LHC Group Inc (LHCG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group Q2 2013 earnings conference call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host today, Eric Elliott with the LHC Group. Please proceed.

Thank you, John, and welcome everyone to LHC Group's earnings conference call for the second quarter ended June 30, 2013. Hopefully, everyone has received the 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 2013 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. Let me begin by congratulating and thanking our entire team for yet another outstanding quarter and first half of 2013. Once again, the collective talent, work ethic, and experience of the more than 8,500 healthcare professionals, who make up our LHC Group family today, have proven to be our greatest competitive advantage. Our people truly are our greatest asset. Job well done.

Even as we continue to drive efficiencies throughout the organization, our quality scores and total patient admissions are at all-time highs, and our employee turnover rate has reached an all-time low. This confirms our continued belief in our successful operating model, growth strategy, and employee -- employer of choice culture. Our Company's proven ability to grow admissions, while simultaneously improving quality, retaining high-caliber employees, and becoming more efficient in our operations is the key to long-term success in today's healthcare environment.

Now, I'd like to give you an update on our activities in Washington DC. As you know, CMS released its proposed rule for calendar year 2014 Medicare Home Health Reimbursement in late June. Last Friday, CMS also released its final rules for Medicare Long-Term Acute Care Hospital and Hospice Reimbursement for federal fiscal year 2014.

As expected, the final rule increased LTACH payments by approximately 1.3%. The final rule also stated that the administrative moratorium for the 25% [referral] rule would expire for cost report periods beginning on or after October 1, 2013. All but two of our Long-Term Acute Care Hospital facilities cost-reporting years that are affected by this rule begin on September 1, 2014. Two of our LTACH facilities have cost-reporting years that begin June 1, 2014.

Also, as expected, CMS increased hospice payments by 1% in the hospice final rule. The final rule also provided additional clarification on CMS policy regarding coding, quality reporting, and hospice experience of care surveys. Our hospices do not participate -- sorry, do not anticipate any issues in complying with these revised policies.

With regards to the Home Health proposed rule, CMS has proposed to rebase Home Health payments beginning in 2014, by reducing reimbursement 3.5% per year for four years, or a total of 14%. This 3.5% annual cut is the ceiling imposed by the Affordable Care Act. CMS is also proposing to drop 170 ICD-9 codes from the Home Health Grouper, which will have a negative impact of approximately one-half of 1%. CMS estimated that the overall impact of its policies in the proposed rule is a negative 1.5% for 2014.

LHC Group is a founder and an active participant in the Partnership for Quality Home Healthcare, which has also joined forces with the National Association of Home Care and Hospice and the Visiting Nurses Association of America in advocating against these significant cuts and the effects on the seniors we serve. These organizations are actively engaged in an all-out effort to change CMS proposal before it is finalized in October, early November. In particular, the partnership has already implemented a strategic plan for addressing the re-basing cuts, which includes active lobbying of Congress to oppose the cuts, data analysis and research to address deficiencies in CMS' approach to re-basing, extensive grassroot efforts in support of our lobbying efforts, and media and public relation activities. The partnership's members, including LHC Group, have devoted substantial funding and resources to aid in these efforts. In addition, LHC Group will be posting partnership advocacy materials on our website as they are finalized.

The partnership and each of its members will be submitting comments to CMS in response to the proposed rule by August 26. In addition to the administrative track, the partnership is actively encouraging Congressional opposition to the re-basing cuts. The partnership's lobbying team has already alerted key members of Congress to the implications of the proposed re-basing rule. They are presently -- there are presently sign-on letters addressed to CMS circulating in both the House and Senate, expressing members' concerns about the magnitude of the proposed re-basing cuts. Some members have already contacted CMS directly to object to the proposed cuts. We continue to aggressively advocate with influential members to develop additional political support for opposing these cuts.

On the research front, the partnership has engaged Avalere Health, Dobson DaVanzo, and [Symbion] Healthcare to analyze the impacts of CMS' proposals and to evaluate the accuracy of their calculations. One partnership-sponsored study by Avalere Health found that legislative and regulatory cuts between 2011 and 2020 will total $72.5 billion over those 10 years. Re-basing and the elimination of the ICD-9 codes from the grouper will result in an additional negative impact of almost $22 billion between now and 2020. This means that between 2011 and 2020, the Home Health industry will experience almost $95 billion in cuts, if CMS re-basing proposal is finalized.

Additionally, partnership research has determined that the average margin for all home health agencies in 47 of the 50 states will be negative by 2017, if the proposed re-basing cuts are finalized. Our research team is also developing more up-to-date estimates of industry costs, which will include recent regulatory burdens, such as face-to-face and PECOS enrollment activities, sequestration adjustments, cost of implementing ICD-9 -- ICD-10 and the costs of legitimate non-reimbursable items like telehealth equipment and monitoring. Our team is also projecting the impact of these cuts beyond 2014 since CMS only evaluated the impact on 2014. The preliminary result of these analyses looks promising and we will be posting final report on our website as they are released.

While clearly we do not agree with these cuts, with uncertainty always comes opportunity. Because of well-conceived strategic choices our team has made with regard to infrastructure investments over the past few years, the LHC Group family today has the people and processes in place to fully capitalize on the opportunities for growth and geographic expansion that lie ahead in the form of additional hospital joint ventures and targeted strategic freestanding acquisitions with significant upside potential and limited overlap, such as the previously announced Addus and AseraCare transactions. Our 4.4% increase in organic growth in home health admissions for the second quarter, building on a 3.7% increase in organic growth in home health admissions in the first quarter, is a clear indicator that we are continuing to gain market share in communities we serve. Our team has never been more confident, more prepared and more eager to grow.

I'll now turn the call over to Don and Pete, but before doing so, I want to once again commend and thank our dedicated, hardworking employees for their commitments to those we are privileged to serve in communities across the country. Pete?

Thank you, Keith, and good morning, everyone. For the second quarter of 2013, our consolidated net service revenue was $166.3 million and net income attributable to LHC Group was $5.8 million and $0.34 per diluted share. Sequestration reduced revenue by approximately $4.2 million in the quarter. For the six months ended June 30, 2013, our consolidated net service revenue was $328.3 million and net income attributable to LHC Group was $12.1 million or $0.71 per diluted share. Sequestration reduced revenue by approximately $4.5 million for the six-month period.

Home-based segment revenue in the quarter was $146.5 million, an increase of 4.7% as compared to the same period last year. For the six months, home-based segment revenue was $288.5 million, an increase of 3.2% as compared to the same period last year. Facility-based segment revenue in the quarter was $19.8 million and $39.7 million for the six months, compared to $18.1 million and $37.2 million on the same periods last year. In quarter two 2013, we recognized a $614,000 increase to revenue due to a cost report settlement in the facility-based segment.

Our consolidated gross margin was 41.7% of revenue in the June quarter, down from 42.4% last quarter. This is the first quarter that has had the full effect from sequestration and that reduction reduced gross margin as a percent of revenue by 1.5%. Our G&A expense as a percent of revenue was 32.6%, up from 31.9% last quarter and a higher by 0.8% as a result of sequestration. [Over] 2013, we expect gross margins to remain in the range of 41% to 42% and G&A in the range of 32% to 33%. Bad debt expense was 1.9% of revenue in the quarter and we expect it to remain around 2% for the remainder of 2013. We expect our effective tax rate to remain between 40% and 41%.

We are raising our guidance range for the full 2013 year to $1.25 to $1.35 per fully diluted share, up from $1.10 to $1.30. We are also adjusting our net service revenue guidance range to $660 million to $670 million. These ranges include the continued impact of sequestration as well as an $800,000 revenue reduction in the fourth quarter which reduces EPS approximately $0.03, which is our best estimate of the impact that the 2014 proposed reimbursement changes will have on the fourth quarter of 2013.

The guidance also includes the announced acquisitions of the home health service lines of Addus HomeCare Corp. effective March 1, 2013 and AseraCare Home Health effective July 1, 2013. This guidance, however, does not take into effect the impact of other future reimbursement changes, if any; future acquisitions or share repurchases, if made; de novo locations if opened; or future legal expenses related to investigations, if necessary. You can drill down on these results further in Q&A. Now, I'm pleased to turn the call over to Don Stelly.

Thank you, Pete, and good morning to everyone. First, let me turn to volumes. Even with soft patient flow in hospitals as well as physician offices in the second quarter, we were able to increase total new home health admissions by 16.2% compared to the same period prior year and organically grow admissions by 4.4%. Growth in new Medicare home health admissions was 16.4% compared to the same period prior year and organic growth was 4.7%.

Investments in sales training, clinical strategies, territory planning, and a continued focus on our overall growth culture has truly helped to attain good growth so far this year. We plan to continue this emphasis and achieve similar growth numbers for the second half of the year; expect our organic total admissions growth to land between 4% and 5% for the year 2013.

Turning briefly to census, our home health average daily census increased 5.9% to 34,923 in the second quarter as compared to 32,988 in Q2 of 2012, while organic growth in home health was essentially flat. Of note, recertifications for the quarter were at a rate of 52.6%, down just slightly from the first quarter of this year and down from 54.9% same period prior year.

Now, moving on to point of care, we continue to move our operations to a point of service model. Since our last call, in fact, 23 agencies have gone live, bringing now the total to 154 agencies up and running. All along, I said that our conversion schedule and timeline have been carefully crafted, crafted to balance efficiencies, to minimize operational disruption of the entire portfolio, and for us to gain extensive knowledge of the hardware, software, and the model, as we proceed to converting larger agencies. We're pleased with each of these areas thus far and thus are now going to convert three of our largest agencies in this third quarter. All in, a group that represents about $65 million in annualized net revenue.

And as stated previously, we do experience reductions to margin until that pivotal six-month post-conversion point when we didn't see profitability increase from its historical averages of the providers. Because so, we're estimating that converting the agencies [in the forementioned] to reduce EPS by approximately $0.04 between now and the rest of the year. This reduction has been accounted for in our guidance that Pete talked about.

Next, I'd like to give a little detail to emphasize Keith's earlier comment about our quality. First, throughout all service lines, no agency or facility has received a condition-level survey from licensed agencies this year so far. Furthermore, 30% of all of our operations surveyed didn't have any deficiencies at all. In home health, our ACA trade has never been lower. In hospice, our excellent care rating, never been higher. And in LTACH, we far exceed the national outcomes for the three mandatory reporting measures. Certainly, we have continued room for improvement, but we're employing a proven strategy to seize this opportunity.

A final comment on quality is that between home health and hospice, we will have 113 locations undergoing joint commission surveys between now and the end of the year. So we are intensely focused on quality and are pleased with our results moving into the remainder of this 2013.

Lastly, I'll touch on our two most recent acquisitions, Addus and AseraCare. Specifically to Addus, we have turned the corner on the transition and now because of so began converting from their legacy system on to our point-of-care platform. We do not expect any further drag from Addus and are extremely pleased with its integration and want to reiterate that we think it is a breakeven for the year.

AseraCare, I'm proud to say, is following in the footsteps of Addus. We acquired this company that has great upside potential but was losing money on a direct margin basis. Our turnaround, even since July 1 on acquisition, is ahead of our internal schedule. And like Addus, we see our AseraCare team contributing greatly as we go into 2014.

In closing, I too want to recognize our team. Team, thanks for all that you do for us as a company and truly for making a difference in the lives of others.

John, we'll now go into the Q&A portion of our call.

Thank you very much. (Operator Instructions) Our first question comes from Kevin Ellich with Piper Jaffray. Please go ahead with your question.

Good morning, guys. Thanks for taking the questions. I guess, first off, could we talk a little bit about the margin strength that we saw in the quarter, I guess? How would you characterize it or what's really driving that, the strength that we're seeing?

Well, Kevin, this is Don. I'm assuming that you're talking about in the aggregate.

Yes.

There are a couple of components. One -- let me just touch on LTACH and get ahead of that. Remember, there was a prior period in there. And so that did help us in the quarter and I don't want you to forget that. But overall, we're really pleased with some of the tools that -- all along, probably 12, 16 months ago, we've been talking about our investment in technology all the way from our branch summary report to some of the metric runs that we're allowing our team to get real-time is truly helping us to manage the business concurrently. And specifically, it's through, what I'll call, proper utilization, because you'll notice our visits per episode are essentially the same. But it's how we're managing the episodes and how we're ensuring productivity for all of our workforce.

A year ago at this time, we had less than 70% of our workforce fully productive. That number has dramatically increased. And so the efficiencies need to be balanced, but with that proficiency and [components]. So I guess, I'm not sure if I'm answering your question, there are a couple of components, but it really is monitoring SWB concurrently. I have to say that Pete and Jeff and Eric and our team are giving us projections concurrently each week of the subsequent month that guide us into going into [play in] areas so to incrementally produce better operating results. And then, lastly, we invested in these last two years tremendously in our leadership. So our team truly does not only blow to follow, but they know how to do it now. So I think all those things combined or allowing us to see these margins and pretty proud of them, honestly.

No, that's helpful, Don, and since I have you, with the $0.04 drag that you expect for the back half of the year from the point of care rollout, is -- where does that come from, is that an impact on revenues or cost?

It's actually cost, and it's because, remember, you got 60-day period in which we actually take all new admissions and any recertifications and when running parallel systems. So that makes us have to flow it up the PR in hours, and usually the overtime hours. As well, any conversion help from our resource team gets coded to those providers versus the G&A, because it's there. And then, honestly, productivity slips, because you're learning the new system with the Samsung 2 and Home Care home-base. And we see that dip, and honestly the reason it's so big is we've converted our largest provider in our portfolio, and we're in the middle of that.

And so, in my prepared comments, I was trying to get to that point. This was by design. We've been doing this a year-and-a-half now, and in order to become knowledgeable and proficient, we certainly weren't going to convert a Mississippi Baptist, our Jackson agency, then. And we wanted to make sure that we knew, we have ironed out the king. So it's really on the cost side. And as a matter of fact, we think we'll see an uptick on revenue, because we more accurately capture the severity in the [seas] that the patient's exhibiting once we get to point of care.

Okay. And then, just two last quick ones here. The [Palmetto] wrap suppression, could you maybe talk a little bit about the impact that you saw in this quarter. What do you expect and is any other fiscal intermediary user? Looking to implement anything like that?

Well, I'll take the first part, and then maybe Pete, either you or Jeff take the cash report of that. The good news is that we did have providers for PGBA on reps suppression, but once we put our action plan in place and show them why, we were excited that they released it, and I want to say this, a lot of what we exhibited in town there was because of our internal compliance programs. And so we were pretty quick to tell them that. As far as to the financial impact inside of the quarter, you guys have anything to add to that?

Yes, sure. This is Jeff. I'd be glad to address that, Kevin. The [wrap suppressions] we think had about a little over a four-day impact on our DSO. We've actually seen 19 of the 20 that were under wrap suppression lifted, following the end of the quarter, and the cash dig into flow back in now. So we are kind of looking forward, I think our DSO is probably going to be somewhere in the mid 40s, or a little lower than we saw at the third end of the -- second quarter.

Got it. And any idea why they implemented this, and why we haven't seen any other max implement summary programs?

Well, there are different schools of thought, but I would be hypothetical or just conjecture for me to say otherwise. I mean we think it's just in the [ag] that -- from what we hear that people would [drop or absent] in some cases folding the doors and closing the provider and leaving them with the bill just a multitude of other reasons and in I think from our standpoint, given we don't disagree with whether it's PGBA or other max making sure that claims are clean. What we disagree with is that when we impose self punitive measures to make sure that we drop clean claims, don't penalizes on cash and I think they got that point.

Got it. Thanks a lot. I'll hop back in queue.

Thank you. Great questions.

(Operator Instructions) Our next question comes from Whit Mayo of Robert Baird. Please go ahead with your question.

Hey, thanks, guys. I think that PECOS is becoming effective this September, maybe I'm wrong, but Don, maybe can you talk about how you've been preparing for that internally and maybe just remind us on the rollout on when that does expire?

Sure. I'll let Keith talk about the rollout. On PECOS, the good news is as they procrastinated and we're not exactly sure if September is going to be the date or not, but we've never stopped preparing. And so between our sales and ops force, we have consistently made sure that all existing physicians that give us at least one admission, that provide us with one admission per year, is signed up and we've kind of tabulated that down. Obviously, when we started, we had about 8,000 physicians on there; and now, it's a handful, it's less than 100. I don't want to mislead you; it still could be a problem as we go forward, but we don't see that as problematic right now. And my last comment is actually on our dashboard, our agencies will be able to go and click on a button and see at any given time, because of the work that our IT staff has done, how many patients on service would be at risk for that and at least go -- allow us to go get that. So Keith, would you (multiple speakers)?

Whit, the rollout on is set to expire in January of 2016. We're already working, lobbying for the permanent fix -- continuing to lobby for the permanent fix to rollout on. It's the fix to remind you is in the wage index and productivity in rural markets. It appropriately recognizes that wages are lower in rural markets, but it doesn't incorporate the lower productivity because of the longer drive times in those rural markets. And we've communicated that and provided research. I think it's understood the question is how do we permanently fix it. So I guess what I'm saying is feel pretty confident there is a lot of -- there is just always a lot of interest in that issue. I would prefer to see a permanent fix to it, but if we don't give that, I'm pretty confident we'll get another some sort of rollout on patch until we can get to that permanent fix.

Yes, no, that's helpful. I just couldn't remember it was 15 or 16. Don, just on the PECOS discussion, do you have a sense today of what percent of your admissions could potentially be at risk from your physician -- referring physicians that are currently perhaps not enrolled in the system?

Yes, I would say none.

None, okay, great. And do you have an idea for how much you're going to spend on these point of care conversions over the second half of the year, maybe remind us how much you spent this year and maybe comment a little bit just sort of on the return on investment that you've been able to achieve there?

I'll take the latter, because I think maybe Pete will have to bail me out on the first one because from my standpoint, it's all operational dollars because the CapEx is already baked into it. But usually, we see upwards of a 200 basis point decay and we're seeing about 200 basis points uptick in between those six months and 12 months. So when you're looking at some of our larger assets, like I said on that $65 million book of business right now, we really want to and anticipate seeing the uptick on or around March, April, May of next year.

And I'll take the answer on the return on the investment. We had a question earlier about the margins in the quarter. And the margins in the quarter are a direct result of the return on investment of the point of care system that started back in 2011. We're seeing productivity improvements, we're seeing margin stabilization when we look at how we manage our business, it's changing from a month retrospective look at operating results to a current productivity and staffing metric that we're taking care of. So to say that we invested $11 and now, we're getting $12, I just don't think that's the right way to look at this type of an investment. This is a complete change in the way we do business and I think you're seeing it in the margins that we have right now.

Well, [two], you can go back and you can look at the G&A numbers and some of the other things, it's allowing us to put more inside of the home and not layer out the G&A. So I think all of those factors and again, I alluded to and you can go back into the math, it'll be about a $0.04 EPS hit between now and the end of the year on these conversions.

Yes. Pete, do you have any of those productivity metrics that you collect internally that you could share quantitatively or qualitatively to help us get a sense of how much more efficient your clinicians are?

Don talked about them earlier a little bit. I mean, when he was saying that 70% of our staff was productive, it's a metric in the past and that's a higher number now. Generally, what we do when we're looking at productivity, we look at it on an agency-by-agency basis. It changes based on the census that you're talking about, based on the mix between Medicare and other payers. So a blended number, I think really, you just have to look at the margin and the improvement that we've had there and the stabilization factor in the sequestration and you can kind of see what's going on in (multiple speakers).

Yes, no, absolutely. And one just last final question is just on your facility-based segment, specifically the LTACH, maybe Don, if you could maybe talk a little bit about the 25% rule and how you see that playing out over the next year and maybe just remind us if you've added any new beds to a lot of your facilities with the moratorium sun setting, just strategically has anything changed with regards to that business? Thanks.

Sure, and another good question, Whit. Keith talked about the cost reporting periods and how that seven of our LTACHs will begin September of 2014 and the other two June. That's an important point. The other is of our nine LTACHs, remember six of the nine are rural and therefore you only have three that really would even be at that 25% threshold and of those two are MSA dominant. So kind of in a nutshell, I'm trying articulate of when the timing of those rules will go into effect and we only have ruling that's going to be a 25% threshold and that's the one that services our New Orleans market. All of that, it still absolutely will affect us, but we feel that we have mitigation plans to do exactly what you alluded.

We're going to be shifting some beds around, we certainly have other potential that I don't want to get ahead of myself talking about actually possibly some M&A activity in select key markets that can offset that and I think my final is our goal in all of our facility base is strategically to mitigate this with kind of a continued contribution between now and the end of 2014. Lot of moving parts in that though, but I wouldn't get ahead of it with and kind of baking what you saw this quarter continuing because of the things that we've tried to tell you, or nuances.

Yes, I mean, maybe, is there a spot number to point us to just to kind of think about what you believe a sustainable margin profile is for the next two quarters just to give us a sense as we enter 2014?

Wouldn't you say, Pete, I'll ask you to probably -- yes, on the LTACHs, I just take whatever we look like year-to-date through the first six months and run that out. I mean --

Yes, I mean for the LTACHs, it's always a first and fourth quarter [fall] and so really I think that the best thing to do would be to take the $600,000 out of revenue in the second quarter and look at that same effective revenue and cost numbers for the second half of the year. They hadn't really moved the number of patient days is relatively stable. I guess is down a little bit on paid days is down a little bit. So I mean we've got some good operating results going on in there. But I don't really see are trending much different than we had any other year for the third and fourth quarters.

Yes, great.

Okay. And maybe, sorry, just one final last one is just any commentary just on Medicare Advantage within your Home Health business and I'll hop off. Thanks a lot.

Maybe global, I'll throw it to Keith. The answer is yes, we have had shift in non-Medicare business that moves from Medicare Advantage to commercial, but opposition all along has is what -- regardless of how they pay, we've been pretty clear that we're not going to take a loss on that. And so, in looking at our numbers, we're down in the aggregate. I'm not going to go into organic versus new acquisitions. We're down on our census numbers for Medicare Advantage, and we're down a little on our per-visit managed care contracts.

And the good news is, you heard me say that we were flat, both prior period, we would replace that with Medicare. And I think that's a dynamic [with] that you're alluding to. Specifically, we have a payer that was paying episodic, that's going to go to per-visit, and therefore make us lose money. We're not -- we're going to exit those, and we've exited some, we've added some good ones, and in the aggregate, that's the numbers that are floating through. Globally, [out through], made the question, Keith, to you to talk about our approach.

Yes, I mean you're -- of course, you're absolutely right. But I guess that we continue to have the policy that we won't accept any commercial pay-managed care business, whatever, as a loss leader to try to get to Medicare, our other profitable business and I think payers know that. But I'm really encouraged by the conversations we're having with those payers now.

And what's really changed the game for us is our ability to predict outcomes and to -- and because of that to put ourselves at risk for performance with them in exchange for a better rate, a better rate structure. And when we do that, we take ourselves out of the position of a commodity and bring something unique to the table. So I'm pretty excited about that. I can't -- we can't report any big national contracts that are under risk arrangements. So I'm not saying that, but that's where we're going clearly. Those are the conversations they want to have. And when I talk about risk, let's be clear.

Today, the proxy for quality in our business is hospital readmissions and we're seeing tremendous predictability in our model, in our ability to reduce re-hospitalizations, when the operators apply certain techniques in a market. The question is how do we get paid for it, because if we're getting commodity rates, and we go in and reduce re-hospitalizations about 20%, we get the same rates obviously, and the payer ends up with a 20% lower rate, re-hospitalization rate, and that works for them, but doesn't work for us. So that's just a whole -- I'm saying a whole lot, but I'm happy you understand the kind of conversations we're having, and I'm very optimistic about that.

No, that's really helpful. Thanks a lot. Good job, guys.

Thank you, Whit.

Our next question is a follow-up from Kevin Ellich with Piper Jeffray. Please go ahead with your question.

I had a kind of big picture question for Keith. Just wondering with the potential re-basing in Home Health, I guess, could you give us an update on the efforts in Washington? You made a few comments in the prepared remarks, but also I'm wondering if this cut goes through what you do think can happen to the industry and what does the outlook look like for acquisitions and valuations?

Right. That's a really good question, but I'm not going to have a -- I'm not going to give you a direct answer [for, obviously] because we don't know where valuations could go. So what our strategy right now is that we're being -- if we're pulling the trigger on an acquisition, we're looking for something with a really low revenue base relative to the potential in a market. And so the pricing becomes less of an issue. Even if you have to pay a little bit of a premium, you're paying a premium on a lower base.

What we are not looking at right now are fully matured companies within a market, where the return has to come from synergies. That's a tough deal to do right now because obviously the sellers don't want to sell for the price where we'd be willing to pay when we apply all of the risk to it. So that's how it affects our strategy, I don't exactly know where pricing will go, because I don't know where re-basing will end up. I will say this, though. Regardless of what the outcome is, whether we get exactly what's in the proposed rule or some watered-down version of it which is what I believe we'll see. Still with these kind of cuts laid out over four years, you're going to have significant consolidation in the industry. I mean we've had it before with lesser cuts on the table.

And for us, we look at consolidation two ways, we're either taking market share in markets that were licensed to serve when other providers that don't have the scale we have start trying to cut employee benefits or cut services or do all of those things to try to survive, it tends to drive volume our way and of course also in markets that we aren't licensed to serve, when we see quality providers that just don't have scale beginning to suffer and look at options, we go in and make those acquisitions always preferring to go into a new market and buy a low revenue base with a lot of upside potential and then drive the volume ourselves rather than pay for it.

Got it. And if you look at the aggregate market, Keith, I guess what percent kind of falls into that camp of what you guys are looking at with that low revenue base?

Well, if you think of -- I don't know what the recent number is, I'm a little stale on this, this was two years or three years ago, but when we looked at all home health providers in the country, let's call it about 10,000, and if you group them by common ownership, like one company or a small company that might own three or four providers. If you look at it that way, two-thirds of the people, individuals or entities that own home health providers had total revenues of less than $9 million. So we kind of think of it that way. There are a whole lot of owners that have revenues of less than $10 million out there and this is going to get pretty tough if these cuts come through for a company of that size. You can't put in a point of care system, for example. You can't afford to do that; and to bring in the analytics that Don alluded to earlier, you just can't do that with a $10 million revenue base.

Interesting. Okay. That's all I have. Thank you.

I'd like to turn it back over to Keith Myers for closing comments at this time.

Okay. Can I say -- I should have done this early, but failed to. You've heard today from Jeff Kreger, who is our Senior Vice President of Finance and just been here since February and over this time, he's taken over the accounting and financial reporting and all the cash cycles in the Company. Specifically, this quarter, he and Eric worked very hard on the remaining guidance that we put together so that we could adjust that for the remainder of 2013. You've heard from him today a little bit and I think you're going to be hearing from him more in the future. Jeff, welcome to the team and we're glad to have you around. So --

[If not, go ahead, Keith].

Right, thanks, Pete. Well, thank you for joining us this morning. On behalf of all of us here at LHC Group, we certainly appreciate you taking the time and appreciate your questions. As always, we're available to answer any questions that may come up between our quarterly earnings calls. So have a great day. And thank you for your confidence and support.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference, you may now disconnect. Good day.