LHC Group Inc (LHCG) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LHC Group Q2 2017 Earnings Conference Call. (Operator Instructions)

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

Thank you, [Aiella], and welcome, everyone, to LHC Group's Earnings Conference Call for the Second Quarter ended June 30, 2017. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy along with other key information about LHC Group and the industry on our website.

In a moment, we'll hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and 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 2017 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'm pleased to introduce the CEO of LHC Group, Keith Myers.

Thank you, Eric, and good morning, everyone. And thanks for being with us today.

I'll begin today with a brief overview of our performance for the second quarter and then take a few minutes to address the proposed changes from CMS for 2019 related to the proposed HHGM reimbursement model. Following my remarks, Josh and Don will discuss the quarter in more detail, and we'll then open it up for more questions.

The strength of our second quarter operating and financial results is a clear indication that the growth momentum we've exhibited over the last 18 to 24 months continued in the second quarter. While each quarter is a bit different, our revenue growth for the second quarter was completely consistent with our ongoing overall narrative of significant organic growth, complemented by the continued success of an acquisition strategy primarily focused on hospital and health system joint ventures.

The growth rate of our organic home health revenues crossed into double digits for the quarter, having increased for the last four quarters. Over this same period, our organic home health admissions have remained above 10%, and these admissions have continued a longer-term trend of steadily increased acuity.

Combining our total organic admissions with the admissions driven by the acquisition of 55 home health, hospice, or community-based health locations over the past year produced a 22.4% increase in total admissions for the second quarter, and the second consecutive quarter with growth in total admissions above 20%.

There are a number of important factors that support this performance, but we believe quality is still the number one factor behind the growth in both our organic and nonorganic admissions. Our having led the CMS star ratings for home health quality and patient satisfaction for the past 5 quarters is perhaps the most visible indication of our quality leadership. But with more than 60% of our home health locations earning home care elite rankings, and with our still being the only national home health provider that is 100% accredited by the Joint Commission, we've long demonstrated that quality care has been the top priority at every LHC Group location since we started the company.

In addition to our reputation of quality care, I'll add the convergence of value-based care with our long-term strategic focus on partnering with hospitals and health systems has also been a key factor driving our growth. The increasing embrace of value-based care by government and the healthcare industry to improve quality and reduce cost has given home health and hospice providers a true seat at the table as acute care providers search for the best partners to serve their patients' post-acute needs so that they can focus on their core acute care operations.

LHC Group is invariably on the short list of partners to be considered because after nearly 2 decades of partnering with acute care providers, we lead the industry in the number of our joint venture partners and the locations we own and operate under their brands.

Expanding this leadership, we signed our 75th health system joint venture agreement on Tuesday of this week with Christus Health. Consistent with our growing pipeline of potential joint ventures involving higher numbers of locations, this latest agreement will bring 21 service locations to LHC Group, including home health agencies, hospice programs, community-based services, and inpatient hospice unit and long-term acute care hospitals. This agreement is representative of another trend we are seeing in which our potential partners are interested in our handling all the post-acute needs of their patients, both inside the hospital and out.

Our joint venture with Christus Health is expected to produce annualized revenue of approximately $80 million. In 2017, we have now announced agreements to acquire revenues for approximately $107 million, which already makes for a record year for the company.

Because of these favorable trends and admissions in quality and in joint ventures, we expect our first half momentum to continue in the second half of the year. As a result, we've increased our financial guidance for the second time thus far this year. This performance is a direct reflection of the quality of the team with whom I'm privileged to work at LHC Group. The effort, empathy, and skill with which they care for our patients, as well as the dedication of those who support our medical teams, make a profound difference in the lives of the people we are privileged to serve. More than anything, they are LHC Group's brand and the key to our current and long-term success. We thank them and wish to again recognize the outstanding job they do.

Now I would like to take a few minutes to talk about the CMS proposed rule for 2018, and specifically address the proposed Home Health Groupings Model, or HHGM, proposed for 2019.

Last week, CMS released its 2018 proposed rule. Generally, the proposed changes to home health prospective payment rates for 2018 are in line with expectations. The proposed rule estimates there will be a net impact of 0.5% reduction in payments due to the expiration of the rural add-on, a 1% home health payment update, and 0.97% adjustment for case mix the third year of a three-year adjustment.

CMS also estimates a reduction in regulatory reporting due to the removal of a number of quality measures and OASIS items. CMS estimates the overall impact of the industry at a decrease in payments of $80 million or 0.4 of a percent.

In addition, CMS has made an initial proposal of a revised payment system to begin in 2019, referred to as HHGM, an acronym for Home Health Grouping Model. As currently drafted, LHC, along with the Partnership for Quality Home Care, the National Association for Home Care, state home care associations across the country, along with industry leaders and consultants, believe this new model would do more harm than good as it would create disincentives to home health utilization and result in patients being forced to remain in more costly institutional settings for longer periods.

This new model is also inconsistent with programs like CJR, or Comprehensive Joint Replacement, and other alternative payment models which are designed to provide cost-efficient, quality care in the home setting, where most patients would rather be. Instead, the HHGM as currently drafted would result in greater utilization of more expensive care settings.

Specifically, CMS is proposing changing the unit of payment for home health services to 30-day periods of care, currently 60-day, and shifting to a model that relies more heavily on clinical characteristics such as principal diagnosis, functional level, comorbid conditions, and referral source. It also eliminates therapy service use thresholds currently used in reimbursement calculations.

CMS estimates in its proposed rule the implementation of HHGM would reduce 2019 Medicare home health payments by as much as $950 million, or approximately 4.3%, if implemented, in fully non-budget neutral manner, or by $480 million or approximately 2.2% if a partial budget neutrality adjustment were applied in 2019 and phased out in 2020.

This impact does not include any positive offset from a potential market basket increase in 2019, continued extension of the rural add-on, or the impact of value-based purchasing. Obviously, the full impact of the proposed HHGM model and its effect on our financial performance in 2019 and beyond will be determined in large degree on how it is ultimately structured if implemented.

LHC, along with the Partnership for Quality Home Healthcare, the National Association for Home Care, state home care associations throughout the nation, and industry leaders and consultants, also question whether CMS has the unilateral authority to make a non-budget neutral change without action by Congress.

In closing, there are two basic things to remember as we move forward with our work on HHGM. First, we are confident that the home health industry can work with CMS to meet their apparent goals of diminishing the impact of therapy on reimbursement, encouraging care for higher acuity patients at home, and encouraging more timely and efficient transfer of patients to home care from higher cost inpatient settings. These goals can be accomplished without the indiscriminate damage this original proposal could inflict on the current reimbursement system, the home health industry, and most importantly the Medicare beneficiaries who need and depend on a stable home health industry.

In this case, CMS has given ample time, at least one year, to work collaboratively and transparently with the agency. We are confident that our collaborative meetings with HHS, CMS, and OMB and our intensive advocacy and broad support among legislators and governors will lead to, at worst, a better model implemented in a budget-neutral manner over multiple years.

To be clear, LHC Group, along with the Partnership for Quality Home Healthcare, the National Association for Home Care, state home care associations around the country, and industry leaders are opposed to the rule in its current form but committed to working together with CMS to get this right.

Second, we know that home health is widely viewed as a critical component of strategies to reduce healthcare cost while maintaining quality outcomes and higher patient satisfaction. The recent Medicare Trustees report highlighted greater support for home health care as a solution in reducing spending and ensuring quality and affordable care is provided to Medicare beneficiaries.

CMS is also supporting efforts to reduce the cost of post-acute care and has identified home health care as an important part of that effort. There has never been a stronger commitment to home health, whether it's from Medicare, managed care, or hospitals and health systems across the country.

LHC Group has faced multiple reimbursement changes over the last 23 years, and we are stronger today than ever. LHC Group will continue to focus on organic growth and acquisitions, mainly resulting from hospital systems joint ventures. We will continue to leverage overhead cost and maintain high quality ratings, which positions us to share in the upside from value-based reimbursement models.

Now I'll turn it over to 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 once again begin my prepared remarks by saying thank you to all of our clinical professionals who continue to lead the industry with the high quality patient care and exceptional service you all provide to the patients, families and communities of those patients that we are so blessed to care for, and to all the LHC Group family members who provide support and service to them every day.

Because of all of you, LHC Group continues to be successful and fulfilling its mission to care for the elderly and frail population in our service area, and we are able to report the results of another strong quarter.

With regard to our financial results, net service revenue increased 15.1% to $260.1 million for the second quarter of 2017, and increased 13% to $506.8 million for the first 6 months of the year compared with the same periods of 2016.

Net income increased 19.4% to $11.3 million in the second quarter and increased 21.1% to $20.8 million in the first 6 months of the year, compared with the same periods in 2016.

Net income attributable to LHC Group per diluted share was $0.63 for the quarter, compared with $0.54 per diluted share for the second quarter of last year, and was $1.16 per diluted share in the first 6 months of the year, compared with $0.97 in the same period last year.

Home health same-store revenue grew 11.9% in the second quarter of 2017 and 10.2% in the first 6 months of 2017, compared with the same periods of 2016. This growth and same-store revenue is due to our growth in same-store admissions of 10.4% for the second quarter and 11% for the 6 months and a 3.4% increase in patient acuity in the home health service line, which is offset by an estimated 2% reduction in medicated home health revenue from the Medicare home health prospective payment system for 2017.

On a consolidated basis, our gross margin was 38.1% of revenue in the second quarter and 37.7% of revenue in the first 6 months, as compared to 39.3% in the second quarter and 39.2% for the first 6 months of 2016. The decrease in gross margin year-over-year is due to the following few factors.

First, the negative revenue impact from the 2017 home health reimbursement rule of an estimated 2% reduction to Medicare reimbursement. Second, the negative revenue impact from the LTAC patient criteria rule, which affected 2 of our LTACs last June, and the other 6 LTACs beginning last September. And also, margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our more mature agencies.

Excluding these recent acquisitions, our consolidated gross margin would be 38.7% for the second quarter and 38.2% for the first half of the year. Home health gross margins were 39.4% for the second quarter and 38.9% for the first half of 2017, compared to 40.2% and 40.1% for the same periods of last year. Excluding recent acquisitions, home health gross margins would have been 39.9% for the quarter and 39.2% year-to-date.

Hospice gross margins were 36.5% for the second quarter and 36.3% for the first half of 2017, compared to 38.2% and 37.3% for the same periods last year. Excluding recent acquisitions, our hospice gross margins would have been 38.5% for the quarter and 37.8% for the first half of the year.

Our general and administrative expense was 28.4% of revenue in the second quarter and 28.8% of revenue in the first half of 2017, as compared to 30.7% and 30.3% for the same periods of 2016. Our general and administrative expense is also lower on a sequential basis, down from the 29.2% we experienced in the first quarter. The improvement in G&A expenses as a percent of revenue is due to continuous cost control efforts while growing revenue and generating additional leverage.

Moving on to bad debt, our bad debt expense continues to improve and represented only 1% of revenue in the second quarter and first half of 2017, as compared to 1.7% and 1.6% for the same periods last year. Our lower bad debt expense is the result of further maturation of our revenue cycle department changes, initially implemented in 2015, resulting in lower days sales outstanding; stronger cash collections overall, including continued improvement on home health commercial and managed-care collections; improvement in our overall accounts receivable agings; and fewer write-offs.

For the 6 months ended June 30, the company has continued to see significant progress with respect to its cash collections on home health receivables. As I mentioned last quarter, a key contributor to our more timely cash collections is the continued maturity of our back office and field operations related to both our point-of-care platform and to other technology advancements in our reporting and analytics.

Also, the key performance indicators that we monitor on our home health receivables indicates substantial improvement from year ended December 31, 2016, to the 6 months ended June 30, such as our DSOs have decreased 7.5%, from 49 days to 45 days; our cash collections have increased 300 basis points, from 98.9% to 101.9% of revenue; our write-offs have decreased by 25%, from 1.6% to 1.2%; and our accounts receivable over 180 days has decreased by 13%, from 19.3% to 16.8%.

We also continue to see progress with respect to our cash collections on hospice receivables. We collected 106% of revenue for the second quarter compared to 100% of revenue for the second quarter last year.

As evidenced by our announcement on Tuesday of our new joint venture with Christus Health and our recent joint venture with Baptist Memorial Health Care, we continue to have great momentum and I could not be more excited about our robust pipeline of potential joint ventures and freestanding opportunities. We currently have $133 million available on our line of credit, which leaves us well-positioned to fund future acquisitions and joint partnerships.

Turning now to our annual guidance for 2017. We are raising our fiscal year 2017 guidance for net service revenue to now be in an expected range of $1.03 billion to $1.045 billion from the previous range of $1.02 billion to $1.04 billion, and fully diluted earnings per share to now be in an expected range of $2.30 to $2.40, up from the previous range of $2.23 to $2.33.

This revised guidance takes into account all acquisitions that we have completed so far this year, but does not take into account the recently announced definitive agreement for the joint venture partnership with Christus Health or the third phase of our joint venture partnership with LifePoint, which we plan to complete each by the end of the third quarter.

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

For the full year of 2017, we expect gross margins to be in the range of 37.8% to 38.2%. We expect GNA expense as a percent of revenue to be in the range of 28% to 28.5%; bad debt as a percent of revenue to be in the range of 1.1% to 1.3%; and, excluding the discrete tax item related to the stock-based compensation that results then at a benefit in Q1, our tax rate to be in the range of 41% to 41.5%.

That concludes my prepared remarks, and I am happy to further discuss during the Q&A section. I am now pleased to turn the call over to Don.

Thank you, Josh, and good morning, everyone.

As discussed, the continuing strength of our operating and financial performance is due in part to the success of our organic and acquisitive growth. In reference to same-store, we continue to see our quality underscore our sales effectiveness.

In addition to the organic growth numbers mentioned by Keith and Josh, I'm pleased to report that Medicare admissions to our home health from hospitals has increased 17.9% in the second quarter of 2017, and 14.6% year-to-date, June 30, as compared to the same periods last year, statistics, we believe, prove in the value we create for hospitals and systems as they effectively manage patients to the most appropriate care settings.

In preparing and caring for this organic growth, our team did a very nice job of capacity planning inside a 3-month period. Specifically, we on-boarded just under 1,900 employees, 60 of which were sales associates, and now go into Q3 with the lowest open position rate in recent history.

Turning to the acquisition front, both LifePoint and Baptist Memorial are on track operationally and financially. The 31 LifePoint Health locations, integrated January 1 through April 1, are now fully integrated and moving into the growth mode. We soon move into phase 3 of our LifePoint plan, a phase where we simply convert 10 managed locations to owned, in a phase with little to no operational disruption for those agencies.

Pleased to say more of the same to be stated for our Baptist Memorial transaction. In short, these agencies are also now fully integrated and completely handed over to our operations team. We're excited to now see the improvement that will be yielded from our operating model across aspects of both of these partnered operations.

Moving on to quality. Goodness, we're again pleased with and proud of the most recently-published CMS star ratings. LHC Group, for the fifth consecutive quarter, leads the industry on both quality and patient satisfaction.

For the quality rating, we produced a score of 4.50 for the July report, which is an improvement of 4 basis points sequentially from the April report and of 45 basis points since the July 2016 report. The national average has been within a range of 3.24 to 3.26 for the last 5 quarters. The report also shows that approximately 95% of our agencies were rated 4 stars or better, compared with 81% and 67% for the next 2 companies on the list and less than 50% for the rest of the providers included in these ratings.

For patient satisfaction, our latest rating was 4.28, up 15 basis points from April and 29 basis points from July last year. The national average is at 3.78, up 11 basis points from July of 2016. 87% of our agencies had ratings of 4 stars or better while the next 5 names on the list ranged from 81% to 65%.

Let me also briefly add that LHC Group has also led both quality and patient satisfaction star ratings in the 9 states in which CMS will be rolling out value-based payment adjustments beginning, of course, in 2018. For companies with a quality measure in the 90th percentile or greater, the payment adjustments could add 1.5% or more to reimbursement for Medicare episodes in 2018 and approximately 3% in 2019. CMS will be identifying how providers are ranked in the next several weeks.

It is, however, important to note that the star ratings are just one of a number of variables considered in determining a provider's percentile ranking, so we'll know more about the impact of this program as the weeks and months come by and when CMS announces their findings.

In summary, we truly are extremely pleased with these second quarter results and where we are inside of our 2017 strategic plan. But we continue to remain focused on improvement initiatives and on our high standards for patients, payers, partners, and shareholders.

In closing and to our team, we sincerely cannot thank you enough nor be more proud to have just discussed the results of what we say that difference you make each and every day. So [Aiella], this concludes our prepared remarks and we're now ready to open the floor up to questions from those on the call.

(Operator Instructions) Our first question is from David MacDonald with SunTrust.

Good morning, guys. Just a handful of questions. Keith, first, can you talk, if I just look at the number of facilities that you've picked up with the Christus deal and then look at the number of facilities they have total, it looks like there's a pretty attractive expansion opportunity there. Can you just spend a minute talking about that and how you guys are looking at that once that deal closes?

Sure. It's similar to LifePoint where you have an existing footprint but the vision of leadership at the hospitals is that they want to have a strong home health program in every market that they serve, which is the most exciting thing for us in any transaction. So I would say that about Christus. So Christus, today, I think has 60 markets, and so obviously the vision is to build out home health and hospice and community-based services in every one of those markets, the same as the vision for LifePoint. And the same could be said for the Baptist system in Memphis. When we go in nowadays to speak to hospitals, the existing business is great and we want that, but what we're really looking for is to hear that long-term commitment to home health. In years past, I can remember a time when we would take anything we could get, but now we're seeing more and more that hospitals see home health as (inaudible) their strategy.

And then Keith, just can you spend a minute on the pipeline? When you look at the pipeline, what percentage of the pipeline now is joint venture opportunities and then within that, what percentage of the joint venture opportunities are with multi-hospital systems? Let's say 3 or 4 hospitals or more.

Yes. I think we have only 2 opportunities in the pipeline that are single hospitals, and that's 2 out of roughly 20 that are at various stages. But it's really flipped on its head. 5 years ago, that would have just been the reverse.

And then, Keith, within some of those conversations that you're having, can you give us any sense of what portion of those are now looking for something that is across all of post-acute as opposed to just home health or just home health and hospice? Are a significant number of those looking for service offerings like you guys have signed up with in terms of Christus?

Yes, that's a good question. So Christus is different in that they have this legacy LTAC piece that used to be -- it's still a separate division. It was referred to as [debley]. So they're different in that regard. But what is consistent is hospitals that want us to be able to cover the full post-acute continuum if and when they need us to do it.

We don't see a tremendous amount of immediate need for it, they just want to know that we can grow with them in that. And that, we obviously want the home health piece, and probably up to 5 years ago we were almost singly focused on home health, but we began to encounter hospitals that wanted us to have that broader conversation. Now, that conversation takes place in every meeting even if they don't need it today.

Okay, and then guys, just one final question. Last quarter you talked a little bit about seeing a broadening of your referral base, so I was wondering if you could provide any update there. Are you guys continuing to see the number of referring doctors expand? And also, any update on did you see any maturation of the new docs that had come on since January 1 in terms of increasing the number of referrals they're sending you?

It's a good question. And we have, and we do track it. Specifically, we had just over 3,000 new physicians admit to us in this quarter. But to be honest, I didn't go back and look at the new docs specifically -- I mean, it's certainly a voluminous number -- to see their throughput. Instead, I just kind of rolled it all in and looked at the total unique physicians sending it to us in Q2 was roughly 16, 16-5.

So I disclosed that last quarter and I say it again and I appreciate the question this quarter, to reinforce what I said in my prepared comments, we really do see that the quality of the company is underscoring the value proposition to referral entities, not only from the hospitals which I said in my prepared remarks but by disclosing that number here. Granted, and admittedly, when you're in the markets, those numbers, we have to add new markets to continue to see those numbers because that's going to go down as you mature the medical profile in your route planning. So we're really pleased with it and extremely excited about diversifying, because in one of our initiatives in the strategic plan was to truly diversify and kind of get away from what we saw was that old 80/20 rule.

Our next question is from Frank Morgan with RBC Capital Markets.

Good morning. A couple of questions. You commented about the impact on the industry for the rural add-on. I'm curious, could you give us any color on how that might -- what effect that might be for you specifically and kind of what are your thoughts on that actually being extended as it has been historically?

Sure. The impacts are around 1% overall. I'm looking at Eric to confirm. But we're highly confident that the rural add-on is going to continue, and probably be part of an extender package in the fall. And when I say we're highly confident, it's not just LHC Group, but the National Association and everyone we speak to in Washington. I mean, we have the support of two major committees of jurisdiction -- Ways and Means and Energy and Commerce. And then on the Senate side, we have so many senators that have -- because of the way the Senate is elected, that have rural constituents. So you always have huge support in the Senate in general. So we're pretty confident about it. But if it didn't, it would be a 1% impact.

Thanks. And then obviously, very strong organic growth and it sounds like you're pretty confident in seeing that continue through the year. As you look further out, do you think there's any particular near-term strength that you've seen on same-store, or should we expect that kind of trend to continue into next year at that level? Or is there any other consideration we can think about when we start looking at the year ahead?

We do see, and I'd have to go back to look at what we guided to, but I think I had guided around 5% to 7% on home health and roughly 8% to 10% on hospice. I will tell you out of full disclosure with July 4 being as it was on that weekday, most of the volumes we've seen in hospitals and everywhere else was soft. We came out of it nicely.

So I probably wouldn't go as robust as we turned in in the second quarter or the first, and more guide down to what I said at the beginning of the year in the aggregate, because that yearly number takes into account the Julys and the Augusts in that soft period. So I hope I've answered that for 2017. And to be candid with you, I'm really not prepared to talk about 2018 right now because I have not yet looked at what acquisitions will roll into same-store calculation, and I could probably mislead you there.

Got you. And certainly, a big opportunity is still out there with all these full-year effects of the JVs. I was just curious. I was going back to look at the Christus release. Did you mention anything about the consideration paid for this particular transaction or is there any kind of color around a valuation that we could draw from that?

Yes -- no, we did not. I mean it's consistent with other joint-venture transactions. We typically don't announce the valuation. It's always fair market value that we use for both parties, but we don't disclose what it is.

Our next question is from Kevin Ellich with Craig-Hallum.

This is actually Per Ostlund on for Kevin. Thanks for taking the questions. I wanted to circle back to Christus as a couple folks already have as well. Can you or have you characterized at all how the revenue composition of the $80 million sort of spreads across home health, hospice, and the other services, and sort of what had the growth rates been in those businesses?

I can tell you the spread and then, Don, if you want to tag-team on the growth rates that we've seen, both from the diligence side as well as what we're thinking for each of the service lines, it's about on an annualized basis $40 million of the $80 million are in the LTACs, in the 6 LTACs that are a part of the transaction. And then the other $40 million of the $80 million is pretty evenly distributed among home health, hospice, and CBS.

And just to tag onto that, their growth has truly been flat. Christus, much like some of the systems that we have conversations with, did a really good job of bringing in some talent over the last two years, leadership talent that put some fundamentals into place that we'll build upon, but they did not truly have growth in those agencies and they were still struggling and still are to get the cost in line with their present volumes, and that's why we guided to the earnings effect as Josh and them put out. So the good news is is that the hurdle rates will be nice when it does follow the same-store, kind of like Frank I think was asking the question about. So, very little growth, lots of upside.

Very good. Following up on that, usually -- and it seems like you've historically done a very, very good job of accelerating the growth rates when you take over the JV facilities and improve their operational performance -- is there anything about a multidisciplinary, large system like this that slows that progression? Or could it actually be quicker because it's bigger and because there's that infrastructure in place? Just sort of curious as to how you think about that since LifePoint's already kind of moved into growth mode. Would this kind of thing take longer to move into growth mode because of its size and spread across surfaces?

It really comes down to the commitment and engagement level at the C-suite of the organization. And in Christus's case, there's a incredible engagement, as strong as I've ever seen, and commitment to home health, and a focus on growth. So I think that's where it starts. We do a lot of things very well, and because we focus on home health 100% of the time and hospitals are running so many different departments.

But things like customer service, not just of patients but internal customer service to their own internal referral sources' case management are not things that the homes health agencies and hospitals typically focus on, certainly not as much as we do. And so, we bring in a sales effort is what I'm saying, and a culture around growing the business to the agency, that usually doesn't exist. And we do that very well, but when it's combined with a commitment from the C-suite and the system, that's when we see the greatest results, and I think we have that at Christus.

And I think, Keith, if I want to add, we absolutely do not think this will be more difficult or at a slower pace, because in many of the joint ventures we don't have the multiservice collaboration opportunity that we have here. Specifically, I was in San Antonio during the announcement and all of those services sit there and tied them together in creating the unified value proposition is something we see as an opportunity. You add the fact that they only have literally a handful of sales representatives focusing on outside. Once we actually fundamentally get it in model, fundamentally create the star results, we see that the accelerated growth here could even be better once we get it to maturity in mid to late 2018.

Excellent. Thank you. One more, if I could, and this is going to maybe seem a little odd in light of the large announcement on Tuesday. But does the HHGM prospect looming -- and I know it sounds like there's some optimism that it can at least be mitigated if not avoided altogether -- but does that throw any cold water on pipeline development at the moment? Does it change how you approach valuation and those sorts of things, or dialogue just continuing despite sort of that factor hanging out there right now?

Sure. I think there are at least two questions in that, maybe three. But so the bigger question is, the proposed HHGM for 2019 certainly doesn't derail us in any fashion at all. And part of that comes from the perspective of being at this for 23 years now and having come through IPS and all the other changes over the years that we've had to mitigate and work through proposed rules on.

But with regard to how it affects the pipeline, if anything, it's more likely to accelerate the pipeline, because it's a potential risk that hospital C-suites will see for home health agencies that are already not performing very well. And so, they may view that differently than we do. It may be a motivating factor to get them over the line. With regard to valuations, of course we'll take that into consideration when we determine fair market value, because it's an unknown.

Our next question is from Brian Tanquilut with Jefferies.

Keith and Don, just kind of following up on the discussion on organic growth. So you had four quarters of double-digit organic admissions. Two questions there. So do you worry about the anniversarying factor, where you start lapping tough -- you started hitting tough, tough comps, number one. And then second, would you characterize this growth (inaudible) as a market share gain? Is it driven more by the JVs? And how penetrated are we now in terms of capturing the referral flow from your JV partners? I'm just trying to gauge how much runway you have in terms of mining the JV partners in your referral sources to sustain this level of growth.

So given the pipeline activity and the volume of new JVs we've already announced, and then the potential growth in those, I actually feel better about sustaining those numbers than I would have a year ago. And we didn't anticipate questions so I'll let Don take the other part of this. And then going forward in terms of the pipeline that we're seeing ahead of us, I don't see any slowing down. In fact, I see acceleration in that. In terms of number of hospitals, because there's more potential hospitals per transaction now than we've seen in the past. Simple math. Don, you want to...

Yes. Brian, and I'd love, if you want to, we can talk about this, or any of you offline, because it's, as you know, a pretty complex thing. You asked a couple of embedded questions. First of all, it depends on our hurdle rate as to where I'm worried about the actual organic growth percentage. For example, in Mississippi, if our team there is running at a 3.5% to 4% clip, I'm elated because we do have market penetration and it's a huge admin flow into the portfolio. Whereas if I'm running a 7% to 8% on the west, I'm very displeased. So the percentage and looking at that number in isolate is something we try not to do. Instead, we roll that up and we do look at the market penetration to find out what the right number is to budget.

Secondarily, we absolutely have room to grow in our joint venture portfolio. Some of those are extremely mature and old and the relationship phenomenal, but some of them have turned over in C-suite, and with, now, 75 of them, each of those are at an inflection point within of itself that kind of creates that opportunity. But I think -- I forgot who had asked the question earlier. In some cases we've done such a good job of growing consistently over the last 4 to 5 years that those hurdles do get a little tougher to jump, and that's why I went a little conservative in saying I wouldn't go ahead and bake in the models of this double digit going into the next few quarters because as these same-store fall in, in cases we actually start out with less census because of our compliance lens and other things that we do to put on, and our length of stay versus other parameters.

So I guess what I'm trying to really -- and I don't know how well I'm doing for you -- there are a multitude of factors that go into that, none of which scare us, to continue the trajectory that we've been on the last two to three years. This pipeline and the JVs that we have coming in are truly so opportunistic.

Let me come back to one other thing, Brian, before you go on. I think if you think about it in terms of hospital joint ventures, when the majority of our acquisitions are coming from hospital joint ventures, our organic growth in the following years has always been greater. It's always greater, substantially greater from hospital joint ventures. Whenever our pipeline has been less successful in the hospital joint venture side and we've done more freestanding acquisitions in a given year, the growth on those freestanding acquisitions is lower. It's harder to achieve that organic growth, just as a general rule, not singling out any one.

That's right. So I guess, Brian, together, did we come close to answering your question?

No, it's really good. Don, for you, you've done a good job bringing down the cost per visit over the last 2 quarters. We've seen that trickle down. Do you mind just sharing with us what exactly is driving that and how should we be thinking about your opportunity or your view on that number continuing to trend down?

Yes, Keith just alluded when you look, we've had two record years now of acquisitive growth, none of which we brought in at corporate margins. So it's given us that 12 to 18-month time frame to, when I'll use the word operationalize now. And I think we're going to continue to see that because, for example, whether it be LifePoint or Baptist that just got into our portfolio, obviously they weren't at those margins either, so we'll continue to see that trend continue. And I think when you factor in the G&A that we've been able to leverage there, you combine those two, we kind of like where we are going into latter 2017 and 2018.

Got it. And then last question for me, Keith, in your press release last night you alluded to the fact that you believe that your JVs or your tie-ups with hospitals set you up to adapt better or have less of an impact from HHGM. If you don't mind just expounding on that and then kind of your thoughts on what they're proposing in terms of essentially a case mix or therapy adjustment to rates based on therapy and how you're exposed? If you could give some color on your therapy exposure as it relates to the HHGM proposals.

Well, let me start by saying if anything in our press release indicated that we had positive thoughts about HHGM, then we probably didn't do a good job of drafting it. But, no, I think directionally, we like the focus of moving patients downstream from more costly inpatient settings to home health. In general, we like where policy's going in that regard.

So I guess that's the only thing that you can say about HHGM that would be anything positive. With regard to the therapy, it's no secret that CMS wants to move away from therapy having such a significant impact on reimbursement. And I think in general, the industry recognizes that and knows that at some point we'll have to address it, but we want to do it in a collaborative fashion and do it in a way that's smart and doesn't disrupt the industry and slow the momentum we have in moving patients downstream to home health.

(Operator Instructions) Our next question is from Whit Mayo with Robert W. Baird.

My calculator might be broken, but I'm looking at the press release, 11.9% organic revenue growth, but same-store episodes declined 80 basis points. Revenue per episode was up 5.4%. I know that's not a same-store number. Can you just flesh out a little bit what's going on in the organic revenue number?

I'll start with it and then Don can jump in and tag-team as well. It's primarily a product of our lower recert rate. So you've got less recerts in there, so from a revenue-per-patient day and a admission growth perspective, you're seeing those numbers obviously extremely healthy. But with different patient characteristics and dynamics that we've got, especially coming through with these joint ventures, when you're getting patients coming out of LifePoint and Baptist and continuing that trajectory, our length of stay and our recert rate in some of those markets has been lower. Don, you got anything you want to add to that?

Just to substantiate that those numbers were 43.9% recert rate this quarter, same period prior year, 47.7%.

So the revenue per episode on the organic, it's got to be up like 10% or something.

Yes, and we usually absolutely see that case mix on first episodes.

Got it. Okay, sorry, just trying to reconcile that.

No, your calculator was not broken.

Okay. Sometimes it is. Maybe another one, Don, since I have you. Just thinking about LifePoint and Baptist and now Christus being folded in, and it sounds like the pipeline is full, robust as it's ever been, just want to make sure that you guys aren't biting off more than you can chew and if you could just talk about just the bandwidth of the organization, the resources you have to manage this. I just want to get some perspective on how the organization is structured today and how you've built out the team to really manage the depth of the development activity that you have.

Whit, that's truly a great question. And it's the same question that our board of directors posed to us about 6 to 9 months ago. In short, we absolutely have no concern going into the latter half of this year, nor would we have in the pipeline that Keith alluded to on those 20 JVs, mainly because of what I said. We had such a great and willing partnership with both LifePoint and Baptist that those are already handed over to operations and it's freed up our integration teams to handle not only what we have now with Christus but what we believe we will be announcing within the next three months. So I have no concern of that right now.

And I also would say that also, we try to very much so balance adding those so we don't just carry that G&A load. So if anything, we'll be adding a few, but it's only a select few. So with what Keith and Josh and our development team have in the pipeline, I have 100% committed to them and our board that we can integrate it with the same fluency as we have so far in the last 12 to 18 months.

Got it. And I presume you'll be going through your planning process in the next few months, and if you were to make some investments in the infrastructure of the organization, where would it be? Is it simply just field level operational support or do we need to start thinking information systems, IT? I guess I'm just trying to get a view inside the boardroom in terms of where the dialogue and the conversation is focused.

No, and it actually wouldn't be this big slug that you would see. In fact, it would be so embedded into the G&A as a percent of the newly required revenue that we'd be leveraging the overall G&A as a whole. So specifically, every department in this home office has metrics based on certain parameters, whether it be payroll having their own or IT. So the adds that I was saying was specifically if we needed to add integration team members, and that would be no more than around 6 people, and all in probably around $600,000, $700,000. But the revenue that we would integrate with those 6 would by far embed that into the normal. Keith?

Let me just add because I realize a lot of people don't have the visual of this. But last year, we moved from a location we had been at for some time to another location in Lafayette where we had room for expansion and brought all home health services, all departments into one building into a new open work environment where we've modeled out our capacity for growth. And then in addition to that, the property, the 4 acres adjacent to us is available and the facility management organization we work with has already developed plans to expand there if we need to. So we have a master plan with metrics for rev cycle and payroll and all of that to continue to have all that support here from Lafayette.

No, that's really, really helpful. And maybe just my last question -- we're at the hour mark -- but just the strategy around Christus, I just wanted to look at the LTACs, and is that something that those are assets that you wanted? Did they want you to have those? And I know the answer is probably, look, this is a broad post-acute care strategy, not an individual asset strategy. But just curious how you evaluated those hospitals. The (inaudible) mix appears to be a little low. So just any color would be helpful.

Fair question. So we certainly didn't go in asking for the LTACs. But we want to differentiate ourselves and we have done it and we want to continue to be able to differentiate ourselves in our positioning with hospitals and health systems, and part of that is being a sole-source solution for post-acute care. In this case, that meant these legacy LTACs.

So they were valued appropriately, and you know what LTACs have gone for recently, the Kindreds and others that have sold. So they were valued appropriately, they're accretive to the operations. But it also opens the door for us to provide other post-acute services that they're probably going to need. I mean, EHR is obviously one that's on the table, and along with that we get the home health, hospice, and community-based services. So I hope that answers your questions. I mean, ideally, home health is the go-to service line that we want, but we realized that we weren't going to be able to hold our position with hospitals and health systems if we couldn't be a sole-source solution.

No, no, that makes sense. Do they not have skilled nursing in their portfolio?

They did not.

They did not. Interesting. And maybe just one last one. Sorry. The visit per episode, I didn't see the disclosure of that for this quarter and I know you gave the recert rate stuff. But do you have the visit per episode?

It was 18.2. And that's Medicare.

Our next question is from Bill Sutherland with Benchmark Company.

Curious about, Don, the sustainability of a couple of segment operating margins of 10% in home health and then directionally, what do you think about hospice going forward?

I'll take hospice first. We actually see some upside in hospice because of our growth banding there, so certainly no decay and we have upside. And I have no concern on home health. Like with any portfolio management, we have L-curve, in which we have 42 of our assets right now that we know we have upside on margin, and certainly working diligently to do that, so I would certainly not bake any decay in any of those margins going out.

So think about hospice going to a higher single digit potential?

I'll have to throw that to Josh because I don't want to overstep me. Josh, do you have any information you can give Bill on what he should model?

Yes -- no, Bill, I think you're right in line with what you just said. That's where I would take it based on what Don was just kind of leading you toward. I think the high single digits is a good place to be.

And Josh, another one for you. The split on the JV, on both Baptist and Christus, is it 70/30 like usual?

Yes, similar to how we answered the question around like LifePoint and other JVs we've done, for the same reasons that Keith alluded to on pricing and valuation, we typically don't disclose the exact ownership percentages, but I'll tell you in both instances, we are the majority owner and will be the consolidator of the financials.

And then last one, you mentioned the third phase of LifePoint that kicks in this quarter. Can you remind us kind of the full rollout plan with LifePoint? I'm remembering, I think your next step is to actually go in and take over actually just de novo sites that are in their local markets.

Simply put, yes, that's exactly right.

Yes, and so just as a reminder, we did the majority January 1. We had a second phase April 1. The third phase that I mentioned in my prepared remarks for Q3 will be September 1 as currently planned, and I don't see anything changing that. And those, we've been managing all year. We're just converting them from management locations to owned locations.

And then on the de novo front, I am excited about not only looking for new markets to de novo, but we've already tucked in a small single location acquisition that has been connected to one of LifePoint's hospitals in Kentucky. We close that one July 1 and we've got probably at least three or four more that I can think of that are in our current pipeline that are connected to the LifePoint growth strategy as well.

Thank you. And I'm showing no further questions. I would now like to turn the call back over to Keith Myers for any further remarks.

Okay. Thank you, operator, and thank you for everyone for dialing in. As always, if you have any questions in the interim, please contact Eric Elliott, and if you need to speak to anyone else on the management team, we'll always make ourselves available to you. Thank you.

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