LHC Group Inc (LHCG) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the LHC Group third quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer with instructions following at that time. (Operator Instructions).

As a reminder, this conference is being recorded. Now I'll turn the conference over to Eric Elliot, Senior Vice-President of Investor Relations for LHC Group. Please begin.

Thank you, Tyrone, and welcome, everyone, to LHC Group's earnings conference call for the third quarter ended September 30, 2012. 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'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 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'm pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you, Eric, and good morning, everyone. Like so many along the Eastern seaboard, many of our LHC Group employees and shareholders for that matter are dealing with effects of Hurricane Sandy. I'd like to first take a moment and let those impacted know that our thoughts and prayers are with you and your families.

A total of 30 of our LHC locations were in the storm's path and I'm so proud of our employees who continue to go above and beyond to help ensure the well being of our patients. Like all residents along the Gulf Coast, LHC Group grappled with many short-term challenges from Hurricane Isaac. This slow moving storm affected 85 of our locations for an extended period. However, we are proud of the dedication exhibited by our clinicians who helped make sure every patient was safe before, during, and after the storm.

Our LHC Group team continues to show resiliency in the face of challenge and adversity. Once again, we have clearly demonstrated our ability to operate efficiently, delivering high quality care in a cost-effective manner even under the most difficult of circumstances. Our industry-leading model of post-acute care partnerships with hospitals and health systems positions us well for the future and we are well poised to continue delivering value to our patients, our partners, and all stakeholders.

I also want to recognize our outstanding team members for their commitment to clinical excellence. We recently learned that nearly 60% of our LHC Group home health agencies were honored as HomeCare Elite in 2012.

HomeCare Elite status recognizes the top 25% of home health agencies in the country based on quality of care, quality improvement, patient experience, process measure implementation, and financial performance. This honor is proof positive of our company's commitment to always putting quality first.

Today I want to briefly discuss CMS's final rule for 2013. CMS estimates the net impact on the home health industry to be $10 million or one-tenth of 1% overall reduction in payments in 2013.

Specifically, components of the proposed rule are a small increase in the proposed base rate to $2,137.73 compared to the 2012 rate of $2,138.52; our market basket update of 2.3% versus the proposed rate of 2.5%; a 1% reduction mandated by the Affordable Care Act; a 1.3% reduction related to case mix adjustments that would carry over from 2012; and wage index updates that would decrease industry payments by an estimated four-tenths of 1%.

In addition, other notable changes in the rule are an improvement to the face-to-face requirement that would allow non-physician practitioners in an in-patient setting to perform the encounter and inform the certifying physician, and an improvement to therapy assessment addressing missed reassessment visits and establishing ranges for reassessment visits.

At LHC Group, we estimate the impact of proposed rules to be a reduction to Medicare revenue of approximately one half of 1% in 2013 due to the changes to the wage index. This estimate does not include any projection of the potential deficit reduction sequester approved earlier by Congress as it is unclear whether or not that reduction will take effect. If the sequester is imposed, it would become effective in January 2013 and will reduce payments by an additional 2%.

Now turning to our acquisition pipeline. As you know, LHC Group is a national leader in post-acute partnerships with hospitals and health systems around the country. In the third quarter, we welcomed Texas Health Resources and Methodist Health Systems as significant new partners in the north Texas market, and we continue to engage in active conversations with potential partners around the country.

As you would you expect, however, these partnerships take time to develop as we work from point of initial contact to formation of the joint venture. As such, we have adopted a two-pronged approach. During these times when conversions are occurring on the joint venture side and until pricing on the freestanding side falls to a level that we feel appropriate, we will continue to be acquirers of our stock. We began this process in June and have since repurchased 1.3 million shares.

I'll 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 commitment to those [we're] privileged to serve in communities throughout the country.

I'm proud to be part of the LHC Group team and know we have assembled a group of dedicated clinicians, 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. Pete?

Thank you, Keith. Good morning, everyone. For the third quarter of 2012 our consolidated net service revenue was $158.9 million, and net income attributable to LHC Group was $6.3 million, or $0.36 per diluted share. We benefited from tax credits under the Work Opportunity, Enterprise Zone and Renewal Community Jobs credit program.

The tax credit reduced our income tax expense for the period and engagement costs related to the tax credit increased our G&A. The net effect was to increase net income $505,000 or $0.03 a share. We recorded in the quarter a $650,000 impairment charge, about $0.02 a share, related to our annual evaluation of recorded intangible assets not suggest to amortization. The impairment charge resulted in writing two intangible assets down to their fair value. We estimate that we lost approximately $570,000 in revenue in the quarter, about $0.02 a share from the business disruption caused by Hurricane Isaac.

Home-based segment revenue was $140.3 million and all but $1.8 million is organic. Total home-based revenue growth is 3.9%, while Medicare revenue in the quarter is approximately same as it was this quarter last year. The increase in home-based revenue is due to an increase in average daily census in our home health business, principally related to our commercial and commercial advantage payers, and an increase in census and patient days in our hospice business.

Facility-based segment revenue was $18.7 million in the third quarter and LTAC revenue was $18 million. Facility-based segment revenue was higher than last quarter due to higher acuity and higher revenue per patient day with fewer unpaid days this quarter. This increase was partially offset by fewer total patient days in the quarter.

Our consolidated gross margin was 42.6% in the third quarter of 2012, slightly up from last quarter and about the same as the third quarter of last year and includes a benefit from lower group health care claims expenditures in the quarter which was offset in part by higher service costs relative to revenue from acquisitions in the quarter.

Our G&A expense increased to 33% of revenue from 32.3% in the third quarter of last year and 32.2% last quarter. The increase is due mainly to an increase in consulting expenses related to the tax credit engagement I described above, higher workers compensation claims, and the local G&A added from the quarter acquisitions.

Operating results from our acquisitions in the quarter generated costs over revenue of about $500,000 or $0.01 per share in the quarter. We believe these operations will break even in Q4 and then be profitable going forward into 2013.

For Q4 2012 we expect gross margins in the range of 42% to 43% of revenue and G&A in the range of 31% to 32%. Bad debt expense this quarter was $3 million or 1.9% of revenue compared to 2.1% in Q3 of 2011. We expect bad debt expense to remain below 2% of consolidated net revenue for the remainder of 2012.

DSOs in the quarter were 52 days, about the same as last quarter. Commercial receivables remain about 33% of total receivables at September 30 which does cause our DSO to be higher. We expect DSO to remain above 50 days throughout the end of this year.

In Q3 2012, our tax rate was 34.9% due to employment tax credit that we talked about above. Excluding the effect of those credits our effective tax rate was 40.6% in the quarter and we expect that rate to apply through the fourth quarter.

We are adjusting our 2012 revenue guidance to the range of $635 million to $645 million and our fully diluted earnings per share to the range of $1.45 to $1.55. This guidance does not take into account the impact of any future acquisitions or future share repurchases if made, de novo locations if opened, future reimbursement changes if any, and excludes legal and other expenses associated with the company's ongoing investigations. We can drill down into these results further in Q&A. Now I'm pleased to turn the call over to Don Stelly. Don?

Thank you, Pete, and thanks to all of you for joining us this morning. Before jumping into my operational update, I also wish to acknowledge all who have and are still dealing with the adversity brought forth by Hurricane Sandy. From our patients to our employees and partners, your resiliency never ceases to amaze.

Now turning toward operations. This third quarter saw our team go through quite a bit. 105 joint commission surveys in the quarter, 26 HomeCare home-base conversions, a partnership with two nationally recognized health systems, a 2013 budget build-up from both sales and operations, and not to mention a hurricane affecting 31% of our locations, some for days.

Even so, during the quarter, our organic growth in total new home health admissions was 3% compared to the same period prior year and our organic growth in new home health Medicare admissions was down 1.8% as compared to the third quarter of 2011. Without those 85 locations being affected by Hurricane Isaac, we estimate our organic growth would have been around 5%, so with that and considering where we sit today in relation to admissions in this fourth quarter, I will again reiterate our expected 5% to 7% organic growth rate for the year.

Turning to census. Our home health [ADC] increased 4.1% to 32,605 in Q3 of 2012, as compared to 31,311 in the third quarter of last year, while organic growth in our home health average daily census was 3.2%. We also like where we sit with our incremental census growth since closing out Q3 as our home health ADC in October came in at 32,840.

Next I'd like to update you on our continued deployment of point of care. Adding in the 24 home health and two hospice agencies converted in the third quarter, we now have 90 home health locations on HomeCare home base and seven hospice locations inside this point of care model. And we plan to convert another 14 home health agencies during the remainder of this year.

We remain pleased with our conversion process and performance results of the respective agencies, and as usual, I commit to keeping you all informed as we get ready to head into 2013's schedule.

Next, I'd like to extend my congratulations to the teams inside of our 134 home health agencies named to that 2012 HomeCare Elite group. As Keith mentioned, this is an independent rating of the top 25% of home health agencies across the country, a rating based on the quality of care provided to our patients and the efficiency with which we operate.

In closing, we used every one of the 92 days in this past quarter to execute our approaches and attain our goals set forth. I'm proud of our team, and I'm honored to be part of them. I will now turn the call over to the operator for Q&A.

Thank you. (Operator Instructions). First question is from Ralph Giacobbe of Credit Suisse. Your line is open.

Good morning, guys. I think you talked about buyback over deals near-term if I heard you right. Can you maybe help us understand where multiples are right now? You know, it just seems I guess a little surprising given all of the cuts over the last few years. Why is there the reluctance to sell or bring down the price, in your opinion?

I don't know if I know the answer to that, Ralph, why pricing isn't coming down. The only answer I can imagine is that the pain hadn't gotten bad enough with some providers. I will tell you what we are seeing though. Periodically we poll all of our locations, and Don actually does this, and just to keep a handle on how many agencies are consolidating and going out of business, and we saw a very measurable uptick in that volume in the last quarter.

I'll let Don say a little bit more, maybe he can give more specifics. I guess what I'm saying is I think that's really turning right now. With regard to multiples, it's hard to use an EBITDA multiple as you can imagine, with so many moving parts going on in reimbursement. We prefer to apply our model and to a volume base, and our comfort level is somewhere around 50% of trailing revenue right now, and even then we're looking for acquisitions that have upside potential.

If they've tapped out on market share and we're just going in trying to cut costs and maintain, those aren't very attractive. So we're just -- when we do our analysis right now, we believe if we can't find those deals and given where the stock is trading at, there's a better return for us to purchase our stock than to make a bad acquisition, to say it simply. Don, you want to talk about the closures?

Yes, Ralph, I'm kind of like Keith, I'm not sure about pricing either. But what we do is we keep talking about the period of consolidation, so we do poll. And I did that about three weeks ago and for the first time we had over 50 markets that we saw either competition closing, consolidating or merging, which is honestly part of our excitement about the potential for growth that I'll talk about I'm sure when we have some questions later.

But you know, the other part is, and I don't know how to measure this, but we'll certainly maximize on the environment, the number of ZPICs out there on the competition, I mean, it's a small world and a small market, is astounding. I guess what I'm trying to say is between the closures, consolidation and the mergers, and the pressures they're getting from post respective reviews, we do believe that our 13% market share that we have in our 790 counties, that's going to lead to the success more so going forward than it has in the past couple of years.

Okay, that's helpful. I guess somewhat along those lines or talking about sort of the pressures, can you talk about the shift to Medicare Advantage? Maybe help us understand what average price differential is on a like-for-like basis relative to fee for service, and maybe what you can do or potentially do to combat that pressure?

Sure. I guess all in, if you look at that business compared to Medicare business, and I think you can see this in our numbers probably, we're seeing Medicare margins for us right now, given the scale and all, at 10% to 11% probably in that range, and I'm looking at Pete here. Then on the -- all-in on the managed care side, we're probably closer to 5%.

So obviously, the managed care business is not business we go after very much. We really take it if we have excess capacity, but then primarily as part of our hospital joint venture strategy, I mean, we do it to help our hospital partners out.

So that's how we approach it. The ones that are paying an episodic rate generally pay us about 10% less than Medicare rates on the episodic rate. We pick up a little bit of efficiency maybe with maybe some documentation that they don't require, but I think you spend it all back on the back office because they're hard to collect from and then you have bad debt to deal with and all.

It's an okay business to have right now if you have a proper blend of Medicare business, but if you get too heavily weighted in that business, it's hard to operate a quality organization with what they're paying today. Did I answer your question?

I guess I was also asking sort of what else can you do, besides just choosing whether or not to bring that incremental volume in. Is there other things you can do to combat the pressure because part of this is just a natural increase in penetration of seniors that are going to be choosing MA over fee-for-service going forward?

This is Don. I'll take part of that. The answer is yes. But the first thing you've got to do is you've got to look at the characteristics of the patient population building this base up. What we've found, it's younger patients with different chronicity factors than our average age, which is almost 80 inside of the traditional Medicare benefit. So why do I even bring that forth?

There is a difference, and you're talking about Medicare Advantage replacements. The majority of that is still on an episodic basis, but we all know that's switching. The key to it, in addition to what Keith talked about, is making sure that we shift from a Medicare-centric care management mindset in home health to that of case management, and that may not sound like it's a whole lot different, but I'll give you one small thing.

There's no way without changing the skill mix of the visit pattern, even if it's the same visits per episode or per admit, will we be able to mitigate the pricing pressures? So the key to it then is to take the best practices with the highest outcome and the biggest skill mix differential and input a care plan for that. Because it's care management versus case management and added to that fact that you have someone on the other line helping you make those decisions, we think that we're in a pretty good spot as we go forward and get more of this business in some of these markets.

Okay, great. Thank you very much.

Thank you. The next question is from Darren Lehrich of Deutsche Bank. Your line is open.

Appreciate you taking the questions. Wanted to just pick up a little bit on the business development activity and maybe get an update, you know, you commented a bit on acquisitions. I guess the other part of it, and probably the more valuable part perhaps is as you build your relationships with your joint venture partners.

And I would be looking for an update on how you see that playing out. It sounds like just given the size of some of those organizations they're taking time to work through the system and for you to get in a lot of those markets. So maybe just help us how think about how that plays out, what it entails from here, and what are some of the key things we ought to be looking for?

Okay, really not much has changed in the strategy other than our focus has shifted to larger, multisite systems, I guess, that would be the biggest shift. I don't want to leave you with -- I hope I didn't lead you to think that we didn't have any of those conversations ongoing. We have a number of them all at various stages of maturity. We just don't like to give specific numbers around it because it might lead people to think that the closing was imminent. Sometimes we'll get into a conversation and when we enter -- let me be more clear.

When we enter the conversation, we'll put an expected closing date, that's what we typically do here. What we've seen as we go to the large organizations, most often we don't hit that expected closing date. When we get into the negotiations, there are some finer points, there are more attorneys involved and it takes more time, so we may end up closing them six months beyond where we initially anticipated.

Years back when we used to talk about a pipeline, we were working with a lot of smaller hospital JVs, and we just didn't have that. It was pretty predictable. So that's kind of why it may seem like we're being a little vague in that, but we're still active in that and that's a sweet spot for us.

We see more hospitals coming to us with conversations right now, so there's no tailing off in that. It's just that it's taking more time to get them closed. But then when you do get one, I think THR, there are 23 hospitals in the system, so it's equal to many joint ventures than maybe a year's worth of joint ventures in years past.

That's helpful. I guess the other part of that is, within the existing relationships, you have announced some of the bigger ones. How does that play out in terms of new joint venture locations as you build out within that system that you already have the relationship with?

I've got you. So, branch locations. Well, you know, a good example of that would be with Mississippi Baptist. Mississippi Baptist is one -- I think that was 2005 or 2006, I'm looking at the guys, something like that. So when we developed all of the bedroom communities around Jackson, Mississippi, we did so by opening satellite offices.

We were on all scripts and we were on paper. Going forward, if we do another Mississippi Baptist, we probably would have only half the satellite offices because with HomeCare home base, remember that our reach is further, where we'll have less local G&A costs, less physical plants, and nurses don't have to come to the office every day, so the model might look a little different.

Darren, this is Don. I'll give you an example. At THR, Pete, in his prepared comments, said that it did drag when we first started and expected to be positive. Not all of that was by design, but much was expected. Now that we have the foundation set, we're going to be in 19 different markets in an 18-month span. In years past, that would have been $3 million in G&A that we would have added and right now we're not going to do that because we're going to do everything that I just told you with point of care.

To tag on what Keith said is, while the voluminous nature of the transactions may not be in the hospital JV sites, what we do have in our portfolio and in our sites are substantially larger that kind of upside, and so we're excited about where we sit. And like I said, to date we have almost 800 counties and we're not scratching the surface on the market share. So the upside for organic growth is truly there, but it's a balance between when you're trying to roll all of these doggone things up, it's tough to focus equally on both of them.

And I guess what I'm telling you now is while we're repurchasing shares, we're pushing on organic. If the pipeline starts shifting that way, then we'll save those for a little bit more rainy days. The truth is, is we've got great upside with some of what we have in the portfolio right now.

That's great. As it relates to the readmission work that you've been doing, I know you've given us some information just about the impact you've had and some of that was piloted. Is there anything new to share there, Don, on that front?

Probably not nothing new. But three years ago I couldn't sit here and tell thank you that we were in a good position with readmission rates because we weren't, and there were a lot of reasons. What I can say right now is when we have a willing partner, a physician constituency that truly does want to be aligned with that, we can get these rates substantially lower than the 27% that it is right now. We're just starting to figure that out collectively with our JV partners because you would be amazed.

Not all of them really even understood their potential hit. We're in good shape. The pilots are working and the programs are working. It's really getting to the table and instituting and executing.

I just had a couple of numbers questions and one last thing for Keith, I guess. Pete, what was the average share price of the stock you bought back in the quarter? I think I saw it in the cash flow statement, there it was about $19 million year-to-date in the quarter, if you could gives us some detail?

It's actually a table that's in the back of the Q and I don't have it in front of me, Darren, but I think it's somewhere in the upper $17 range, it's $17.80, $17.60, something like that.

Okay, we'll check out the Q then. You said the tax rate in the -- I missed it for the fourth quarter. What was your estimate?

40.6% is where we'll go forward. It's creeping up just slightly and that all relates to state taxes and where we're actually making our money, and then we have I think three entities that are C-corps with our group. I don't know how tight you guys get with the tax rate but it brings it up a tenth of a percent here, and a tenth of percent there. Right now we're thinking 40.6% is the go forward rate.

Okay, that's helpful. You mentioned DSOs, they are obviously in a band, but a little bit higher. Can you just help us think about that? Is there something you're waiting on? Is there a payer that you're in any kind of dispute with? Where do you think DSOs will land?

It moves a little bit and what ends up happening is when you -- we have $90 million, $100 million worth of receivables and the lion's share of those receivables are Medicare. Well, Medicare by and large is a pretty consistent homogeneous type of environment. So one Medicare receivable and another Medicare receivable are kind of the same. The things that you need to do to complete the billing process and get that thing collected, it's relatively routine and you can get that done. It's just the opposite with commercial.

Every payer that you have has a different billing and collection routine, and you have to go through that. So just by the nature of those receivables, it takes a little bit longer. In our case, when we -- we don't necessarily have contracts with every payer when we accept a patient. Sometimes we admit a patient on a one-off, and that requires a separate letter of authorization that we negotiate independent of a contract with that particular payer.

The more you have of those, the more complex the collection process is. In the past, we've talked about prepay audits and the effect that that has had, and that volume of an activity increasing and having an impact on our claims. We have internal bill holds related to our internal compliance program that causes an impact.

But in my mind, the largest contributor to both DSOs and to bad debt expense is the one-off relationships that we establish in order, honestly, to admit patients because it's important with our relationships with, as Keith alluded to earlier, our joint venture partners. It's very important that we admit patients when they're referred to us.

Darren, this is Don, I'll take a bullet for Pete. Operationally we changed some things inside of the third quarter going forward to actually affirm that process. We weren't as tight on LOA admission and control as we now are today. I don't know that effect, Pete, but I did want to say that that was a variable contributing to DSOs that we've corrected.

And like I said, I think it's in a band, just, that's helpful color. Last thing, I appreciate you taking all of the questions. Keith, we obviously got the final rule and they did ease a bit on therapy assessment, obviously there's another court ruling out there about progress and status of patients over the course of their therapy, and I'm just wondering if you could maybe sort of wrap that up into a thought for whether it is helpful for volumes next year? Do you think it's just there and not helpful? Maybe just some color on how you think about that.

I'm certainly hopeful. I think everybody would be there, but I'd be real hesitant to say that -- to predict any volume increase because of it. I'll say this. It's certainly, to me, a sign that the number of people who recognize the value and the leverage potential of home health providers continues to grow, and that was a real positive sign certainly with that article, but there are other things out there.

The dialogue with MedPac that we have as an industry, I think, is more positive today than it's ever been. It hasn't resulted in any kind of recommendation that would give us a reason to jump up out of the seat yet, but the dialogue is more positive. They're asking the right questions and we have dialogue and are able to present information to them. So I'm very encouraged about it, but I don't know if it's next year. I think, you know, this is still a long-term play.

Okay, guys, thanks.

Thank you. Our next question is from Kevin Campbell of Avondale Partners. Your line is open.

Back to your relationship with your joint venture partners. Can you tell me a little bit more about what drives that structure? Who are some of the providers you consider to be the most important? How does that impact future partnerships? How do you present a value prospective? What do you consider to be the longer-term outcome?

When you say what providers, are you talking about specific hospitals?

Right. Are the hospitals the most important? What type of value proposition are you bringing to the hospitals and are they receptive to that value?

Okay, sure. I'm certainly not going to mention any names on specific health systems or anything, but I'll speak to the second part. You know, I think I've said this before on previous calls. Back in the 1990's, late 1990's when we first started with hospital joint ventures, the value that we brought to the table was taking home health agencies that had not made the conversion from cost -- or were not going to make the conversion from cost reimbursement to PPS and taking a losing asset off of their hands, then managing it profitably.

Now it's more about being integrated to help them control readmissions and with some of the larger ones now, it's being at the table and participating with them in capitated arrangements, or ACO models or those things. So we bring value now in those two ways. Yes, it's still a -- there's still a bottom line financial impact that's just associated with the day-to-day operations of the home health agency. They bring us in as a successful and proven home health operator to get our arms around that, but then, at the same time, we're in the room with discussions around how we plug in to larger integrated models.

Now, within that integrated model, do you isolate the different payers and what is occurring among some of the various payers? What are some of the things you're thinking about as it relates to a commercial payer versus a Medicare payer, and how does that dynamic impact the structure of the partnership in the future?

If it's with a hospital partner, we're a participant in the negotiation with that payer but we're not negotiating with the payer directly.

Okay.

We're functioning as a department would in a health system.

Got you. Guys, thanks for taking my question.

Okay.

Our next question is from Kevin Ellich of Piper Jaffray. Your line is open.

Hi, this is actually Brad in for Kevin. A lot of the questions have been answered so just couple of quick ones here. Have you guys been able to quantify any potential impact on the 30 locations from Hurricane Sandy?

Brad, this is Don. We have. Right now at both our run rate in those two states, 36% down, that's the bad news. But the good is that we were having a hell of a month so far on our other locations. And so as I sit right now, I don't expect Hurricane Sandy to change the trajectory of the 5% to 7.5% growth that I talked about for the year.

Okay, great, thank you. And then just one other one as it relates to home health reimbursement. Any thoughts on rebasing coming in, in 2014? I know it's difficult to know, but if you have any additional thoughts?

No, not really. I mean, I really don't. I have some -- we look at data to try to estimate what all-in industry margins are and it would be available to any of you out there. I think you know this, we use OCS on national research, and they have the ability to take 2012 actual claims data and utilization, the number of visits being made to patients, and then they can take cost report data from previous years and gross that up for cost increases, and they can estimate with what I consider to be reasonable accuracy, the profit margins.

They're never that far off. If you look at what those margins are for 2012 now and you put another cut on for 2013, we're getting really close to a point where I have to believe we're almost already rebased. That's my view. I think that's what you're asking me for. Other than that, I would really continue to point you to Eric Berger that heads up our partnership in Washington, D.C. Eric is kind of the central point for this and I think he's a great resource. He's closer to the ground on this than I would be.

Great, thanks, guys.

Next question is from Whit Mayo of Robert W. Baird. Your line is open.

Good morning, guys. I was just curious, Don, how much time you're spending looking at LTACs now with the moratorium expiring in January? Just kind of curious what the appetite is for potentially expanding the footprint there over time, and frankly just sort of curious what you think happens with deals in that sector next year?

Hi, Whit, good question. I've got to tell you, I think for the first time in a long time we actually feel very good about the potential of expanding into different markets where we have great partnerships with LTAC. Specifically, I will tell you we've been contacted by three of our hospital partners within the last six months because I think we all believe that this service, much like Keith was talking about HomeCare, you see what the future has for it with MMSEA and where it went.

We have our homework done in our existing group of hospitals because we're HIH. So while I don't want to put out and give you an expectation that we go at these to our facility-based segment, I would be remiss to say that we're not open to do it. And I would also say that I could see possibly having conversations as imminently in the next month or so that we could possibly do one.

That's helpful. How do you think about them just with your existing facilities now? Obviously, you're going to have the capabilities now to expand those if you would choose to do so. Do you anticipate maybe adding some existing beds to your -- or adding future beds to your existing facilities next year?

Two of them, yes.

Any way to kind of frame up the size of the potential expansion?

You know, honestly, no, because I don't know how many beds we would be allotted by the host right now. I will tell you this, when we put out our guidance for 2013, I'll have better clarity for you. It's just too preliminary right now to put that forth and you bake that into your model.

Got it, and the conversations you're having, just to be clear, with hospitals or systems right now, would it be taking over their current LTACs or would it be potentially partnering to build out new LTACs?

Specifically, one would be a start-up in that community, and one, there's an existing license that we would actually go purchase and then partner with them in that manner.

Are most of these hospitals existing joint venture partners on home health or are these kind of new partnerships?

The first, they're existing partners.

Got it, okay. I guess we'll just kind of wait to hear a little bit more granularity on the strategy there next year.

Honestly, Whit, it's a great question and I don't mean to be vague, but if I get any more pinpoint than that, I'm get heading ahead of myself. You know us, I'm not going do that (multiple speakers) mislead you.

No, no, I understand that. It was really helpful. Thanks a lot.

Okay.

Thank you. This ends the Q&A portion of today's conference. I'd like to turn the conference over to Keith Myers for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.