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Kindred Healthcare (NYSE:KND)

Q4 2012 Earnings Call

February 26, 2013 9:00 am ET

Executives

Charles Edward Jones - Chairman and Principal

Paul J. Diaz - Chief Executive Officer, Director and Chairman of Strategic Development Committee

Richard A. Lechleiter - Chief Financial Officer and Executive Vice President

Benjamin A. Breier - President and Chief Operating Officer

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Clara Houin - Avondale Partners, LLC, Research Division

Henry Reukauf - Deutsche Bank AG, Research Division

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Operator

Good day, everyone, and welcome to this Kindred Healthcare 4Q '12 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Eddie Jones with Corporate Communications. Please go ahead.

Charles Edward Jones

Good morning. Welcome to the Kindred Healthcare Fourth Quarter Conference Call. This is Eddie Jones from Corporate Communications. Before the company's presentation, I would like to read a cautionary statement.

This conference call includes forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involves a number of risks and uncertainties. Such forward-looking statements are based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company and its management are unable to predict or control, that may cause the company's actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. The company cautions participants that any forward-looking information is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking information. The company refers you to its reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K, the company's other reports filed periodically with the SEC and its press release regarding the fourth quarter operating results for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements.

Many of these factors are beyond the control of the company and its management. The company cautions investors that any forward-looking statements made by the company are not guarantees of future performance. The information being provided today is as of this date only, and the company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Certain references to operating income, or EBITDAR, as well as other non-GAAP disclosures, have been reconciled to the company's consolidated operating results and are available on the company's website, www.kindredhealthcare.com.

It is now my pleasure to introduce the participants in today's call: Paul Diaz, Chief Executive Officer; Rich Lechleiter, Executive Vice President and Chief Financial Officer; and Ben Breier, President and Chief Operating Officer. Mr. Diaz will begin the call.

Paul J. Diaz

Thank you, Eddie, and good morning, everyone. Last night, we announced our operating results for the fourth quarter and full fiscal year. I am pleased to report that we finished the year on a strong note and that our core operating performance for 2012 was at the high end of the guidance we issued to investors at the beginning of the year.

2012, Kindred continued to make progress in improving quality and patient satisfaction and delivering better clinical outcomes for patients in settings across the post-acute continuum. We want to thank our caregivers and colleagues throughout our organization, who delivered on Kindred's promise of hope, healing and recovery, as they work to advance our mission in spite of a very challenging operating environment.

From an operational and financial standpoint, we finished the year with a solid quarter. Excluding certain items, our continuing operations, earnings per diluted share of $0.46 in the fourth quarter was a significant improvement from the comparable $0.28 per share reported last year, following major Medicare cuts in both our Nursing Center and rehabilitation therapy divisions. And we are very encouraged by the strong volume trend so far this year and our strong operating cash flows.

Before commenting further on our results and our opportunities going forward, I'd like Rich to recap our results, and then we'll provide some operational color as well. Rich?

Richard A. Lechleiter

Thanks, Paul. Good morning, everybody. As Paul said, Q4 finished the year quite nicely at $0.46, actually a bit better than we expected. The full year core EPS of $1.52 actually came in at the high end of our guidance range we put out in the first quarter last year and reflects the full realization of the RehabCare synergies and other cost reductions put in place earlier in the year.

A couple of items to note. Our Hospital division turned in a nice quarter with EBITDAR growing 8%, even though volumes were a bit soft at the beginning of the quarter, but rates were better overall. RehabCare operating margins were over 13%, including strong growth in our hospital rehab therapy business.

Two other items are also included in the quarter. $8 million of favorable bad debt pickup based on very strong cash collections and a $6 million hit from the rehab therapy Medicare caps that were put into place on October 1, a bit worse than we thought.

On the Home Health side, revenues and EBITDAR both doubled from last year. Operating margins improved to 10%. And we reached a threshold $200 million in annualized revenues. Cost controls across the enterprise continue to be very effective. For example, in the Hospital division, our cost per patient day grew only 1.2% in the quarter, while in the nursing homes, cost grew only 9/10 of 1% compared to the fourth quarter last year. Corporate overhead was up only 1.8% from last year and stood at 2.9% of consolidated revenues at the end of the year, a very good showing.

Onetime items for the quarter were primarily comprised of the goodwill impairment associated with the rehab therapy business related to the recent Medicare rules.

On the liquidity front, and I think this is the most important part of our financial discussion, Kindred had a great cash flow year. If you take our operating cash flows of $263 million, less our routine capital spending and development spending for new facilities, you have $97 million worth of free cash flow, ahead of our expectation of $85 million to $90 million. Those funds were used to partially fund our acquisitions during the course of the year.

In 2012, we acquired 3 Home Health and Hospice businesses, adding $75 million of revenue to the enterprise. And we also acquired 3 previously leased facilities for approximately $100 million, further improving our long-term financial profile.

Our unused credit capacity at the end of the year is significant, with our revolver capacity standing at $420 million at December 31 to fund our future growth.

And finally, our core guidance for 2013 remains at $1.10 to $1.30. While this is a decline from our indicated results in 2012, we are highly confident that we can achieve $90 million of free cash flow throughout the enterprise in 2013 to fund further growth and repay debt. Ben?

Benjamin A. Breier

Thanks, Rich. As we head into 2013, I'd like to add some color around our operating plans to achieve the earnings guidance that we've laid out for our investors.

Our first quarter is typically very strong, and we see opportunities to continue to capitalize on our Continue the Care integrated strategy, as well as the ongoing development of deeper relationships with many of our referral sources across the country.

In both of our facility-based divisions, we should benefit from the stronger volumes that we've seen to start off the year in the right direction. This should drive further growth in our RehabCare division on an organic basis, and coupled with continued external customer contract growth that we've been seeing in this division since the RehabCare acquisition.

Finally, we're continuing to aggressively grow our Home Health and Hospice business, both on an organic basis and through integrated market acquisitions. And as Rich said, we're now at $200 million in annualized revenue. As we indicated in our earnings release, we now offer Home Health and Hospice services in '12 of our 21 integrated care markets, and we're very excited about that.

I'm sure that you're all familiar with the significant reimbursement rate pressure that we face in fiscal 2013, particularly as it relates to the Medicare sequestration across all of our businesses, as well as the budget neutrality adjustments in our Hospital business and reductions in Part B therapy payments in our skilled rehabilitation business. On a combined basis, these cuts will negatively affect -- will negatively impact our revenues by as much $100 million in 2013.

In our view, growing volume, expanding our service base organically and continuing our integrated market development strategy will just not be enough to offset all of this rate pressure in 2013. And as a result, we previously discussed with you -- with your -- our internal project to consider other ways to improve our operating efficiencies to further refine our post-RehabCare acquisition processes and streamline some of our administrative functions across the organization. We've been referring to this as Project Apollo. And among other things, Project Apollo is driving various structural changes in human resources, sales, marketing and finance under a shared service model that more effectively meets the needs of our 4 major operating divisions.

While this work is ongoing, our earnings guidance reflects further enterprise-wide reductions in 2013 that will not impact patient care, that will range from $60 million to $70 million. When fully implemented, the annual impact of these savings will exceed $90 million in 2014.

You'll also note from the earnings release that we'll pay a one-time $25 million bonus to about 47,000 of our teammates who are subject to a wage freeze in 2013. Essentially, while we're pressing forward aggressively to reduce our structural costs in a very material way, it's very important that we maintain a sense of balance relative to our employees and the quality of our services that better position our operations going into 2014.

As Rich noted earlier, it's critical that we continue to focus on managing our operations and our balance sheet to generate strong operating cash flows in excess of our routine and development capital spending to fund our strategic initiatives, integrated market acquisitions and repay debt. Paul?

Paul J. Diaz

Thanks, Ben. I'd like to make a few comments about our plans for the future and what our strategy is to succeed in a rapidly changing health care market, which is quickly becoming more patient-centered, physician-driven and integrated from both a care delivery and payment standpoint.

First, we will continue to focus on our core operations, as Ben just described, by improving the quality of our services, clinical outcomes and improving employee satisfaction engagement. These are a must.

As Ben discussed, we also see opportunities to grow admissions, reduce cost and deliver strong operating cash flows to support future growth. Our 2012 results and reaffirmance of our core annual guidance for 2013 provides a solid base line to grow the company and pursue our integrated care market and Continue the Care initiatives.

As we've discussed in previous releases, our strategic plan is to build the capabilities to provide a full continuum of post-acute services in selected integrated care markets throughout the country. We are more convinced than ever that this is the right strategy, as an increasing number of hospitals, physician groups, employers, health systems and managed care pairs are coming together to form accountable care organizations and other integrated care networks to manage an episode of patient care from hospital to home.

We are working with many of these systems in our integrated care markets to help manage these care transitions and deliver higher-quality and more cost-effective care.

A very important part of this strategy is the continued growth of our Home Health and Hospice operations in our integrated care markets. Following the success of our recent IntegraCare acquisition, we will continue to deploy our free cash flow to add quality Home Health and Hospice operations in our key markets to better continue the care for our patients in their transition homes into a full recovery.

We are also continuing to look for opportunities to reposition our mix of businesses to advance our strategy. The 2013 divestiture of 54 Ventas nursing centers as an example of this, and you could expect to see more portfolio rationalization in the future, as we continue to evaluate other nonintegrated market assets that we may want to divest and redeploy the proceeds into other businesses and repay debt.

Finally, we remain committed to exploring new ways to create shareholder value and improve the capital structure of the company, including the deployment of free cash flows and the proceeds from asset sales to pay down debt, buy back real estate or finance acquisitions.

That concludes our formal remarks. Rich and Ben and I will be happy to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And we will begin our Q&A session with A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

A few questions, if I might. First of all, just in trying to understand what you're doing with the Q1 bonus. Is it the right way to think about that is that would be -- that $25 million would be, essentially, about the same amount as the increase would have been, if you would have just have given the normal inflationary pay increases? Or is it somehow different than what it would have been?

Benjamin A. Breier

A.J., this is Ben. The way that the numbers had sort of break out is the $25 million one-time compared to about a 1.5% raise is not exactly -- it's close to apples to oranges -- it's $25 million one-time versus 1.5% of close to somewhere around $30 million. But that's just in terms of putting it into the year. Our people typically get their raises at their anniversary date. If you looked at that on an annualized basis, it's more like in the $50 million range annualized. So you could kind of say it's $25 million one-time versus $50 million annualized.

Albert J. Rice - UBS Investment Bank, Research Division

And is the thought process on that, when you come to 2014, their base is still flat and therefore, you're giving them an increase off of what has been a flat base versus had you put it in there and that's sort of what you're picking out from this?

Benjamin A. Breier

That's right. It doesn't become structural, correct.

Albert J. Rice - UBS Investment Bank, Research Division

All right. Okay. On the -- I wonder, Paul, if there's any update on LTAC criteria discussion? Do you expect anything out of the proposed rule that will come out in the spring related to LTACs for them to address -- would CMS will address this or the short -- or the outlier issue that's still outstanding?

Paul J. Diaz

No, I mean, I think, as some folks may have seen from the MedPAC discussions, we're likely to continue to think about the role of LTACs and CMS will likely continue to comment on their view around certification. I mean, look, I think the broad consensus is that we can do better from a policy standpoint than just defining LTACs as a 25-day length of stay. The AHA and the Federation continue to lead our efforts, the industry's efforts, to advance the certification legislation. I think there may be a couple of opportunities as the year progresses to advance that legislation, particularly as it scores budget savings, as we expect it will. And in the context of either deficit reduction later this year, if that happens, or revisiting the doc fix, which there's an increasing interest in a permanent solution to the doc fix, which I think is a -- would be a wonderful thing for Healthcare services generally to move past that every year phenomenon. I think we'll have a couple of opportunities to potentially advance the legislation.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then maybe, finally, obviously, with the moratorium on LTAC building, aspiring at the end of the year, last year, do you have plans to -- what's your thought process in terms of developing new LTACs? Do you wait for this clarity on things like the criteria, or will you start moving ahead with some new development?

Paul J. Diaz

Well, I mean, I think over the last few of years, in anticipation of criteria, whether it's legislative or regulatory, meaning, whether it's advanced through the AHA legislation or working with CMS, we think the role of LTACs will continue to be defined more narrowly, although the sickest, most medically complex patients will go to LTAC. So as we've looked at development for many years, we've had a very rigorous demand analysis to do that. So we continue to look at that. There are a few opportunities we think to -- whether it's an underserved LTAC bed need, transitional care hospital bed need. But I don't -- I would not expect a tremendous surge in development in the broader context of the opportunities for LTACs and the roles for LTACs.

Operator

And we'll now hear from Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

First question and it may be obvious here. I just want to understand the cost savings from Project Apollo. You're saying $60 million to $70 million this year and then $90 million by next year. So just as -- is the overall change somewhere between $20 million and $30 million for next year, that's what we should see benefit on the cost side next year?

Benjamin A. Breier

Yes, that's right.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then on the $25 million of compensation expense that you're spiking out for this year as one-time. Will that be -- assuming no changes in the current legislative environment, will that be back into sort of normal operations for 2014?

Benjamin A. Breier

Yes, we would expect to get back to giving raises to our teammates in 2014. And that's in our minds.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then lastly, I guess, bigger picture from the changes in the Taxpayer Relief Act in -- the discount for multiple procedures. At this point, is it too early to tell what, if any changes, that's having -- what, if any impact, that's having on provider behavior, or more generally, in the contract therapy space competitively?

Benjamin A. Breier

It's still a little too soon to tell. I think as you start sort of early in the year and people have not sort of maximized their caps yet. Obviously, we have some pretty good intelligence from what we saw at the end of the fourth quarter last year in terms of its impact, which we've tried to build into our guidance this year. I think that, really, as you get into March, you'll start to see a better sense of how that's going to really affect our business, and we'll certainly be able to talk more about that in the second quarter.

Operator

And at this time, there is no additional questions in the queue. [Operator Instructions] And we'll take a question from Clara Houin with Avondale Partners.

Clara Houin - Avondale Partners, LLC, Research Division

This is Clara in for Kevin Campbell this morning. So just first, what is the revenue and margin profile of RehabCare going to look like after taking into account the Medicare cuts to rehab payments on April 1?

Paul J. Diaz

I think the 13.3% margin that you saw on the fourth quarter is lots of ins and outs, a pretty good base line for where we're growing that business on a margin perspective. As Ben mentioned, we still see a great demand for rehab services. We saw, as mentioned, really strong growth, 27% growth in our hospital rehab business in the management of acute rehab units. And one of the things that we're really excited about as we continue to work with more systems across the country in our integrated care markets, is more opportunities to work with hospital systems on their rehab services, in addition to the organic growth of our skilled nursing and assisted living contract business. So from a margin perspective, working through a lot of changes. But from a top line perspective, and as Ben mentioned in his comments, the strong volume trend bode well for the organic delivery as well. So we've got a number of different things that should give us both top line growth and sustained margins going into '13.

Clara Houin - Avondale Partners, LLC, Research Division

Okay, great. And then on the 4Q '12 adjusted EPS calculation. Is the bad debt benefit included or excluded from that calculation?

Richard A. Lechleiter

It is included.

Clara Houin - Avondale Partners, LLC, Research Division

Okay. And then, what's the annual run rate in skilled nursing, taking into account the transition of the Ventas facilities to discontinued ops?

Paul J. Diaz

You'll see that in the segment data. And maybe we can talk about some of the modeling stuff off-line. My only comment on the rehab piece, just to add, is that is a recurring savings in terms of the cash collections and our bad debt. So it is a one-time item in the quarter, but it has a recurring benefit going forward in terms of RehabCare. We'll -- the Ventas facilities have been moved into discontinued ops, but you'll also see 1 quarter or 2 to see what the net impact to there. As we said, those facilities in total are slightly dilutive on an EPS basis to our '13 plan, but we'll have more to talk about that probably after Q2.

Operator

In the queue, we have a follow-up from A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Yes. So I'll just ask a couple more then if we got a short list of questions today. On the capital deployment side, I know you've got ongoing investment in the cluster strategy and building that out. But there has been discussion from time to time about looking at buybacks and things like that. Can you update us on your thinking on any of that?

Paul J. Diaz

Yes. So I would say that we continue to have a good pipeline of Home Health and Hospice opportunities that we're the most excited about. As we mentioned, we're in 12 out of 21 integrated care markets. We want to get Home Health and Hospice to 21 out of 21. We -- and I know this question was asked earlier, we do have a number of LTAC and IRF development projects. Some are joint ventures with hospitals on their campuses. So I think you'll see very high end new development projects of Transitional Care Hospitals, both IRFs and LTACs and hospital-based sub-acutes. We have a number of Transitional Care Centers that are under development, again, on hospital campuses or right next to hospital campuses in Vegas and Indianapolis. So those are all projects that we're excited about. And as Rich mentioned, we'll be able to fund out of operating cash flows. And looking particularly in the back half of the year as we advance the broader repositioning strategy and the potential proceeds from asset sales get even more aggressive in the Home Health and Hospice area, I think, as we look beyond '13, A.J., and we get more clarity out of Washington, whether if sequestration happens or not or it's delayed or there's a deficit reduction bill, I think in the context of that clarity, we continue to discuss with our Board a number of different shareholder activities. Again, given our strong free cash flows, we think that whether it's a buyback or more likely, a dividend, something we're excited to think about going into next year likely when we get a little bit more DC clarity.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. Have you looked at the Affordable Care Act in terms of what it means for your own employee benefit structure and so forth? Does it have implications that are worth thinking about there that you're beginning to address?

Paul J. Diaz

Huge implications. As you can imagine, we're one of the largest private employers in America. We believe that it's critically important to have our employees from a retention and cultural standpoint in our health plans. Ben can talk a little bit more about the great efforts that he and Andrei [ph] and the other teammates have done in terms of our wellness programs. And the difficult challenges of moving to high-deductible plans with HSAs that are all in keeping and trying to get ahead of 2014 in terms of the plan design issues. But there are a lot of open issues still, as we look to comply with the Affordable Care Act with respect to our plans. Ben, you might have a little bit more color.

Benjamin A. Breier

The only other color that I would add is we're -- we've been a little bit ahead of the game here. We think, at Kindred, in terms of the implementation of what we see coming starting in 2014. To Paul's comments around reducing the number of networks, our high deductible plans, the changes we've made this year, keeping the cost piece out of the equation and just thinking about the effect it has had on our employees, it's been substantial. And it is -- it requires enormous amounts of communication and goodwill and in answering the questions back and forth. And as we look to 2014 and beyond, the only thing that we know is that the law is very complicated and is going to require a lot of thought and a lot of ongoing discussions with our teammates in terms of implementation.

Paul J. Diaz

And A.J., the only other thing that I would add, though, is in a much broader context of both Medicare spend, health care spend, as the country continues to move to more physician directed care models and ACOs, private and public, and changes in moving to high deductible plans, where consumers are making more informed choices, I think you're going to continue to see flattening of the cost curve. And while this is a transition year for us, we fully expect that the more consumer-oriented, high deductible plans where employees are looking at their HSA and looking at what they spend to flatten the growth in our own company of the cost of health care and benefits. And we do think that there are sustainable macro trends that we see in our actuarial numbers as that you're seeing in the Medicare data published over the last couple of weeks.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then I know it's still early in the year, but last thing and maybe just to ask you about, was you've got some leases that you're going to have to give notifications on they don't expire or come up for renewal till next year but I think you got to give notification later in this year. Is there any update on those? And can you just -- is it similar amount and size and implications to what you'd had -- what you'd been going through in the last year on the first round?

Paul J. Diaz

Slightly larger, about 86 skilled nursing facilities and 22 hospitals. And again, I think, as compared to where we were before, if you think about the 300 million of reimbursement cuts that we've seen over the last 4 years, the 100 million that we are seeing going into '13, I think the future earnings prospects of some of these facilities, some of which are now 3 years older, we're less excited about operating some of them. And so I think going into the beginning of the process in October and we've got a good line of communication with Ventas and it's been a difficult process on the 54, particularly for our teammates, but they performed miraculously well. The quality and the budgetary performance of the 54 are right on plan. But it's been a noisy transition for sure and creating a lot of uncertainty. But I think you should expect that we will take a fairly aggressive position in the fall as we go into this next renewal process.

Operator

And we will have a question now from Henry Reukauf with Deutsche Bank.

Henry Reukauf - Deutsche Bank AG, Research Division

Just a quick question, a follow-up to A.J.'s on Affordable Care Act, or maybe just to straighten out a little confusion in my part. Are all of your employees now in health plans, or are you going to have to move a substantial number to them into a health plan in 2014?

Paul J. Diaz

Go ahead.

Benjamin A. Breier

No, not all of our employees are in a health plan. And the answer is that in 2014, everybody has to be provided coverage. So we'll obviously have options around how we want to provide that coverage in terms of keeping them on our employee benefit plan, utilizing an exchange, deciding whether to pay or play, if you will. So those decisions are still being thought about and looked at. And we're still not exactly sure what we'll end up doing in 2014.

Henry Reukauf - Deutsche Bank AG, Research Division

Is it a large number that aren't? Or you have like a percentage of the total?

Paul J. Diaz

Well, keep in mind that out of our 80,000 folks, you got a lot of people who are on their spouses' plans, people who are Medicaid eligible, et cetera. So I mean, substantially, the vast majority of our employees are in our plan. In some markets, they're in HMOs, like Kaiser, so they're not in our self-insured plan. And I think to Ben's point, one of our responsibilities and we've got a number of different initiatives to do this, is to help folks navigate what's in their best interest. We use a company like called Health Advocates and some other things in-house to help people figure out what's in the best -- what's in their best interest; to be in our plan, to look to the expansion of coverage under Medicaid and children's insurance programs, in some cases. And in the future, to look at these exchanges and facilitate, again, the consumeristic behaviors that we all want for them to find the best choices. So it's going to be a complex transition intuitive. The only other thing in that regard that I will mention is, because the president proposed increasing the minimum wage, I got that question today. I mean, the vast -- we have a very small subset of our employees that are not at the minimum wage. Certainly, if those policies were to advance, that would potentially move our 1.25%, 1.5% wage rate numbers up to 1.5%. Historically, that has been a good thing for our workforce. It's been a good thing for employee retention and quality. So we don't view the Health Care Reform Bill as particularly a negative for our employee health piece. We're moving to, again, consumeristic plans, nor do we view the minimum wage proposals necessarily as a negative. Obviously, we'd rather deal with that without sequestration cuts. But that might be too much to ask.

Henry Reukauf - Deutsche Bank AG, Research Division

So it sounds like while the -- you're still working on how -- you're still figuring out how things will work out with the Affordable Care Act, but in terms of a cost number, it's not something that's really concerning you in terms of kind of roughing out estimates now, it's not something that you're worried about, it's something that's manageable?

Paul J. Diaz

Yes, I mean, as Ben said, we're -- this year, reflects some significant plan design changes in anticipation of the implementation of the Affordable Care Act in 2014. And this year, essentially, the expense is flat to the company. So -- but there are a lot of hoops and hurdles. There are a lot of things that we still don't know in or around the implementation. But the short answer's no. We do not anticipate anything material to impact our financial results going into 2014.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. And just a last one on the rehabilitation rehab caps on therapy. You said it's too early to tell. People really haven't changed their behavior. How have you kind of thought about in the back half of -- or in your guidance? Have you assumed a steady state, a reduction? Something you might have seen in the fourth quarter? How did -- what kind of thoughts did you put into the guidance about the changes in utilization of therapy?

Benjamin A. Breier

Well, we talked about -- Henry, in the guidance we put out for 2013, we talked about a $25 million to $30 million impact from the rehab cuts. And our best view is that's what we would apply to this year. We'll kind of phase those in, as you've said, into the probably starting into the second quarter and into the third and fourth quarter. We have a pretty good sense from what happened in the fourth quarter last year around what the impact of those rates were. So I would expect you'll start to see those leak into the second quarter and then, certainly, the back half of the year. But it'll be in that $25 million to $30 million range.

Operator

And now, we'll take a question from Gary Lieberman with Wells Fargo.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

This is Ryan Halsted on for Gary. I guess I wanted to go back to the possible divestitures of non strategic assets. I guess, just to be clear, are you looking at facilities, I guess, outside of, or business lines outside of your portfolio of leases that you're considering rationalizing?

Paul J. Diaz

Yes. So we are looking, in a very sort of capitalistic ruthlessly objective way, a health care system that is increasingly integrating at a local level, and at the same time, requires enterprise-wide systems and processes to reduce cost away from the bedside, the Apollo stuff that Ben talked about. And so as we look at nonstrategic assets outside of our integrated care markets, both hospitals and nursing centers, both leased and owned, we are in a process of looking at not renewing leases and selling assets that do not fit our long-term strategic plan. And this is a year where in the context of reimbursement issues and everything else, we think's an important year. And our Board has been very supportive of us getting more aggressive around this repositioning strategy.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay. That's very helpful. I guess, I can appreciate your strategy as far as integrated care bundled payment. Just, I guess, to clarify, are you participating in some of the recently announced bundled payment models? It didn't appear so. And I guess, my question. I'm sorry.

Paul J. Diaz

We are in one of the -- if you look at our investor presentation, you'll see in our quality report that we published on Monday, actually, you'll see a fair amount of information. So let me direct you there. The quality and social responsibility report talks a lot about our innovations around operationalizing Continue to Care, as well as our integrated care market strategy. And there's a specific section to describe the CMS bundled payment demo in Cleveland that we are participating in. And we're happy to talk with you more about it off-line.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay. I'll take a look there. And then, lastly, I guess you mentioned volumes continued to be strong into January. You also called out separately you saw some strength in the same-store nongovernment. Did you see a continuation of those trends, specifically with the nongovernment?

Benjamin A. Breier

Yes, we did. I mean, I think the last half of December into January, and certainly, continuing in February, have been good in that regard. So we've got some possible momentum to start the year.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay. Actually, and one more. You talked a lot about some of the investments you were looking into Home Health and Hospice, as well as developments of ERFs. Have you thought about, or are you thinking at all about LTAC bed capacity? And what kind of, I guess, admissions growth or occupancy increases might you look for in order -- before you would start considering maybe building some new beds?

Paul J. Diaz

Well, maybe I wasn't clear, I'm sorry. So though we do have a number of LTAC development projects underway and a few new ones that we're looking at. In the context of A.J.'s question and yours, we do a bottom-up market analysis of what we think LTAC bed need is. And we do that looking in through various lenses of what certification criteria might look like. And we are also, in the context of the expiration of the moratorium, adding some capacity in hospitals where we're full. So in Sacramento, California, in Baldwin Park, which is in California, we added 20 beds. And the team there did such a great job. I mean, I think we had 15 patients out of the 20 patients in 2 weeks. I mean, so there are markets where there are -- is still bed need for LTAC services, and we'll continue to explore those and announce those as they come up.

Operator

Right now, there's no additional questions in the queue. [Operator Instructions]

Paul J. Diaz

Great. Well, thank you, everyone. We know it was kind of a complex quarter, but a solid one again, in our view. And notwithstanding a lot of change externally, I'm really proud of our entire team in terms of how we delivered on quality and patient satisfaction and financially here at the end of the year. And as have been said, I think we're off to a good start this year and that this year is going to be an important year for us to reposition the company and make the changes structurally and otherwise, that we think will really propel growth and shareholder value creation going into '14 and '15. So we appreciate you being on the phone today and all your support. Thank you.

Operator

Ladies and gentlemen, that will conclude your conference for today. Thank you for your participation.

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Source: Kindred Healthcare Management Discusses Q4 2012 Results - Earnings Call Transcript
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