Gen Digital Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference call. [Operator Instructions] I would now like to turn the call over to Lori Mayer. Please go ahead.

[Lori Mayer:]

Good morning, and thank you for joining us today. We filed our earnings press release yesterday afternoon. This announcement is available on the Investor Relations section of our website at www.genesishcc.com. A replay of this call will also be available on our website for one year. Before we begin, I would like to quickly review a few housekeeping matters. First, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements, and are encouraged to review our SEC filings for more complete discussion of factors that could impact our results. Except as required by Federal Securities law, Genesis HealthCare and its affiliates do not undertake to publicly update or revise any forward-looking statements or changes that arise as a result from new information, future events, change in circumstances or for any other reason. In addition, any operation we mention today is operated by a separate independent operating subsidiary, that has its own management, employees and assets, references to the consolidated company and its assets and activities, as well as the use of the terms, we, us, our, and similar verbiage are not meant to imply that Genesis HealthCare has direct operating assets, employees or revenue or that any of the various operations are operated by the same entity. Furthermore, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon at the exclusion of GAAP report. GAAP to non-GAAP reconciliations are available in today's press release. To facilitate comparisons before and after the February 2015 combination with Skilled Healthcare, we've also provided certain non-GAAP financial information on a basis assuming the combination of Skilled Healthcare and Genesis HealthCare occurred at the beginning of each reporting period. This data is labeled pro forma. Also, when we reference earnings per share, we are always referring to diluted earnings per share. With us on the call today are George Hager, Chief Executive Officer; Tom DiVittorio, Chief Financial Officer; and Jason Feuerman, Senior Vice President of Strategic Development and Managed Care. And with that, I will turn the call over to George Hager, CEO of Genesis HealthCare.

[George Hager:]

Thank you, Lori. Good morning and thank you for joining us. Today I will provide an update on our value-based initiatives, portfolio management and strategic transactions. I will then turn the call over to Tom DiVittorio, our CFO, for details on our earnings, balance sheet and guidance. After our remarks, we will be available to answer your questions. But before I discuss progress on our value-based initiatives, I'd like to provide an overview of the current operating environment, which had a significant impact on our first quarter earnings and our outlook for the balance of 2016. Genesis and all of post-acute care are clearly in transformative phase, as we migrate from fee-for-service to pay-for-value. For several quarters now we have been talking about an industry climate that is producing near-term headwinds against organic census and skilled mixed growth. Those headwinds strengthened in the first quarter of 2016 in the form of a 170 basis point year-over-year decline in same-store skilled census. This decline equates to over 1,200 fewer average daily census patients in the first quarter of 2016 as compared to the same period last year, a 12% reduction. There are several factors at play, and it is critically important to understand that some are strategic, some are seasonal and others are environmental. As we analyze the 12% decline in year-over-year skilled census, we estimate one-third of the decline is attributed to a 5% contraction in the length of stay of our short stay Medicare indemnity and Medicare Advantage patients. Activities among managed care payors, conveners and acute care hospital systems to reduce skilled nursing length of stay continue to have an impact. The length of stay is increasingly being impacted by intentional actions taken by us to manage down lengths of stay and avoidable hospital readmissions where clinically appropriate. Lower lengths of stay and reducing avoidable hospital readmissions, had and will continue to reduce our near-term skilled patient days. But these measures are absolutely vital to our long-term success in value-based system. The other two-thirds of the decline in year-over-year skilled census are attributed to lower skilled patient admissions. As we further analyze admission data, we estimate that half of the admission decline is due to flu and weather. The first quarter of '15 experienced an exceptionally intense influenza season as compared to a relatively mild season for flu and flu-like illnesses in the current year. Last year we also saw exceptionally harsh winter weather patterns, geographies where we our have greatest concentration, the Northeastern and Mid-Atlantic regions of United States, whereas the most recent winter season was one of the warmest on record in these markets. Both flu and weather-related admissions are important contributors to the strong seasonal skilled mix trends we typically see in the first quarter of the year. The other half of the admission decline appears to be caused by initiatives among acute care providers, managed care payors and conveners to diverge skilled nursing referrals to home health or other community-based care settings. We believe a significant percentage of the reduced skilled admissions fall into the two CJR program DRGs. On April 1, 2016, the CJR program went into effect in 67 MSAs throughout the country. Genesis has approximately 100 facilities downstream from CJR hospitals in 22 MSAs. While the program went into effect on April 1, 2016, we believe many hospitals were preparing prior to the actual effective date. Hospitals at risk under the CJR program as well as the hospitals not mandated participated in CJR are more actively directing lower joint discharges home. We also observe that acute care hospitals are more actively managing the discharge of all patients, with a goal of reducing the rate of post-acute center-based services. And last, we continue to see acute care hospitals increasing the use of observation status and discharging patients in less than three days. Preventing Medicare beneficiaries from accessing their Medicare benefit for skilled nursing services, following an episode in the hospital. Despite this near-term pressure, we are confident and optimistic about the long-term opportunities for Genesis to capitalize on our unique clinical capabilities, to strengthen our acute care and managed care relationships and our market density. We expect these differentiators will position Genesis to capture a disproportionate share of patients coming from acute care providers and payors, as they increasingly focus on outcomes and cost. We continue to pursue a significant number of strategic collaboration opportunities with acute care and managed care partners in our core markets. In the meantime, we will remain focused on the long-term drivers of our business, providing high-quality outcome-oriented care, continuously adjusting our cost structure with a changing business climate, leveraging our scale to strategic growth opportunities and positioning Genesis to succeed in a world that rewards value-based providers. Moving now to our progress with value-based initiatives. I will start with the most recent development, which is our participation in the Medicare Shared Savings Program or MSSP. Effective January 1, 2016, our newly formed Genesis Healthcare ACO was approved by CMS as one of the 100 new MSSP ACOs. Genesis Physician Services is the participating entity in this ACO. For the past year, we have been highlighting Genesis Physician Service capability as a critical differentiator to improving outcomes and attracting up and downstream value-based partners. Now, this unique capability affords us an opportunity to participate with CMS in shared savings. Through the MSSP, Genesis Healthcare ACO is participating in the upside-only gain share track, which requires us to save at least 3% of the total Medicare spend under management, in order to share at up to 50% of the savings with CMS. Once the 3% hurdle has been reached, Genesis begins sharing based on the first dollar of savings. Preliminary data shows that we are managing approximately 15,000 Medicare fee-for-service beneficiaries with annualized Medicare spend of more than $800 million. Although the final gain share reconciliation will be completed by CMS until mid-2017, we expect to have sufficient benchmark data to measure and monitor performance beginning in the third quarter of this year. I can't emphasize enough the opportunity this program affords. I can assure you, we are focused on clinically-based initiatives to achieve the outcomes necessary to meet the shared savings threshold. To this end, in April 2016, we hired Dr. Richard Feifer, as the Chief Medical Officer of Genesis Physician Services. Previously Dr. Feifer was the Chief Medical Officer of National Accounts at Aetna. Dr Feifer will lead our nearly 400 full and part-time physicians and nurse practitioners, who provide more than 600,000 visits annually to residence and patients of Genesis. Dr. Feifer's addition is another example of our commitment to clinical excellence and further investing in our value-based capabilities. Now to the Bundled Payments for Care Improvement demonstration program. As you may recall, Genesis is the largest sniff participant in the Bundled Payment Model-3 initiative with 32 centers. We are grateful for the knowledge gain to date in this program and we are encouraged by the positive results thus far. We have received two quarterly reconciliations since our last earnings announcement. The first represented reconciliations for the second quarter of 2015 and the results for three centers were not significant. The second reconciliation represented 13 facilities from the third quarter of 2015 and netted a positive gain of $0.5 million. We expect to receive the reconciliation for the fourth quarter of 2015 in July of 2016, which will include all 32 facilities participating in 38 of the 48 available bundled families in the program. I am confident we will see further improvement in the coming BPCI reconciliation periods. Before I go any further on our value-based initiatives, I want to emphasize a key point. It is critically important to understand that the upside economics to Genesis from these initiatives will not be fully realized and recorded in our financial statements until future periods, despite the fact that we are impacted by their downside effect on our near-term skilled patient census. This is because of the retrospective settlement periods for these programs extend anywhere from nine to 18 months from the measurement dates, and because there is limited historical data to reliably estimate any upside earned by Genesis until the settlements are finalized. Specifically, Genesis has not yet recorded any estimated retrospective settlement under the BPCI model during programs for the quarters ended December 31, 2015 or March 31, 2016. Nor have we recorded any estimated retrospective settlement under the MSSP program for the quarter ended March 31, 2016. Looking ahead, Genesis expects accounting recognition for the BPCI program to lag two quarters behind each measurement period. With respect to MSSP, Genesis does not expect to recognize a material amount of shared savings until settlement occurs in 2017. The next value-based initiative I want to highlight today is Vitality to You. We continue to make great progress with this new service offering that extends Genesis Rehab Services into the community. Vitality to You is yet another unique Genesis capability, attractive to our hospital partners and payors, looking to improve outcomes at a reduced cost per episode. Vitality to You saw revenue expand 13.7% over the first quarter 2016 as compared to the fourth quarter of 2015. Our engagement in value-based initiatives, even though they have a near-term negative impact on our skilled census are certainly vital to our long-term success and enables us to participate in the upside economics offered by these programs. We will continue to aggressively pursue opportunities to participate in the value created by these programs. And we will keep you posted of our progress. Now in the area of portfolio management. On January 1 we sold 18 non-strategic Kansas assisted living facilities, using $54 million of the $67 million proceeds to pay down our real estate bridge debt. In March, we closed on the sale lease-back of a corporate office building, generating $9.4 million of proceeds, used to pay down our revolving credit facility. And after the quarter end, effective May 1, we completed the sale of our hospice and homecare business for $84 million, using $72 million of the cash proceeds to pay down our long-term debt. We are very pleased with our progress on deleveraging transactions. So far this year we have reduced our funded debt about $136 million through non-strategic asset sales. And finally, strategic transactions. We are making great progress integrating the newly acquired Revera centers. There are no surprises to report and the facilities are transitioning smoothly. We do not have an update on the pending change of ownership approval to acquire the remaining five Revera facilities located in State of Vermont. We are not aware of any open issues with the state, other than completion of their due diligence. On April 1, 2016, we expanded into the Pittsburg market with a purchase of a 194 bed skilled nursing and rehabilitation facility for $12.9 million. This owned facility was financed with $9.9 million bridge mortgage financing, with plan to submit for the HUD guaranteed mortgage financing in 2016. Also, in April, Genesis signed lease and joint venture agreements to construct two 120 bed PowerBack Rehabilitation facilities in Pennsylvania, one in Exton, PA and one in Allentown, PA. Genesis will contribute approximately $1.4 million in equity to finance the joint ventures, representing a 25% ownership interest in the real estate. These projects are expected to break ground in the fall of 2016. Genesis Rehab Services is also making significant headway in China. Our Bang Er joint venture relationship is progressing as plan as three hospitals are now opened, and a fourth open yesterday, and an additional four are projected to open by the end of the year. To date, we have seen hospital case load increase from average daily census of 128 to 171 and rehabilitation case load has increased from 30 patients to 66 patients with 135 patients expected. Before I turn the call over to Tom, I want to recognize and thank to nearly 90,000 Genesis caregivers and employees for their care and compassion they deliver each and every day to our patients, our residents and their families. I also want to acknowledge all the nurses across the country as we celebrate the essential role nurses play in healthcare during National Nurses Week. With that, I'd like to turn the call over to Tom DiVittorio, our Chief Financial Officer.

[Thomas DiVittorio:]

Thank you, George. Good morning, everyone. I'll start with the recap of first quarter earnings, then move to the balance sheet and financial guidance. Revenue of $1.462 billion in 1Q '16 were 4.2% over revenue in 1Q '15, with growth principally fueled by the net impact of 22 in-market in-patient facility acquisitions and two newly built facilities, offset by the sale or divestiture of 25 non-strategic or underperforming facilities. Adjusted EBITDAR was $178.4 million in 1Q '16 compared to pro forma adjusted EBITDAR of $185.4 million reported in 1Q '15. As anticipated, the 2016 quarter includes $6 million of higher self-insured risk and bad debt expense, which was discussed on our last quarter conference call and reflected in our 2016 guidance. Adjusting for these expenses, EBITDAR in 1Q '16 was essentially flat against 1Q '15. Drilling down further, 1Q '16 versus 1Q '15 EBITDAR was favorably impacted by $7 million from the previously mentioned newly acquired and built facilities offset by the lost earnings of divested facilities. These year-over-year gains were offset by the earnings impact of the contraction and skilled patient mix noted earlier by George. Cash rent grew $5.7 million in 1Q '16 versus 1Q '15, with $3.5 million of the increase from scheduled rent escalators and the remaining $2.2 million increase attributed to the rent of newly acquired and built facilities. Free cash flow in the LTM March 2016 period was approximately $57 million. Although, our overall results fell below our expectations due to the unanticipated trend in skilled census, we executed exceptionally well against our operational and balance sheet objectives. First on the operational side. We are very pleased with the integration and execution thus far on the recently completed Revera transaction, and we continue to track well against our $25 million run rate target for skilled healthcare synergies by mid-2016. Our strategy of acquiring and building strategic assets in core markets along with the skilled healthcare synergies, serve to offset the organic EBITDAR contraction caused by reduced skilled patient census. Second, the conversion of skilled healthcare's decentralized billing and collection function to Genesis' centralized platform by mid-2016 continues to be on track. We are encouraged by the improvement in collection metrics of the former skilled facilities that have fully converted to the Genesis platform. And third, controllable routine expenses in both the in-patient and rehabilitation therapy segments were well managed, despite the lower than anticipated skilled census, with in-patient operating cost per patient day held at targeted levels and therapist efficiency improving to 70% in 1Q '16, up from 69% in 1Q '15. Now, turning to the balance sheet. Our key capital planning priorities continue to focus squarely on refinancing and deleveraging funded debt in order to reduce fixed charges and grow free cash flow. There are two components to our refinancing initiatives. First is to refinance $494 million of real estate bridge loans entered into in the Skilled and Revera transaction. And second is to refinance the $225 million term loan facility, maturing in December of 2017. We made excellent progress on the bridge loan refinancing initiative so far this year. On January 1 we used $54 million of proceeds from the sale of our Kansas ALF portfolio to pay down real estate bridge debt. In March we closed 10 HUD guaranteed mortgages, totaling $67.9 million and closed an additional three HUD mortgages, totaling $9.2 million subsequent to quarter end. The average fixed interest rate on the completed HUD loans was 4% with maturities ranging from 30 to 35 years. We continue to expect to refinance the remaining $363 million of real estate bridge loans with lower cost HUD guaranteed mortgages or other permanent financings between now and the end of the year. With respect to the term loan facility maturing in December 2017, last week we paid down the term loan of $72 million from the proceeds generated by the sale of our hospice and home care business, bringing the term loan balance to approximately $153 million. We plan to refinance the remaining term loan balance using proceeds from additional asset sales, available borrowings under our revolving credit facility and proceeds of a newly issued term loan currently being marketed with new credit parties. At March 31, our liquidity position was $195 million, consisting of $52 million of cash on hand and $143 million of available borrowings under our revolving credit facility, giving us the flexibility to partially repay the term loan with currently available capital. In summary, our capital strengthening initiative thus far in 2016 have resulted in $136 million of funded debt reduction and $77 million of debt refinancing through HUD. Moving now to our 2016 guidance. As a result of the current business climate and the resulting contraction in skilled patient mix trends, we are revising our full year 2016 guidance to the following ranges

[Operator:]

[Operator Instructions] Your first question comes from the line of Joanna Gajuk with Bank of America.

[Joanna Gajuk:]

So just to come back on first on the discussion, the follow-up on EBITDAR commentary around, that I guess you mentioned that organic EBITDAR decline. So can you please try to quantify? And also, I get stuck about the $7 million from new facility opening. So are you afraid to Revera being added in the quarter or you're talking about just PowerBack and other new facilities. So what I'm trying to get is sort of comparable same-store EBITDA year-over-year trends, because when you in the press release talk about 4%, when we adjust for Revera and also the kinds of facilities, we're coming up with the 6% decline year-over-year, so is that the right number or there is some other adjustments to be made here in order to kind of see the organic EBITDAR performance in the quarter?

[George Hager:]

Juliana, there is other year-over-year contributors other than just Revera. If you sort of go back over the course of the last year, I mean we've acquired a number of buildings, a few in Texas, a few in Colorado. So when we reference the $7 million of year-over-year impact, it's really the combination of all of those acquisitions and new builds coming online offset by divestitures. So there was roughly 22 facility acquisitions year-over-year minus 25 divestitures, but the acquisitions contributed minus the effect of the divestitures with positive to our earnings by $7 million. Now, we have other drivers in the business, of course, as well that drive growth. Our rehab business generated some year-over-year growth. We continue to be very focused, of course, on managing our costs. So I think what you're asking is, precisely, what was the effect of the year-over-year contraction in skilled mix census, and I would put that number somewhere in the $7 million to $10 million range.

[Joanna Gajuk:]

I'm coming up, what I guess, a little bit a higher number. So if I adjust for the $7 million of these newbuilds net of divestitures, and then also, I guess, for the Revera, which sounds like that's separate or maybe that's like 11% [multiple speakers].

[George Hager:]

No. That's included in that.

[Joanna Gajuk:]

Including the $7 million, actually?

[George Hager:]

That's correct.

[Joanna Gajuk:]

And also separately on the guidance reduction, the magnitude of it, can you just walk us through, because I guess you reaffirmed the guidance two months ago, and what happened between now and then that led you to cut guidance by that much, which sounds like that's really the sort of surprising effect of the new payment models on the business, but I guess back then you kind of would have expected some pressure. So can you just walk us through what happened between now and then? And what's driving the guidance for reduction here?

[Thomas DiVittorio:]

Well, if you go back to some of the color that we provided when we gave our 2016 guidance, we projected that our skilled census and overall occupancy would be relatively flat in 2016 versus 2015. And when we reaffirmed our guidance in mid-February, our skilled census was certainly lagging behind budget and the prior year, but what was very difficult for us to gauge, Joanna, at the time was how much of that softness was being driven by the flu and weather, which if that were the case, we fully expect it would correct itself as we moved into second quarter and beyond. It was also difficult to gauge how much of it perhaps was a late start to our normal 1Q seasonal uptick that we see in skilled census, which as we've gone back and looked at prior years, sometimes we see that uptick start to occur in second week of January, sometimes it doesn't occur until the first week of February. So it was just a little bit difficult for us to gauge how much was flue, weather, the timing of maybe our normal seasonal pattern. And last, since we have given annual guidance not quarterly guidance, think we felt even if we had a moderately soft first quarter, we could still make up any shortfall in the first quarter in the last three quarters well within the range of our original guidance. But as the back half of the quarter unfolded, our census challenged that it worsened, and as we began to gather more intelligence as to what was really happening on the ground, it became pretty apparent that the admission volumes were being influenced by more than just flu and weather and perhaps a late start to the seasonal census uptick. And so really it wasn't until late February well into March that we realize we had an environmental issue in addition to just perhaps a seasonal issue.

[Joanna Gajuk:]

So now what do you expect this skill mix to be for the year?

[Thomas DiVittorio:]

Well, Joanna, I think we would expect our skill mix to follow the same sort of normal seasonal trend that we typically see and the first quarter is typically are the peak for us. So we're really just starting off on a much lower base than what we had originally expected. So we would expect to see some, I would say, flattening to declining skilled census in the second quarter that's continuing to decline seasonally in the third quarter, which is what we would expect with maybe a little bit of uptick than in the fourth quarter. But the adjustment that we made to guidance is exclusive being driven by the degree of lower level of skill mix in the first quarter and then starting from that base moving forward.

[Operator:]

Your next question comes from the line of AJ Rice with UBS.

[Brandon Fazio:]

This is Brandon Fazio for AJ here. Just wondering if you could discuss some of the conversations that you're having with health systems that are looking to create narrow networks for skilled nursing facilities in the markets, and whether those economics makes sense for you. And just how much of an advantage your readmission metrics are as part of that discussion?

[George Hager:]

The conversations depends on the needs of our hospital partners in each given market. And they range literally from hospital systems approaching us to actually lease beds to get access to a source for discharging patients, when there is an inability to discharge in certain markets. I wish there was more of that than there actually is. We do find some markets where hospitals are having difficulty discharging, and I think to a great degree its due to the lack of clinical skill in the post-acute service area in those markets, all the way to gain sharing opportunities with respect to CJR, ACO and other bundle payments, bundle model to payment initiatives, looking actually at -- the basis of conversations is principally around, we would like to make commitments around episodic cost in exchange for body. And to us that's the key. And episodic costs are actually influenced by readmission rates, as well as length of stay. And that's where we bring in our unique capabilities, like GPS, the Vitality to You; we can accelerate discharge from the skilled nursing center, continue to follow patients home, and provide therapy in a much less costly setting. And look, I wish that we were having these conversations systematically. And we could commit to when we would expect to see a greater concentration of referral of volume into our centers. That we can't do as we sit here today, but the level of collaboration conversations are increasing daily, and we are encouraged by what we're seeing around all of our value-based programs.

[Brandon Fazio:]

And just one follow-up here. Your GPS and your Vitality to You business, how big are those combined at this point? And how easier are they to scale? And what kind of growth you can expect from those kind of businesses?

[George Hager:]

Case load for Vitality to You today is somewhere around 1,600 patients, and once again small, I mean, we are still looking at ruling out that capability and there are hollows to regulatory barriers and constraints in certain market to get that rolled out. But whereas in place we are seeing significant growth. So relatively small, but we see tremendous upside there. GPS, as I've said, is 400 physicians and these are full-time or substantially full-time physicians and nurse practitioners providing about $600,000 business a year. But the way I would look at the opportunity around GPS is more around the ACO. And then I think it's important for the market to understand that MSSP is very different than bundle payment. And I think those distinctions, everyone should understand. So if you think about 15,000 patients and $800 million of Medicare spend that we are participating in, the way MSSP works, if we do achieve the 3% threshold, which would be $24 million of savings on that population. If we achieve 3%, we gain share of 50% of that 3% starting with $1, which means that there would be, if we achieve anything in BPCI, you would estimate that there will be a $12 million gain share; 3% of $800 million at a 50% gain share rate. I'd also like to emphasize that that is one-directional program where there is no downside risk in that program.

[Brandon Fazio:]

Is that after the $24 million that you get to 50% or 50% of the $24 million?

[George Hager:]

We get 50% of the $24 million, if we achieve the $24 million of savings, that's different than the bundle payment program, where literally the way the bundle payment program works against episodic cost. CMS takes the first 3% and we gain share of 100% above the 3% savings. So it's different. But also in an order of magnitude, our 32 bundled payment facilities with the 38 episodes that we are bundles that we are participating in, so approximately a $100 million of Medicare spend, whereby the MSSP is a much larger opportunity. We are exposed to, and once again, gain share only participating in value created around $800 million of Medicare spend. So we are just shy of managing $1 billion of Medicare spend in the two programs, but by far the bigger opportunity for us is the Medicare Shared Savings Program.

[Operator:]

Your next question comes from the line of Chris Rigg with Susquehanna Financial.

[Frank Lee:]

This is Frank Lee on for Chris. Just a follow-up on the BPCI initiative, and you mentioned that you would see the reconciliation from the third quarter of $0.5 million. Could you just give a sense for what the range of outcomes is for that number and what is the ultimate target you're looking at? And then what is your view on adding additional facilities to that program?

[George Hager:]

I'm probably going to get that, and the last part of that question I'll turn it over to Jason Feuerman. But the $0.5 million gain share, I'd emphasize two points, it's only related to 13 facilities that we had in the program for the third calendar quarter of 2015 reconciliation to September 30 quarter. Today, we have 32 centers in the program. So I think it wouldn't be unfair to extrapolate that across now 32 facilities versus 13, and also, to emphasize that it was our first quarter really to have any meaningful presence in the program. As I had said in my earlier comment, we are learning tremendous amount, the access to data that we have through participation in the program is invaluable. We'll continue to learn and I think improve upon our ability to generate improved results, better outcomes, reduced cost in those centers and actually apply that to our other gain share initiatives like MSSP. As far as our ability to bring additional facilities in; I think that program is closed as it was the demonstration, but I'll ask Jason to comment.

[Jason Feuerman:]

Yes, George, that's correct. So there is no long run opportunity under the current BPCI program to enter new facilities in. But keep in mind, as George referenced in Medicare Shared Savings Program that is operating in approximately 180 of our facilities. And we've got plans to, as we expand GPS, we have plans to expand our presence in that program to a much larger portion of our portfolio. The BPCI, it's clearly a demonstration program. It looks like it's going to have an expiration period and that they'll renew it some time third quarter of 2018, but MSSP is really the big time winner here. And the learning that we've gotten from BPCI can transcend in Medicare Shared Savings. And again, it will impact a much larger portion of our portfolio.

[Frank Lee:]

And then regarding the [ph] length of stay time and short stay Medicare and Medicare Advantage, is there a way we should think about how much of that decline is related to the company's own initiative? And your active participation in these programs versus the outside sources that you highlighted, such as the managed care payors, conveners and the referral sources. And then is there anyway to counteract some of the actions of the outside sources in the near-term and the long-term?

[Thomas DiVittorio:]

I would say, it's very difficult to gauge how much of length of stay decline is being generated by our own initiatives versus external factors. But I will say that we have increased our focus in that area, particularly in the last six months as we've entered into these value-based programs. And so clearly the rate of decline in length of stay that we saw this quarter versus last, accelerated, I would say, probably doubled from where we've seen it decline in pervious periods. So probably the best information we have is half is generated by our own actions and half may very well still be external.

[George Hager:]

I had a couple, just to add it to our comments to that. One, in our bundled payment centers, the length of stay decline is about double what it is in the rest of our portfolio. So clearly, where we have an opportunity to participate in gain share type program, once again, where it is clinically appropriate where we get our patients to achieve -- and drive clinical program to achieve a better outcome at a lower length of stay. We are finding ways to do that. I would also say that, our view of where the markets heading is we don't necessarily want to try to stand in the way of our hospital partners and/or our managed care partners in looking at innovative clinically appropriate ways of reducing episodic cost, our hope is to help them and support those initiatives and goals of our partners, and with that we expect to increase our market share, as they over time increasingly concentrate their referrals.

[Operator:]

Your next question comes from the line of Dana Hambly with Stephens.

[Jacob Johnson:]

This is Jacob Johnson on for Dana. In preparing this new guidance, is there anything you guys changed about your approach or forecasting process this time around or any changes in your visibility into the business?

[Thomas DiVittorio:]

Well, I would say that given the decline that we saw in skilled mix, we spent a lot more time really trying to understand what the dynamics were closer to the ground on admission flow. But beyond that, as I mentioned to Joanna, the only change that we made to our guidance versus what we previously released was the anticipated impact of the skilled census trends that we experienced in the first quarter. All the other drivers in the business are in line with what we have previously anticipated, and in the first quarter we executed really quite well against our original guidance, where if not for the skilled census decline.

[Jacob Johnson:]

In the past, you guys had given some good examples where you've seen shorter length of stays, but at the same time were able to gain market share. So from the guidance it appears shorter length of stays or headwind at the macro level, but are you guys starting to see market share gains across sort of all facilities or is it too early to tell?

[George Hager:]

I would say, what we are seeing is very isolated at this point and incremental. It's not enough to really move the needle. I would say, the pressure is more broad-based. Our ability to offset that is incremental at this point. But we are seeing significant increase in conversation and interest of our partners to collaborate. I would say that that really has not yet generated the concentration of referral volume that we expect there over time. I do think we are sort of more in the first half of the game that we are in the second half of the game as far as the ultimate migration into these value-based programs, where the average party is truly concentrating referral volumes as a result of the outcome. So I'd still think a lot more opportunity to come there.

[Jacob Johnson:]

And one last one from me. On Welltower's call last week, there seem to be some concerns regarding RAC audits. I guess that's something we've never really viewed as a large issue, but just wondering if you guys have any thoughts on that?

[George Hager:]

Well, look our thoughts on it are that it's just, I would say, one of many audits, and probes, and reviews that are conducted by whether its government sources or our own internal auditing, or our independent auditors, so our organization is very well-geared towards supporting audit processes like that. We have not received any indications yet that we've been selected for audit, but to the extent that we are and we understand that it will, that we're expecting some focus in the future on therapy utilization that we'll be very well-prepared for any RAC audits that we engaged with. We are very comfortable with all of there clinical documentation, particularly with respect to therapy. I would describe RAC audits as an administrative burden to us. They can have a financial impact, if there are claims that are denied and we ultimately have to work through an arduous appeal process, but we are very prepared to manage through that if and when we have RAC audits.

[Operator:]

Your next question comes from the line of Joanna Gajuk with Bank of America.

[Joanna Gajuk:]

Just a follow-up question on your free cash flow guidance, which I guess, now you expect $52 million for this year, but that's recurring free cash flow. But how should we think about, I guess, as reported free cash flow for the year given the size of -- the magnitude of these adjustments? So how should we think about now the free cash flow all-in for the year?

[Thomas DiVittorio:]

Joanna, it's not unusual for us to have some non-recurring adjustments principally around transaction related costs. We view those as really an investment in whatever transaction we're engaging in, and that will ultimately have a return. There might be some other small legal costs and things like that associated with some of our regulatory matters. But as we think about 2016 relative to 2015 and even 2014, there was obviously a very significant level of activity around large transformative transactions that generated a lot of, I would call, the non-recurring costs. But we think about 2016 and what we're focused on we don't expect those non-recurring items to be anywhere near the level you've seen in recent years.

[Joanna Gajuk:]

And just a follow-up to my question that I was trying to get at early on the EBITDAR, the organic EBITDAR number. So when I talk about 6% to 7% decline, am I in the ballpark, because I'm still not sure I understand the $7 million, because in the press release you talk about the $7 million from Revera, and net of $2 million assets sold, but then create those additional assets as you might have audit over the year. So can you help me still to understand the organic sort of change in the quarter for EBITDAR?

[Thomas DiVittorio:]

And the estimates that we gave you, Joanna, was that, you should expect that there was organic contraction in the in-patient -- just in the in-patient business in the neighborhood of $7 million to $10 million.

[Operator:]

And at this time there are no further questions. I would like to turn the call back over to George Hager. End of Q&A

[George Hager:]

Just appreciate everyone's interest. Obviously, the industry overall is having challenging times. And I assure you, we are focused on the realization of long-term strategic value for all of our stakeholders, patients, employees and investors, despite just near-term pressure. We continue to be very confident and optimistic about our positioning in the marketplace. And thank you all for your support.

[Operator:]

And that does conclude today's conference. You may now disconnect.