U.S. Physical Therapy, Inc.
Q4 2012 Earnings Call Transcript

Published: 7 Mar 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the U.S. Physical Therapy Fourth Quarter and Year-End 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the call over to Mr. Chris Reading, Chief Executive Officer. Please go ahead, sir.

[Christopher J. Reading:]

Thank you. Good morning, everyone. Welcome to U.S. Physical Therapy’s fourth quarter and year-end 2012 earnings call. With me here on the office this morning will include, Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Rich Binstein, our Vice President and General Counsel; Jon Bates, our Vice President and Controller. Before we begin today’s call, where we have a lot of material to recover. We first need to review with you a brief disclosure statement. Jon, will you do those honors?

[Jon Bates:]

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. And these forward-looking statements are based on the company’s current views and assumptions and the company’s actual results can vary materially from those anticipated. Please see the company’s filings with the Securities and Exchange Commission for more information.

[Christopher J. Reading:]

Thanks, Jon. Okay, we’ll start today by walking through a few highlights from what was another good year. In fact, the sixth straight year, very solid earnings growth, in fact, record growth from operations. Some highlights from the year in the quarter. For the year, we produced same-store revenue growth of 4.4%, which was muted somewhat near years end by the affects of Hurricane Sandy. Despite that, we finished the year as well as the quarter in solid steady fashion. Our net revenue growth for the year increased 6.4% and our corporate cost as a percent of revenue declined just under 10% for the full year, for the first time in the company’s history. 2012 also marked an expansion in our development initiatives to include a program that help our largest partners tuck-in, existing, local and regional practices to further accelerate their growth. This was successful. And then in the second half of the year, we closed on seven of these tuck-ins, following the larger acquisition of a very nice partnership announced earlier in that year. As we begin to walk through our performance for 2012 along with our plans for 2013, I thought it important to create some additional perspective and briefly reflect on a few relevant items that will relate contextually to the path that we will take for 2013 as we work through some of these recently announced federal payer and other challenges that face not us– not just us, but the entire industry. We have detailed a thorough and thoughtful plan to navigate this path as we’ve done repeatedly over these past 9 to 10 years. Over this period, we have successfully worked through previous federal payer rule and reimbursement changes and challenges. We have remodeled an earlier company-owned store initiative, which we needed to significantly revamp when we arrived. We successfully added, broadened, developed, and adapted with the changing market forces, aided in part by a very capable sales team that we’ve developed many years ago. Most recently with the help and support of our partners, we have further identified approximately 55 locations where we are in the process of training an existing team member, that member will be a non-licensed person. So typically, Physical Therapy technician with degreed background or front office person to assist in a targeted sales program further expanding the number of sites, where we will have at least part-time sales coverage in an effort to drive more business and touch more lives with our facilities excellent care. With the help and support of our partners and our corporate resource group, we have added numerous programs and services over the years to help us further differentiate ourselves in the marketplace, all while taking care to maintain our partner centric environment and ownership model that’s helped us be successful over these past 20 plus years. Our committed group of de novo partners have grown dramatically over this time and in more recent years, we have further enhanced our growth and capabilities through our selective and focused partner acquisition program, which has helped us to grow significantly during these past six years of record earnings. I have a great deal of faith in all of our partners, as well as our main corporate resource groups to continue to work as they have to overcome as we have before in the past some of the challenges that are before us this year, so let’s discuss these challenges. Right out of the gate, we are dealing with some persistent severe winter storms coupled with the worst flu season in quite sometime, affecting virtually the entire nation this winter. Last year, you might recall an incredibly favorable winter weather season, which unfortunately this year we’ve not seen this far. Additionally, as outlined in the earnings release, some very greater detail regarding the impact from the recent MPPR Medicare Payment Reduction, as well as last week sequester impact. These are certainly real challenges that we have to work to overcome this year, so let’s spend sometime talking about how our team dedicated clinicians, front and back office teams, sales, corporate resource, and leadership groups are responding to these challenges. First a quick comment that I believe these Medicare pricing reductions are wrong headed, the target in the industry known for its cost effectiveness, its very positive impact on patients, and overall cost of care. Rather than belabor that, we are channeling that frustration into productive action designed to overcome the effects of these recent challenges over the course of the year and going forward. First, it is important to know that we have been in action mode for sometime. We have proactively worked to further strengthen our team, both centrally here in the form of additional development and operational for resources, as well as by continuing to grow our organic and acquired partner network. We’ve been working hard to fight our way through this tough flu and winter period by working to drive new patients in the door despite the challenges around us. Our partners, directors, and sales teams have done a very commendable job during a period with multiple important initiatives going on to stay focused on job one, that is driving new patients in the door and then working to get them better with great care and service. I’m pleased to say that despite a visit impact from the unkind winter season, we are on plan with respect to our new patient referrals thus far this year. These continuing efforts should bode well for us as Mother Nature settles down and things thaw out for us around the country. Shifting gears a little bit, today we announced our first acquisition in the year with a terrific group of partners we have come to know very well and are very excited to have on our team and we are working hard to keep that momentum moving through the rest of the year. On that note, we have recently adjusted some previously allocated development resources and we have invested in a seasoned new team member we’ve known for a long time who will assist us in further developing our acquisition flow, taking over the tuck-in acquisition process as well. This individual is well known and well regarded in our industry and will undoubtedly assist us in our success as we move forward. We are very confident that we can provide a good home for many of these private practices who are out there working to navigate in an increasingly complicated payer world. We’re actively working hard to fold in the very best of those into our family of the coming months and years. Next, our clinicians are hardworking smart people, who understand the meaningful impact of these rate reductions have in our business and as well they understand the changing environment in general. They’re actively working with us to create meaningful efficiency improvements while maintaining the strength and effectiveness of our clinical care. These adjustments are underway. Finally, in the area of new programs and existing program enhancements, we still have a few things up our sleeve for this year. First, fit to work is doing a terrific job in gaining staying weekly, signing some very nice contracts, expanding existing relationships with some well known large companies. This will help us to offset the poor patient volume start as the year progresses, as well as to bolster our net rates to an expanding comp focus. Next, we have a new orthopedic home care initiative that is moving forward, which we believe will open us up to some patients that we might not otherwise get, allowing us to see them for a few visits in the home generally following bigger orthopedic surgical procedures within a rapid transition into the clinical setting. These and other clinical program enhancements should help us to respond to the issues discussed in this relief. This will be a challenging year for us and for many in our industry. We have a very focused and capable team, however, who are all working hard to overcome these challenges in order to deliver results to our shareholders while maintaining the fabric of our culture and what is important to and for our patients whom are entrusted to our care. Over the long run and accelerated by these recent challenges, we believe that these will be a further catalyst for consolidation and alignment within our industry. That should bode well for us as I firmly believe that we continue to be a great long-term home for many of these best-in-area private practices. In closing, let me say that we will work diligently to deal with these headwinds chart a course, which will allow us to grow, leveraging a strong balance sheet and a strong team. Due to the recent timing of these challenges and the fact that our action plans are in the early stages, we have elected to defer giving guidance at this time. Rest assured we have not deferred our commitment nor collective belief in our ability to make a difference for our shareholders, colleagues, and patients alike. With that overview, Larry, I would like you to go ahead and cover the financials and operating performance in greater detail. Thank you.

[Lawrance W. McAfee:]

Thanks, Chris. I’ll begin with a review of the quarter. Net revenue increased 3.3% from $60.7 million to $62.7 million, primarily due to an increase in patient visits of 2.9%. The average net rate for a visit was $106.37 as compared to $105.09 in the year earlier quarter. Total clinic operating cost were 77.5% of revenue in the fourth quarter 2012 versus 75.6% in the 2011 period. The increase was primarily attributable to new clinics opened or acquired. Provision for doubtful accounts was 1.9% versus 2%. Corporate office costs were 9.8% of the revenues versus 11.7% a year earlier. Operating income for the fourth quarter of 2012 was $7.9 million. Net income was $4,043,000 million, adjusted earnings per share were $0.34 in the recent quarter, as compared to $0.29 in the fourth quarter of 2011. The $0.34 in EPS for the quarter was better than the consensus estimate, despite an estimated $0.02 hit we took from Hurricane Sandy. Same-store revenue visits and the average net rate per visit were flat for the period. Visits would have been higher if it were not for Hurricane Sandy, which impacted more than 50 of the company’s clinics. I’ll now review the full year; net revenue increased 6.4% to $252.1 million due to an increase in patient visits of 7%. The average net revenue per visit for the year was $105.57 as compared to $104.72 in 2011. The increase in net revenue was partially offset by a decrease in other revenues of $2.8 million due to a reduction in revenue from physician services. Total clinic operating costs were 75.2% of net revenue in 2012, as compared to 74.4%. The increase was due to increased costs related to the clinics acquired. The provision for doubtful accounts was 1.9% for the year versus 1.6% in 2011. In 2012, the gross margin from the company’s core physical therapy business increased by $4.6 million or 7.9%, while the margin from the physician services decreased by $2.7 million. Corporate costs remained about the same in 2012 as 2011, in terms of total dollars. But as a percentage of revenue as Chris mentioned, they were 9.8% in 2012 versus 10.4% a year earlier. Operating income in 2012 rose to $37.8 million. Net income for 2012 was $17.9 million. Earnings per share for 2012 were $1.51 million as compared to adjusted earnings of $1.35 million in 2011. Same store revenue increased 4.4% due to higher same store visits and a slightly higher net rate. Today, we announced that the company is increasing its dividend by 11% from $0.09 to $0.10 per share for the quarter. We also announced as Chris mentioned, that in February, the company acquired a 72% interest in a nine clinic physical therapy group. Last, I’d like to just briefly go over or speak about the current operating environment. The so-called American Taxpayer Relief Act of 2012 enacted in January included provisions, which will reduce reimbursement for physical therapy services provided to Medicare patients. The new law increases MPPR to 50% effective April. Estimated impact this year to the company from the rate reduction is up to $0.18 per share. On March 1, the sequester went into place, it calls for an additional 2% cut in Medicare, and projected effect to the company is to further reduce earnings by approximately $0.04 per share in 2013. As we noted in the release and Chris talked about briefly, January and February were tough, although patient referrals were good and in fact on plan, the company’s volume of patient visits were significantly impacted by both the weather and the flu. Winter storms have continued in certain parts of the country thus far in March. Normally, the company’s management gives earnings guidance at this time, because of the current uncertainties and all of us losing parts, the management is deferring giving guidance.

[Christopher J. Reading:]

Okay. That’s a lot of a material. I know we will have questions. So operator, why don’t you go ahead and open up the line and we’ll be happy to answer any and all questions.

[Operator:]

(Operator Instruction) Your first comes from the line of Larry Solow of CJS Securities.

[Christopher J. Reading:]

Hi, Larry.

[Lawrence Solow:]

Hey, guys. Good morning. Anyway you could ballpark the impact of Sandy on visits; quantify it anyway? I know it’s probably difficult, but…

[Christopher J. Reading:]

Yeah, I mean I know we looked at it. We don’t have them here in the room.

[Lawrance W. McAfee:]

We have been tracked it. We don’t have it with us. We did and because we have business discontinuance some insurance, we knew the impact would be – what is our deductible and that’s equivalent to two steps of earnings.

[Lawrence Solow:]

Okay. I noticed that your costs, particularly your SG&A, went up a good amount sequentially and as a percentage of revenue year-over-year. Anything in there non-recurring, or is it just anything that should be worried about there?

[Christopher J. Reading:]

Our new clinic openings were kind of tilted towards the back side of the year. I think Larry, as he outlined in the release, a lot of that was due to the new and acquired facilities that were in just, part of the year. So I don’t think there is anything that’s non-recurring in that group though there.

[Lawrance W. McAfee:]

When you say SG&A, Larry, you’re talk about salaries related?

[Lawrence Solow:]

Yeah, that’s what I meant, exactly.

[Lawrance W. McAfee:]

I mean we had a significant acquisition in July of 2011, is that right?

[Lawrence Solow:]

Right.

[Lawrance W. McAfee:]

That only had what six, five months ending versus 12. So that would have made a difference.

[Christopher J. Reading:]

And then we had another deal in late in the spring.

[Lawrance W. McAfee:]

We have a deal in May and we have clinic openings for more – we have more clinic openings in the second half of the year than the first.

[Christopher J. Reading:]

That’s correct.

[Lawrence Solow:]

Definitely, that’s some temporary excuse there I guess, essentially. And then just last question, I know you guys are not providing guidance now. Two parts, do you plan to inevitably provide guidance? And then the second part is you sort of outlined the MPPR of I think $0.13 to $0.18 and then the additional $0.04 on the further costs from the sequestration. I assume maybe you can’t give me a number, but that those $0.18 and $0.14 are sort of maths targets and hopefully you can offset some of that with your initiatives?

[Lawrance W. McAfee:]

Well, I mean we have a number of initiatives, but the full impact of those combined things $0.22.

[Lawrence Solow:]

Right.

[Lawrance W. McAfee:]

And as to guidance, the reason we didn’t get guidance now as frankly, there wasn’t enough clarity. We came up with some figures, but it would have been such wide range. We didn’t think it would be relevant to the investors. So we’re going to give guidance. We wanted to do with accuracy and hit the number. So we deferred even at this time. We may give it later just in terms on where we are.

[Lawrence Solow:]

And is that wide range driven by the impact or some offsetting impact to this $0.22, or is it wide or is it relate to the weather in Q1, both?

[Lawrance W. McAfee:]

Well, the weather – I don’t have February financials yet, but…

[Lawrence Solow:]

Okay.

[Lawrance W. McAfee:]

The weather will continue to hurt us, so we all know – we know what the impact was in January was significant also in February, but we don’t have the numbers yet. The other thing is due to all the action items we’re taking or just beginning or in midstream…

[Lawrence Solow:]

Okay.

[Lawrance W. McAfee:]

And it would be premature to try to quantify what the net benefit is going to be.

[Lawrence Solow:]

Gotcha. Okay, fair enough. Thanks, guys.

[Operator:]

(Operator Instructions) Your next question comes from the line of Brooks O’Neil of Dougherty & Company.

[Christopher J. Reading:]

Hi, Brooks.

[Brooks O’Neil:]

Good morning. I was kind of hoping that you might be able to walk us through sort of the modeling impact of the Medicare cuts. I’m just trying to think it through obviously, Medicare is only 20% of your procedures. Help me think about how you came up with this $0.18. I’m not questioning it. I’m just trying to understand.

[Lawrance W. McAfee:]

Yeah, when I initially came out, we ran a model and then also the APDA has a model and, in fact, we put the same assumptions and units in there that their figures and there’s came out almost exactly the same. The impact to us was about an 8% to 10% reduction and our average net rate for Medicare, which is about eight bucks. So and then we took our Medicare visits times the 8 bucks and that’s how you come up with the dollar impact.

[Christopher J. Reading:]

Yeah, it’s actually, I think it layers as well. I think it’s actually a little bit more than eight bucks. When we look at our Medicare reimbursements to begin with we were about $95 of visits. So depending upon the unit selections somewhere in that 8% to 10% range versus in that 8% to 9.50% range, and then on top of that, which just mathematically as we back through our Medicare visits and the real impact on that we end up in $0.18 figure and then the sequester had another 2%. And then as Larry mentioned, as I discussed in this release, we’ve done a lot of things to get through this. Those are revenue impacts. We have to do other things to offset that. Runway is just short in terms of visibility from when these things happened, what we’re doing and we just need a little bit more time.

[Lawrance W. McAfee:]

Sure.

[Christopher J. Reading:]

To get these things in place.

[Brooks O’Neil:]

I totally understand that, I think most people do. I think that I recall that historically, Larry said you guys don’t have a pipeline of potential acquisitions. But I sense that you’re in somewhat active pursuit of opportunities all the time. Could you just characterize in a broad general sense? I mean I sort of sense acquisitions could be one way you could begin to offset some of the impact of the cuts. Would it be fair to assume that it’s likely you’re going to try to be more active this year?

[Christopher J. Reading:]

Yeah. So in terms of our growth is kind of a path response on the whole pipeline issue because we don’t announce, certainly people were talking to and we don’t give an estimate ahead of time even after we signed a letter of intent with somebody in terms of a deal until it’s closed.

[Brooks O’Neil:]

Yeah.

[Christopher J. Reading:]

We’ve been very active this past year in the market. We’ve had good success and having some very good discussions. We added to our team another seasoned person who will focus his entire day, week, and month, day-in, day-out on prospecting and finding new deals and we expect to be very active as – we expect to be active this year in doing our kinds of deals, good people that want to stick around that have the right kind of values and perspective on the business. And so, we’ll continue to deploy cash in a disciplined way with people that we like and are also interested.

[Brooks O’Neil:]

Sure.

[Lawrance W. McAfee:]

The reason we don’t refer to it as a pipeline is, because it’s not groups that we’re contracted with to do the deal yet.

[Brooks O’Neil:]

Sure. I understand that and I think it’s a good way to think about it. As I think about the offsets beyond building up the clinic groups, it strikes me that probably it will be a combination of efforts to drive revenue or patient visits higher, combined possibly with some efforts to trim expenses where you think you can do that. Is that a fair way to think about what you’re going to try to do this year?

[Christopher J. Reading:]

Yeah. There are a number of things. So one of those is to improve our efficiencies which our partners understand we have to do. The other is to continue to drive through a variety of different ways, new programs, some of which we discussed; it’s high revenue and more volumes, just to working one of those initiatives and one of the other being the fairly significant expansion of our sales team with these additional part-time folks. We’ve got about 55 people in training right now across our company in typically in facilities that we have and covered with before. So those things combined with some other things that we’re working on, we hope to have an impact.

[Brooks O’Neil:]

That’s good. And then pretty clearly, I guess I’m assuming that it’s possible to look at the facilities in the fourth quarter that were impacted by Sandy, and those that weren’t, and kind of assess how your business was in the markets that weren’t really affected, compared to the markets where it was and that may not be the only variable, but…?

[Christopher J. Reading:]

Yeah. The business was fine in the fourth quarter. I mean, we had a very strong fourth quarter going late into the year. And the only impact really for us was Sandy.

[Lawrance W. McAfee:]

Yeah.

[Brooks O’Neil:]

Yeah. And then in the first quarter with the weather and the flu, that almost certainly is much more broadly disbursed around the United States, obviously not many snowstorms in the warm-weather areas, but is that a fair way to think about it, that it’s pretty much across the United States?

[Christopher J. Reading:]

Yeah, it’s pretty board. Flu was everywhere and we even had storms in North Texas that were – in Oklahoma that was significant this year. So it’s not been a kind winter season. But we’re going to be out of it soon, and we’re doing everything that we can. And the team did a great job driving new patients, new referrals into the facility. In fact, we were on plan both January and February, and things are picking up, so.

[Brooks O’Neil:]

That’s good. Let me just ask one last question. I’m curious your philosophy in thinking about raising the dividend at this point. Obviously, I’m guessing it’s a message that you think the long-term prospects for the business are good, but can you just tell us what you and the Board thought about as you thought about raising the dividend right now?

[Lawrance W. McAfee:]

Yeah, well, since we initiated the dividend, we set up along. Our plan was to business permitting that continue to increase it. Our free cash flow has been exceptional, even after paying a special dividend in the fourth quarter, $0.40 of share. We’ve reduced our debt very, very quickly after that thus far in the first quarter. So we’re in a great place. Balance sheet was – we had ability to not only pay a dividend, but to grow internally and externally and when it’s opportunistic to even continue to buy in shares.

[Brooks O’Neil:]

That’s great. Thanks a lot. I appreciate all the color.

[Christopher J. Reading:]

Thanks Brooks.

[Operator:]

Your next question comes from the line of Mike Petusky of Noble Financial.

[Christopher J. Reading:]

Hey, Mike.

[Michael Petusky:]

Good morning guys. I guess a few questions somewhat related to a couple of the questions Brooks was asking. On the M&A front, I would assume with kind of the double hit the MPPR and then the sequestration hit, hip up, obviously, as much as it impacts you guys, it’s got to impact smaller operators even more. Have you guys noticed more calls coming in, unsolicited kind of looking for an exit strategy? Have you guys noticed anything in terms of that at this point?

[Christopher J. Reading:]

Yeah, I don’t know that I can relate it directly to MPPR. I think quite honestly, some groups are still trying to digest what the impact is and what it means to them. We’ve seen an increase in activity, I’d say over the last six or nine months with usually calls from smaller groups who are looking for some shelter. The bigger groups, the guys that we’re talking to, we usually are very well positioned until they look at some of these headwinds and challenges, often times setting what we do as a potential opportunity. The question often is, whether they want to go alone or they want to kind of combine forces. And so, we’ve talked to some good people and we’re going to continue to do these tuck-ins into our stronger partnerships, and we’ll continue to grow organically. And you’re right, these challenges are affecting everybody. And some groups have less resources to be able to deal with it than others. We’re fortunate to have strong resources and a very good balance sheet.

[Michael Petusky:]

Okay. I would assume I know the answer to this, but I’m going to ask it anyway. Does this in anyway, these challenges this year in terms of some of what you’re facing out of Washington. Does that change in any way your thinking about de novos? You guys have always been pretty consistent over the years in how you think about that, but does any of this change that?

[Christopher J. Reading:]

It changes it very suddenly in this way. We’re going to continue to do, I think that we’re going to try to do as many de novos as we can, that we can do predictably. We’ve shifted some resources out of going into brand new markets where we’re going to put a single dot with a brand new unknown partner to a great extent towards further developing our existing partner network through the addition of satellites. So I think what you’ll see in this year and we continue to take the temperature of what we need to do to make adjustments. But you’ll see more satellites, which are very predictable for us in terms of their performance, maybe less brand new partners and more resources shifted between the satellite expansion and the acquisitions. And so we’re moving some things around. The organic expansion that we’ve had over the last few years, much of that not all, but a lot of it, a big chunk has come as a result of our acquired partnerships, who have robust teams that are very strong and we’re working with along with our seasoned organic partners to continue to grow organically within all of those partnership. So I think as we acquire more and do more deals, you’ll see that organic flow continue to be very steady.

[Michael Petusky:]

Okay, great. That was great color, and I’m glad I asked the question. In terms of your commentary around sales reps. And I didn’t catch it if you said this, how many sales reps do you guys have now?

[Lawrance W. McAfee:]

Well, we currently have 75 sales reps covering 306 locations.

[Michael Petusky:]

And did I hear you right saying that there’s 55 in training?

[Lawrance W. McAfee:]

That is separate from – separately 75 sales reps that we have are traditional full time and part time sales reps that are trained sales reps. The 55 number that Chris was talking about are employees that we have working in the clinic either in our business office or as athletic trainers and others that we are training to assist in sales and marketing, that have a finite group of docs that they have relationships with that then can go out and continue to benefit.

[Michael Petusky:]

I actually should think of those folks as augmenting or assisting the 75 that you traditionally have had in that ballpark, right or no?

[Christopher J. Reading:]

Correct, I would not add that to the 75 there assisting in a sales and marketing effort.

[Christopher J. Reading:]

Yeah. But Mike, just to be clear, they don’t always exist in a facility where we have a full turnaround. So when we say they are assisting, they’re assisting the company and broadening our sales efforts. They’re not necessarily by degree a trained sales person. We are giving them the training that they need to be able to go out and call on a focused group. But it is broadening our sales effort across a greater number of facilities.

[Michael Petusky:]

Yeah. So if my takeaway was you guys are making a material effort to kind of muscle up in that area that would be a reasonable takeaway, right?

[Christopher J. Reading:]

I like that description.

[Michael Petusky:]

Okay. All right and then just last question. Around your initiative on the orthopaedic home care, where I guess you’re doing a first few visits in the home, and then that leads to some clinic visits. Do you guys expect that over time, and I’m not talking about 2013, I’m talking about over the next few years that that initiative could have a material impact, or is that more just a little bit of incremental business that you guys could pick up?

[Glenn McDowell:]

At this point in time, we would say that it would be incremental. We think that there is an opportunity for this to open up some doors with orthopedic groups in areas that we’ve not been in yet; so at this point, with the incremental that we’re looking for, but we are getting some very positive response back from our partners and from physicians that we’re talking to about it.

[Christopher J. Reading:]

And Mike, I would agree with Glenn. I would characterize this as being a little early to say whether or not we can get enough steam into this more to be a material change. When you look at the size of our clinics averaging somewhere in the low 20 visits for clinic per day range, if we can pick up a few visits a day, whether or not you consider that incremental or material, it’s kind of a decent needle mover. And so where this won’t necessarily go in every facility, we’re beginning the rollout process and we think it will have a positive impact.

[Lawrance W. McAfee:]

And one thing I want to make sure that nobody think this is home healthcare, it’s not. And it’s an outpatient physical therapy visit, which in this case should have been done in the clinic, it’s done one or two times maybe three in somebody’s home after they’ve had major surgery even they can’t get to the clinic yet.

[Christopher J. Reading:]

And so to Larry’s point, the reimbursement is the same as we would typically be paid for, it’s no different than in clinic Medicare visit. It’s not classified truly as the home health business.

[Michael Petusky:]

Okay, great. And actually let me ask one more question unrelated, and if you’ve commented on this, forgive me. But did you guys make any comments around your physician sales business, and I didn’t catch anything if you mentioned of early, just crack it there?

[Christopher J. Reading:]

The one thing I should have mentioned is, I get – I made it generic comment about strengthening our resource group here. We brought back somebody who have been with us for a number of years moves outside the company to increase a major hospital systems, physician practice, expansion initiative you did that for a few years, came back to us. He is now the lead person of our physician services group and we’re working through that, transition as we speak real-time, so…

[Michael Petusky:]

So, I mean, currently, I mean your outlook for that business in 2013, is it going to be kind of a transitional year with hopefully more growth in 2014, or how do you just think about I guess the next year or two in that business?

[Christopher J. Reading:]

Yeah, I think this will continue to be a transition year. We hope to make progress this year. We have a number of things that we’re adding and we’re working through some steps from the past. But we’ve got a good leadership group and they’re working hard on it right now.

[Michael Petusky:]

Right. Thanks, guys.

[Operator:]

(Operator Instructions) Your next question comes from the line of Kevin Leary of Spitfire Capital.

[Kevin Leary:]

Just a couple of questions around the Medicare rate going from sort of this mid 90s level to the mid 80s level. I know historically for the Medicare, it’s a good business, because Medicare patients can come in the middle of the day when the rest of us are up funding Medicare.

[Christopher J. Reading:]

Good way to put it.

[Kevin Leary:]

Two questions; first, (inaudible) and then second, if it is still true, at what rate do your practitioners start grumbling about covering a fixed cost and God forbid turning away Medicare patients?

[Christopher J. Reading:]

We’re not in danger I don’t think anywhere turning away Medicare patients. I mean, the nice thing about our company still is we’ve got a pretty good portfolio. So most of these Medicare doesn’t make up the bulk of what we do. And you’re right. They are able to often to come in and have more flexibility in terms of time. I wouldn’t speculate at what rate. We’re making some changes in our company, in our efficiencies, in our other things, which adopt to improve our cost structure. I’m certainly hoping that we’re not, in the near future going to see additional costs because this is a pretty onerous year in terms of a Medicare focus. On a group generally seen as saving the healthcare system cost. So I’m not anticipating at least further reductions anytime in the near future. So we haven’t done that math. But you’re first question, we either had a blip in our phone or yours and we didn’t hear it, so if could repeat that.

[Kevin Leary:]

Actually, you’ve answered it. I was just making sure that it’s still good business. Second questions, on the other peer groups, do you private payers and your workers comp payers look at this reduction as an opportunity to maybe get some slippage in your other payer sources?

[Lawrance W. McAfee:]

I think it’s uncertain right now. I mean when MPPR came out, initially couples years ago, two, three years ago, we had a couple of payers I think as not being one that adopted to be MPPR and Medicare alike payment mechanism. I think to guess, I would imagine that there maybe some, but I think it’s still a little early. We didn’t see a ground slow when the initial MPPR came out. I don’t expect to see it now. Most of commercial payers now are dealing with whatever they’re dealing with. They have a system in place. They have a utilization management system. Now they have their guidelines in terms of what percentage of their premiums they have the pay up to providers. And so, I’m personally not expecting to see a ground slow movement in that direction.

[Kevin Leary:]

Great, that’s helpful. Good luck in 2013 guys.

[Lawrance W. McAfee:]

Thanks.

[Operator:]

(Operator Instructions) At this time, we have no further questions. I’ll now return the call to management for any closing remarks.

[Christopher J. Reading:]

Okay. Listen, I thank you for your time and attention. This was a little bit of a long call. Management team will be here to answer questions today or through the rest of the weeks if you have any. And again, we appreciate your attention and your support. Thank you.

[Operator:]

Thank you. That does conclude the U.S. Physical Therapy Fourth Quarter and Year-End 2012 earnings conference call. You may now disconnect.