LHC Group, Inc.
Q4 2015 Earnings Call Transcript

Published: 3 Mar 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the LHC Group’s Fourth Quarter and Full Year 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Eric Elliott, Senior Vice President of Finance. Please go ahead.

[Eric Elliott:]

Thank you, Kat and welcome everyone to LHC Group’s earnings conference call for the fourth quarter and year ended December 31, 2015. Hopefully, everyone received a copy of our earnings release. If not, you may obtain a copy, along with other key information about LHC Group and the industry on our website. In a moment, we will hear from Keith Myers, Chief Executive Officer; Don Stelly, President and Chief Operating Officer; and Dionne Viator, our Chief Financial Officer. 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 the number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update information provided on this call to reflect subsequent events. Now, I am pleased to introduce the CEO of LHC Group, Keith Myers.

[Keith Myers:]

Thank you, Eric and good morning everyone. It’s a pleasure to be here this morning to report on a successful quarter and to close out such a successful year. I want to begin by thanking our team of dedicated healthcare professionals for a job well done. Our ability to consistently deliver high-quality care for the growing number of patients, families and communities we serve is a testament to the collective power, work ethic and experience of the growing number of healthcare professionals who make up our LHC Group family. Thank you for all that you do. Our double-digit revenue growth and meaningful market expansion for the fourth quarter of 2015 reflects well-balanced growth from strong execution of an expansion strategy both the strong organic growth, acquisitions in a fragmented industry with broadening consolidation pressure and margin improvement through operating leverage and focused cost containment initiatives. For the fourth quarter of 2015, our focus on organic growth produced an increase in same-store volume for home health of 4% and for hospices, 10.6%, I am sorry. For the full year, these increases were 3.4% and 8.2% respectively. Our focus on growth through acquisitions resulted in three fourth quarter acquisitions with aggregate annual revenue of more than $48 million, part of our total of 7 acquisitions for the full year that brought nearly $65 million in aggregate annualized revenue for the company. Our focus on cost containment contributed to the 60 basis point improvement in G&A expenses as a percentage of revenue for the quarter and a 140 basis point improvement for the year. The bottom line impact of these and other improvements was 17.8% growth in fourth quarter adjusted net income attributable to LHC Group and a 39.6% increase for the full year 2016, reflecting and in part because of our great performance in 2015, we have a positive outlook on our growth potential for 2016 primarily because of the growth opportunities related to the ongoing shift to value-based payment model from traditional fee-for-service models. With the shift of financial risk performance through the payer and our healthcare provider, our value as a provider of high-quality non-acute care in a very low cost setting has come sharply into focus for many of our existing and potential partners who own that financial risk. Simply put, by providing our high-quality home health hospice services and community-based services to help our partners reduce their patient’s length of stay in an institutional setting, we can help them significantly reduce their costs. We have always had these capabilities, but under our value-based payment model, payers and providers are strongly incentivized to leverage our capability. This transition is ongoing and will be for years and before it can both not come fully into fruition for a number of years. However, it has already had a positive impact on our organic growth for 2015 and it continues in 2016 in terms of both the volume and acuity in our mission. We believe an important reason we are already benefiting is that we have an extensive network and district of health system joint ventures. Through our work in these partnerships over the years, many health systems have a direct experience with our quality of care, our services and our IT capabilities, while others know us from specific value-based pilots in which we participated in recent years. This is not to say that we don’t have to continually educate the market and especially the MCOs about our home health capabilities and how we can add value lower cost in any value-based payment model. This process has continued and there is much greater interest and understanding in how we can help than ever before. But we believe the real-time impact on organic growth that we are seeing is primarily due to our deep experience with our health system partner, which in turn is a great recommendation for others, considering LHC Group as a potential partner. In addition to organic growth and due in part to the investment required to be an attractive partner in this changing environment. The transition to value-based payment is driving consolidation pressure in our industry contributing to having an unprecedented pipeline of potential acquisition opportunities. Currently, we have active discussions going with 20 potential transactions, representing approximately $1 billion in trailing 12-month revenues. 10 of these our health system joint ventures and 10 are freestanding. With regard to size, 11 of the 20 or the smaller more local companies like the Heartlite Hospice acquisition we announced yesterday or the two home health acquisitions we acquired in the fourth quarter, which have less than $10 million in trailing 12-month annual revenues, 7 are more regional in nature and a size more consistent with the Halcyon acquisition in the fourth quarter and two are larger opportunities with annual revenues in excess of $100 million. So, it’s a diversified and balanced pipeline of opportunities. Important to note that some of these will undoubtedly pay us some consideration and as we have further discussion, we may find that some are not near-term opportunities. But the point is we expect that our current pipeline will produce a record year in acquisitions for 2016 and the expansion on pipeline and development efforts has continued to accelerate. Let me conclude by saying that despite the 2016 reimbursement reductions we noted in the release, we have some meaningful payout wins that support our growth expectations for 2016. On a longer term basis, we believe that we are well-positioned to continue gaining market share as a result of the transition to value-based payments. We believe payers and providers will seek the partner with high-quality non-acute care providers that also have the scale, market density, technological sophistication and financial strength to meet their evolving needs. LHC Group is in this select and arguably small group of home health providers and we expect this market position to drive our long-term growth through organic expansions and acquisitions creating further margin opportunities. As a result, we are highly confident about our prospects for further long-term growth in earnings and shareholder value. And now, I will turn the call over to Dionne.

[Dionne Viator:]

Thank you, Keith. Good morning, everyone. Thank you for joining our call. 2015 has certainly been a year where many initiatives have come together operationally, as Keith mentioned and this execution by our team resulted in strong financial performance. Net service revenue for the fourth quarter of 2015 was $219 million, an increase of 13.2% compared with net service revenue of $193.4 million in the same period of 2014. For the year, net service revenue was $816.4 million, an increase of 11.3% compared with net service revenue of $733.6 million in 2014. Same-store revenue grew 6.5% for the fourth quarter and 5.2% for the year compared to 2014. This growth in same store revenue is due to our growth in same store admissions and an overall increase in patient acuity from 2014 to 2015. Net income for the fourth quarter of 2015 was $7.7 million or $0.44 per diluted share, an increase of 37.5% compared with net income of $5.5 million or $0.32 per diluted share in the same period of 2014. For the year, net income was $32.3 million or $1.84 per diluted share, an increase of 46% compared with net income of $21.8 million or $1.26 per diluted share in 2014. Adjusted net income for 2015 was $34.1 million or $1.94 per diluted share. 2015 operating expenses were adjusted by the following items to reflect a normalized result from operations. First, $1.1 million in disposal costs related to the closures of six underperforming locations. The majority of this cost is from the closure of a hospice inpatient unit that was acquired as a part of the Halcyon transaction in the fourth quarter of 2015. Second, $1.3 million in goodwill and intangible disposal costs were related to the closure of those underperforming assets already mentioned and the write-off of the corresponding impaired assets of those locations. Third, $578,000 in costs associated with the Halcyon and Nurses Registry acquisition. On a consolidated basis, our gross margin was 41.1% of revenue for both the fourth quarter of 2015 and for the fiscal year 2015 as compared to 41.7% of revenue in the fourth quarter of 2014 and 40.7% in fiscal year 2014. Our general and administrative expenses were 31.1% of revenue in the fourth quarter of 2015 and 30.5% of revenue for the fiscal year 2015 compared to 31.7% in the fourth quarter of 2014 and 31.9% in fiscal year 2014. Our bad debt expense represented 2% of revenue in the fourth quarter and 2.4% for the year as compared to 2.1% and 2.2% in the same periods of 2014. Operating cash flow for 2015 was $59.1 million as compared to $38.7 million in 2014. Regarding 2016 full year guidance, we are expecting 2016 net service revenue to be in the range of $870 million to $890 million and fully diluted earnings per share in the range of $1.90 to $2. This guidance includes $9.5 million reduction to Medicare home health revenue resulting in a $0.32 reduction in fully diluted earnings per share for 2016, due to the 2016 CMS home health rule. It also includes $3.6 million reduction to Medicare LTAC revenue due to the new CMS established patient criteria resulting in a $0.06 net reduction in fully diluted earnings per share for the 2016 after implementation of strategies. This guidance does not take into account the impact of other future reimbursement changes, if any, future acquisitions, if made, de novo locations, if opened, or future legal expenses, if necessary. A few focused areas in 2016 to help offset the effects from the impact of the rules that I have just mentioned are; First, accretion in 2016 from the Halcyon acquisition. Second, anticipated same-store growth in home health of 3% to 4% and in hospice of 4% to 5%, improvements in commercial payer collections, reduction in losses at underperforming agencies and continued leverage of G&A expense. While we don’t usually give quarterly guidance because of all of the moving pieces in the first quarter of 2016, I will give a range to help you with your modeling. We are anticipating that the first quarter EPS to be in the range of $0.35 to $0.38. This estimate includes the traditional increase in first quarter payroll taxes of approximately $2.5 million over quarter four of 2015 as well as expenses related to the Halcyon conversion to point of care of the acquired 16 locations or was and have been or will be converted in the first quarter of 2016. Second, integration costs of Nurses Registry. Third, companywide oasis training to prepare for value-based purchasing. And lastly, acquisition and integration costs for the recently acquired Heartlite hospice. For the full year of 2015, we expect gross margins to be in the range of 39.5% to 40.5%, G&A as a percentage of revenue to be in the range of 29% to 30%. And bad debt as a percentage of revenue to be in the range of 2% to 2.2%, I apologize, that’s for the full year of 2016. That concludes my prepared remarks. I am now pleased to turn the call over to Don Stelly.

[Don Stelly:]

Thank you, Dionne and good morning everyone and thanks again for listening. I would like to begin my comments as did Keith by acknowledging our LHC Group team. 2015 was a huge year for us and solidified the foundation from which we will build upon in the years ahead, well done and as we say, keep pressing, team. Now, moving on to my update, presently we are executing our quality improvement initiatives, our growth initiatives and our provider business plans with the highest level of effectiveness that, truthfully, I have seen in my team here at LHC Group. Case in point, in July of last year, 42% of our home health providers were above the national average in star ratings. In January with this 2016, that number has moved to 62% and the preview data that we have before us puts that number at 80% of our providers being in that category in the coming April. It’s unparalleled movement. Additionally, in the initial HH tax report, our LHC Group has had an average of 4.4 stars with the national average being 4.03 and this too according to our intel is still is improving. So as we, as I last year committed we have improved, we continued to improve and we truly are creating discernible value with this plan. Along those same lines, we are also pleased with our growth numbers right now. In the aggregate, we are ahead of our budgeted business as of today by 922 patients or 102% of our expectation. Our first quarter organic admission growth in home health assuming no further weather interruptions or like event is tracking to 4.15% this first quarter of ‘16, hospice tracking to just north of 6%. We expect those numbers for the full year of 2016 to be similar, more specifically and for your modeling I suggest baking in a 4% same-store admission growth for home health and a 5% same-store number for hospice. Just as a note, our CVS growth is incorporated into what I just guided you to for home health. Two more quick updates before going to Q&A, first Keith mentioned the $65 million in trailing 12-month net revenue acquired last year. Of the 28 operations producing that revenue, all will be completely integrated by March 31 of this year with the exception of one, one Halcyon provider. But it will be completed by May 1. The reason that I made note of this is to dovetail on what Dionne was alluding to. Obviously, we see these assets contributing much more so in the last half of ‘16 and factoring nicely to margin improvement that we speak. And my last update in my prepared comments is regarding the LTAC hospitals to give you clarity on some of what was put in the release. We are projecting a net $3.6 million top line net revenue loss due to the new LTAC admission criteria coming forth for us in ‘16. The net income effect in ‘16 after mitigation is $1.9 million or $0.06 per diluted share. Just a little color on the strategies to mitigate this and which builds up to that $1.9 million

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Ryan Halsted with Wells Fargo. Your line is open. Please go ahead.

[Ryan Halsted:]

Thank you. Good morning.

[Keith Myers:]

Good morning.

[Ryan Halsted:]

I was hoping you could elaborate on the admissions growth that the nice admissions growth that you are seeing that you can attribute to some of this shift in the reimbursement models to value-based payment models?

[Keith Myers:]

So, this is Keith. I will start and Don and I kind of tag team over here. So, from the managed care side, patients that are in any risk-based product with a managed care provider, especially where we have joint ventures with health systems, we are seeing higher percentage of that population coming our way simply because of our ability demonstrate greater value in managing those patients, the greater value in patient outcomes and our ability to underwrite the risk. So, you generally take a lesser payment upfront and a gain share payment in arrears a quarter, at least one quarter in arrears, maybe longer than that with others. So yes, we will be able to carry the paper on them. Don, you wanted to talk about it?

[Don Stelly:]

Yes, Ron, this is Don. And obviously being in the number of markets, the tipping point to that value-based environment is all overboard. But what I would go back to is what I said in the second quarter of the earnings call last year, we really – it took a lot of effort to convert this company to point-of-care and that effort caused distraction in all parts of the business. I was very honest about that. In regards though we have now increased the quality, we have market-by-market differentiators in our sales team, all while we are converting, were being prepped to go out to market for these differentiators. So yes, it ties to the value-based markets, but I got to tell you, it ties much more closely to product differentiation, service differentiation timing initiation of care. And that’s really what we are seeing as this whole environmental shift kind of starts to play out. I don’t want to sound like it’s anything, it’s not and we have over 425 people that have boots on the ground everyday fight and fight. But I think what we are saying is that those initiatives are more effective now than I said in my opening comments near 11 years that I have been here in the realm of sales.

[Keith Myers:]

Let me just add, Ron. And I want to add to my comments, I was describing how it works with health systems and payers that we currently have gain sharing arrangements with and that’s the very truth. But I think a lot of the benefit we are seeing is also people looking ahead, where we don’t have arrangements in place yet, but they are moving in that direction. So, they want to align with providers who have a proven ability to be able to add value to them. But I think we are seeing we are a little bit ahead of the curve with some of those.

[Ryan Halsted:]

That’s great. And if I could sort of extend this to the Medicare program and I am curious if you are starting to get ahead of the game as you think about the Medicare bundle that goes into effect in April on the hip and knee and if you have already sort of established potential gain sharing with particular health systems or other types of providers?

[Don Stelly:]

Ron, this is Don again and the answer is yes. We have been and I know Keith targeted at couple of the conferences, but we used our Ochsner relationship in New Orleans to create our total joint program. And offline, Eric can get you really comfortable with the details of that. But from decreased readmission rate to true stables in the liquidation of their lipid state to a host of others, we have this program really nicely packaged and ready to perform wherever those arrangements are going to be. So, we are using that system to do the same type thing with congestive heart failure, diabetes and a couple of other major diagnostic programs. We do not have those results as tightly packaged, but I expect that to be in the next 3 to 6 months very equivalent. So, the answer is yes and it was a long way of getting to that yet.

[Ryan Halsted:]

That’s very helpful. So, I mean what are some of the areas for improvement you think that are out there to give you that kind of visibility into maybe adding those additional types of episodes, the congestive heart failure and the like?

[Don Stelly:]

Yes, the first thing then I don’t want to get too big is you got to get in before the admission or the discharge disposition is already made and that’s the biggest thing in these pilot programs and some of these patient choice things and things that we can do in the forefront without having the footfalls of the regulatory constraints allows us to really care plan and do some of the things earlier while they are sicker. So, that’s part of it. The other is when you are paid to actually do intensive work such as remote patient monitoring, such as bio-impedance monitoring, congestive heart failure, you can take the kitchen sink so to speak at that care program and you are not going to get your margins. So, it’s just that simple. It allows us to use the clinical tools at our home health disposal and actually get reimbursed for it. The present Medicare system just doesn’t allow that.

[Ryan Halsted:]

That’s great. Next question, you mentioned or you didn’t mention any impact on the hospice rule. I was wondering if there was – if you could just comment on where you think your sort of your patient mix is on the two-tiered reimbursement model and just how that relates to your view on what that impact is for ‘16?

[Don Stelly:]

Yes, maybe Dionne can bare this down again – bare me out on this. We think it’s going to be flat right now in our existing patient population. Out of pure openness, January and February has seen a slight decay, but I think that’s the patient shift that we brought in with Halcyon. And I think our marketing efforts are going to get that back to our normal run rate. So if you look at it and I think we were at about an $85 million book and we are going to $128 million, I would bake in those margins flat to that same-store of ‘15.

[Dionne Viator:]

I will add a quick comment to that. So basically, if your patients are under 60 days of care or at the 30.7% mark, we consider that about a breakeven. Currently in February, we are running at 31% of our patients in under 60 days of care tier. So we anticipate that and have built it into our guidance as flat.

[Ryan Halsted:]

Great. Thanks. Thanks for taking my questions. I will hop back in the queue.

[Keith Myers:]

That’s a great one Ryan. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Brian Tanquilut with Jefferies. Your line is open. Please go ahead.

[Brian Tanquilut:]

Hi, good morning and congratulations guys. Keith, just a follow-up to one of the comments you made as answers to Ryan’s questions. So this gain-sharing that you are seeing with one of your partners, I mean is this something that you think you can replicate across your JVs or even across your portfolio of home health assets. And then kind of as a follow-up to that, does that bring your rate up in margins to a level where it’s essentially in line already or right around fee for service?

[Keith Myers:]

Yes. The answer is yes to both. Brian, of course the only unknown is the negotiation of the gain-share. That’s what we should par, but let me tell you why it makes sense. There is quite a bit of value on the table here to share. So as Don alluded to Ochsner in that model, we have seen a value creation to the health system in excess of $3,000 per patient when the first tax setting is home health. So not every patient that’s discharged from the hospital can come straight to home health and the biggest shift has been from SNF to home health, but that was a – the New Orleans market was a pretty high SNF utilization market. You had no bet based on – but it’s we have been at the dialogue for capabilities of the home health provider in that market to do this. And Don can talk a little bit about that in detail if you want to know more detail around it. But I believe there is more the question being asked when the patient is – when the consideration being made where to place this patient. Historically, the question that’s been asked us, what’s the highest level of service to patient qualifies are based on documentation in the chart. For a really long time, that’s been a question that’s being asked by assessing clinicians. And the culture starts to change in the health system where they ask the question instead, what is the lowest cost that the patient could go to and achieve the same outcome? And if the patient is given a choice, the patient always wants to go home. So I think we are benefiting from that. To sum that up, I don’t want to give the perception that we are doing something so great and I think we are the best provider in the market, of course but we are doing something so great, that there is something magical we have going on as framing the patient. But a lot of it has to do with the questions being asked as well. Don, do you want to…

[Don Stelly:]

Keith, the only thing that I would say is I really want to echo your comments. What we are doing is truly care coordinating and practicing at the top of our scope of service and our license and that is the value that’s being created. And again, Brian I can answer further questions if you want, but I think Keith just made it.

[Brian Tanquilut:]

No, I appreciate that. And then just on the guidance, one of the things that was mentioned in your release was that you were anticipating sort of a negative 1.5% cut sort of last year and now we are seeing a 2% cut, am I right in thinking that you have assumed that 2% net cut have basically occurring throughout the year. And the follow-up to that is, are there ways to mitigate that, I mean I am guessing that’s a case mix or an HHRG-driven number?

[Don Stelly:]

Yes, this is Don. The answer is yes, that assuming that it’s most of the year. And yes, there are things that we were doing. Keith alluded to the fourth quarter, really these last four months being the most successful organic admit run in the company’s history – and it was. The issue is it shifted our mix of type of patients due to some of the markets that we put it in. So obviously, we are going to go and try to continue, I guess right mixing if I may, that number one. Number two, we have just initiated and I think Dionne’s prepared comments talked about spending money on oasis education. That is really to improve our outcomes, but it’s also going to improve our case mix when we do at associates. So we are expecting to see that. And then the last thing is operationally, as Keith kind of said, I think we do a phenomenal job, but we have grown in on-boarding some of our clinicians, it has taken a while and I think we can do some things to make sure we don’t get down coded on some of the episodes as we are right now. So again, I can give you more detail, but the answer is that full effect is inside of the guidance that we issued. We do think there is upside to that and those were the three means that I think we are going to try to prove my statement is correct.

[Brian Tanquilut:]

Got it. And then Keith, there is this chatter or there is this proposal on the pilot for preauthorization and I know you guys are very well connected to D.C., so if you don’t mind just giving us your views and how you think that will play out on this whole preauthorization requirement?

[Keith Myers:]

So you won’t be surprised to hear the number one initiative now that we are working on at the partnership level. You are aware that it’s focused on – in five states, four of which are weak states. It’s modeled after the pilot and a medical device industry. We think that our arguments are that is wrong for a number of reasons. One is it puts – it really puts a level of bureaucracy between the patient and the service and kind of oversteps the physician. That’s an obvious argument. Understanding that 50% of patients that come to home health actually come from hospitals, you can begin to imagine how this delay could back patients up in hospitals where you got to notice these problems. Whether we spend all this time, we have a physician piece on it. And Eric, maybe we can publish out just on the website whoever needs jut read all of this out. But we think we have good arguments against this and we think that there will be a lot of modifications made to it before it ever gets rolled out beyond these five states. I guess that’s what we are pretty confident about that.

[Brian Tanquilut:]

Alright. Got it. Thanks guys.

[Keith Myers:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kevin Ellich with Piper Jaffray. Your line is open. Please go ahead.

[Kevin Ellich:]

Hey guys. I just want to echo Brian nice quarter. I guess just following up on the question about the prior authorization, can you – Keith can you remind us what’s your exposure to Florida, Texas, Michigan, Illinois and Massachusetts?

[Keith Myers:]

Our only real – our only exposure really is in Illinois and Texas. Let me look around and see if we – do we have our mid-revenues?

[Kevin Ellich:]

Okay. And while you look it up, what do you think the likelihood – it always seems like in the home health industry, it’s been more troubled markets than the whole entire state like remember it’s Miami-Dade County, Greater Houston and Detroit areas, which is why I think they are going after those states, at least my opinion. Is there any chance that you guys think this will be nailed down to those specific geographies versus kind of like in the whole entire state, and I mean don’t – aren’t there enough safeguards in place that face to face regulations are ready or there really shouldn’t be anymore fraud and abuse in the industry?

[Keith Myers:]

Yes, absolutely. We will get this paper, this piece published as soon as we get off the call here. So you can all see it. But that’s exactly right. I mean we think those target markets should be the focus area. We know where that abuse is occurring. But also, if you want to go across all markets, there are ways to identify the high utilization providers and targets those. We have done a lot of work on this at the partnership level stratifying the provider population and highlighting those providers that one could say from the data might be abusive, because of longer length of stay. So, those are all comments we are going to be providing to the regulators.

[Don Stelly:]

Kevin, this is Don. Eric has kind of added it up for us in all 5 states and that we have about $50 million in net revenue.

[Kevin Ellich:]

$50 million. Okay, thanks Don and Eric. Keith, going back to your prepared comments that your pipeline is bulging as usual 20 deals with $1 billion of potential revenue. You commented about two larger opportunities of greater than $100 million of revenue. Wondering what stage those deals are at? Could we see them this year? And then could you also tell us what type of services are we looking at? Are those traditional home health, hospice, community-based?

[Keith Myers:]

Yes, so we – let me answer that in two parts. When we report – when we share what we have in our pipeline and we have done that, I think we have done that for a decade since we have gone public, it’s nothing new for us. But we don’t include anything in the pipeline that we don’t think is going to – has the potential to close within 12 months. If we identify that something is not going to be near-term, we will revisit it with them later, then it comes off of that active – what we referred to as a active pipeline. So, maybe that will give you some clarity around that. And with regard to the mix, we are still about, I would say, 90% of the pipeline is home health and hospice and close to 50-50 split and about 10% would be home and community-based services.

[Kevin Ellich:]

Got it, got it. And then even though the LTAC business is relatively small compared to the other parts of your business and Don, you gave some great information on the headwinds that you are facing there. Just wondering if you have any updated thoughts on – I mean there are some headwinds. You have got bundling coming down the pipe, which could have a negative impact on volumes there, which should actually benefits your home health business in my opinion thoughts on whether you guys want to keep that business or thoughts of maybe getting rid of it?

[Keith Myers:]

Yes, I think we have talked about this before. Don focused and the operator focused primarily on mitigation and doing a heck of a job. And so that’s good, but you are right, when we see a pipeline of this size, clearly, our fairway is home health hospice and home and community-based services for the long-term. So, it could well be that we might decide to place the LTAC assets with someone that’s more core for them and us redeploy those dollars into acquisition of home health and hospice. With this pipeline, it could well turn out that would be a possibility for us. And I can also tell you that there is interest in the LTAC. We have actually received an inbound call on that within the last month. So, I think all of that is on the table.

[Kevin Ellich:]

Got it. No, that’s helpful. And then I guess Don going back to your comment about I think you said the unmitigated loss was $3.1 million based on reduction of the 18 beds. Is that $3.1 million in addition to the – that’s in addition to the $3.6 million off of the reimbursement change, is that right?

[Don Stelly:]

That is correct.

[Kevin Ellich:]

Okay, okay, got it. That’s helpful. And then also you gave some information on star ratings and your providers are performing at a very high level. What sorts of things have you guys have done to really drive that improvement in the star ratings? I think you said 62% are now 80% this April, I guess, how did that happen?

[Keith Myers:]

Well, one thing is as honestly dejected as I personally was last year when I came out, I was also clear as to the why. I was clear that back then we had 110 agencies going to the home care home based transition and that distraction it just doesn’t matter how good we tried caused discrepancies in the documentation from paper to the point-of-care systems. So, because of that time lag, it made us look worse than truthfully we were. That was an excuse. The data would support what I have just told you. But I didn’t take that for granted and neither did our great team. Instead, from me personally, jumping on the worst of our star agencies to investment in strategic software, we have a multitude of things that we have done and this last one of this oasis training and it’s kind of like the last piece to that puzzle. So, it wasn’t one silver bullet. There were several things, but we were the benefactor of the time lag and now are the benefactor of all of our approaches really starting to take hold. Does that make sense?

[Kevin Ellich:]

It does. It’s very helpful. And actually that leads me to my last question, which is for Dionne anyway, you provided the Q1 guidance and you made a comment about a few of the expense-related items. How much cost is associated with the oasis training and integration of Nurses Registry?

[Dionne Viator:]

The cost of the oasis training to do wing to wing in the organization is going to be about $750,000 cost. The cost of the Nurses Registry and other acquisition integration is about $500,000.

[Kevin Ellich:]

And that’s only in Q1, is that right, Dionne?

[Dionne Viator:]

Correct.

[Kevin Ellich:]

Okay, great. Thanks, again, guys.

[Keith Myers:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Toby Wann with Obsidian Research Group. Please go ahead.

[Toby Wann:]

Hi, thanks for taking the question and congrats on the fourth quarter. Quickly just one little housekeeping item, guidance for ‘16, does that include the Heartlite acquisition you guys announced yesterday?

[Don Stelly:]

It does.

[Toby Wann:]

Okay. So that is factored in there, okay. So, that’s $6.8 million revenue and $0.01. And then just a quick – on the strong organic growth that you guys posted in the fourth quarter and you guys expect in year-to-date two-thirds of the way through the first quarter on both the home health and hospice side, I think you guys said up 4 and up 5 or 6, I can’t remember right off the top of my head. But I guess my question is given kind of a milder winter, if you will, as well as a much weaker flu season than last year, what do you guys attribute the growth, the strong organic growth to in aggregate?

[Don Stelly:]

The first thing is we put another 30 sales reps in key markets that we knew we had upside and that’s really starting to pay dividend. And I am going to go back to what I said, Toby, I think to Ryan’s question. Right now and I have to kind of go back to see – I believe we are going to have close to 80 agencies in either a 5-star HH cap or 5-star outcome and process measure and we are absolutely blasting that as a differentiator. So, you got more sales force producing each day. And honestly, we have some market differentiators that are really starting to take hold and really create that tailwind Keith talked about in his prepared comments.

[Toby Wann:]

Okay. Now, that’s really helpful color. I appreciate that. And then just one other subject matter, which really hasn’t kind of been touched on much given the strength of the home health and the hospice business, but community care, we look at the center sits up nicely 14.5%, 14.8% on a year-over-year basis, up 9 sequentially billable hours are a little bit of a different story, but you also see kind of a nice bump in the revenue per billable hour up 10 on a year-over-year basis and up 3 or up 2 on a quarter-over-quarter basis. I guess – and so my question is what’s kind of going on there in terms of looking at the revenue per billable hour being up 10%, but yet you are not seeing huge growth in the number of billable hours, but yet a pretty big bump in the census. I mean, so you are obviously spending less time, but a greater dollar amount per visit. So, I am just kind of – is it a mix shift, what – just some color on that?

[Eric Elliott:]

Yes, it really is a mix shift. There are two things that I want to kind of allude to there. We are at 13 locations and we have mapped out in this tri level of care that you have heard us talk about a few more that we are actually rolling out. But I want to do that very methodically because we don’t have a lot of room in that margin to open these and drag it. So what you are seeing is some of those newer ones that we are doing are causing that mix shift, but I mean the team is trying to be very methodical on how we roll that out. The other thing that I wanted to say and then I will put out there is that we are also doing something pretty unique by piloting benefiting nurse aides in certain markets. And the reason that we think we can do that, it may decay the margin just a little bit, but there are some contracts that we can go out and get that we presently don’t have. And we think that can bolster those billable hours, but a little bit lower margin per hour if you would. So those kind of things in combination of what you are seeing in there. And because, it’s still a very relatively important but small revenue stream that’s just – it’s so transparent in numbers.

[Toby Wann:]

Alright. Absolutely lot of small numbers there. And then just more from a little bit of a macro commentary, if you will, obviously gas prices and I know you guys reimburse on a mileage basis as opposed to a gas price basis. But gas prices are back to where they were, I think when I turned 16 and I am in my 40s now or pretty close to it anyway, so I am thankful for that from a personal economic standpoint, but it should be theoretical tailwind to you guys as well. So is that also kind of factored in, I am guessing into some of the guidance, because you do face some headwinds on the reimbursement side from the home health rebasing as well on the LTAC side, but you should also have a little bit of a tailwind from lower fuel and/or reimbursement costs as well, so maybe some commentary there about that and then I will hop back?

[Don Stelly:]

Yes. Toby, it’s Don. And I will be crystal clear to that. The answer is yes. And in our bridge from 2015 through ‘16, part of our guidance incorporates a $0.03 pickup because of what you just talked about.

[Toby Wann:]

Okay, perfect. Thanks so much.

[Operator:]

Thank you. Our next question is a follow-up from the line of Ryan Halsted with Wells Fargo. Your line is open. Please go ahead.

[Ryan Halsted:]

Thanks for taking the follow-up question. I wanted to go back to the strategy of maybe trying to increase your acuity as a way to mitigate the Medicare reimbursement headwinds, I just wanted to get a sense of operationally, how you are doing that and really just gauge what’s kind of the risk to that operational strategy, I mean is there concerns around how much therapy you can – how many therapists can you really attracted in the market and what the cost of that would be?

[Don Stelly:]

Well, I am really glad you asked that, because semantically its increasing case mix was the question, not necessarily increasing the acuity. What we said was two things. First was the mix of patients, in other words more clinical band therapy was attributable to that. So it’s not like we are going to take an existing therapy patient and try to go do differently than we are today. It’s that we are going after more of the orthopods where we shifted to clinical, point one. Point two is because of the oasis, if there is oasis inaccuracy, when you are refuting one’s self inside of that documentation, your case mix is low. So you are really not capturing through the documentation if the patient acuity is actually pivoting. Those are the two things Ryan that I was trying to allude to. We want to go back after some of the patients that are traditional mix incorporated. And when we do actually document, we need to use what’s called SHP, it’s our program. We need to use that SHP system to say, hey you know what it’s telling us that we are not making sense, let’s make sure we are making sense. And when we do that, we have seen case mix go up.

[Ryan Halsted:]

Okay, I appreciate it. Sorry go ahead.

[Don Stelly:]

What Keith was asking, we used to use a company called OCS and really it just wasn’t a user friendly for the field, it was a great for us, me, Keith and Eric and everybody, but we switched that entity it’s been about a year. And with anything when you are trying to get 6,000 people to get comfortable with the change in what they are viewing on their laptops and their devices, it’s really just taking hold right now.

[Ryan Halsted:]

Thanks for clarifying that. So is there a need to try to staff differently or you are saying it’s purely what you just described?

[Don Stelly:]

It’s pretty much what we just described. The need to staff differently is because in certain markets right now, gosh I wish it could be all the way, we got pipeline issues that we can’t take. We got people waiting to come into the ages and I can’t find staff in some of the Northwest agencies. So that’s really what I was alluding to there. Does that answer your question?

[Ryan Halsted:]

Yes, absolutely. Thanks for the – for taking the follow-up.

[Operator:]

Thank you. And that does conclude today’s Q&A portion of the call. I would like to turn the call back over to Keith Myers for any closing remarks.

[Keith Myers:]

Okay. Thank you, operator. Thank you, everyone for dialing in this morning, participating in the call. As always, if you have any follow-up questions between now and our next call, please feel free to contact to Eric Elliott. And if he can’t answer questions, he will get you in touch with Don or Dionne and we will work with you as much as we can. Thank you.

[Operator:]

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