LHC Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the LHC Group First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Eric Elliott, Senior Vice President of Finance. Please go ahead, sir.

[Eric Elliott:]

Thank you, Abigail, and welcome everyone to LHC Group’s earnings conference call for the first quarter ended March 31, 2016. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy, along with other key information about LHC Group and the industry on our website. In a moment, we will hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Josh Proffitt, Chief Financial Officer of LHC Group. Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to comments regarding our financial results for 2016 and beyond. Actual results could differ materially from those projected in forward-looking statements because of the number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update information provided on this call to reflect subsequent events. Now, I am pleased to introduce the CEO of LHC Group, Keith Myers.

[Keith Myers:]

Thank you, Eric and good morning everyone. We're pleased to be reporting stronger than expected financial results this morning as well as more great news on our quality star ratings. We believe our performance will only serve to further differentiate LHC Group as one of the country’s leading providers of non-acute services with a proven quality, technological sophistication, scale and financial strength to be the partner of choice for payers and providers in the emerging value-based healthcare system. Before going into the details of the quarter's results, let me recognize and thank all the people that made this performance possible. I am extraordinarily proud of our growing team of talented and committed healthcare professionals. In a period of ongoing change for our industry and our company, our team has risen to every challenge and not only continued to provide great care for our patients and their families, but improve the quality of that care we provide to the point that places LHC Group now significantly above industry averages according to most recent star ratings. So thank you for all that you do and keep up the good work. I also want to welcome Josh Proffitt to his first conference call in his new role as Chief Financial Officer. Josh is an eight-year veteran of LHC Group who has been Executive Vice President of Corporate Development and General Counsel for us for the past three and half years. He has done a great job overall and I and the Board are confident that he will do a great job as CFO. Our 15.3% revenue growth for the quarter reflects the continued momentum in our organic growth and acquisition strategy. The 8.1% increase in organic net service revenue for our home health business was driven by 7.2% increase in admissions, our best performance for this metric since the second quarter of 2012. We also benefited from increased reimbursement due to our admitting more medically complex patients as indicated by the increase in our average Medicare case mix. As a result, average reimbursement for Medicare episodes for our total home health business increased 3.6% in the first quarter. As we discussed last quarter, this volume growth is due in part to our strong network of relationships with our joint venture of hospital and health system partners, who have direct experience with our ability to add value as the low cost provider of high quality services. In just a minute, Don will share with you some additional information concerning our volume growth that speaks to the impact these relationships are having. The growth in our first quarter net service revenues is also attributable to the full quarter impact of the seven acquisitions completed in 2015, and the partial quarter impact of the five transactions completed the first quarter. These Q1 transactions included three related to our joint ventures with Missouri Delta Medical Center, Baton Rouge General and Northern Arizona Healthcare. The other two were for our freestanding home health agency in Jennings, Louisiana, and the Heartlite Hospice deal we announced during the quarter. Our corporate development pipeline remains very strong. I’ll remind you that this pipeline consists of potential transactions that we believe could be completed in 12 months. And as such, it changes on a quarter-to-quarter basis. At this time, our pipeline consists of a balanced portfolio of 23 opportunities totaling approximately $350 million in trailing annual revenues. And we are highly confident that 2016 will be a record year in acquisitions for the company. Our strong financial performance in the first quarter was complemented by improvement in star ratings. Don is going to cover these in more detail, but I wanted to discuss how important both the improvement we have shown and our strong overall ratings, all in the context of value-based healthcare. As I said earlier in my remarks, we are focused on differentiating LHC Group in the market as a partner of choice for health systems and payers, seeking to improve quality and lower cost for their patients that need non-acute care. This focus is a continuation of a long-term strategy to align ourselves close with hospitals and health systems, which began nearly two decades ago. These partners are now familiar with our quality of care, our services, our IP capabilities and infrastructure, and our culture. We believe we are strongly differentiated and in the view of many of the peers, we got our long history of developing and operating successful partnerships that are in strategic alignment with each hospital or health system and that have proven to stand the test of time. Today, as value-based healthcare is changing our industry dynamics, this partnership strategy and the relationship it has created are proving very important that hospitals and health systems know their panels are seeking the most proven resources. We have no doubt that quality will be one of the most important measures, if not the most important measure in determining the [indiscernible] As one of the leaders in the star ratings, we believe this potential question becomes an advantage for LHC Group, and so we will continue to work very hard to continuously improve our quality. In summary, we believe LHC Group remains well-positioned to continue gaining market share through organic growth and acquisitions. As a shift to value-based care intensifies we expect to build on our history of working with providers and payers to be their partner of choice for non-acute care. We are confident the successful execution of these strategies will also position us to achieve further profitable growth and increase shareholder value. Thank you. And now here is Josh to cover our financial results in more detail. Josh?

[Josh Proffitt:]

Thank you, Keith and good morning everyone, and thank you all for joining our call. Let me begin by saying that I am honored to now be serving in this role and then privileged to be able to tell the story of the over 11,000 hardworking and dedicated LHC Group family members who care for over 150,000 patients each year. You are the true heroes and because of your efforts, and the high-quality exceptional service you provide to the patients, families and communities, we are so blessed to care for, we are able to report another successful quarter to our shareholders. Since joining LHC Group in 2008, it has been an amazing experience to work alongside some of the very best clinicians and other professionals in healthcare, and I look forward to serving together with you for many years to come as we continue to grow organically and through acquisitions and new joint venture partnerships. With regard to our financial results, net service revenue for the first quarter of 2016 was $222.6 million, an increase of 15.3% compared with net service revenue of $193.1 million in the same period of 2015. Same-store revenue grew 8.4% for the first quarter. This growth in same-store revenue is due to our growth in same-store admissions and an overall increase in patient acuity and the home health service line in the first quarter of 2016 as compared to the first quarter of 2015, offset by an estimated reduction in Medicare home health revenue of approximately 1.2%. Net income for the first quarter of 2016 was $7.7 million or $0.44 per diluted share, an increase of 12.9% compared with net income of $6.8 million or $0.39 per diluted share in the same period of 2015. Quarter one 2016 EPS includes the impact of the Medicare reimbursement changes due to the 2016 CMS home health rule. On a consolidated basis, our gross margin was 39.1% of revenue for the first quarter of 2016 as compared to 40.7% of revenue in the first quarter of 2015. This decrease in gross margin is primarily due to three factors; one being higher expenses related to acquisition integration, second being margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our mature agencies, and third being, increased costs of providing care for higher-acuity case mix patient population, all while experiencing an estimated 1.2% reduction to reimbursement that I discussed earlier. Our general and administrative expense was 29.8% of revenue in the first quarter of 2016 as compared to 30.8% in the first quarter of 2015. The 100 basis point improvement in G&A expense as a percent of revenue is due to continuous cost control efforts while growing revenue, generating additional operating leverage. Our bad debt expense represented 2.1% of revenue in the first quarter as compared to 2.7% in the same period of 2015. The 2.1% bad debt expense in the first quarter is in line with our expectations for the year. The higher bad debt expense in the first quarter of 2015 was attributable to additional reserves that we recorded in that quarter for patient claims related to prior period patient care associated with two commercial payers. Those adjustments were oscillated that negatively impacted bad debt that quarter. Operating cash flow for the first quarter was $17.2 million and free cash flow was $14.5 million. We currently have $123 million available on our line of credit, which leaves us well-positioned to fund future acquisitions and joint venture partnerships. With these first quarter results and our expectations for the remainder of the year, we are reaffirming our fiscal year 2016 full year guidance for net service revenue to be in an expected range of $870 million to $890 million and fully diluted earnings per share to be in an expected range of $1.90 to $2.00. This guidance does include the reduction to Medicare home health revenue due to the 2016 CMS home health rule and the reduction to Medicare LTAC revenue due to the new CMS established patient criteria after implementation of certain mitigation strategies. This guidance does not take into account the impact of future reimbursement changes, if any, future acquisitions, if may, de novo locations, if open or future legal expenses if necessary. For the full year of 2016, we continue to expect gross margins to be in the range of 39.5% to 40.5%, general and administrative expense as a percent of revenue to be in the range of 29% to 30% and bad debt as a percent of revenue to be in the range 2% to 2.3%. This concludes my prepared remarks. I am now pleased to turn the call over to Don Stelly.

[Don Stelly:]

Thank you, Josh, and good morning everyone. I’ll second Keith in saying that we had a very good start to 2016 with our first quarter performance, and we certainly intend to build upon this in the quarters ahead. There are few items that I would like to touch on before moving to Q&A. First, Josh mentioned the decline in gross margin resulting from higher acquisition integrating expenses and higher acuity mix. You may recall that in the fourth quarter call, I mentioned that our acquisitions would be fully integrated by the end of the first quarter, all except Halcyon, which we expected to be complete in this month of May. A meaningful piece of our increased cost of revenue for the quarter was the transition to point-of-care of Halcyon 16 locations, 11 of which were completed in this first quarter of 2016. The transition is not unlike many that we've done before overall in the company and we expect similar benefit both on revenue and cost as we finish this completion. In addition, the increase in patient acuity does acquire additional resources and that’s more expanding to provide these patients the care that they need. We expect this trend to continue and that our average Medicare case mix will also continue to increase over time as well. Of course, we welcome these patients and are staffing and adding capacity in anticipation of this trend. For instance, we incurred additional costs in the quarter from ongoing away constrained which is necessary for us to ramp up our efforts to serve more medically complex patients. And while our cost did increase providing services so did our reimbursement as evidenced by 3.6% increase in average reimbursement for completed and build Medicare episode. In addition, as we expand the range of patients, we can serve the value add for our health system partners continues to grow. Now, these hospitals and health system relationships are mutually beneficial has particularly been evident in our increase in volumes for several quarters. We dug a little deeper into the home health admission numbers this quarter and gained some pretty good insight. For example, the growth rate in our admissions from our JV partners was faster than non-JV admissions. So while total Medicare admits increased 3.3% for the quarter, those from our JV partners increased 3.6%. In a similar fashion, total admits increased 7.2% for the quarter and total JV admits increased 8.1%. Although JV admits are growing off of a smaller base, the gap is closing. Our JVs accounted for 40% of the Medicare admissions for this quarter and 43% for total admissions. Adding the fact that we are seeing much of the increased patient acuity from these partners the growing impact and success of our health system alignment strategy is clear. These figure help illustrate why the differentiating impact of the quality star ratings support our long-term growth plans by making us the attractive partner for systems and payers. The new April quality of patient care star ratings that were recently released represent fourth release of these ratings. It's interesting to note that the average national rating for April of 3.245 stars was less than a full basis point from the first national average release which is last year in July that was 3.238. The average ratings in the states, in which we operate are a bit lower but they remain fairly flat. In contrast though, our ratings have increased 54 basis points over the last nine months to 3.702, up from that initial 3.145. Today, we led our public company peers and we are 45 basis points above the national average. And we believe we're continuing to make progress. When we analyze the most recent data, we see that we're over 90% of our home health providers currently at 4.5 stars or greater. More specifically the number is 92%. As I mentioned before, part of this improvement we've shown is the result of us having a workforce that has a lot on its hand, nearing that initial measurement period. We will finalize and if you would recall our main completion through electronic health technology. Today however, in less than a year, we are clearly on a differentiation path both in quality star ratings as well as past that. Our patient satisfaction are overall ratings 3.922 and is well above the national average and above all of our primary public peers expect for one, in which we trail by 9 basis points. So in closing, I want to congratulate and thank our team for another tremendous quarter. The work you are doing is immensely important and extremely impactful and honestly the results of this mission as evidenced by what we're sharing today are truly among the best in the nation. So, Abigail this would conclude our team’s formal remarks and we're pleased to open up the floor for questions.

[Operator:]

[Operator Instructions] And our first question comes from Frank Morgan with RBC Capital. Your line is open.

[Frank Morgan:]

It was interesting commentary around your deal backlog and I think the $350 million of revenues, could you give us any color on kind of describing those particular opportunities, how many of those are competitive versus negotiated and maybe what kind of EBITDA contribution that 350 million represents?

[Keith Myers:]

Frank, this is Keith and thanks for the question. And look let me a correction, this is, I wanted to read in my prepared comments as much as [indiscernible] I was looking at the 23 opportunities and I said 350 million having realized it's actually 950 million.

[Frank Morgan:]

[Technical Difficulty].

[Keith Myers:]

So what the pipeline consist of is a little bit of everything. On the small end, there are a couple of what we call tuck in acquisitions maybe in $2 million, $3 million, $4 million range and then on the large end we have a couple of multi-state opportunities that include home health and hospitals. About 50-50 joint ventures and free spanning in terms of revenues and I don't have to calculate in terms of what it means in EBITDA all-in but - I mean you can probably say the use of our 8% to 10% fully loaded margins and all of this has a blend. Some of these when we go in are drag fully ended and so we have to pull the synergies out of them to generate that return.

[Frank Morgan:]

I guess you had called out your cash flow from ops, but on a year over year basis, a little bit of a decline there, is that mainly acquisition related or is it any kind of other issues that you would point out?

[Josh Proffitt:]

Yeah Frank, this is Josh. You're spot on, it's primarily acquisition related and specifically one of the bigger items that’s impacting that cash for the quarter is we had a Hospice cash payment that related to pre-closing periods in connection with the Halcyon acquisitions, maybe we are still working to recruit but that was cash flow that went up with all on our behalf.

[Frank Morgan:]

One more and I'll hop off, on the subject Hospice, how is the new two-tiered payment system working out so far and what's your general mix between those under 6900 and versus over days? Thanks.

[Don Stelly:]

Frank, this is Don, so far actually we are about flat and that's not unexpected as we had illustrated in our last call because of where our [indiscernible] stay is. I do think we have an opportunity with Halcyon as we see that because its mix with patients in those geographic areas was somewhat different from ours. I don't think I bake a whole lot however because we're still getting Halcyon mature, so I guess in some way the existing portfolio is about flat and Halcyon we think has an upside as well hit the latter part of the year but aren't seeing that just yet.

[Operator:]

Thank you. Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

[Brian Tanquilut:]

Keith, you guys talked a lot of about the JVs, just wanted to hear your thoughts on what the limiter is in terms of accelerating the pace of JVs, because clearly you have good relationships with a lot of these referral sources that you especially in the non-profit side, so what are the discussions like and what's kind of the regulator at least near term on wrapping up JVs?

[Keith Myers:]

That's a really good question. So the only thing that holds us back is getting decisions from that, [Technical Difficulty] but as you would imagine, back in the mid-90s I guess, the early 2000 we are starting to get a momentum, it was really hard to get a meaning and get them to even entertain thoughts, because generally back then I thought that, they said, you need to do everything as well as needed to or learn how to do everything. And no one wants to be first to market on this kind of concept but now we have enough success and history behind us. And the fact that having a reference list that's made up of every popular health system we have ever done business with, we don't have any bad stories or failures. So, I think that's starting to accelerate, but your question is what is the limiting factor, I mean that's the limiting factor, as far as implementation and execution what the operations are, once we have operations in our hands it's as easy or I would say made it easier than the pre-standing guide and it's easier because we had our core I think our more operations implement anything else and just the fact that we always had an all-in [indiscernible] that's where we are most comfortable, so when we have volumes that's coming our way down a pipeline and we're great at managing that volume, so what we are - what we struggle with we have to put a lot of effort into is given the sales side of the business. So Don, I think you want to add something.

[Don Stelly:]

I think exactly right, the limiting factor is tough as they come inside of our pipeline and mature, it’s that simple Brian, once we get them in, it's an easier lift because you've already got the brand equity in some of things that you can maximize to turn around pretty quickly, so we're excited about that mix that Keith talked earlier on in his prepared remarks.

[Brian Tanquilut:]

To follow up on that, is it fair to assume that the interest level is picking up and then also kind of related to it, are you seeing any pick up in volumes yet or at least referral flow related to CJR and PPCI?

[Keith Myers:]

I'll take the first part of that and Don take the second part. So, to be real clear, yes, we are seeing the momentum pick up significantly in pipeline, so of that 950 million in revenues, about 40% of that was hospital and health system JV that's a big number, we've never had anything close to that prior year and on CJR.

[Don Stelly:]

Yeah, I'm really glad you asked that question. Are we seeing volume increases, the answer is yes and our monthly run rate from prior year is up 46% and let me color that in with Brian, we’ve got [indiscernible] we have presence in overlap in 20 of them. Seven of those 20 are equity debentures and we would go pretty deeply, 189 hospitals in those areas with 50,000 discharges with DRG 469 and 470. And when you look at what we've been able to do with the program that we co-branded and co-worked with, that program is truly a differentiator, for example it increases our utilization from 66% to 79% in home health primary, decreased less than 28% to 11% and a drop [indiscernible] acute facilities to 1.4 days for a knee and 1.8 for a hip. All of this were wrapped in and this pilot that we are now flushing inside of those 189 hospitals when they open the door for us create a 1% re-hospitalization rate and just under 1.8% for the hips. I said this data to back up that 46% that we are seeing right as increase from January, February, March and what we're seeing April and we're truly excited about it. And my last caveat is to give some [indiscernible] boys and girls to team, our therapy team and what they've enabled to do mimic this model for us is really a differentiator in CJR.

[Brian Tanquilut:]

And then Don, last question from me, stars is something that you’re talked about and clearly very proud on in the progress you've made there. In terms of that's slowing through, value base is not until 2018, how are you seeing the benefit from stars right now, or are you already seeing any benefit from the pickup in your stars ratings?

[Don Stelly:]

Well, it's twofold, value based purchase and certainly the amount of star agencies we have which is 4.5 or 5 stars, we are about at 250 of our facilities right now. It's definitely been a differentiator for marketing, and sales and marketing, it's a driver of our organic growth. That and CJR are the two things that we're really pushing into the deep summer months, so it truly has helped us and that's one of the things and when we are turning in that organic growth of course, we are pleased and proud but the hurdle was big for us. Unlike some of our comps, I mean, sometimes you jump a pretty weak curve and you start beating chest but then when hurdle is high, it's a little bit harder to jump over. Little bit more specific to value based purchase and however, it's a little bit more difficult to quantity it right now because you don't know what comp is going to be, you don't know what the regencies in that space specificity area is going to be. We took we had our analytics executive take a stab at it and certainly in the aggregate, we would be in the upside box, but I just don't want to get out right now and tell you what those numbers are instead would rather just say I truly like the position because as long as we see ourselves, getting better and doing it faster than the comp, you got to like our position in the value-based purchasing model.

[Brian Tanquilut:]

Got it. Thanks guys.

[Keith Myers:]

Thank you.

[Operator:]

Thank you. Our next question comes from Toby Wann with Obsidian Research Group. Your line is open.

[Toby Wann:]

Hey, good morning guys. Thanks for taking the questions. Coming back the JV partnership you guys called out some statistics about how you're growing faster, getting more admissions, this 100 JV partners but you also talked briefly about, but didn't quantify specifically the difference in acuity that you're getting. Can you maybe tease that out a little bit maybe provide little more color about that?

[Don Stelly:]

Toby, this is Don. That acuity is truly related and dovetailed on the therapy and orthopedic program in CJR and even then it’s not inside of CJR “terminology our ortho program including our resorted model that our Chief Medical Officer and our team has developed is really paying dividend for us, so that’s really driving that acuity. But we're also seeing higher acuity in the clinical component of it as well. We believe that is related to our diabetes, congestive heart failure and COPD model that they've also developed. Look, it’s still work in progress and we still got to be the primary provider of choice in quality, but that really is starting to resonate as Keith mentioned in this prepared comments they are really getting it and narrowing the panels and obviously as a partner we have the largest voice and largest seat at that table, so when you combine that with what we're doing in quality, it’s hard not to expect that volume to come to us, but truly we are earning it.

[Toby Wann:]

No, that’s helpful especially as it relates to the DRG 469 [ph] and related and how that's going to possibly play itself out with CGR. And then on a related item, as it relates to higher acuity, you guys also made the comment that higher acuity is driving - obviously those patients are a little more expensive to treat, so you did see a little bit of a degradation in your gross margin on the home health side. So how do you balance that going forward to where you can either maintain or expand margins while still treating that same patient subset of that higher acuity, little color on that?

[Keith Myers:]

Yeah, let me color that in just a little bit. That’s a lot related – we do really good job of using what we call extenders and that's the nurse enrollment, LP and on therapy it’s PTAs and coders, so as we had embarked upon these new models and we get all of the training we are little heavy and we see that blending back down as we fine tune the plans of care in some of these patients. Differently stated, I think we can split the baby if you will and we want to always get back to the exact scale mix of the [indiscernible] coefficient, but we are going to get closer to what we were in a little bit further away from what we are now and that will help increase our margins.

[Toby Wann:]

Thanks for that color and congrats on the quarter.

[Keith Myers:]

Thank you. Good questions.

[Operator:]

Thank you. Our next question comes from Ryan Halsted with Wells Fargo. Your line is open.

[Ryan Halsted:]

Thank you. Good morning. Sticking with the popular topics of your JV strategy and as well as CJR, I was wondering is your strategy with joint ventures to focus on some of the markets where the CJR is mandatory within your pipeline sort of what percentage of those JV opportunities involved CJR margins?

[Keith Myers:]

So we can – there are seven in our existing markets where we operate. But to your question I think it is the pipeline. Are we targeting from a pipeline perspective markets where CJR is and I am going to have to say that we are not that – we are not that short sighted in the pipelines. I think CJJR is precursor to more and more value-based purchasing type model. So we are not focused on those markets more than now.

[Don Stelly:]

Ryan, this is Don. I will turn – Keith was talking on the acquisitive side, more so on the growth side we are definitely using the CJR awareness and our associated program to get into the door even outside of those seven equity ventures and here as well. Even though they are not in that hospital in the actual program, the demonstration of decrease in their stay by day and a half is extremely important to those CFOs. Being able to show them how we can as appropriate bypass the sniff and get to a lower cost setting is appropriate. So I totally agree with Keith. He was coming - I don’t think we are certainly not doing that on the acquisition standpoint, but on the day to day blocking and tackling we are absolutely taking that to market.

[Keith Myers:]

And on that I mean operationally our activity in those markets where CJR is present it is not limited to our hospital. We can generate same results for our hospitals that are not -

[Ryan Halsted:]

Okay. I am curious, with the JVs, as these value based models and as maybe gain sharing arranges are sort of entering into discussion, how does that sort of play into your joint venture strategy I mean how does that sort of become a more prominent part of your JVs, how they sort of evolved since you originally started this strategy and sort of along those lines, do you eventually see your role in the joint venture as being more risk based?

[Keith Myers:]

I think so let me answer that two ways. I think the introduction of risk in value based purchasing on the hospital health systems is a driver in accelerating the joint venture opportunities we see in the pipeline. I was going to stay while we are not targeting CJR hospitals, the reality is that in our pipeline right now I just want to take a guess at this, but 75% or better of the hospitals and health systems in our pipeline today that volume has significant risk exposure. So they are much more interested in talking to us when they have risk. I think that on the home health operation side, what we bring to the hospital, touching on the down side, it is more than just operating a successful home health agency but it is our ability to reduce length of stay and improve their overall quality that’s becoming really attractive. So did that answer the question?

[Ryan Halsted:]

Yeah. Sort of last one on the JVs. Are you seeing increased competition for JV opportunities in your pipeline? I mean are there home health and hospice agencies pursuing the same strategy.

[Keith Myers:]

So we’ve seen some one-offs in different markets. I think we are probably seeing more people looking at it. I can’t imagine that they wouldn’t, but it’s – what we found as an organization is that it’s not something you can flip a switch on and do overnight, so it’s more than just being able to operate home health agency successfully and I really mean that it’s you have to understand the hospital business and you have to understand what’s going on in their larger business to be a really good home health partner. We are seeing in our real accounts is that where a home health operator goes in and that’s the part of the hospital ro health system and the one thing they want is to get as many Medicare patients as they can from the hospitals, so home health providers. And if you go in with that mindset, you are not going to be very successful. You have to be able to solve the complete problems of the hospitals. For us that means having to work through Managed Care situations sometimes on their face and at the beginning they are not very profitable and so we have to provide models to be able to operate that business and including going back and negotiating with Managed Care companies. And you talked about sharing significant - introducing risk into our reimbursement. One model we really like is to agree to a base line reimbursement that’s based on average market performance and things like re-hospitalization, the star rated, those type metrics and then with us having the ability to have a gain share or additional reimbursements retrospectively be based on our performance until you have that, because we are very confident in our ability to produce exceptional results.

[Don Stelly:]

Ryan, the only thing that I would add to Keith’s comment because of what he said this trend certainly is bound to change. We haven’t lost one when there has been those one-off people trying to get in there that we wanted either. And I think that bodes well for our team and the ability of the accomplishment approach they bring to being a partner versus just trying to get volume.

[Ryan Halsted:]

That’s great color. I appreciate that. Maybe just one last one on the guidance. Last quarter you guys called out some of the headwinds from the Medicare reimbursement work. And called out $0.16 could be offset by improvements in driving case mix and utilizing higher therapy, just wondering if you thought what’s the status with kind of being able to offset that and do you think that’s something you should be – you could be successful at throughout the rest of the year?

[Keith Myers:]

Thank you for the question. Yeah, it is and honestly when we sat with you all we weren’t trying to be conservative, we were trying to guide you to exactly what we thought at the time and especially in the last six weeks or before we got a lot of headwind, because it is [indiscernible] that we invested in the December and January, really took hold and listen I use the phrase a lot, that hope within the strategy, I do hope this continues, which strategically we have things in the plate. Back to your point we do see it going forward into it and once we get a couple of more months under our belt and get late into the second quarter hopefully we will have even better insight and news on the next call for you.

[Ryan Halsted:]

Thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from Whit Mayo with Robert Baird. Your line is open.

[Whit Mayo:]

Hey, good morning. I just wanted to go back to the deal environment and really test your appetite for leverage. I mean rough math on nearly 1 billion of acquired revenue with 10% margins would put your overall leverage in the 5.5% to 6% range and I guess I just want to understand what the realistic expectation for growth is and when you say a record year, the best year I can see is maybe $80 million of revenues, so you have already acquired half of that, just can you help us think through what an appropriate manageable level of growth is?

[Keith Myers:]

There is few questions. First of all, the record year for us is in 2014. I think we were at $105 million, so when I look at the pipeline that’s in front of us right now, I can’t imagine us not being significantly past that this year. So that’s what I am talking to – referencing when I say a record. In terms of leverage and overall pipeline, so of that $950 million that’s in the pipeline today and there is 23 opportunities, I also can’t imagine any scenario that whereby we would actually close 100% of those in 2016 or even in – but from a leverage standpoint, we’ve always said that we can get comfortable up to three times leverage level on a consistent basis. Not to say, we wouldn’t peak above three times, it’s a deal came along the call just to do that and then work it back out. But we also were public and so we think about going back to the market if there were opportunities beginning to flow through. So it would be a combination of those two things, leverage up to three times and maybe it’s even a little better if we have enough opportunities flowing through and go back to the market.

[Whit Mayo:]

Okay. That makes sense. Can you maybe update us on just seller expectations, valuation levels, maybe it’s not productive to say publicly on a call, but anything to speak about where you think valuations are right now on acquisitions?

[Keith Myers:]

Yeah. Of course, that’s what we spend most of our time. We do all the other deals and get comfortable everywhere else. But the reality is that the reimbursement is being cut year after year or one way or the other, whether it’s through a CMS cut or regulatory restrictions and all those things. So we don’t forecast in any pricing increases. So it all has to come through growth, we flow through some decreases and buyer and seller expectations and right now, generally speaking, on everything expect JV. On JVs, we never have that issue honestly, because when we do a JV, it just goes to a fair market valuation in the deal transaction. But on freestanding especially, seller’s expectations end up being higher than what we want to pay, normally a process, being able to be a process and you have to hold, they don’t find some money that’s overly aggressive, willing to pay more or willing to pay. They do have limit and I would say, I don’t want to beat around the bush. I would say that diligence is certainly an issue for us. So I would guess that 20% to 25% of the deals we look at fall off because of diligence related issues. And then anything else in this is just on price. You just get to our point a little more, we can’t go back.

[Whit Mayo:]

Yeah. That’s really helpful color. And maybe one last one for Don, just can you provide maybe a little bit more color around just fee for service admit growth and Medicare Advantage Admit growth, is one growing faster than the other and maybe just a comment on sort of recertification rate trends? Thanks.

[Don Stelly:]

It’s a good question. Good to hear from you, Ed. They’re actually pacing at about the same. Last year, we saw the Medicare Advantage, especially in our Northwest portfolio starting out on, but we’re not seeing that right now. It’s about one in the same. I’m trying to run through my mind in a market where I would be misleading, but I don’t think that is the case. And on our recent rate, let me go to see. Where are we Eric?

[Eric Elliott:]

48%.

[Don Stelly:]

Yeah. We’re running at 48% in one of these stacks.

[Whit Mayo:]

Is that trend up or lower as you start seeing higher acuity patients, more therapy patients?

[Don Stelly:]

It’s actually lower. That’s a good point. I mean we get them in, we get them out, we get them out especially on the joint program.

[Operator:]

[Operator Instructions] Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

[Brian Tanquilut:]

Hi, guys. Just a quick follow-up. Hospice margins during the quarter were down slightly. Is there anything you want to point out there on hospice?

[Keith Myers:]

Yeah. We need to get them back. Good question, Brian. It’s all unrelated and integration related. When we look back at the quarters, you saw we were running up 12%, even 14% in reported quarters and we’re down half. That’s going to come back to us. We’re going to be back end loaded and get back where we need to get.

[Brian Tanquilut:]

Okay. And then, Don, on reimbursement on the home health side, you came out last quarter saying that it’s about 2% cut. In your guidance today, you’re still saying it’s 2%. Are you seeing any change or opportunity to pull that back a little bit?

[Don Stelly:]

Yeah. Right now, and again I say this with caution, because it’s back to mix dependent and we did a really good job of shipping the mix. We’re really seeing about 1.28%, but I would go a little bit closer back to that 1.5%, 1.6% mark. And I’m looking at Eric and Josh to make sure I’m not misleading you there. It’s not as bad because we were going off what we saw in that last quarter on 2015, but it’s also not as good as where we’re tracking to date. We don’t think when we get back to that mix on what I was saying earlier on in those clinical admits, especially because it’s something that I do want to disclose. We’ve got some admit holes in some of our agencies that were giving us a lot of clinical component and it’s due to staffing in the Northwest and as that flows back through, I think I’m going to see a normalized mix again in the portfolio.

[Brian Tanquilut:]

So you feel good to say that it will be below 2 once everything is done on average for the year?

[Don Stelly:]

Yes.

[Operator:]

Thank you. Our next question comes from Toby Wann with Obsidian Research. Your line is open.

[Toby Wann:]

Hey, good morning. Thanks for the follow-up. You guys have talked a little bit about training calls in December a little bit and in January, can you just quantify the impact of that during the quarter?

[Keith Myers:]

That’s 783,000.

[Toby Wann:]

Okay. And then, also on a little bit of a smaller component of your overall business, I noticed that you guys did, looks like, close down, I’m making sure I get my number right, a couple of community based locations on a sequential basis, but yet, looks like revenue per billable hour up slightly, just kind of a little bit of color about your thinking if any updated thinking on the community based business?

[Don Stelly:]

So I’ll take the first and then Keith can talk about the outlook, those couple were actually dragging that and when we closed them down, our Elk Valley made the aggregate push up.

[Keith Myers:]

On the long term outlook for CBS, we’re really high on the service line, but it’s our ability to be successful and it is dependent on reimbursement which is state specific. So we have to look at that on a state by state basis, unlike home health and hospice. And we don’t need market with CBS. So once we have a presence in a market in home health, then we look to see what the state reimbursement is like, if it’s favorable and we look to add that service. I mean, patients need it everywhere and benefit from it, it was just a matter of having to stay in the reimbursement.

[Toby Wann:]

Okay. That’s helpful. And then one last one from me, just noticeably absent from this call with regards to home health is, is there any discussion about commercial patients, maybe kind of you guys could give us a little bit of an update on what you guys are seeing on the non-Medicare side on the home health component. Thanks.

[Keith Myers:]

Yeah. Well, it’s not absent for any reason that we just have the folks on Medicare. I did say that because of our relationships with hospitals and health systems, I think we’re forced more than most home health providers to really tackle that problem head on and so we spend a lot of time at it. At a high level, I can tell you this. From 2014 to 2015, when we look at that year, we improved our margin on that business about 500 basis points. That’s a pretty big number. So we guys come from a combination of -- and we grew the volume quite a bit as you’ll see. But in that mix are contracts that got terminated, which led to renegotiations, however it is renegotiating contracts already in place and some of it was operational where there were contracts and I’ll let Don to speak a little bit to this where in some of our home health locations, we were doing the same thing for those managed care referrals, not in terms of patient care, all the patient care is the same, but all of the paper work that we do internally that might be required for Medicare is not required for the commercial payer, we were still doing. So I know Don and operators did a great job streamlining some of that. All of that led to our ability to expand the margin in that business and make it more profitable.

[Don Stelly:]

Yeah. I think Keith, you’re absolutely right, Keith and the team did a good job of helping us on some of the rate structure, but not much to be honest, there is a lot of operations and look, we just used the term and it’s managed care, we’ve got to be very prudent.. In a Medicare episode, we have the blessing of truly managing the care of that patient 60 days and here you don’t. It’s on a per visit model, so you’ve got to tweak the way you have a lens, and you got to balance that operationally but still ensuring quality. So it’s not that we avoided it for any other reason than it’s just the smaller portion, but still very intentionally looked that from the outside.

[Operator:]

Thank you. Our next question comes from Bill Sutherland with Emerging Growth Equities. Your line is open.

[Bill Sutherland:]

Good morning. Just had a quick one here on LSEC. Just looking at the first quarter, which was essentially in line, and wondering about the expected fall off that you guys had talked about and then maybe a bit more color on the mitigation efforts that Don had mentioned in the last call and if I miss something in the prepared comments, forgive me, I had to jump off for a second.

[Don Stelly:]

No, Bill. This is Don. We didn’t even address it in the prepared comments and really nothing has changed since that last call. I had talked about the net income effects for 2016 after mitigation being about 1.9 million or $0.06 per share and we’re on track there. We may be able to pick out a little bit in the betterment side, but I wouldn’t model that in right now and to that mitigation, obviously, part of our mitigation, there is kind of two trains of thoughts, you had to go straight to the [indiscernible] appropriate or you work towards site neutrality blending and ours is the latter. And in our rural markets and in the HIH world that we’re in we simply didn’t have the latitude from a pipeline standpoint to do that. So our strategy is to manage those site neutrality patients, open up that pipeline because it is an opportunity to provide services to those newly qualified patients, number 2, we’re meeting with every hospital to ask for their help and decreasing some of the ancillary and rents as appropriate and it’s tough for them too, but basically the alternatives and then honestly where we do have any opportunity with agency or contract labor and some of the nuances inside the walls, mitigate that as much as we can. So those three in combination lead to that 1.9 million and I said it on the last call and I think we have to sit where we said then is that you got to bake that in to double for our 2017, that’s kind of where we’re headed.

[Bill Sutherland:]

By double, you mean not as much or more mitigation?

[Don Stelly:]

No. What I mean by that is this takes effect for us on the cost report on the last half of this year. So as people keep asking us, what do you look at for ‘17 if you take that effect on the last half of this year, I would just multiply that times 2 on EPS effect going forward into 2017.

[Bill Sutherland:]

And then I guess the step down really starts to occur most noticeably in your, starting in your third quarter, because you’re going to be losing I think it’s 18 beds as well as the other?

[Don Stelly:]

Yeah. That’s -- in July, it does. That’s correct. So you’re absolutely right. A lion’s share of this are stored in the September earnings period and go through of course December.

[Operator:]

Thank you. I’m showing no further questions. I’d like to turn the call back to Keith Myers for closing remarks.

[Keith Myers:]

Thank you, operator and thank you everyone for joining the call this morning. As always, if any questions that you have between earnings calls, please feel free to reach out to us. First, Eric, you need to get to Don or Josh or myself. Eric will arrange that. So thanks so much.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.