LHC Group Inc (LHCG) 2016 Q2 法說會逐字稿

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

I would now like to turn the conference over to your host for today, Eric Elliott, Senior Vice President of Finance. You may begin.

Thank you, Sonia, and welcome, everyone, to LHC Group's earnings conference call for the second quarter ended June 30, 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 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 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. Thanks for being with us today as we report operating and financial results that show we not only produced very solid results for the second quarter, but also that we continue to position LHC Group well for future growth.

As always, I want to begin by recognizing and thanking our entire team for the great job that they do day in, day out providing exceptional customer service and unparalleled quality care for the growing number of patients, families, and communities we are fortunate to serve and our growing network of referral sources and hospital and health system partners.

I want to specifically congratulate our team on the latest CNS star ratings, which show that LHC Group is providing the highest quality of care and the best patient satisfaction in the home health services industry. We are proud of this accomplishment and we are committed to ongoing improvement.

Turning to the quarter, we continue to benefit from both our organic growth and our acquisition strategies, which combined to produce a 12.3% increase in total admission and 12.9% growth in net service revenue. These totals included the impact of 8.7% growth in organic admissions and a 4.6% increase in organic revenue growth.

Continuing the favorable trend of the last few quarters, the acuity of our patients increased, as reflected in the comparable and sequential-quarter increases and Medicare case mix for the second quarter.

Our growth in admissions in the second quarter was equally strong in our JVs and non-JVs, with JVs turning in 8.5% organic growth while our non-JVs turned in 8.8%. For the six months ended June 30, organic admissions in our JVs was 8.3% and in our non-JVs was 7.8%. In addition, these JV admissions are driving the increased acuity in our case mix and thereby our increased reimbursement for completed and billed episodes.

From our discussions with our partners, we understand that these trends reflect their efforts to provide their nonacute patients proven quality care at a lower cost than in an institutional setting. We've worked with most of our partners for years and they know our ability to provide high-quality care for patients while enabling them to remain exactly where they want to be: in their homes, which are also the lowest cost venue for their care.

Through our work with these partners, they also know of our long-term investment in the equipment and in the ongoing training and education of our team to provide the more intensive care needed for more medically complex patients. They know of our success with innovative programs addressing EPCI initiatives, including the joint replacement initiative through our cobranded program with Ochsner. And of course, they've seen our work to prepare and launch programs for patients with diabetes and COPD.

As these partners prepare for growing involvement in value-based care, they are sending higher acuity patients to us and we are performing. Since we are still at an a early stage in the development and full implementation of health system networks across the industry, we believe that our organic growth will continue to benefit from rising admission volume and patient acuity from our JV partners.

As a result of these successful partnerships, we are also seeing rising interest in our capabilities among our partners' peers. We offer new hospital and health system partners a proven solution that is supported by the most extensive network of hospital and health system partnerships in the home health services industry.

In this context, the July release of CMS star ratings is very important for us. Quality is perhaps the most important issue providers consider in evaluating both their potential JV partners and the providers in their integrated networks.

The industry has seen our improving quality and satisfaction star rating and we believe that to now be the best in both category and an important competitive advantage. As a result of all these factors, we are very pleased with the continuing success of our hospital alignment strategy and the increased number of new hospital and health system JV transactions in our current pipeline.

So let's turn now to our acquisition strategy, which has been a large contributor to our revenue growth for the quarter as a result of the acquisitions completed in the 12 months preceding the quarter's end. As you know, we have been pursuing a strategy of new joint ventures, acquisitions, and de novo growth.

We executed three hospital joint venture transactions in the first quarter. We announced four transactions to acquire freestanding home health providers during the first half of 2016. One of these acquisitions, East Arkansas Health Holdings, headquartered in Little Rock, Arkansas, was completed on July 1, 2016. And I would like to take this opportunity to welcome the healthcare professionals in Arkansas to our growing LHC Group family.

We also announced the signing of a definitive purchase agreement to acquire Professional Health Resources, or PHR, and expected it to close on August 1, 2016. While we continue to work with the sellers, to date they have been unable to satisfy the conditions of closing.

Should the closing conditions not be satisfied or waived and the transaction closed by October 1, 2016, the purchase agreement will terminate if not amended by us and PHR. We'll issue a press release when the transaction closes or in the event the purchase agreement is terminated or amended.

We have now completed 6 transactions in the year to date generating annualized revenue of approximately $25 million. We expect to complete additional transactions in the second half of 2016 and that our revenues will reflect a meaningful benefit from these acquisitions.

Our corporate development pipeline remains very robust. As you know, this pipeline consists of potential transactions that we believe could be completed within the next 12 months. We don't expect all these transactions to be completed the next 12 months, and in fact, expect changes in the pipeline from quarter to quarter as the timing for various transactions under discussion slows or accelerates.

The removal of opportunities from our reported pipeline does not necessarily mean that we lost the opportunity. It often means that negotiations have simply slowed for one reason or another.

That being said, we currently have 20 active potential transactions in the pipeline totaling more than $750 million in aggregate annual revenues. While the overall pipeline volume is down from the first quarter, we are very pleased with the growth in new hospital and health system partnership opportunities, which now make up 70% of our active pipeline. We remain pleased with our pipeline quality and volume and the growth opportunities it represents.

To summarize my comments this morning, let me simply repeat what I told you last quarter. We believe LHC Group is well positioned to continue gaining market share in our highly fragmented industry through both organic growth and additional acquisitions. We are successfully building on our extensive history of working with providers and payers to be their partner of choice for nonacute care, a trend that has intensified with the shift to value-based care. We are confident that strong execution of our proven growth strategy will also position us to achieve long-term profitable growth and increase shareholder value.

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

Thank you, Keith, and good morning, everyone. Thank you all for joining our call. Let me begin my prepared remarks by saying thank you to all of our clinical professionals who constantly deliver exceptional service to the patients, families, and communities we are so blessed to care for.

And thank you to all the LHC Group family members who support them on a daily basis. Because of all of you, we were able to report another successful quarter to our shareholders.

With regard to our financial results, net service revenue for the second quarter of 2016 was $226 million, an increase of 12.9% compared with net service revenue of $200.2 million in the same period of 2015. For the 6 months ended June 30, net service revenue increased 14.1% from $393.3 million in 2015 to $448.6 million in 2016.

Consolidated same-store revenue grew 5.6% for the second quarter and 7.1% for the 6 months ended June 30, 2016. 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, which is offset by an estimated reduction in Medicare home health revenue of approximately 1.5%.

Net income attributable to LHC Group grew 5.7% to $9.5 million compared with $9 million or 5.9% on a per-diluted-share basis to $0.54 per share from $0.51 per share, which includes estimated Medicare reimbursement reductions for the second quarter of $0.07 per diluted share.

Net income also included these components: a negative impact of $1.1 million or $0.04 per diluted share for severance related to the resignation of our previous CFO, which is recorded in G&A. Second, a negative impact of $996,000 or $0.03 per diluted share related to the loss on disposal of our damaged aircraft.

Third, a negative impact of $686,000 or $0.02 per diluted share in transaction-related costs primarily for the PHR transaction that Keith touched on earlier and is also recorded in G&A. And last, a positive impact of $2 million or $0.11 per diluted share related to a reduction to an uncertain tax position and the related interest expense. After adjusting for these components, our adjusted net income to LHC Group grew 1.1% to $9.1 million compared to $9 million, where it grew 2% on a per-diluted-share basis, up to $0.52 per share from $0.51 per share.

On a consolidated basis, our gross margin was up from 39.1% of revenue reported in the first quarter to 39.3% of revenue for the second quarter of 2016 as compared to 41.7% of revenue in the second quarter of 2015. The decrease in gross margin year over year is due to multiple factors, including an increase in managed care volume, increased costs of providing care for higher acuity case mix patient population, the impact from the estimated 1.5% reduction to Medicare reimbursement that I discussed earlier, margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our more mature agencies. And for comparison purposes, the second quarter of 2015 also benefited from a health insurance reserve adjustment of approximately $2 million, which reduced salaries, wages, and benefits in that quarter.

Our general and administrative expense was 30.2% of revenue in the second quarter of 2016 as compared to 30.1% in the second quarter of 2015. When you exclude the severance- and transaction-related costs I just mentioned, our G&A expense for Q2 2016 was down to 29.4%. The improvement in normalized G&A expenses as a percent of revenue is due to continuous cost control efforts while growing our revenue, which is generating additional operating leverage.

Our bad debt expense represented 1.7% of revenue in the second quarter and 1.9% for the 6 months compared to 2.4% and 2.6% for the same periods of 2015. The decrease in bad debt expense year over year is positively affected by a shift in our receivables from over 181 days to more current and continued process improvements related to structural changes implemented in our revenue cycle department.

The 1.9% is more in line with our expectation of 2% to 2.2% for the year, while 2015 was inflated due to additional reserves that we recorded in that period for patient claims related to prior-period patient care associated with two commercial payers. These adjustments were an isolated occurrence that negatively impacted bad debt last year.

Days sales outstanding increased slightly from 48 days in the first quarter to 49 days in the second quarter versus 46 days for the second quarter of last year. The reason for the slight increase is mainly due to a few things: an increase in AR from acquisitions and the transition period associated with the changes of ownership, an increase in our managed care receivables as a percent of total AR, and collection delays from certain VPICs, RACs, and ADRs, which unfortunately have become a normal part of doing business in healthcare.

In furtherance of Keith's comments about corporate development, we currently have $108 million available on our line of credit, which leaves us well positioned to fund future acquisitions and joint venture partnerships.

Turning now to our annual guidance, we are raising our 2016 guidance for net service revenue to be in an expected range of $885 million to $900 million, up from the previous range of $870 million to $890 million. And we are also affirming our established 2016 guidance for fully diluted earnings per share to be in an expected range of $1.90 to $2.

This guidance does include the negative impact from the Medicare home health prospective payment system for 2016, which is currently expected to reduce 2016 home health revenue by approximately 1.5% to 2% or $7.1 million to $9.5 million, with an effect on fully diluted earnings per share of $0.24 to $0.32.

Second, it includes the negative impact from a Medicare long-term care hospital prospective payment system, which is expected to reduce 2016 LTAC revenue by 4.9% or $3.6 million and fully diluted earnings per share by a net $0.06 after implementation strategies.

It includes the negative impact from the reduction of 18 beds in one of the Company's LTACs that began in June 2016, which is expected to reduce 2016 LTAC revenue by $3.1 million and fully diluted earnings per share by a net $0.03 after implementation strategies.

It also includes the negative impact on the fourth quarter of 2016 from the proposed Medicare home health prospective payment system for 2017, which is currently expected to reduce fourth-quarter Medicare home health revenue by approximately 2.3% or $900,000 and fully diluted earnings per share by approximately $0.03 per share. And it includes the positive impact from the 2017 Medicare hospice wage index and payment rate final rule, which was effective October 1, 2016.

It is expected to increase our Medicare hospice revenue for the fourth quarter by 2.1% or $650,000 and fully diluted earnings per share by $0.02. This guidance does not take into account the impact of other future reimbursement changes, if any; future acquisitions, if made; de novo locations, if open; or future legal expenses, if necessary.

For the full year of 2016, we expect gross margins to be in the range of 39% to 40%, which is down from our previously stated range of 39.5% to 40.5%, and is the main consideration for why we have not increased our annual EPS guidance while increasing our annual revenue guidance. We expect 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%.

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

Thank you, Josh, and good morning, everyone. I also am pleased with our financial results for the quarter and with the comparable-quarter momentum we have seen in our total admissions and our organic home health admissions over the last three quarters.

Our ability to handle this growth along with the increasing medical complexity of the case mix, even as we achieved top star ratings in our segment of the healthcare industry, says a great deal for the skills and passion and dedication of our team. As Keith mentioned, we are very proud of our latest star ratings, just as we've been proud of that substantial overall improvement since they were first released last year.

In the latest ratings, we lead our peer group in quality with a 4.05 compared to a 3.70 result for the April release. As a result of this 35-basis-point improvement, we are now 20 basis points above our nearest public competitor and 85 basis points above the national average.

We also received the highest ratings for patient satisfaction, with a 4.0 in the latest release, up from 3.92 in April. The national average was 3.65 in July and most of our peers were somewhere between us and that average.

We know that we can still improve, however. But we don't underestimate the difficulty of achieving these improvements and sustaining them. It takes constant execution at the highest level by thousands of people across our Company, so as I mentioned, our ratings are a real tribute to our team and their associated effort.

Before going to Q&A, I want to comment on a couple of recent regulatory updates and the new proposal. As we mentioned in the news release, the 2017 hospice wage index and payment rate final rule would increase our payments by approximately 2.1%.

Because this rule takes effect on October 1, 2016, we expect it to have a positive impact on our net income for the fourth quarter of this year of approximately $600,000 or $0.02 per diluted share.

In addition, CMS announced proposed changes for the Medicare home health prospective payment for the calendar year 2017. The CMS project that Medicare payments to home health providers would be reduced by 1% in the last year of the four-year phase-in of the rebates and adjustments to home health payments rates finalized in 2014.

Our analysis indicates that these proposed changes would affect our Medicare home health revenues by a negative 2.3% for 2017. Primarily due to change in methodologies in the CMS's required calculations and our case mix, which reflects our increasing provision of therapy.

On June 8, CMS launched a three-year demonstration called free claims review. Free claim review is in a process through which requests for provisional affirmation of coverage is submitted for the review before a final claim is submitted for payment. The free claims review will require that the agency submit documentation establishing beneficiary eligibility and medical necessity for home health prior to submitting the final claim.

The demonstration affects all home health claims for initial or recertification episodes for five states beginning on the effective date that is below. Illinois: August 1 of this year; Florida: no earlier than October 1; Texas: no earlier than December 1; and Michigan and Massachusetts: no earlier than January 1, 2017.

LHC Group has 19 combined locations in Illinois, Texas, and Florida, with annual Medicare revenues of approximately $46 million. We have put certain procedures in place to mitigate the effect from these reviews, such as central review in our compliance department prior to submission, to ensure that all documentation is submitted accurately and in a timely manner. We will keep you informed as we proceed through the demonstration.

Next, we were pleased to see that the recent proposal by CMS for our pilot program based on mandatory bundled payments for heart attacks and bypass surgery, which could take effect on July 1, 2017. These will be the first cardiac procedures included in such a mandated program and a program that affects hospitals in 98 randomly selected metro areas. The CMS also proposed to expand the first such programming it introduced, its comprehensive joint replacement program, by including hip and femur fractures.

We think all this is positive news for several reasons. It adds further impetus to the healthcare industry shift to the value-based care which we expect will accelerate the development of joint ventures and integrated healthcare networks. As Keith mentioned, we're also piloting innovative initiatives for cardiac patients that follow the template of our Oschner joint replacement program. And we would expect this proposal to accelerate the introduction of this capability to a wider market.

In addition, we believe our participation in the CJR program has demonstrated our ability to meaningfully move the needle in terms of helping our hospital and health system partners improve the care and lower the costs for high acuity patients who need nonacute care. We believe there is an increase in urgency among acute care providers and their development of their networks, and we are confident that both our long history of partnership with our acute care providers as well as the cutting-edge results we are producing through our CJR and our BPCI initiatives are strong competitive points in our favor.

Considering that we are also industry's quality and patient satisfaction leader according to these star ratings I've alluded, we believe we have substantial opportunity to continue working toward our goal of being the partner of choice for nonacute care.

In closing, let me sincerely congratulate and thank our teams for their great work. Their commitment and empathy makes a difference every day to people who have hired help to remain in their homes. We think this team is the best in the nation in what they do and why we pushed to get even better. The star ratings would seem to be in agreement.

This concludes our formal remarks. Thank you for listening so far and we are now ready to turn the floor over to the Q&A section.

(Operator Instructions) Brian Tanquilut, Jefferies.

My first question is on guidance. I think you alluded to the fact that you adjusted down your gross margin expectations. If you don't mind just giving us a little more color on the drivers there and what we're seeing that has changed in the last quarter?

Yes, Brian. This is Josh. A couple things and I can give a little bit more detail than what I had in my prepared remarks. So we are taking gross margins down from 39.5% to 40.5% about 0.5% percentage point down to 39% to 40%. We feel real confident that we will land in that range and have some strategies to implement to get toward the top end of that range over the back half of the year.

But what I will say is as our managed care volume continues to go up, those patients generate a slightly lower margin than the Medicare patients do, as I don't think is any surprise. So as we continue to grow that book of business, it is pressing our margins just a little bit.

I also mentioned the effect on our acquisitions. And when you look at the last 12 months and the gross margins for our acquisitions, in the first quarter of this year, they were contributing gross margins of about 29.2%. In the second quarter, that has crept up to about 31.7%. So still below our mature gross margins, but moving in the right direction.

So I think we will see some additional contribution from those going forward as well. And then obviously you've got the increased costs for the added therapy population that Don mentioned as well.

Got it. And just to follow up on that. As we think about the increasing percentage of revenue coming from non-Medicare or commercial plans, how should we think about your views on payer mix management? And what you could do -- or if you want to do that -- to rebalance the mix and maybe refocus more on fee-for-service just to push up the margins a little bit.

This is Don. I will take the first part and see if anybody wants to chime in. I think what we're seeing right now is the new reality. If you look at our history and how we have kind of moved into more metro areas, the managed care penetration is there.

And for us, it's a pretty simple choice. Do we want to continue to contract and open that pipeline up and let it be accretive, even at the risk of a little bit depressed margins? And most of these markets -- and I'll give Rhode Island as very good example -- there is very little traditional Medicare in the market that we are in in Cranston. So we have opened up a floodgate on commercial business that is accretive to EPS, but when you look at it on a margin basis, isn't too pleasant.

So I think you'll see that approach for us more in some of these areas. And therefore, I would not say that we are mismanaging the volume. I think we are managing it to earnings versus simply to the margin. And there's another reason that Josh said that. Because commercial admits are up 14% quarter over quarter, and honestly, that has also helped us in the pipeline of Medicare as evidenced by what you saw in out organic growth.

So I guess to tie a bow around that, I don't think we will ever be a traditional fee-for-service Medicare percentage as our ratios. Instead, I think our idea is to manage by provider in specific locations a better mix of earnings per admit.

Got it. And then last one for me. Keith, you talked about the JVs and how that is driving volumes. If you don't mind just giving us a little more in-depth color on what do you think you are seeing in terms of market share. Are you capturing essentially 100% of the share from these JVs?

And also as we think about site of service shift because of the bundled payments. What are you seeing from your JV partners on that front? Thank you.

I don't, by any stretch of the imagination, think we have 100% of the market. I think we are the market leader for sure. But there are a lot of hospitals out there. We really like the strategy -- we like the long-term strategy of being positioned for value-based purchasing.

I want to go back for a minute to the managed care piece. Don and Josh are both right. I agree with what they said, but if we break it down to individual markets, I do see our margins expanding in the markets where we have significant market share either from being part of the large hospital system or have a cluster of hospitals in a market.

Once you get to that concentration, then you have leverage with the payers. And by leverage, I just simply mean getting a seat at the table to be able to make a proposal that is a gain sharing proposal or something that is more in a value-based purchasing [model].

If you don't have market share, you can't get to the table. So sometimes we have to go in a market and we have to take more managed care business than we'd like to take for the first couple of years until we get into the system and can prove our -- prove that we can deliver value. So I don't want to waste too much time on that.

On the go-forward strategy, though, there is no question that we're just seeing an unprecedented volume of inbound calls to us from hospitals and health systems. It's kind of -- we've got enough credibility there with our list of current hospital partners. I think that's driving a lot of it.

And in every conversation, what is making them pick up the phone and call us is that what we offer plugs into their strategy to prepare for value-based purchasing population management.

I think I've said this before. In years past when we first started the hospital joint venture strategy, every call that we would get was to come in and take over a home health agency that was losing money. And all they wanted us to do was to operate it more efficiently.

Now, it's something much bigger. They want us to be a part of the system and they want us to manage the subacute care in the system. The focus has been on home health more than anything else.

Got it. Thanks, Keith.

Frank Morgan, RBC Capital Markets.

I wanted to switch over onto the acquisition pipeline and what you are seeing in terms of the valuations. And any color on size and how the valuations are varying based on the size. And really looking at it both on the home healthcare side and the hospice side. Thanks.

Okay, we can tag team this a little. I don't have it in front of me in terms of percentages, but the majority -- the vast majority of the pipeline is home health. There is some hospice in it. And as I said in prepared comments, 70% of the current pipeline is attached to hospitals and health systems.

As it relates to valuations, we have two ways that we approach valuation. One is a traditional EBITDA multiple if there is an agency that has stable volume and has earnings going in. In our strategy, we don't often see the strong earnings there. So we use a blend of whatever earnings are there and we look at the volume and then the specific state and the provider density, which tells us the competitive profile of the market.

So still -- nothing new there; that is the way we approached it for quite some time. But I think your question might be do we see values going up or going down. And I think right now on the acquisition side, they are either flat or slightly down.

There's just a lot of uncertainty around the CMS demonstration project in those five states. So certainly in those five demonstration states, values are definitely down. And we see some processes just going on pause until we see how CMS works through that in those five states.

So is that statement across the board for size of the deals? Are bigger deals the same? Are they also flat to trending down? Or is there something different for bigger deals versus the smaller ones? Thanks.

Yes, Frank, definitely not trending up. I would say flat to trending down. Year over year, looking at mark to market where we are now in 2016 compared to 2015.

And Keith, I don't know if you would agree with this or not. I think anecdotally in the market are these real big deals. If you are really big, then that means you are transcending some of these states with pre-claims review. And I think they are also a little bit worried of how this is going to affect them. So I think that further bolsters, Keith, your statement that those valuations are not going to go up.

Yes, it's hard to model. We don't -- we are not really active in those five states. We don't have much volume there, and what we do have is mostly hospital joint ventures. But in the past couple of quarters, we have looked at a couple and what we have found is that it's really hard to model. Because we of course are going to model worst-case scenario, and the seller wants to of course set off a historical.

Good question, Frank.

Okay, thank you.

(Operator Instructions) Ryan Halsted, Wells Fargo.

If I could just clarify on your non-Medicare business and the growth you are seeing there, is the majority of that non-episodic business?

Yes, yes it is. If you look at all in, I would say the non-Medicare, between the commercial split and the episodic, it's probably about 60/40, respectively.

But I will say this. Keith alluded to something that we've had some spotted success. As we have demonstrated that value in some of this, Ryan, we have gotten back to the table. So much so that we have actually -- it is very pragmatic. We put a red, a green, and a yellow list in for our agencies because we're getting a lot of traction, where our payers that are green it's simply say yes and let's go take it. The ones that are yellow, certainly you've got to look at the complexity of that, whether it's resource-intense. And then the reds are the ones we would just do on the LOAs.

So I share that with you as color commentary to say we're doing a better job of managing managed care. It is not where we want to be, and as Keith would tell me under the table here, it's not where he wants us to be. But I can assure you, we are on the right track to where we use that, to Keith's point earlier, as a means to get more market share in the fee-for-service.

And I would just add to that that -- I will remind you that if you take our all-in non-Medicare business -- our managed care commercial business and look at it on a per-visit basis when we get reimbursed -- a per-visit basis for the non-Medicare business, our rates today are about 5.5% higher than they were last year this time.

So it is where the volume is coming from. Maybe some of our new locations where we don't have that leverage yet, but we are taking volume. But on either side, I will say that there is one contract with a hospital system that we just increased are the largest payer there, that a pretty significant increase. It's 20% --

Yes, almost 20%.

-- in their per-visit rate. But that -- it isn't effect yet. You will see that in the coming quarters.

This is Josh. The only thing I would add to that is not only are we seeing some better rates in newly negotiated contracts, but payers are starting to open up to the idea of going at risk and shared savings opportunities going forward. I don't want to mislead you and say that we have a lot of those currently in queue, but the conversations are starting. And I think we're going to head that direction.

And when you look at our star ratings and some of the other avenues of value we can definitely deliver to the payers, I think you're going to see more of that in the future as well.

All right. That's very helpful. I know you have mentioned in the past the efforts you are making to better communicate with the payers, so it's helpful to hear about some of the progress you are making on that. But just as kind of my last follow-on with this is do you think it's -- are you confident that you can get to the margins of your Medicare book of business with a non-Medicare book of business in the near future?

No. We are not. In the near future, I'm thinking you are talking about within the next year. I don't think we're there. Not until we are deeper into value-based purchasing.

The key to us getting the -- to ultimately being reimbursed at or potentially above the prevailing Medicare rate with managed care payers is going to be from a gain share or a gain share model. And I think we're still several years away before we see that becoming the norm in the way that managed care pays home health providers.

Yes, and Ryan -- but I'm going to go to the other side of the spectrum. I also wouldn't want you to be concerned in modeling any continued trajectory of the K because of that either. I think Josh used that as only one of the reasons.

I do not want you to be misled and think that our margin compression in the quarter was solely or even heavily attributed to that. It was only piece and parcel of it. To be candid with you, it was the acquisitions in Arizona and Halcyon that contributed to that more so than managed care.

Absolutely.

I think we should also say that we do have the ability to control this mix. So part of what we do is we when have a payer that is paying us significantly below the prevailing Medicare rate, we go into referral sources and we explain to them why it is that we can't take those patients. If we have significant market share in the area when we get to the table, and sometimes it takes six months to turn that around.

So I don't want you to think that the phone is ringing and we're just taking everything that comes in and we don't have the ability to manage mix. We're more careful about how we communicate and manage the mix in our partnerships with hospitals and health systems. Because we don't want to damage the long-term relationship. In freestanding agencies, it's a much different story.

No, that's very helpful. Maybe to switch gears to the regulatory side, so it seems like CMS, given some of the case mix in 2016 and now taken away in 2017 on a proposed rule. I know it is still just in the proposed phase, but is there any mitigating strategies that you think you could potentially offset some of that incremental rate reduction that is related to the case mix?

You know, that's a tough question. I'll say LHC Group still has opportunity in what we call the extender use. And that is using PTAs and codas versus therapy. But as far as from mitigating and changing the visits necessary to care for those patients, you really can't do that. And honestly, with the CJR expansion, I think we're going to see even more volume to home health.

So you know, it's a real tough question because I don't want to mislead you and say we don't have room to increase efficiencies, because that would be disingenuous. But I also don't want to lead you to think that we have this great plan to take the 2.3% and make that de minimus. I just don't see that right now.

And if I was modeling out, I would actually model out the 2.3%. And if we go into the year with plans of improvement that help mitigate that, we will certainly disclose it to you.

I think we have some -- on the G&A side, I think we have some capacity that is beyond our current volume. So if we execute on what's in the pipeline now as we continue to do that and hold the line on G&A costs, that will give us market (multiple speakers).

That's where I think it comes, [actually].

That's very helpful. Maybe just last one on the LTAC rule. Appreciate the color on the reduction of the beds. Do you still anticipate potentially transitioning some of your LTAC beds to the lower acuity business? And do you think that that could be I guess also somewhat of an offsetting dynamic to the headwind that you outlined in your guidance? Thanks.

That's a really good question and the answer's yes. Absolutely. And we do have two of our eight facilities inside of that dynamic right now. Granted, they are two that we thought we would do well and they are. But I think, and Josh can correct me, I think we guided to a $0.06 2016 effect.

And in my last call with you said that we would anticipate that would be doubling. Well, obviously, if you have $0.06 in the pro-rata year of 2016 and only $0.012 going into 2017, there is mitigatory approaches that lead to that because it would be much more than $0.12.

So I guess all to say that we are doing that today in those two facilities; we do expect to repurpose those beds and do some things creatively. So the full effect on an apples-to-apples basis isn't affecting 2017 earnings.

Thanks for taking my questions.

Bill Sutherland, Emerging Growth Equities.

Is the mix similar to your current revenue profile? I'm mostly thinking hospice and home health.

Is the mix -- is our current -- can you repeat the question? I'm not sure I understood.

Oh, I'm sorry, yes. Is the pipeline of acquisitions that you are considering have a mix that matches your current revenue mix? Or is it weighted more towards one business over the other, such as hospice or community-based?

Yes. It's weighted more to home health.

Okay. And did you say, Eric -- I'm sorry, Keith, the current pipeline as it is currently looking as 70% of the deals are joint venture with hospital?

70% of the volume today are joint venture opportunities with the single hospitals or health systems.

And that's of the total pipeline or just the home health? Because it seems like a big number.

Of the total pipeline.

Okay, that speaks volumes. And then finally on hospice, the -- on a patient day basis as far as the reimbursement, are you still running around a budget-neutral number?

Yes, we sure are. The [U-shape] really hadn't affected us to this point.

Okay, that's it for me. Thanks so much.

Thank you. And that does complete our question-and-answer session. I would now like to turn the call back over to Keith Myers for any further remarks.

Okay. Thank you, everyone, for dialing in. And as always, if you have any questions -- any follow-up questions between this time and next earnings call, please contact Eric. And if you need to talk to any of the management team, we will be available for you. Thanks again.

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