LHC Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the LHC Group Third 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 maybe recorded. I would now like to turn the conference over to Eric Elliott, Senior Vice President of Finance. You may begin.

[Eric Elliott:]

Thank you, Nicole, and welcome everyone to LHC Group’s earnings conference call for the third quarter ended September 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. 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. We are very pleased to be reporting on strong third quarter financial results for LHC Group complemented by our outstanding new CMS Star rating as well as our announcement of our new joint venture with LifePoint Health. Before we go further, let me thanks everyone on our LHC Group team who are key to our third quarter results and our prospects for future growth. We have a great team who's commitment to excellent drive our ability to provide high quality care and outstanding customer service to our patients, their families and in many communities we serve. This commitment also drive our strong admission and growing network of referral sources in hospital and health system partners, and it enables LHC Group believe to be leader of the industry in quality of care and patient satisfaction according to latest star ratings. Now, turning to the third quarter, we continue with operating momentum evidenced throughout the year with our fourth consecutive quarter double-digit revenue growth. In addition, our 15.3% increase in total admissions and 10.5% increase in organic home health admission each represents the fourth consecutive quarter of accelerating growth in these admission metrics. In our home health business, we clearly believe this admission growth has been driven by the market consolidation in the home health industry and the intensifying shift to value-based healthcare. At hospitals, health systems and other referral sources are becoming more and more aware about differentiating capabilities and are consistently higher quality sourced at a time when they are highly focused on cost effective placements of patients in need of non-acute care and are seeking department with higher quality home health providers to help them to reduce unnecessary utilizations of more costly in patients, both acute care. We are experiencing this volume both in our joint venture operations and in our freestanding locations. Because these admissions often earned greater in acuity, we have now seen a steady rise in our average Medicare and case mix leading to a 4.2% increase in average Medicare reimbursement over 2015. Our growing admissions have had a positive impact on organic revenue growth, which increased 5.4% for the third quarter and which has not been below 4.6% over the prior five quarters. Since we are still very early in the transition of the healthcare systems to value base arrangements, we expect to see continued growth in organic admissions in coming quarters. In addition, LHC Group continues to be very well positioned to expand market share through acquisitions. We are very pleased to announce our definitive agreement to create a new joint venture with LifePoint Health, one of the leading and largest providers of acute healthcare to non-urban communities. This partnership brings together two culturally aligned companies that are driven by a vision of expanding home health and hospice care, ensuring that patients and families in need of these services have the access to that and improving the health of the communities we serve. Combining the LifePoint Health transactions with all other transactions closed in the year-to-date, we have now equipped our $100 million acquisition annual revenue target with approximately $106 million in acquired revenue. Our corporate development pipeline of potential acquisition and joint venture opportunities remains very robust. Thus far in 2016, our corporate development team has sourced LHC inbound of 225 opportunities, including 65 in Q3 and 20 in the first month of Q4. We have the deep industry knowledge with disciplined, attention to be payer, deal experience and the integration capabilities and financial strength continued to benefit from growing consolidation pressures through selective acquisitions in our highly fragmented industry. In addition, we fully expect to build on our hospitals alignment strategy that over two decades now has enabled LHC Group to develop the most expensive network of hospital and health system partnerships in the home health services industry. With the inclusion of the LifePoint Health, we are the trusted partner of 68 hospitals and health systems which includes now 172 hospitals. At a time when hospitals and health systems are attractively prepared for value-based healthcare by developing the integrated care networks, we represent a highly experienced, high quality of proven partner with the scale and market density, data-driven technological capabilities and infrastructure and financial strength to be a leading partner of choice. Potential partners now only have our 20 year history of hospitals joint venture experience. Our joint venture partners that can provide real-time information about our capabilities and the value we deliver as they close to key partner, but also the latest CMS Star rating data demonstrating our industry leading quality of patient satisfaction results. As a result, we are confident that our acquisitions strategy will continue to be a key growth engine to LHC Group, delivering high quality acquisitions and joint ventures, and we expect 2017 to be another very strong year growth for our customers. So to summarize, we had a strong quarter to support our continuing operating momentum, which is evidenced in the increase in our earnings and revenue guidance for 2016. The market and demographic trends that are contributing to our growth appear sustainable for years to come. Given our strong competitive market position, we are very well positioned to continue to gain share in our markets through both organic growth and acquisition growth and [Indiscernible] provider is better positioned than LHC Group to be the partner of choice for hospital and health systems seeking to expand the quality and lower the cost of their non-acute care. Through continued successful execution of the strategies that helped us create this leading market position, we expect to drive long-term growth and increase shareholders value. Thanks for your time this morning and now we will hear Josh who will 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 continued to raise the bar with high quality and exceptional service you delivered to the patients families and communities we are so bless 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 third quarter of 2016 was 230.8 million, an increase of 13.1% compared with net service revenue of 204.1 million in the same period of 2015. For the nine months ended September 30, net service revenue increased 13.7% from 597.4 million in 2015 to $679.4 million in 2016. Consolidated same-store revenue grew 4.6% for the third quarter and 6.2% for the nine months ended September 30. 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 8.7% to 9.6 million, compared with 8.8 million or 8% on a per diluted share basis to $0.54 per share, up from $0.50 per share. On a consolidated basis, our gross margin was 39.0% of revenue in the third quarter of 2016, as compared to 40.8% of revenue in the third quarter of 2015. Consolidated gross margin for the nine months ended September 30, 2016, was 39.1% of revenue compared to 41.1% of revenue in 2015. The decrease in gross margin year-over-year is due to a few factors. First, the negative impact from the 2016 home health reimbursement rule has an estimated 1.5% reduction in Medicare reimbursement. Next, the negative revenue impact from the LTACH patient criteria rule which affected two of our LTACHs beginning June 1, of this year and another six LTACHs beginning September 1. Third, margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our more mature agencies. And finally, a temporary increase in contract labor in our community based service line in order to staff or expansion of service strategy in Tennessee. That said, I would also like to note that home health gross margin is up sequentially from 40.1% in Q1 of 2016 and 40.2% in Q2 of 2016, to 40.4% this quarter. The increase in home health gross margin is due to higher revenue growth from admissions and increased patient acuity. This positive gross margin trend also holds true for hospice, which is also less sequentially from 36.3% in Q1 and 38.2% in Q2, up to 39.9% this quarter. The increase in hospice gross margin is mainly due to our continued improvements in our healthy arm operations Our general and administrative expense was 29% of revenue in the third quarter, as compared to 29.6% in the third quarter of 2015. This is also down from 29.7% in Q1 of this year and a normalize 29.4% in Q2 of this year. Consolidated G&A expense for the nine months ended September 30th was 29.6% of revenue, compared to 30.1% of revenue in 2015. The improvement in general and administrative expenses as a percent of revenue is due to continuous cost controller efforts, while growing revenue and generating additional operating leverage. Moving onto bad debt, our bad debt expense represented 1.4% of revenue in the third quarter and 1.7% for the nine months, as compared to 2.4% in the same period of 2015. Similar to G&A, it is also sequentially down from 2.1% in the first quarter of this year and 1.7% in Q2. The decrease in bad debt expense year-over-year and quarter-over-quarter is positively affected by continued process improvements related to structural changes implemented in our revenue cycle department and strong cash collections. In further as of Keith comment about our corporate development pipeline, we currently have $123.2 million available on our line of credit along with free cash flow of 43.3 million in the nine months in the September 30th, which leads us very well position to fund future acquisitions and joint venture partnerships. Turning now to our annual guidance, we are raising our fiscal year 2016 guidance for fully diluted earnings per share to be in an expected range of $2.05 to $2.08, from the previous range of $1.90 to $2 million. And we’re raising our fiscal year 2016 guidance for net service revenue to be an expected range of $910 million to $920 million from the previous range of $885 million to $900 million. This guidance does include the negative impact from the Medicare Home Health Prospective Payment System for 2016, the negative impact from the Medicare Long-Term Care Hospital Perspective Payment System, the negative impact from the reduction of 18 beds in one of the company’s LTACs beginning June of 2016, the negative impact on the fourth quarter of this year from the follow Medicare Home Health Perspective Payment System will offer 2017, which we currently expect to reduce fourth quarter fully diluted earnings per share by approximately $0.03 per share. And the positive impact from the 2017 Medicare Hospice Wage Index and Payment Rate final rule, effective October 1, 2016, which is expected to increase our Medicare Hospice revenue for the fourth quarter of 2016 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 future reimbursement changes, if any; future acquisitions, if made; de novo locations, if opened; or future legal expenses, if necessary. The raise in our guidance is primarily due to of few things; first, better than expected admission in revenue growth in both the home health and hospice service lines, while continuing to leverage our G&A; second, the continued improvements in margins from acquisitions that have closed within the last 12 months; and third, continued decreases in our bad debt expense as a percent of revenue related to our revenue stock of process improvements and the strong cash collection I allude to you earlier. For the full year of 2016, we expect gross margin to be in the range of 39% to 39.2%, general and administrative expense as a percent of revenues to be in the range of 29.3% to 29.5%, and bad debt as a percent of revenue to be in the range of 1.7% to 1.9%. Before turning the call over to Don, I would like to briefly touch on the final home health rule for 2017 which was released by CMS on Monday of this week. We are currently engaged in our analysis of the impact of the final home health rule on results for next year. However, each home health agencies patient mix needs to be individually evaluated to determine the estimated effect by agencies and then ultimately rolled up for our entire home health service line. At this time, we estimate the negative effect to LHC Group's Medicare home health reimbursement to be in the range of 1.75% to 2.25%. We will provide more detail along with our financial guidance in 2017, when we issue fourth quarter release in late February or early March. But I would like to say that with the 1.75% and 2.25% range that we are very confident that we will fully mitigate the cut the next year. That concludes my prepared remarks. And I’m now pleased to turn the call over to Don Stelly.

[Don Stelly:]

Thank you, Josh, and good morning to everyone. I too would like to begin my prepared remarks by thanking every member of our LHC Group family. And here at home office and throughout the country, you ladies and gentlemen are doing a remarkable job out there. Keep up the push to greatest. Speaking about push, I'd like start my first update by speaking the CMS has most recently released star rates. You will all recall that last quarter we achieved the highest star ratings among the home health industry for both quality and patients satisfaction. We are in this position after four quarters of steady improvements since the ratings the first release in July of last year. We are very pleased to say that for the ratings just released this past October, last month, we've now then only sustained our leadership position in both quality and satisfaction ratings, but we strengthened that lead over the industry and the nation. In addition, earlier this week the 11th Annual Homecare Elite Winners were announced based on an independent analysis of publicly available performance data that identifies the top 25% of all Medicare certified home health agencies. This year approximately 9,400 agencies qualified for the ratings and 2,353 were named to the top 25. Our company again performed very well in this ranking with more than 60% of our home health providers making that top 25. We've never had so many providers named to home care list and it's no accident as we remain committed to given all of our teams training, tools, and the support they need to continuously improve quality and patient satisfaction. With quality of care being such as important focal point in any healthcare providers' ability to succeed in a value based healthcare system, LHC Group's quality achievements for a meaningful and competitive advantage because they independently validate a core part of our message to potential hospital and health system partners. I am very proud of our team's performance. We all note that sustaining and improving quality has to be a non-seeping focus to be affective and we know that every provider can be better. We are already working hard to achieve this goal and I am confident. Actually, I am positive that we will. With regard to CMS this through year Pre-Claim Review demonstration which began in August, CMS has delayed the start based for the remaining four states inside of the demonstration. Florida was the next state expected to begin participating as early as the 1st of October. CMS has not set a specific date for Florida or the other state. CMS also said that they would give a 30-day notice before patient participation is commenced. LHC group has 19 combined locations in Illinois, Texas, Florida with annual Medicare revenue of $46 million. We have put some procedures in the place to mitigate the reviews in our compliance format to submission to ensure that all documentation is submitted accurately and in a timely manner. Because we are so deeply invested in compliance and have a great detail of reviewed process, the Pre-Claim Review is not a major issue for us but more like a shifting process. We will keep you inform as we learn more and as we proceed through the demonstration. In closing, let me again recognize and congratulate our team for their great work. LHC group is positioned to make a significant contribution to improve its quality, lowering cost of healthcare about providing high quality, pre-and post-acute care in the patients' home which is the least expensive venue and which provides the patient the greater satisfaction. Simply put, our team is the foundation of this belief. Nicole, this concludes our formal remarks and we'll now open the floor up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Brian Tanquilut of Jefferies. Your line is now open.

[Brian Tanquilut:]

Hey, good morning guys. Congratulations, good quarter. Keith, thank you for the color on volumes, but I was just wondering if you can give us more inside into -- what do you think the drivers are for the healthy volume growth this quarter and sustainability of this kind of levels growth and for maybe even your ability to accelerate especially as you think about the bundled payment programs and all the alternative payment models that have been rolled out by CMS?

[Keith Myers:]

Sure, thanks Brian. When I look at it, they're really coming from three different angles, that John jumped in as well but -- so first of all let me answer that in -- not only do I think it's sustainable, but I believe there is opportunity for it to even accelerate more. Certainly, on the traditional sale side asset, we spent a lot of time being more actively managing that whole process. And how do we go about marketing and we’re shifting more and more towards, of course, marketing are differentiating capabilities rather than just relationship market. And Don, can dive deeper into that, because he spends a lot of time driving sales in addition to everything else. But what I’d like to talk about is the volume actually think coming in markets from market consolidation pressure. One of the things as we've spent a lot of time looking at in our deliver activities is, we’re in acquisition opportunities come to us. The first check we make is to if we have overlap. We may be able to pick a high percentage of the volume from the average of the target is and acquisition pipeline whether we buy them or not. Just disruption in the market, when we may see the turnaround for a long time, it has a good brand but was mom and pop change of pants. It was not so far, but we position ourselves well with the key volume and go to the market with our differentiating quality scores and capabilities. We can get more than our proportion of share of that patient volume, and so we really dig and look at a much more in-depth that we had in the past, mainly those decisions. And the other is a clear shift in patient moving to downstream from higher cost settings, I mean we see that in a big away and that just continuing to grow quarter-to-quarter. It’s a key topic of conversation in all of the hospital joint venture partners. Everyone in healthcare is focusing on looking at patients individually and identifying which patient or in higher cost setting, when they could be in a lower cost setting in every level of health and home health has been ready for that. So, those are the three drivers of this organic growth n market. Don, you want to add on.

[Don Stelly:]

Yes, I think Brian, Keith captured the themes extremely well, and I think the drive home point from mass status is not concurrent. Keith and I and our core team, they get a long time now and I’d say, I've never been so robust on the forward looking organic growth that I see right now. Even with the recent flooding that we experienced here at Louisiana, be honest you, I mean we have home office effective, net operations effective. Just sustain and excel of what we did and that was a real event. I guess why I’m saying is not, you take that away and you'll look toward where we’re going in ’17, I think it’s going to be impressed that by our company organically.

[Brian Tanquilut:]

I appreciate those comments. Sort of a follow-up to that, Don, how do you think about managing the mix, growth in Medicare advantage is very strong, obviously. But as we think about your agency, is there probably a labor capacity limit as well? So, how do you think about balancing MA versus people service plus the cost of adding or that the challenges of adding staffing?

[Don Stelly:]

Yes. It's kind of a twofold question. First of all, with the use our, how do we look at managing the mix and I want to be very clear. We can and we do manage that mix. But staffing constrained is real with order sub-index and I guess as we've done excellent in that -- I haven’t to spoken to you about, we've done a really good job of multitier in our recruiting efforts that starts with the recruiters that we have here and it goes to kind of the seasoned team locally. So, it's kind of twofold, that something and we call it capacity planning. And we are doing a much better job because the growth that we can experience for example on the Northwest is different from a pipeline standpoint with all of mix bond then it is in some of our very smaller markets. So when add all of that up, I think my answer to the question is as staffing is not going to be in totality eliminating factor going forward into next year and honestly beyond 2017 and managing the mix, I think we have better front door. And I think, Josh may can talk about that later, but front door and back door control whenever before and I think that's what you've seen in our incremental improvement quarter-to-quarter.

[Brian Tanquilut:]

And then last question from me for Josh. How should we think about the impact on 2017 of Department of Labor every time rules to kick in on number first?

[Josh Proffitt:]

Yes, and Don you can share on as well. As you not imagine when that came out, we did a lot of analysis internally to see what the impact could be. And we have went through by employee type by whether it's back office or the home office or whether it is adding the field and evaluated all of those changes and to be honest with, you we've now be able to mitigate it where there is not going to be financial impact on our P&L next year.

[Operator:]

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

[Ryan Halsted:]

I wanted to get back to the volume question. Obviously great quarter with some impressive same-store volume growth specially highlighted the case mix. I thought maybe you could provide a little color on the types of cases or DRGs, I mean, is this mostly or is a lot of this the CJR type of cases that you are seeing?

[Don Stelly:]

This is Don. Some of it is, but Keith used up, he used three different reasons and his third was push from downstream specifically [SNFs] and [ERG]. And as we see people really to start to manage that continuum that is a big reason that we are seeing. So, even if it's clinically driven, patient, the severity of that disease, the acuteness if you would, has been seen at higher to-date than in years passed, point one. CJR is certainly part of that with the shift to the home based system, but I would put both of those in combination and say it honestly, it's a bigger contributory factor of what Keith alluded from that push from, that acute setting into this home setting.

[Ryan Halsted:]

Okay, that's helpful. And then just shifting gears to regulatory side, I was hoping you could clarify, you said that the impact from the Medicare final home health update would be a 1.75% to 2.25%, negative impact. Did you say that you expect now to be able to mitigate the entirety of that impact?

[Josh Proffitt:]

Yes, Ryan. This is Josh. Yes, that's a range that we are currently estimating and again I would definitely make sure that we are all aware of that. There is a lot of analysis that goes into that which we while we have a point five spread in our range, right now. The rule just came out and we're crunching all the analysis through all the different case mix way changes. But, yes, we feel very confident that we'll be to mitigate because next year I mean, just a couple of factors that give us that level of confidence. I mean, Don really spoke to earlier, but the organic growth that we are not only planning for next year and capacity planning for as Don said, but also budgeting for next year. Is that unprecedented? Obviously, we'll have some accretion from the LifePoint transaction that we announced yesterday, that we are very excited about. The improvement in hospital reimbursement, as our hospitals service lines becomes more and more substitute a 2% increase, and that reimbursement obviously helps offset some of the home health. And then, the continued margin improvement in our prior acquisitions, I really want to stress that. It's mainly driven by healthy arm, but when you look quarter-over-quarter, our in total, our gross margins for acquisitions that have gone from 29.2% in Q1, 31.7% in Q2 up to 37.3% in Q3, for the gross margin contribution from our acquisitions. So, we have additional acquisitions that we think are going to continue to improve heading in the next year. And then the last one I will give you, just the continuing leveraging our G&A. I couldn't be more pleased with the foundation that we have invested in over the last five or six years, from the technology perspective, from the diplomat of home care and home base, and being fully prepared and ramped up there to really all of our back office areas at a point that we can add $100 million of acquired revenue and be able to continue to leverage that as we grow to offset those cuts.

[Ryan Halsted:]

Okay, I follow you. But just to be clear, I realized it's still something you are working through and varies. But the range you are providing, I assume that sort of incorporates maybe some of the changes that came out from final rule from proposed rule. But is there any chance that you think -- is there any way you think you can mitigate the impact just by changing your mix or your care protocols or something like that?

[Josh Proffitt:]

Yes, I'll let Don take that from an operational perspective. The short answer is, no. But I'll definitely let speak to it. And you are Ryan, the range we gave does into take account our now three days into analyzing all the case mix, wait change. As you probably recall, we had a 2.26% number that we had out there prior to the final rule coming through. But Don, you want to speak to that?

[Don Stelly:]

Yes, as you said, it's exactly right. The shorter answer is, no. That is definitely based on not only the [HHDRG] that we get when we [Indiscernible] but a provision of care from wait visit and reach out all of those things. So, I don’t think that is able to be mitigated, but I think that our experience shows that through the spectrum of the years, those numbers are of fluid. For example, in January as I sat here, I think Eric has talked to us about a 2% expected impact from the rule of last year, while we're not experiencing that. But it we won because we were able to mitigate the fuller patients. We actually increased services like our ortho program and that was able to offset that. So, it’s not a targeted approach to mitigate or honestly manipulate the patient volume instead we will look at what we think the worse could be, and make sure that we have backfill approaches that Josh alluded to accrete to our shareholders.

[Ryan Halsted:]

Now that make sense, I appreciate that. And then just last one for me. On the LifePoint joint venture, looks like a great deal. I thought maybe, can you provide some color just on how many of the LifePoint hospitals do you think could ultimately look to expand, or have a home health and hospice location? And then just secondly, how much overlap currently exists, and is there an opportunity, or do you think there is a need for additional overhead? Or do you think you can manage at is? Thank you.

[Keith Myers:]

So the goal is in this partnership, and we’re not saying partnerships, LifePoint is as committed to building a world-class home health and hospice program as any hospital health system we’re going to work with. And they want to really like it that they see this as a very core part of the strategy for the future. So there is always that we will build out home health and hospice services in every LifePoint facility. Currently, and as they continue to grow, I’ll let Don speak to this specific overlap and the timeline. But it is aggressive. And I could give you a general feel for what that means. And if we just take the current LifePoint footprint of hospitals they have today and we gave the entirety, the hospital joint venture volume we have today compared it in size with hospitals of their size and then missions and all. If LifePoint didn’t grow from where they are today this was $200 million to $250 million home health and hospice business today when it's fully implemented and rolled-out. But again more exciting to me is their continued growth and our being their partner long-term as this continues to grow. Don, can you talk, maybe give us a timeline.

[Donald Stelly:]

I mean, they’re spending on hospitals about half of them right now is what we’ll be working on to integrate. What Keith was talking is one of the really exciting parts of this is that LifePoint is equally as excited about using home health to leverage that downstream volume run as we are. So of course in that vein they want us in every market that they are. And what Keith talked about $200 million to $250 million, I kind of look at that as year three. When we go in the year three of this partnership, our operational plan our conjoined operational plan has us budding up in all of those markets to be that solution. And I think when we get there, that run rate of revenue and on the span as they continue their M&A and by the way we do the same. So Keith, you’re absolutely right, I agree.

[Keith Myers:]

I think there was one other partner question also, but you asked about capital. And obviously in the markets where there is no overlap and they do not have those services existing, then we have to build those out. And if it's in a non-specific main state then it’s just a matter of line, but also license here and doing a start-up and a significance needs base, then I mean, we follow our carved out team will be working that immediately, while the operations team is transitioning to the existing assets, there’s been sensitive needs base then we would have to source a, probably a smaller provider in that market and then use that as a vehicle to get the joint venture starting whether home, health or hospice in that market. But very minimal capital required.

[Ryan Halsted:]

And just, what's the size of their current home health business today, and hospice business today?

[Joshua Proffitt:]

Ron, this is Josh. We really need to, from our perspective, stay focused on what Keith and Don were talking about on the future and the potential. Right now, we're still finalizing the phase-in nature of the current business. So, I don’t want to give you a number that all comes in January 1 for example. It will all be coming-in in 2017, so that's one reason. And then the other is just the sensitivity between two public companies between LHC and LifePoint, a lot of those particulars and details we are not putting out there.

[Operator:]

Thank you. Our next question comes from the line of Dana Hambly with Stephens. Your line is now open.

[Dana Hambly:]

Just on that LifePoint, is that going to be consolidated?

[Keith Myers:]

Yes. So we will be the consolidator of the revenue.

[Dana Hambly:]

Where you have agencies in LifePoint markets? Would you be contributing those to the joint venture, or would you continue to operate at those 100% on your own?

[Donald Stelly:]

This is Don. We will in 2018 that we’ll begin contributing portions of that, yes. But it's kind of like Josh said economically we’re not ready to put that out there yet, because we’re still working for some of those details.

[Dana Hambly:]

As you talk with your hospital partners, is there any desire on their part to turn over their whole post acute operation to someone like you instead of maybe using the convener, use someone like LHC, and would you be interested in doing that or have the capacity to do something like that?

[Keith Myers:]

Ron, the short answer is, yes. So, that’s really where we see ourselves going. And more and more in fact I would say, in 2016, I don’t know of any hospital conversations. I do a lot of that work myself with our team where the hospital has not asked us to do that. I want to remind you that we've always had those capabilities. And prior to going public LHC operated out-patient therapy centers, we managed SNF facility, we managed in-patients rehab. And then we ended up with the seven regulatory out there we have with hospital partners here in Louisiana, as you well know. But we see ourselves going back in that direction with hospital partners when asked to do so. The only must have, the requirement that we have is that we must have home health, because the home health is the home health is having a high performing home health total is how we really leverage our cost. But when we see ourselves more and more managing this SNF and ERS and part of our existing hospital partners when asked, and we have recently beefed up our team to support those. That are really good questions.

[Dana Hambly:]

And just last one for me, Josh, when you said you can mitigate the impact of the home health cut that is before any future acquisitions. Is that correct?

[Joshua Proffitt:]

That’s correct.

[Operator:]

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

[Bill Sutherland:]

Just want to look at a couple of the other business lines for a second, in hospice, what was the growth expense-acquisition impact year-over-year?

[Joshua Proffitt:]

Bill this is Josh. I just want to make sure I got the question right. Are you asking for organic same-store revenue growth for hospice [multiple speakers]…

[Bill Sutherland:]

That’s right, revenue. Thank you. And maybe the split between volume and price, if that’s available.

[Joshua Proffitt:]

Patient days, Bill, we’re around 17.5% and revenue around 15.5%.

[Bill Sutherland:]

And what do you guys build out the sustainability on that side?

[Donald Stelly:]

This is Don. That is a substantial part of that mitigation Josh was talking about is inside of that. I mean he noted the healthy arm, but just from a contribution margin sequentially over last quarter, we view it as another $1.2 million. And we really haven’t hit our stride, this thing has really turned. It’s a real good asset. And I would also say the same thing for our legacy and our organic portfolio. You combine that with 1.9% pick up and we feel real good about it.

[Bill Sutherland:]

And then curious on community based services. Seems like the steady trend there. Is that high-up on the M&A focus list, or how do you guys think about that going forward?

[Keith Myers:]

Yes, so this is Keith. So, that’s really a state by state answer. So we’re very high on the service line, especially in the dual eligible population. So, if there is adequate funding in a given state, I really like to see home health hospice and community based services. When you think about the services that we deliver outside of the end base study, we like to see all three of those. But it's such a state specific question. When we look at a CVS and we look at it on a state by state basis and we decide to -- if we look at it as an opportunity, we look at the states that they’re in and then we actually do a deep dive on not only the current reimbursement in for those services, but the underlying political environment and the ability of the state to continue to fund it forward. And we typically use model with that as we’ve been for that. So, I hope I am answering the question. And what I’m saying is that we’re very high on the service. We believe it’s a much needed service. We believe it should be better funded, it's very much needed. But it’s very risky because of this state reimbursement is volatile. So that’s why we cautiously expand that. And I would just close by saying, we have the highlight I’d say that we have a strong global management service in Tennessee. Tennessee has a great global [indiscernible] state, so model that way. It’s a great business line for us, great for patient, and it’s great financially. So, I hope that answers your question.

[Bill Sutherland:]

Yes, that’s helpful.

[Donald Stelly:]

Yes, we know a lot of just as -- Bill I’ll add just a little color to it. You used the word steady-eddy and that’s a really good way. We look at it as we’re going to way forward to no-go plan just in the State of Arkansas, the CVS in and of itself, each one of those are going to contribute next year. So your question was set it around whether we would look at it acquisitively. As Keith said, we’re absolutely open when the state specificity warps that, but organically we have a good opportunity to co-locate base in the market and we’re executing that plan right now.

[Bill Sutherland:]

So was it 22 states you guys have footprints, or whatever it is. How many states do you feel like CVS makes sense, given the particulars on the states?

[Keith Myers:]

Right now probably four or five. I mean, there are some that have decent reimbursement today. But when you do a deeper dive with someone like -- I don’t want to get involved with Illinois, and put it out in the Illinois, put their name out. But there are others that do that same work. They would just study that could be risk in the program in two to three years out, and so which they’re just way from investing very much in that, for example.

[Operator:]

Thank you. And our next question comes from the line of Brian Tanquilut of Jefferies. Your line is now open.

[Brian Tanquilut:]

Just a follow-up, Keith or Don. Healthy on you, you alluded to that, show some improvement this quarter. So, as we think about your original synergy plan and turnaround plan for that business when you bought it. Where are we in business like bidding and for that specific acquisition? And I mean this comes from the just notion that there is probably more of it we can sweep out of that and to drive some upside or some earnings going forward. Is that a good way to think about that?

[Keith Myers:]

Yes, it really is. And I’ll say this again for you it’s not that most of the time it takes about 12 months to turn these things around when they’re broken. The good news is we’re right at that period right now and right on track admittedly. And I said it last call, we were a little bit behind. But the September and October acceleration by the teams there got us right back on track, but we’re not kept out by those stretches. We still have opportunity in it. And roughly about 25% of the locations, it’s a bell-curve as of it right now we’re not where I thought we’d be. But on the other side of that curve, we’re hitting especially in our Georgia market. So, we have definite tailwind behind this thing.

[Brian Tanquilut:]

And then the last one for me, you alluded to your stars progress in your prepared remarks. What level of focus do you think, your referral sources have, and your potential partners have when start at this point, or is that more of a two to three year-add opportunity or is that already part of the discussion?

[Donald Stelly:]

No, it's extremely top of mind for now. And I’ll there say when Keith use those three, the traditional sales, he said they use more differentiation, a lot of times you would expect people like us to talk about it, this is a differentiator now. And so -- and it's not just candidly referral entities and hospitals, their programs one of them that I'm looking at right now that when patients are admitted to a facility, there are programs that platform immediately on an iPad for example the number one agency in that market. So that choice is moving away from relationship to consumer as value. So, it is extremely top of mind. And I think it's a big reason that I was so robust and why I feel good about the organic next year.

[Keith Myers:]

And I would just add to that, so Don filled in that this is -- comments of really addressing the organic growth, but I can back that up. I think in the hospital's meeting that I'm going to and especially it's one of the first questions they are asking us, they wanted to talk about the star ratings and our ability to sustain and full fall from that. But the reason is that they are tying that to their value based purchasing strategy in this region.

[Operator:]

Thank you. Our next question comes from the line of Frank Morgan of RBC Capital Markets. Your line is now open.

[Frank Morgan:]

I was hoping if you could give us an update on your, the LTACH mitigation strategy for patient criteria. And just any color there and maybe how that's shaping up in terms of the drag it presents? Thanks.

[Keith Myers:]

At a high level, Frank, the drag that it presented is being experienced in the trajectory of earnings right now. We don’t see again any worse. So I guess let me state that little bit differently. The EPS that we’ve experienced in this third quarter, and that allowed us to raise our guidance going into this full quarter is exactly where we thought these things would be. And so the site neutrality plans that we have pretty much the script is working, and I would continue to say that the earnings that we’re experiencing today are going to go through next year, not only this will come back in to the full phase in as we get to the last little piece on it. Does that answer to that?

[Frank Morgan:]

Yes, that's it. And what quarter that your last hospital roll-in to criteria?

[Keith Myers:]

All of them, the last of 831 prior year-in so September of 2017, right here.

[Operator:]

Thank you. Our next question comes from the line of Whit Mayo of Robert W. Baird. Your line is now open.

[Whit Mayo:]

Can we go back to the pre-claim review just for a minute, and I'm going to play double-havoc if even though I think it's the dumbest rule that I've ever seen. You characterize it as a simple change in internal processes. And when we talk to agencies, it sounds a lot more complicated than that. So, I just like to hear little bit more about the experience. I mean it sounds like the max are being extremely inconsistent in their determinations. We’re hearing lot of issues with doctors complaining and referrals sources complaining they’re getting irritated, patients are cancelling up their surgery calls, they are getting letters from CMS and they don’t understand this and agencies are holding cases, volumes are going, I mean, I could go on. But it sounds so bad that it probably gets fixed. So I guess I would just be curious to hear a little bit more perspective on how you look at this one specific issue?

[Donald Stelly:]

So let me color in, its Don. Let me color in my comment and I went back to my prepared remarks just to make sure I have got on the point. In the prepared I said it's not in quote-on-quote, not a major issue but more like a shift in process. It is a paying in the tail, and I agree with you. And we concur about how the restrictions are precluding care and cases. So I don’t want to mislead. Point one that I want to make there. We’re not as a Company concentrated in these states like some of our costs. Therefore, I am just telling they’re not major issue. And point two as we had, what's called an end of episode process that’s essentially before bills are dropped keeping hones at that bill are looked at. What we have done and what I’ve asked by our team to do we shift that up, so that we essentially stay ahead. And now that we’ve experienced the PGDA is looking for, we have good feel. None of that is to say that it's not a distraction. But I have to say that, if you kind of take these distractions and these rules as they come and hop on the fact of negativity, I mean, that’s how we live now. So whether its face-to-face proclaimed review they are all problems and we don’t like. But I can't leave investors to think that we can't overcome and mitigate that as best as anyone in the industry, and that what I was trying to say is not a major issue for us.

[Whit Mayo:]

Yes, it just seems that base off of the experience that no one know, I mean, it was a such a tragic implementation that they obviously had to freeze this. And again anecdote that you hear about like takes over an hour to gathering and take review and upload the claims, the information. I mean it's just -- it all sounds terrible. And I guess we all presume that it won't be implemented or reinstated until after the election for various reasons. But I guess from a policy perspective and conversations you are having on this, they’ll keep this. Any feedback that you can provide that gives us some comfort that broadly speaking this for the industry may change, may soften, just any thoughts?

[Keith Myers:]

I realized that -- so we’re on public earnings call. I think there are a lot of people even at CMS we realized they’ve got their own. And I think what they are trying to accomplish, they’re trying to go after aberrant behavior. But this is just another of those shot-gun approaches where rather than taking a targeted approach, you do something across the Board that has unintended consequences. And that conversation -- these are good people who have the jobs, just like the rest of us. I just think this plan wasn’t well thought through. So I really do believe that there is going to be serious modification to it. And it’ll end up being something more targeted and that would be -- we have lesser a negative effect on goods providers that are trying to do the right things. I really do believe that. And that’s because they’ve been responsive. But there is also in these agencies, things don’t move quick and then once they offer something, it seems like the almost a pride of authorship when one you have to walk it back, it moves a little slower than we’d like it to. That’s what I think. But I do think they hear us, everyone in the industry has done a lot of great work. I think our colleagues, we’ve involved they’re involved also, but the partnership has done a lot of great work and being very proactive in presenting data. And I think CMS is being very responsive to it. So I’m encouraged about it. I think what Don was trying to say from an operator’s perspective, here is how I see it seems like for now 22 years, we don’t get a whole lot of good news in home health. We do get more issues that we have to deal with. So we just buckle down and deal with. And I think that’s where we’re involved in.

[Donald Stelly:]

And Whit I want to just in with this, and again, I think Keith and you were saying we don’t like this. But our job is to deal with what we don’t like and incur the earnings of Company. We’re just still experiencing a steady 76% affirmation rate, which obviously means 24% not where we see this, there is not a major impact to earnings is that those cases are going to be won. We feel that the [indiscernible]. So we can absorb that and still create the value in the earnings for our shareholder was more of my prepared comment under-toe that’ll be as we think that this in any way good or acceptable.

[Whit Mayo:]

Does that 78% affirmation rate include the partial affirmations?

[Donald Stelly:]

Yes, it does, and it’s 76%.

[Whit Mayo:]

Still sounds like a non-affirmation when it's a partial affirmation, but that’s just me…

[Donald Stelly:]

It depends actually, and I can take that offline Whit and tell you what we experience in that when it comes to the type of business environment.

[Operator:]

Thank you. And the next question comes from the line of Ryan Halsted of Wells Fargo. Your line is now open.

[Ryan Halsted:]

Thanks for this follow-up, I’ll be quick. I apologise if I missed this. But did you give an update on the status of the PHR transaction?

[Joshua Proffitt:]

No Ryan, this is Josh. So I’ll go ahead and give that response to you. As we announced at the last call, we had put the transaction, from a negotiation standpoint and expected closing on a hold. And it continues to be in that on-hold state. I’ll tell you since the last call we have terminated technically the purchase agreement, but are still in conversations with the sellers. And if we can come to an agreement on value and all the other key terms, I would treat this one like any other deal in the pipeline. It is not in the $106 million that Keith talked about earlier, just to be clear. I know I got a question about that last night. So, the previously announced PHR is not being attributed to any of our stats that were given to you. But we are still looking at it and considering if there is a transaction there to be had.

[Ryan Halsted:]

And I know it’s not one of your largest states, but Florida, was there any impact from the hurricane?

[Donald Stelly:]

Minimally, but nothing in volume. Operationally, we had a couple of issues but it didn’t hurt -- the patients there that’s already admits.

[Ryan Halsted:]

And I assume you’re referring to the broader business, I expect Florida, but any location?

[Donald Stelly:]

That is correct. We don’t have broadly in fact we got things going into another side, honestly a little parallel. So it was very minimal for us.

[Operator:]

Thank you. And I'm showing no further questions, at this time. I do hand the call back over to Keith Myers for any closing remarks.

[Keith Myers:]

Okay. Thank you everyone operator. And thank you to everyone for dialing in. And as always, if any questions come up or you would like to speak with us, if something between earnings call, Eric Elliott is always available and the executive team will make themselves available if you have any issues or not, I don’t know. Thanks again for joining us and thanks for your support and confidence in LHC Group.

[Operator:]

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