LHC Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Welcome to the LHC Group Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Eric Elliott, Senior Vice President of Finance. Sir, you may begin.

[Eric Elliott:]

Thank you, Shannon. Welcome everyone to LHC Group's Earnings Conference Call in the third quarter ended September 30th, 2015. Hopefully everyone has received a copy of our earnings release. If not you may get the copy along with other key information about bout Group and the industry on our website. In a moment we will hear 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. First I want to congratulate and thank my outstanding group of colleagues for their many contributions for great operating results, our team delivered thus far in 2015. We’re particularly pleased with our strong and well balanced results during the third quarter and through the first nine months of 2015 due to the fact that our result was driven by strong organic growth further significant leveraging of our G&A cost and continued improvement and operating results for our acquisition. As a result we’re once again increasing our 2015 revenue and EPS guidance. Our increase in EPS guidance, a new range of $1.75 to a $1.85 includes $0.08 of dilution for integration and transition cost by acquisition for the fourth quarter and also includes a $0.02 dilutive effect in the fourth quarter from the 2016 home health final rules [ph]. We remain intensely focused on growth in new markets through acquisitions and hospital joint ventures as well. On October 1st 2015, we did an acquisition of Halcyon Hospice which consist of 16 hospice locations across three states and annual revenue of approximately $41 million bringing our hospice segment revenue to approximately 115 million. Also since our last earning call we've added two smaller acquisitions consisting of three Home Health locations and two states with combined annual revenues were approximately 3.8 million. In addition included in our press release yesterday afternoon was announced one of the pending acquisition of nurse registry home health of 5.7 million. Nurses registry, license home health service area cover 16 counties in the [indiscernible] State of Kentucky, That's the major population of the licensed service areas over 765,000 with more than 101,000 over age 65. Estimated annual revenue is approximately 6.5 million. This acquisition is expected to close on November 11, 2015 and LHC Group estimates the earnings per share impact to be a negative $0.02 for the fourth quarter including integration and transaction cost. Year-to-date we have now reviewed more than 264 acquisitions our hospital joint venture opportunities including a 114 since our last earnings call. Of these opportunities we have reviewed so far this year more than 35 were main, five of we have exclusivity agreements on law performing, due diligence and negotiating purchase agreements. We continue to see a steady increase in a number of opportunities reviewed by our corporate development team. Period after period and we expect this trend to continue well into next year. On October 30th, CMS released a final rule regarding the payment rates for home health service provided during the calendar year 2016 and beginning with episodes in our asset January 1, 2016. The national standard 60 day episodic rate will increase to $2965.12 in 2016, a 1% increase over the 2015 rate of $2961.38. This was a net 10% increase in the national standardized 60 day episodic rate due to application of rebasing decrease of 2.75%, case mix adjustments decreased a 0.97% and net market basket increase of 1.9%. Case mix recalibration budget to trial the adjustment increase of 1.87% and wage index, budget neutrality adjustment increase of 0.11%. The home health market basket percentage increase for calendar year 2016 is 2.3% and the productivity adjustment is 4/10th of 1%, for our net home health market basket of 1.9%, CMS reduced it's estimate of nominal case mix growth during calendar year 2012 and calendar year 2014 from 3.41% to 2.88%. And spreads adjustment payment over three years at 0.9 or 1% each year to account the nominal case mix growth. The finalized payment policies results in a 1.4% reduction in payments for all agencies and the overall impact of payment policies is 260 million in reduced home health payment of 2016 compared to 2015. Our estimate for LHC Group is a negative 1.38% impact for home health Medicare revenue which is in line with industry average and includes our impact from the case mix recalibration. In addition CMS also finalized this proposal to implement a home health value purchasing program which Don will touch on during his prepared remarks. I'm happy to address any of these further during Q&A but now turn the call over to the Dionne Viator.

[Dionne Viator:]

Thank you, Keith and good morning. I would like join Keith in thanking our team for their continued dedication and hardwork producing not only strong results reported here but high patient satisfaction and quality services. Our results for year-to-date service revenue for the third quarter of 2015 was 204.1 million an increase of 8.7% compared with net service revenue of 187.7 million in the same period of 2014 and for the nine months ended September 30, 2015 net service revenue was 597.4 million and increase of 10.6% compared with the net service revenue of 540.3 million in the same period of 2014. Same store resident grew 6.8% for the third quarter and 4.7% year-to-date compared to the same period last year. This growth in same store revenue is due to our growth in same store admission, changes in patient acuity, and the increase in the Medicare episodic rate from 2014 to 2015. Net income for the third quarter of 2015 was 8.8 million or $0.50 per diluted share, an increase of 43.3% compared with a net income of 6.2 million or $0.36 per diluted share in the same period of 2014. For the nine months ended September 30, 2015 net income was 24.6 million or a $1.40 per diluted share and an increase of 50.9% compared with net income of 16.3 million or $0.94 per diluted share in the same period of 2014. On a consolidated basis our gross margin was 40.8% of revenue in the third quarter of 2015 and 41.1% of revenue for the nine months ended September 30, 2015. As compared to 39.7% and 40.4% in the same period 2014. Our general and administrative expense were 29.8% of revenue in the third quarter of 2015 compared to 30.2% of revenue for the nine months ended September 30, 2015. This compares to 30.1%, 31% and 31.9% in the same period of 2014. Our bad debt expense represented 2.4% of revenue in the third quarter and 2.5% for the nine months ended September 30, 2015 as compared to 2.1% and 2.2% in the same periods of 2014. This increase in the provision for bad debt year-to-date as compared to 2014 primarily attributable to additional reserves being recorded for patient claims associated with two commercial payers one of which is now a [indiscernible] as well as an increased preserved for accounts receivable due to legacy system transition from prior year acquisition. Our effective tax rate in the second quarter and for the nine months ended September 30, 2015 was 41% compared to 40.7% to 2014. Regarding 2015 full year guidance as Keith highlighted earlier. We are raising our full year 2016 guidance for net service revenues to a new range of 805 million to 815 million from the previous range of 780 million to 795 million. In addition we're raising our fully diluted earnings per share to a new range of $1.75 to $1.85 from the previous range of a $1.70 to a $1.80. This guidance includes the negative impact on the fourth quarter from the Medicare home health perspective payment system for 26 days of approximately $0.02 for diluted share, this guidance also includes the recent acquisition of Halcyon Hospice and the pending acquisition of Nurses Registry which is anticipated to be dilutive to LHC Group's fourth quarter 2015 earnings per share by approximately $0.06 and $0.02 respectively totaling $0.08 due to transaction and integration cost. This guidance does not take into account the impact in future reimbursements if any, future acquisitions is made to noble locations is opened for 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 revenues to be in the range is 29.5% to 30.5%, bad debt as a percentage of revenue to be in the range of 2.0% to 2.5%. Our effective tax rate in 2015 to be in a range of 40.5% to 41.5%. The main factors behind our raise in this quarters are that we continue to see strong volume and revenue growth in our same store locations within the home health and hospice division. Strong cost management and continued improvements in [Technical Difficulty]. That concludes my prepared remarks and I'm now pleased to turn the call over to Don Stelly.

[Don Stelly:]

Thank you, Dionne and good morning to everyone and thanks for listening in. I'll begin my prepared comments by touching on just a few things that are ahead of us. As Keith mentioned CMS has finalized it's proposal to implement a home health value based purchasing program which is of course intended to be incentive the delivery of high quality patient care. This program which would withhold 3% of Medicare payments beginning in 2018 an increase that withholding to 8% in 2022 would be redistributed to participate in home health agencies depending on their performance relative to specified measures. The value based purchasing program would apply to all agencies in the following state. Arizona, Florida. Iowa, Massachusetts, Maryland, Nebraska, North Carolina, Tennessee and Washington state. CMS estimates that the payment redistribution under this program would be approximately $380 million as a company we have 29 million home health providers located in these pilot states and we support any and all efforts to enhance value across that industry. And as a side note for our 29 providers this presents a total of $118 million in our net revenue portfolio and we truly look forward to their future total performance scores demonstrating superior quality and as a result enhanced shareholder value as the exchange formula is applied for an uptick in net revenue. Now turning briefly to volumes, as Dionne talked about growth was really good in the quarter. Growth in home health admissions for the quarter was 5.3% in totality and same story came in at 2.9%. For the nine month period we produced a total added growth in home health of 8.3% and same store of 4%. In relation to hospice for the quarter we grew 7.3% in totality and same store with 7%. For the first three quarters if this year as compared to the same period prior year our total growth in hospice was 10.4% and same store of 7%. While we are pleased with our growth and the accuracy of our guidance around it we're really pleased that we've been able to leverage cost and Viator as said reduce G&A as a percent of net revenue while experiencing this growth. Specifically and I won't repeat the numbers that the Dionne talked about the G&A of net revenue but it was 200 basis points which really drove that reduction of the things that she talked about and drove our EBITDA from 6.7% in 2014 to 8.7% year-to-date in this 2015. I truly cannot say enough about our team's execution of this approach they've worked extremely hard to do this and the great part is that they have simultaneously improved quality and volume, a trend that we obviously desire to go forward into next year. My last update is that just a little detail to what Keith alluded in relation to acquisition so far this year. Year-to-date across all service lines we have acquired and integrated 22 locations representing a total of $57.3 million of net revenue, add in Nurses Register which is close of week from today and we will now have 63.8 million in newly added net revenue in a 10.5 month period this year. Our final point Keith also alluded that we’re negotiating purchase agreements that we expect additional revenue to fall into the portfolio prior to year-end. So I will say all this [indiscernible] point on this update. This new portfolio wasn't and isn't a corporate margin. So while we still have a lot of work to do to capture it the upside hasn't been fully recognized in our present earning run rate but I do expect it's turn that way substantively within the next couple of months. We can answer more about that and any other topic that we have touched on shortly but before so let me close by also thanking our team. Once again you delivered stellar performance in the midst of a very complex environment. And to those of you think listening to our call we appreciate that as well and now Shannon, I will turn the call over to you and open the lines for questions.

[Operator:]

[Operator Instructions]. Our first question comes from [indiscernible] with Wells Fargo. You may begin.

[Unidentified Analyst:]

I wanted to start with the guidance, pretty significant increase in the revenue growth guidance. You mentioned a couple of factors there but I was hoping you could just highlight sort of what's the biggest wing factor that you see to help you achieve the high end of that guidance?

[Don Stelly:]

The biggest and most contributory factors is volumes obviously right now. When we mapped out all year our consensus growth we essentially hit around July consensus where we thought we'd be today. And so with the episodic rate that we would put forth in the schedules that really is propelled us right now and is carry forth our increased volumes into the quarter. So [indiscernible] and the consensus is really the biggest factor contributing to that and we feel pretty good about it right now.

[Unidentified Analyst:]

Are you including the pending transactions and the guidance?

[Don Stelly:]

No that is exclusive on that. It is inclusive of [indiscernible] as we talked about and there is strategy which we disclosed as well is going to drag.

[Unidentified Analyst:]

Next question, you mentioned an increase in patient acuity I was hoping maybe you could provide some color on what you saw there?

[Don Stelly:]

Well [indiscernible] one is that on the clinical component we're seeing an uptick in the severity of that and that’s just really due to core morbidities and accuracy but the other thing is that a year a year ago at this time about 54% of all of our patient population received at least one therapy visit without acquisitions and just a profile change and that number is up just above 60%, so those two things in combination are increasing the case.

[Unidentified Analyst:]

Are you seeing any particular procedure type or episode types, I guess I was alluding to you know joint replacement procedures any kind of uptick you're saying in particular types of cases?

[Don Stelly:]

No really it is across the Board, I mean on the clinical side it's the same five diagnosis just a little bit severe side, you know congestive heart failure, COPD hypertension, diabetes for the most part. But the joint program and I know that I’ve talked about this the last earnings call with our [indiscernible]. We have seen an uptick in total joint in that specifically but just because the program is about to start we haven't seen that across our portfolio.

[Unidentified Analyst:]

Okay, maybe just last one on the strong Medicare admission growth. I'll be curious are you seeing any change in referral patterns from hospital discharge planners? Are you seeing maybe more referrals from a particular hospital or just an overall increase in the number of hospitals in your referral networks?

[Don Stelly:]

Well Ron I'm sure you know this better than I do but actually the hospital volumes for the last two months have been down. So our shift to the community actually is what propelled us a little bit. But really back to us in general, on our last call I talked about our conversion to new CRM product, it's called Play Maker, That’s got behind us and honestly helped alleviate distraction that it caused, so really back to the hospital is really not that I think it's our focus, our selling of our disease programs that we really began in mid-Summer and it's just kind of trailing into that push that we're pleasantly experiencing right now.

[Operator:]

Our next question is from Kevin Ellich with Piper Jaffray. You may begin.

[Kevin Ellich:]

So just wanted to go back to your comments on the joint program, so Medicare's hip and knee bundling program was supposed to definalize soon but I don't think the final rules out yet. Do you have any update I guess is that going to get pushed out to July 1st? What do you guys hearing and what do you think about it?

[Keith Myers:]

I would be guessing just like, I'm looking to Erik do we have any further news?

[Eric Elliott:]

Last I heard it was CMS had pushed it over to [indiscernible], they're going to score in the next couple of weeks and then will come out but at this time of year it's hard for me to say that it will actually goes into effect January 1. I would think that they will push that date back.

[Keith Myers:]

But I will tell you this Kevin, we're not acting that way. We’re going full force within that -- I think we had 26 agencies [Technical Difficulty] I can go back and make sure that is accurate. But we're deploying out that same offshore model that I talked about last time in those markets and at the worst possible case for us it's a great differentiator.

[Kevin Ellich:]

And then I guess going back to your comments about the acquired revenue is not a corporate margins Don, that’s typically the case when you guys do deals right? Is that really anything new and I guess, did you say it will just take a couple of months before you get to the corporate levels?

[Don Stelly:]

Yes I'm really glad you asked that question, here's what unique about it. Usually we’re so basically oriented throughout the period that some of them are improving while we're dumping others in that that aren't that way Kevin and [Technical Difficulty] make that comment, when we built Halcyon and Nurse Registry both in a six week window, in a very prideful way say that even with that we were able to raise our guidance on this present run rate and I'm excited that we’re integrated those faster than I expected and therefore the contribution or the accretion to EBITDA margin is going to be enhanced in about 60 days from where the run rate is right now allowing us to rate. So it's kind of a future boost so to speak and so the crux of your question why was that so different now is because of the essentially the big boost of revenue and drag that came in to the portfolio all to up 6 to 8 week period.

[Kevin Ellich:]

And kind of with that, so the increased guidance it includes the transaction costs and whatnot for deals. Does that also take into consideration the lower margin from Halcyon and Nurses Registry as well?

[Don Stelly:]

Yes it does. But the crux of those one time things were buy out of leases and some things that we’re doing to get that aggregate margin, so it is both of them. It's [indiscernible] onetime really hit pretty hard and we can probably if you need to more offline give you a little bit better color of items those are. But yes both the one times and the drag from those and I'll say this publicly. Specifically the Halcyon there two in-patient units that we’re diligently working to ground service but they're really driving that portfolio right now and we’re taking some of the things that we know from our LTACH division and trying to incorporate into that, but it's pretty complex and that's the one factor that I'm still a little bit on fixed on.

[Kevin Ellich:]

And just help me out here with the math. I was kind of backing into what you're implied Q4, EPS is, off of the new guidance, the guidance $175 to $185 year-to-date you’ve done a $1.40, so we’re looking at $0.35 to $0.45 but then clearly you’re being impacted by the Medicare cut of $0.02 right? And then you've got Halcyon that’s $0.06 and Nurses Registry that’s another $0.02 I'm not saying that we should back up the Medicare cuts but I mean that's about what $0.08 we could in theory add back if not from the deals is that right?

[Don Stelly:]

Yes.

[Kevin Ellich:]

Okay just wanted to check that. And then I know you guys talked about it and I've seen one of your company mentioned one pair that went into bankruptcy just wondering if you guys, is that a smaller guy any color behind that?

[Don Stelly:]

I'll take some of it. It is it isn't unique because we knew this competitor because of our substantive presence in Kentucky, Nurses Registry has been around for a long time and we've been watching. So I think it's just you unique to this deal. I think as far as I can say safely we don't have any other things in bankruptcy that we’re looking at right now.

[Kevin Ellich:]

Okay. And then Keith I guess just kind of big picture. You know you guys are performing at a very high level, lots of good deals out there. Can you maybe give us a little bit of color behind another five deals you have exclusivity in terms of the timing size and I guess competitive landscape how that looks right now?

[Keith Myers:]

On the five we have exclusivity on, there is significant in that group. So there are a lot of small regional place. Not in the larger group that's active in the pipeline we referred to that they're a bigger transaction, possibilities of that. But I mean those are conversations that are larger ones are the conversations that we’re in through that bring books to us and there are others involved in the process. So you know we don't know where those are going to land. So just to remind you know there are everyone, beginning this year we're really on two tracks pipeline, we have our historical highly accretive smaller acquisition pipeline and continues to do, we have done forever and then we have a separate group executive team that’s engaging with banks and looking at larger transactions and trying to find one that makes sense that we can pull the trigger on that will be accretive.

[Kevin Ellich:]

And then have valuations changed? I mean looking at your leverage is still really relatively low. Maybe 1, 1.5 times, is that and you guys have ample capital available?

[Keith Myers:]

And your question was will have valuations change?

[Kevin Ellich:]

Yes

[Keith Myers:]

They seem to be creeping back up some. We all look at same numbers and so I think the short answer is -- not tremendously you know maybe 50% or so it looks like but they are creeping back up. I think that's just more confidence in the space long term and it's bringing more money to the states and that’s driving the competition.

[Kevin Ellich:]

And then last question for me. Even though, Don alluded to the hospital volumes being a little weak this quarter or last few months wondering if you guys haven't started to notice any new referrals or admissions coming from Medicare shift to value based reimbursement and the bundling programs they're going on.

[Don Stelly:]

You know honestly not for us, as a matter of fact couple of joint venture partners that I'm not going to name actually backed out of a couple of those arrangements for multitude of reasons so I'm thinking on the fly right now, Kevin, not for facts we haven't seen this quarter.

[Operator:]

Our next question comes from Whit Mayo with Robert Baird. You may begin.

[Whit Mayo:]

Wanted to first start with the 2016 final rule, I hear you on the 1.38% kind of in line with the industry but you know how do we think about your ability to offset that next year I mean this past year it seems like the case weight changes seem to help the industry out broadly and I don't think you get that pick up into 2016, so I just want to make sure that we're thinking through the model correctly and is it as simple as I take the $0.02 cut on the straddle patients for the fourth quarter double that the four quadruple that to 16 since the year is that not the appropriate way to think about the headwind?

[Don Stelly:]

The way I'm looking around make sure that my answer is in-line with our thinking, I think that is a good, we think that is a good starting point to do that because yes there are things we can do to mitigate that but there are things that we also don't want to do that could be looked as manipulated because of that and so I think what we're saying right now and obviously we're not at a point for you to model 2016 because we’re going to issue guidance that later on of course but just kind of thinking it through, we’re shaking our head, especially yes that’s how kind of you should be thinking at a high level.

[Whit Mayo:]

Yes, can you just remind me how much -- when I look at the home based segment how much of that today is now just pure home health and then how much of that home health is fee for service Medicare you've grown so much that it's kind of hard to tease out exactly where you are now.

[Don Stelly:]

Eric is looking through the stack sheet.

[Eric Elliott:]

Home health is 76.2% and of that Medicare is 77.2%.

[Whit Mayo:]

Okay. We've heard from some home health agencies this is probably something more isolated or not but trying to think about you know MA plans and kind of how some of their behavior is changing and we've heard you know some of them. You know starting to penalize providers on the star ratings signaling like hey you know when we contract you we're going to cut you because your star ratings are well below your peer benchmark, are you seeing any new behavioral changes in the marketplace from the MA plans?

[Don Stelly:]

There was one in Tennessee that we have come up, that has done that but they were very small. See the problem with that is that and we all know this is that the star ratings are not indicative of the present quality, they are revising time. So it's kind of a flex in their philosophy because you've been good back in the day and not so today [Technical Difficulty].

[Whit Mayo:]

That's what I thought and maybe my last one I just wanted to go back and get maybe the updated thoughts just around your LTACHs and we've had two large LTACH providers site some challenges as they prepare to transition into patient criteria and you’ve previously I think communicated a thought that maybe you'd look at some strategic alternatives at the board level and I just did know Keith if you have any new updated thoughts as it relates to kind of the strategic value of owning those assets going forward.

[Keith Myers:]

I don't want to sound like a broken record but I feel like I'm going to say the same thing the eight assets we have now are here in Louisiana and located in communities where we have hospital partners and other service line. So that kind of integrated into all operation but having so much volume in Louisiana it also positions us well, repurpose -- in one case where we had a facility with a hospital partner they needed us at one point to move away from the hospital because they needed a space. Now we need to be close at ICU of those patients, so we're negotiating to move it back in-house, we’re renegotiating some lease and ancillary contracts with the hospitals. So all these things are going on and I'm going to dodge here I think but it doesn't -- we aren't effective until the midpoint of beyond of 2016.

[Don Stelly:]

Yes, with a couple things on that. First of all at a global perspective. The revenue base and I think Eric just said it's about 72 million on a run rate, it's still a very important service but that revenue is becoming much more de minimis to the portfolio. So the things that happen in the [indiscernible] does increase the wobble that it obviously creates for the two or three if you allude it in your opening, that’s point one. Point two is years ago because of managerial concerns we changed cost reporting years to be [indiscernible] in all the facilities except the two and those two were equal. So Keith is right, the bad news is we've got to deal with this next year, good news for us is only two of them till we start dealing with this and that begins in June. And then the other in September, and so yes it's the rules, the criteria is going to adversely affect the EBITDA from the facility based edition but at a [indiscernible] we’re working as Keith said with our whole hospitals to make that affect as minimally as we can and includes but not limited to adding different services, decreasing certain beds, possibly even shutting down a facility or two but because we have a latitude of time being on our side a little bit would be much more in our approach to this so than when we issue guidance whatever that's going to be March, usually it's March we'll be able to really go through and walk you through what those effects will be. Is that helpful?

[Whit Mayo:]

It is. We have spent a lot of time analyzing the change, I mean it's fascinating for my point of view and I think so many different providers in the industry have a different hand to play going forward and I don't really hear anything too terribly consistent. I think we'll just sort of sit here and see how things transition over time if your point it's a small piece of the overall earnings stream but I guess maybe I'm a going to throw one last one and then I will hop off but just, it's just been kind of a weird quarter I think in general for just health care service companies and some new themes have developed and we can't really piece out what's the trend and what's not a trend but you know we've had a conversation with higher wage pressure, high registry cost, [indiscernible] cost, are you seeing anything in terms of turnover with your nurses, any pressure in any market, just how do you think about just general wage cost and pressure going forward?

[Don Stelly:]

You know we're not seeing the wage as a problem, we’re seeing availability in our Northwest Sector and what we call our gateway division specifically Idaho or some of the California markets. But that's not any different than it's been all year for us and our contract labor actually has come down, we have a program that we started with our therapist, we've changed some of the ways that we pay them and it's actually a benefit to all for the loans that want to be productive. So I can't say that’s a bigger issue than normal and all of this turns over real quickly. We did a really good job of decreasing incrementally turnover, except for in [indiscernible] bucket and we have done some things with orientation training, clinical latter development that we think is going to pay dividend in 2016 to address that. But I think for us it's always a problem. I mean in doing it's a long time and it's going to continue to be -- we still need a [indiscernible].

[Operator:]

[Operator Instructions]. Your next question is from Toby Wann with Obsidian Research Group. You may begin.

[Toby Wann:]

Just quickly if you can comment on payer mix shifts within the different buckets, if you're seeing anything there along those lines?

[Don Stelly:]

I was looking to see if Keith Myers would take it globally, but I will answer this, yes we’re. There is no doubt that the shift to commercial and even to episodic managed care is happening and for us we're working in six pilots right now that we're doing something unique to manage care trying to essential better manage the visit patterns, the things that we do in but because the shift is real for us. We've seen our Medicare mix again lead back down in totality, roughly 75% and that number is continuing to present itself. The issue for us is especially in our joint venture partners how do we stay a full service, a full spectrum partner when this managed care tipping point is really occurring. So we've got our challenges there but we also have our plans and we’re piloting those right now.

[Keith Myers:]

Let me add some color to what Don said, one of the challenges that we have it's a challenge but then when you get it right you actually develop models you can push out across the network but with hospital partners we just don't have the ability to go after Medicare only business, we have to move those patients off the hospital. So sometimes that forced us to on the front end take business as not profitable and then find a way to get to the table with managed care companies and deliver value that they can measure and pay for and we've done that in places -- one of ones we have done what I think is cutting edge work in that areas with Austin and New Orleans, we have developed models there where we are delivering measurable value to the hospital system by moving those patients out and we're being able to use that data to bargain and negotiate with other managed care company. So it's a slow process. You know the problem we have is both in our industry would agree with me that by and large managed care companies don't fully understand and appreciate how home health can be leveraged to lower their overall cost and if we can ever get that through and they really understand it will be just the tremendous opportunity there, I believe greater than Medicare fee for service.

[Toby Wann:]

And then just kind of to expand on a little bit more of some of the pilot programs you guys were talking about what could you kind of maybe elaborate a little bit more on what all is involved in some of those types of activities you all are doing?

[Keith Myers:]

We are being kind of a little bit more prescriptive with the intervention and the inconsistence with major diagnosis and do it in a fashion that’s more predictive on a seven day a week schedule. Let me explain that granularly for second. If we take managed care diabetic a usually younger and more mobile so there is some things that we can do that would be a little bit different in that visit, in that intervention but we've got to work with our physician to get it from Hemoglobin A1C and doing some things that and other cases we would have a 60 days to do that and in this case we track that down and care coordinate that into about 20 or 30 days.

[Toby Wann:]

And then can we just maybe elaborate a little bit more on the bad debt issue, I was writing furiously I don't think I caught all of that so maybe we could get a little more color about that,

[Dionne Viator:]

Our bad debt expense has increased in 2015 through 2014. 2014 we were at about 2.1% of net revenue so far in this 2015 we’re at 2.5% of net revenue. A rounding up of this was about 550,000 or so quarter, that were up so far this year. That really is two primary reason, one is as we talked a little bit about it from a couple of times write offs related to activity with a couple of our commercial payers, one of them in particular is going to vito currently in that proceeding. We had a high concentration of these patients [indiscernible] part of our relationship with our RJV Partner in Tennessee. Other than that we have lot in reserves for age, accounts receivable due to legacy system transitions from prior acquisition that have increased our bad debt expense for 2015. I’ve to tell revenue cycle is a key focus area for us looking forward.

[Operator:]

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

[Keith Myers:]

Thank you operator and thank you everyone for dialing in today. As always we’re available with any follow up question that may come up. Reach out to Eric and we will be glad to get on phone with you. Thanks for dialing in and thanks for your support.

[Operator:]

Ladies and gentlemen this concludes today's conference. Thanks for your participation. Have a wonderful day.