Kevin LeBlanc – Director of Investor Relations
Bill Borne – Chairman and Chief Executive Officer
Dale Redman – Chief Financial Officer
Larry Graham – President and Chief Operating Officer
John Ransom – Raymond James
Art Anderson – Jefferies and Co.
Kevin Elledge – RBC Capital
Darrin Lerrich – Deutsche Bank
Derrick Dagnan – Avondale Partners
Newton Juhng – BB&T Capital Markets
Eric Gommel – Stifel Nicolaus & Company, Inc.
Whit Mayo – Robert W. Baird & Company
Amedisys, Inc. (AMED) Q3 2008 Earnings Call October 28, 2008 10:00 AM ET
Good day and welcome to the Amedisys third quarter 2008 earnings conference call. Today’s conference is being recorded.
At this time I would like to turn the conference over to Mr. Kevin LeBlanc. Please go ahead, sir.
Thanks. Good morning and thank you for joining us today for Amedisys investor conference call to discuss this morning’s third quarter 2008 earnings announcement and related matters.
By now you should receive a copy of our earnings press release. If you did not receive the press release you may access it on Investor Relations page on our website at www.amedisys.com.
Joining me on today’s call from Amedisys are Bill Borne, Chairman and Chief Executive Officer, Larry Graham, President and Chief Operating Officer, and Dell Redman, Chief Financial Officer. Also speaking today will be Alice Ann Schwartz, Chief Information Officer and Senior Vice President for Clinical Operations and Jeffrey Jeter, Chief Compliance Officer.
Before we get started with our call, I’d like to remind everyone that any statements made on this conference call today or in our press releases that express a belief, expectation, or intent as well as those that are not historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act.
These forward-looking statements are based on information available to Amedisys today, and the company assumes no obligation to update these statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties which may cause the company’s results to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings including our forms 10-K and 10-Q.
Also, the company urges caution in considering any current trends or guidance that may be discussed on this conference call. The home health and hospice industry is highly competitive, and trends and guidance are subject to numerous factors, risks, and influences which are described in the company’s reports and registration statements filed with the SEC. The company disclaims any obligations to update information on trends or targets other than in its periodic filings with the SEC. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website at www.amedisys.com on the Investor Relations page under the link Press Releases.
Thank you. Now I’ll turn the call over to Bill Borne. Please go ahead, Mr. Borne.
Thank you Kevin and good morning. First, let me welcome each of you to this call. We appreciate the opportunity to update you regarding the company’s performance for the quarter and share our vision for Amedisys.
Today’s call will be a little different in past calls. As Kevin mentioned, we will have two additional speakers. Alice Ann Schwartz will be speaking today to provide more detail on our clinical approach and result to caring file patients. In addition, Jeffrey Jeter will be providing an overview of our compliance program.
High clinical care is the top priority in compliance essential to everything we do as a company. We like investors to fully understand our commitment to both of these components of being a healthcare provider and we believe today’s call is a great form to provide that information.
Amedisys is a leader in disposing detail information. In our effort to even be more transparent, we have changed the format of today’s call to provide a comprehensive detailed review of our process and controls as it relates to our clinical population and compliance program.
The narrative thought of this call will end approximately one hour and then we will take questions. We
will file an 8-K posing this narrative for your review as necessary.
As background, Alice Ann is our Chief Information Officer and Senior Vice President of Clinical Operations and she has been with Amedisys for 11 years. Prior to joining the company, she was employed as a nurse in the acute care-trauma and cardiovascular surgery intensive care unit at John Hopkins Hospital and Adam Crowley Shock Trauma Center. In the industry she has published an out coming proven matter and has engrained many clinical measurements within our organization.
Jeffrey Jeter has been with Amedisys since 2001 and brings the background of prosecuting health care fraud and nursing home abuse as an assistant attorney general for the state of Louisiana Department of Justice.
Both Alice Ann and Jeffrey have brought a tremendous amount of value to the company and have been an integral part of growth and success of Amedisys over the years. We’re very proud of both them and welcome this opportunity for them to share their knowledge and insight with our investing public.
We had outstanding results for the third quarter recording net revenue of 322 million and adjusted earnings per share of $0.89. This represents growth of 78% and 46% respectively over the third quarter of ’07.
For the nine-month period, we have revenue of 847 million and adjusted earnings per share of $2.33. This represents growth of 68% and 38% respectively over the first nine months of ’07. Based on this performance and our expectations for the remainder of the year, we had increased guidance for ’08.
During the quarter, we opened seven new home health agencies. As a result of the noble growth and acquisitions in previous quarters, we ended the quarter with 461 home health locations, a 150 more agencies than the third quarter of ’07. In addition, we owned 44 hospice agencies at the end of the third quarter of ’08, 17 more hospice agencies than the prior year.
Subsequent to quarter end we closed on two acquisitions that added seven home health and one hospice agency in four states. In addition, we opened a start-up in New Mexico last week, which is a new state for us. With these additional agencies, we have increased the number the states that we are now servicing to 37.
Frequently we hear that our country is headed for a health care crisis. Over the next decade if no significant changes are implemented, we will see a continued erosion of the Medicare Trust Fund. Currently, 12% of all Medicare beneficiaries account for 69% of Medicare spending. The time is now to develop ways to control future spending.
There are several legislative initiatives that are currently being considered to help better manage healthcare resources utilized by the chronic pro-morbid population. Amedisys and a coalition of leaders from the home health industry are at the forefront of this effort.
Amedisys will continue to benefit from favorable demographic trends for the foreseeable future. But more in just riding this wave, we want to position the company to address the care management needs of this aging demographic and thus maximize our growth opportunities. That is why delivering high quality, cost effective care to elderly patients with multiple chronic conditions is our (inaudible 00:13:16) with the nationwide footprint, a highly skilled and compassionate team of commissions, best practices, care management programs and a best-in-class technology platform, our focus at Amedisys is to be a key part of the solution to the healthcare crisis in our country.
I would like to extend a warm welcome to all of the new employees of the agencies we have acquired since our last earnings call. We’re very excited that you are part of the Amedisys family.
In conclusion, we are grateful to the talented employees of Amedisys that provide our competitive advantage of cost-effective, quality healthcare services to the patients entrusted to our care. Our passion for servicing our patients, commitment to our core values in the culture of hard work are the intangibles that separate us from our competition.
I will now pass this call to Dale for his financial overview. Thank you.
Thank you Bill and good morning.
Our third quarter was another excellent quarter for Amedisys, highlighted by record revenue and earnings. Revenue grew 78% over the third quarter of 2007 to 322 million. And for the nine-month period grew 68% to 847 million. Acquisitions accounted for approximately 93 million of this increase in the third quarter and 218 million for the nine-month period.
Our net income for the third quarter was 23.5 million or $0.87 per share. This was a 13% increase over the 20.2 million for the third quarter of 2007 or $0.77 per share. Net income for the nine-month period was 60.3 million or $2.25 per share while 2007 was 48.4 million or $1.85 per share, an increase of 22%.
Included in the three-month and nine-month periods ended September 30, 2008 are certain TLC integration cost. This cost totaled 1.1 million or $0.02 per share during the three-month period and 3.7 million or $0.08 per share during the nine-month period. They primarily consisted of severance cost and cost related to the conversion of the TLC agencies to our operating systems.
In addition you may recall in the third quarter of last year, we had a one time non-cash gain of 4.2 million or $0.16 per share, after adjusting for this item, our earnings per share increased by 46% or $0.89 for the third quarter and 38% to $3.33 for the nine-month period. We have included these adjustments in the rest of our discussion this morning.
Our gross margin was 53% for the third quarter of 2008 compared to 53.3% in 2007 and 52.7 for the nine month period compared to 53.2 for the same period in 2007. Our G&A expense including depreciation and amortization as a percent of revenue remains flat at 39% for the third quarter compared to 2007 an increase to 40% for the nine-month period compared to 39% in 2007. EBITDA for the quarter was 49.4 million or 15.3% of revenue versus 33.7 million or 18.6% of revenue during the third quarter of 2007. EBITDA for the nine-month period was a 126 million or 14.9% of revenue versus 83.6 million or 16.6% of revenue.
Let me now take a minute and talk about our accounts receivable. As you know we adjust our Medicare home health and hospice revenue or amounts we do not expect to collect from Medicare through an estimated revenue adjustment that reduces both revenue and accounts receivable. This estimated revenue adjustment was 2 million and 4.1 million for the three and nine-month compared to 900,000 and 2.5 million for the comparable period this last year.
On the non-Medicare accounts receivable, we provided allowance for the doubtful accounts, which is netted against patient accounts receivable in the balance sheet. Our private and Medicare accounts receivable totaled 66.9 million at quarter end, 34.4 million at year end 2007, and 32.3 million at the end of the third quarter of last year.
Bad debts expense for the current quarter was 6.2 million or 1.9% of revenue compared to 30.7 million or 2% of revenue for the third quarter of last year. Bad debt expense for the nine-month period was 15.5 million or 1 (inaudible 00:18:23) of revenue compared to 9 million or 1.8% of revenue for the same period in 2007. For the last seven quarters, this percentage of expense to (inaudible 00:18:25) has averaged 1.8%.
Let me now walk you through the amounts for doubtful accounts for the quarter. We began the quarter with an allowance of $16 million. We expensed 6.2 million, we wrote-off 2.2 million, for an ending reserve of 20 million.
Days revenue outstanding increased in the fourth quarter of 2007 and the second quarter and 2008 by five days to 56.7 days. Our significant acquisition activity over the last nine months has had an impact on our billed and un-billed accounts receivables. However, we’ve seen an substantial increase in collections during October and we anticipate improvement in this metric by year end. We generated cash flow from operations of 87 million during the nine-month period. We spent 447 million on acquisitions, 21 million on capital expenditures, and we issued 412 million in new debt.
During the third quarter we reduced our notes payable under our bank agreements by $18 million with cash generated from operations. At September 30th, our leverage ratio was 1.84 times and our fixed charge coverage ratio was 2.3 times. This reduction in our leverage ratio below 2 times will reduce the margin on our bank debt facilities by 25-basis points.
For the quarter, the average increase rate on our bank debt was 4.1%. We have a $139 million available under our revolving credit facility at September 30th. Today we are increasing our revenue guidance to the range of 1,150,000,000 to 1,175,000,000 at earnings per share guidance to the range of $3.20 to $3.25 per share based on the estimated 26.9 million shares.
This guidance includes the anticipated results of our recently completed acquisitions after adding back the TLC integration cost. It does not include any future acquisitions. We made these changes to active as a net guidance primarily for the following reasons. First, integration of TLC was completed during the third quarter ahead of schedule. Second, to roll out our clinical programs under our new specialty division is also ahead of schedule and producing positive early results. Finally, the extension of a Hurricane Katrina employment credits to August of 2009 from the prior expiration date of August 2007 will cause our full year effective tax rate to be lower than we originally expected.
Now, I’ll turn the call over to Larry for his operational comments.
Thank you, Dale. Our internal growth rate of episodic-based revenues for the quarter was 28% year-over-year. We define internal growth as episodic-based growth from all agencies except agencies we have acquired in the last 12 months. We believe this metric is indicative of the company’s true growth performance. The components of this metric include internal admissions, internal recertification and average revenue for completed episode.
For the quarter, our internal growth rate over last year in episodic-based admissions was 14% . Our internal recertification growth over prior year was 23%. The increase in our recertifications are the result of our admission growth, our start-up (inaudible 00:22:28) and our agencies acquired over the past two years that have (inaudible 00:22:30) to have these agencies. As an agency open, we first develop our census by obtaining patient admission. However, as time progresses these patients may require an additional episodic care and that causes our recertification rates to increase.
It is also important to note that 67% of all of our patients have only one episode of care. Alice Ann will discuss this in more detail later in our call.
To summarize this, our internal episodic-care revenue growth rate in dollars grew 28%, which consist of volume growth of 19%. As a reminder, volume growth is total episodic growth, which is admin plus research growth.
Our revenue rate growth is our revenue for episode increase of $196 applied to all of our episode. This revenue rate growth (inaudible 00:23:28) percent. Therefore, our volume growth rate of 19% plus our revenue rate growth of 9% equals our total growth of 28%.
During the third quarter we opened seven new locations. We have approximately one hundred (inaudible 00:23:45) start-ups in various stages in the (inaudible 00:23:48). Of these (inaudible 00:23:51) 40 are incurring expenses, but have not yet opened.
During the first three quarters, we opened 20 new location and anticipate opening an additional 15 agencies in the fourth quarter making our 2008 target 35 new home health agencies. Regarding hospice, while we did not open any new agencies in the quarter, we have opened four so far this year and expect one more opening in the fourth quarter.
Moving to external growth, as Bill mentioned we closed acquisitions on October 1st. We acquired six agencies from home health corporation, which consist of two agencies each in the states of Pennsylvania, Maryland and Delaware.
Revenue for these agencies for the previous 12 months ended June 30, 2008 was approximately 23 million. The second acquisition we closed was a retail home health and hospice located in the state of Washington. These agencies had revenue for the past 12 months ended August 31st of 1.7 million.
I would like to welcome all of the new employees to Amedisys who have just joined us from Home Health Corporation in the state of Washington. Our acquisition pipeline continues to be robust and we continue to analyze potential opportunities as they become available.
Our quarterly revenue and contribution margin are broken down as follows: Contribution margin is pre-tax and pre-corporate overhead. 211 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 33%. Six million in home health and hospice start-up revenue, related to start-ups open less than 12 months with a negative 1% contribution margin.
Also in the quarter we incurred approximately 3 million in costs associated with home health and hospice agencies we plan to open in the future. Twelve million in hospice revenue related to agencies we have owned longer than 12 months, with a contribution margin of 22%. Ninety-three million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 18%.
The agency integration and corporate department transition of TLC is complete. The wind down of TLC corporate staff continues to progress according to schedule. The 2 remaining regional billing centers were closed on Friday, October 24. From approximately 210 employees at the time of acquisition, TLC’s corporate staff is currently at 38 and will be reduced to 14 after Friday of this week. We believe that now with the conversion processes complete, we will see growth in revenue and contribution margin from TLC. I want to thank all of the employees of TLC for their cooperation and efforts throughout the integration process.
We launched the Balance for Life Specialty Division earlier this year and we have set up the program in 97 locations. We intend to roll this program out to 160 locations by the end of the year. It helps the elderly with their balance through more intensive therapy sessions and as a result, reimburses us at a higher rate than our average episode.
Some facts about the falls related to the elderly: In the United States, more than one-third of adults 65 and older fall each year. Among older adults, falls are the leading cause of injury deaths. They are also the most common cause of non-fatal injuries and hospital admissions for trauma.
Balance for Life is one of our 13 evidence based clinical programs aimed at improving the health of our senior population.
Before I turn the call over to Alice Anne, I want to highlight some key points related to the chronicity of our patient population.
OCS, an independent health care benchmarking firm, has just published a white paper, which will be posted on our website. I will now read from that report. I quote, “There is a difference in distribution of risk at the provider level. Not all providers have a patient risk profile that matches the national norm. Some have a higher distribution of lower risk patients. Others have patient populations disproportionately represented of higher risk patients. Amedisys is a clear example of a home health provider with a higher distribution of patients on the high end of the risk scale. More than one-half of all patients admitted by Amedisys Agencies are predicted to be of high or very high risk to hospitalization. Compared to just one-third of patients nationwide. Conversely, only 10% of Amedisys patients are assessed as low or very low risk, compared to 23% of patients nationally.
Another indicator of overall patient severity is length of stay, with higher severity patients requiring more days of service as a general rule. As patient length of stay increases, hospitalization rates also increase and many measures of patient outcomes typically decrease. The higher severity of Amedisys patients is also shown by longer length of stays than the national benchmarks, based on 2008 data.
The average Medicare patient requires approximately 1.55 episodes of care. The average Amedisys Medicare patient receives about 1.85 episodes of care. The logical result of a high risk patient population is overall lower quality outcome scores, yet despite caring for a population that is considerably higher risk, and requires a longer length of stay than the national norm, Amedisys has shown consistently higher overall quality of care as measured by the OCS Standardized Outcome Index, referred to as SOI, a proprietary measure that offers a single number representative of overall quality.
Amedisys not only has a higher SOI than the national database, but an increasing SOI score over the past several years.”
In conclusion, Amedisys excels in a complicated care management environment. As evidenced by a patient population with higher than national risk characteristics, requiring a longer length of care, and yet producing quality patient outcomes. I will now turn the call over to Alice Anne, where she will go into more detail of why we service a higher acuity patient. Alice Anne.
Alice Anne Schwartz
Thank you Larry. I will begin by sharing with our investors the clinical profile of our average patient population, some information on clinical acuity, meaning how sick or debilitated our patients are, the risk of hospitalization, length of stay information, our focus on intensive clinical strategies, and in addition, web-based information will also be posted on the company’s coding, clinical auditing, billing, compliance, recertification controls, and state survey quality trends.
Amedisys’s average patient age is 82 years-old. 25% of our patient population is between 80 to 84 years-old. If you extend that percentage segment beyond, almost 50% of our population is between the ages of 75 to 84. We service a more elderly senior, as opposed to the newly benefit eligible recipient. We will provide on our website a graphical age distribution break down of our population.
Clinical acuity, meaning how sick or debilitated a patient is, is expressed in home care by what is known as a case mix weight. This single score is a summary of a patient’s clinical needs, functional impairments, I mean how difficult it is for patients to move about, and their service requirements, whether they came from a hospital or a rehabilitative setting. We will post a three year trend of case mix weights on our website. You will note that Amedisys case mix weight is higher than both national and regional norms.
To better understand our patient population compared to external norms we frequently engage outside benchmarking firms to perform clinical comparisons. The most recent report from OCF, which Larry just referenced, has risk stratified our clinical population according to very high risk for hospitalization, high risk, moderate, and low risk. As Larry explained, we service a sicker population than average.
To further cross validate the acuity of our patients, I will review their medication trends. Polypharmacy trends are a consistent indicator of comorbidity increases. Simply stated, a doctor orders medications for a patient to treat certain diseases. We have no control over these trends and they are a very good indicator of how sick or how many clinical conditions the physician is treating.
In 2006, our patients took on average eight medications per day. In 2007, our patients took on average nine medications per day. And in 2008, our patient population is now taking over an average of 12 medications per day.
Further breaking down episodic categories, to illustrate that the patients who stay on service longer have more comorbidities, patients receiving care in one or two episodes, take an average of 12 medications per day, patients receiving care in episodes three or greater, take an average of 15 medications per day. Using that same type of cross acuity validation, functional scores and their trending are also a useful metric in understanding a population’s impairment levels.
In home care, patients are ranked on functional impairment scales ranging from F0, meaning minimal impairment to F4, maximum impairment. This would be a patient that is close to being bed bound. The new payment system does not have an F0 ranking. We will post the organization’s past three years of functional trending scores.
Investors reviewing these graphs will note a year-over-year decline of patients entering the system with minimal functional impairment, meaning scoring F0 to F1, coupled with a simultaneous year-over-year increase in patients with more debility and more chronicity, scoring F2 to F4.
Further breaking down these episodic categories, to illustrate that those patients who stay on service longer are sickest and most debilitated, patients with one or two episodes, 86% of those patients have a functional severity level of 2+ or greater. Patients with three or four episodes, 88% of those patients have a functional severity level of 2+ or greater, and patients with five or greater episodes, 93% of those patients have a functional severity level of 2+ or greater. We service a sicker population, requiring greater resource needs.
You will see that our length of stay is longer, when compared to the national averages. The OCS external report states that the average episodes per patient nationally for the first half of 2008, is 1.55 episodes per patient. Amedisys episodes per patient is 1.85. This longer length of stay is supported by our higher case mix weight, increased polypharmacy needs, indicating more clinical comorbidities, and increased functional debilities.
We will also post a patient on service graphical breakdown for all of last year. To give investors a gauge, 67% of our populations complete their care in the first episode only. 18% extend into the second episode. 7% extend into the third episode. 3% extend into the fourth episode, and so forth. Stated another way, 85% of our total population receives care within two episodes or less. 10% of the population goes into a third or fourth episode and the remaining 5% is the more chronic debilitated population extending beyond four episodes.
So as a clinical summary, our average patient age is 82 years-old with a higher case mix weight, more pronounced functional debilities, on an average of 12 medications, and has a much higher risk of hospitalization when compared to external metrics.
I’ve given a snapshot at this point at the patient level. Internal and externally validated data reveals that the organization’s burden is one of year-over-year increasing chronicities year-over-year increased polypharmacy needs, year-over-year increases in patient debility. With a trend of sicker patients receiving services each year, our approach has been to continue to develop our care management systems and evidence based clinical programs with a focus on better servicing our senior population that has multiple clinical needs.
The advanced senior who is sick and has multiple clinical needs, is not going to go away. This population will only increase year-over-year. Providers will be faced with the challenge of insuring their care management systems remain robust enough to handle these increasingly complex patients and that their disease management specialty programs are intense enough, treatments and modalities to adequately improve chronic patient functioning and clinical outcomes.
These types of clinical programs or strategies are extremely important when faced with improving outcomes in the complex patient. To give you several examples of intensive services, our centralized cardiac tele-health program monitors the care of over 800 patients throughout seven states. Tele-health increases the standard of care by monitoring the patients’ vital signs daily, as opposed to intermittent nursing visits. We deploy this to a frail subset that requires more intensive clinical monitoring.
Our multi-disciplinary wound program pairs nursing and therapy to provide a more intensive program focused on aggressive wound treatment in the patients with very complex wounds.
Multi-disciplinary care of complex disease is considered a best practice standard in geriatric medicine. In this program, the nursing aspect focuses on traditional nursing interventions such as advanced wound dressing practices, teaching and nutritional needs, and disease teaching to enhance behavioral modifications and improve patients (inaudible 00:40:11).
The therapy aspect focuses on advanced modalities that only a therapist can provide, that is proven effective in wound healing, such as electrical stimulation, ultrasound techniques, balancing and off-loading, and shards debridement. Each discipline provides a unique skill focused on complex wound healing. Therapy wound modality research will also be available to investors on our website.
Our (inaudible 00:40:45) nursing division is a team of advanced practice certified clinical nurse specialists who provide consultative wound care services and clinical education. Working off specialized clinical reports, they are able to identify the complex, high resourced, wound patients we have throughout the system and work with the specific agencies directly to insure our patients are receiving the appropriate evidence based wound protocols.
Our balance for life specialty program focuses on improving the functional outcomes of that more chronic patient with an increased fall risk, through the implementation of evidence based, vestibular balance retraining modalities. Fall risk and safety concerns are a prime reason patients end up having to leave their homes for more intensive settings. Through our disease management data tracking, we have also found that the number one reason discharged patients were going back into the hospital, post home health services, was because they had sustained a fall.
This program focuses on increasing functioning and improving balance, thereby allowing seniors to live more safely and longer at home. Mitigating fall risk is a key strategy in saving overall health care costs by reducing unanticipated hospitalizations. This is central to our mission. For investor interests, vestibular modality research will also be posted on our website.
We are often asked why we have a higher acuity or sicker patient. There are several reasons for this clinical trend. First, we spent the first two years prior to the implementation of PPF in 2000 developing our evidence based clinical disease management programs. We were prepared day one to clinically service complex resource intensive patients. Many providers at the time were unsure if they had the resource requirements that would allow them to service a complex wound patient and/or a multidisciplinary need patient. Because our standardized clinical protocols are systems were in place, we were immediately prepared to go to our physicians and referral sources and ask to service this sicker patient at a time when the industry was unsure.
Second, since PPF we have continued to focus on the highly complex patient. Growing out our partners in wound care program, chronic kidney disease at home, COPD at home, stroke recovery at home, surgical recovery at home, rehab at home, behavioral health at home, orthopedic recovery at home, heart at home, pain management at home, diabetes at home, balance for life, Tele-health at home, and dysphagia at home. These are the clinical programs that differentiate our service.
Third, our strategy has always been to approach our physician base, encouraging them to use homecare as a first, stabilizing alternative to the hospital setting as opposed to the latter. For example, 41% of our patient population comes directly from the doctor’s office, as opposed to 29% when compared to the national level. 43% of our patients come directly from the hospital, as opposed to 56% when compared to the national levels. External benchmarking referral sourced statistics will be posted for our investors. As a reminder, patients who have not been stabilized by a hospital stay originally, tend to be sicker and require greater resource needs.
Fourth and final, as we have conveyed to our investors in the past, our strategic goal has been to migrate into a chronic care coordination company. With that in mind, our systems, clinical infrastructure, clinical programs and referral strategies have all been geared to focus on the more complex population.
Shifting gears now, I would like to review with investors our field automation and business system controls. We have 461 home care locations that are all connected via a wide area network. All of our full time and consistent PRN employees in home care have laptops and are using those to input clinical visit information in the patient's home.
We had three goals when developing this system: enhance standardization with consistency and compliance controls, the ability to have most all of our notes in digital format and the ability to provide more intensive care management services to our population.
We currently have 11,200 laptops deployed nationwide, making it the largest company-centered deployment in the industry. I would like to take a brief moment to congratulate the IP staff on most recently being recognized as one of the top 50 most innovative IP divisions by information week. Each year this national publication recognizes the top 500 companies who have implemented business, technology innovations.
You will continue to see the company further integrate evidence-based clinical management standards in its technology, and expand its system capabilities. Details on our business system infrastructure will be posted on the website, including our organization coding controls, clinical auditing controls, billing controls, compliance controls, patient recertification controls and clinical auditing state survey trends.
We highly encourage our investors to review this infrastructure information because these processes are engrained in all levels of the organization and are key to understanding our business systems and control environment.
Once investors review the information posted today, they will see clinical trends from past to present that reflect the following clinical dynamics: an increasing trend of sicker patients entering the Company each year; a recurrent clinical auditing infrastructure that is proactive and aimed at reducing clinical risk; a point of care technology rolled out in 2007 that enhanced many clinical documentation, chronic care management capacities and compliance control; an organization commitment to quality with defined trends of improving quality scores; a reduction in local state survey citations from 2006 to present; an increase in deficiency-free perfect surveys from 2006 to present.
Using CMS's survey deficiency percentages as a benchmark, Amedisys's better-than-national citation percentages in 14 of the top 15 categories. Using CMS's publicly reported outcomes as a benchmark, Amedisys is at or better than its footprint in 12 out of 12 categories, at the national level, at or better in 10 out of 12. Just the beginning of the PPS environment in 2000, Amedisys is focused on caring for the complex patient.
Our focus on delivering evidence-based care to the sickest senior will not change because the demographic trends support this is where our clinical emphasis should be. Clinically we have a commitment to improving the quality of care and the outcomes of our elderly sick seniors and enhancing our evidence-based programs and chronic care management clinical systems to best serve the elderly patient who wants to remain at home for their care during their latter years. I will now turn the call over to Jeffrey.
Thanks, Alice Ann. As Bill stated earlier, I will address the compliance functions that occur at Amedisys each and every day. I also recommend that you review the information contained in our investor materials with respect to our compliance program, which you can find on our website. Our compliance program features a multi-layer and recurrent approach, designed to insure the propriety of both our services and our billings.
At the outset, it must be noted that the Amedisys compliance program is based on the OIG's Model Compliance Guidance for Home Health and Hospice. As Chief Compliance Officer, I am the person responsible for oversight with the compliance functions of Amedisys. I came to Amedisys seven years ago after serving as an assistant attorney general with the Louisiana Department of Justice, where I prosecuted healthcare fraud and nursing home abuse.
It should be noted, however, that I am not the sole person responsible for compliance at Amedisys. We have an experienced team of people, not only within the compliance department but across numerous company divisions, who all play a vital role in the overall compliance efforts of our company.
We also stress compliance as a responsibility off all Amedisys employees, such that compliance is part and parcel of everything we do. Moreover, we have leveraged technology and automation to support the compliance functions of the company with the same mindset of efficiency and effectiveness that we have deployed throughout the other segments of the organization.
First and foremost, it is well established that one of the strongest compliance protections that an organization can have is the commitment to comply its training and education. Conducting adequate training often prevents problems from ever materializing. It is my belief that the vast majority of people want to do the right thing. However, as so often is the case, the regulations surrounding our business are complex and can be confusing. The goal of training is to raise awareness and educate staff on the pitfall and risks of our business so as to avoid problems in the first place.
Therefore as the government clearly recognizes, training and education of staff is paramount, and Amedisys has implemented a targeted and tiered training strategy to train all of our staff about the seminal importance of compliance in our day-to-day jobs. Every employee in the scene is required to complete general compliance training upon hire and then annually thereafter.
In addition, any staff involved in billing and coding functions, both from a corporate level as well as a local agency level, must participate in separate billing compliance training. We also require that all of our billing personnel complete annual competency testing and training. Similarly, our sales force is required to receive special compliance training concerning how they market and the constraints and legal limitations placed on their marketing activities by the federal anti-kickback law and the Stark law.
Compliance experts will also tell you that the time at the top is essential in establishing a resounding culture of compliance. Amedisys embraces this synomate. Every other month we host a program called New Employee Orientation, where we bring in newly hired employees to a regional location where the entire meeting is devoted to the Company's core principles and values.
During this orientation, Bill Borne, Larry Graham and I each speak on individual responsibility and accountability, as well as the role that each employee plays in both our success and our compliance. Beyond all the training that Amedisys requires, we also monitor our compliance and the propriety of our day-to-day activities through a number of technological and auditing controls.
I find it most useful when describing these ongoing compliance controls to stratify them in terms of their local, regional and corporate scope. Consequently I will briefly detail each strata of compliance control. Our compliance controls actually begin on the local level with our standardized clinical tracks, which are used in the delivery of care to our patients.
We employ these guidelines in an effort to ensure the consistency of care across all of our markets. Therefore our diabetic patient in San Diego, California receives the same high quality of care and the same type of services that are received by our diabetic patient in Charleston, South Carolina. These clinical tracks are rooted in best practices and demonstrate clearly how we can consistently meet and exceed national quality benchmarks for outcomes across all of our many markets.
Additionally, our Point of Care system represents a fundamental compliance control and is the sort of technology that helps us improve not only what we do in terms of clinical care, but how we do it in terms of our adherence to Medicare rules and regulations.
Through our Point of Care system, we are better able to ensure the accuracy and completeness of our documentation and when used in concert with our clinical management dashboards, allows for real-time assessment and review of our coding and documentation. One simply cannot overemphasize the importance of this technology as a means for strengthening our compliance with the law.
Based on my experience as a healthcare fraud prosecutor, I've found that a provider's documentation is often a make-or-break aspect to their overall compliance. A home health agency can be delivering the best and most appropriate care in the world, but if the documentation information the services being provided is not reflective of the billings being submitted, then the agency is placing itself at substantial risk. Amedisys's Point of Care system elevates the quality of our documentation, which goes hand in hand with better compliance.
Amedisys saw first-hand the importance of improved documentation back in 2003 in a matter that we saw purported to the OIG related to our agency in Monroe, Louisiana. As our investors will recall, we disclosed the settlement of this issue several years ago. Ultimately, several thousand dollars in overpayments because of insufficient documentation led to a $1.1 million settlement.
This experience underscored for us the inherent compliance value of an improved system of documentation which was ultimately manifested as our Point of Care system. The Point of Care used by Amedisys clinicians now helps to avoid inadvertent or erroneous omissions of information that may subsequently affect clinical quality, impact reimbursement or create survey deficiencies and legal liability.
A fundamental compliance control of our Point of Care system is the system requirement that clinicians fully complete their documentation prior to submission and where their responses are inconsistent with one another or are potentially erroneous, we have the means to identify and catch problems before these mushroom into major issues.
While we still require the actual remediation of these problems be undertaken, only with the approval of the clinician actually seeing the patient, our technology affords us the ability to scrutinize for gaps and potential problems and thereby reduce the occurrence of porous or errant documentation.
Our Point of Care system also requires the visiting staff obtain patient signatures during their visits, which are both time and date stamped. This process significantly inhibits staff from falsifying visits because we were able to note inconsistent signatures and we can identify discrepancies in visit times suggestive of a staff member not making scheduled visits.
It is also not coincidental that as Amedisys has moved our agencies to the Point of Care system, we have noted a marked increase in the number of deficiency-free state surveys that we undergo. This is a direct benefit of the better documentation afforded by our Point of Care system.
From a technology standpoint, we utilize a series of data scrubs and edits in an effort to assure that our Oasis information makes sense from both an accuracy and consistency standpoint. For example, if a clinician answers in one portion of an assessment that a patient cannot safely ambulate but in another portion of the assessment the clinician indicates that the patient needs no assistance to get in and out of the bathtub, then these answers are inconsistent with one another and one of the responses may not be accurate.
Our systems are programmed to catch these types of inconsistencies such that potential problems can be resolved on the front end. We also employ other types of technology, such as 3M coding software, to further support the propriety of our billing practices.
At a regional level, Amedisys conducts unannounced compliance and billing audits led by our regional staff to monitor compliance, review agencies deemed to have elevated clinical risk and resolve any problems that are identified. We also require their operational leadership participate in the audit process in order to actively engage those responsible for shaping and implementing corrective action plans and getting the necessary buy-ins to resolve any issues identified.
Lastly, at a corporate level, we conduct quarterly compliance oversight audits, which warrant additional discussion. This compliance oversight audit program is conducted by clinical auditors reporting to me. Let me start by saying that we have seen no trend of fraud or abuse, nor a pervasive pattern of improper activity in our audit findings since the inception of our compliance oversight audit processes in 2005.
It would be fair to say, however, that we routinely identify problems in the course of our audits, as one might expect as part of any series quality assurance process. However, these are generally found to be problems where agencies are not following the prescribed processes, or staff are not consistently documenting their work or there are educational deficiencies.
Let me briefly describe for you the compliance oversight audits that Amedisys conducts each quarter. Beginning in early 2005, we identified three key areas to which any home health care agency may be susceptible because of the inherent revenue impact of each. These are: First, excessive therapy where a high number of therapy visits are conducted which result in increased reimbursement and may be potentially suggestive of fabricated or unnecessary visits just to increase reimbursement.
Second, LUPA exaggeration, which is where an agency has an exceptionally low number of low utilization payment adjustments, otherwise known as LUPAs, which may be suggestive of potentially fabricated or unnecessary visits so as to avoid having reimbursement automatically reduced by the government. And third, upcoded case mixes, where an agency has a higher-than-average case mix weight that may be suggestive of possible manipulation of coding occasioned by scoring patients as sicker than they actually are.
These are big bangs for the buck kinds of risk areas for fraud. Since 2005, one of the primary functions that my compliance auditors have performed is the proactive review of agencies that perform well in each of these areas. We have focused on those Amedisys agencies performing very well with respect to having a higher percentage of high-profitability therapy episodes and having a lower incidence of low reimbursement LUPAs and in having overall higher reimbursement case mix scores.
Now it should be noted that just because an agency has a high percentage of high profitability therapy or a low occurrence of LUPAs or a higher case mix does not necessarily mean that there is something improper or untoward occurring. In each instance there may well be wholly-appropriate justifications for each risk category. However, because of the revenue implications of each, there exists a potential for improprieties, which we feel warrants a compliance review.
Since 2005 my staff has audited those agencies that stand out based on these high-revenue audit focus areas. In these audits, my compliance staff selects the agencies to be reviewed, conducts the clinical chart reviews and billing reviews, develops corrective action plans where problems are identified, conducts remedial training and education where necessary, and ensures that any billing adjustments are processed if warranted.
They are also responsible for monitoring the ongoing improvements that occur in those agencies. We are also continuously refining our audit processes and risk control. For example, this year we have developed a compliance risk score card that expands on the three compliance risk areas previously detailed. Under this compliance risk score card, we have identified some 43 individual risk measures, drawing on data points that are reflective of financial risks, operational risks, regulatory risks and environment risks.
For example, we still consider whether an agency has excessive therapy, exaggerated LUPAs and high case mix, and we also now take into account considerations such as high turnover, changes in agency leadership, in experienced agency leadership, startup or acquisition status, missed visits in surveyed efficiencies among many other risk factors.
All of these data points are weighted and scored and agencies are audited based on the score card results. Additionally, my compliance auditors are responsible for conducting audits related to complaints that are made on our company hotlines, as well as issues identified in exit interviews.
They also conduct special audits in my direction, which have included reviews of high-risk clinical events such as Coumadin administration, as well as other compliance risks, such as outriders and recertification patients.
Furthermore, I would be remiss not to point out that we also have annual Sarbanes-Oxley audits that are conducted by a separate department within the company as well as audits that are conducted by KPOG, who are independent auditors. Both of these groups look at our internal controls over financial reporting related to our billing compliance and revenue practices.
We also have a substantial internal audit department that conducts its own independent reviews of our processes and practices. In addition to our audit capabilities, Amedisys attempts to glean problems that may be festering by providing ample opportunities for staff to report their concerns. In so doing, we have implemented several avenues for fielding complaints from both current and former employees.
We use a confidential compliance hotline that is available 24 hours a day, seven days a week and permits employees to report problems directly to me and allows them to even remain anonymous if they so choose. This hotline also serves as our SOX whistle blower hotline. All calls come into our hotline, are reported to the company's board of directors on a quarterly basis. In addition, we maintain separate hotlines to report HIPAA violations as well as harassment issues.
We also provide every employee who leaves the company with an opportunity to complete an online exit survey which includes several specific questions about potential compliance concerns. When a former employee alleges compliance problems, my department conducts a special audit of that agency.
Moreover, earlier this year, we implemented a process in which we randomly select 30 active employees each month in my office confidentially to inquire about whether the employees have any ongoing compliance concerns that have not otherwise been reported through the compliance hotline. Any report of potential wrongdoing will be investigated and those agencies about whom complaints are voiced will be subject to a special complaint audit. However, to date, we have had no allegation of fraud identified in these survey calls.
Finally, Amedisys has long had strict enforcement policies for compliance violations. Our compliance plan articulates a zero tolerance policy for healthcare fraud and abuse. Therefore, if an employee is found to have engaged in fraud, we take disciplinary action. However, in the last few years, we have expanded our zero tolerance policy. Now, it is not only instances of wrongdoing that subject staff to zero tolerance. Rather, we also apply our zero tolerance policy where staff placed the company at risk by not following key processes, even if the failure to follow those processes has not resulted in an actual problem.
Back in 2006, we identified certain key compliance-related procedures that safeguard our billing practices. Given the importance of these controls, we regard the failure to scrupulously follow each is placing the company at greater risk.
For example, we have a series of system billing holds that will prevent a client from being billed if it has certain unresolved problems such as missing physician orders. If, in the course of an audit, we find that these controls were circumvented, then the staff member responsible for so doing is terminated. In fact, we have terminated several dozen employees for these kinds of zero tolerance violations over the past two years.
Therefore, in summation, Amedisys compliance program is driven by technology with an emphasis on training, documentation, and risk-based auditing. I hope this gives our investors a good flavor of the compliance program in practice at Amedisys. And with that, I would like to turn the call back over to Bill.
Thank you, Jeffrey and Alice Ann. I hope the additional information provided today brings a clear understanding about pinnacle and compliance processes. At this time, we'll open up the call to your questions. Because of the extra time we have taken today, we ask that you please limit yourself to two questions. We may not be able to answer everyone's call today. If your question was not answered, please contact our Investor Relation department and they will be able to answer your questions. Ryan, please open the line to questions.
Yes, sir. Thank you. (Operator instructions) We'll now take our first question with John Ransom from Raymond James
John Ransom – Raymond James
Hi, good morning. I have writer's cramp. That was quite an hour. The question I have, if you look at your clinical mix, I know your research has gone up and your case mix has gone up, but if you just look at your pure raw clinical mix, what is different about the distribution of your population today, say, versus pre this new Medicare PPS change?
Alice Ann Swartz
Just to give you a gauge, when we look at our population in total, 60% of our population is divided into four categories: cardiac patient, wound care patient, diabetes, and stroke patients. Currently, the cardiac category represents about 27.4% of our population, and that's increased from 2007 to 2008 by a little under one percentage point.
The wound care population right now runs a little under 15% at 14.95%. That's increased approximately 1% from '07 to '08. Diabetes, the third category, is at 11.85%. That's gone down a little bit, 0.83% from the prior year. Then our stroke category currently represents about 5.5% of the episodes, and that's gone up almost 2%, 1.7% from the prior year. The remaining 40% are just various clinical conditions, non-categories that happens throughout the system. So those are the macro trends.
John Ransom – Raymond James
Okay. My second question, and this is for Dale, could you give a little more color on the process by which you reserve for the bad debt, particularly the Medicare Advantage plans, receivables, when it gets written down to the income statement and then when ultimately it gets charged off on the balance sheet. Thank you and I'll get back in queue.
Yes. On the allowance for bad debts, which is on non-Medicare receivables, we age those receivables and we look at it on an aging basis. We also look at it on a vintage basis where we look at the amount collected over time. As a balance between those two, we provide a provision on a quarterly basis against future bad debts. And as we talked about today, that was $6.2 million in the third quarter.
Our Medicare receivables, which would be Home Health Medicare and Hospice Medicare as well as MA, we provide a revenue adjustment which we collect over 99% of our Medicare receivables and when we do that, we end up with a revenue adjustment that we provide against revenue and accounts receivable. I'm sorry, MA is not included in that issue. That's only on Medicare we provide the revenue adjustment. MA is a part of the allowance for doubtful accounts. So that's a breakdown on how we do that and as we also pointed out in our discussion this morning, our provision on our allowance for bad debt is averaged about 1.8% of revenue for the last seven quarters.
He also asked about write offs, when you write stuff off.
We have a policy that we evaluate our receivables on a regular basis. We do not have an arbitrary deadline in which we charge off a particular receivable. But as a practice, almost all of the receivables that we charge off are fully reserved. That means in the period in which we charge them off, there is no impact on income in that period. The income effect of that charge off was taken in prior periods as we build that reserve, as it ages and when we get to the point of charging it off, it really has no impact on income.
Thank you, Dale. Next question.
We'll take our next question from Art Anderson of Jefferies and Co.
Art Anderson – Jefferies and Co.
Hi, good morning. Thanks for all the color on compliance. Very helpful. Larry, I know in the last conference call you had discussed, as far as your De Nova developments are concerned, some delays in getting Medicare provider numbers for those agencies that are incurring expenses at the moment. I was curious, are you seeing any change there as far as any acceleration of those issuances?
We only opened seven in the third quarter. We expect to open around 15 in the fourth quarter so we have seen and we have improved our communication with the intermediary about the status of our startups. It's still totally out of our control. In this quarter, I gave more color to let you know that we have 130 startups that we've identified that we want to open, of which 40 are incurring expenses, which costs us about $3 million in the fourth quarter.
I'm trying to send a signal that even though the startup process has slowed, we are aggressively pursuing startups. It's a significant part of our growth strategy and we feel good about the accretion that they provide over time.
Art Anderson – Jefferies and Co.
Okay. The follow up question is kind of for both, I guess Bill you and Larry, whichever one wants to take it. Just in light of the presidential election next week and the platforms that are currently out there, as well as the economy weakening, could you kind of give your thoughts about how home nursing is positioned as we move ahead, how resilient you sort of feel this space is, and what sort of opportunities may exist moving ahead under either of those two candidates.
As you've heard from both candidates that everybody has a focus on caring for the chronic and complex population, there hasn't been a clear formula yet as of today on how we want to move forward and that's why Amedisys has really targeted that population.
With McCain, you'll probably see less change. With Obama, you may see more overall change. Either way, we think that both of the dynamics of either change will include a better and more effective way to care for the exact patients that we have been managing over the years. So we feel as an industry and through our efforts with the alliance, we have brought a value proposition to the regulators or in the administrators in Washington and we think we're well positioned no matter who becomes president, to be able to show the value of managing these very costly patients in our system through the home health process.
We'll take our next question from Kevin Elledge of RBC Capital
Kevin Elledge – RBC Capital
Thanks for taking my questions. Just kind of following up on that question, given the challenging economy, have you seen or do you expect to see any changes in utilization of any of your services?
This is Larry. No, we're pretty recession proof because we're in healthcare. Bill mentioned that we service the chronic co-morbid population, 82 years old, so their need for services do not ebb and flow with the economy.
Kevin Elledge – RBC Capital
Okay. And then going back to some of the prepared remarks on the compliance and clinical care, it looks like you guys are servicing more acute or sicker patients and you're getting a lot more of your referrals from the physicians versus the hospitals. How do you go about targeting that subset of patients?
I'll answer that question. No, it's not targeting patients. A couple of key points. Our sales force calls on physician offices, calls on hospital discharge planners and they utilize those 13 programs that Alice Ann articulated as a sales point. They're also only incentivized on admissions from those facilities. They are not incentivized on revenue or types of patient. So once they identify a doctor that has a high Medicare population, they go in there and present the disease program that maybe represents a higher percentage of that doctor's patient population, and they take all of the home care referrals from that physician.
So we do a lot of calls to physicians and hospital discharge planners and have been doing that for a long time and Alice Ann articulated that we started out of the gate calling on physicians, encouraging them to discharge their frail and co-morbid population directly to home care and allowing us to stabilize where appropriate, versus going into the hospital, which obviously costs the system more dollars, and our staff back that up as you mentioned.
We'll take our next question from Darrin Lerrich with Deutsche Bank.
Darrin Lerrich – Deutsche Bank
Thanks. Good morning. I have one area of questioning about your receivables and then I wanted to ask a question about the compliance. Dale, the DSO was up a little bit in the quarter. I just wanted to flush it out a little bit more. Was the balance of the acquisitions you made in early October included? I don't think you paid for them in the quarter so I don’t know if the assets hit the balance sheet. But can you just confirm that? Then as far as the change or improvement in collections you referenced for October, how much impact do you think that'll have on DSOs here in the fourth quarter? I just want to get your view on where you think DSOs go.
Let me address that issue. As you know, we are in the process, we've completed our TLC integration. A large part of that integration in terms of revenue occurred in August and September and as you are also probably aware, there's oftentimes a 30 to 35 day lag when you convert to systems to get your billing processes completely through the system.
So what we saw in August and September, with some degradation in collections, we've seen that turn around in October and we're optimistic that our numbers will be substantially improved by year end.
Darrin Lerrich – Deutsche Bank
In your DSO, any guidance or thoughts on where that'll fall in the fourth quarter?
We don't have a specific target that we publicize but obviously, we are optimistic that that number is going to come down substantially by the fourth quarter.
Darrin Lerrich – Deutsche Bank
Okay. And then compliance, my question really is about your compliance risk scorecards. It sounds like you began recently or in the last year or two. Can you just maybe give us a sense for the baseline of where you are across your portfolio just so we can understand how you're viewing the risk of your agency's corporate against this scorecard that you've developed. I just would like to get a little more commentary about that please.
Darrin, I think the answer ultimately is it depends on which of the different 43 risk factors we're talking about. Each of them is weighted and gauged differently but I can tell you from an overall standpoint, we look at the company average as a whole and then we examine those agencies who perform better than the company average in good categories or worst in company average in bad categories. And we assess them based on where they fall in terms of standard deviation from the mean.
We'll take our next question from Derrick Dagnan with Avondale Partners.
Derrick Dagnan – Avondale Partners
Thanks for taking my question and thanks for access to Alice Ann and Jeffrey. I have one question on the oversight audit that Jeff's team complete. When you identify problems with an agency, is it usually the older same (inaudible 01:21:48) agencies that maybe need retraining or haven't adjusted well to some sort of operational change? Or are you typically looking at new acquired agencies or startups?
Sure. Prior to the implementation of our scorecard, we were really seeing it across the board. There wasn't a whole lot of rhyme or reason to it. We would occasionally see spikes after we've done larger acquisitions such as after we did the House Calls acquisition for example.
One of the things that we've done as part of the new compliance risk scorecard is that we actually take agencies that are either acquired via acquisition or established as a startup and they get extra credit for being in those positions so that their risk, in our view, is actually greater either because of an acquisition is transitioning over to our policies and our procedures or a startup is fresh out of the gate, so we don't have a history there of strong leadership in the market.
So because of those factors, the acquisitions and startups are actually given a greater risk score just by virtue of falling in those categories.
Derrick Dagnan – Avondale Partners
Okay, thanks. I'll let other people ask questions.
We will go next to Newton Juhng with BB&T Capital Markets.
Newton Juhng – BB&T Capital Markets
Good morning, gentlemen and ladies. I guess I have a couple of questions here. The first one just built around the sequential decline in episodic based admissions. Just trying to get an understanding with the higher internal admissions growth number that we're seeing there, can you just give me a little better idea as to why there was an actual decline in the number there on an absolute basis.
I'm trying to figure out the decline because our admission growth year over year last quarter was 13%, the quarter before that was 7% and this quarter it's 14%.
Newton Juhng – BB&T Capital Markets
Larry, I'm looking at a 53,203 number, down from 53,561, if I'm looking at apples to apples here.
I think you might be talking about the gross margin percentage?
Newton Juhng – BB&T Capital Markets
No. The episodic based admissions number. I'll take that one offline, Larry.
If there's any material issue associated with that small decline, you're talking about from the second quarter to the third quarter.
Newton Juhng – BB&T Capital Markets
All right. Typically, the back half of the year we experience a couple more holidays than we do in the second quarter. But I've seen that year over year from the second to third quarter about the same, maybe a slight decline but there's no overall reaching issue there. In the fourth quarter, you might see a little bit of a decline because we have four holidays and those types of things. But that's more historical trends than it is anything indicative of quarter two to quarter three.
Newton Juhng – BB&T Capital Markets
Okay. Just on the secondary recertification front, growth at the 23% level, if I'm looking at the nine month number, it implies that the first half was around a 32% growth level. Can you just give us a little bit of understanding as to where that kind of difference is on the secondary recertification growth?
The number I gave was based on internal recertification growth, which would be (inaudible 01:25:03) year over year. The numbers that you're looking at would be total, which would be acquisitions all end.
Newton Juhng – BB&T Capital Markets
But in terms of the difference in the first half of the year versus what we're seeing in the third quarter, is there kind of a way of explaining where the kind of slowdown is occurring there? It's still a big, robust number but just understanding the difference there.
There's no single shot answer with recertification. That has more to do with the acuity level of our patients and the mix and Bill mentioned we had 150 locations this quarter that we didn't have a year ago that we acquired. So it depends on their case mix then and now. So that's not just an easy answer. You'll see variations in recertification rates just like you see variations in admissions.
We'll go next to Eric Gommel with Stifel Nicolaus.
Eric Gommel – Stifel Nicolaus & Company, Inc.
Good morning and thank you for all the information you provided on the conference call today. I had a question about your revenue per episode and the gross there. I think you talked last quarter about the impact of a greater exposure of programs in I think the Northeastern and Mid Atlantic through acquisitions and having an impact on the revenue per episode. Have you any information as to how much the percentage increase in that revenue per episode is attributed to that versus this growth in sort of your case mix?
Don't have the specifics of geographical breakdown, other than there is a wage index component and like you stated, there are certain areas of the country -- California and the Northeast -- that have a higher wage index component. But the revenue per episode is made up of that fact that you just mentioned, wage index. It's made up of that we have a new case mix reimbursement system this year as opposed to last year, and our acuity level going up, and our therapy programs to address that acuity level have a higher revenue per episode. So we haven't broken that growth down into those three categories.
Eric Gommel – Stifel Nicolaus & Company, Inc.
Okay, fair enough. My final question really is on the SG&A. I’m noticing more leverage there relative to our model and I'm just curious, how do you think about, as you growth this revenue, make acquisitions, startups and things, how should we think maybe about the leverage at that line?
I think generally, we can comment that as time progresses, we are looking for our technology and our growth in revenue without a commensurate growth in either cost of revenue necessarily or G&A, in other words, an efficiency concept there to improve that leverage over time. I don’t know that we're in a position to give you a specific number.
But that being said, I articulated that TLC, we expect to see improvements now that we're fully converted, both at SG&A in the field. We have been experiencing improvements of SG&A with the corporate employee staff going from 210 down to 38 down to 14 this Friday, closing the four regional billing centers. And we will continue to see improvement in SG&A efficiency levels as we mature the agencies we have and acquire more agencies. That's part of our strategic plan.
We will take our next question from Whit Mayo of Robert W. Baird & Company.
Whit Mayo – Robert W. Baird & Company
Thanks. Good morning, everyone. Just turning back to the recert rate for a second, it just might be a little helpful to get a sense of how your recert rate growth, how that's been coming from startups as they mature versus your base agency. Is there just any way you could parse that out for us to get a sense from where that growth is really coming from? I'd just like to get a little bit more granularity around that. Thanks.
Sure. As a reminder when we do a startup, historically a lot of them have been a peel off of an existing agency, so you may end up taking census from a mature agency and that begins the beginning census of a startup. So with that being said, historically, at least over half of our recertification rate growth has come from startups understanding some of it has been a pull off of existing agencies.
We haven't broken down the recertification growth between startup and acquisition and mature. Again, that is highly dependent on the case mix inside the agency. What we did want to clearly articulate is over the last three years, our case mix has been going up, as backed up by our functional stability of the patient, as backed up independently by the number of medications they are on; even go so far as telling you that the number of medications thereon increases with their length of stay.
So we feel very good about our recertification process and it's also important to note that 85% of our patient population has either one or two episodes. So it's a small percentage of the total population that gets recertified based on the clinical severity of that patient.
Whit Mayo – Robert W. Baird & Company
That's help. Just to shift gears to TLC for a second, can you just remind me what IT system they were on and whether or not you've addressed contract they may have had and whether or not you plan on buying that out. If you do plan on it, what kind of timing, anything along those lines would be helpful.
Alice Ann Swartz
From a systems perspective, they used McKesson in their field locations and as we were rolling out and converting our agencies, the act of converting those agencies took TLC off of that converted system, that McKesson system, from a contractual standpoint as far as the contract.
We may have some legacy issues with either contracts or with, as an example, the lease in the success, home office building that we may be able to mitigate, we may not. Generally, those will go to goodwill if we end up having to buy out those at some price.
That is all the time we have for questions today. I would now like to turn the conference back to the Amedisys management for any additional or closing remarks.
Thank you, Ryan. As a reminder, all of the narratives will be posted in the 8-K that we will file in their entirety today. So if you have additional questions or you want to go back and review, that information will be available to you in script.
I would also like to thank everyone for taking the time to call in and join us for our third quarter results call. We're excited and passionate about our company and the prospects for the future. We look forward to speaking to you again and sharing our year-end results. Thanks for calling in this morning.
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