LHC Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the LHC Group Q2 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I’d now like to turn the conference over to Eric Elliott, Senior Vice President of Finance. Please go ahead.

[Eric Elliott:]

Thank you, Viola, 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 will hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Josh Proffitt, Chief Financial Officer of LHC Group. Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to comments regarding our financial results for 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.

[Keith Myers:]

Thank you, Eric, and good morning, everyone. Thanks for being with us today. I’ll begin the day with a brief overview of our performance for the second quarter and then take a few minutes to address 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 will than 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 have 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 the same period, our organic home health admissions has 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 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 [ph] the CMS Star ratings for home health quality and patient satisfaction for the past five quarters is perhaps the most visible indication of our quality leadership. But with more than 60% of our home health locations earning HomeCare Elite raking and with our still being the only national home health provider that is a 100% accredited by the Joint Commission, we’ve long demonstrated that quality care has been the top priority at every LHC Group locations, since we started the Company. In addition to our reputation of quality care, I’ll add that conversion to a 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 ceded favor as acute care providers search for the best partners to serve their patients, post-acute need, so that they can focus on their core acute care operation. LHC Group is invariably on the short list of partners to be considered because after nearly two decades of partnering with acute care providers, we lead the industry in a 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 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’re 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’ve now announced agreements to acquire revenues of 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’d 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 rate for 2018 are in line with the 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, 1% home health payment update and 0.97% adjustment to the 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 of measures and OASIS items. CMS estimates the overall impact to industry at a decrease in payments of $80 million or 0.4%. In addition, CMS is made an initial proposal of a revised payment system to begin in 2019, referred to as HHGM, an acronym for Home Health Groupings Model. As currently drafted, LHC along with the partnership with Quality Home Care, the National Association for Home Care, State Home Care Associations across the country along with industry leaders believe this new model would do more harm than good as it would recreate 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 payment by as much as $950 million or approximately 4.3%, if implemented in fully non-budget neutral matter, or by $480 million or approximately 2.2%, if partial budget neutrality adjustment were applied in 2019 and phased out in 2020. This impact does not include any positive offset from the 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 with 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 actually [ph] congress. In closing, there are two basic things to remember as we move forward with our work on HHDM. 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 homecare 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 transparency with the agency. We are confident that our collaborative meetings with HHS, CMS and OMB, and our intensive advocacy and broader support among legislative and governance will lead to at worst, a better model, implemented a budget neutral manner over multiple years. To be clear, LHC Group along with the partnership with Quality Home Health Care, the National Association of Home Care, State Home Care Associations around the country and industry leaders are oppose to the rule in its current forum but permitted to working together with CMS to get this right. Second ,we know that home health is widely viewed as a critical component of strategy to reduce healthcare costs while maintaining quality outcomes and higher patient satisfaction. The recent Medicare trustees report highlighted greater support for home healthcare 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 healthcare 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 costs and maintain high quality ratings which positions us to share in the upside from value-base reimbursement models. Now, I’ll turn it over to Josh to discuss our financial results in more detail. Josh?

[Josh Proffitt:]

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’re so blessed to care for, and to all of 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 in fulfilling its mission to care for the elderly and frail population in our service area, and we’re 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 six 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 six 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 six 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 six months of 2017, compared with the same periods of 2016. This growth in same store revenue is due to our growth in same store admissions of 10.4% for the second quarter and 11% for the six months and a 3.4% increase in patient acuity in the home health service line, which is offset by an estimated to 2% reduction in Medicare 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 six months as compared to 39.3% in the second quarter and 39.2% for the first six months of 2016. The decrease in gross margin year-over-year is due to the following few factors

[Don Stelly:]

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 am 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 30th, as compared to the same periods last year. Statistics, we believe proving the value we create for hospitals and systems as they effectively mange patients to the most appropriate care settings. In preparing and carrying for this organic growth, our team did very nice job of capacity planted inside of three-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 1st, through April 1st, 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 know operational disruption for those agencies. Pleased to say more of the same to be stated for our Baptist Memorial transaction. In short, these agencies area also now fully integrated and completely handed over to our operations team. We are 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 are 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 the 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. Then national average has been within a range of 3.24 to 3.26 for the last five quarters. The report also shows that approximately 95% of our agencies were rated four stars or better, compared with 81% and 67% for the next two 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 four stars or better while the next five 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 nine states in which CMS will be rolling up value-based payment adjustments, beginning of course in 2018. For companies with the quality management, the 98 percentile graded, [ph] 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 the 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 a 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, this concludes our prepared remarks and we’re now ready to open the floor up for questions from those on the call.

[Operator:]

Thank you. [Operator Instructions] Our first question is from David MacDonald with SunTrust. Your line is now open.

[David MacDonald:]

Good morning, guys. Just a handful of questions. Keith, first, can you talk, if I just look at the number of facilities that you picked up with the CHRISTUS deal, and then look at the number of facilities they have total. It’s looks like there is 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?

[Keith Myers:]

Sure. It’s similar to LifePoint where you have an existing footprint, but the vision of leadership at the hospital 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 -- data by CHRISTUS, so CHRISTUS today I think has a 60 markets. And so, obviously, the vision is to build out home health and hospice in every one of -- 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, now they choose to speak to hospitals. The existing business is great and we want that. But what we’re looking for is to hear that long-term commitment to home health. In years past, I can remember the time when we would take anything we could get. But, now, it’s a -- we’re seeing more and more that hospitals see home health as [ph] their strategy.

[David MacDonald:]

And then, Keith, just, can you spend a minute on the pipeline? When you look at the pipeline, I mean, what percentage of the pipeline now is joint venture opportunities? And then, within that, what percentage of the joint venture opportunities are with multihospital systems, let’s say three or four hospitals or more?

[Keith Myers:]

I think, we have only two opportunities in the pipeline that are single hospital, and that would -- that’s 2 out of roughly 20 that are at various stages. So, it’s really flipped on its head. Five years ago, that would have been the opposite, just been the reverse.

[David MacDonald:]

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 significant number of those looking for service offering like you guys have signed up with, in terms of CHRISTUS?

[Keith Myers:]

That’s a good question. So, CHRISTUS is different in that they had this legacy LTACH piece that used to be -- it was a separate division. It was referred to as Dubuis. 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 lot of -- 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 healthy piece. And probably up to five 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 a bit [ph] on needed today.

[David MacDonald:]

And then guys, just one final question. Last quarter, you talked a little bit about seeing a broadening of your referral days. 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 have come on since January 1, in terms of increasing the number of referrals they’re sending you?

[Don Stelly:]

It’s a good question, and we have and we do track it, specifically we have 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 voluminous number, to see their throughput. Instead, I just kind of rolled it all in, looked at the total unique physicians sending it to us in Q2 was roughly 16.5. So, I guess, I disclosed that last quarter and I’d say it again, and I appreciate 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 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 and your route planning. So, we are 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 80-20 rule.

[Operator:]

Our next question is from Frank Morgan with RBC Capital Markets. Your line is now open.

[Frank Morgan:]

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

[Keith Myers:]

The impact is around while 1% overall, I am looking at Eric to confirm. But, we are highly confident and highly confident that it’s -- the rural add-on is going to continue and probably be part of the next tender package in the fall. When I say we’re highly confident, 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, what [ph] it means to Energy and Commerce. And then on the Senate side, we have so many senators that have -- because of the way senators that have some -- they have rural constituents. So, you always have huge support in the Senate in general. So, we are pretty confident about it, but if it did, it’d be a 1% impact.

[Frank Morgan:]

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

[Don Stelly:]

We do see, and I think, I’d have to go back to Eric 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 at a full disclosure, with July 4th, being as it was on that week day, most of the volumes we have seen in hospitals and everywhere else we soft; we came out of it nicely. So, 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 July’s and the August in that soft period. So, I hope I have answered that for 2017. And to be candid with you, I am 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.

[Frank Morgan:]

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 any kind of color around valuation that we could draw from that? And I will hop off. Thank you.

[Keith Myers:]

N, Frank, 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.

[Operator:]

Our next question is from Kevin Ellich with Craig-Hallum. Your line is now open.

[Unidentified Analyst:]

Thanks. Good morning. This is actually [indiscernible] 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 have the growth rates been in those businesses?

[Josh Proffitt:]

This is Josh. 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 LTACHs, in the six LTACHs that are part of the transaction and then the other $40 million of the $80 is pretty evenly distributed among home health, hospice and CBS.

[Don Stelly:]

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 really good job of bringing in some talent over the last two years, leadership talent that put some fundamentals into place that will build upon, but they did not truly have growth in those agencies and they were still struggling and still are to get the costs in line with their present volumes, and that’s why we guided to the earnings effect as Josh has then put out. So, the good news is that the hurdle rates will be nice when it does follow the same store comp like Frank I think was asking the question about. So, very little growth, lots of upside.

[Unidentified Analyst:]

Very good. Following up on that. Usually, 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 multi-disciplinary, large system like this that slows that progression or could it actually be quicker because it’s bigger and because there is that infrastructure in place? Just sort of curious as to how you think about that. Since LifePoint, it’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 services?

[Keith Myers:]

This is Keith. Let me take that. It really comes down to the commitment and engagement levels at the C-suite. In CHRISTUS case, there is 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 a 100% of the time and hospitals are running so many different departments, the things like customer service, not just the patients but internal customer service to their own internal referral sources, case management, not things that the home health agencies in a hospital typically focus on and certainly as much as we do. And so, we bring them sales efforts, when I am saying and a culture around growing the business to the agencies that usually doesn’t [ph] exist. And we do that very well, but when it’s combined with a commitment from the Sales-suite in the system, that’s when we see the greatest result, and I think we have that in CHRISTUS.

[Don Stelly:]

And I think, Keith, if I would 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 multi-service collaboration opportunity that we have here. Specifically, I was in San Antonio during the announcement and all of those services sit there, and tie them together and creating the unified value proposition is something we see is an opportunity. You add the fact that they only have literally a handful of sales representatives focusing on outside. We actually -- 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.

[Unidentified Analyst:]

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 they HHGM prospect looming, and I know it sounds like there is 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 in those sorts of things, or a dialogue just continuing despite sort of that factor hanging out there right now? Thank you.

[Keith Myers:]

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. Part of that comes from the perspective of being at this for 23 years now and having come through IPOs and all the other changes over the years that we had to mitigate and work through proposals on. But with regard to how it affects of pipeline, if anything, it’s more likely to accelerate the pipeline. Because it’s a potential risk that hospital C-suite will see for our 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 into consideration when we determine fair market value, because it’s an unknown.

[Operator:]

Our next question is from Brian Tanquilut with Jefferies. Your line is now open.

[Brian Tanquilut:]

Keith and Don, just kind of following up on the discussion on organic growth. So, you’ve 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 stress 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? Just trying to gauge how much runway you have in terms of mining the JV partners and your referral sources to sustain this level of growth?

[Keith Myers:]

I will take the first part of that. So, given the pipeline activity and volume of new JVs we already announced and then the potential growth in those, actually doing better about sustaining those numbers than would have a year ago. And we didn’t anticipate questions ourselves, but Don take the other part of this. And in going forward, in terms of the pipeline that we are 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 are more potential hospitals per transaction now that we have seen in the past. It’s simple math. Don?

[Don Stelly:]

Yes. Brian, I’d love if you want to, we can talk about this or any of you offline because it’s, as you know, pretty complex thing. You asked a couple of embedded questions. First of all, it depends on our hurdle rate as to where I am worried about the actual organic growth percentage. For example, in Mississippi, if there our team there is running at a 3.5% to 4% clip, [indiscernible] because we do have market penetration and it’s a huge admit flow into the portfolio. Whereas if I am running 7% to 8% on the west, I am very displeased. So, the percentage and looking at that number in isolate is something we trying not to do, instead stay 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 relationship phenomenal but some of them have turned over and see swing. With seven announced, [ph] five of them, each of those are at an inflection point in and of itself that kind of creates that opportunity. But, I think -- I forgot who had asked the question earlier. In some cases, we have done such a good job of growing consistently over the last four to five years that those hurdles do get a little tougher to jump, and that’s why I went a little conservative and say and I wouldn’t go ahead and bake in the models of this double-digit going into 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 in length of stay versus other parameters. So, I guess what I am trying to really -- and I don’t know how well I am doing for you, there are multitude of factors that go into that none of which scare us to continue the trajectory that we have been on the last two to three years. This pipeline and the JVs that we have coming in are truly so opportunistic.

[Keith Myers:]

Let me come back to one other thing Brian for you. I think if you think about it in terms of hospital joint ventures, 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. When our pipeline has been less successful in the hospital joint venture side and we have done more free-standing acquisitions in a given year, the growth on those free-standing acquisitions is lower, it’s harder to achieve that organic growth, just as a general rule, not singling out any one.

[Don Stelly:]

So, I guess Brian, together, did we come closer to answering your question?

[Brian Tanquilut:]

It’s really good. Don, for you. You’ve done a good job, bringing down the cost per visit over the last two quarters, we see that’s trickled down. Do you mind just sharing with us what is exactly is driving that and how should we be thinking about your opportunity or your view on that number continuing to trend down?

[Don Stelly:]

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 timeframe to, what I’ll use the word, operationalize them. And I think we’re going to continue to see that because for example whether it’d 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’re going into latter 2017 and 2018.

[Brian Tanquilut:]

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 the hospitals, set you up to adapt better or have a less of an impact from HHGM. If you don’t mind just expanding 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 can give some color on your therapy exposure as it relates to the HHGM proposal? Thanks.

[Keith Myers:]

Let me start by saying, if anything in our press release indicated that we had positive thoughts about HGGM, then we probably didn’t do a good job of drafting. But, 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 is 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:]

[Operator Instructions] Our next question is from Whit Mayo with Robert W. Baird. Your line is now open.

[Whit Mayo:]

My calculator might be broken, but I am 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 flush out a little bit, what’s going on in the organic revenue number?

[Josh Proffitt:]

This is Josh. I’ll start with it now and Don can jump in and tag team as well. It’s primarily a product of our lower reset [ph] rate. So, you’ve got less reserves in there. So, from a revenue per patient day and 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, length of stay and are reset rate in some of those markets has been lower. Don, you got anything, you want to add on that?

[Don Stelly:]

Just to substantiate that those numbers were 43.9% reset [ph] rate this quarter same period prior year 47.7%.

[Whit Mayo:]

So the revenue per episode on the only organic, it’s going to be up like 10% or something?

[Don Stelly:]

Yes. We usually absolutely see that case-mix on first episode…

[Whit Mayo:]

Got it. Okay. Sorry, just trying to...

[Don Stelly:]

No. Your calculator was not broken.

[Whit Mayo:]

Okay. Sometimes it is. Maybe another one, Don, since I have you. Just thinking about LifePoint and Baptist, and CHRISTUS being folded in and 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, how you’ve built out the team to really manage the depths of the development activity that you have?

[Don Stelly:]

Whit, that’s truly a great question. And it’s a same question that our Board of Directors posed to us about six to nine months ago. In short, we absolutely have no concerns going into the latter half of this year, nor what we have in the pipeline that Keith alluded to in 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 at same fluency as we have so far in the last 12 to 18 months.

[Whit Mayo:]

Got it. And then presuming 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 don’t know, I guess, I’m just trying to get to a view inside the Board room in terms of where the dialogue and the conversation is focused?

[Don Stelly:]

No. It actually wouldn’t be this slow that you would see [ph] it; in fact, it would be so embedded into the G&A as a percent of the newly acquired 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 would 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 six people and all in probably around 600, $700,000 but the revenue that we would integrate with those six would by far embed that into the normal.

[Keith Myers:]

Let me just add. 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 a different -- to another location in Lafayette where we have room for expansion and brought all home health services, all departments into one building, into new open work environment where we have 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 that we work with has already developed plans to expand area if we need to. So, we have a master plan with metrics for rev cycle [ph] and payroll, and all of that to continue to have all that support here from Lafayette.

[Whit Mayo:]

And that’s really, really helpful. And maybe just my last question and we’re at the hour mark. But just the strategy around CHRISTUS. I just wanted to look at the LTACHs, and is that something those are assets that you wanted, that 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 and that mix appears to be little low. So just any color would be helpful.

[Keith Myers:]

Fair question. So, we certainly have been going and asking for the LTACHs. But it’s -- 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 met these legacy LTACHs. So, they were valued appropriately and you know what LTACHs have gone for recently and others. So, they were valued appropriately, they are accretive to the operations. But, it also opens the door for us to provide other post-acute services there that they are probably going to need. I mean Earth [ph] is obviously one that’s on the table. And along with that we get the home health, hospice they serve. So, I hope that answers your question. I mean, ideally, where home health is the go to service line that we want to but we realize that we weren’t going to be able to hold our position with hospitals or health systems if we couldn’t be a sole source solution.

[Whit Mayo:]

No, that makes sense. Did they not have scale nursing in their portfolio?

[Keith Myers:]

They did not.

[Whit Mayo:]

They did not, interesting. And maybe just one last one. The visit per episode, I didn’t see the disclosure of that for this quarter, and I know you gave the reset rates up but do you have the visit per episode?

[Don Stelly:]

It was 18.2.

[Whit Mayo:]

Perfect. Thanks guys.

[Don Stelly:]

And that’s Medicare, Whit.

[Operator:]

Our next question is from Bill Sutherland with Benchmark Company. Your line is now open.

[Bill Sutherland:]

Thanks. I want to just sneak in one or two more. Curious about, Don, the sustainability of a couple of segment operating margins up 10% in home health. And then directionally, what do you think about hospice going forward? Thanks.

[Don Stelly:]

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 of home health. Like with any portfolio management, we have bell 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.

[Bill Sutherland:]

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

[Don Stelly:]

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

[Josh Proffitt:]

Yes. No, Bill, I think you’re right in line with what you just said; that’s where I’d take it based on what Don was just kind of leading you toward. I think high the single digits is a good place to be.

[Bill Sutherland:]

Okay. And Josh, another for you, the split on the JV on both Baptist and CHRISTUS, is it 70-30 like usual or…?

[Josh Proffitt:]

Yes. Bill, similar to how we answered the question around LifePoint and other JVs we’ve done, for the same reason that Keith alluded to on pricing and valuation, we typically don’t disclose the exact ownership we’re seeing. But I’ll tell you in both instances, we’re the majority owner and we’ll be the consolidator of the financials.

[Bill Sutherland:]

Okay. 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 am remembering, I think your next step is to actually go in and take over -- to actually just de novo sites that are in their local markets?

[Don Stelly:]

Simply put, yes; that’s exactly right.

[Josh Proffitt:]

Yes. 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 closed that one July 1st and we’ve got probably at least three or four more that I can think of that are on our current pipeline that are connected to the LifePoint growth strategy as well.

[Operator:]

Thank you. And I am showing no further questions. I’d now like to turn the call back over to Keith Myers for any further remarks.

[Keith Myers:]

Okay. Thank you, operator. 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 any of the -- anyone else on the management, we’ll always make ourselves available to you. Thank you.

[Operator:]

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