LHC Group Inc (LHCG) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to Eric Elliott, Senior Vice President of Finance. Please go ahead, sir.

Thank you, Abigail, and welcome, everyone, to LHC Group's earnings conference call for the first quarter ended March 31, 2016. 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 will hear from Keith Myers, Chief Executive Officer, Don Stelly, President and Chief Operating Officer; and Josh Proffitt, 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 goals for 2016 and beyond.

Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now I am pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you, Eric, and good morning, everyone. We are pleased to be reporting stronger-than-expected financial results this morning as well as more great news on our quality star rating. We believe our performance will only serve to further differentiate LHC Group as one of the country's leading providers of nonacute services with the proven quality, technological sophistication, scale, and financial strength to be the partner of choice for payers and providers in the emerging value-based healthcare system.

Before going into the details of the quarter's results, let me recognize and thank all the people that made this performance possible. I am extraordinarily proud of our growing team of talented and committed healthcare professionals.

In a period of ongoing change for our industry and our Company, our team has risen to every challenge and not only continued to provide great care for our patients and their families, but improve the quality of that care we provide to a point that places LHC Group now significantly above industry averages according to most recent star ratings. So thank you for all you do and keep up the good work.

I also want to welcome Josh Proffitt to his first conference call in his new role as Chief Financial Officer. Josh is an eight-year veteran of LHC Group who has been Executive Vice President of Corporate Development and General Counsel for us for the past 3 1/2 years. He has done a great job in those roles and I and the Board are confident that he will do a great job as CFO.

Our 15.3% revenue growth for the quarter reflects the continued momentum in our organic growth and acquisition strategy. The 8.1% increase in organic net service revenue for our home health business was driven by a 7.2% increase in admissions, our best performance for this metric since the second quarter of 2012.

We also benefited from increased reimbursement due to our admitting more medically complex patients, as indicated by the increase in our average Medicare case mix. As a result, average reimbursement for Medicare episodes for our total home health business increased 3.6% for the first quarter.

As we discussed last quarter, this volume growth is due in part to our strong network of relationships with our joint venture hospital and health systems partners, who have direct experience with our ability to add value as a low-cost provider of high-quality services. In just a minute, Don will share with you some additional information concerning our volume growth that speaks to the impact these relationships are having.

The growth in our first-quarter net service revenues is also attributable to the full-quarter impact of the seven acquisitions completed in 2015 and the partial-quarter impact of the five transactions completed in the first quarter. These Q1 transactions included three related to our joint ventures with Missouri Delta Medical Center, Baton Rouge General, and Northern Arizona Healthcare. The other two were for our freestanding home health agency in Jennings, Louisiana, and the Heartlite Hospice we only announced during the quarter.

Our corporate development pipeline remains very strong. I will remind you that this pipeline consists of potential transactions that we believe could be completed in 12 months. And as such, it changes on a quarter-to-quarter basis.

At this time, our pipeline consists of a balanced portfolio of 23 opportunities totaling approximately $350 million of trailing annual revenue. And we are highly confident that 2016 will be a record year in acquisitions for the Company.

Our strong financial performance first quarter was complimented by our improvement in the April star rating. Don is going to cover these in more detail, but I wanted to discuss how important both the improvement we have shown and our strong overall ratings are in the context of value-based healthcare.

As I said earlier in my remarks, we are focused on differentiating LHC Group in the market as the partner of choice for health systems and payers seeking to improve quality and lower costs for their patients in need of nonacute care. This focus is a continuation of the long-term strategy to align ourselves closely with hospitals and health systems which began almost nearly two decades ago.

These partners are now familiar with our [solid] care, our services, our IT capability and infrastructure, and our culture. We believe we are strongly differentiated in their view and in the view of many of their peers because of our long history of developing and operating successful partnerships that are in strategic alignment with each [post], hospital, or health system. And that have proven to stand the test of time.

Today, as value-based healthcare is changing, our industry is dynamic. This partnership strategy and the relationships it has created are proving very important as hospitals and health systems narrow their panels by seeking the most proven resource. We have no doubt that quality will be one of the most important measures, if not the most important measure, in determining the firms selected.

As one of the leaders in the star rating, we believe this potential question becomes an advantage for LHC Group. And so we will continue to work very hard to continuously improve our quality.

In summary, we believe LHC Group remains well positioned to continue gaining market share for organic growth and acquisitions. As the shift to value-based care intensifies, we expect to build on our history of working with providers and payers to be their partner of choice for nonacute care. We are confident that successful execution of these strategies will also position us to achieve further profitable growth and increase shareholder value.

Thank you. And now here is Josh to cover our financial results in more detail. Josh?

Thank you, Keith, and good morning, everyone. And thank you all for joining our call. Let me begin by saying that I am honored to now be serving in this role and am privileged to be able to tell the story of the over 11,000 hard-working and dedicated LHC Group family members who care for over 150,000 patients each year.

You are the true heroes and because of your efforts and the high-quality exceptional service you provide for the patients, families, and communities we are so blessed to care for, we are able to report another successful quarter to our shareholders.

Since joining LHC Group in 2008, it has been an amazing experience to work alongside some of the very best clinicians and other professionals in healthcare. And I look forward to serving together with you for many years to come as we continue to grow organically and through acquisitions and new joint venture partnerships.

With regard to our financial results, net service revenue for the first quarter of 2016 was $222.6 million, an increase of 15.3% compared with net service revenue of $193.1 million in the same period of 2015. Same-store revenue grew 8.4% for the first quarter. This growth in same-store revenue is due to our growth in same-store admissions and an overall increase in patient acuity in the home health service line in the first quarter of 2016 as compared to the first quarter of 2015, offset by an estimated reduction in Medicare home health revenue of approximately 1.2%.

Net income for the first quarter of 2016 was $7.7 million or $0.44 per diluted share, an increase of 12.9% compared with net income of $6.8 million or $0.39 per diluted share in the same period of 2015. Quarter-one 2016 EPS includes the impact of the Medicare reimbursement changes due to the 2016 CMS Home Health rule.

On a consolidated basis, our gross margin was 39.1% of revenue for the first quarter of 2016 as compared to 40.7% of revenue in the first quarter of 2015. This decrease in gross margin is primarily due to three factors. One being higher expenses related to acquisition integration. A second being margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our mature agencies.

And third being increased costs of providing care for a higher acuity case mix patient population, all while experiencing an estimated 1.2% reduction to reimbursement that I discussed earlier.

Our general and administrative expense was 29.8% of revenue in the first quarter of 2016 as compared to 30.8% in the first quarter of 2015. The 100-basis-point improvement in G&A expense as a percent of revenue is due to continuous cost control efforts while growing revenue, generating additional operating leverage.

Our bad debt expense represented 2.1% of revenue in the first quarter as compared to 2.7% in the same period of 2015. The 2.1% bad debt expense in the first quarter is in line with our expectations for the year. The higher bad debt expense in the first quarter of 2015 was attributable to additional reserves that we recorded in that quarter for patient claims related to prior-period patient care associated with two commercial payers. Those adjustments were isolated that negatively impacted bad debt that quarter.

Operating cash flow for the first quarter was $17.2 million and free cash flow was $14.5 million. We currently have $123 million available on our line of credit, which leaves us well positioned to fund future acquisitions and joint venture partnerships.

With these first-quarter results and our expectations for the remainder of the year, we are reaffirming our fiscal year 2016 full-year guidance for net service revenue to be in an expected range of $870 million to $890 million and fully diluted earnings per share to be in an expected range of $1.90 to $2.

This guidance does include the reduction to Medicare home health revenue due to the 2016 CMS Home Health rule and the reduction to Medicare LTACH revenue due to the new CMS-established patient criteria after implementation of certain mitigation strategies. 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 2016, we continue to expect gross margin to be in the range of 39.5% to 40.5%; general and administrative expense as a percent of revenue to be in the range of 29% to 30%; and bad debt as a percent of revenue to be in the range of 2% to 2.2%.

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

Thank you, Josh, and good morning, everyone. I second Keith in saying that we had a very good start to 2016 with our first-quarter performance, and we certainly intend to build upon this in the quarters ahead.

There were a few items that I would like to touch on before moving to Q&A. First, Josh mentioned the decline in gross margin resulting from higher acquisition integrating expenses and a higher acuity mix. You may recall that in the fourth-quarter call, I mentioned that our acquisitions would be fully integrated by the end of the first quarter, all except Halcyon, which we expected to be complete in this month of May.

A meaningful piece of our increased cost of revenue for the quarter was the transition to point-of-care of Halcyon's 16 locations, 11 of which were completed in this first quarter of 2016. This transition is not unlike any that we have done before overall in the Company and we expect a similar benefit, both on revenue and cost, as we finish this completion.

In addition, the increase in patient acuity does require additional resources and thus more expense to provide these patients the care that they need. We expect this trend to continue and that our average Medicare case mix will also continue to increase over time as well.

Of course, we welcome these patients and are staffing and adding capacity in anticipation of this trend. For instance, we incurred additional costs in the quarter for ongoing Oasis training, which is necessary for us to ramp up our efforts to serve more medically complex patients. And, while our costs did increase to provide these services, so did our reimbursement, as evidenced by the 3.6% increase in average reimbursement per completed and billed Medicare episode.

In addition, as we expand the range of patients we can serve, the value-add for our health system partners continues to grow. That these hospital and health system relationships are mutually beneficial has particularly been evident in our increasing volumes for several quarters.

We dug a little deeper into the home health admission numbers this quarter and gained some pretty good insight. For example, the growth rate in our admissions from our JV partners is faster than non-JV admissions. So while total Medicare admits increased 3.3% for the quarter, those from our JV partners increased 3.6%. In a similar fashion, total admits increased 7.2% for the quarter and total JV admits increased 8.1%.

Although JV admits are growing off of a smaller base, the gap is closing. Our JVs accounted for 40% of the Medicare admissions for this quarter and 43% of total admissions. Add in the fact that we are seeing much of the increased patient acuity from these partners, the growing impact and success of our health system alignment strategy is clear.

These figures help illustrate why the differentiating impact of the quality star ratings support our long-term growth plans by making us the attractive partner for systems and payers. The new April quality of patient care star ratings that were recently released represent the fourth release of these ratings.

It is interesting to note that the average national rating for April of 3.245 stars is less than a full basis point from the first national average release, which was last year in July. That was 3.238. The average rating in the states in which we operate were a bit lower but they remain fairly flat.

In contrast, though, our ratings have increased 54 basis points over the last nine months to 3.702, up from that initial 3.145. Today, we lead our public company peers and we are 45 basis points above the national average. And we believe we're continuing to make progress.

When we analyze the most recent data, we see that we are over 90% of our home health providers currently, at 4.5 stars or greater. More specifically, the number's 92%.

As I have mentioned before, part of this improvement we have shown is the result of us having a workforce that had a lot on its hands nearing that initial measurement period. We were finalizing, if you will recall, our move and completion to electronic health technology. Today, however, in less than a year, we are clearly on a differentiation path, both in quality star ratings as well as past that.

For patient satisfaction, our overall rating is 3.922 and is well above the national average and above all of our primary public peers except one in which we trailed by 9 basis points.

So in closing, I want to congratulate and thank our team for another tremendous quarter. The work you are doing is immensely important and extremely impactful. And honestly, the results of this mission, as evidenced by what we are sharing today, are truly among the best in the nation.

So Abigail, this will conclude our team's formal remarks. And we are pleased to open the floor for questions.

(Operator Instructions) Frank Morgan, RBC Capital.

It was interesting commentary around your deal backlog and I think the $350 million of revenue. Could you give us any color on describing those particular opportunities? How many of those are competitive versus negotiated? And maybe what kind of EBITDA contribution that $350 million would represent?

Thanks for the question. Let me make a correction. This is one of the reasons I don't like prepared comments as much as because I don't read as well as I speak sometimes, I think. It is actually $950 million.

So I was looking at the 23 opportunities and I said $350 million. I didn't realize it. Josh wrote me a note. So it is actually $950 million. So of those --

That's okay. Bigger's better.

So what the pipeline consists of is a little bit of everything. On the small end, that -- there are a couple of what we call tuck-in acquisitions, maybe in the $2 million, $3 million, $4 million range.

And then on the large end, we have a couple of multi-state opportunities that improve home health and hospice. About 50-50 joint venture and freestanding in terms of revenue. And I don't have it calculated in terms of what it means in EBITDA, all in, but you could probably figure use about 8% to 10% fully loaded margin in all of this as a blend.

Yes. I would agree.

Some of these, when we go in, are drags fully loaded. And so we have to pull the synergies out of them to generate that return.

Okay. And I guess you had call out your cash flow from ops, but on a year-over-year basis, a little bit of a decline there. Is that mainly acquisition-related or is that any kind of other issues that you'd point out?

Yes, Frank, you are spot on. It is primarily-acquisition related. And specifically, one of the bigger items that is impacting that cash for the quarter is we had a hospice [cap] payment that related to pre-closing periods in connection with the Halcyon acquisition that we are still working to recoup. But that was cash flow that went out the door on our behalf.

Okay. One more and I will hop off. On the subject of hospice, how is the new two-tiered payment system working out so far? And what is your general mix between those under -- 60 and under and versus [overnight]? Thanks.

So far, actually, we are about flat. And that is not unexpected, as we had illustrated in our last call because of where our length of stay is. I do think we have an opportunity with Halcyon as we see that because its mix of patients in those geographic areas was somewhat different from ours.

I don't think I would bake in a whole lot, however, because we are still getting Halcyon mature. So I guess in summary, the existing portfolio is about flat. And Halcyon, we think, has an upside as well hit the latter part of the year, but are not seeing that just yet.

Brian Tanquilut, Jefferies.

Congratulations, guys. Keith, you guys talked a lot about the JVs. Just wanted to hear your thoughts on what the limiter is in terms of accelerating the pace of JVs? Because clearly, you have good relationships with a lot of these referral sources that you have, especially in the nonprofit side. So what are the discussions like and what is the regulator, at least near term, on ramping up JVs?

Yes. That is a really good question. The only thing that holds us back is getting a decision from the c-suite in a hospital health system. Not that that's an easy hurdle.

But as you would imagine, back in the late-1990s, I guess the early 2000s, we started to get momentum. It was really hard to get a meeting and get them to even entertain the idea. Because generally, back then they thought that they could either do everything as well as they needed to or learn how to do everything and (inaudible). And no one wants to be first to market on this kind of concept.

But now, we have enough success and history behind us. And the fact of having a reference list that is made up of every hospital or health system we have ever done business with. We don't have any bad stories or failures in those. So I think that is starting to accelerate.

But your question is what is the limiting factor. I mean, that is the limiting factor. As far as implementation and execution, once the operations -- once we have operations in our hands, it is as easy or I would say maybe easier than the freestanding side.

And easier because we at our core I think are more operations people than anything else. And just the fact that you'll always have an all-in -- John and then Johnny before him in the operator seat. That is where we are most comfortable.

So when we have volume coming our way down a pipeline, we're great at managing that volume. What we struggle with and we have to put a lot of effort into is in the sales side of the business on the freestanding locations.

So Don, I don't know if you want to add anything to that.

I think that is exactly right. The limiting factor is how fast they come inside of our pipeline mature. It's that simple, Brian. Once we get them in, it is an easier lift because you have already got the brand equity and some of the things that you can maximize to turn around pretty quickly. So we are excited about that mix that Keith talked about earlier on in his prepared remarks.

So to follow up on that, is it fair to assume that the interest level is picking up? And then also kind of related to it, are you seeing any pickup in volumes yet or -- at least referral flow related to CJR and BPCI?

I will take the first part of that and let Don take the second part. So to be real clear: yes, we are seeing the momentum pick up significantly in the pipeline. So of that $950 million in revenue, about 40% of that is hospital and health system JVs. That is a big number. We have not had anything close to that in prior year.

And on CJR, I think --

Yes. I'm really glad you asked that question. Are we seeing volume increases? The answer is yes, and our monthly run rate from prior year is up 46%.

And let me color that in a little bit for you, Brian. We have got -- of the 69 MSA areas in CJR, we have presence in overlapping 20 of them. Seven of those 20 are equity ventures. And we have dug pretty deeply.

Now, 189 hospitals in those areas, which 50,000 discharges with DRG 469 or 470. And when you look at what we have been able to do with the program that we cobranded and co-worked with Ochsner, that program is truly a differentiator.

For example, it increased our utilization from 66% to 79% in home health primary, decreased SNF from 28% to 11%, and it dropped the length of stay for the acute facilities to 1.4 days for a knee and 1.8 for hip. All of this wraps in and this pilot that we are now flushing inside of those 189 hospitals when they open the door for us creates a 1% rehospitalization rate. And just under a 1.8% for the hips.

I throw out this data to back up that that 46% that we are seeing right now has increased from January, February, March, and what we are seeing in April, and we are truly excited about it. And my last caveat is to give some atta boy and girls to our team. Our therapy team and what they have been able to do to mimic this Ochsner model for us is really a differentiator in the CJR.

And then Don, last question for me. Stars is something that you have talked about, and clearly very proud of the progress you have made there. In terms of how that is flowing through, value base is on until 2018.

So how are you seeing the benefit from stars right now? Or are you already seeing any benefit from the pickup in your stars ratings?

Yes. Well, it is twofold. Value-based purchases. And certainly the amount of star agencies we have, which is 4.5 or five stars, we are about at 250 at of our facilities right now, it is definitely been a differentiator for marketing -- in sales and marketing. It is a driver of our organic growth. That and CJR are the two things that we are really pushing into the deep summer months.

So it really has helped us and that is one of the things and -- when we are turning in that organic growth, of course we are pleased and proud, but the hurdle is big for us. Unlike some of our comps, sometimes you jump a pretty weak hurdle and you start beating your chest. But then when the hurdle is high, it is a little bit harder to jump over.

A little bit more specific to value-based purchasing, however, it is a little bit more difficult to quantify right now because you don't know what the comp is going to be. You don't know what the agencies in that state's specificity area is going to be.

We took -- we had our analytics executive take a stab at it. And certainly in the aggregate, we would be in the upside box, but I just don't want to get out right now and tell you what those numbers are. Instead, would rather just say I truly like the position because as long as we see ourselves getting better and doing it faster than the comp, you got to like our position in the value-based purchasing model.

Toby Wann, Obsidian Research Group.

Thanks for taking the questions. Going back to the JV partnership, you guys called out some statistics about how you are growing faster, getting more admissions from your JV partners. But you also talked briefly about the -- and quantified specifically the difference in acuity that you're getting. Can you maybe tease that out a little bit and maybe provide a little more color about that?

Yes. That acuity is truly related and dovetailing on the therapy and orthopedic program in the CJR. And even when it's not inside a CJR, quote-unquote, terminology, our ortho program, including our restorative model that our Chief Medical Officer and our team has developed, is really paying dividend for us there. So that is really driving that acuity.

But we are also seeing higher acuity in the clinical component of the [her] as well. We believe that is related to our diabetes, congestive heart failure, and COPD model that they have also developed.

Look, it is still a work in progress, and we still got to be the primary provider of choice and quality. But that really is starting to resonate. As Keith mentioned in his prepared comments, they are really getting it and narrowing the panels. And obviously, as a partner, we have the largest voice and largest seat at that table.

So when you combine that with what we are doing in quality, it is hard not to expect that volume to come to us. But truly, we are earning it.

No, that is helpful, especially as it relates to the DRG 469 and related and how that is going to profitably play itself out with CCJR. And then on a related item as it relates to higher acuity, you guys also made the comment that that higher acuity is driving -- obviously, those patients are little more -- bit expensive to treat. So you did see a little bit of a degradation in your gross margin on the home health side.

So how do you balance that going forward to where you can either maintain or expand margins while still treating that same patient subset of this higher acuity? A little color on that.

Yes. Let me color that in just a little bit. That is a lot related -- we do a really good job of using what we call extenders. In the nursing realm, it is LPNs, and on therapy, it is PTAs and coders. So as we have embarked upon these new models and we did all of the OASIS training, we are little bit RN heavy. And we see that blending back down as we fine-tune the plans of care in some of these patients.

Differently stated, I think we can split the baby, if you will. And we don't always get back to the exact skill mix of the RN/LPN coefficient, but we are going to get close to what we were and a little bit further away from what we are now. And that will help increase our margin.

Thanks for that color and congrats on the quarter.

Ryan Halstead, Wells Fargo.

Sticking with the popular topics of your JV strategy and as well as CJR, I was wondering is your strategy, with the joint ventures, to focus on some of the markets where the CJR is mandatory? Within your pipeline, what percentage of those JV opportunities involve CJR margins?

So we can -- how many, Don?

There is seven.

Seven in our existing markets where we operate.

That is correct.

But your question, I think, is the pipeline, or are we targeting from a pipeline perspective markets where CJR is. And I am going to have to say no. We are not that -- I don't want this to come out wrong, but we are not that shortsighted in the pipeline.

So I think CJJR (sic) is just a precursor to more and more value-based purchasing type model. So no, we're not focused on those markets more than others.

Ryan, this is Don. I will turn -- Keith was talking on the acquisitive side. More so on the growth side, we are definitely using the CJR awareness and our associated program to get in the door even outside of those seven equity ventures.

And here is the sell. Even if they are not in that hospital in the actual program, the demonstration of decrease in their length of stay by a day and a half is extremely important to those CFOs. Being able to show them how we can, as appropriate, bypass the SNF and get to a lower cost setting is appropriate.

So I totally agree with Keith. He was kind. I don't think we certainly are not doing that on an acquisition standpoint, but on a day-to-day blocking and tackling, we are absolutely taking that to market.

Yes. For sure. And on that, operationally, our activity in those markets where CCJR is present is not limited to our hospitals.

That's correct.

We can generate the same results for hospitals that are not on point.

Right.

Okay. I am curious: with the JVs -- as these value-based models and as gain-sharing arrangements are sort of entering into discussion, how does that play into your joint venture strategy? Has that sort of become a more prominent part of your JVs? Have they evolved since you originally started this strategy? And along those lines, do you eventually see your role in the joint venture as being more risk-based?

Let me answer that in two ways. I think the introduction of risk and value-based purchasing to the hospital and health systems is a driver in accelerating the joint venture opportunities you see in the pipeline.

I was going to say while we are not targeting CCJR hospitals, the reality of it in our pipeline right now -- I am just going to take a guess at this, but 75% or better of the hospitals and health systems that are in our pipeline today of that volume have significant risk exposure. So they are much more interested in talking to us when they have risk.

I think that on the home health operations side, what we bring to hospital, touching on what Don said, it is more than just operating a successful home health agency. But it is our ability to reduce length of stay and improve their overall quality that is becoming really, really attractive. So did that answer the question?

Yes. That does. Last one on the JVs, are you seeing increased competition for JV opportunities in your pipeline? I mean, are other home health and hospice agencies pursuing the same strategy?

We have seen some one-offs in different markets. I think we will probably see more people looking at it. I can't imagine that they wouldn't.

But what we found as an organization is that it is not something you can flip a switch on and do overnight. Because it is more than just being able to operate our home health agency successfully, and I really mean that. It's you have to understand the hospital business and you have to understand what is going on in their larger business to be a really good home health partner.

What I have seen in other attempts is where a home health operator goes in and wants to partner with a hospital or health system. And the one thing they want is to get as many Medicare patients as they can from the hospital. That is what home health providers want.

And if you go in with that mindset, you are not going to be very successful. You have to be able to solve the complete problems of the hospital. For us, that means having to work through managed care situations sometimes on their face, and at the beginning, they're not very profitable. And so we have to revise models to be able to operate that business, including going back and negotiating with managed care companies.

And when you talked about sharing significant -- or introducing risk into our reimbursement, one model that we really like is to agree to a baseline reimbursement that based on average market performance on things like rehospitalization or star ratings or those type methods, and then with us having the ability to have a gain share or additional reimbursement retrospectively be based on our performance.

And so we love that. Because we are very confident in our ability to produce exceptional results.

The only thing that I would add to Keith's comments because of what he said -- and this trend certainly is bound to change. We haven't lost one when there has been those one-off people trying to get in there with us that we wanted either.

And I think that bodes well for our team and the ability of it being accomplished and the approach they bring to being a partner versus just trying to get volume [runs].

That's great color. Appreciate that. Maybe just one last one on the guidance. Last quarter, you guys called out some of the headwinds from the Medicare reimbursement outlook. And called out $0.16 could be offset by improvements in driving case mix and utilizing higher therapy.

Just wondering if you thought -- what is the status with being able to offset that? And do you think that is something you could be successful at throughout the rest of the year?

Yes. Thank you for the question. Yes, it is. And honestly, when we sat with you all, we were not trying to be conservative; we were trying to guide you to exactly what we thought at the time. And especially in the last six weeks of the quarter, we caught a lot of headwind because this OASIS trading that we invested in December and January really took hold.

And listen, I use the phrase a lot that hope isn't a strategy. I do hope this continues. But strategically, we have things into place. Back to your point, we do see it going forward into it. And once we get a couple of -- more months under our belt and get late into the second quarter, hopefully we will have even better insight and news on the next call for you.

Thanks for taking my questions.

Whit Mayo, Robert W. Baird.

I just wanted to go back to the deal environment and really test your appetite for leverage. Rough math on nearly $1 billion of acquired revenue with 10% margins would put your overall leverage in the 5.5 to 6 range.

And I guess I just want to understand what the realistic expectation for growth is. And when you say a record year, the best year I can see is maybe $80 million of revenues. So you've already acquired half of that. Can you just help us think through what an appropriate manageable level of growth is?

Sure. So a few questions there. First of all, the record year for us was in 2014. I think we were around 105. So when I look at the pipeline that is in front of us right now, I can't imagine us not being significantly past that this year. So that is what I am talking -- referencing when I say a record year [and look past that] in 2014.

In terms of leverage and overall pipeline, so of that $950 million that is in the pipeline today and these 23 opportunities, I also can't imagine any scenario that -- whereby we would actually close 100% of those in 2016 or even if they did. But from a leverage standpoint, we have always said that we can get comfortable up to a 3 times leverage level on a consistent basis. Not to say we wouldn't peak above 3 times if a deal came along that caused us to do that and then work it back down.

But we also -- we are public. And so we think about going back to the market if those opportunities began to flow through. So it would be a combination of those two things: leverage up to 3 times and maybe exceeding a little bit. And if we have enough opportunities flowing through, then we would go back to the market.

Okay. No, that makes sense. Can you maybe update us on seller expectations, valuation levels? Maybe it is not productive to say publicly on a call, but anything to speak about where you think valuations are right now on acquisitions?

Yes. Of course, that is where we spend most of our time. If we do all the other [deals], you get comfortable everywhere else. But the reality is that reimbursement is being cut year after year one way or the other, whether it is through a CMS cut or regulatory restrictions and all those things.

So we don't forecast in any pricing increases. So it all has to come through growth, and we feel like there is some decreases. And buyer and seller expectations all have been a little bit off. And right now, generally speaking, on everything except JV -- on JVs, we never have that issue, honestly. Because when we do a JV, it just goes to a fair market valuation in the deal transaction.

But on freestanding, especially, sellers' expectations in the --being higher than what we want to pay. There is normally a process -- a bid process. And you have to hope they don't find somebody that is overly aggressive willing to pay more than we are willing to pay. We do have a limit.

And I would say this. I don't want to beat around the bush. I would say that diligence is certainly an issue for us. So I will just -- I will guess that 20% to 25% of the deals we look at fall off because of diligence-rated issues. And then anything else we miss is just on price. We just get to a point that we won't -- we can't go past.

Yes. No, that is really helpful color. And maybe one last one for Don. Just can you provide maybe a little bit more color around fee-for-service, admit, growth, and Medicare Advantage admit growth? Is one growing faster than the other? And maybe a comment on recertification rate trends? Thanks.

It is a good question. Good to hear from you, Whit. They are actually pacing about the same period. Last year, we saw the Medicare Advantage, especially in our northwest portfolio, starting to out run. But we are not seeing that right now. It is about one and the same.

And I really don't -- I am trying to run through my mind in a market where I would be misleading you. But I don't think that is the case.

And on our recertification rate, let me go to my stat sheet. Where are we, Eric?

About 48%.

Yes. We are running at 48% in one of these stacks somewhere.

Is that trend up or lower as you start seeing higher acuity patients, more therapy patients?

It's actually lower. That is a good point. I mean, we get them in; we get them out. We get them out, especially on the joint program.

Got it. Okay. That's really helpful; thanks, guys.

(Operator Instructions) Brian Tanquilut, Jefferies.

Just a quick follow-up. Hospice margins during the quarter were down slightly. Is there anything you want to point out there on hospice?

Yes. When are you going to get them back. Good question, Brian. It is all Halcyon-related and integration-related. When we look back at the quarters, you saw we were running up 12%, even 14% in the reported quarters, and we were down half. That is going to come back to us. We are going to backend-loaded on Halcyon and get back where we need to get.

Okay. And then Don, on reimbursement on the home health side, you came out last quarter saying that it is about 2% cut. In your guidance today, you are still saying it's 2%. Are you seeing any change or opportunity to pull that back a little bit?

Yes. Right now -- and again, I say this with caution because it is back to mix dependent. And we did a really good job of shifting the mix. We are really seeing about a 1.28, but I would go a little bit closer back to that 1.5, 1.6 mark. I am looking at Eric and Josh to make sure I am not misleading you there.

It is not as bad, because we were going off what we saw in that last quarter on 2015, but it is also not as good as where we are tracking today, we don't think, when we get back to that mix on what I was saying earlier on those clinical admits, especially because this is something that I do want to disclose.

We have got some admit holds in some of our agencies that were giving us a lot of the clinical component. And it is due to staffing in the Northwest. And as that flows back through, I think I'm going to see a normalized mix again in the portfolio.

So you feel good saying that it will be below 2 once everything is said and done on average for the year?

Yes.

Okay. Got it.

Toby Wann, Obsidian Research.

You guys have talked a little bit about OASIS training costs in December, a little bit in January. Just to kind of quantify the impact of that during the quarter?

About 783,000.

Okay. Then also on a little bit of a smaller component of your overall business. I noticed that you guys did, looks like, close down a couple of community-based locations on a sequential basis. But yet, looks like revenue per billable hour up slightly. Just kind of a little bit of color about your thinking, if any, updated thinking on the community-based business.

I will take the first and then Keith can talk about the outlook. Those couple were actually dragging that. And when we closed them down, our Elk Valley made the aggregate push up.

Okay.

And on the long-term outlook for CPS, we are really high on the service line. But it is -- our ability to be successful in it is dependent on reimbursement, which is state specific, but we have to look at that on a state-by-state business. It is unlike home health and hospice.

And we don't lead in a market with CPS. So once we have a presence in a market in home health, then we look to see what the state reimbursement is like; if it is favorable. And we look to add that service. Patients need it everywhere and benefit from it. It is just a matter of having stable reimbursement.

Okay. No. That's helpful. And then one last one for me. Noticeably absent from this call with regards to home health is any discussion about commercial patients. Maybe you guys could give us a little bit of an update on what you are seeing on the non-Medicare side on the home health component. Thanks.

Well, it is not absent for any reason, that we just tend to focus on Medicare, I guess. I did say that because of our relationships with hospitals and health systems, I think we are sourced more than most home health providers to really tackle that problem head on. And so we spend a lot of time at it.

At a high level, I can tell you this. From 2014 to 2015, when you look at that year, we improved our margin on that business by 500 basis points. That is a pretty big number. So that comes from a combination of -- and we grew the volume quite a bit, as you will see.

But in that mix are contracts that got terminated, which led to renegotiations. Some of it was renegotiating contracts already in place. And some of it was operational, where there were contracts -- maybe Don can speak a little bit to this. Where in some of our home health locations, we were doing the same thing to those managed care referrals. And not in terms of patient care. All the patient care is the same, but all the paperwork we do internally that might be required for Medicare, but not required for the commercial payer, we were still doing.

So I know Don and the operators did a great job of streamlining some of that. All of that led to our ability to expand the margin in that business and make it more profitable.

Yes. I think, Keith, you're absolutely right. Keith and the team did a good job of helping us on some of the rate structure. But not much, to be honest. It was a lot of operations.

And we just use the term manage managed care. We have got to be very scrutinous. In a Medicare episode, we have the blessing of truly managing the care of that patient 60 days. And here you don't. It is on a per-visit model, so you have got to tweak the way you have a lens and you have got to balance that operationally, but still ensuring quality.

So it is not that we avoided it for any other reason than it is just a smaller portion. But it's still very intentionally looked at from the ops side.

Bill Sutherland, Margin Growth Equities.

Just had got a quick one here on LTACH. Just looking at the first quarter, which was essentially in line, and wondering about the expected fall-off that you guys have talked about.

And then maybe a bit more color on the mitigation efforts that Don had mentioned on the last call. And if I missed something in the prepared comments, forgive me. I had to jump off for a second. Thanks.

No, Bill. We didn't even address it in the prepared comments. And really nothing has changed since that last call. I had talked about the net income effect for 2016 after mitigation being about $1.9 million or $0.06 per share. And we were on track there. We may be able to eke out a little bit in the betterment side, but I wouldn't model that in right now.

And to that mitigation, obviously, part of our mitigation -- there are kind of two trains of thought. You either go straight to the MSDRGs that are just going to be LTACH appropriate or you work toward site neutrality blending. And ours is the latter.

In our rural markets and in the HIH world that we are in, we simply didn't have the latitude from a pipeline standpoint to do that. So our strategy is to manage those site neutrality patients, open up that pipeline, because it is an opportunity to provide services to those newly qualified patients.

Number two, we are meeting with every host hospital to ask for their help in decreasing some of the ancillary and rents, as appropriate. And it is tough for them, too, but they see the alternatives. And then honestly, where we do have any opportunity with agency or contract labor and some of the nuances inside the walls, mitigate that as much as we can.

So those three in combination lead to that $1.9 million. And I said it on the last call, and I think we have to sit where we said then is that you have got to bake that in double for 2017. That is kind of where we are headed.

By double, you mean not as much or more mitigation?

No. What I mean by that is this takes effect for us on the costs report on the last half of this year. So as people keep asking us what do you look at for 2017? If you take that effect on the last half of this year, I would just multiply that time two on that EPS effect going forward into 2017.

I see what you mean. And then the stepdown really starts to occur most noticeably in your -- starting in your third quarter. Because you're going to be losing, I think it is, 18 beds as well as the other effects?

In July?

Yes.

Yes. That is in -- in July, it does. That is correct. So you're absolutely right. The lion's share of this will start in the September earnings period and go through, of course, December.

I am showing no further questions. I would like to turn the call back to Keith Myers for closing remarks.

Thank you, operator. And thank you, everyone, for joining the call this morning. As always, if any questions that you have between earnings calls, please feel free to reach out to us. First to Eric, and if you need to get to Don or Josh and myself, Eric will arrange that. So thanks so much.

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