LHC Group, Inc.
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the LHC Group Second Quarter 2016 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host for today, Eric Elliott, Senior Vice President of Finance. You may begin.

[Eric Elliott:]

Thank you, Sonya, and welcome everyone to LHC Group’s earnings conference call for the second quarter ended June 30, 2016. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy, along with other key information about LHC Group and the industry on our website. In a moment, we will hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Josh Proffitt, Chief Financial Officer of LHC Group. Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to comments regarding our financial results for 2016 and beyond. Actual results could differ materially from those projected in forward-looking statements because of 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 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, as we report operating and financial results, but sure, we not only produced very solid results for the second, but also that we continue to position LHC Group well for future growth. As always, I want to begin by recognizing and thanking our entire team but the great job that they’d be day-in and day-out, providing exceptional customer service and unparalleled quality care for the growing number of patients, families, and communities we are fortunate to serve, and our growing network of referral sources in hospital and health system partners. I want to specifically congratulate our team on the latest CMS star ratings, which show that LHC Group is providing the highest-quality of care and the best patient satisfaction in the home health services industry. We’re proud of this accomplishment and we’re committed to ongoing improvement. Turning to the quarter, we continue to benefit from both our organic growth and our acquisition strategies, which combined to produce a 12.3% increase in total admission and 12.9% growth in net service revenue. These totals included the impact of 8.7% growth in organic admission and a 4.6% increase in organic revenue growth. Continuing the favorable trend over the last few quarters, the acuity of our patients increased, as reflected in the comparable and sequential quarter increases in Medicare case mix for the second quarter. Our growth in admissions in the second quarter was equally strong and our JV and non-JV, with JVs turning in 8.5% organic growth, while our non-JV turned in 8.8%. For the six months ended June 30, organic admissions in our JV was 8.3% and our non-JVs was 7.8%. In addition, the JV admissions are driving the increased acuity in our case mix, and thereby, our increase reimbursement for completed and billed episode. From our discussions with our partners, we understand that these trends reflect their efforts to provide their non-acute patients proven quality care at a lower-cost in an institutional setting. We’ve worked with most of our partners for years and they know our ability to provide high-quality care of a patient, while enabling them to remain exactly where they want to be in their homes, which are also the lowest cost they need for their care. Through our work with these partners, they also know of our long-term investments in the equipment and in the ongoing training and education of our team to provide the more intensive care needed for more medically complex patients. They know of our success with innovative programs, addressing CPCI initiative, including the joint replacement initiative through our cobranded cocooning adoption, and, of course, they’ve seen our work to prepare and launch programs with patients with diabetes and COPD. As these partners prepare for going involvement in value-based care, they are sending higher acuity patients to us and we are performing. Since we’re still in an early stage in the development and full implementation of healthy system networks across the industry, we believe that our organic growth will continue to benefit from rising admission volume and patient acuity from our JV partners. As a result of these successful partnerships, we’re also seeing rising interest in our capabilities among our partners’ peers. We offer new hospital and health system partners with proven solution that is supported by the most extensive network of hospital and health system partnerships in the home health services industry. In this context, the July release of CMS star ratings is very important for us. Quality is perhaps the most important issue provide us – considering and evaluating both their potential of JV partners and the providers in our integrated networks. The industry has seen our improving quality and satisfaction star ratings and we believe that’s now being the best in both category and an important competitive advantage. As a result of all of these factors, we are very pleased with the continued success of our hospital alignment strategy and the increased number of new hospital and health system JV transactions in our current pipeline. So let’s start now to our acquisition strategy, which has been a large contributor to our revenue growth for the quarter, as a result of the acquisitions completed in the 12 months preceding the quarter event. As you know, we have been pursuing a strategy of new joint ventures, acquisitions, and de novo growth. We executed three hospital joint venture transactions in the first quarter. We announced four transactions so far freestanding home health providers during the first-half of 2016. One of these acquisitions, East Arkansas Health Holdings headquartered in Little Rock, Arkansas was completed on July 1, 2016. And I’d like to take this opportunity to welcome the healthcare professionals in Arkansas to ongoing LHC Group back. We also announced the signing of a definitive purchase agreement to acquire Professional Health Resources, or PHR, and expected it to close on August 1, 2016. While we continue to work with the centers, today they have been unable to satisfy the conditions of closing. Should the closing conditions not be satisfied or away and the transaction close by October 1, 2016, the purchase agreement will terminate, if not amended by NDA chart. We’ll issue a press release when the transaction closes or in the event the purchase agreement is terminated or amended. We have now completed six transactions in the year-to-date generating annualized revenue of approximately $25 million. We expect to complete additional transactions in the second-half of 2016 and that our revenues will reflect a meaningful benefit from these acquisitions. Our corporate development pipeline remains very robust. As you know, this pipeline consist of potential transactions that we believe could be completed within the next 12 months. We don’t expect all of these transactions to be completed in the next month 12 months, but in fact, expect changes in the pipeline from quarter-to-quarter, as the timing for various transactions under this discussion slowed or accelerated. The removal opportunities from our quarters pipeline does not necessarily mean that we lost opportunities. It often means that negotiations are simply slow for one reason and another. That being said, we currently have 20 active potential transactions in the pipeline totaling more than $750 million in aggregate annual revenues. While the overall pipeline volume is down from the first quarter, we’re very pleased with the growth in new hospital and health system partnership opportunities, which now makes up 70% of our active pipeline. We remain pleased with our pipeline quality and volumes and the growth opportunities that represents. To summarize my comment this morning, let me simply repeat what I’ve told you last quarter. We believe LHC is well-positioned to continue gaining market share in our highly fragmented industry through both organic growth and additional acquisitions. We are successfully building on our extensive history of working with providers and payers to be their partner of choice for non-acuity care, a trend that has intensified to ship the value-based care. We are confident that strong execution of our proven growth strategy will also position us to achieve long-term profitable growth and increase shareholder value. Thank you. And now, here is Josh to discuss our financial results in more detail. Josh?

[Joshua Proffitt:]

Thank you, Keith, and good morning, everyone. Thank you all for joining our call. Let me begin my prepared remarks by saying thank you to all of our clinical professionals to constantly deliver exceptional service to the patients, families, and communities we are so blessed to care for, and thank you to all of LHC Group family members who support them on a daily basis. Because of all of you, we were able to report another successful quarter to our shareholders. With regard to our financial results, net service revenue for the second quarter of 2016 was $226 million, an increase of 12.9% compared with net service revenue of $200.2 million in the same period of 2015. For the six months ended June 30, net service revenue increased 14.1% from $393.3 million in 2015 to $448.6 million in 2016. Consolidated same-store revenue grew 5.6% for the second quarter and 7.1% for the six months ended June 30, 2016. 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, which is offset by an estimated reduction in Medicare home health revenue of approximately 1.5%. Net income attributable to LHC Group grew 5.7% to $9.5 million, compared with $9 million, or 5.9% on a per diluted share basis to $0.54 per share from $0.51 per share, which includes estimated Medicare reimbursement reductions for the second quarter of $0.07 per diluted share. Net income also included these components. A negative impact of $1.1 million, or $0.04 per diluted share for severance related to the resignation of our previous CFO, which is recorded in G&A. Second, a negative impact of 996,000, or $0.03 per diluted share related to the loss on disposal of our damaged aircraft. Third, a negative impact of 686,000, or $0.02 per diluted share in transaction-related costs, primarily for the PHR transaction that Keith touched on earlier and is also recorded in G&A. And last, a positive impact of $2 million, or $0.11 per diluted share related to a reduction to an uncertain tax position and the related interest expense. After adjusting for these components, our adjusted net income to LHC Group grew 1.1% to $9.1 million, compared to $9 million, or it grew 2% on a per diluted share basis up to $0.52 per share from $0.51 per share. On a consolidated basis, our gross margin was up from 39.1% of revenue reported in the first quarter to 39.3% of revenue for the second quarter of 2016, as compared to 41.7% of revenue in the second quarter of 2015. The decrease in gross margin year-over-year is due to multiple factors, including an increase in Managed Care volume, increased costs of providing care for higher-acuity case mix patient population, the impact from the estimated 1.5% reduction to Medicare reimbursement that I discussed earlier, margin, contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our more mature agencies, and for comparison purposes; the second quarter of 2015 also benefited from a health insurance reserve adjustment of approximately $2 million, which reduced salaries, wages and benefits in that quarter. Our general and administrative expense was 30.2% of revenue in the second quarter of 2016, as compared to 30.1% in the second quarter of 2015. When you exclude the severance and transaction-related costs, I just mentioned, our G&A expense for Q2 2016 was down to 29.4%. The improvement in normalized G&A expenses as a percent of revenue is due to continuous cost controller efforts, while growing our revenue, which is generating additional operating leverage. Our bad debt expense, representing 1.7% of revenue in the second quarter and 1.9% for the six months, compared to 2.4% and 2.6% for the same periods of 2015. The decrease in bad debt expense year-over-year is positively affected by shift in our receivables from over 181 days to more current and continued process improvements related to structural changes implemented in our revenue cycle department. The 1.9% is more in line with our expectation of 2% to 2.2% for the year, while 2015 was inflated due to additional reserves that we recorded in that period for patient claims related to prior period patient care associated with two commercial payers. These adjustment for an obsolete recurrence that negatively impacted bad debt last year. Days sales outstanding increased slightly from 48 days in the first quarter to 49 days in the second quarter versus 46 days for the second quarter of last year. The reason for the slight increase is mainly due to a few things. An increase in AR from acquisitions and the transition period associated with the changes of ownership, an increase in our Managed Care receivables as a percent of total AR, and collection delays from certain [indiscernible] and ADRs, which unfortunately became a normal part of doing business in healthcare. And furtherance of Keith’s comments about corporate development, we currently have $108 million available on our line of credit. which leaves us well-positioned to fund future acquisitions and joint venture partnerships. Turning now to our annual guidance. We are raising our 2016 guidance from net service revenue to be in an expected range of $885 million to $900 million, up from the previous range of $870 million to $890 million. And we are also affirming our established 2016 guidance for fully diluted earnings per share to be in an expected range of $1.90 to $2. This guidance does include the negative impact from the Medicare Home Health Prospective Payment System for 2016, which is currently expected to reduce 2016 Home Health revenue by approximately 1.5% to 2%, or $7.1 million and $9.5 million with an effect on fully diluted earnings per share of $0.24 to $0.32. Second it includes the negative impact from a Medicare Long-Term Care Hospital Prospective Payment System, which is expected to reduce 2016 LTACH revenue by 4.9%, or $3.6 million, and fully diluted earnings per share by a net $0.06 after implementation strategies. It includes the negative impact from the reduction of 18 beds in one of the company’s LTACHs that began in June of 2016, which is expected to reduce 2016 LTACH revenue by $3.1 million and fully diluted earnings per share by a net $0.03 after implementation strategies. It also includes the negative impact on the fourth quarter of 2016 from a proposed Medicare Home Health Prospective Payment System for 2017, which is currently expected to reduce fourth quarter Medicare Home Health revenue by approximately 2.3%, or 900,000, and fully diluted earnings per share by approximately $0.03 per share. And it includes the positive impact from the 2017 Medicare Hospice Wage Index and Payment Rate final rule, which is effective October 1, 2016. It’s expected to increase our Medicare Hospice revenue for the fourth quarter by 2.1%, or $650,000 and fully diluted earnings per share by $0.02. This guidance does not take into account the impact of other future reimbursement changes, if any; future acquisitions, if made; de novo locations, if opened; or future legal expenses, if necessary. For the full-year of 2016, we expect gross margins to the in the range of 39% to 40%, which is down from our previously stated range of 39.5% to 44.5% and is the main consideration for while we have not increased our annual EPS guidance, while increasing our annual revenue guidance. We expect general and administrative expense as a percent of revenues to be in the range of 29% to 30% and bad debt as a percent of revenue to be in the range of 2% to 2.2%. That concludes my prepared remarks. And I’m now pleased to turn the call over to Don Stelly.

[Donald Stelly:]

Thank you, Josh, and good morning to everyone. I also – I’m pleased with our financial results for the quarter and with a comparable quarter momentum we’ve seen in our total admissions and in our organic home health admissions over the last three quarters. Our ability to handle this growth, along with the increasing medical complexity of the case mix, even as we achieved the top star rating in our segment of the healthcare industry says a great deal for the skills, compassion and dedication of our team. As Keith mentioned, we are very proud of our latest Star ratings. Just as we’ve been or proud of that substantial overall improvements, since their first release last year. In the latest ratings, we believed our peer group to quality with the 4.05 compared to a 3.70 result for the April release. As a result of this 35 basis point improvement, we are now 20 basis points above our nearest public competitor in 85 basis points, above the national average. We also received the highest ratings for patient satisfaction with a 4.0 from the latest release, up from 3.92 in April. The national average was 3.65 in July and most of our peers were somewhere between us and that average. We know that we can still improve, however, but we don’t underestimate the difficulty of achieving these improvements and sustaining them. It takes constant execution of the highest level about thousands of people across our company. So as I mentioned, our ratings are reattribute to our team and their associated effort. Before we’re going to Q&A, I want to comment on a couple of recent regulatory updates and new proposal. As we mentioned in the news release, the 2014 Hospice Wage Index and Payment Rate final rule would increase our payments by approximately 2.1%, because of this rule takes effect on October 1, 2016. We expect it to have a positive impact on our net income for the fourth quarter of this year, approximately 600,000 or $0.02 per diluted share. In addition, CMS announced proposed changes for the Medicare Home Health perspective payment of calendar year 2017. CMS project that Medicare payments to home health providers would be reduced by 1% in the last year, the full-year payment of rebates and adjustments to home health payments rates finalized in 2014. Our analysis indicates that these proposed changes would affect our Medicare Home Health revenues by a negative 2.3% for 2017, primarily due to change in methodologies in the CMS as required calculations and our casemate would reflects our increasing provisions authority. On June 8, CMS launched the three year demonstration called Pre-Claim Review. Pre-Claim Review, is in a process to which request for visual affirmation of coverage is submitted for the review before quantify and submitted for payment. The Pre-Claim Review will required at the agencies, the mid-documentation establishing beneficiary eligibility and medical necessity for home health product to submitting for the claim. The demonstration affects our home health claims for an issue or recertification episodes for five states beginning on the effective date as below, Illinois, August 1 of this year, Florida, no earlier than October 1, Texas, no earlier than December 1, and Michigan and Massachusetts no earlier than January 1, 2017. LHC Group has 19 combined locations in Illinois, Texas and Florida, with annual Medicare revenues of approximately $46 million. We put certain procedures in place to mitigate the effect from these review such as central review and our components department product submission to ensure that all documentation is submitted accurately in a timely manner. We will keep you informed as we proceed with the demonstration. Next we were pleased to see that the recent proposal by CMS for pilot program based on mandatory bonded payments for heart attacks and bypass surgery, which could take effect on July 1, 2017. These will be the first cardiac procedures included in such a mandated program and the program would affect hospitals and 98 randomly selected metro areas. CMS also proposed to expand such program it introduced its comprehensive joint replacement program by including hip and femur fractures. We think all this is part of news for several reasons. It has further impetus to the healthcare industry shift to the value-based care, which we expect we’ll accelerate the development, joint ventures and integrated healthcare networks. As Keith mentioned, we’re also piloting innovative initiatives for cardiac patients that follows the template of our oxygen joint replacement program. And we would expect this proposal to accelerate the introduction of this capability to a wider market. In addition, we believe our participation in the CJR program has demonstrated our ability to meaningfully move the needle in terms of helping our hospitals and health system partners, improved the care and lower the costs for higher acute patients in the non-acute care. We believe there is an increasing urgency among acute-providers and their development of their networks, and we’re confident that both our long history of partnership with our acute care providers as well as the cutting-edge results we’re producing through our CJR and our BPCI initiatives are strong competitive points in our favor. Considering that we are also industries quality and patient satisfaction later according to the Star ratings I’ve alluded, we believe we have substantial opportunity to continue working toward our goal being the partner of choice for non-acute care. In closing, let me sincerely congratulate and thank our team for their great work. Their commitment and efforts they makes a difference everyday to people who have help to remain their homes. We thank this team as the best in the nation of what they do and while we close to getting in better, the Star ratings will seem to be in agreement. This concludes our formal remarks. Thank you for listening so far and we’re now ready to turn the floor over to the Q&A session.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Brian Tanquilut from Jefferies. Your line is now open.

[Brian Tanquilut:]

Hey, good morning guys. My first question is on guidance, I think you alluded to the fact that you adjusted down your gross margin expectations. If you don’t mind, could you give me a little more color – fibers there and what we’re seeing that stage in the last quarter?

[Joshua Proffitt:]

Yes, Brian, this is Josh. A couple times and I can give a little bit more detail than one in our prepared remarks. So we’re taking gross margins down from $39.5, $40.5, but half percentage point down to 39 to 40. We feel real confident that will land in that range and have some strategies to implement to get towards the top into that range over the back half of the year. But well I say is as our managed care volume continues to go up, those patients generate a slightly lower margin than the Medicare patients do as our enterprise. So as we continue to grow that book of business. It’s pressing our margins just a little bit. I also mentioned the affect on our acquisitions and when you look at the last 12 months in the gross margin for acquisitions in the first quarter of this year, they were contributing gross margin of about 29.2%. In the second quarter, that’s crept up to about 31.7%, so still below our mature gross margin, but moving in the right direction. So I think we’ll see some additional contribution for those who want toward as well. And then I mean obviously you’ve got the increased cost for the added therapy population that Don mentioned as well.

[Brian Tanquilut:]

Got it, and just a follow-up of that Keith, as we think about the increasing percentage of revenue from Medicare – from non-Medicare were the commercial plan, how should we thinking about your views on mix – payer mix management and what you could do or if you wanted to do that rebalance and they can – maybe refocus more in fee for service, just the push up the margin a little bit.

[Donald Stelly:]

Hey Brian, this is Don. I’ll take the first part and see if anybody worth of time and I think what we’re seeing right now is the new reality. I mean if you look at our history and how we kind of moved into more metro areas the management care penetration is there. And for us, it’s a pretty simple choice. Do we want to continue to contract and open that pipeline up and let it be accretive even at the risk of little bit depress margins, and most of these markets and I’ll give Rhode Island as a very good example. There is a very little traditional Medicare in the market that we’re in Frankenstein. So we’ve opened up the a flow gate [ph] on commercial business that’s accretive to EPS, but when you look at it on a margin basis it’s too pleasant. So I think you’ll see that approach for us more in some of these areas and therefore I would not say that we’re miss manage in the volume. I think we’re managing in a earnings versus simply to the margin and there is another reason as Josh said that, because commercial admits are up 14% quarter-over-quarter. And honestly that’s also helped us in the pipeline of Medicare as evidenced by what you saw in our organic growth. So I guess to tie a bow around that I don’t we’ll ever be a traditional fee-for-service in Medicare percentages and ratios and instead I think our idea is to manage by provider in specific locations of better mix of earnings per admit.

[Brian Tanquilut:]

Got it. And then last one for me Keith. You talked about the JVs and how that’s driving volumes? If you don’t mind just giving us a little more in-depth color on what you think interest of market share are you capturing essentially 100% of the share from these JVs, and also as we think about find it through shift, because of the bundle payment. What are you seeing from your JV partners on that front? Thank you.

[Keith Myers:]

I don’t minding to stretch the imagination. I think we have a 100% of the market. I think we’re the market leader, sure – but there are hospitals out there. We really like the strategy. We like the long-term strategy of being positioned for value based purchasing. I want to go back for a minute to the Managed Care piece. Don and Josh both right, I agree with what they said. But if we break it down to individual markets, I do see our margins expanding in the markets where we have significant market share as long as being part of the large hospital system, we have a cluster of hospitals in the market. Once you get to that concentration then you have to leverage with the payers. And leverage about – leverage, I just said when you’re getting a seat at the table, we have to make a proposal that gain share in proposal or something that’s more on a value based purchasing part of that. If you don’t have market share, you can’t get to the table. So sometimes we have to go in a market and we have to take more Managed Care business than we’d like to take for the first couple of years until we get into the system they can prove – proving into our value. So I don’t waste too much time on that. On the go forward strategy though, there’s no questions that we’re just seeing an unprecedented volume of inbound cost us – from hospitals and health systems kind of and you got enough – ability there if I missed the current hospital points, I think that’s driving a lot of it. And in every conversation what’s making them pickup foreign callers is that what are foreclosed and to their strategy prepare for value based purchasing population there. And I think I said this before and years passed when we first started the hospital, joint-venture strategy, every call that we would was to come in take over a home health aid without using losing money. And all they wanted us to do was to operate it more efficiently. Now and it’s something much bigger. They want us to be a part of the system and they want us to manage the several acute care in the system and focus has been on home health more need I guess.

[Brian Tanquilut:]

Got it. Thanks Keith.

[Operator:]

Thank you. And our next question comes from Frank Morgan from RBC Capital Markets. Your line is now open.

[Frank Morgan:]

Good morning. I want to switch up around the acquisition pipeline and what you’re seeing in terms of valuation and any color on size and how valuations are varying based on the size. And it’s really looking at it both from the home health care side and the hospice side? Thanks.

[Keith Myers:]

Okay, in Kat Akin this little. I don’t have in front me in terms of percentages, but the majority – the vast majority of the pipeline is home health. I mean there’s some hospice on it. And as I said in prepared comments that with 70% of the current pipeline is attached to a hospitals and health systems. As it relates to valuation we have two ways that we approach valuation. One is traditional EBITDA multiple. If there’s an agency that has stable volume and has earnings going in. And our strategy we don’t often see the strong earnings. Yes, so we use a blend of whatever earnings are there. And we look at volume and then the specifics stake and the provider density in which tells us the competitive profile in the market. So still nothing new there that’s the way we’ll proceed for quite sometime. But I think your question might be that we see values going up or going down. And I think right now on the acquisition side they’re either flat of slightly down. Just a lot of uncertainty around the CMS demonstration project those fast state. So certainly in those far demonstration phase values are definitely down. And we see some processes just gone on pause and so we see how CMS works through that in those far state.

[Frank Morgan:]

So is that statement across the Board or size of the deals I mean your bigger deals saying they also less they’re trending down or is there something different from bigger deals versus the smaller ones? Thanks.

[Keith Myers:]

Yes, Frank that’s definitely not trending up. I would say flat to trending to trending down year-over-year looking at mark-to-mark and where we are now in 2016, compared to 2015.

[Frank Morgan:]

And Keith I don’t know if this is – you would agree with this and I think anecdotally in the market only is real big deals if you’re really big and that means you’re trades in some these states with Pre-Claim Review. And I think they’re also a little bit worried of this is going to affect them. So I think that further bolsters Keith your state of that and those valuations are not going to work?

[Keith Myers:]

Yes, it’s hard to model, we don’t have – we’re not really at it in those five states. We don’t have much volume there and what we do have was most like joint ventures. But in the past couple of quarters we looked at a couple and what we found is that it’s really hard to model, because we of course are going to model worse case scenario and seller wants to of course sell off historically. Yes good question Frank.

[Frank Morgan:]

Okay. Thanks.

[Operator:]

[Operator Instructions] And our next question comes from Ryan Halsted from Wells Fargo. Your line is now open.

[Ryan Halsted:]

Thanks. Good morning.

[Keith Myers:]

Good morning.

[Ryan Halsted:]

If I could just – I just clarifying your non-Medicare business and the growth you’re seeing there. Is the majority of that non-episodic business?

[Joshua Proffitt:]

Yes, it is if you kind of look at all-in, I would say it’s the non-Medicare between the commercial split and the episodic it’s probably about 60/40 respectively. But I’ll say this people we’ve alluded to something that we had some spotted success. As we have demonstrated that value in some of this Ryan. We have gotten back to the table so much so that we’ve actually it’s very pragmatic we put a red, a green and a yellow listed for our agencies, because we get the lot of traction where our payers had green it’s simply say yes and let’s go take it. We won’t go to yellow certainly you got to look at the complexity of that whether it is resourcing it and in the red with the longevity we just do on the LOA. So I share that with you is color commentary of the say we’re doing a better job of managing Managed Care it’s not where we want to be. And as Keith would tell me onto the table here it’s not where it wants us to be. But I can assure you well the right track to where we use that to Keith’s point earlier as a means to get more market share of the big service.

[Keith Myers:]

And I would just add to that, I’ll remind you that if you take our all-in non-Medicare business or Managed Care and Commercial business and look at it on a per visit basis, where we get reimbursed, for us there is a basis of non-Medicare business. Our rates today are about 5.5% higher than they were last year at this time.

[Ryan Halsted:]

Got it.

[Keith Myers:]

So it’s where the volume is coming from, maybe some of our new locations, where we don’t have that leverage yet, where we were taking volume. But on the other side, I’ll say that, there’s one contract with a hospital system that we just increased with a larger scale there with a pretty significant increase to 10% or 20%...

[Joshua Proffitt:]

Yes, almost 20%.

[Keith Myers:]

That’s great, but that in and effect yet, you’ll see that in the coming quarters.

[Joshua Proffitt:]

Yes, and this is Josh. The other thing I would add to that is not only are we seeing some better rates and newly negotiated contracts. But payers are starting to open up to the idea of going out risk and shared savings opportunities going forward. I don’t want to mislead you and say that, we have a lot of those currently in Q. But the conversations are starting and I think, we’re going to have that direction. And when you look at our star ratings and some of the other avenues or value that we can definitely deliver to the payers. I think, you’re going to see more of that in future as well.

[Ryan Halsted:]

That’s very helpful. I know you have mentioned in the past the efforts you’re making to sort of better communicate with the payers. So it’s helpful to hear about some of the progress you’re making on that. But just as kind of my last follow-on which is, do you think it’s a – are you confident that you can get to the margins of your Medicare book of business with a non-Medicare book of business in the near future?

[Keith Myers:]

No. I mean, isn’t – no, we’re not. I mean that – in the near future, I’m thinking, you’re talking about within the next year, I don’t think we’re there.

[Ryan Halsted:]

Okay.

[Keith Myers:]

I mean, not until we’re – not until we’re deeper into value-based purchasing. The key to us giving the – ultimately being reimbursed at or potentially above the prevailing Medicare rate with Managed Care payers is going to be from a gain share or a gain share model. And I think we’re still several years away, but we see that becoming the norm in the way of Managed Care, based on the health providers.

[Donald Stelly:]

Yes, Ryan, but I’m going to the other side of the spectrum also wouldn’t more to be concerned model in any continued trajectory of the case, because it right either. I think Josh used that, it’s only one of the reason I do not want you to be misled and think that our margin compression in the quarter was solely or even heavily attributed to that. It was only peas in parcel [ph] of it, to be candid with you is the acquisitions in Arizona in healthy arm that contributed to that more so than Managed Care.

[Keith Myers:]

Absolutely. I think, we should also say that, we do have the ability to control this mix. So part of what we do is, we have a payer that’s paying us significantly below their prevailing Medicare rate. We go into with viral sources generally. We have explained to them why it is that we can’t take those patients. And we have significant market share in the area, didn’t get to the table, and sometimes it takes six months to transact all around. So I don’t want you to think that with the phone in rain and we’re just taking everything that comes in and we don’t have the ability to manage mix.

[Ryan Halsted:]

Yes.

[Keith Myers:]

We’re just more – we’re more careful about how we communicate and manage the mix and our partnerships with hospitals and health systems, because we don’t want to damage the long-term relationship, in freestanding agencies must have facility.

[Ryan Halsted:]

It’s very helpful. Maybe to switch gears to the regulatory side, so it seems like CMS give us some case mix in 2016 and I’ll take in away in 2017 in a proposal rule. I know it’s still just in the proposed phase, but I mean, is there any mitigating strategies that you think you could potentially offset some of that incremental rate, reduction that’s related to the case mix?

[Donald Stelly:]

You know, that’s a tough question. I’ll say LHC Group still has opportunity in what we call the extender use. And that is using PTAs and coders versus therapy. But as far as for mitigating and changing the visits necessary to take care for those patients you really can’t do that. And honestly with the CJR expansion, I think we’re going to see even more volume to home health. So, it’s a really tough question, because I don’t want to mislead and say, we don’t have room to increase efficiencies, because that would be disingenuous, but I also don’t want to lead you to think that we have this great plan to take the 2.3% and make that de minimis. I just don’t see that right there. And if I was modeling out, I’ll actually model out the 2.3%. And if we go into the year with plans of improvement, that help mitigate that, we’ll certainly disclose it to you.

[Keith Myers:]

Yes, I think we have some – on the G&A side, I think we have some capacity that beyond our current volume. So if we execute on what’s in the pipeline now, as we continue to do that all the mine on G&A, that’s where gross margin fits. [Multiple Speakers]

[Ryan Halsted:]

That’s very helpful. Maybe just last one on the LTCH rule, I appreciate the color on the reduction of the beds. Do you still anticipate potentially transitioning some of your LTCH beds to the lower acuity business. And do you think that that could be, I guess, also somewhat of an offsetting dynamic to the headwind that you outlined in your guidance? Thanks.

[Donald Stelly:]

Yes, that’s a really good question, and the answer is, yes, absolutely. And we do have two of our eight facilities inside of that dynamic right now granted. They are two that we thought we would do well and they are. But I think and Josh can correct me. I think we guided to a $0.06 2016, in fact, in my last call, we said that we would anticipate that be doubling. While obviously, if you have $0.06 in the pro rata year of 2016 and only $0.12 going into 2017, there is metacognitive approaches that lead to that, we’re going to be much more than $0.12. So I guess all to say that we are doing that today in those two facilities. We do expect to repurpose those beds and do some things creatively. So that’s a full effect on an apples-to-apples basis didn’t affect in 2017 or 2018.

[Ryan Halsted:]

Thank you for taking my questions.

[Keith Myers:]

Absolutely, and good return, thanks.

[Operator:]

Thank you. And our next question comes from Bill Sutherland from Emerging Growth Equities. Your line is now open.

[Bill Sutherland:]

Is the mix kind of similar to your current revenue profile, mostly thinking hospice and home health?

[Keith Myers:]

The mix is our current – can you repeat the question, I’m not sure, I understood?

[Bill Sutherland:]

Oh, I’m sorry. Yes. is the pipeline of acquisitions that you’re considering now have a mix that kind of matches your current revenue mix, or is it weighted more towards one business or the other, such as, hospice or community banks?

[Joshua Proffitt:]

It’s weighted more to home health.

[Bill Sutherland:]

Okay. And did you say, Eric, the – I’m sorry, Keith, the current pipeline as it’s currently looking as a 70% of the deals are joint venture?

[Keith Myers:]

Yes, 70% of the volume today is our joint venture opportunities with single hospitals or health systems.

[Bill Sutherland:]

And that’s with the total pipeline or just the home health, it seems like a big number?

[Keith Myers:]

That’s on the total pipeline.

[Bill Sutherland:]

Okay, that stuff speaks volumes. And then finally, on hospice, the – are you still – on turn on a patient-day basis as far as reimbursement, are you still running around the budget neutral kind of number?

[Donald Stelly:]

Yes, we assure all, the U shape really hadn’t affected us to this point.

[Bill Sutherland:]

Okay. That’s it for me. Thanks much.

[Donald Stelly:]

The question, let’s talk about it.

[Operator:]

And that does conclude our question-and-answer session. I would now like to turn the car back over to Keith Myers for any further remarks.

[Keith Myers:]

Okay. Thank you everyone for dialing in. And as always if you have any questions – any follow-up questions between this time and next earnings call, please contact Eric, and you can talk, any of the management team will be available for you. Thank you, again.

[Operator:]

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