LHC Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to LHC Group First Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would like to hand the conference call to Mr. Eric Elliott. You may begin sir.

[Eric Elliott:]

Thank you, Kevin, and welcome, everyone, to LHC Group's earnings conference call for the first quarter ended March 31, 2015. 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'll hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Dionne Viator, 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 2015 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events. Now I'm pleased to introduce the CEO of LHC Group, Keith Myers.

[Keith Myers:]

Thank you, Eric, and good morning, everyone. I’m extremely proud of the strong and well balanced operating results our team delivered during the first quarter. I’m particularly pleased with our ability to once again achieve solid organic growth rate in home health admissions of 6.5% compared with the first quarter of 2014. I would like to congratulate and thank our nearly 10,000 team members for their unwavering commitment to excellence and for consistently delivering high-quality care to the growing number of patients, families and communities we serve. Since we had our last earnings call just two months ago, we will keep our prepared remarks short in order to allow more time for Q&A. However before I turn the call over to Don and Dionne I would like to touch on couple of items. First; in April Congress passed the SGR repeal bill, in this bill there were two items that were specific to home health. One; the SGR bill included a two-year extension of the rural home health add-on pavement of 3%. The rural ad on pavement, which was set to expire on December 31, 2015 has now been extended to December 31, 2017. There was overwhelming congressional support for the rural add-on I should add. Number two; the SGR bill also sets the annual update for all post-acute care providers including hospice at a positive 1% for 2018 net of any adjustments with the sole exception being the penalty for non-submission of quality data. The SGR bill along with the ACA has now given us visibility through 2018. With regard to external growth; consolidation activity continues to accelerate and our in-house corporate development team is reporting record activity in the first four months of 2015. We continue to focus on hospital joint ventures and small acquisition opportunities that have been the bread and butter of our growth strategy for the past 20 years, thus far in 2015, we have logged 96 new opportunities in this category. Of these 96, we decided to pass on 68 after our initial review, the remaining 28 received in 2015 remain active giving us a total of 39 opportunities in the pipeline at this time under evaluation of this smaller size. In addition to our traditional core pipeline activity, our executive team is meeting more regularly with investment bankers evaluating larger strategic opportunities typically greater than $50 million in annual revenues. We’re also continuing to strengthen our relationships with managed care payers and value-based purchasing models that create better alignment between our organizations. I’m happy to address any of these further during the Q&A, but now I’d like to turn the call over to Dionne.

[Dionne Viator:]

Thank you, Keith, and good morning everyone. If you had a chance to review our earnings release you will notice that we have now broken out each of our different service lines into the income statement, specifically it includes home-based services, which is home health; community-based services; hospice services and facility-based services, which is primarily made up of our LTACHs. Since you now have the ability to see the operating results of each service line, I will no longer go through those during my prepared remarks, instead I will focus on the key trends during the period. On a consolidated basis, our gross margin was 40.7% of revenue in the first quarter of 2015, as compared to 40.5% in the first quarter of 2014 and 41.7% of revenue in the fourth quarter of 2014. This decrease in gross margin compared to the fourth quarter of 2014 was principally driven by seasonal increase in payroll taxes of approximately $1 million over the fourth quarter, which lowered the gross margin by 40 basis points and the remaining decrease is due to an increase in our self-insured health care cost during the quarter. Our general and administrative expense was 30.7% of revenue in the first quarter as compared to 33.4% in the first quarter of 2014, and 31.7% of revenue in the fourth quarter of 2014. The decrease in G&A compared to the fourth quarter of 2014 was due to the elimination of certain general and administrative expenses in association with the completion of our organization wide conversion to point-of-care as discussed on our last earnings call. Our bad debt expense represented 2.7% of revenue in the first quarter as compared to 2.1% of revenue in both the first quarter of 2014 and the fourth quarter of 2014. The increase in provision for bad debts was directly attributable to an additional reserve being recorded for patient service claims related to prior period patient care associated with two commercial payers. These adjustments are an isolated occurrence and negotiation between the parties are ongoing. Our effective tax rate in the first quarter of 2015 was 41%. Regarding 2015 full year guidance; we are raising our full year 2015 guidance issued on February 25, 2015 for net service revenue in the range of 755 million to $775 million to a new range of $765 million to $780 million. In addition, the company is revising its fully diluted earnings per share in the range of $1.50 to $1.70, we’re raising the lower end and establishing a new range of $1.55 to $1.70. This guidance does not take into account the impact of future reimbursement changes if any, future acquisitions or share repurchases if made, de novo locations, if opened, or future legal expenses, if necessary. For the full year of 2015, we continue to expect, gross margins to be in the range of 40.5% to 41.5%. G&A as a percent of revenue to be in the range of 31% to 32%. Bad as a percentage of revenue to be in the range of 2.0% to 2.5%, and our effective tax rate in 2015 to be in the range of 40.5% to 41.5%. That concludes my prepared remarks. And I'm now pleased to turn the call over to Don Stelly.

[Donald Stelly:]

Thank you Dionne, and good morning to everyone and we appreciate you listening in to our prepared comments. I’ll start with volumes briefly and stay brief as Keith said to get to the Q&A. But during the first quarter, we too had our faired share of weather related issues just as we did last year in the same period. This year, however, we saw approximately 150 of our agencies experience either partial or total closure inside of quarter. But we were pleased as our clinician certainly put patient care first and our operations and sales team continue to grow the business. As Keith alluded to, we saw a 6.5% organic growth when compared to same period prior year, and that in combination with what we believe our sales and market development efforts are producing right now, lead me to go ahead and guidance toward an increase in our organic growth for the year of 4% to 5% versus what we talked about last quarter as you would recall was 2% to 3%. Moving on briefly to a couple of regulatory updates; over the last couple of weeks CMS has released proposed rules for both hospice and LTACHs for our fiscal year 2016. On the hospice front, the proposal was released on 30th of this year, the components are as followed; an estimated 1.3%, an approximate $200 million [ph] increase in the payments for fiscal year 2016. These rules also proposes two different payment rates, a routine homecare, that would result in a higher base rate for the first 60 days of hospice care and reduced base payment rate for 61 or more days of hospice care. These deferring payment rates would further the goal of more accurately aligning the per diem payments with visit intensity as well as the cost of providing the service and care. Proposed rule also includes a Service Intensity Add-On Payment, the proposed SIA payment is a payment that would be made for the last seven days of life, in addition to the per diem rate or the RAC or routine homecare level of care, if certain criteria were met the payment would not be made to providers with patient residing in sniffs and nursing facilities. The SIA payment policy encourages visit to patients at the end of life and improves provider accountability. Additionally, the policy begins to address industry and other organizational concerns who are in the need for increased payment for more resource intensive days. The proposal rule for LTACHs was released on April 17, and those components are as followed. The pathway for SGR Reform Act of 2013 directed to CMS to established two different types of LTCH PPS payment rates, depending on whether or not the patient needs certain clinical criteria. Standard LTCH PPS payment rates and new site neutral LTCH PPS payment rates the latter based on IPPS rates. The law transitions the payment reduction for site neutral cases for the first two years of the revise LTCH PPS for required payment based on a 50-50 blend of the standard rate and the site neutrality rate. CMS projects that the LTCH PPS payments would decrease by about 4.6% based on the proposed rates for fiscal year 2016. This estimated decrease is primarily attributable to the statutory decrease in the payment rates for site neutrality cases that do not meet the clinical criteria to qualify for the higher standard LTCH PPS payment rates. CMS’s analysis of 2013 data shows approximately 54% of LTCH discharges will be paid at the LTCH PPS rate in 46% subject to the new site neutrality rates, consistent with the industry's estimates and by the way consistent with LHC Group's current patient population. Cases that do not qualify for the higher standard rate, will see an increased net payment rate of 1.9%. For us, this rule will become effective for two of our eight locations beginning 6/1 of 2016, and then the remaining beginning 9/1 of 2016. In closing, I too and we are extremely pleased with our first quarter performance, and truly we feel great about our momentum across all facets of the business as we proceed into the year. To our team members listening this morning, thanks for all that you do. You did a fantastic job, you’re valued and appreciated. And to all again thanks for listening into our prepared comments, and Kevin will now go into the Q&A session of the call.

[Operator:]

[Operator Instructions] Our first question comes from Kevin Ellich with Piper Jaffray.

[Kevin Ellich:]

Good morning, and thanks for taking my questions; first off, a nice quarter guys. Keith, wondering if you could remind us what percent of your revenues are exposed to the real add-on that was extended.

[Keith Myers:]

45% roughly, now.

[Kevin Ellich:]

Great thanks. And then for the development activity known the 28 or 39 deals that you have in the pipeline, is there a dollar value that you guys could put on that to help us kind of think about that?

[Keith Myers:]

So let me say it this way. So a lot of, in that pipeline that we refer to as – we refer to as smaller deal that include the hospital joint ventures, I’m they will really range from – I’m just thinking, I don’t know have the pipeline in front of me, but you know some as low as $1 million in trailing revenue, where it’s just really rolling in and with an opening into our market and then going to grow market share to probably on the high end right now in that pipeline, $20 million or so, you know and not many of those. But the sweet spot I guess would be, the average would be in the $5 million to $10 million range, that’s kind of what we see. I don’t have them added up, so I don’t want to tell you that’s what the average of that group, but that’s what they typically run. And then I hope I got the point across right in prepared remarks, but separate and apart from that effort, this is something we just started really focusing on, really, right at the end of the last year and it’s really become part of what we do on a day-to-day basis, the executive team is meeting on a very regular basis with investment bankers and not just – we always have bankers that come in and call on us, but we have several groups that we spend more time with and they've invested the time in getting to understand exactly where we want to grow and how we want to grow on larger deals, and so we’re being much more focused and specific and managing those. Those of course take longer to develop and some of them we think might be coming to market at some point in the future, but not really ready yet and then there are some that are nearer, but that’s a new process for us. In the past, we used to kind of sit here and not put a lot of effort into it, but we just sit here in receive mode, so we’re trying to be more proactive about that.

[Kevin Ellich:]

Great, and then actually if you could add a little bit more color on that last point Keith. I guess what sort of deals are you guys evaluating with these bankers? Are they core home health, hospice and LTACH or are you looking to kind of add something else to the business? And I guess, what are the criteria that you're looking at when you’re evaluating these deals and if you have any thoughts on potential timing would be helpful as well?

[Keith Myers:]

So that’s a good question. So on the larger deals, I mean we're really looking to those would typically be home health, hospice or community based services, kind of the short answer. Something that we believe we perfected our model in and we’re looking to scale up and go into new areas. We’re always looking at new opportunities to where it makes sense to expand the service offering and piloting things that are small, but wouldn’t go do an acquisition to, that’s not typically how we do it, do an acquisition to kind of enter a new space. And on the timing, there is not really not much I can say about timing for obvious reasons, but I’m would just – I can just tell you that the numbers should tell you that we're pretty active, we’re generating a lot of activity here and it would be surprising if we had all this activity and didn’t have acquisitions to show for at the end of the year.

[Kevin Ellich:]

Got it. Okay, that's helpful. And then, I guess I kind of want to read my last question into things. I think there has been a lot of movement or activity by Medicare with their shift to value-based reimbursement models, I think you guys have kind of dip toe – you’ve tone the water with ACOs and BPCI, wondering what your thoughts are there? And then on top of that, you know there's the post-acute care bundling legislation on the hill, wondering what your thought is and kind of long-term strategically, where do you think that position – that’s put the company and what would you like to add to kind of I guess best position yourself when bundling does eventually happen down the road?

[Keith Myers:]

So, let me just take the, you know, kind of a guess first at a macro level. We really like this continued movement towards post-acute bundling and are very encouraged that we continue to move more and more towards a general acceptance of site neutral pavement and where all providers post-acute providers that are capable of underwriting the risk and delivering on quality will have an opportunity to be the convener or the coordinator as the backpack bill refers to of those services, I mean, that's very encouraging. But if I can take just a minute, you know, I want to set back in time a little and remind you that this – some we’ve been working on, and not just we LHC Group, but leaders in the industry for a number of years. Back in 2010, when we all came together and informed the partnership for quality home health and the alliance for home health quality and innovation, it was to kind of look ahead outside of just fighting year-to-year reimbursement changes, to look ahead and try to have some voice in shaping the future how it would be reimbursed. What you see in the backpack bill is really the result of a study that we commissioned in 2012 by Dobson/Davanzo was to clinically appropriate and cost-effective placement study. And that’s published, it's available through the alliance for home health quality and innovation. And as always, I encourage all of you to reach out to Eric Burger in Washington D.C. that heads up for the partnership for us to follow up more detail. But what that basically did was, long before we were involved in BCP [indiscernible] or whatever, it told us that patients that were placed in the most cost-effective settings, appropriately placed, experienced the same outcomes at a much more cost. And for us, with the bundles we’re involved in now and working with the companies like Nava Health, examples as one that we work with, when we go in and analyze all the data and look at where all of the savings are coming from in these post-acute, more than two-thirds of the savings is coming from just the shift of patients from Smith to home health. And the other is, the other third comes from patients being shifted from LTACH and Earth down to Sniff. So for the final part of your question when we think about what is it that we will add in the future to better position us to capitalize on that value, to be able to capture that value, it’s things like, and Don can speak more to this, but it’s things like a wound care capabilities, the ability to care for higher level wounds in home, in home infusion services. Those are the reasons that allow the patients are in sniff units, and the reasons we aren’t caring forming the home health initiative, a, because the payment is not there, but if you move to a site neutral payment, then that really turns out on his head and I would argue that no one is better positioned in the home health to create that value. Don, do you want to add?

[Donald Stelly:]

Yeah Keith, I’m following that a lot to add to that because you really hit the nail on the head, we see the in-home service model that we're going to date evolve into where we take care of a much more broadened patient issue type. For example, Keith talked about wounds, we also see IV of patients sneezing and sniff payers that we can now take. And so we're going to have that evolve over time and to where we’ve broadened the breath services inside of our company. But also Kevin back to your comment about us dipping the toe into the water of ACOs, I have inside of a spreadsheet that we work on in our internal market development, it’s a pipeline at least 402 ACOs in our portfolio states. That toe in the water now has us in 10 with really only one of them being a non-pure play on volume. They wanted to talk about is a 90% discount – 9% part of the Medicare rate and our upsize is up to 120. So really in any of those there is no risk in any upsize just didn’t recognized yet. But I guess what I would say to that is we like kind of how that toe feels in that water, but not all of ACOs are equal in these markets and some of them are much more loosely run, some of them have a much tighter provider network and we like the latter, and we intend to go ahead and bring those into the portfolio as the year goes and I’ll probably keep updating on you that as we go forward.

[Kevin Ellich:]

Sounds good. Thanks guys.

[Operator:]

[Operator Instruction] Our next question comes from Toby Wann from Obsidian Research Group.

[Toby Wann:]

Hey guys, thanks for taking the question. Could you maybe talk up a little bit about your recent experience on the commercial insurance side, Medicare advantage, just kind of the trends you guys are seeing there relative to history? Thanks.

[Keith Myers:]

Sure. Are you talking in terms of volume?

[Toby Wann:]

Yeah both volume, rates et cetera, I mean just in – kind of in general? You’re seeing more and more people in the Medicare Advantage, so commercial is got to becoming a bigger part of your business I would think, so just kind of your experience with those sorts of things?

[Keith Myers:]

Sure. Okay. I got it. Just want to make I was answering, what you – the question correctly. So we are seeing an increase in managed-care penetration in the larger population centers as you might imagine. One thing that’s’ a little unique about LHC Group is the, we just mentioned is the higher percentage of rural mix we have. One of the reasons we’re really happy about the extension of rural add-on because we like rural areas because we don’t have to deal with as much of the managed-care penetration. As you can imagine the managed care companies, the good news is that you have a lot of volume in one spot, the bad news is that you have a hard time negotiating rates that you can be profitable at. What we're encouraged by – so we’re able to operate profitably because we're leveraging our scale to drive efficiencies to be able to do that business. But long-term we’re going to continue to reduce rates and we’re not going to be able to continue to reduce cost, so what we’re excited about is the pilots that we have that we’re looking at, and value-based purchasing and that becoming very much a part of their language, one thing I’ve noticed is when you go in and you’re trying to negotiate rates with a commodity approach that you should raise your rates on all home health, it just really falls on deaf ears and you don't get anywhere. But the minute that you introduce your willingness to go at risk for performance that changes the whole conversation and that's where we are with I would say with almost all of them now. The devil is in the detail now; is how do we work it out and how do they – some of them actually get it and want to go with models we propose, but then it becomes a matter of how do they track it for us and separate us from all of the home health providers because we’re not capable of taking 100% of the market. That is just all they didn’t coordinated yet. So I hope that answers the question. I mean, its business that is profitable for us now, but looking ahead as we continue to do volume we can’t continue to get ratchet down on the race, there has to be some upside for us based on performance and I think we’re going to get that.

[Toby Wann:]

And what percent of your overall – home health hospice business is derived from managed care, if you don’t mind?

[Donald Stelly:]

Toby, this is Don. Right now, in fact I was going almost chime in, and Keith when you said that it was a bigger part of our business, we’re about 76%, it’s exactly 76.1% of our total census, it’s still Medicare and that’s only actually varied from 75.9% when we were sitting here last year. So you can actually see that it’s really not a big tick up, but I want to echo what Keith said is that our clinical teams are doing some modeling right now that want to take this as a big opportunity, but we’ve got to do some things differently and get in front of the managed care payer, so that things like telephony and telemonitoring are adjunctive and remote, but yet still get the same outcome. So while it is not substantively different than it was last year, our view of this is opportunistic, is probably different than last year.

[Keith Myers:]

Don, that’s a good point Don. So when I say – Don, just shared those numbers with you. What I didn’t say is that we limit the number of the managed-care business we’re taking in now. So if we did not limit that, managed-care would be equal to or maybe greater than our Medicare. So when I say we’re able to generate some small margin on managed care business, it’s because we're being very selective with which ones we contract with.

[Toby Wann:]

That’s helpful. Thanks for the questions.

[Operator:]

The next question comes from Kevin Ellich with Piper Jaffray.

[Kevin Ellich:]

Hey guys, sorry to get back in the queue so quickly. Just had a couple of a quoted questions. So hospice margins being down, wondering if you could provide some color there, and when do you think we should see margins improve, and then going back to the strong organic home health admissions growth. I think you did have a easier comp, due to weather. Don, can you write us how many agencies were hit last year with the really harsh winter weather? Just kind of trying to figure out what the normalized organic admissions rate should be?

[Keith Myers:]

I’ll answer the volume questions, Kevin, and then I’ll turn it over to Dionne and we’ll kind of maybe tag team the hospice, but I don't have the specific number of agencies last year, but it was more and you’re right that the comp and the hurdle was fairly weak. And before the weather hit us this year, we thought we were going to knock it out apart. So I was pretty excited about that during our last call. But in my prepared comments, I'm trying to guide still do that 4% to 5% organic growth rate for this year. I mean honestly, I think it’s a little conservative, but when I did our last projection in [indiscernible] and kind of took some seasonality into account, I got to the upper limit of that 5%. But I don't want to kind of get outside of that right now and you guys get ahead of us on those volumes. So I would probably stick with 4% to 4.5% as a pretty solid number, and I’ll know a little bit more on our next call. And so just to kind of sum it up, we did have, in our portfolio we had tremendous weather impact this year as well, in fact because of our Elk Valley location now being mature, which came on Deaconess those billable hours hurt us fairly deeply. And so all of that factored in is kind of why I moved away and moved up, 2% to 3% organic growth rate. Dionne, do you want to hit the hospice, on those margins.

[Dionne Viator:]

So the question about hospice, and the decrease in margins there between this quarter and the last quarter and 2014 is primarily related to volume. We have had a reduction in volume between quarters and in this first quarter of 2015, the increase with payroll taxes has made a difference there as well.

[Keith Myers:]

I’ll just add to it. I think the payroll tax is probably subsequent to that because when you look pre-NCI, we’re about, almost 11% this period compared to about 13% run rate. A lot of that was driven between just those two things that she alluded to. So I think that’s going to blend back up if I was modeling in Kevin.

[Toby Wann:]

Okay. And just want to confirm a couple of things to Dionne. I think in your prepared remark you said payroll tax hit gross margin by 40 basis points this quarter, is that right?

[Dionne Viator:]

Right.

[Toby Wann:]

And what was the healthcare cost or the medical claims, did you quantify that?

[Dionne Viator:]

I didn’t quantify it in my prepared remarks, but that was large claims that were – right below $1 million as well for the current quarter.

[Toby Wann:]

Got you. And then last question on the financial stuff is, what’s your current availability on your credit facility, in case you guys do look at doing some bigger deals?

[Dionne Viator:]

On our current credit facility, we have about $165 million, but in discussions about that as well.

[Toby Wann:]

Okay. Sounds good. Thank you.

[Operator:]

I'm not showing any further questions at this time. I'd like to turn the call back over to Keith.

[Keith Myers:]

Okay. No further questions, then thank you for joining us again and for listening in our call this morning. As always, any questions that come between calls, please feel free to reach out to us. Thank you and have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.