LHC Group Inc (LHCG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group's fourth-quarter and full-year 2015 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.

I'd now like to introduce your host for today's conference, Eric Elliott, Senior Vice President of Finance. Please go ahead.

Thank you, Kat; and welcome, everyone, to LHC Group's earnings conference call for the fourth-quarter and year-ended December 31, 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, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Dionne Viator, our Chief Financial Officer. 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 2015 and beyond. Actual results could differ materially from those projected in the 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 information provided on this call to reflect subsequent events.

I'm pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you, Eric; and good morning, everyone. It's a pleasure to be here this morning to report on a successful quarter that closes out such a successful year. I want to begin by thanking our team of dedicated healthcare professionals for a job well done.

Our ability to consistently deliver high-quality care to the growing number of patients, families, and communities we serve is a testament to the collective talent, work ethic, and experience of the growing number of healthcare professionals who make up our LHC Group family. Thank you for all that you do.

Our double-digit revenue growth and meaningful market expansion for the fourth quarter of 2015 reflects well-balanced growth from strong execution of an expansion strategy focused on organic growth, acquisitions in a fragmented industry with rising consolidation pressure, and margin improvement through operating leverage and focused cost-containment initiatives.

For the fourth quarter of 2015, our focus on organic growth produced an increase in same-store volume for home health of 4% and for hospice of 10.6%. For the full-year these increases were 3.4% and 8.2%, respectively.

Our focus on growth through acquisitions resulted in three fourth-quarter acquisitions with aggregate annual revenues of more than $48 million, part of our total of seven acquisitions for the full year that brought nearly $65 million in aggregate annualized revenue to the Company. Our focus on cost containment contributed to the 60 basis point improvement in G&A expenses as a percentage of revenue for the quarter and 140 basis point improvement for the year. The bottom-line impact of these and other improvements was 17.8% growth in fourth-quarter adjusted net income attributable to LHC Group and a 39.6% increase for the full-year 2016.

Reflecting -- and in part because of -- our great performance in 2015, we have a positive outlook on our growth potential for 2016, primarily because of the growth opportunities related to the ongoing shift to value-based payment models from traditional fee-for-service models. With the shift of financial risk for performance to the payor and/or healthcare providers, our value as a provider of high-quality non-acute care in a very low-cost setting has come sharply into focus for many of our existing and potential partners who own that financial risk.

Simply put, by providing our high-quality home health cost of services and community-based services to help our partners reduce their patients' length of stay in an institutional setting, we can help them significantly reduce their costs. We've always had these capabilities, but under a value-based payment model, payors and providers are strongly incentivized to leverage our capabilities. This transition is ongoing and will be for years and -- before it can -- not come fully into fruition for a number of years. However, it has already had a positive impact on our organic growth for 2015, and it continues in 2016 in terms of both the volume and acuity of our admissions.

We believe an important reason we are already benefiting is that we have an extensive network and history of health system joint ventures. Through our work in these partnerships over the years, many health systems have a direct experience with our quality of care, our services and our IT capabilities, while others know us from specific value-based pilots in which we participated in recent years.

This is not the say that we don't have to continually educate the market, and especially the MCOs about our home health capabilities and how we can add value at lower cost in any value-based payment model. This process is continuous, and there is much greater interest in understanding how we can help than ever before. But we believe the real-time impact on organic growth that we are seeing is primarily due to our deep experience with our health system partners, which in turn is a great recommendation for others considering LHC Group as a potential partner.

In addition to our organic growth, and due in part to the investment required to be an attractive partner in this changing environment, the transition to value-based payments is driving consolidation pressure in our industry, contributing to having an unprecedented pipeline of potential acquisition opportunities. Currently, we have active discussions going with 20 potential transactions, representing, approximately $1 billion in trailing 12-month revenue.

10 of these are health system joint ventures, and 10 are freestanding. With regard to size, 11 of the 20 are for smaller, more local companies, like the Heartlite Hospice acquisition we announced yesterday, or the two home health acquisitions we acquired in the fourth quarter, which have less than $10 million in trailing 12-month annual revenues.

Seven are more regional in nature and of size more consistent with the Halcyon acquisition in the fourth quarter. And two are larger opportunities, with annual revenues in excess of $100 million. So it is a diversified and balanced pipeline of opportunities.

It's important to note that some of these will undoubtedly pale from consideration; and as we have further discussion, we may find that some are not near-term opportunities. But the point is: we expect that our current pipeline will produce a record year in acquisitions in 2016, and the expansion of our pipeline and development effort has continued to accelerate.

Let me conclude by saying that despite the 2016 reimbursement reductions we noted in the release, we have some meaningful tailwinds that support our growth expectations for 2016. On a longer-term basis, we believe that we are well positioned to continue gaining market share as a result of the transition to value-based payments. We believe payors and providers will seek to partner with high-quality, non-acute care providers that also have the scale, market density, technological sophistication, and financial strength to meet their evolving needs.

LHC Group is in this select and, arguably, small group of home health providers. And we expect this market position to drive our long-term growth through organic expansion and acquisitions, creating further margin opportunities. As a result we are highly confident of our prospects for further long-term growth in earnings and shareholder value. And now I'll turn the call over to Dionne.

Thank you, Keith. Good morning, everyone. Thank you for joining our call. 2015 has certainly been a year where many initiatives have come together operationally, as Keith mentioned, and this execution by our team resulted in strong financial performance.

Net service revenues for the fourth quarter of 2015 was $219 million, an increase of 13.2% compared with net service revenue of $193.4 million in the same period of 2014. For the year, net service revenue was $816.4 million, an increase of 11.3% compared with net service revenue of $733.6 million in 2014.

Same-store revenue was 6.5% for the fourth quarter and 5.2% for the year compared to 2014. This growth in same-store revenue is due to our growth in same-store admissions and an overall increase in patient acuity from 2014 to 2015.

Net income for the fourth quarter of 2015 was $7.7 million or $0.44 per diluted share, an increase of 37.5% compared with net income of $5.5 million or $0.32 per diluted share in the same period of 2014. For the year, net income was $32.3 million or $1.84 per diluted share, an increase of 46% compared with net income of $21.8 million or $1.26 per diluted share in 2014. Adjusted net income for 2015 was $34.1 million or $1.94 per diluted share. 2015 operating expenses were adjusted by the following items to reflect a normalized result from operations.

First, $1.1 million in disposal costs related to the closures of six underperforming locations. The majority of this cost is from the closure of a hospice inpatient unit that was acquired as a part of the Halcyon transaction in the fourth quarter of 2015.

Second, $1.3 million in goodwill and intangible disposal costs related to the closure of these underperforming assets already mentioned and the write-off of the corresponding impaired assets of those locations. Third, $578,000 in costs associated with the Halcyon and Nurse Registry acquisition. On a consolidated basis, our gross margin was 41.1% of revenue for both the fourth quarter of 2015 and for the fiscal-year 2015 as compared to 41.7% of revenue in the fourth quarter of 2014 and 40.7% in fiscal-year 2014.

Our general and administrative expenses were 31.1% of revenue in the fourth quarter of 2015 and 30.5% of revenue for the fiscal year 2015 compared to 31.7% in the fourth quarter of 2014 and 31.9% in fiscal-year 2014. Our bad debt expense represented 2% of revenue in the fourth quarter and 2.4% for the year as compared to 2.1% and 2.2% in the same period of 2014. Operating cash flow for 2015 was $59.1 million as compared to $38.7 million in 2014.

Regarding 2016 full-year guidance, we are expecting 2016 net service revenue to be in the range of $870 million to $890 million and fully diluted earnings per share in the range of $1.90 to $2.00. This guidance includes $9.5 million reduction to Medicare home health revenue, resulting in a $0.32 reduction in fully diluted earnings per share for 2016 due to the 2016 CMS home health rules.

It also includes $3.6 million reduction to Medicare LTACH revenue due to the new CMS established patient criteria, resulting in a $0.06 net reduction in fully diluted earnings per share for the 2016 after implementation of strategies. This guidance does not take into account the impact of other future reimbursement changes, if any; future acquisitions, if made; de novo locations, if opened; or future legal expenses, if necessary.

A few focus areas in 2016 to help offset the effects from the impact of the rules that I've just mentioned are, first, accretion in 2016 from the Halcyon acquisition; second, anticipated same-store growth in home health of 3% to 4% and in hospice of 4% to 5%; improvement in commercial payor collections; reduction in losses and underperforming agencies; and continued leverage of G&A expense. While we don't usually give quarterly guidance, because of the all of the moving pieces in the first quarter of 2016, I will give a range to help you with your modeling.

We are anticipating that the first quarter EPS will be in a range of $0.35 to $0.38. This estimate includes the traditional increase in first-quarter payroll taxes of approximately $2.5 million over quarter four of 2015 as well as expenses related to that Halcyon conversion to point-of-care. Of the acquired 16 locations, 11 have been or will be converted in the first quarter of 2016.

Second, integration costs of Nurses Registry; third, Company-wide OASIS training to prepare for value-based purchasing; and, lastly, acquisition and integration costs for the recently acquired Heartlite Hospice. For the full year of 2015 (sic), we expect gross margin to be in the range of 39.5% to 40.5%, G&A as a percentage of revenue to be in the range of 29% to 30%, and bad debt as a percentage of revenue to be in the range of 2% to 2.2% -- I apologize; that's for the full year of 2016.

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

Thank you, Dionne. And good morning, everyone, and thanks again for listening.

I'd like to begin my comments, as did Keith, by acknowledging our LHC Group team. 2015 was a huge year for us and solidified the foundation from which we will build upon in the years ahead. Well done and, as we say, keep pressing, team.

Now moving on to my update. Presently we are executing our quality improvement initiatives, our growth initiatives, and our provider business plans at the highest level of effectiveness that, truthfully, I've seen in my 10 years at LHC Group.

Case in point: in July of last year, 42% of our home health providers were above the national average in star ratings. In January 2016, that number has moved to 62%. And the preview data that we have before us puts that number at 80% of our providers being in that category in the coming April. It's unparalleled movement.

Additionally, in the initial HHCAHPS report, our LHC Group is at an average of 4.4 stars, with the national average being 4.03. And this, too, according to our intel, is still is still improving. So as we, as I last year committed, we've improved; we continue to improve; and we truly are creating discernible value with this plan.

Along those same lines, we are also pleased with our growth numbers right now. In the aggregate, we are ahead of our budgeted business as of today by 922 patients or 102% of our expectation. Our first-quarter organic admission growth in home health, assuming no further weather interruptions or like events, is tracking to 4.15% this first quarter of 2016, hospice tracking to just north of 6%. We expect those numbers for the full year of 2016 to be similar. More specifically, and for your modeling, I suggest baking in a 4% same-store admission growth for home health and a 5% same-store number for hospice. Just as a note, our CBS growth is incorporated into what I just guided you to for home health.

Two more quick updates before going to Q&A. First, Keith mentioned the $65 million in trailing 12-month net revenue acquired last year. Of the 28 operations producing that revenue, all will be completely integrated by March 31 of this year, with the exception of one -- one Halcyon provider, but it will be completed by May 1. The reason that I make note of this is to dovetail on what Dionne was alluding to. Obviously, we see these assets contributing much more so in the last half of 2016 -- in fact, leading nicely to margin improvement that we see.

And the last update in my prepared comments is regarding the LTACH hospitals, to give you clarity and some of what was put in the release. We are projecting a net $3.6 million top-line net revenue loss due to the new LTACH admission criteria coming forward for us in 2016. The net income effect in 2016 after mitigation is $1.9 million or $0.06 per diluted share.

Just a little color on the strategies to mitigate this and which builds up to that $1.9 million. Number one, we are going to increase the number of intensive-need patients. In 2015, 35.7% of our admissions would have qualified for full LTACH payment under the new rules. In 2016, we expect this number to increase to about 42% of our admissions. This is going to be a result from advanced care coordination within our host hospitals through physician education, both of which we are deep into our plan now, even though we are not going to see the impact until later this year.

The second point of mitigation is to capture the positive side of the regulatory changes -- the increase of appropriate admissions. We all realize that the new rule limits the patient eligible for full LTACH reimbursement, but it provides opportunity: opportunity to provide services to newly qualified patients.

This additional patient population, which we turn down every day right now, can now be served in an LTACH under this setting as a relief to the 25-day average length of stay restriction and will allow us to have additional high-acuity patients. And albeit, granted that reimbursement will be at lower site-neutral rates, but they'll also have a lower length of stay and allow us to maximize capacity and increase our hospital service provision.

And then the third category that builds to that mitigation to driving efficiencies and decreasing costs. From lower-end host hospital lease and ancillary rates successfully so far to renegotiated service contract and much in between, we are decreasing costs while at the same time diversifying the top line that I just mentioned.

My final point on LTACH is, to give you a little color here, in addition to the impact of the new patient criteria, part of what is factoring into this year's earnings is the effect of an imminent reduction of 18 beds at one of our larger hospitals -- host hospitals. And that's going to be effective July 1.

In a nutshell, the host hospital has requested that we reduce these beds because of their capacity problems and things they have going on in the marketplace with the charity hospital system being taken over. Although not a direction that honestly we wanted to take and nor did we think we would have to take, the existing moratorium prevented other alternatives from being executed that we had on the table. And we will, in fact, lose those beds. All told, this bed reduction causes an unmitigated loss of $3.1 million in net revenue in 2016, with a mitigated effect we've gotten down to $800,000 or $0.03 per fully diluted share. So to sum up about the LTACH: the mitigated effect of the rule changes to 2016 EPS is $0.06, and the mitigated effect of this bed issue, [$0.03]. I hope that this provides clarity.

So in closing, to all who called, thanks again for listening in to our prepared comments. And, Kat, we will now open the call and the line for questions.

(Operator Instructions) Ryan Halsted, Wells Fargo.

Thank you, good morning. I was hoping you could elaborate on the admissions growth -- the nice admissions growth that you're seeing that you can attribute to some of this shift in the reimbursement models to value-based payment models.

This is Keith; I'll start, and Don and I kind of tag-team a little here. So from the managed care side, patients that are in any risk-based product with a managed-care provider, especially where we have joint ventures with health systems, we are seeing some higher percentage of that population coming our way, simply because of our ability to demonstrate greater value and managing those patients -- the greater value of patient outcomes -- and our ability to underwrite the risk of the -- we generally take a lesser payment upfront and a gainshare payment in arrears a quarter, at least one quarter, in arrears. Maybe longer than that with others. So you have to be able to carry the paper on that.

Don, do you want to talk about just --?

Ryan, this is Don. And obviously, being in the number of markets, the tipping point to that value-based environment is all over the board. But what I would go back to is what I said in the second quarter of the earnings call last year. We really -- it took a lot of effort to convert this Company to point-of-care. And that effort caused distraction in all parts of the business; I was very honest about that.

In regards, though, we've now increased the quality. We have market-by-market differentiators. And our sales team, all while we were converting, were being prepped to go out to market for these differentiators. So yes, it ties to the value-based markets, but I've got to tell you, it ties much more closely to product differentiations, service differentiation, timely initiation of care. And that's really what we're seeing as this whole environmental shift kind of starts to play out.

I don't want to sound like it's easy; it's not. And we have over 425 people that have boots on the ground every day, fighting the fight. But I think what we're saying is that those initiatives are more effective now than I said in my opening comment, in the near-11 years that I've been here in the realm of sales.

Let me just add, Ryan -- I want to add to my comments. I was describing how it works with health systems and payors that we currently have gainsharing arrangements with, and that's very true. But I think a lot of the benefit we're seeing is also people looking ahead, where we don't have those arrangements in place yet, but they are moving in that direction.

Exactly.

So they want to align with providers who have a proven ability to deliver that value to them. So I think we're seeing -- we're a little bit of ahead of the curve of some of those.

Good point, Keith.

That's great. And if I could sort of extend this to the Medicare program, and -- you know, I'm curious if you are starting to get ahead of the game as you think about the Medicare bundle that goes into effect in April on the hip and knee; and if you've already sort of established potential gainsharing with particular health systems or other types of providers?

Ryan, this is Don again, and the answer is yes. We've been -- and I know Keith touted it at a couple of the conferences -- but we've used our Ochsner relationship in New Orleans to create our total joint program. And off-line, Eric can get you really comfortable with the details of that. But from decrease readmission rate, to true savings in the liquidation of their length of stay, to a host of others, we have this program really nicely packaged and ready to deploy wherever those arrangements are going to be.

So we are using that system to do the same type thing with congestive heart failure, diabetes, and a couple of other major diagnostic programs. We do not have those results as tightly packaged but I expect that to be, in the next 3 to 6 months, very equivalent. So the answer is yes, and it was a long way of me getting to that yes.

No, that's very helpful. So what are some of the areas for improvement, do you think, that are out there to give you that kind of visibility into maybe adding those additional types of episodes, you know, the congestive heart failure and the like?

Yes, the first thing -- and I don't want to get too [big in it] -- you've got to get in before the admission or the discharge disposition is already made. And that's the biggest thing in these pilot is some of these patient choice plans and things that we can do in the forefront without having to flip off of a regulatory constraints allows us to really care-plan and do some of the things earlier while they're sicker. So that's part of it.

The other is when you are paid to actually do intensive work such as remote patient monitoring, such as bioimpedance monitoring in congestive heart failure -- you can take the kitchen sink, so to speak, at that care program, and you're not going to decay your margins. So it's just that simple. It allows us to use the clinical tools at our home health disposal and actually get reimbursed for it. The present Medicare system just doesn't allow that.

That's great. Next question -- you mentioned, or you didn't mention, any impact on the hospice rule. I was wondering if there was -- if you could just comment on where you'd think your patient mix is on the two-tiered reimbursement model, and just how that relates to your view on what that impact is for 2016?

Yes, so maybe Dionne can -- this is Don again -- bail me out on this. We think it's going to be flat right now in our existing patient population. Out of pure openness, January and February have seen a slight decay. But I think that's a patient shift that we've brought in with Halcyon, and I think our marketing efforts are going to get that back to our normal run rate. So if you look at it -- and I think we were at about an $85 million book, and we're going to $128 million -- I would bake in those margins flat to that same-store of 2015.

I'll add a quick comment to that. So basically if you're a patient under 60 days of care or at the 30.7% mark, we consider that about a breakeven. Currently in February, we are running at 31% of our patients in under 60 days of care tier. So we anticipate that and have built into our guidance as flat.

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

Had some great ones, Ryan. Thank you.

Brian Tanquilut, Jefferies.

Congratulations, guys. Keith, just a follow-up to one of the comments you made in answers to Ryan's questions. So this gainsharing that you're seeing with one of your partners -- I mean, is this something that you think you can replicate across your JVs or even across your portfolio of home health assets? And then kind of as a follow-up to that, does that bring your rate up in margins to a level where it essentially in line already or right around fee-for-service?

Yes, the answer is yes to both, Brian. Of course, the only unknown is the negotiation of the gainshare. You know, that's what we shoot for.

But let me tell you why it makes sense. There's quite a bit of value on the table here to share. So Don alluded to Ochsner; in that model we've seen a value creation to the -- for the health system in excess of $3,000 per patient when the first PAC setting is home health. So not every patient that is discharged from the hospital can come straight to home health, and the biggest shift has been from SNF to home health.

But that was a -- the New Orleans market was a pretty high SNF utilization market. You've got to know that baseline. But you know, it's -- we did have to dial up the capabilities of the home health provider in that market to do this. And Don can talk a little bit about that detail if you want to know more detail around it.

But I believe there's more -- the question being asked when the patient is -- when the consideration being made, where to place the patient. Historically, the question that has been asked is: what is the highest level of service the patient qualifies for based on documentation and [starring]. For a really long time, that's been the question that's been being asked by assessing clinicians.

And the culture starts to change in the health system, where they ask the question instead: what is the lowest-cost setting the patient could go to and achieve the same outcome? And if the patient is given a choice, the patient always wants to go home. So I think we're benefiting from that.

To sum that up, I don't want you to -- I don't want to give the perception that we're doing something so great -- and I think we are the best provider in the market, of course -- but where we are doing something so great that there's something magical we have going on that is bringing the patients. But a lot of it has to do with the questions being asked as well.

Don, do you want --?

Keith, the only thing that I would say is I really want to echo your comments. What we're doing is truly care coordinating and practicing at the top of our scope of service and our license. And that is the value that's being created. And again, Brian, I can answer further questions if you want, but I think Keith just nailed it.

No, I appreciate that. And then on the guidance, one of the things that was mentioned in your release was that you were anticipating sort of a negative 1.5% cut last year, and now we're seeing a 2% cut.

Am I right in thinking that you've assumed that 2% net cut -- basically occurring throughout the year? And the follow-up to that is: are there ways to mitigate that? I'm guessing that's the case mix or an HHRG driven number?

Yes, it's Don. The answer is yes, that is assuming that it flows through the year. And yes there are things that we are doing. Keith alluded to the fourth quarter, and really these last four months, being the most successful organic admit run in the Company's history -- and it was. The issue is it shifted our mix of type of patients due to some of the markets that we put it in. So obviously, we're going to go and try to continue, I guess, right-mixing, if I may. That, number one.

Number two, we have just initiated -- and I think Dionne's prepared comments talked about -- spending money on OASIS education. That is really to improve on our outcomes, but it's also going to improve our case mix when you do it associated. So we're expecting to see that. And then the last thing is operationally, as Keith kind of said, I think we do a phenomenal job, but we've grown; and on-boarding some of our clinicians has taken a while. And I think we can do some things to make sure we don't get downcoded on some of the episodes as we are right now.

So again, I can give you more detail, but the answer is that full effect is inside of the guidance that we issued. We do think there's upside to that. And those were the three means that I think we're going to try to prove my statements correct.

Got it. And then, Keith, there's this chatter, or there's this proposal on the pilot for preauthorization. And I know you guys are very well connected to DC. So if you don't mind just giving us your views and how you think that will play out on this whole preauthorization requirement?

Well, you won't be surprised to hear they're the number-one initiative now that we are working on at the partnership level. You're aware that it's focused on in five states, four of which are HEAT states, we are -- you know, it's modeled after the pilot in the medical device industry. We think that -- our arguments are that it's wrong for a number of reasons.

One is it puts it really puts a level of bureaucracy between the patient and the service and kind of oversteps the physician. That's an obvious argument. Understanding that 50% of patients that come to home health actually come from hospitals, you can begin to imagine how this delay could back patients up in hospitals. That's another huge problem.

Rather than spend all this time, we have a physician piece on it that, Eric, maybe we can publish out just on the website. And rather than me just read all of this out. But we think we have good arguments against it. And we think that there will be a lot of modifications made to it before it ever gets rolled out beyond these five states. I guess that's what I would say. We're pretty confident about that.

All right. Got it. Thanks, guys.

Kevin Ellich, Piper Jaffray.

Hey, guys. Just want to echo Brian; you know, nice quarter. I guess just following up on the question about the prior authorization. Keith, can you remind us: what's your exposure to Florida, Texas, Michigan, Illinois, and Massachusetts?

Our only exposure really is in Illinois and Texas. Let me look around and see if -- do we have our [mid-revenues]?

Okay. And while you look it up, what do you think the likelihood -- it always seems like in the home health industry, it's been more troubled markets than the whole entire state. Like, everyone remembers Miami-Dade County, greater Houston and Detroit areas, which is why I think they're going after those states, at least my opinion. Is there any chance that you guys think this will be narrowed down to those specific geographies versus kind of like in the whole entire state? And aren't there enough safeguards in place with face-to-face regulations already where there really shouldn't be any more crowd-in abuse in the industry?

Absolutely. And we'll get this paper, this piece, published soon as we get off the phone here so you can all see it.

But that's exactly right. We think those target markets should be the focus area. We know where that abuse is occurring. But also, if you want it to -- they want it to go across all markets, there is ways to identify the high utilization provided and target those. We've done a lot of work on this at the partnership level, stratifying the provider population and highlighting those providers that, one could say from the data, might be abusive because of longer length of stays.

That makes sense.

Those are all going to be -- those are all comments we're going to be providing to the regulators.

Kevin, this is Don. Eric just kind of added it up for us in all five states; in that we have about $50 million in net revenue.

$50 million? Okay, thanks, Don and Eric.

Keith, going back to your prepared comments, your pipeline is bulging, as usual -- 20 deals with $1 billion of potential revenue. You commented about two larger opportunities with greater than $100 million of revenue. I'm wondering what stage those deals are at. Could we see them this year? And then could you also tell us -- what type of services are we looking at? Are those traditional home health, hospice, community-based?

Yes, so the -- let me answer that in two parts. When we report -- when we share what we have in our pipeline, and we've done that -- I think we've done that for a decade, since we've gone public. It's nothing new for us. But we don't include anything in the pipeline that we don't think is going to have the potential to close within 12 months. If we identify that something is not going to be near-term, and we'll revisit it with them later, then it comes off of that active -- what we refer to as the active pipeline. So maybe that will give you some clarity around that.

And with regard to the mix, we're still about -- I would say 90% of the pipeline is home health and hospice, and -- close to a 50%/50% split. And about 10% would be home and community-based services.

Got it, got it. And then even though the LTACH business is relatively small compared to the other parts of your business -- and Don, you gave some great information on the headwinds that you're facing there -- just wondering if you have any updated thoughts on -- you know, I mean, there are some headwinds. You've got bundling coming down the pipe, which could have a negative impact on volumes there, which should actually benefit your home health business in my opinion. Thoughts on whether you guys want to keep that business, or thoughts of maybe getting rid of it?

Yes, I think we've talked about this before. You know, as we -- Don's focused and the operators will focus primarily on mitigation and doing a heck of a job. And so that's good, but you're right; when we see a pipeline of the size, clearly our fairway is home health hospice and home and community-based services for the long term.

So it could well be that we might decide to place the LTACH assets with someone that that's more core for them. And how should we deploy those dollars into acquisition of home health and hospice? With this pipeline it could well turn out that that would be a possibility for us. And I can also tell you that there is interest in the LTACHs. We've actually received an inbound call on that within the last month. So I think all of that is on the table.

Got you -- no, that's helpful. And I guess, Don, going back to your comment about the -- I think you said the unmitigated loss was $3.1 million based on the reduction of the 18 beds. Is that $3.1 million in addition to the -- that's in addition to the $3.6 million off of the reimbursement change. Is that right?

That is correct.

Okay, okay, got you. That's helpful. And then also you gave some information on star ratings, and your providers are performing at a very high level. You know what sorts of things have you guys done to really drive that improvement in the star ratings? I think you said 62% are now 80% this April? How did that happen?

Well, one thing is as honestly dejected as I personally was last year when that came out, I was also clear as to the why. I was clear that back then, we had we had 110 agencies going through home care, home base transition. And that distraction -- it just doesn't matter how good we tried -- caused discrepancies in the documentation from paper to the point-of-care system.

So because of that time lag, it made us look worse than, truthfully, we were. That wasn't an excuse. The data would support what I just told you. But I didn't take that for granted, and neither did our great team. Instead, from me personally jumping on the quote/unquote worst of our star agencies, to investment in strategic software, we have a multitude of things that we've done. And this last one of this OASIS training -- it's kind of like the last piece to that puzzle.

So it wasn't one silver bullet. There were several things. But we weren't a benefactor of the time lag and now are the benefactor of all of our approaches really starting to take hold. Does that make sense?

It does; it's very helpful. And actually, that leads me to my last question, which is for Dionne, anyway. You provided the Q1 guidance, and you made a comment about a few of the expense-related items. How much cost is associated with the OASIS training and the integration of Nurses Registry?

The cost of the OASIS training to do wing-to-wing in the organization is going to be about a $750,000 cost. The cost of the Nurses Registry and other acquisition integration, about $500,000.

And that's only in Q1. Is that right, Dionne?

Correct.

Okay, great. Thanks again, guys.

Thank you.

(Operator Instructions) Toby Wann, Obsidian Research Group.

Thanks for taking the question and congrats on the fourth quarter. Quickly, just one little housekeeping item. Guidance for 2016 -- does that include the Heartlite acquisition that you guys announced yesterday?

It does.

Okay, so that is factored in there. Okay, so that's $6.8 million revenue and $0.01. And then just a quick -- on the strong organic growth that you guys posted in the fourth quarter, and you guys expect year to date two-thirds of the way through the first quarter. On both the home health and hospice side, I think you guys set up for it up 5 or 6; I can't remember right off the top of my head. But I guess my question is given kind of a milder winter, if you will, as well as a much weaker flu season than last year, what do you guys attribute the growth -- the strong organic growth to in aggregate?

The first thing is we put another 30 sales reps in key markets that we knew we had upside. And that's really starting to pay dividends. And I'm going to go back to what I said, Toby, I think, to Ryan's question: right now, and I'd have to kind of go back to see -- I believe we're going to have close to 80 agencies in either a five-star HHCAHP or five-star outcome and process measure. And we are absolutely blasting as a differentiator.

So you have got more sales force producing each day. And honestly, we have some market differentiators that are really starting to take hold and really create that tailwind that Keith talked about in his prepared comments.

Okay. No, that's really helpful color; I appreciate that. And then just one other subject matter which really hasn't been touched on much, given the strength of the home health and the hospice business, but community care: if we look at the census, it's up nicely -- 14.5%, 14.8% on a year-over-year basis; up 9% sequentially. Billable hours are a little bit of a different story. But you also see kind of a nice bump in the revenue per billable hour, up 10% on a year-over-year basis and up 3% or up 2% on a quarter-over-quarter basis.

And so my question is: what is kind of going on there in terms of looking at the -- in looking at the revenue per billable hour being up 10%, but yet you're not seeing huge growth in the number of billable hours, but you had a pretty big bump in census. So you're obviously spending less time, but at a greater dollar amount per visit. So I'm just kind of -- is it a mix shift? Just some color on that?

Yes, that -- it really is a mix shift. There are two things that I want to kind of allude to there. We are at 13 locations, and we have mapped out in this tri-level of care that you heard us talk about a few more that we're actually rolling out. But I want to do that very methodically, because we don't have a lot of room in that margin to open these and drag it. So what you're seeing is some of those newer ones that we are doing are causing that mix shift, but me and the team are trying to be very methodical in how we roll that out.

The other thing that I wanted to say and that I'll put out there is that we're also doing something pretty unique about pilot teams benefiting nurse aides in certain markets. And the reason why we think we can do that -- it may decay the margin just a little bit, but there are some contracts that we can go out and get that we presently don't have. And we think that can bolster those billable hours, but at a little bit lower margin per hour, if you would.

So those kind of things in combination are what you're seeing in there. And because it's still a very relatively important but small revenue stream, it's just -- it's so transparent in numbers.

Right, yes, absolutely. A lot of small numbers there.

And then just more from a little bit of a macro commentary, if you will, obviously gas prices -- and I know you guys reimburse on a mileage basis as opposed to a gas price basis, but gas prices are back to where they were, I think, when I turned 16, and I'm in my 40s now -- or pretty close to it, anyway. So I'm thankful from that from a personal economic standpoint.

But it should be a theoretical tailwind to you guys, as well. So is that also kind of factored in, I'm guessing, into some of the guidance? Because you do face some headwinds on the reimbursement side, from the home health rebasing as well as on the LTACH side. But you should also have a little bit of a tailwind from lower fuel and/or reimbursement costs as well. So maybe some commentary there about that, and then I'll hop off.

Toby, it's Don, and I'll be as crystal clear to that. The answer is yes. And in our bridge from 2015 through 2016, part of our guidance incorporates a $0.03 pickup because of what you just talked about.

Okay, perfect. Thanks so much.

Ryan Halsted, Wells Fargo.

Thanks for taking the follow-up question. I wanted to go back to the strategy of maybe trying to increase your acuity as a way to mitigate the Medicare reimbursement headwinds. I just wanted to get a sense of operationally how you're doing that and really just gauge what's kind of the risk to that operational strategy? I mean, is there concerns around how much therapy you can -- how many therapists can you really attract in the market and what the cost of that would be?

I'm really glad you asked that, because semantically, it's increasing case mix was the question, not necessarily increasing the acuity. What we said was two things; first was the mix of patients, in other words, more clinical-band therapy was attributable to that. So it's not like we're going to take an existing therapy patient and try to go do differently than we are today. It's that were going to go after more of the orthopods, where we ship it from clinical, point one.

Point two is because of the OASIS, if there is OASIS in accuracy, when you're refuting oneself inside of that documentation, your case mix is low. So you're really not capturing through the documentation what the patient acuity is actually exhibiting. Those are the two things, Ryan, that I was trying to allude to. We want to go back after some of the patients that our traditional mix incorporated.

And when we do actually document, we need to use -- it's called SHP is our program. We need to use that SHP system to say, hey, you know what? It's telling us that we are not making sense. Let's go make sure we're making sense, and when we do that, we've seen case mix go up.

Okay, I appreciate you -- oh, sorry, go ahead.

What Keith was asking -- we used to use a company called OCS, and really it just wasn't as user-friendly for the field. It was great for us, me, and Keith, and Eric, and everybody. But we switched that, and then it's been about a year. And with anything, when you're trying to get 6,000 people to get comfortable with a change in what they're doing on their laptops and their devices, it's really just taking hold right now.

Thanks for clarifying that. So is there a need to try to staff differently, or you're saying it's purely what you've just described?

It's pretty much what we just described. The need to staff differently is because in certain markets right now, gosh, I wish it could be all the way -- we've got pipeline issues that we can't take. We've got people waiting to come into the agency, and I can't find staff in some of the Northwest agencies. So that's really what I was alluding to there. Did that answer your question?

Yes, absolutely. Thanks for taking the follow-up.

Thank you. And that does conclude today's Q&A portion of the call. I'd like to turn the call back over to Keith Myers for any closing remarks.

Great, thank you, operator. Thank you, everyone, for dialing in this morning, participating on the call. As always, if you have any follow-up questions between now and our next call, please feel free to contact Eric Elliott. And if he can't answer your questions, he'll get you in touch with Don or I or Dionne. And we'll work with you as much as we can. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.