LHC Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to LHC Group Q2 2015 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Eric Elliott, Senior Vice President of Finance. Please go ahead, sir.

[Eric Elliott:]

Thank you, Candice, and welcome everyone to LHC Group's earnings conference call for the second quarter ended June 30, 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. As always, I want to begin by congratulating and thanking our nearly 10,000 team members for their unwavering commitment to excellence and for consistently delivering high quality care to a growing number of patients, families and communities we serve. I'm extremely proud of the well balanced overall performance of our team thus far in 2015. I'm particularly pleased with our solid organic growth rate in home health admissions of 4.4% in the first half of 2015 compared to the same period of last year, and our ability to control and further reduce G&A cost as a percentage of revenue. For 2016, home health proposed rule released in early July, if implemented as proposed would have an overall negative impact of negative 1.8% on home held in 2016 according to CMS. The main components of the proposed rule or addition to replacing or a negative 0.6% cut for productivity and negative 1.72% case mix increased cut in each of calendar year 2016 and 2017, and 2.9% market basket update. In it's draft regulation CMS is also proposing to pilot a home held value based purchasing program in nine states which Don will touch on in more detail in his section. We are actively working in conjunction with the National Association for Home Care in [ph] and the partnership for quality home healthcare in preparing comments in response to this proposal. VNA is also collaborating with knocking the partnership in this effort. These groups have commissioned several analytical studies to counter CMS's position on nominal case mix group. In addition, these groups are joined together to initiate a Congressional sign on letter in the House last week led by representative Walden Price from our McGowan, and expected companion letter to be circulated in the Senate in the near term. The 2016 cost reimbursement final rule was issued last Friday. Cost-based agencies will see an estimated 1.1% increase in their payment for fiscal year 2016, beginning January 1, 2016, CMS is implementing two routine home care rates to provide separate payment rates for the first 60 days of care and care beyond 60 days. In addition, to the two routine home care rates, CMS has recruited a service intensity add-on payment that was helped to promote and compensate for the provision of skilled visits at end of light. With approximately 70% of our hospice patients falling inside the zero to 60 day timeframe, we feel this new payment structure will benefit LHC. Moving on now to our pipeline, with regard to external growth, we continue to focus our corporate development efforts on our three end home service lines of home held hospice and community based services. With a more intense focus than ever before on adding hospice to our service offering and every market we serve, and home and community to get their services in every market and states where reimbursement is addition. Year-to-date, we have reviewed more than 150 acquisition, our hospital joint venture opportunities, including more than 50 since our last earnings call. For the same period last year, that total number reviewed was less than 75. From these numbers you can see that activity has increased significantly and we expect this trend to continue. Off the opportunities we reviewed thus far this year, more than 30 remained active, four of which we had exclusivity on while performing confirmatory due diligence and negotiating purchase agreements. In addition to our traditional core pipeline activity, our executive team is continuing to meet more regularly with investment bankers to evaluate larger strategic opportunities. I'm happy to address any of these further during Q&A. Now I would like to turn the call over to Dionne.

[Dionne Viator:]

Thank you, Keith, and good morning everyone. The net services revenue for the second quarter of 2015 was $200.2 million, an increase of 6% compared with net service revenue of $188.9 million in the same period of 2014. And for the six months ended June 30, 2015, net service revenue was $393.3 million, an increase of 11.6% compared with net service revenue of $352.5 million in the same period of 2014. Same-store revenue grew 2.7% for the second quarter and 4.1% year-to-date compared to the same period last year. This growth in same-store revenue is due to our growth in same-store admissions, changes in patient acuity, and the increase in the Medicare episodic rate from 2014 to 2015. Net income for the second quarter of 2015 was $9 million or $0.51 per diluted share, an increase of 47.7% compared with net income of $6.1 million or $0.35 per diluted share in the same period of 2014. And for the six months ended June 30, 2015, net income was $15.8 million or $0.90 per diluted share, an increase of 55.5% compared with net income of $10.1 million or $0.59 per diluted share in the same period of 2014. On a consolidated basis, our gross margin was 41.7% of revenue in the second quarter of 2015, and 41.2% of revenue for the six months ended June 30, 2015, this was compared to 40.9% and 40.7% in the same periods of 2014. Our general and administrative expense was 30.2% of revenue in the second quarter of 2015 and 30.4% of revenue for the six months ended June 30. 2015. This is less than the 31.6% and 31.9% in the same periods of 2014, an indication of successfully controlling costs while growing revenue. Our bad debt expense represented 2.4% of revenue in the second quarter as compared to 2.7% of revenue in the first quarter of 2015 and 2.3% in the second quarter of 2014. During the first half of 2015, we performed re-engineering of our revenue cycle department. We are now seeing the benefits from that as our cash collections in July are 11% higher than the monthly average, January through June of this year. As of today, the balance on our line of credit is down to $30 million, and our leverage ratio stands at $0.58. Our effective tax rate in the second quarter and for the six months ended June 30, 2015 was 41.0% compared to 41.8% in the second quarter of 2014. Regarding 2015 full year guidance; we are raising our full year 2015 guidance for net service revenue to a new range of $780 million to $795 million from the previous range of $765 million to $780 million. In addition, we're raising our fully diluted earnings per share to a new range of $1.70 to $1.80, from the previous range of $1.55 to $1.70. The guidance does not take into account the impact of future reimbursement changes, future acquisitions or share repurchased if made, de novo locations, if opened, or future legal expenses, if necessary. For the full year of 2015, we 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 30.5% to 31.5%, bad debt expense as a percentage of revenue to be in the range of 2% to 2.5%. Our effective tax rate in 2015 to be in the range of 40.5% to 41.5% Included in our new guidance is our estimates of the impact in the fourth quarter of 2015 of the proposed 2016 home held rule on strangle espisodes, the final hospice and LTACH rules for the 2016 which go into effect October 1, 2015. And the estimated effect from ICV10 [ph]. The primary factors behind our raise in guidance this quarter are few things, first, organic growth, we are trending at 4.4% as Keith mentioned, compared to our 2% to 3% growth expectation previously. Our acquisition of Deaconess, Addus, AseraCare, and LikeCare operating margins are trending better than expected strong cost management. And lastly, a benefit in pricing from the 2015 CMS home held reimbursement rule. The 2015 rule included an increase in the standard episodic base rate to offset the case mix reweighing in an effort or to be budget neutral for the industry. The neutrality was built into our previously issued guidance, however, due to our patient population, we are actually experiencing a 3% increase in our episodic rate in the first half of 2015 over the same period last year. 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 everyone and thanks to all for listening in. I'll begin my prepared comments by touching on a few things that's ahead of us. First, as Keith mentioned the 2016 home held proposed rule looks to establish a value-based purchasing pilot program. The proposed pilot program would withhold between 5% and 8% of participating home held agencies Medicare payments which would then be redistributed depending on participants performance related to certain and specified quality measures. Beginning on January 1st of next year, nine states will be participating in the program and we have 29 providers located in these nine states which represents about $103 million of our net service revenue. In addition to fully supporting these efforts with point of care now in rears with us and a new relationship with SHP, we are excited to fully maximize this opportunity and those that will follow, at least we think this paid for performers lead. Next, I'll touch on comprehensive care for joint replacement. Under this proposed model, the hospital in which a hip or knee replacement takes place will be accountable for the cost and the quality of care from the time of the surgery through 90 days afterwards, that's called an episode of care. Depending on the hospitals quality and cost performance during the episode, the hospital would either earn a financial reward or be required to repay Medicare portion of the costs. This payment would give hospitals an incentive to work with physicians, home held agencies and other providers to make sure beneficiaries receive the coordinated care that goes along with the goal of reducing avoidable hospitalizations and subsequent complications. Hospitals would have additional tool such as spending and utilization data, as well as the sharing of best practices to improve the effectiveness of that care coordination. By bundling these payments, hospital and physicians have an incentive to work together to deliver more effective and efficient care. This model would be in 75 geographic areas throughout the country, and most hospitals in those regions would be required to participate. LHC Group has 24 agencies located in the 75 geographic areas, 11 of which are joint ventures with hospitals. Interestingly, even before this model was introduced, we've again working on a very similar orthopedic program with one of our major hospital partners, a program that has demonstrated less than 1% re-hospitalization rate and a savings of nearly $0.75 million on the in-patient side for the hospital as well. So obviously, we're excited with this program, we're excited to expand it to our other JVs and certainly plan to do it in these 75 markets. Thirdly, the Medicare choice model is designed to evaluate whether eligible Medicare and duly eligible beneficiaries would have liked to receive supported care services, typically provided by hospice if they could also continue to receive curative services, and whether providing both, palliative and curative care concurrently impacts overall quality, as well as satisfaction. Services under this model will be available to Medicare beneficiaries that like to participate in the model, around the clock, 365 calendar days per year, and CMS will pay a per beneficiary per month fee ranging from $200 to $400 to participate in hospices for delivering these services under the model. We have two hospice agencies that will be participating in this model as of today's call; one, beginning in Phase I and the other of course in Phase II. Next the rule to update fiscal year 2016 payment policies and rates under inpatient PPS and LTACH PPS which affects discharges occurring on or after October 1st of this 2015 would decrease projected LTACH PPS rates by 4.6%. This estimate decrease is primarily attributable to the statutory decrease in payment rates with side neutrality cases that do not meet the clinical criteria to qualify for higher LTACH rates and cost supporting years beginning on/after October 1st of 2015. Cases that do not qualify for the higher LTACH PPS rate will actually see a payment increase of 1.7%, cases that do qualify, sorry – for that LTACH PPS rate will actually see a payment rate increase of 1.7%. CMS has also finalized this proposal to implement a transitional blended rate, 50% of side neutrality and 50% of the LTACH PPS rate or side neutral discharges occurring in fiscal years 2016 and 2017. So certainly there are lot of moving parts, and I think the cut to the chase for us is that of our 8 locations, this rule will become effective for two of them beginning June 1st of 2016, and the remaining six locations beginning September 1st of 2016. So we have time to mitigate and we will have all scored plans factored into our 2016 guidance. My last rule update is in regard to CMS's proposed change to the Medicare physician fee schedule for calendar year 2016 which includes payments to physicians for advanced care planning sessions that they have with patients and with family members. CMS proposed coverage of advanced care plan as a vital step towards improving quality of care ensuring patient involvement in self-determination in the healthcare decision making process. This proposal fits nicely with what we are doing to enhance care coordination and better leverage in-home interventions by physicians, nurse practitioners, and physician assistance. Turning briefly to growth, growth in new home held admissions in the quarter was 4.9% for the six month period ending June 30, 2015, 11% as compared to the same period prior year. Organic growth in home held admissions was 1.7% and for the six month period ending June 30, 2015, was 4.4% as compared to the same periods last year. Also during these months, the company deployed and trained upon a new CRM platform for the entire salesforce. While admittedly, this did interrupt caller routes and tonnage some productivity during this past quarter. We were still pleased with our growth initiatives, its results, and see the CRM platform as imperative to growing our market share in the future. We still do have about 20% of our salesforce below our expectations for their event management inside of this playmaker but we see that momentum is getting better each and every day that closes and thus still hold to what Keith and Dionne both alluded to that 4.5% run rate on organic growth. Before I hand the call over to Candice for Q&A I want to thank our entire LHC Group family for doing a job well done in the first half of the year thus far. Specifically however I want to acknowledge our Hospice leadership team and all who were involved in transferring 99 patients from a competitor hospice provider in South Carolina to our team at South Carolina HPC in the last few weeks. You were all instrumental in transferring those lives to us and the employees came that came on board as well, nice work and truly way to live out our purpose it's all about helping people. So Candice we’re now ready to open the call up for Q&A.

[Operator:]

And our first question comes from Kevin Ellich of Piper Jaffray. Your line is open.

[Kevin Ellich:]

Keith maybe can we start off with the comments on external growth with the deals that you’re evaluating and could we get some color on the four [ph] that you’ve exclusivity and what you’re talking about with the larger deals here leading with bankers on?

[Keith Myers:]

I will tell you as much as I can, so the four [ph] that we have confirmatory diligence at this point are a combination of home, health and hospice and I guess I could say this as far as I don’t want to get into specifics but let's say that I think four combined are less than a 100 million revenue and I will say that because we’re talking about conversations with bigger deals and I don’t want to leave out there that there is some real big deal in confirmatory diligence. And then on the larger deals our traditional core pipeline that’s been very accretive for us and we have built company with I don’t think it's a secret to anyone that follows us has been highly accretive and the bread and butter for us, it's where the hospital joint ventures come and all of the tuck-in free standing location and we’re not if anything we’re accelerating that but in addition to that now we want to be opportunistic and therefore the executive team is meeting in a separate effort with banks on a regular basis to evaluate these larger opportunities very seriously. In fact we were on the road last week doing some of that and I'm very involved in that. You know the timing is right for us not all of our work on the fundamentals over the last 4 or 5 years balance sheet is strong and we have some reimbursement clarity now that that just makes into the right time for us.

[Kevin Ellich:]

With these large deals that you’re evaluating are they still in the core home health hospice categories? Are you looking at something, are you evaluating other specialties as well and then how willing are you guys to put on debt on the balance sheet I don’t know if Dionne can chime in kind of what you’re willing to take your leverage ratio upto?

[Keith Myers:]

So we will tag team that so, it's really good question, you also know that we’re not huge risk takers. So these larger deals are all in bottom, home, health, hospice or home based services [ph] we’re constantly piloting and testing other built on service lines but we do that on a really small scale, we hit the radar here and test those out and some of that would advance practitioner services that built into our model and things like that, but we wouldn’t go out and do a big acquisition on that for before testing it for some period of time and with regard leverage, I will let Dionne -- but in conversation for the right large opportunity came along we would be comfortable levering the company upto the in the mid-3s maybe a little bit higher that fell short period of time if we had because we’re generating enough cash to pay that down very quickly and then you also have the option of going back to the market and if we have the need to do that we already have leveraged the balance sheet, I mean that’s something that we’re talking about in board room and as we’re prepared to do if it makes sense.

[Dionne Viator:]

That’s exactly right, with the stable earnings of the company, the clean balance sheet, there is a variety of financing options including today our current commercial bank. We have options with institutional investors and then back to the market so at this point I feel like with the opportunities are the right opportunity, we have a variety of ways to finance that and not limiting ourselves to one particular structure there.

[Kevin Ellich:]

And then Dionne since I got you, could you maybe talk about the expense management, you guys have done a great job of controlling G&A, just wondering how much more -- how much lower that can go all the [indiscernible] taken at this point?

[Dionne Viator:]

I think you continue to look at that with a fresh pair of eyes constantly, so I think a lot of the low hanging fruit and some not low as Don has alluded to over the last 4 or 5 years, done a lot to look at the cost side. I think one of the primary opportunities here is with the anticipated growth continuing to hold and reduce where possible our G&A cost but really just taking advantage moving forward of the combined size and levering of the infrastructure in place at this time.

[Don Stelly:]

I will just a little bit of color to that obviously we were really clear that the cessation of point of care and finalizing all of that allowed us to cut over $8 million six months ago. So while we may not have that kind of chunk specifically I can assure you that operationally we have a 0.5 million a month that we go find and we’re working through but most of that the newer acquisition improvement and letting some of that grow offset some of the cost infrastructure that we don’t because of the low volumes that we’re really starting to see that right now, so I guess all in all obviously there is room for improvement in pocketed areas but I don’t want to mislead you to think that we have got another huge chunk like we just did at the beginning of this year.

[Kevin Ellich:]

And then if Don, if I can squeeze one last quick one in, you gave some detail on the joint care, kind of had some bundling initiatives and also what you guys are seeing with your hospitals in terms of cost savings and readmissions I mean very impressive data, just wondering where you think everything is going here and maybe Keith can also add some color with BPCI, ACOs everything going on towards value based reimbursement models, how do you think that’s going to play out for your and how big of an opportunity is it?

[Don Stelly:]

We think it's going to be a huge opportunity and listen I don’t think anyone that loves this industry like we do discounts the fact that this is where it needs to go. I mean we need to be in a pay for performance environment, I have said all alone Kevin, that this point of care conversion, I’ve said those words so many times I'm tired of hearing that, it was huge distraction for us and distraction that’s moved away and it's going to allow us to capture that opportunity, what we have proven to ourselves is when we truly coordinate care, not in words but in processes every day that 1% was huge in this pilot program and that three quarters of a $1 million was real money both in length of stay and cost issues when it came to supply services and things that we did on the bundle side and so we can replicate that throughout the country, it obviously is going to put us in a great position for all of these but this is going to be here to stay so we need to live within those confines and honestly we need to use it as a competitive advantage for us.

[Keith Myers:]

I would just add Kevin that it's been a great experience for us to work with hospital partners in risk based arrangements in a managed care setting. We’re seeing everything we learn that will be applicable to [indiscernible] value base and then it's the closest thing we have seen the value based purchasing. It removes the reimbursement barriers that are embedded in our service environment that restrict home health from being fully leveraged and so we’re quite excited about that.

[Operator:]

[Operator Instructions]. And our next question comes from Toby Wann of Obsidian Research Group. Your line is open.

[Toby Wann:]

Just couple of quick things, with regards to the CRM implementation during the quarter and it's impact can you maybe tease that out a little bit in terms of how much better could the quarter could actually have been has not benefited the drag.

[Keith Myers:]

Yes I will be honest with you, I had to eat a little bit [indiscernible] but when I sat with the earnings call last time at that time I thought I was sitting on a 5% number just on Medicare home health but when we had to infiltrate this training of play maker it took about on average 10 hours of productive time of wait per PCR per sales revenue 152 of them, and so it's stunned us pretty hard in a three week period and although we ramped up obviously we didn’t ramp up enough to get to the number that I thought we would get but I still hold true that that 3 to 5% is going to bake in for the year. So it really did bump it off and then the last thing is I was very honest, we still about 20% of that team because the way this kind of works you first got to get really accustomed to the methodology and the screenshots to route plan, and then there is some embedded data based on rankings of statistically what referral sources are better to call upon at others on their utilization home health services and it's just taken us a little bit more time than I personally thought to see that ramp up. It has affected us a little bit in July as well but we’re really coming out of it right now on the better end of the learning curve. Did that kind of help you?

[Toby Wann:]

Yes absolutely, I mean the quarter could have been a little bit better obviously but it was still fantastic quarter so I mean I'm not just wanted to get out a little bit more and then just kind of in a general sense at a higher level as we have seen medicated I mean Medicare advantage continue to grow more managed than Medicaid because of the ACA expansion and the expanded Medicaid, can you guys just talk about your experience with bad debts how deductible health plans those were to things and kind of how that maybe impacting if at all your business as the patients now have a little more skin in the game financially than they typically did.

[Keith Myers:]

That’s a real complex question, there is no doubt that the diversification payer sources require us to do different things both in the front end and the back end from authorization and the nuances that come with that to the pre-off running it out and still the patient services and yet not having that. So that’s very complex, the states specificity on the Medicaid manage issues that you’re talking about seem to change daily and we have done a much better job as our community based services has grown from $6 million to going to 50 million mark of dealing with that, you know has it affected our bad debt, Dionne can talk to that a little bit more. The answer is yes but she has also alluded to some of the revenue cycle issues that we have tackled are addressing as issue through pod program. So I guess that’s a rambling way to say it is much more complex but I think the process is in the undertone of what we’re doing from pre-admin all the way through collections or addressing that and I don’t think, and Dionne can step if you disagree that if that bad debt percentage that she disclosed will that all run up because of what you just addressed.

[Dionne Viator:]

I just add a little bit to what Don has said, a part of the restructuring I alluded to earlier is really more about putting different processes in place on the front end, rather than having the impact on the back end there. So still working through some of those issues but not an area of high concern at this point.

[Toby Wann:]

And then just kind of in general with regards to managed care, as that becomes a bigger payer source how do you guys approach that relative to traditional Medicare type A patients those were to think some provider shy away from managed care, don’t think they can make a decent enough margin, just kind of what your thoughts with regards to that.

[Don Stelly:]

That’s a really good question and one that I think it's fair to say that our position is changing. I think you said it best, I think that’s an obvious we have run away from it and I think now what we’re looking at is intuitive in different ways inside of our agencies to deal with that. So I will give you one specific example is that six months ago we didn’t have anyone truly looking at the utilization by visit under commercial buss, now not only do we are we piloting that but we’re piloting it in several different managed care environments to make sure that we have a pretty good handle at G&A inside of that team and also the actual service provisions that can be done differently in that visit. And so all of that’s to say that I think and maybe Keith can chime in, instead of looking at this something that have to do to get to the Medicare I think our thought is beginning to go to the thought of let's do it and minimize any disruption because it's here and we’re forced to take some of that, so don’t necessarily run at it but quit running away from it.

[Keith Myers:]

I think I will try and come at it different angle. Every managed care company that we deal with seems to have their own twist on how they want to run their programs around everything but really on home care, they will have centralized oversight management of different functions and it's not consistence across all and in our standard model we of course provide all of the basis and requirements of a Medicare provider but we do a lot of things in addition to that to drive quality metrics and things that are important to us on what this report on Medicare patients and historically we have done that same thing for everyone and we have done it for the managed care patients to even though they didn’t want it or were really pay for it, we weren't required to it for them so I think Don is that right? We have separated that out and so far those patients we have more patient specific models. Of course for those payers where we have an adequate volume and market to justify that if we [indiscernible] managed care company with a handful of patients, while we of course don’t do that.

[Don Stelly:]

They pay us per visit in many cases and most times we’re still doing things as if it was an episodic patient paying us for a period of time. So we’re really looking at, we’re really trying to tailor to the need of the payer and still be a part of it. So I think as what we’re trying say is that two years ago we probably wouldn’t have answered this question that long because we didn’t look at it that hard, that’s the bigger point that I'm trying to make is that it's part of our life and we need to do a better job, grant by specificity of payer but we need to do a better job of managing that business.

[Toby Wann:]

And then just one last one for Dionne, on the revenue cycle management stuff that you have guys have been doing and congrats on the results of that is there further leverage to do in other words is there further room for improvement beyond what you guys have already sort of realize? Not that I'm going to bake that into my model let me put that qualifier out there.

[Dionne Viator:]

Absolutely, you know to score it at this point not prepared to do that. If you’re not baking it in you don’t need me to anyway, but absolutely I think that we have got a nice amount of opportunity part of what we have done is in our restructuring instead of our billers and collectors working across the board with all of our payers, we have put the billers and collectors in pods we call that so that they can develop relationships back to the point of refocused on how we work with a lot of our managed care plans and commercial business. Having billers and collectors in pods where they develop relationships with each of the payers understand what they need from that payer from the front end doing the authorization all the way to the end of collecting is really proving beneficial now and into the future with like I said understanding each payer and now nuances relationships and what we can do from there.

[Operator:]

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Keith Myers for closing remarks.

[Keith Myers:]

Thank you, operator. Thank you everyone for listening in this morning. Thank you for your support of LHC Group; as always if you’ve any questions or would like to discuss anything with us between these regularly scheduled earning calls please feel free to reach out to us Eric Elliott and we will be glad to schedule time with management if that’s something you would like to have. Thank you so much. Talk you next quarter.

[Operator:]

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