LHC Group Inc (LHCG) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by, and welcome to the LHC Group's fourth-quarter 2013 earnings conference call.

(Operator instructions)

As a reminder, today's conference may be recorded. It's now my pleasure to turn the floor over to Eric Elliott, Senior Vice President of Investor Relations. Sir, please go ahead.

Thank you, Huey, and welcome, everyone, to LHC Group's earnings conference call for the fourth quarter and year ended December 31, 2013. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy, along with other key information about LHC Group and the industry, on our website at LHCgroup.com. In a moment, we will hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Jeff Kreger, 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. I am pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you, Eric, and good morning, everyone. I will make just a few opening comments and then turn it over to Jeff and Don to provide a brief overview of financial and operational performance before going to Q&A.

Let me begin by thanking our team of dedicated healthcare professionals for their consistency in delivering high quality care for the growing number of patients, families and communities we serve. One thing we never lose sight of is the fact that our people and the high quality care we provide are the greatest competitive advantage we have. Thank you for all that you do each and every day for those we serve.

Beginning with external growth, the number of quality acquisition opportunities coming to market continues to increase as the negative impact of the Affordable Care Act is being realized by home health agencies across the country. Since CMS released its final rule on rebasing on November 22, we have seen an even more significant spike in pipeline activity. With certainty that the home health industry will be hit with an additional 7% cut, assuming an annual market basket adjustment of 2%, more and more home health providers are evaluating alternatives.

In recent years, our greatest challenge, as it relates to our ability to close on acquisition opportunities, has been the lack of clarity around future Medicare reimbursement for home health. We believe the clarity in reimbursement over the next four years will serve to bring buyer and seller expectations in line and significantly accelerate consolidation in the industry.

An example of this is our recent announcement that we signed a definitive stock purchase agreement with BioScrip to purchase two of its operating subsidiaries, Deaconess HomeCare and Elk Valley Health Services, with combined annual revenues of approximately $72.6 million. Deaconess was established in 1969 and is a charter member of the National Association of Home Care and Hospice and accredited by the credit agent commission for healthcare.

When you see a nationally recognized provider with a long-standing reputation for providing quality care seeking to be acquired, then you get a sense of the reimbursement headwinds causing many providers to look for alternatives. We have worked hard over the past several years to prepare for what we believe will be an unprecedented period of consolidation in the home health industry. As a result, we are well-positioned to produce significant external growth over the next several years.

Our plan is to aggressively grow hospice services as well, especially in markets where we have a strong and established home health presence. On February 28 we closed on the recently announced transaction to acquire a hospice provider located in New Orleans, Louisiana, covering nine parishes in the state of Louisiana, which has a facility need review for new hospice providers. This acquisition will allow us to grow our hospice services in Southeast Louisiana, where we have a strong existing home health presence.

In response to changing needs and emerging opportunities, and to continue developing a broader range of in-home services in the markets we serve, we've also made the decision to grow community-based services in certain markets where we have a home health presence. Similar to the early growth of our hospice business, we have historically provided this service line in just a few select markets. However, like hospice, we see an opportunity to expand this business into additional markets in which we have a home health presence.

This opportunity is evident in the Deaconess/Elk Valley acquisition we discussed earlier. Our purchase of Elk Valley health services will add nine new home health locations to the 26 existing locations, and two hospice locations we already operate in Tennessee. In addition to providing traditional home health services, however, Elk Valley is also a community-based services provider that is licensed to cover the entire state of Tennessee.

As a result, the Elk Valley community-based services platform provides us the opportunity to grow our CBS business throughout our other multiple markets in a state where we already have a home health presence.

Consistent with this strategy, we recently announced the acquisition of a home health provider in Tompkinsville, Kentucky, which is also a community-based service provider with a service area covering three counties. With 25 home health locations now operating in Kentucky, we believe this CBS platform also represents a meaningful long-term growth opportunity.

And now I will turn it over to Jeff.

Thank you Keith, and good morning, everyone. For the fourth quarter of 2013, our consolidated net service revenue was $165.3 million. Our net income was $5 million, and our fully diluted earnings per share was $0.29 per share. Included in net income was a pretax non-cash impairment charge of $500,000, associated with an intangible asset impairment which was recorded in general and administrative expense on our income statement and which reduced EPS by approximately $0.02.

On a year-over-year comparative basis for the fourth quarter, sequestration effectively reduced revenue by $4.5 million in the quarter, equating to $0.15 of EPS. In addition, the 2014 home health reimbursement rule, which Keith described earlier, reduced revenue and pretax income by approximately $300,000, or $0.01 of fully diluted EPS.

Turning to our full-year 2013 results, for the 12 months ended December 31, 2013, our consolidated net service revenue was $658.3 million, our net income was $22.3 million and our fully diluted EPS was $1.30 per share. The effect of sequestration on our full-year 2013 results effectively reduced revenue in the year by $13.5 million on a year-over-year comparative basis, which then caused a year-over-year reduction in EPS of $0.45 for the 2013 year.

Reviewing our revenue results on a business segment basis, revenue from our home-based segment totaled $147.5 million in the fourth quarter, an increase of 2.5% over the year-ago fourth quarter. For the full year 2013, home-based segment revenue was $582.9 million, an increase of 3.4% as compared to the prior-year 2012 full year. Revenues from our facility-based segment totaled $17.8 million in the fourth quarter and $75.4 million in the full year 2013 as compared to $17.9 million in the year-ago quarter and $73.8 million in the prior-year 2012 full year.

On an overall consolidated income statement basis, our consolidated gross margin was 42.4% of revenue in the fourth quarter, down 50 basis points year-over-year from the 42.9% gross margin in the 2012 fourth quarter. The decrease in year-over-year gross margin resulted from the sequestration revenue reduction. On a sequential quarter basis, our consolidated gross margin increased 190 basis points in the fourth quarter to 42.4%, up from 40.5% in the third quarter of 2013. The sequential increase in gross margin was due to improved operating efficiencies.

Looking forward into 2014, we expect our consolidated gross margin to fall between 40% and 41% of revenue in 2014.

Our general and administrative costs as a percent of revenue were 33.5% in the fourth quarter, sequentially up 130 basis points from the third quarter of 2013.

The sequential increase in G&A costs resulted from the combination of the following three items. First, we recorded a nonrecurring pretax charge of $1 million in the fourth quarter of 2013. This charge related to a combination of the intangible asset impairment I mentioned previously, combined with a charge for recording our reserve for potential prior-year hospice cap liabilities related to previously acquired hospice operations.

Second, we incurred an increase in connection costs associated with our new point-of-care system following an increase in the number of our agencies who have now converted over to our new point-of-care system. Later in the call, Don will further discuss our point-of-care system and its benefits to the Company.

Third and lastly, we incurred costs in the quarter associated with a leadership conference which we hosted in November for our joint venture hospital partners. We believe both the point-of-care system initiative and the hospital partner leadership conference benefited the Company in 2013 and will continue to provide benefits to the Company in 2014. Looking forward into 2014, we expect consolidated G&A to be between 32% and 33% of revenue in 2014.

Our bad debt costs represented 2.1% of revenue for the 2013 full year, and 2.5% of revenue in the fourth quarter of 2013. In the fourth quarter, we experienced an uptick in bad debt costs associated with an increase in potential collection risks which we identified on certain commercial insurance payer claims and private pay claims. Looking into 2014, we expect our bad debt costs to continue to be around the 2.1% figure which we experienced for the 2013 full year.

Our effective tax rate for the full year 2013 was 41.5%, up from the prior-year 2012 effective tax rate of 39%. Be aware that in the prior year, our effective tax rate was comparatively lower than in the current year due to our ability in 2012 to utilize certain one-time nonrecurring income tax credits. Without the benefit of these one-time nonrecurring income tax credits in the current year, then our 2013 effective tax rate increased to 41.5%. Looking forward into 2014, we expect our all-in effective tax rate to fall between 41% and 42%.

Our FY14 net service revenue is expected to be the range of $700 million to $720 million and fully diluted earnings per share are expected to be in the range of $1.15 to $1.35. Our 2014 guidance includes the negative impact from the Medicare home health perspective payment system for 2014, which on a year-over-year basis is an approximate $5 million reduction in Medicare revenues, equating to a $0.17 reduction in EPS.

Our 2014 guidance also includes the impact of the recently announced acquisition of Deaconess HomeCare and Elk Valley Health Services, which is expected to close on April 1, 2014. Deaconess and Elk Valley include operations in the home health, hospice and community-based service lines, and these operations are anticipated to be accretive to our 2014 fully diluted earnings per share of between $0.05 to $0.10 of EPS.

Our 2014 guidance also includes an estimated $0.05 EPS reduction in the first quarter of 2014 due to the impact of inclement weather conditions in January and February which caused multiple agency closures. Our 2014 guidance does not take into account the impact of other future reimbursement changes, if any, other future acquisitions, any future stock buyback or share repurchases if made, any new de novo locations if opened, or any future legal expenses outside the ordinary course of business if necessary.

That concludes my prepared remarks. I am now pleased to turn the call over to Don Stelly.

Thank you, Jeff, and good morning, everyone. As mentioned on our last call, we have key focus areas that remain top of mind as we go through our day-to-day operations. Today, I will center my prepared remarks on a few of these, and begin with internal growth.

In the fourth quarter, total new home health admissions grew by 7.5% compared to the same period prior year, while our organic home health admissions declined by 0.8%. Growth in new Medicare home health admissions was 9.3% compared to the same period prior year, and organic growth for Medicare home health admissions declined by 0.3%.

For the year, total new home health admissions grew by 11.7% compared to the same period prior year, while total organic home health admissions grew by 3.6%. Growth in new Medicare home health admissions was 12.9% compared to the fourth quarter of last year, as well as organic growth on the Medicare home health admissions as being 3.7%.

So while our annual organic growth numbers fell inside of our projected range, we were less than pleased with the contributions of our fourth quarter to that number.

Multiple factors, none more impactful than soft hospital volumes across our geographic footprint, were identified as we prepared our growth initiatives for the upcoming year. In accordance, we enacted several approaches in late December and early January, just to experience unprecedented winter storms and business interruption. More specifically, as of March 4 of this 2014, we have already seen 162 of our agencies experience either partial or total closure, equating to literally thousands of unrecoverable work dollars.

While I'm pleased to report our success in continuing care provision for each and every patient during in this time, I can't report the same success in maintaining admission volumes. Thus, we are estimating this to adversely affect our first-quarter EPS by approximately $0.05. We're getting back on track and project our full-year organic growth to be around 3%.

Now moving on to my second update, point-of-care, we currently have 220 home health and hospice agencies up and running. As a group, we continue to see operating margin improve by over 150 basis points from pre-conversion baselines. We are converting 88 additional agencies in 2014, which will bring us ever so close to completion of our existing portfolio. An add-on note -- we will also be moving our existing community-based service locations to a point-of-care system.

Our existing eight locations, as well as two to be opened in April of this year, will all be completed by year end as well.

Having all three of our in-home service lines armed with electronic health technology is key to executing the tri-level of care strategy Keith alluded to earlier. We believe it seems to be also key to improving patient outcomes as they navigate through our integrated service model.

Next, I have received many questions over the past weeks in regards to our preparedness for ICD-10. As most know, on October 1 of this year, the ICD-9 code set used to report medical diagnosis and inpatient procedures will be replaced by ICD-10. We have a very detailed strategy and associated timeline mapped out in order for us to be prepared.

From training to systems testing, we have a lot of work to do, but that work is going on now, going well, and will yield an expected state of readiness. We estimate cost associated with ICD-10 mandates to be approximately $1 million in the year, or an EPS effect for the year end 2014 of approximately $0.03 per share. Incurred costs, beginning presently, are factored into the guidance that Jeff alluded.

Lastly, I will touch on Deaconess and its integration. As we approach the close of this transaction at the end of this month, we like where we are. All pre-closed deliverables are on track and our nine-month operational plan is formulated and ready to enact upon change of control. I know we have many soon-to-be LHC Group team members listening in, mainly from Hattiesburg, this morning. I'd like to extend a huge welcome to all, and especially to Penny Lovitt for being a rock during these past months.

I will be glad to answer questions, as well as the rest of the team, shortly. But before turning it over to Huey, let me again acknowledge our team for their tremendous dedication and, truly, for making a difference in the lives of others. I cannot thank you enough, but I certainly can thank you now. Huey, we are now ready to go to Q&A.

Sure thing, sir.

(Operator instructions)

Ralph Giacobbe, Credit Suisse.

Thanks. Good morning.

I guess first, just on the assumption for 2014, did you say embedded 3% organic growth? And is that just volume assumption? And then, is that inclusive of the weather or exclusive of the weather impact?

It is total admits and it is including where we sit right now with the softness in Q1, Ralph.

Okay. So help us sort of bridge that, right? Because coming off of the fourth quarter you saw some softness and we could certainly debate whether or not we are going to see some of that improve from a hospital volume perspective.

So I guess from where you sit right now, in terms of the comfort level of coming off of a negative going to a positive, inclusive of the weather impact, which suggests improvement into the back half of the year. So just trying to get your comfort level there.

Is it the inclusion of Addus, maybe, that would maybe help that organic number? How should we think about getting comfort with that organic growth coming off of a softer 4Q?

Actually, that's a very good question.

The first two weeks of January -- I have been with the company 9 years, and it is the worst 2-week period in the history of me being here. It put us in the hole pretty badly. Otherwise, we'd have had a pretty good quarter, based on what we saw just in the workdays that we did not have business interruption.

So we actually look at it, Ralph, on a -- every one of our sales reps as well as a per-day basis of what we think our run rate is. We had a couple of things of note there. We had a tremendous first quarter last year, so our hurdle rate for organic growth was already going to be tough, even without weather, but we did sustain that hurdle. Obviously, as I said, that did not happen because of the inclement weather.

So when we look at the next couple of hurdle rates, it looks pretty good. Then you factor in Addus, which again, will begin affecting that organic growth month number in April, we actually feel pretty solid about the 3%; we really do.

It's not easy. We have got a lot of challenges out there, but considering what we were able to do for the year in 2013 with a pretty bad December; considering where we are right now; I think those things will tie together for you pretty nicely if you map it out by quarter.

All right, great.

And then, just going back to the commentary on growing the community-based services and -- just trying to get a sense of how big that opportunity is to expand. Is there going to be a lot of greenfield there versus acquisition? Or how should we think about how quickly you are growing that business?

The first thing -- I think Keith alluded in his prepared comments -- we dissected our geographic footprint into essentially three areas. One is a substantive presence where we can have a tri-level service -- meaning home health, hospice, and community-based services.

If you look, I alluded in my prepared comments, we have eight community-based services now, representing roughly about $4 million. You can multiply that nearly seven times when we are going to bring on Deaconess, so automatically we are going to have a nice footprint that fits the tri-level of care. As well, we have got some tremendous leadership now in our system. But we are going to add triple the expertise when we get Deaconess in the fold.

So our model then becomes pretty refined and baked in to overlay to those three geographic areas. One, meaning the tri-level of care. The other, a dual, with the combination of either home health/hospice or home health/CBS. And then obviously the last is simply a smaller home health or our solo service presence.

So all of those things fit in and tie together Keith's comment to what I tried to put forth about what we are calling a tri-level of in-home service model.

All right. That's helpful. Then just my last one.

Can you update us on the strategy around the LTAC? Is that still core to you going forward? Is this something you'd sort of consider looking at other alternatives?

Just help us frame where the LTAC now fits in, because obviously you are aggressively growing the home health, hospice, and community-base. Just trying to figure out where that LTAC fits in at this point. Thank you.

Sure. That is another good question. You obviously are reading the tea leaves.

LTAC is something that we believe we have to be connected to, and be able to have a strong LTAC partner, especially in hospitals where we joint-venture any of the LTACs. Less and less we are believing that we need to necessarily own those LTACs.

We're obviously evaluating alternatives internally with regard to LTACs in light of the new readmission criteria that is on the horizon. There are certainly moves we can make to reposition those assets for them to be profitable and successful, but it takes time and resources to do all of that.

So we are just thinking about this. Is our time better spent focusing more on home health, hospice, and community-based services? Especially given the enormous consolidation opportunities in front of us. So, yes, we are evaluating those things.

All right. Thank you very much.

Kevin Ellich, Piper Jaffray.

Good morning, guys. Just a couple of questions.

Maybe, Don, if you could start off going back over the organic home health growth that we saw this quarter. And I might have missed it -- I know you called out hospital admissions, or hospital referrals. Was there anything else that caused kind of the weakness that we saw this quarter?

Good question, Kevin.

We had a really good October. We were doing really well. Had a lot of steam on us going into Thanksgiving, and candidly, a couple of factors. The hospital volumes in our communities fell off the face of the earth, and we're 50/50.

We've said that all along, so that probably hurt us a little bit more than we anticipated, because we were having such a strong run at mid-Q4. The next thing, and it sounds like an excuse, but it's really -- if you look back at it, it was real. The way that Christmas and New Year's fell for us, those lost workdays did not help us whatsoever recover what we saw from Thanksgiving to the early Christmas period.

So those two things combined knocked us off the run rate that we had saw in the first 7, maybe even 8 weeks of the quarter. So we noticed it, obviously, and we put some things into place that ranged from doubling call volumes on certain sales areas to weekend work; and we were just starting to hit the steam coming up, and then we had all of the inclement weather.

So it really was a perfect storm for us. That has kind of reversed. Well, it was reversing in early March. We had a couple of just tremendous days, and then yesterday and day before, we had literally all of our Kentucky agencies shut down on Monday and we're recovering now.

So I guess what I'm trying to say is, we were really predictable throughout 2013 until the last 7 or 8 weeks of the year's end. We had further bad luck and obviously, we're not the only ones. You all see that. We are recovering.

What I can't predict is what else going to happen between now and the end of March. We are only a select -- I think we have 15 agencies down to date. So we can recover and get back to our run rate.

What I don't know is, going into May and June what the summer months will look like. That's why, candidly -- I think Eric would kick me under the table, but I wanted to come out a little bit stronger on the growth and [Lee] just told me that the data would not support that right now even though the strategies may.

Got it. Okay, that's helpful. I appreciate that color.

Then going back to the acquisitions with Addus -- just wondering how is that performing relative to your expectations when you first acquired them? What have you learned over the course of the last 12-plus months with Addus?

Kevin, I'm not sure if you sit in my operational meetings, but I've learned a lot. Let me expand on your question.

How's the group performing to our expectations? It's a little short, but let me qualify that. It is certainly performing better than when we bought it. If you remember right, it was on an annualized $2 million loss run, which was about 5.5% on an op margin basis.

The portfolio we now have above 10%. But we have some California and Nevada drag in that; that's going to improve a little bit better.

What we learned, and I will tie that to Deaconess, is we were on a McKesson system when we bought that; and we, the Company, obviously meet. We made a decision to accelerate the conversion inside of late Q3 and Q4 that prevented us from being where I expected. But I think, and we believe, that it's going to allow the latter year ramp up more successfully than if I had waited to convert them.

With Deaconess -- I'll switch even though you didn't ask that. Because of that lesson learned, we are going to push them -- and for other reasons, honestly, but we're going to push them until we finish existing point-of-care conversion inside of LHC Group. So we get some operational steam because it is accretive right now. It was a little bit different.

I will end with this -- we had very little to lose with Addus, because it was losing so much money. And we obviously have a lot of risks because of the accretion that Jeff alluded to for Deaconess.

Okay. That's helpful.

And then lastly, big picture for Keith -- a couple quarters ago you guys talked about expansion into post-acute services, managing some skilled nursing for hospital partners. Wondering where that stands? And I guess what the timing is for when we can see some sort of expansion? Thanks.

So that is really around risk models. Specifically, we were talking about Ochsner Health System in New Orleans. I can say that now. We operate an LTAC there and we operate a home health agency.

There are a significant number of lives under capitation, that Ochsner has under capitation. We are talking about putting together a comprehensive post-acute joint venture to manage all post-acute services. Not just for the capitated product, while that is what is driving the conversation, but it is to handle everything.

So it's really a market-specific. So what you think of rolling out, we don't have any other hospital partner that we are talking about now to do the whole post-acute continuum in that way. But what we are getting is one-offs at different hospitals, where someone wants us to come in and help them manage their SNF.

It is usually to solve an issue that they are experiencing, a too-high length of stay on the SNF; and it is causing patients to back up in the hospital. The answer, of course, is that we need to take the lower-acuity patients in the SNF and move them to home health. That's usually what we find.

So when we talk about leading with home health, in every one of these cases, home health is the foundation that allows us to bend the cost curve. And the only reason we would reach upward into upstream verticals is to help manage patients down into the home health setting, to be honest.

Thank you.

Frank Morgan, RBC Capital Markets.

Good morning.

With all these opportunities out in the acquisition market today, I'm just curious if you have any thoughts surrounding your tolerance for leverage to take advantage of all these opportunities. So absolute leverage tolerance; but also any other structures you are contemplating to use as you think about consolidating of the industry.

Yes, this is Keith.

I don't want to get into any specifics. I'll just say that we're looking at a lot of different options.

Let's re-start from the first question, about our comfort around leverage. Historically, the Company's always had a check point at two times pro forma EBITDA; just saying that we want to check in when we get to that point.

If there is an opportunity that came up that would push us north of that for some period of time, but we could see a fairly quick return down to get back to the two times pro forma number or below, then that has been a rule of thumb. But now, there are opportunities that could come to the table that would require something more creative.

And yes, we are having those conversations. We are actually not initiating them. I guess you'd say we are fortunate to have people actually coming to us, seeing us as someone likely to be a leading consolidator, and offering alternatives when we come across those opportunities.

The last thing I'll say is that the earlier question about LTAC? That has come up, honestly, since we went public in 2005. It's just a question that always comes up -- what about the LTAC? Is it core business? Is it something you would consider doing something with?

The answer for me has always been, what are we going to do with the cash? Because we did not have enough acquisition opportunities to deploy that cash quickly, and we don't get it, so we are better just operating the LTACs and letting them be a cash cow. But now, with so many home health opportunities coming to the table we are having to rethink that as well.

So I guess I would just tell you that we're looking at all available alternatives that will allow us to maximize the consolidation opportunities that we see. It's not even in the future. They're here now.

Okay. That's very interesting.

One is just a clarification here. On the 2014 guidance, you commented about 3% total admission growth in your assumptions. What does that translate into in terms of organic growth versus -- I'm assuming, is that correct? If that's the case, I guess that would include these acquisitions. So what is the underlying organic growth rate assumption for admits?

Frank, this is Don.

That is organic growth and not factoring in Deaconess because -- excuse me, Addus -- will fall in to the category in April -- April forward. So that is organic.

Okay. Thank you very much.

You're welcome.

Darren Lehrich, Deutsche Bank.

Thanks. Hello, everybody.

A couple of things here. Keith, keying into the discussion around the LTACs. I know use of whatever the sales proceeds has always been a topic of debate, but I also recall that the overhead contribution that it contributed was another part of the discussion.

So I guess I would be curious to get your thoughts about how you think about your corporate in the context of, perhaps, not having the revenue associated with LTAC.

We actually, about two years ago we actually split that, so now it is a separate and distinct overhead load. So in the event that we did something with LTAC, that would go away.

Okay. That's helpful.

As far as the timing goes for Deaconess, when should we assume it to close? And what is in your guidance along those lines?

I will go with the first part. We do expect the actual close to be March 31. And on the guidance, I know Jeff alluded to our range.

So, Jeff, you want to pinpoint that for him a little bit more?

On the Deaconess range?

Yes.

Our Deaconess range -- we're expecting it to be accretive in the neighborhood of $0.05 to $0.10 for the nine-month period.

Okay. Does the range take into account a later close date? Or is that just the range of --

Darren, that is assuming the close occurs midnight, March 31.

Got it. Okay. That's what I was looking for.

And then, you referenced in your prepared remarks just the Medicare cap and I think you cited in relation to prior periods. Can you maybe flesh that out a little bit more? What was that? And how are you thinking about Medicare cap going forward for hospice?

Yes. The reason we called it out -- and by the way, the reason it is down there in G&A is it is a point of contention with, actually, the former owners of this hospice agency. We are currently working through with them as to whose liability it is.

Arguably, we believe it is theirs. It is the seller's liability. But conservatively, we recorded a reserve should that outcome play against us.

I see. Okay.

It is a prior period cap issue that has already been settled? Or did this become known in the fourth quarter?

It became known to us -- again, it relates to a much earlier period several years ago. Let me just take the opportunity to mention we currently have no hospice cap issues in any of our operations currently. So this risk and this issue relates back to several years ago and it is a liability that we took on with the acquisition of these assets.

Okay. Yes, that's what I was looking for, so that's perfect. All right.

And then the last thing is just, when we look at the guidance and think about it, obviously acquisitions are still not contemplated. In that context, just looking at the upper end of the range, can you help us think through what it would take to get there?

Is it a function of just better profitability year over year from Addus, and point-of-care margin benefit plus the organic? Or is there something else there that would get you to the upper end of the range that I didn't mention?

You actually touched on several of them. One is, I already talked about where we are with Addus and where we think the trajectory is going. That's factored into the upside on the range.

Organic growth -- I again said that I think the 3%. Granted, we have got all understand the headwinds there, but I think we are going to outperform that. Point-of-care -- I would not say that, though, because again we are still going to miss. We've got 88 agencies.

But I think the bigger thing is Deaconess. You notice the range right there. It is $0.05 to $0.10. What we don't know -- this is a really exciting transaction for us, but there are a lot of operational issues as we go into looking at how we are going to model it up, how we're going to overlay some of our processes, including, but not limited to, things with our CIA, just to make sure we're doing all of that right.

And also, we're not exactly sure, when you go into this, any kind of haircut on an existing book of business on net revenue. We're not seeing it now, so we're really excited about it. But I think we would be disingenuous if we baked that in and put that at the top automatically.

Got it. Okay. Very helpful. Thanks everybody.

(Operator instructions)

Whit Mayo, Robert W. Baird.

Thanks.

I just wanted to go back to the LTACs for a second. When we look at your mix, it's probably not the best headed into patient criteria and site-neutral payments.

So if you look to monetize those assets, do you think you need to invest in some new clinical programs and do some repositioning before you take that to market to make it attractive asset to a buyer? I guess I'm just curious, if they're not attractive or core to you, how you think about extracting value from those assets?

I guess I'll take the front end -- Whit, this is Keith -- and I will let Don maybe get on those specifics.

So I hope I did not miscommunicate that. It's not that they are not attractive to us or that we cannot reposition them. It's more of a matter of what is the best use of our time, given the consolidation opportunities right now.

So yes, we have -- not all of the LTACs we operate are the same. There are some that are well-positioned right now, and then there are some in some smaller markets that would have to be repositioned. Don, maybe can give him more detail about that?

Yes. I think, Whit -- and first of all, I thought you did a really good job coming out the other day with your analysis.

But obviously, no matter what we do, status quo isn't an option. So we're going to continue to invest in clinical programs, but we are also going to continue to do what we have always done in looking for other opportunities to mitigate this.

So it's not like we're giving up on this approach or strategy. It's just, we are going to overlay, as Keith said, other alternatives to test the waters out there.

There's no way, when we start looking at the net revenue effect going into fiscal year 2016, will we have the same portfolio as we do today, nor the same clinical programs or occupancy as we do today.

Whit, just let me also say, just to emphasize that -- we actually, in addition to the nine LTACs we have now, we have two additional LTACs in the pipeline. And those are in larger markets with hospital partners that we worked with. So we have been continuing to go down that path.

It is just now we're seeing so much volume come in on the home health side, and for the first time ever, we are seeing the potential that we could leverage the Company beyond two times leverage. And so we are looking at alternatives we have not done in the past.

Does that make sense?

It does. I guess one last question on LTACs and I'll move off the topic.

But do have a sense, Don, of when you look your Medicare cases today, how many are currently complying? I recognize there are a lot of changes that are going to evolve between now and 2015 and 2016.

Yes, we do. Obviously, you can go back to 2011; you can call support data and you can do a lot of data mining. What we don't know is, because there are obviously other LTACs in the market, how all of those shifts are going to come through right now either, and how we can consolidate some of those. For example, in New Orleans. Another example is here in Lafayette.

So we have some assumptions that would mitigate some of that, Whit. But I will tell you this, and I think Keith would allude and with his commentary on the two in the pipeline, our portfolio, as we see it today -- we are not going to stay as we are today existent.

For example, we have one small LTAC -- Keith alluded to us having nine. Next earnings call, that's going to be eight, because we are going to be consolidating that from a satellite back to its provider, which is accretive to us and it is better.

I want to reiterate. We're very clear on, as this progresses what we need to do to not stay in the net revenue decay environment that you yourself actually brought forth and saw.

That's helpful.

And turning to the pipeline for a second -- and I guess, Keith, I'd be curious how you could characterize the quality of some of the assets that you are seeing there. I guess I have a hard time, from where I'm sitting, parsing out what is a real opportunity and what could be potentially inheriting a problem.

Not all deals are good deals, and presumably some of these agencies may not even need to be in existence. I'm just curious how you think about balancing all of that.

You have historically been much more calculating and conservative than your peers, and certainly you can see what has happened to some of them. So I guess just a broader question, how you think about being disciplined on your acquisition opportunities.

Yes, well, the good news is that we are pretty predictable. I guess I'm pretty predictable. We always start with top line.

Let's take Deaconess, for example. Deaconess has been here since 1969 and has gone through couple of ownership changes that did not affect top line at all. The core operating group -- Penny Lovitt and her group -- have stayed with it through those transitions. Penny has been in charge for 30 years, so Penny came over with it.

When we look at that opportunity, we see very stable top line volume. We see very real opportunities to grow that, and then we see opportunities to improve the cost structure. For example, there on McKesson, they desperately want to go to home care/home base. They are begging for it, and we know what that move to that point-of-care system has done for us. We can see that visibility, so it's somewhat of a sure bet.

I'm obviously not going to mention names on the other side, but we have had an opportunity recently that got presented to us with about the same top line revenue as Deaconess, maybe a little bit more. But the ramp-up over the last five years has been incredible. Like 15%, 16% year-over-year growth; and you really cannot make any sense out of the ramp-up.

So the volume falls apart for us when we put it in a pro forma. They're already on point-of-care and they're already have really impressive margins -- margins that exceed the industry average. So when we look at something like that, we don't see anything but downside.

We are still applying the same discipline. The first stop for us is top line, always, though. And that's why we like the hospital joint venture strategy so much, is that we can really get our hands around where the patient volumes come from.

I will close this line by saying this: the one thing that I would put our team up against anyone at, is in our ability to operate once the volume comes in the door. I think we know this benefit and how to provide care and operate efficiently as well as anyone. What makes it fall apart is when you don't have the volume of admissions coming in.

Okay. That's helpful. One last one and I'll hop off.

Just back on -- and maybe I missed this -- on the bad debt in the quarter. I think you mentioned that there was a specific payer or something?

Was this a deterioration in your underlying collection rates? Did you write off a group of receivables with the specific payer? Any other comments would be helpful.

It was not a specific payer other than our commercial insurance and private pay bodies of receivables. And we have seen some trending that would indicate in some areas some increased potential collection risk.

We have not yet written those receivables off, because we don't yet think they are fully exhausted from a collection efforts standpoint. But we have reflected a reserve based on that assessment.

Whit, this is Don.

I will add just a little color, because I wanted to tie to our total organic growth being negative. One of the things Jeff is alluding to is that on occasion, we take in commercial patients on letters of agreement, or LOAs. And we have seen our collection probabilities much worse in that, so we are stopping to do that.

So while our growth rate looks poorly, honestly, it is a smart move. That is part of the thing operationally is attributing to Jeff disclosing that financially.

Got it. So it sounds like you just had a group of receivables that aged out to a point where it was appropriate to put a higher reserve. Is that a fair way to look at it?

That's a fair summary, yes.

Okay, great. Thanks, guys.

Thank you, sir.

Presenters, at this time I'm currently showing no additional phone questioners in the queue. I'd like to turn the program back over to Keith Myers for any additional or closing remarks.

Thank you, Operator.

Thank you everyone for taking the time to listen in and participate in the call this morning. As always, we will be available to answer any questions that may come up between our quarterly earnings calls. Have a great day.

Thank you, gentlemen; and thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.