lot of these hospital joint ventures down the quarter. Presumably, a lot of the negative press hasn't helped in the past two years. I'm curious how your strategic review process may or may not play into that equation now. I have to think a lot of the hospital boards are asking themselves that question as you talk through these conversations. What is the largest impediment to really move a lot of these transactions forward?

Honestly, we haven't drawn a lot of questions about -- from the hospitals we are talking about. I don't know. I'm not sure why that is. I want to believe we have a pretty strong reference list when we go in, and I think our credibility is well established in the hospital community. So, really, the barriers have been with the larger systems -- just getting them to change away from what they are doing. If they have a home health agency, the team that is managing those home health agencies is, quite frankly, entrenched, sometimes. Unless the C -Suites drill down and look at the data themselves and decide to take some action, it becomes hard.

If we have a management team with a hospital partner that is really engaged and wanting to take steps to change, then it moves a little faster. If not, it takes more time. And then the second part is -- a lot of the hospitals we've -- or most of them that we have relationships now with, are all nonprofit health systems. So when you get to the governance side of that -- just getting it to go through their Board approval process takes quite a bit of time. That has been what our biggest barriers have been.

Yes, that is fair. I know there is not a lot that you're going to say or can say or should say with regards to the strategic review. But you did mention in your prepared remarks, and to quote verbatim -- it is prudent to undergo periodically this process. So I guess my question is -- is this an exercise that you have privately performed in prior years? I'm just curious if you've gone through this before?

Yes, I don't want to -- I think you know the make-up of our Board -- especially the independents -- they come here with a lot of experience at much larger organizations. So, every year it's part of our discussions in the boardroom, and it is just around the -- from the approach of -- are there opportunities to increase shareholder value that haven't been considered that should be considered? And this year, the result of that discussion was the process we are in.

(Operator Instructions)

David MacDonald, SunTrust.

Just want to circle back to the pipeline for one minute, again. With such a huge percentage of what you're looking at -- being these hospital-based opportunities -- can you walk us through the economics a little bit? Is part of it the trends that these hospital-based JVs tend to be better, or the pricing is more reasonable? A second part of that question is -- what are you seeing on pricing? Are some of the standalone acquisitions still not as realistic about pricing as they should be, given the environment?

I'll take the first part of that, and ask Don to help me.

Let me take a second part first. In general, the freestanding locations for the last couple of years -- we've seen seller expectations be a little too high. And it is because everyone wants to look only at trailing performance. We are dealing with reimbursement decreases and projecting future reimbursement decreases, and it is hard to reconcile all of that in a negotiation, especially with the smaller freestanding providers that we focus on -- say $10 million or lower. We're still talking to those folks, and there are a lot of areas that we are very interested in. It is just harder to reach a number with them. So --

Is it fair to say, even though that you've had a couple years of pretty sobering reimbursement, that, that is still happening? It is still slow to adjust, in terms of the pricing? With the freestanding?

Yes, that's what our experience has been. And if you look at the numbers of transactions and the volume, it seems to be down for everyone. So I don't think it's with just our approach.

Okay.

And then, back to the hospital side -- what makes a difference on the hospital side is that in most cases, when we go in, the upside potential is much greater than it would be with freestanding. Because hospitals don't focus on home health as much as they do on their core hospital business, it's normally not run as well as it should be -- if they have one. And of course, if they don't have one, there is tremendous upside potential. So even if we pay a premium or to the top end of the range on fair market value for trailing revenue, it's not a barrier for us, because there is so much upside in the pro forma.

It's fair to say -- with all the pressures that the hospitals are also seeing, especially the not-for-profit guys, that the number of conversations that you are having relative to historically is going up exponentially?

Yes, that is very fair.

Kevin Campbell, Avondale Partners.

While we are talking about home health M&A, what are your thoughts -- current expectations --on multiples that you are willing to pay -- revenue multiple and EBITDA multiples?

I don't think there is any way that I can answer that in just a one line answer, because it all depends on what the forward-looking pro forma looks like on the upside potential on every specific deal.

Instead of looking at trailing, maybe what a pro forma EBITDA multiple, or pro forma revenue multiple might be, as you work through your analysis of -- if we were to operate it, this what it would to look like under LHCG?

I would have to take the last three or four deals we priced and average that out. I'm just not prepared to do that right now.

Okay, understand.

On the strategic review -- obviously, I know you can't talk about it -- but can you give us a sense of any costs that might be associated with that? And are those costs included in guidance, or will they be broken out as a one-time?

The costs are not included in guidance, and quite honestly, right now, I'm not prepared to give you an estimate of what that number would be. We are just getting started, and I think you're going to see some of it in the first quarter. When we disclose our first quarter actual results, we will break that number out and show it to, so you'll be able to see it.

Do you have any cost-cutting initiatives that you are in the process of rolling out, whereas -- such that you might be at the end of the year at a much higher run rate of earnings than you are right now? Or you're not really having anything going on specifically right now on the cost side?

I'd look at it more as improving. Remember -- we're going to be touching on 100 locations in point-of-care with Home Care Home-Based. We have expectations on margin. And in my prepared remarks, I told you that I am pleased where they are at in the six month. But now is the time that they really have some tailwind, and we need to push them through to get them back to corporate margins and above in 12 months.

We also have efficiency things. We do that every single month during MORs, which I had it yesterday. There are always locations that we will consolidate, close, move -- but to say that we are in the midst of some huge production of cost cutting -- that is not fair to say. I think we did that, we showed we did it twice in 2011-- one in March, and once again, to the tune of a $54 million, 12-month look run rate back in October. And so, now it's time to take all of that and build it to point through efficiencies. We're going to get that through margin improvement, mostly in our home health and a little in our hospice segment.

As we think on the Home-Based Services side, the average daily census -- obviously, it's improved from 4Q to 1Q thus far. Can you give us a sense as to maybe how that should change sequentially throughout the year -- just on a normal, excluding any acquisitions you might do, but on a normal run rate basis? So you see it dip down in the second and third quarter before going up in the fourth?

Yes. What we want and what we expect is smooth, incremental growth through the period at about 6%. And you look at that over the prior year. So you can back into that. I don't think that it's going to stay stagnant between today and the end of Q2, and then all of a sudden have this big jump up. On the other side of it, I also don't think that it's going to jump up between now and when we announce anything differently than I talked about today in my prepared comments. I just smoothed that out. Were looking at our divisions as a whole. Again, I think you're going to see that trail with a 5% to 7% admit growth. So I would say 6% to 7% on the census, and the same for admits.

That's on a year-over-year basis, obviously?

That is correct.

Ralph Giacobbe, Credit Suisse.

Is there any way to break out the volume growth that you've been getting from your JV partnerships? Or maybe the growth there versus your Business? So in other words, if the Business is growing 5%, is the JV growing 5%, or is that business growing faster than your other business?

Overall -- yes, we would see more growth as a percentage. I want to emphasize -- as a percentage in those hospitals -- because begin --it is the starting point. I said earlier that we started such a low baseline there. So the percentage growth looks really good, especially in the first three years out-of-the-box.

Don you want to --

Yes, I think that is fair, Keith. To give it a little bit more color -- we're about half and half right now. That incremental growth I talk about from the third quarter until today is about half and half. But we also believe that we have some headwind with a couple of freestanding, because of a couple of things we have. So I think you maybe tip that toward the last part of the year; our JV is growing a little bit more -- but it's not going to be much different than about half and half.

And just so I understand -- after you JV, do you essentially get 100% of the referral channel? Does it become an exclusive, essentially, or is that not the right way to think about it?

In fact -- absolutely not. We still have to go earn the business, and we have said on previous calls as well. What we do is, when we take over, it's just the opposite. Those hospitals, in so many cases, don't even go outside the confines of their walls in referral issues. We actually go to the whole community, because we see competitors. We see people that we compete with cherry-picking inside the hospital. So we change that paradigm, and then start seeing about a 50/50 split in there. To date, out of all of our JVs, we don't even get 50%. Out of all of those, we get about 60% from the community and about 40% from all the hospital walls. I don't think that's going to change, and I don't want it to change.

Obviously, you've done a number of these, and have been very successful -- and to your point on this call, there appears to be a lot more appetite from hospitals to do it. We've heard some of your peers becoming more interested. Are you at all concerned about the questions that it raises as it relates to Stark Laws? Maybe it would be helpful to remind us why it doesn't fall under that self-referral channel?

The hospitals cannot refer our patient to us. The patients are referred by physicians, and every patient on discharge from hospital has to receive a choice letter of all the home health agencies that are providing services in the community, so that the first decision -- or the only decision -- is with the patient. If the patient has had a good experience in the hospital, in our model, as you know -- I think most of you know -- we don't brand anything with LHC. So we, in almost every case, take the name of the hospital partner. We get some benefit from leveraging their name when it gets to the patient choice. Again, if they've had a positive experience in the hospital.

The answer is, no. We're not concerned about Stark; and, technically, Stark does not apply to the JV relationship, but does so to a physician relationship. Because Keith is absolutely right -- patient choice prevails. Then, you still have to have physicians sign a plan of care. The way that this hospital venture works is, we become a partner in the care continuum of the community; whereas other providers that we bump up against think they have the full solution as home care alone, and that they are the Messiah. We actually don't. We see the hospital as the epitaph and the center of healthcare, and we become their partner. We work with them to make sure that we align and we do the things that are, first, right for the patient, and then right for the system.

At this time, I would like to turn it over to Mr. Stelly for any closing remarks.

Thanks, Javon. On behalf of us all, thank you for taking time to participate this morning. As always, we are available to answer any questions that may come up between our quarterly earnings calls. Have a great day. Again, thank you for supporting and believing in the mission of LHC Group

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