LHC Group Inc (LHCG) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group third quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded.

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

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

We are very pleased to be reporting on strong third quarter financial results for LHC Group, complemented by our outstanding new CMS Star rating, as well as the announcement of our new joint venture with LifePoint Health.

Before we go further, let me thank everyone on our LHC Group team, who are key to our third quarter results and our prospects for future growth. We have a great team whose commitment to excellence drives our ability to provide high-quality care and outstanding customer service to our patients, their families and the many communities we serve.

This commitment also drives our strong admissions and growing list of referral sources and hospital health system partners, and it has enabled LHC Group to lead the industry in quality of care and patient satisfaction, according to the latest Star ratings.

Now turning to the third quarter, we continued the operating momentum evident throughout the year with our fourth consecutive quarter of double-digit revenue growth. In addition, our 15.3% increase in total admissions and 10.5% increase in organic home health admissions each represent the fourth consecutive quarter of accelerating growth in these admission metrics.

In our home health business, we clearly believe that submission growth is being driven by market consolidation in the home health industry and the intensifying shift to value-based healthcare, as hospitals, health systems and other referral sources are becoming more and more aware of our differentiating capabilities and our consistently high quality scores at a time when they are highly focused on cost-effective placements of patients in need of nonacute care and are seeking to partner with high-quality home health providers to help them reduce unnecessary utilizations of more costly inpatient postacute care.

We are experienced in this volume, both in our joint venture operations and in our freestanding locations. Because these admissions often are of greater acuity, we have now seen a steady rise in our average Medicare case mix, leading to a 4.2% increase in average Medicare reimbursement over 2015.

Our growing admissions have had a positive impact on organic revenue growth, which increased 5.4% for the third quarter and which has not been below 4.6% over the past five quarters. Since we are still very early in the transition of the healthcare system to value-based arrangements, we expect to see continued growth in organic admissions in the coming quarters.

In addition, LHC Group continues to be very well positioned to expand market share through acquisitions. We are very pleased to announce our definitive agreement to create a new joint venture with LifePoint Health, one of the leading and largest providers of acute healthcare to nonurban communities. This partnership brings together two culturally aligned companies that are driven by a vision of expanding home health and hospice care, ensuring that patients and families in need of these services have access to them, and improving the health of the communities we serve.

Combining the LifePoint Health transaction with all other transactions closed in the year to date we have now eclipsed our $100 million acquisition annual revenue target, with approximately $106 million in acquired revenue. Our corporate development pipeline of potential acquisition and joint venture opportunities remains very robust.

Thus far, in 2016, our corporate development team has sourced or received inbound leads of 225 opportunities, including 65 in Q3 and 20 in the first month of Q4. We have the deep industry knowledge, the discipline, attention to detail, deal experience and the integration capabilities and financial strength to continue to benefit from growing consolidation pressures through selective acquisitions in our highly fragmented industry.

In addition, we fully expect to build on our hospital alignment strategy that over two decades now has enabled LHC Group to develop the most extensive network of hospital and health system partnerships in the home health services industry. With the inclusion of LifePoint Health, we are the trusted partner of 68 hospitals and health systems, which includes now 172 hospitals.

At a time when hospitals and health systems are actively preparing for value-based healthcare by developing their integrated care networks, we represent a highly experienced, high-quality and proven partner with the scale and market density, data-driven technological capabilities and infrastructure and financial strength to be a leading partner of choice.

Potential partners not only have our 20-year history of hospital joint venture experience, our joint venture partners that can provide real-time information about our capabilities and the value we deliver as a postacute partner, but also the latest CMS Star rating data demonstrating our industry-leading quality and patient satisfaction results.

As a result, we are confident that our acquisition strategy will continue to be a key growth engine for LHC Group, delivering high-quality acquisitions and joint ventures, and we expect 2017 to be another very strong year of growth for our company.

So, to summarize, we have a strong quarter that supports our continuing operating momentum, which is evident in the increase in our earnings and revenue guidance for 2016. The market and demographic trends that are contributing to our growth appear sustainable for years to come.

Given our strong competitive market position, we are very well positioned to continue to gain share in our markets through both organic growth and acquisition growth, and no home health provider is better positioned than LHC Group to be the partner of choice for hospitals and health systems seeking to expand the quality and lower the cost of their nonacute care. Through continued successful execution of the strategies that helped us create this leading market position, we expect to drive long-term growth and increase shareholder value.

So, thanks for your time this morning, and now here's Josh, who will discuss our financial results in more detail. Josh?

Thank you, Keith, and good morning, everyone. Thank you all for joining our call.

Let me once begin my prepared remarks by saying thank you to all of our clinical professionals, who continue to raise the bar with the high quality and exceptional service you deliver 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 are able to report another successful quarter to our shareholders.

With regard to our financial results, net service revenue for the third quarter of 2016 was $230.8 million, an increase of 13.1%, compared with net service revenue of $204.1 million in the same period of 2015. For the nine months ended September 30, net service revenue increased 13.7%, from $597.4 million in 2015 to $679.4 million in 2016.

Consolidated same-store revenue grew 4.6% for the third quarter and 6.2% for the nine months ended September 30. This growth in same-store revenue is due to our growth in same-store admissions and in 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 8.7% to $9.6 million, compared with $8.8 million, or 8%, on a per diluted share basis to $0.54 per share, up from $0.50 per share.

On a consolidated basis, our gross margin was 39% of revenue in the third quarter of 2016, as compared to 40.8% of revenue in the third quarter of 2015. Consolidated gross margin for the nine months ended September 30, 2016 was 39.1% of revenue, compared to 41.1% of revenue in 2015.

The decrease in gross margin year over year is due to a few factors: first, the negative impact from the 2016 home health reimbursement rule of an estimated 1.5% reduction to Medicare reimbursement; next, the negative revenue impact from the LTAC Patient Criteria Rule, which affected two of our LTACs beginning June 1 of this year and another six LTACs beginning September 1; third, margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our more mature agencies; and, finally, a temporary increase in contract labor in our community-based services service line in order to staff our expansion of service strategy in Tennessee.

That said, I would also like to note that home health gross margin is up sequentially, from 40.1% in Q1 of 2016 and 40.2% in Q2 of 2016 to 40.3% this quarter. The increase in home health gross margin is due to higher revenue growth from admissions and increased patient acuity.

This positive gross margin trend also holds true for hospice, which is also up sequentially from 36.3% in Q1 and 38.2% in Q2 up to 39.9% this quarter. The increase in hospice gross margin is mainly due to our continued improvements in our Halcyon operations.

Our general and administrative expense was 29% of revenue in the third quarter, as compared to 29.6% in the third quarter of 2015. This is also down from 29.7% in Q1 of this year and a normalized 29.4% in Q2 of this year.

Consolidated G&A expense for the nine months ended September 30 was 29.6% of revenue, compared to 30.1% of revenue in 2015. The improvement in general and administrative expenses as a percent of revenue is due to continuous cost control efforts while growing revenue and generating additional operating leverage.

Moving on to bad debt, our bad debt expense represented 1.4% of revenue in the third quarter and 1.7% for the nine months, as compared to 2.4% in the same periods of 2015. Similar to G&A, it is also sequentially down, from 2.1% in the first quarter of this year and 1.7% in Q2. The decrease in bad debt expense year over year and quarter over quarter is positively affected by our continued process improvements related to structural changes implemented in our revenue cycle department and strong cash collections.

In furtherance of Keith's comment about our corporate development pipeline, we currently have $123.2 million available on our line of credit, along with free cash flow of $43.3 million in the nine months ended September 30, which leaves us very well positioned to fund future acquisitions and joint venture partnerships.

Turning now to our annual guidance, we are raising our fiscal year 2016 guidance for fully diluted earnings per share to be in an expected range of $2.05 to $2.08 from the previous range of $1.90 to $2.00, and we're raising our fiscal year 2016 guidance for net service revenue to be in an expected range of $910 million to $920 million, from the previous range of $885 million to $900 million.

This guidance does include the negative impact from the Medicare Home Health Prospective Payment System for 2016; the negative impact from the Medicare Long-Term Care Hospital Prospective Payment System; the negative impact from the reduction of 18 beds in one of our company's LTACs beginning June of this year; the negative impact on the fourth quarter of this year from the final Medicare Home Health Prospective Payment System Rule for 2017, which we currently expect to reduce fourth quarter fully diluted earnings per share by approximately $0.03 per share; and the positive impact from the 2017 Medicare Hospice Wage Index And Payment Final Rule, effective October 1 of 2016, which is expected to increase our Medicare hospice revenue for the fourth quarter of 2016 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 future reimbursement changes, if any; future acquisitions, if made; de novo locations, if opened; or future legal expenses, if necessary.

The raise in our guidance is primarily due to a few things: first, better than expected admission and revenue growth in both the home health and hospice service lines while continuing to leverage our G&A; second, the continued improvements in margins from acquisitions that have closed within the last 12 months; and third, continued decreases in our bad debt expense as a percent of revenue related to our revenue cycle process improvements and the strong cash collections I alluded to earlier.

For the full year of 2016 we expect gross margin to be in the range of 39% to 39.2%, general and administrative expense as a percent of revenue to be in the range of 29.3% to 29.5%, and bad debt as a percent of revenue to be in the range of 1.7% to 1.9%.

Before turning the call over to Don, I would like to briefly touch on the final home health rule for 2017, which was released by CMS on Monday of this week. We are currently engaged in our analysis of the impact of the final home health rule on our results for next year. However, each home health agency's patient mix needs to be individually evaluated to determine the estimated effect by agency and then ultimately rolled up for our entire home health service line.

At this time, we estimate the negative effect to LHC Group's Medicare home health reimbursement to be in the range of 1.75% to 2.25%. We will provide more detail along with our financial guidance in 2017 when we issue fourth quarter release in late February or early March, but I would like to say that with the 1.75% and 2.25% range that we are very confident that we will fully mitigate the cut for next year.

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

Thank you, Josh, and good morning to everyone.

I, too, would like to begin my prepared remarks by thanking every member of our LHC Group family. From here at the home office and throughout the country, you ladies and gentlemen are doing a remarkable job out there. Keep up the push to greatness.

Speaking of that push, I'd like to start my first update by speaking of CMS' most recently released Star ratings. You'll all recall that last quarter we achieved the highest Star rating among the home health industry for both quality and patient satisfaction. We earned this position after four quarters of steady improvement since the ratings were first released in July of last year.

I'm very pleased to say that for the ratings just released this past October, last month, we not only sustained our leadership position in both quality and satisfaction ratings, but we strengthened that lead over the industry and the nation.

In addition, earlier this week the 11th Annual HomeCare Elite winners were announced based on an independent analysis of publicly available performance data that identifies the top 25% of all Medicare-certified home health agencies. This year approximately 9,400 agencies qualified for the rankings, and 2,353 were named to the top 25.

Our company again performed very well in this ranking, with more than 60% of our home health providers making that top 25. We've never had so many providers named to HomeCare Elite, and it's no accident, as we remain committed to giving all of our teams the training, the tools and the support they need to continuously improve quality and patient satisfaction.

With quality of care being such an important focal point in any healthcare provider's ability to succeed in a value-based healthcare system, LHC Group's quality achievements are a meaningful and competitive advantage, because they independently validate a core part of our message to potential hospital and health system partners. I am very proud of our team's performance.

We all know that sustaining and improving quality has to be a non-ceasing focus to be effective, and we know that every provider can be better. We're already working hard to achieve this goal, and I'm confident -- actually, I'm positive that we will.

With regard to CMS' three-year pre-claim review demonstration, which began in Illinois in August, CMS has delayed the start dates for the remaining four states inside of the demonstration. Florida was the next state expected to begin participating, as early as the first of October. CMS has not set a specific date for Florida or the other states. CMS also said it would give a 30-day notice before a state's participation would commence.

LHC Group has 19 combined locations in Illinois, Texas, Florida, with annual Medicare revenues of $46 million. We have put certain procedures into place to mitigate the reviews in our compliance department to submission to ensure that all documentation is submitted accurately and in a timely manner.

Because we are so deeply invested in compliance and have a very detailed review process, the pre-claim review is not a major issue for us, but more like a shift in process. We will keep you informed as we learn more and as we proceed through the demonstration.

In closing, let me again recognize and congratulate our team for their great work. LHC Group is positioned to make a significant contribution to improving quality and lowering cost of healthcare by providing high-quality pre and postacute care in the patient's home, which is the least expensive venue and which provides the patient the greatest satisfaction. Simply put, our team is the foundation of this belief.

Nicole, this concludes our formal remarks, and we'll now open the floor up for questions.

Thank you.

(Operator Instructions)

Brian Tanquilut, Jefferies LLC.

Hey, good morning, guys. Congratulations, good quarter. Keith, thank you for the color on volumes, but I was just wondering if you can give us more insight into what do you think the drivers are for the healthy volume growth this quarter, the sustainability of this kind of level of growth, or maybe even your ability to accelerate, especially as you think about the bundled payment programs and all the alternative payment models that are being rolled out by CMS.

Sure. Thanks, Brian. I look at it really coming from three different angles, and I'll let Don jump in, as well. But, so first of all let me answer that, and not only do I think it's sustainable, but I believe there is opportunity for it to even accelerate more.

Certainly on the traditional sale side effort we've spent a lot of time being more actively managing that whole process. How do we go about marketing?

And we're shifting more and more towards marketing our differentiating capabilities rather than just relationship marketing. And Don can dive deeper into that, because he spends a lot of time driving sales in addition to everything else.

But what I'd like to talk about is the volume I see coming to the markets from market consolidation pressure. One of the things that we spend a lot of time looking at in our corp dev activities is when acquisition opportunities come to us.

The first check we make is to see if we have overlap. We may be able to pick up a high percentage of the volume from whoever the target is in the acquisition pipeline whether we buy them or not.

Just the disruption in the market when an agency that's been around for a long time and has a good brand but was a mom and pop changes hands, if we were not to acquire but reposition ourselves well with their key employees and go to the market with our differentiating quality scores and capabilities, we can get more than our proportional share of that patient volume. And so we really dig and look at it much more in depth than we have in the past when we make those decisions.

And the other is a clear shift in patients moving downstream from higher cost settings. I mean, we see that in a big way, and that's just continuing to grow quarter to quarter.

It's a key topic of conversation in all of our hospital joint venture partners. Everyone is focusing, everyone in healthcare is focusing on looking at patients individually and identifying which patients are in higher cost settings when they could be in a lower cost setting at every level of healthcare, and home health is benefiting from that.

So that's the three -- those are the three drivers of this organic growth, in my opinion. Don, do you want to expand at all?

Yes, but I think, Brian, Keith captured the themes extremely well. And I think the drive-home point from my seat is I concur.

Keith and I and our core team have been together a long time now, and I've got to tell you, I've never been so verbose on the forward-looking organic growth that I see happening right now. Even with the recent flooding that we experienced here in Louisiana, to be honest with you, I mean, we had home office affected, we had operations affected, to sustain and excel at what we did, because that was a real event -- I guess what I'm saying is is that you take that away and you look toward where we're going in 2017, I think it's going to be unprecedented by our company organically.

I appreciate those comments. Sort of a follow-up to that, Don, how do you think about managing the mix? Your growth in Medicare Advantage is very strong, obviously. But as we think about your agency there probably is a labor capacity limit, as well. So how do you think about balancing MA versus fee-for-service plus the cost of adding or the challenge of adding staffing?

Yes, that's a kind of twofold question. First of all, you used the word how do we look at managing the mix, and I want to be very clear. We can and we do manage that mix.

But staffing constraint is real regardless of the mix. And I've got to say we've done -- that's something that I haven't spoken to about -- we've done a really good job of multi-tiering our recruiting efforts. And that starts with recruiters that we have here and it goes through a kind of a decision tree locally.

So it's kind of twofold. That's something -- and we call it capacity planning. And we're doing a much better job, because the growth that we can experience, for example, in the Northwest is different from a pipeline standpoint regardless of mix, Brian, than it is in some of our very smaller markets.

So when you add all of that up, I think my answer to the question is is staffing is not going to be in totality a limiting factor going forward into next year and honestly beyond 2017. And managing the mix, I think we have better front door, and I think Josh may can talk about that later, but front door and back door control than ever before. And I think that's what you've seen in our incremental improvement quarter to quarter.

Got it. And then last question for me for Josh, how should we think about the impact on 2017 of the Department of Labor retirement rules to kick in on December 1?

Yes, I can --

You got it?

-- I can take it, and then, Don, you can fill in, as well. As you might imagine, when that came out we did a lot of analysis internally to see what the impact could be. And we have went through by employee type, by whether it's back office, at the home office or whether it is out in the field and evaluated all those changes. And, to be honest with you, we've now been able to mitigate it to where there's not going to be a financial impact on our P&L next year.

All right, got it. Thank you, guys.

Ryan Halsted, Wells Fargo Securities, LLC.

Thanks, good morning. Wanted to go back to the volume question. Obviously a great quarter, with some impressive same-store volume growth, plus you highlighted the case mix. I thought maybe you could provide a little color on the types of cases or DRGs. I mean, is this mostly or is a lot of this the CJR type of cases that you're seeing?

This is Don. Some of it is, but Keith used -- he used three different reasons, and his third was a push from downstream, specifically SNFs and IRFs, and as we see people really starting to manage that continuum that is a big reason that we're seeing. So even if it's a clinically driven patient, the severity of that disease, the acuteness, if you would, is being seen as higher today than in years past, point one.

CJR is certainly part of that, with the shift to the home-based system. But I would put both of those in combination and say honestly, it's a bigger contributory factor of what Keith alluded from that push from that acute setting into this home setting.

Okay. That's helpful. And then just shifting gears to the regulatory side, I just want to -- I was hoping you could clarify, you said that the impact from the Medicare final home health update would be a 1.75% to 2.25% negative impact. Did you say that you expect now to be able to mitigate the entirety of that impact?

Yes, Ryan, this is Josh. Yes. That's the range that we are currently estimating. And, again, I would definitely make sure that we're all aware that there's a lot of analysis that goes into that, which is why we have a 0.5 spread in our range right now. The rule just came out, and we're crunching all the analysis through all the different case mix weight changes.

But, yes, we feel very confident that we'll be able to mitigate the cut next year. I mean, just a couple of factors that give us that level of confidence, I mean, Don really spoke to it earlier, but the organic growth that we are not only planning for next year and capacity planning for, as Don said, but also budgeting for next year is at an unprecedented level.

We obviously will have some accretion from the LifePoint transaction that we announced yesterday that we're very excited about. The improvement in the hospice reimbursement -- as our hospice service line becomes more and more substantive, a 2% increase in that reimbursement obviously helps offset some of the home health.

And then the continued margin improvement in our prior acquisitions, I really want to stress that. It's mainly driven by Halcyon, but when you look quarter over quarter, our -- in total, our gross margins for acquisitions have gone from 29.2% in Q1, 31.7% in Q2, up to 37.3% in Q3 for the gross margin contribution from our acquisitions. So we have additional acquisitions that we think are going to continue to improve heading into next year.

And then the last one I would give you is just the continuing leveraging of our G&A. I couldn't be more pleased with the foundation that we've invested in over the last five or six years from a technology perspective, from the deployment of Homecare Homebase and being fully prepared and ramped up there, to really all of our back office areas, are at a point that we can add $100 million in acquired revenue and be able to continue to leverage that as we grow to offset those cuts.

Okay. I follow you. But just to be clear, I realize it's still something you're working through and varies, but the range you're providing, I assume that sort of incorporates maybe some of the changes that came out from final rule from proposed rule. But is there any chance that you think -- is there any way you think you can mitigate the impact just by changing your mix or your care protocols or something like that?

Yes, I'll let Don take that from an operational perspective, but the short answer is no. But I'll definitely let Don speak to it. And you are right, Ryan, the range we gave does take into account how we're now three days into analyzing all the case mix weight changes. As you probably recall, we had a 2.26% number that we had out there prior to the final rule coming through. But, Don, do you want to speak to that?

Yes, I think you said it exactly right. Ryan, the short answer is no, because that is definitely based on not only the HH-DRG that we get when we score the OASIS, but the provision of care, from the (inaudible) visit and recert and all of those things. So I don't think that is able to be mitigated.

But I think that our experience shows that through the spectrum of the year those numbers are fluid. For example, in January, as I sat here, I think Eric had talked to us about a 2% expected impact from the rule of last year. Well, we're not experiencing that, but it wasn't because we were able to mitigate the flow of patients.

We actually increased services like our ortho program, and that was able to offset that. So it's not a targeted approach to mitigate or honestly manipulate the patient volume. Instead, we want to look at what we think the worst could be and make sure that we have backfill approaches that Josh alluded to to accrete for our shareholders.

Okay. No, that makes sense. I appreciate that. And then just last one for me, on the LifePoint joint venture, it looks like a great deal. I thought maybe, can you provide some color just on how many of the LifePoint hospitals do you think could ultimately look to expand or have a home health and hospice location? And then just secondly how much overlap currently exists, and is there sort of an opportunity, or do you think there's a need for additional overhead, or do you think you can kind of manage as is? Thank you.

Yes, good questions. So, the goal is in this partnership, and when I say partnership, LifePoint is -- has committed to building a world-class home health and hospice program as any hospital or health system we ever work with. And they -- what I really like is that they see this as a very core part of their strategy for the future.

So the goal is that we will build out home health and hospice services in every LifePoint facility currently and as they continue to grow. I'll let Don speak to the specific overlap and the timeline, but it is aggressive.

And I can give you a general feel for what that means. And if we just take the current LifePoint footprint of hospitals they have today, and we take the entirety of the hospital joint venture volume we have today and compare it in size, in hospital bed size and admissions and all, if LifePoint didn't grow from where they are today, this is a $200 million to $250 million home health and hospice business today when it's fully implemented and rolled out.

But, again, more exciting to me is their continued growth and our being their partner long term as their system continues to grow. Don, can you talk maybe a little bit about the timeline?

Yes, I mean, of their 71 hospitals, about half of them right now is what we'll be working on to integrate. And Keith was talking about is one of the real exciting parts of this is that LifePoint is equally as excited about using home health to leverage that downstream volume run as we are. So, of course, in that vein they want us in every market that they are.

And what Keith talked about about the $200 million, $250 million, I kind of look at that as Year 3. When we go into Year 3 of this partnership, our operational plan, our conjoined operational plan, has us buddied up in all of those markets to be that solution. And I think when we get there that run rate of revenue will only expand as they continue their M&A and by the way we do the same. So, Keith, I think you're absolutely right. I agree.

I think there was one other part of the question I failed to answer. You asked about capital. Obviously in the markets where there is no overlap and they do not have those services existing, then we have to build those out.

If it's in a non-Certificate of Needs state, then it's just a matter of applying for licensure and doing a startup. If it's in a Certificate of Needs state, then, I mean, we follow our -- our corp dev team will be working that immediately while the operations teams transition the existing assets. If it's a Certificate of Needs state then we would have to source probably a smaller provider in that market and then use that as the vehicle to get the joint venture started, whether home health or hospice, in that market, but very minimal capital requirement.

That's great. And just what's the size of their current home health business today, and hospice business today?

Yes, Ryan, this is Josh. We really need to, from our perspective, kind of stay focused on what Keith and Don were talking about, on the future and the potential. Right now we're still finalizing the phased-in nature of the current business.

So I don't want to give you a number that all comes in January 1, for example. It will all be coming in in 2017. So that's one reason.

And then the other is just the sensitivity between two public companies, between LHC and LifePoint. A lot of those particulars and details we're not putting out there.

Okay. Thanks for taking my questions.

Dana Hambly, Stephens Inc.

Thanks. Good morning. Just on that LifePoint, is that going to be consolidated?

Yes, so we will be the consolidator of the revenue.

Okay. Where you have agencies in LifePoint markets, would you be contributing those to the joint venture or would you continue to operate those 100% on your own?

Yes, this is Don. We will. In 2018 that will begin contributing portions of that, yes. But kind of like Josh said, economically we're not ready to put that out there yet, because we're still working through some of those details.

Okay. All right. Thank you. As you talk with your hospital partners, is there any desire on their part to kind of turn over their whole postacute operation to someone like you, instead of maybe using a convenor use someone like LHC? Would you be interested in doing that or have the capacity to do something like that?

Well, the short answer is yes. So, that's really where we see ourselves going. And more and more -- in fact, I would say in 2016 I don't know of any hospital conversation, and I do a lot of that work myself with our team, where the hospital has not asked us to do that.

I want to remind you that we've always had those capabilities. Prior to going public LHC operated outpatient therapy centers. We managed SNF facilities. We managed inpatient rehab. And then we ended up with the seven legacy LTACs -- eight, I'm sorry, legacy LTACs we have with hospital partners here in Louisiana, as you all well know.

But we see ourselves going back in that direction with hospital partners when asked to do so. The only must-have requirement that we have is that we must have the home health, because the home health is the -- the home health program, and having a high-performing home health program is how we really leverage our cost.

But when we're -- we see ourselves more and more managing the SNF and the IRFs inside our existing hospital partners when asked to. And we've recently beefed up our team to support those efforts. So that's a really good question.

Thanks. That's helpful. And just last one for me, Josh, when you say you can mitigate the impact of the home health cut, that is before any future acquisitions. Is that correct?

That's correct.

Okay. Thanks very much.

Bill Sutherland, Emerging Growth Equities.

Thanks. Good morning. I just want to look at a couple of the other business lines for a second. In hospice, what was the growth ex the acquisition impact year over year?

Yes, Bill, this is Josh. I just want to make sure I got the question right. Are you asking for organic same-store revenue growth for hospice (inaudible)?

Yes, yes, revenue. That's right, revenue, thank you, and maybe the split between volume and price, if that's available.

Patient days, Bill, were around 17.5, and revenue around 16.5.

And what do you guys feel about the sustainability on that side?

This is Don. That's a substantial part of that mitigation Josh was talking about is inside of that. I mean, he alluded to Halcyon, but just from a contribution margin sequentially over last quarter we've yielded another $1.2 million. And we really haven't hit our stride.

This thing has really turned. It's a real good asset. And I would also say the same thing for our legacy and our organic portfolio. You combine that with a 1.9% pickup and we feel real good about it.

Got it. Thanks. And then I'm curious on the community-based services. Seems like kind of a steady Eddie trend there. Is that kind of high up on the M&A focus list, or how do you guys think about that going forward?

Yes, so -- this is Keith -- so that's really a state-by-state answer. So, we're very high on the service line, and especially in the dual eligible population. So if there's adequate funding in a given state, ideally we like to see home health, hospice and community-based services when you think about the services you deliver outside of the inpatient setting. We like to see all three of those.

But it's such a state-specific question. When we look at a CBS, when we look at on a state-by-state basis and we decide to -- if we look at an opportunity we look at the state that they're in and then we actually do a deep dive on not only the current reimbursement for those services, but the underlying political environment and the ability of the state to continue to fund the program.

And, I mean, we typically use -- Marwood is who we've been using for that. So I hope I'm answering the question. What I'm saying is that we are very high on the service. We believe it's a much-needed service.

We believe it should be better funded. It's very much needed. But it's very risky because of the state's reimbursement involved. So that's why we cautiously expand that.

And I would just close by saying we have -- to highlight a state that we have a strong program in is the state of Tennessee. Tennessee has a great program. I wish more states would model that way. It's a great business line for us, great for patients, and it's great financially. So I hope that answers your question.

No, that's helpful.

Yes, and you know what I like? Bill, I'll add this little color to it. You used the word steady Eddie and that's a really good way. We're looking at this. For example, we have four de novos planned just in the state of Arkansas for CBS in and of itself. Each one of those are going to contribute next year.

So your question was centered around whether we would look at it acquisitively, and, as Keith said, we're absolutely open when the state specificity warrants that. But organically we have a good opportunity to co-locate [days] in the markets and we're executing that plan right now.

So of the, was it 22 states you guys have footprints, or whatever it is, how many states do you feel like CBS makes sense, given the particulars on the states?

Right now probably 4 or 5. I mean, there are some that have decent reimbursement today, but when you do a deeper dive with someone like -- I don't want to get Marwood and put them out here, but I'm already putting their name out, but there are others that do that same work. They're just -- they would just tell you that there could be risk in the program in two to three years out, and so, which scares us away from investing very much in that, for example.

Got it. Thanks again.

Brian Tanquilut, Jefferies LLC.

Hey, just to follow up, Keith or Don, Halycon, you kind of alluded to that showing some improvement this quarter. So as we think about your original synergy plan and turnaround time for that business when you bought it, where are we in terms of like innings for that specific acquisition?

And this comes from the just notion that there is probably more that we can squeeze out of Halcyon that could drive some upside or some acceleration in earnings going forward. Is that a good way to think about that?

Yes, it really is. And, you know, I'll say this again. For years now I've said most of the time it takes about 12 months to turn these things around when they're broken. The good news is we're right at that period right now and right on track.

Admittedly, and I said it last call, we were a little bit behind. But the September and October acceleration by the teams there got us right back on track. But we're not tapped out by no stretch yet. We still have opportunity in it in roughly about 25% of the locations.

It's a bell curve. As I said, right now we're not where I thought we'd be, but on the other side of that curve we're ahead, especially in our Georgia markets. So we have definite, definite tailwind behind this thing.

Okay. And then last one for me, you've alluded to your Stars progress in your prepared remarks. What level of focus do you think your referral sources have, and your potential partners have, on Stars at this point, or is that more of a two- to three-year out opportunity, or is that already part of the discussion?

No, it's extremely top of mind for them. And I'll dare say when Keith used those three, the traditional sales, he said -- he used the word differentiation. And a lot of times you'd expect people like us to talk about it. This is a differentiator now.

And so, and it's not just, candidly, referral entities and hospitals. There are programs, one of them that I'm looking at right now, that when patients are admitted to a facility, there are programs that platform immediately, on an iPad, for example, the number one agency in that market.

So that choice is moving away from relationship to consumerism in value. So it is extremely top of mind, and I think it's a big reason that I was so verbose on why I feel good about the organic growth next year.

I would just -- I would add to that, so Don's someone that this is a -- Don's comments are really addressing the organic growth. But I can back that up by saying in the hospital meetings that I'm going to in the C suites, it's one of the first questions they're asking.

They're wanting to talk about the Star rating and our ability to sustain and go forward from that. But the reason is that they're tying that to their value-based purchasing strategy in the future.

All right. Got it. Thank you.

Frank Morgan, RBC Capital Markets.

Good morning. I was hoping you could give us an update on the LTAC mitigation strategy for patient criteria and just any color there and maybe how that's shaping up in terms of the drag it presents. And that's it. Thank you.

At a high level, Frank, the drag that it presented is being experienced in the trajectory of earnings right now, and we don't see it getting any worse. So I guess let me state that a little bit differently.

The EPS that we've experienced in this third quarter and that allowed us to raise our guidance going into this fourth quarter is exactly where we thought these things would be. And so the site neutrality plan that we have pretty much to script is working.

And I would continue to say that the earnings that we're experiencing today are going to go through next year. The only dip will come back in to the full phase-in as we get to the last little piece of it. Did that answer that?

Yes, that's it. And what quarter do your last hospitals roll into criteria?

All of them, the last have the 8/31 cri year end, so September of 2017. Right, Eric?

Okay. Thank you.

Whit Mayo, Robert W. Baird & Co.

Hey, thanks. Good morning. Can we go back to the pre-claim review just for a minute? And I'm going to play devil's advocate, even though I think it's the dumbest rule that I've ever seen.

We agree.

Yes, you characterize it as a simple change in internal processes. And when we talk to agencies it sounds a lot more complicated than that. So I'd just like to hear a little bit more about the experience.

I mean, it sounds like the MACs are being extremely inconsistent in their determinations. We're hearing a lot of issues with doctors complaining and referral sources complaining and they're getting irritated. Patients are canceling episodes because they're getting letters from CMS and they don't understand this, and agencies are holding cases, volumes are going -- I mean, I could go on.

But it sounds so bad that it probably gets fixed. So I guess I'd just be curious to hear a little bit more perspective on sort of like how you look at this one specific issue.

So, Whit, let me color in -- this is Don -- let me color in my comments. And I went back to my prepared remarks just to make sure I got home the point.

In the prepared I said it's not a -- quote, unquote, not a major issue but more like a shift in process. It is a pain in the tail. And I agree with you. And we concur about how the restrictions are precluding care in cases. So I don't want to mislead.

Point one that I want to make, though, is we're not as a company concentrated in these states like some of our comps, therefore undertowing the non-major issue. And point two is we have what's called an end-of-episode process that essentially before bills are dropped key components of that bill are looked at.

What we've done and what I've asked our team to do is shift that up so that we essentially stay ahead. And now that we've experienced what PGBA is looking for, we have a good feel.

None of that is to say that it's not a distraction. But I have to say that if you kind of take these distractions and these rules as they come and harp on the fact of negativity, I mean, that's how we live now.

So whether it's face to face, pre-claims review, they're all problems, and we don't like it. But I can't lead investors to think that we can't overcome and mitigate that as best as anyone in the industry, and that was what I was trying to say is not a major issue for us.

Yes, it just seems that based off of the experience in Illinois, I mean, it was such a tragic implementation that they obviously had to freeze this. And, again, like the anecdotes you hear about, like takes over an hour to gather and annotate, review and upload the claims information. I mean, it just, it all sounds terrible.

And I guess we all do presume that it won't be implemented or reinstated until after the election, for various reasons. But I guess from a policy perspective and conversations you're having on the Hill, Keith, just any feedback that you can provide that gives us some comfort that, broadly speaking, this for the industry may change, may soften? Just any thoughts.

I realize that -- so we're on a public earnings call, right? I think there are a lot of people even at CMS who realize they got this wrong. And I think what they're trying to accomplish and what they're trying to go after aberrant behavior.

But this is just another one of those shotgun approaches where rather than taking a targeted approach you do something across the board that has unintended consequences. And I've had conversations, look, and these are good people who have jobs just like the rest of us. I just think this plan wasn't well thought through.

So I really do believe that there's going to be serious modification to it and it'll end up being something more targeted and -- but will be -- have less of a negative effect on good providers that are trying to do the right thing. I really do believe that, because they've been responsive.

But I -- there's also in these agencies things don't move quick. And then once they author something it seems like there's almost a pride of authorship. When they have to walk it back it goes a little slower than we'd like it to. That's just -- that's what I think.

But I do think they hear us. And everyone in the industry has done a lot of great work. But I think our colleagues, and we've been involved also, but the partnership has done a lot of great work and being very proactive in presenting data, and I think CMS is being very responsive to it. So, I mean, I'm encouraged about it.

I think what Don was trying to say, though, from an operator's perspective, here at LHC it seems like for now 22 years we don't get a whole lot of good news in home health. We just get more issues that we have to deal with. So we just buckle down and deal with them. And I think that's what you're hearing from Don.

And, Whit, I want to just end with this, and, again I think Keith and you are saying we don't like this, but our job isn't to deal with what we don't like and hurt the earnings of the Company. We're still experiencing a 76% affirmation rate, which obviously means 24% not.

Where we see this as not a major impact to earnings is that those cases are going to be won. We feel (inaudible), period. So we can absorb that and still create the value in the earnings for our shareholders was more of my prepared comment undertow than it is that we think this is in any way good or acceptable.

Did that 78% affirmation rate include the partial affirmations?

Yes, it does, and it's 76%. It does.

Okay. It still sounds like a non-affirmation when it's a partial affirmation, but that's just me.

It depends, actually, and I can take that offline with you and tell you what we're experiencing in that when it comes to the type of business sometimes.

No, okay. No, that's it. Just wanted to get a little bit more color and perspective. I appreciate it, as always.

Absolutely. Good question.

Ryan Halsted, Wells Fargo Securities, LLC.

Thanks for the follow-up. I'll be quick. And I apologize if I missed this, but did you give an update on the status of the PHR transaction?

No, Ryan. This is Josh. So, I'll go ahead and give that response to you. We, as we announced at the last call, we had put the transaction from a negotiation standpoint and an expected closing on hold. And it continues to be in that kind of on hold state.

I'll tell you since the last call we have terminated technically the purchase agreement but are still in conversations with the sellers. And if we can come to an agreement on value and all the other key terms, I would treat this one like any other deal in the pipeline.

It is not in the $106 million that Keith talked about earlier, just to be clear. I know I got a question about that last night. So the previously announced PHR is not being attributed to any of our stats that we're giving you. But we are still looking at it and considering if there's a transaction there to be had.

Okay. And I know it's not one of your largest states, but Florida, was there any impact from the hurricane?

Minimally, but nothing in volume.

Okay.

Operationally we had a couple of issues, but it didn't hurt the patient visits or the admits.

And I assume you're referring to sort of the broader business. I said Florida, but any location?

That is correct. We don't have hardly -- in fact, we've got Pensacola, and then on the other side Titusville and Ocala. So it was very minimal for us.

All right. Thanks again.

Thank you for the question.

Thank you. And I'm showing no further questions at this time.

I'd like to hand the call back over to Keith Myers for any closing remarks.

Okay, thank you, operator, and thank you, everyone, for dialing in. And, as always, if any questions come up or you would like to speak with the Company between earnings calls, Eric Elliott is always available, and the executive team will make themselves available if you have any issues arise at our level.

Thanks again for joining us, and thanks for your support and confidence in LHC Group.

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