LHC Group Inc (LHCG) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the LHC Group third-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the conference over to Eric Elliott, Senior Vice President of Finance. Sir, you may begin.

Thank you, Shannon, and welcome, everyone, to LHC Group's earnings conference call for the third quarter ended September 30, 2015.

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.

In a moment, we'll hear from Keith Myers, the Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Dionne Viator, Chief Financial Officer of LHC Group.

Before that, I would like to remind everyone that statements included in this conference call and 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 2015 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.

First, I want to congratulate and thank my outstanding group of colleagues for their many contributions to the great operating results our team delivered thus far in 2015. We are particularly pleased with our strong and well-balanced results during the third quarter and through the first nine months of 2015, due to the fact that our results were driven by strong organic growth, further significant leveraging of our G&A costs, and continued improvement in the operating results of prior acquisitions.

As a result, we are once again increasing our 2015 revenue and EPS guidance. Our increase in EPS guidance at a new range of $1.75 to $1.85 includes $0.08 of dilution for integration and transition costs for acquisitions in the fourth quarter and also includes a $0.02 dilutive effect in the fourth quarter from the 2016 home health final rules.

We remain intensely focused on growth in new markets through acquisitions and hospital joint ventures as well. On October 1, 2015, we completed the acquisition of Halcyon Hospice, which consists of 16 hospice locations across three states and annual revenue of approximately $41 million, bringing our annualized hospice segment revenue to approximately $115 [million].

Also since our last earnings call, we've added two smaller acquisitions, consisting of three home health locations in two states with combined annual revenues of approximately $3.8 million.

In addition, included in our press release yesterday afternoon was the announcement of the pending acquisition of Nurses Registry and Home Health for $5.7 million. Nurses Registry's licensed home health service area covers 16 counties in the CON state of Kentucky. The estimated population of the licensed service area is over 765,000, with more than 101,000 over age 65.

Estimated annual revenue is approximately $6.5 million. This acquisition is expected to close on November 11, 2015, and LHC Group estimates the earnings-per-share impact to be a negative $0.02 in the fourth quarter, including integration and transaction costs.

Year to date, we have now reviewed more than 264 acquisitions or hospital joint venture opportunities, including 114 since our last earnings call. Of these opportunities we've reviewed so far this year, more than 35 remain active, five of which we have exclusivity agreements on while performing confirmatory due diligence and negotiated purchase agreements. We continue to see a steady increase in the number of opportunities reviewed by our corporate development team period after period and we expect this trend to continue well into next year.

On October 30, CMS released the final rule regarding payment rates for home health services provided during the calendar-year of 2016 and beginning with episodes beginning on or after January 1, 2016. The national standardized 60-day episodic rate will increase to $2,965.12 in 2016, a 1/10 of 1% increase over the 2015 rate of $2,961.38. This is a net 10% increase in the national standardized 60-day episodic rate, due to application of a rebate decrease of 2.75%, case mix adjustment decrease of 0.97%, and net market basket increase of 1.9%, case mix recalibration and budget neutrality adjustment increase of 1.87%, and wage index budget neutrality adjustment increase of 0.11%.

The home health market basket percentage increase for calendar-year 2016 is 2.3% and the productivity adjustment is 0.4%, for a net home health market basket of 1.9%.

CMS reduced its estimate of nominal case mix growth between calendar-year 2012 and calendar-year 2014 from 3.41% to 2.88% and spread the adjusting payment over three years at 0.97% each year to account for nominal case mix growth. The finalized payment policies results in a 1.4% reduction of payments to all agencies and the overall impact of payment policies is $260 million in reduced home health payments for 2016 compared to 2015.

Our estimate for LHC Group is a negative 1.38% impact from home health Medicare revenue, which is in line with industry average and includes our impact from the case mix recalibration. In addition, CMS also finalized its proposal to implement a home health value purchasing program, which Don will touch on during his prepared remarks.

I'm happy to address any of these further during Q&A, but now I will turn the call over to Dionne Viator.

Thank you, Keith, and good morning. I would like to join Keith in thanking our team for their continued dedication and hard work producing not only strong results reported here, but high patient satisfaction and quality services.

Our results for the year to date, net service revenue for the third quarter of 2015 was $204.1 million, an increase of 8.7% compared with net service revenue of $187.7 million in the same period of 2014, and for the nine months ended September 30, 2015, net service revenue was $597.4 million, an increase of 10.6% compared with a net service revenue of $540.3 million in the same period of 2014.

Same-store revenue grew 6.8% for the third quarter and 4.7% year to date compared to the same period last year. This growth in same-store revenue is due to our growth in same-store admission, changes in patient acuity, and the increase in the Medicare episodic rate from 2014 to 2015. Net income for the third quarter of 2015 was $8.8 million or $0.50 per diluted share, an increase of 43.3% compared with a net income of $6.2 million or $0.36 per diluted share in the same period of 2014.

For the nine months ended September 30, 2015, net income was $24.6 million or $1.40 per diluted share, an increase of 50.9% compared with net income of $16.3 million or $0.94 per diluted share in the same period of 2014.

On a consolidated basis, our gross margin was 40.8% of revenue in the third quarter of 2015 and 41.1% of revenue for the nine months ended September 30, 2015, as compared to 39.7% and 40.4% in the same period of 2014.

Our general and administrative expense was 29.8% of revenue in the third quarter of 2015, compared to 30.2% of revenue for the nine months ended September 30, 2015. This compares to 30.1%, 31%, and 31.9% in the same periods of 2014.

Our bad debt expense represented 2.4% of revenue in the third quarter and 2.5% for the nine months ended September 30, 2015, as compared to 2.1% and 2.2% in the same period of 2014. This increase in the provision for bad debt year to date as compared to 2014 is primarily attributable to additional reserves being recorded for patient claims associated with two commercial payers, one of which is now in bankruptcy proceedings, as well as an increased reserve for aged Accounts Receivable due to legacy system transition from prior-year acquisition.

Our effective tax rate in the second quarter and for the nine months ended September 30, 2015, was 41% compared to 40.7% in 2014.

Regarding 2015 full-year guidance, as Keith highlighted earlier we are raising our full-year 2015 guidance for net service revenue to a new range of $805 million to $815 million from the previous range of $780 million to $795 million. In addition, we are raising our fully diluted earnings per share to a new range of $1.75 to $1.85 from the previous range of $1.70 to $1.80.

This guidance includes the negative impact on the fourth quarter from the Medicare home health prospective payment system for 2016 of approximately $0.02 per diluted share. This guidance also includes the recent acquisition of Halcyon Hospice and the pending acquisition of Nurses Registry, which are anticipated to be dilutive to LHC Group's fourth-quarter 2015 earnings per share by approximately $0.06 and $0.02, respectively, totaling $0.08, due to transaction and integration costs.

This guidance does not take into account the impact of future reimbursement changes, if any; future acquisitions, if made; de novo locations, if opened; or future legal expenses, if necessary.

For the full year of 2015, we expect gross margins to be in the range of 40.5% to 41.5%; G&A as a percent of revenue to be in the range of 29.5% to 30.5%; bad debt as a percentage of revenue to be in the range of 2.0% to 2.5%. Our effective tax rate in 2015 will be in the range of 40.5% to 41.5%.

The main factors behind our raise in this quarters are that we continue to see strong volume and revenue growth in our same-store locations within the home health and hospice divisions, strong cost management, and continued improvement in prior acquisitions.

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

Thank you, Dionne, and good morning to everyone and thanks for listening in. I'll begin my prepared comments by touching on just a few things that are ahead of us.

As Keith mentioned, CMS has finalized its proposal to implement a home health value-based purchasing program, which is, of course, intended to incentivize the delivery of high-quality patient care. This program, which would withhold 3% of Medicare payments beginning in 2018 and increase that withhold to 8% in 2022, would be [redistricted] to participate in home health agencies, depending on their performance relative to specified measures.

The value-based purchasing program would apply to all agencies in the following states: Arizona, Florida, Iowa, Massachusetts, Maryland, Nebraska, North Carolina, Tennessee, and Washington state. CMS estimates that the payment redistribution under this program will be approximately $380 million.

As a Company, we have 29 home health providers located in these nine pilot states and that we support any and all efforts to enhance value across that industry. And as a side note, for our 29 providers this represents a total of $118 million in our net revenue portfolio and we truly look forward to their future total performance scores demonstrating superior quality as a result and enhanced shareholder value as the exchange formula is applied for an uptake in net revenue.

Now turning to briefly to volumes. As Dionne talked about, growth was really good in the quarter. Growth in home health admissions for the quarter was 5.3% in totality and same store came in at 2.9%. For the nine-month period, we produced a total admit growth in home health of 8.3% and same-store of 4%.

In relation to hospice for the quarter, we grew 7.3% in totality and same store was 7%. Through the first three quarters of this year, as compared to the same period in prior year, our total growth in hospice was 10.4% and same store of 7%.

While we are pleased with our growth and the accuracy of our guidance around it, we are really pleased that we've been able to leverage costs and, as Dionne said, reduce G&A as a percent of net revenue while experiencing this growth. Specifically -- and I won't repeat the numbers that Dionne talked about with the G&A and net revenue, but it was 200 basis points, which really drove that reduction of the things that she talked about and drove our EBITDA from 6.7% in 2014 to 8.7% year to date in this 2015.

I truly cannot say enough about our team's execution of this approach. They've worked extremely hard to do this, and the great part is that they simultaneously improved quality and volumes, a trend that we obviously desire to go forward into next year.

My last update is to add just a little detail to what Keith alluded to in relation to acquisitions so far this year. Year to date across all service lines, we have acquired and integrated 22 locations, representing a total of $57.3 million in net revenue. Add in Nurses Registry, which will close a week from today, and we will now have $63.8 million in newly added net revenue in a 10-1/2-month period this year.

My final point, as Keith also alluded, that we are negotiating purchase agreements that we expect additional revenue to fall into the portfolio prior to year-end.

So I say all this for this take-home point on this update. This new portfolio revenue wasn't and isn't at corporate margin, so while we still have a lot of work to do to capture it, the upside hasn't been fully recognized in our present earning run rate, but I do expect it to turn that way substantively within the next couple of months.

We can answer more about that and any other topic that we've touched on shortly, but before so let me close by also thanking our team. Once again, you've delivered stellar performance in the midst of a very complex environment, and to those of you listening to our call, we appreciate that as well.

Now, Shannon, I'll turn the call over to you and open the line for questions.

(Operator Instructions). Ryan Halsted, Wells Fargo.

Thanks, good morning. I wanted to start with the guidance, a pretty significant increase in the revenue growth guidance. You mentioned a couple of factors there, but I was hoping you could just highlight sort of what's the biggest swing factor that you see to help you achieve the high end of that guidance?

Ryan, I'll take this. This is Don. The biggest and most contributory factor is the volumes that we see right now.

When we mapped out all year our census growth, we essentially hit around July in census where we thought we'd be today. So with the episodic rates that we put forth in the schedules, that really is propelling us right now and is going to carry forth our increased volumes into the quarter. So, the admit loans and the census is really the biggest factor contributing to that, and we feel pretty good about it right now.

Are you including the pending transactions in the guidance?

No, that is exclusive of that. It is inclusive of Halcyon, as we talked about. And Nurses Registry, which we disclosed as well for the drag.

Got you. Okay. Next question, you mentioned an increase in patient acuity. I was hoping maybe you can provide some color on what you saw there.

There's twofold there. One is that on the clinical component where we are seeing an uptick in the severity of that and that's just really due to comorbidities and [OH] accuracy, but the other thing is that a year ago at this time about 54% of all of our patient population received at least one therapy visit. With our acquisitions and just the profile changing, that number is up just above 60%. So those two things in combination are increasing the case mix.

Are you seeing any particular procedure types -- or, I'm sorry, episode types? I guess I was alluding to joint replacement procedures, any kind of uptick you are seeing in particular types of cases?

No, really, it is across the board. I mean, on the clinical side, it's the [same] diagnosis, just a little bit severe inside of congestive heart failure, COPD, hypertension, diabetes, for the most part.

But the joint program -- and I know I talked about this in the last earnings call with our joint venture in Ochsner, we've seen an uptick in total joints in that specifically, but just because the program is about to start, we haven't seen that across our portfolio.

Okay. Maybe just last one on the strong Medicare admission growth, I would be curious. Are you seeing any change in referral patterns from hospital discharge planners? Are you seeing maybe more referrals from a particular hospital or just an overall increase in the number of hospitals in your referral networks?

Ryan, I'm sure you know this better than I do, but actually the hospital volumes the last two months have been down. So our shift to the community actually is what propelled us a little bit.

But really, back to us in general, on our last call I talked about our conversion to a new CRM product. It's called PlayMaker. That got behind us and honestly helped alleviate the distraction that it caused. So really back to the hospital, it's really not that. I think it's our focus, our selling of our disease programs that we really began in mid-summer, and it's just kind of trailing into that push that we are experiencing -- pleasantly experiencing right now.

All right. Thanks. Thanks for taking my questions. I'll hop back in the queue.

Kevin Ellich, Piper Jaffray.

Thanks for taking the questions. Don, that CRM product, the PlayMaker, kind of sounds like that running back that LSU has. He's pretty good.

(laughter). (multiple speakers). Let's not go there yet. Call me back on Monday, Kevin.

Yes, big game. Big game.

So I just wanted to go back to your comments on the joint program. So Medicare's hip and knee bundling program was supposed to, I think, be finalized soon, but I don't think the final rule's out yet. Do you have any update, I guess? Is that going to get pushed out to July 1? What are you guys hearing and what do you think about it?

You know what, I would be guessing just like you. I'm looking at Eric. Do we have any further [and Angie] --

Last I saw -- last I heard, it was -- CMS had pushed it over to the OMB. They are going to score it over the next couple of weeks and then it will come out. But at this time of year, it's hard for me to say that it would actually go into effect January 1. I would think they would push that date back.

But I will tell you this, Kevin. We are not acting that way. We are going full force within the -- I think we had 26 agencies within 75 markets, something of that sort. I can go back and make sure that's accurate, but we are deploying that same Ochsner model I talked about last time in those markets and as a worst possible case for us, it's a great differentiator.

Okay. That's helpful. I appreciate it.

And then, I guess, going back to your comments about the acquired revenues not at corporate margins, Don, I mean that's typically the case when you guys do deals, right? Is that really anything new? I guess, did you say it'll just take a couple months before you get to the corporate levels?

Yes, I'm really glad you asked that question. Here's what's unique about it. Usually, we are so base hit oriented throughout the period that some of them are improving, while we are dumping others in that aren't that way, Kevin.

And the reason I really wanted to make that comment is when we [felt] Halcyon and Nurses Registry both inside of a six-week window, honestly I was trying in a prideful way say that even with that, we were able to raise our guidance on this present run rate, and I'm excited that we integrated those faster than I expected and therefore the contribution or the accretion to the EBITDA margin is going to be enhanced in about 60 days from where the run rate is right now, allowing us to raise.

So it's kind of a future boost, so to speak, and so the crux of your question is, why was that so different now? It's because of, essentially, the big boost of revenue and drag that came in to the portfolio all in a six- to eight-week period.

Got it. That's helpful. And then, I guess kind of with that, so the increased guidance, it includes the transaction costs and whatnot for the deals. Does that also take into consideration the lower margins from Halcyon and Nurses Registry as well?

Yes, it does, but the crux of those one-time things were buyout of leases and some things that we are doing to get that aggregate margin. So it is both of them. It's just substantively those one-times really hits pretty hard, and Dionne can probably, if you need to or off-line, give you a little bit better color of the items those are.

But yes, it's both the one-times and the drag from those, and I'll say this publicly. Specifically to Halcyon, there are two inpatient units that we're diligently working on. It's a great service, but they are really dragging that portfolio right now, and we are taking some of the things that we know from our LTAC division and trying to incorporate it into that, but it's pretty complex and that's the one factor that I'm still a little bit loose on.

Okay. And then, just help me out here with the math. I was kind of backing into what your implied Q4 EPS is off of the new guidance. So the guidance, $1.75 to $1.85. Year to date, you've done $1.40, so we are looking at $0.35 to $0.45, but then, clearly, you are being impacted by the Medicare cut of $0.02, right? And then you've got Halcyon, that's $0.06, and Nurses Registry, that's another $0.02, so -- I'm not saying that we should back out the Medicare cut, but that's about $0.08 we could in theory add back if not for the deals, is that right?

Yes.

Okay. I just wanted to check that.

And then, I know you guys talked about it and I've seen one other Company mention one pair that went into bankruptcy. Just wondering if -- is that a smaller guy? Any color behind that?

I'll take some of it. It is -- it isn't unique because we knew this competitor because of our substantive presence in Kentucky. Nurses Registry has been around for a long time and we've been watching it. So I think it's just unique to this deal. I think I can say safely we don't have any other things in bankruptcy we are looking at right now.

Okay. And then, Keith, I guess, just kind of big picture, you guys are performing at a very high level, lots of good deals out there. Can you maybe give us a little bit of color behind the five deals you have exclusivity on in terms of timing, size, and, I guess, competitive landscape, how that looks right now?

Yes. On the five we have exclusivity on, there's nothing significant in that group, so there are a lot of small regional plays.

In the larger group that's active in the pipeline, when we refer to that, they are bigger transaction possibilities in that. But I mean, those are conversations that are -- the larger ones are conversations that we are in through banks that bring books to us and there are others involved in the process. So we don't know where those are going to land.

So just to remind you or everyone, beginning this year we are really on two tracks in the pipeline. We have our historical, highly accretive, small -- smaller acquisition pipeline that continues to do what we've done forever. And then, we have a separate group, executive team, that's engaging with banks and looking at larger transactions, and trying to find one that makes sense that you can pull the trigger on that'll be accretive.

And then, have valuations changed? I mean, looking at your leverage, it's still really -- relatively low, maybe 1, 1.5 times of [that]. And do you guys have ample capital available?

Yes. And your question was, have valuations changed?

Yes.

They seem to be creeping back up some. I think we are all looking at the same numbers, and so I think the short answer is yes. Not tremendously, maybe 15% or so, it looks like, but they are creeping back up. I think there's just more confidence in the space long term and it's bringing more money to the space, and that's driving the competition.

Great. And then last question from me, even though Don alluded to the hospital volumes being a little weak this quarter or the last few months, wondering if you guys have started to notice any new referrals or admissions coming from the Medicare shift to value-based reimbursement and the bundling programs that are going on?

You know, honestly, no. Not for us. As a matter of fact, a couple of joint venture partners that I'm not going to name actually backed out of a couple of those bundled arrangements for a multitude of reasons. So I'm thinking on the fly right now, Kevin. Not for us. I actually haven't seen that in this quarter. Keith?

(multiple speakers). No, I hadn't [at all].

Great. Okay. Thanks, guys. Nice quarter.

Whit Mayo, Robert Baird.

Thanks. Good morning, guys. I wanted to first start with the 2016 final rules. I hear you on the 1.38% kind of in line with the industry, but how do we think about your ability to offset that next year? This past year, it seems like the case rate changes seemed to kind of help the industry out broadly, and I don't think you get that pickup into 2016.

So I just want to make sure that we're thinking through the model correctly. And is it as simple as I take the $0.02 cut on the straddle patients for the fourth quarter, double that to $0.04, quadruple that to $0.16 a year, or is that not the appropriate way to think about the headwind?

I'm looking around to make sure that my answer is in line with our thinking. I think that is a good -- we think that is a good starting point to do that because, you know, yes, there are things we can do to mitigate that, but there are things that we also don't want to do that could be looked at as manipulating because of that.

So I think what we're saying right now -- now, obviously, we are not at a point for you all to model 2016 because we are going to issue that guidance later on, of course. But just kind of thinking it through, we are shaking our heads yes. That's kind of how you should be thinking at a high level.

Yes. Can you just remind me how much -- when I look at the home-based segment, how much of that today is now just pure home health and then how much of that home health is fee-for-service Medicare? You've grown so much that it's kind of hard to tease out exactly where you are now.

Right, right. Eric is looking through the stat sheet so we get it exactly right.

Home health is 76.2%, and of that, Medicare is 77.2%.

77.2%. Cool. Okay. We've heard from some home health agencies -- this is probably something more isolated or not, but trying to think about MA plans and kind of how some of their behavior is changing, and we've heard some of them starting to penalize providers on the star ratings, signaling like, hey, when we contract you we are going to cut you because your star ratings are well below your peer benchmark. Are you seeing any new behavioral changes in the marketplace from the MA plans?

There was one in Tennessee that we've come up that has done that, but they were very small.

I think the problem with that is that -- and we all know this -- is that the star ratings are not indicative of present quality. They are revisited in time, so it's kind of a bust on their philosophy because you could have been good back in the day and not so today, and (inaudible). So, only that one so far.

Great. That's what I thought. And maybe my last one, I just wanted to go back and get maybe the updated thoughts just around your LTACs, and we've had two large LTAC providers cite some challenges as they prepare and transition into patient criteria and you've previously, I think, communicated a thought that maybe you would look at some strategic alternatives at the Board level. And I just didn't know, Keith, if you have any new updated thoughts as it relates to kind of the strategic value of owning those assets going forward.

I don't want to sound like a broken record, but I feel like I'm going to say the same thing I've been saying.

So the eight assets we have now are all here in Louisiana and located in communities where we have hospital partners and other service lines, so they've kind of integrated into all operations. But having much volume in Louisiana, it also positions us well to repurpose those beds.

In one case where we had a facility with a hospital partner, they needed us at one point to move away from the hospital because they needed the space. Now we need to be close to the ICU and those patients, so we are negotiating to move it back in house. We are renegotiating lease and ancillary contracts with the hospital, so all these things are going on, and I'll let Don jump in here, but it doesn't -- we aren't affected until the midpoint of beyond of 2016 (multiple speakers). Don, do you want to --

Yes, we have a couple of things on that. First of all, at a global perspective, the revenue base -- and I think, Eric, it's about $72 million on the run rate -- it's still a very important service, but that revenue is becoming much more de minimus to the portfolio.

So the things that happen in the LTAC doesn't create the wobble that it obviously creates for the two or three that you alluded to in your opening. That's point one.

Point two is years ago because of managerial concerns, we changed cost reporting years to be congruent in all facilities except for two, and in those two, they are equal.

So Keith is right. The bad news is we've got to deal with this next year. The good news for us is only two of them do we start dealing with this and that begins in June. And then the others, in September. And so, yes, the rule -- the criteria is going to adversely affect the EBITDA from the facility-based division. But at a global point, we are working, as Keith said, with our host hospitals to make that effect as minimally as we can, and listen, that includes but not limited to adding different services, decreasing certain beds, possibly even shutting down a facility or two.

But because we have the latitude of time being on our side a little bit, we are being much more methodical in our approach to this so that when we issue guidance, whenever that's going to be -- usually it's in March, we'll be able to really go through and walk you through what those effects will be. Is that helpful?

No, it is. We've spent a lot of time analyzing the change, and it's fascinating from my point of view and I think so many different providers in the industry have a different hand to play going forward and I don't really hear anything too terribly consistent.

But no, no, I think we'll just sort of sit here and see how things transition over time. And to your point, it's a small piece of the overall earnings stream.

But I guess maybe -- I'm going to throw one last one in there and I'll hop off, but just this has been kind of a weird quarter, I think, in general for just healthcare service companies and some new things have developed and we can't really piece out what's a trend and what's not a trend. But we've had a conversation on higher wage pressure, higher registry cost, temporary nurse cost. Are you seeing anything in terms of turnover with your nurses? Any pressure in any markets? Just how do you think about just general wage cost and pressure going forward.

We are not seeing the wage as a problem. We are seeing availabilities on our Northwest sector in what we call our gateway division, specifically Idaho, Oregon, and some of the California markets. But that's not any different than it's been all year long for us.

And our contract labor actually has come down. We have a program that we've started with our therapists that we've changed some of the ways that we pay them and it's actually a benefit to all of the ones that want to be productive.

But I can't say that that's a bigger issue than normal, and then I'll address turnover real quickly. We've done a really good job of decreasing incremental turnover except for in the RN bucket, and we've done some things with orientation and training and clinical ladder development that we think is going to pay dividend in 2016 to address that. But I think for us, it's always a problem. I mean, we've been doing this a long time and it's going to continue to be. We just need to do a little bit better each and every year on that.

Okay. That's great. Thanks, Don.

Thank you. Great question.

(Operator Instructions). Toby Wann, Obsidian Research Group.

Hi, guys. Thanks for taking the question. Quickly if you could kind of comment about payor mix shifts within the different buckets, if you are seeing anything there along those lines.

Toby, I was looking to see if Keith wanted to take it globally, but I'll -- the answer is yes, we are. There is no doubt that the shift to commercial and even to episodic managed care is happening, and for us, we are working in, I think, it's six pilots right now that we are doing some things unique to managed care, trying to essentially better manage the visit patterns, the things we do in the visit, because the shift is real for us. We've seen our Medicare mix again leap back down in totality. I think we are roughly 75% (multiple speakers) [business] and that number is continuing to present itself.

The issue for us is, especially in our joint venture partners, how do we stay a full-service, a full-spectrum partner when this managed care tipping point is really occurring. So we've got our challenges there, but we also have our plans and we are piloting those right now.

This is Keith, just to maybe add some color to what Don said. One of the challenges that we have -- it's a challenge, but then when you get it right, you actually develop models you can push out across the network.

But with hospital partners, we just don't have the ability to go after Medicare only because we have to move those patients out of the hospital, so sometimes that forces us to, on the front end, take business that's not profitable and then find a way to get to the table with managed care companies and deliver value that they can measure and pay for.

And we've done that in places. One of the ones we've done what I think is cutting-edge work in that area is with Ochsner in New Orleans. We've developed models there where we are delivering measurable value to the hospital system by moving those patients out and we are able to use that data to bring in and negotiate with other managed care companies.

So, it's a slow process. The problem we have is I believe most in our industry would agree with me that, by and large, managed care companies don't fully understand and appreciate how home health can be leveraged to lower their overall cost. And if we can ever get that through and they really understand it, it'd just be a tremendous opportunity there, I believe better than Medicare fee-for-service.

No, that's helpful color. And then just kind of to expand on that a little bit more, some of the pilot programs you guys were talking about, can you maybe elaborate a little bit more on what all is involved in some of those types of activities you all are doing?

We are kind of being a little bit more prescriptive with the interventions being consistent with the major diagnosis and doing it in a fashion that's more predictive on a seven day a week schedule.

So let me explain that and just get granular for a second. If we take a managed-care diabetic, they're usually younger and more mobile, so there's some things that we can do that would be a little bit different in that visit, in that intervention. But we've got to work with our physician constituency to get it, drawing hemoglobin, A1Cs, and doing some things that in other cases we'd have a 60-day window to do that, and in this case we'd shrink that down and care coordinate that into about 20 or 30 days.

No, that's helpful color. Thanks.

And then, can we just maybe elaborate a little bit more on the bad debt issue? I was writing furiously and I don't think I caught all of that, so maybe we could get a little more color about that.

This is Dionne, good question. Our bad debt expense has increased in 2015 from 2014. 2014, we were at about 2.1% of net revenue. So far in 2015, we are at 2.5% of net revenue. I'm rounding up a bit, but it's about $550,000 or so a quarter that we are up so far this year.

It really is two primary reasons. One is -- as we've talked a little bit about; it's come up a couple of times -- write-offs related to activity with a couple of our commercial payers. One of them in particular, Univida, is currently in bankruptcy proceedings. We have a high concentration of these patients with Univida as a part of our relationship with our RJD partner in Tennessee.

Other than that, we have a lot of reserves for aged Accounts Receivable due to legacy system transitions from prior acquisitions that have increased our bad debt expense in 2015. I have to tell you revenue cycle is a key focus area for me moving forward.

Thank you for that and thanks for taking the questions.

Thank you. I'm showing no further questions at this time. I'd like to turn to call back over to Keith Myers for closing remarks.

Okay. Thank you, Operator, and thank you, everyone, for dialing in today. As always, we are available with any follow-up questions that may come up. Reach out to Eric and we will be glad to get on the phone with you for any of them. Thanks for dialing in and thanks for your support.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.