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Almost Family, Inc. (NASDAQ:AFAM)

Q4 2012 Earnings Conference Call

February 27, 2013 11:00 ET

Executives

Nick Laudico - Investor Relations, The Ruth Group

William Yarmuth - Chairman and Chief Executive Officer

Steve Guenthner - President and Principal Financial Officer

Analysts

Brian Tanquilut - Jefferies

Kevin Campbell - Avondale Partners

Matthew Gilmore - Robert W. Baird

Kevin Ellich - Piper Jaffray

Operator

Greetings, and welcome to the Almost Family Inc. Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Nick Laudico with The Ruth Group. Thank you, Mr. Laudico. You may now begin.

Nick Laudico - Investor Relations, The Ruth Group

Thanks, operator. Before we get started, I’d like to remind everyone that all statements other than statements of historical facts included in this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, expect, believe, estimate, project, anticipate, continue or similar terms, variations of those terms or the negative of those terms. These forward-looking statements are based on the company’s current plans, expectations and projections about future events. Because forward-looking statements involve risks and uncertainties, the company’s actual results could differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

The potential risks and uncertainties, which could cause actual results to differ materially include regulatory approvals or third-party consents may not be obtained, the impact of further changes in healthcare reimbursement systems, including the ultimate outcome of potential changes to Medicare reimbursement for home health services and to Medicaid reimbursement due to state budget shortfalls; the ability of the company to maintain its level of operating performance and achieve its cost control objectives; changes in our relationships with referral sources; the ability of the company to integrate acquired operations; including obtaining synergies, integration objectives, and anticipated timelines; government regulation; healthcare reforms; pricing pressures from Medicare and Medicaid and other third-party payers; changes in laws and interpretations of laws relating to the healthcare industry; and the company’s self-insurance risks.

For a more complete discussion regarding these and other factors which could affect the company’s financial performance refer to the company’s various filings with the Securities and Exchange Commission, including its filing on Form 10-K for the year ended December 31, 2012 in particular information under the headings Special Caution Regarding Forward-Looking Statements and Risk Factors. The company undertakes no obligation to update or revise its forward-looking statements.

With that, I would like to turn the call over to William Yarmuth.

William Yarmuth - Chairman and Chief Executive Officer

Thanks, Nick and welcome everybody. I hope you will indulge me for a couple of minutes as I use this year ending conference call to reflect a bit on our company’s recent history and connect our readiness to take advantage of what I believe is a brightening industry future.

For the past two to three years, we, in the industry, have been operating in a virtual storm and with extremely limited visibility. We have faced the same headwinds in the form of consistent rate cuts and an occasional severe gust in the form of regulatory changes like face to face and therapy reassessment. We continue to be faced with additional storms over the horizon with the prospects of rebasing and potential threat of new changes to our reimbursement in form of co-pays.

Steve and I frequently say to each other after listening to things like I just said with the line, but when you say it that way, it doesn’t sound so good. And I guess it does it. However, as each day goes by, I am actually becoming more optimistic about the future of Almost Family and excited about venturing forward, because I can see brighter skies on the horizon. You might say why? So, let me try to quickly just grab why my optimism is increasing. Everything we have faced over the past few years has resulted in virtually everyone in the industry slowing down. In severe storms, you usually proceed cautiously and we have done that.

During this two to three-year period, some of the things we did not do were just as important as what we did do. We avoided making decisions that would have compromised our condition of strength, keeping our financial position strong, and making measured changes to our sales and marketing organization while achieving balance with cost control. Mistakes of overreaction are sometimes easy to make in challenging times and our team avoided major hazards such as cutting too deeply in the effort to quote right-size our business. We are moving too fast in anyone direction that may have taken us off course. In other words we have weathered the storms we have faced. In years passed when visibility was clear we moved more quickly achieving significant growth and improving financial performance.

What I believe as a shareholder of this company is that the most important outcome in navigating through stormy weather is to maintain a strong ship and I am confident we have accomplished that. Our financial condition makes us as strong as any company in the industry, our management team falls into the same category. More importantly our managers and caregivers in the field operating with our senior advocacy mission continue to provide services to the seniors we support in ways that distinguish us in our local markets. This gives me great pride in our people.

Although we still face some possible wind gust in 2013 and 2014, I am confident we will weather them. The impact of these gusts is unknown today, but we will be known soon. After three year of suspense, CMS is scheduled to release preliminary regs regarding rebasing in July, just five months from now. Visibility should improve and we believe our company with both our operational and financial strength will be in a position to capitalize on this visibility back growing more aggressively in an industry that still is held out by most investors as one with great growth attributes and is key in the healthcare delivery system. Adding to my confidence in the industry is the increasing interest in the strategic value of home healthcare by those both inside and outside of the business. Non-traditional strategic players have voted with their balance sheets saying that home health should and will be a continued part of the healthcare delivery system given its attractive demographics and proven ability to lower the cost of care.

Looking at the year as a whole, we are pleased with our progress in phase of an unusually difficult storm. We weathered nearly a 5% Medicare rate cut and with a keen eye on cost controls managed to offset a meaningful portion of those cuts. In our North region we continued to deal with the ramifications of the Medicare Advantage mix shift that is occurring across the states. This is the trend that has been an industry wide challenge throughout 2012 and we expect the challenge to continue as we head into the first quarter of 2013 and beyond. Historically we have worked to be selective in the Medicare Advantage business we chose to take, given the generally lower value placed on the home healthcare by these programs. Our decisions to accept Medicare Advantage business has been and will continue to be strategic.

We make decision on an individual market basis considering the relationship with the referral source and the potential for overall growth and expansion of that relationship. We will continue to approach this business methodically as we move forward staying selective in which Medicare Advantage plans we chose to accept and considering what is best for the long-term growth prospects of our organization.

In the phase of these significant challenges, we managed to increase shareholder value by paying $2 special dividend at the end of December. We did this without compromising our very strong balance sheet and financial ability to take advantage of the expansion opportunities. On our last call we told you that we would focus over the next few quarters on improved and measured organic growth, sustained cost controls to mitigate rate pressures, continued contributions from personnel care and diligent focus on acquisitions. These remain our priorities as we move into 2013. We are pleased with the progress we have made in some of these areas and feel we will have more work to do in others.

From an M&A perspective we feel the industry is moving towards an up-tick in activity. We continue to look for opportunities to expand the portfolio on the both VN and personal care sides in our efforts to enhance our footprint and scale and look forward to reporting to you on our progress.

Lastly 2012 saw a significant effort by our management team and the industry as a whole to deepen our relationships in Washington. Working together to develop proactive ideas that help to bend the cost curve and maintain our quality of care for the Medicare beneficiaries we serve. As we move towards an environment where healthcare reform will become fully implemented our constituents in DC are increasingly responsive to the industry’s ideas and proposals to ensure that we continue to eliminate fraud abuse in home healthcare and ensure that it is a continued part of the healthcare delivery system. We entered 2013 with a sense of partnership and healthy dialogue that we believe will prove helpful as the industry moves to some of the uncertain times of 2013 and 2014 and continue with the metaphor that view through our comment today.

I’ll now turn the call over to Captain Steve for latest weather update. Steve?

Steve Guenthner - President and Principal Financial Officer

Thanks, William. We did put our release out this morning. Hopefully, everyone on the call has seen that. We currently anticipate filing our 10-K sometime towards the end of next week.

Quarterly results, diluted earnings per share were $0.40 for the fourth quarter of 2012 compared to $0.57 in the same quarter of last year, for $0.17 decline with approximately a $0.19 reduction in EPS due to the Medicare rate cut. This quarter included a $0.02 reduction in earnings related to Superstorm Sandy as we suggested in our last call could have an impact on earnings. Without that impact, we would have been at $0.42. Sequentially versus Q3, we increased our sales labor cost with an investment in additional sales force that approximated about $0.03 in earnings impact. Revenues for the quarter were just under $87 million versus slightly over $89 million in the same period last year. Again, the reduction primarily being due to the Medicare rate cut.

In our VN segment, total admission growth was about 1%. Medicare episodic admissions were flat between years. However, the prior year included about 600 Medicare Advantage episodic admissions that have either moved to per-visit payment or were terminated due to low contract pricing. Excluding those from the prior year Medicare episodic admissions resulted about a 2% Medicare episodic admission growth rate. By contrast, Medicare data available to us suggest that traditional fee-for-service population and home health utilization in the territories we serve is roughly flat between years. So, despite slower growth, we appear to continue to be taking some market share. The year-over-year earnings improvement in the VN segment continued through cost controls, lower labor cost through better controls, improved earnings per share about $0.06.

As William described just a moment ago and as we talked about in more detail in our Q3 earnings call the shift in Medicare Advantage programs from episodic reimbursement to per-visit reimbursement reduced earnings year-over-year by about $0.03. For the year, diluted earnings per share were $1.85 versus $2.22 in the prior year, with about an $0.80 impact of the Medicare rate cut. So, if that rate cut had been in effect in 2011, we would have been at a $1.42. So, on a pro forma basis, we have $0.43 earnings improvement year-over-year, which is driven primarily by the improved cost controls and improved efficiencies in our VN segment, which increased earnings per share by about $0.45.

Revenues for the year were about $349 million versus $340 million last year even with that $12 million rate cut effect in it. In our Personal Care segment, we did show some bumps in the performance of this segment as we completed the Cambridge transition system and process changes, some changes in management generally upgrades in management.

Going forward, we feel like we have a good base upon which to grow over the long-term. From a cash flow perspective, our AR DSO was 53 days at the end of December 2012 continuing a slight uptick that is predominantly internally driven as we seek to continue to control our labor cost. Our operating cash flow for the quarter was $3.1 million compared to about $3.7 million of net income. And for the year, operating cash flow was approximately $17 million, which is about the same as net income.

At the end of the year, our balance sheet reflected $26 million in cash following the payment of a $19 million special dividend right at year end. Without which, our cash balance would have been about $45 million, up from $34 million in the prior year. As I mentioned, receivables ticked up slightly. We have no outstanding balance on our revolving credit facility. We have a very small about $1 million worth of seller financing debt on our balance sheet. Total assets were about $250 million and book equity was $204 million. William?

William Yarmuth - Chairman and Chief Executive Officer

Thank you, Captain. Operator we’ll now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting our question-and-answer session. (Operator Instructions) Thank you. The first question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian Tanquilut - Jefferies

Hey good morning guys. First question is for the Admiral, just wanted to hear your thoughts, it seems like you are starting to get really more optimistic about the outlook ahead. And so as you guys prepare for what could be some pretty significant rate cuts in the horizon, what exactly do you need to do today to prepare for that? And how do you balance cost cuts versus growth and preparing for the opportunities that lie ahead?

William Yarmuth

Well, thanks Tanquilut. And I am not sure I am the Admiral, but I don’t know if I am, but I will take the question is being directed towards me. I think our approach towards any perspective rate cuts are sort of measured and we continue to kind of approach them in a measured way. We always strive to try to manage our costs and to try to build efficiencies into our delivery model in a way that will result in better performance without compromising care for the people – is the care for the seniors that we take care of. And we are approaching rebasing with that. We have been doing that over a period of time, over the last few years. So, this is not an unknown event. I mean, we have known it for a while. And we are really facing this like we are sort of glad it’s happening. We have got our – it’s certainly a different array of outcomes, it could be a non-event, it could be similar to what we have experienced in the past. We know the maximum limit under the legislation is 3.5% -- on the current legislation is a 3.5% rate cut per year over the next four years.

We believe we could manage through that. We believe the visibility and the certainty of where we are going to end up is going to provide us with an opportunity to measure the industry where it’s going. And as we said in our statements are really confident that we are going to be able to capitalize on opportunities that will come out of the ultimate CMS proclamation of what the rebasing outcomes going to be. And so actually I am very positive about getting to know the answer, because I am really confident that we are going to be able to capitalize on that outcome. And I think that it’s going – I don’t believe it’s going to – it’s the death knell for the industry. I think it’s going to be something that good providers with strong balance sheets and good operations are going to be managed through. And I think the growth attributes for the industry are significantly strong and we plan to play in that world.

Brian Tanquilut - Jefferies

Okay. And then William you said something about the strategic value of home health, and I know some of your competitors have talked in the past about hospital partnerships and what they are doing there? Just wanted to hear what your thoughts are or what you guys are doing in terms of how you are thinking of capturing that opportunity or adapting to that potential change in healthcare delivery and how home health plays into that?

William Yarmuth

It’s a good question. And I think that the way we are approaching this is that there is a little bit of uncertainty about where the delivery systems going. The healthcare delivery system is not necessarily hospital-centric, although most people would think about it as a hospital-centric delivery system. And in doing that, you probably you have to think about it as a part of your strategy how might I work with hospitals if indeed that’s where it ends up. Hospitals being the highest cost venue of care, all of the momentum is moving towards if you look at the sort of the changes in reimbursement over the past four, five years, there has been a significant obviously amount of emphasis on driving care to the non-institutional side of the industry, which is where we believe we are in the sweet spot at the lowest cost provider of care in the non-institutional base segment. So, we are looking at all range of different possibilities, and we are evaluating and pursuing relationships with a varied group of people who are trying to position themselves should be in the right spot around where the system might evolve. We think it – if we don’t think it’s going to happen immediately, we think it’s going to be evolutionary, not necessarily revolutionary. And as a part of being in an evolutionary process, we feel that we are going to pursue all of the different – the various opportunities, which could include home healthcare as the gatekeeper, not necessarily the hospitals as the gatekeeper. And that’s a broad range, but we are not necessarily committed to any one pathway, because we are not sure that those pathways are clear.

Brian Tanquilut - Jefferies

Okay. And then last question for the Captain, how should I think about your tax rate going forward at 39.5?

William Yarmuth

Got it. Alright, that’s pretty easy question.

Brian Tanquilut - Jefferies

Far more, Captain is really more precise in advances than advantage.

Steve Guenthner

Precise in customers.

William Yarmuth

Thanks, Brian.

Brian Tanquilut - Jefferies

Thanks guys.

William Yarmuth

I appreciate it. That’s an easier question though.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Kevin Campbell with Avondale Partners. Please proceed with your question.

Kevin Campbell - Avondale Partners

Good morning. Thanks for taking my questions. I wanted to just start on the idea of the Medicare Advantage plans and sort of what percentage of your Medicare Advantage plans are already on a per-visit basis versus episodic?

Steve Guenthner

Yeah. Kevin, this is Steve. We are well past the halfway mark in terms of Medicare Advantage exposure to episodic business. As we were working to touch on in the prepared comments, just I think I might have not mentioned the annual number, I think I talked about the year number. We have had about somewhere around 2000 Medicare Advantage episodic admissions in 2011 that are now gone year, because they have shifted to per-visit. And we, as William said strategically elected to hang on to that business or another chunk that frankly we just didn’t renew over pricing. So, I think most of the exposure for further loss is probably muted by the fact that the magnitude of the losses have already occurred in the concentrations, where they have occurred. They have already occurred in the places, where we had most of the business. The rest of it which maybe we are at 40% left or 45% left something like that is pretty scattered with no individual market with a really large concentration there. Now, having said all that, as William also said, we are sort of contemplating all of this managed care stuff. And I think there is an opportunity potentially for us to increase the level of sophisticated approach that we take to this business and think about how we might work with managed care either to revise the products or that we could lower the cost of producing that product for them, since they seem to be interested in a little different product than Medicare fee-for-service is. And we may be able to increase the level of sophistication in our patient and payer acceptance decisions that might help us going forward.

Kevin Campbell - Avondale Partners

Yeah. What about the M&A environment, I think William you said you are expecting an improvement there? What sort of driving that view that you think there will be a pickup in activity. So, just as you think within five months we’ll have more clarity and it will pickup after that or do you think it actually accelerates before then?

William Yarmuth

Well, I don’t know if I am that good at the timing questions. I’ll Steve speak to this from his vantage point systems in a bit more time on this than I do, but my sense of it is that it just a lot of time is past with under periods of uncertainty and people have a tendency to say. There are sort of maybe not in it for as longer term as maybe we are, are basically saying it might be time for me to look to get out of this business or to move on and do something else. So, I’ve been in the business for long time and it’s time for me to get out. We’ve been expecting this for a long time. I think really my tone is around what our experience is as opposed to trying to figure out what’s in the minds of the seller. I just think that our experience is we have had a lot more companies that we are further in discussions with and that are – we believe our transaction is more likely and we would anticipate – certainly anticipate that as the rebasing answer in the visiting nurse side of our business becomes clear. There will be whole the new set of opportunities in terms of both people willing to sell, people interested in selling and tying to connect the disconnect that we’ve experienced over the past few years between sellers’ expectations and buyers valuation. We think this will – those will come closer together and then activity will increase.

Kevin Campbell - Avondale Partners

How you guys, you put – you talked about sort of potential for transactions being a little bit more likely from your own experience with deals being further along line. How are you – if something what happened before that rebasing is known, how you are protecting yourself, how you’re structuring the deals such that you don’t end up over paying if again you due to it in advance of the rebasing being announced?

William Yarmuth

Well, I’ll let Steve.

Steve Guenthner

I’ve been more than happy to I think our approach to M&A has always been pretty deliberate and pretty selective. And we have always looked for transactions that set a fairly rigid criteria in terms of geographic positioning. It allows to gain additional value and we gain that additional value by increasing our operational span of control. In a lot of cases we are able to gain additional value, by essentially bolting on contiguous service territories where maybe we already have a presence. They can’t serve in that contiguous territory because we don’t have a license or COM or just a presence in that marketplace.

So, I think the other point is relative to leverage. We’ve always thought about our M&A strategy and our leverage around thinking of the multiple of our leverages of multiple of cash flow lined up against the visibility of reimbursement. So, I think one of the things that is just a reality in the M&A business with five months to go here as we continue our efforts to accelerate our pace, deals don’t happen the day you decide you think you might want to do it. There is a lot of work that has to happen in there. And so in large measure sort of cranking up the activity right now still probably won’t result in a whole lot of closures before the rebasing was announced.

William Yarmuth

I think I wanted to just to add to what Steve was saying. The way we view transactions for our company are not necessary – is essentially around valuing what we think we are going to get out of the transaction given our development strategy and our approach towards development. And so as we value and measure deals we are going to do that with a range of rebasing outcomes and sort of use our judgment on whether where the value falls in that range of potential outcome and decide whether that’s worth pursing or not.

What we have achieved in the past when we were doing more M&A activity is an ability to acquire an agency or an operation and then be able to grow that going forward. And I think one of the things that we obviously want to think about or as rebasing is coming closer and the outcome of it, the demographics are still going to drive growth in the industry, we believe and we built those into our assessment. But ultimately, we are going to take into account the range of possibilities around rebasing. And what we think we can do with the business as it becomes part of our network and that’s sort of the approach that we’ve taken in addition to the thing that Steve talked about in his answer.

Kevin Campbell - Avondale Partners

Have you guys seen any change in activity or (rebase) or anything like that?

William Yarmuth

I don’t think we’ve seen any meaningful change in the last six months, I’ll use six months I don’t know if that’s the right metric, but I don’t think we have any significant change in that period.

Kevin Campbell - Avondale Partners

Alright, great that’s all I have. Thank you very much.

William Yarmuth

Thank you.

Operator

Thank you. The next question comes from the line of Matthew Gilmore with Robert W. Baird. Please proceed with your question.

Matthew Gilmore - Robert W. Baird

Hi guys. I just had a couple of quick follow-ups to the rebasing discussion. The first question was around the range of potential outcomes and do you all know if you get – you could get to receive the market basket along with whatever rebasing cuts, so you will have say a 2% to 3% positive impacts for the market basket less whatever productivity or coding adjustments and then less the rebase impact, is that the right way to think about that?

Steve Guenthner

That’s correct and that rebasing factor that goes in to the equation cannot be more than 3.5% negative.

Matthew Gilmore - Robert W. Baird

Okay. So, I guess just the rebasing outcome is zero to negative 3.5% than sort of a reasonable two to three year or to my guess three to four-year outlook for Medicare pricing would be kind of be – maybe positive 1% to negative 2% at the low end?

Steve Guenthner

Yeah, I think the closest thing to sort of published guidance on that comes from MedPAC’s analysis of margins. Now, we think MedPAC reports too higher margin, because MedPAC takes a lot of the high cost providers, hospitals, in particular, in frozen mountains as they don’t really can’t. You take all the high cost providers out and don’t count all the cost while margins are a lot higher than if you leave everybody in and count all the costs. So, that’s an ongoing part of our discussion in DC. However, if you sort of bought off on there, I think they stick on that 11 point something percent for 2012. If CMS were to follow their methodology and we are not really sure that they will. We think CMS will kind of do their own thing. If you just took that and divide it by four, you get some look and what that can be and really what you hit on here is to tie this back to the M&A question while the seller is just I’ll say I think it will be zero and the backers offset I think it will be 3.5%.

Matthew Gilmore - Robert W. Baird

But I guess if we get….

William Yarmuth

Again, if we can get, so in between there is based on current statue, current legislation, that’s kind of what the range is.

Matthew Gilmore - Robert W. Baird

And I guess the point I was trying to get at is, but let’s say it’s somewhere in the middle where we have a reimbursement outlook that is sort of zero to maybe negative 1%, but is that an environment where you think you can close deals and perhaps kind of start growing organically again?

William Yarmuth

Yeah, I think I want to make this comment into sort of a two-party answer. One is we are working in DC to try to get the most reasonable and fairest outcome for the industry. And when you look at the trajectory that margins are on and let’s suppose that trajectory we’re continuing you have almost a auto-rebasing that’s already been happening. The question is when they publish these rigs where does it go? Okay. So, our gut tells us it won’t be at the high end. So, I think I sort of follow your point. Our gut tells us it won’t be zero. Most importantly though is from an M&A perspective to productivity answer, it probably matters more that we know what the answer is, so that the buyer and the seller plug the same number into their valuation models. And that if the buyer and the seller plug in the same pricing assumption, it removes a very large CASM between buyer expectations of value and seller expectations of value. And that’s what’s bottling up in our review. That’s what’s bottling up transaction flow right now.

Matthew Gilmore - Robert W. Baird

Okay. And then just second question was the Steve, I think you mentioned that the utilization for home health services just within your markets was sort of flat, so that implies you are still out there taking share, but I was hoping you could sort of discuss what are the factors you think that sort of have contributed to slower growth rate than previous years in your markets. I assume that kind of relates to the face-to-face regulations. And then you might have mentioned this already, but in terms of the investments in the sales force, I just curious if there was some sort of growth expectation you are hoping to achieve through those investments at some point in the future?

William Yarmuth

Yeah, I might ask the Admiral here to keep track of that second question just because I am going to answer the first one and I will lose track of the second one…

Steve Guenthner

I might ask you to repeat that….

Matthew Gilmore - Robert W. Baird

Okay.

William Yarmuth

Yeah, but let me tell you kind of what our views about what’s going on in the marketplace broadly for Medicare services. Despite the fact that the Medicare program spends more per member per month in Medicare Advantage than they do in the fee-for-service program, but in the high single-digits, 8%, 9%, we are seeing growth in that Medicare Advantage penetration over the past several years. The percentage growth in that population has been fairly high. We are currently at a point were about 28% or 29% of the Medicare recipients or Medicare beneficiaries are enrolled in Medicare Advantage at this point, and that’s probably 23% or 24% just a couple years ago.

So, even though with that the baby boom coming on and we’ve got somewhere around 2.5% almost 3% compound annual growth rate and the total Medicare population, that put says in a zero to 1% compound annual growth rate in the fee for service if you look back over the past say three or five years. So, you have got sort of stall happening right in there. We are not sure why that makes sense from a policy perspective, but it is where we are at the moment. So, then the next thing that’s happening is 2011 is the first year really in the inception of home healthcare that we saw that number – raw number of episodes performed go down. And went down very, very slightly like 40,000 on 6.8 million.

And so we do think that that has to do probably more with the sentinel effect than the real medical necessity effect, resulting from the face-to-face requirement. So, our view on this is that the patients that we have seen over the years have always been qualified for service. We wouldn’t see them and I think that’s probably true in most of the – with most of the providers. However, when CMS sent out that strong a message doctor you must get your own pen out and write down a paragraph essay on why that patient really need service and you couldn’t have a stronger statement other than just explicitly saying we want you to be really, really, really sure that that patient needs it would suggest you want – you maybe not order it is much.

So, that sentinel effect, we think has more or less caused that sort of a pullback and it what it is. So, I guess the good news is that regulators and members of Congress and staff members, they should all feel a whole lot better about when the patient is now admitted. That we now have additional comfort that patients are in homecare and so I think that’s contributed to a temporary sort of stalling in growth rate and maybe that’s okay for right now because I think the longer term benefit of those regulators feeling a lot better about the next patient that gets admitted, will enable us to then work creatively and proactively with the program and with other care providers to find ways to appropriately move more qualified patients into homecare and out of higher cost settings.

Matthew Gilmore - Robert W. Baird

Okay, that answers it. Thanks very much.

William Yarmuth

Well, I think one of the other comments just I think relative to your question, but I might be off but let’s assume that well you can tell me whether I was after answering the question, but you will take Florida as an example just to get a sense of when we say we’re taking market share. Essentially, if you view as we have viewed our market as a traditional Medicare beneficiary that person that is participating in the standard government reimbursed Medicare portion of the business and not Medicare advantage, that number in the state of Florida despite the fact senior population to getting older is about has been about 2.3 million people over the last four years. Okay, having grown now the Medicare Advantage side of it is grown back on a percentage basis pretty rapidly.

But if you look at our market that would say it’s flat market and that’s still a big market. And our share of the marketplace our calculation is somewhere in the 5% to 6% range. Okay, so we view our ability to capture patients greater than zero to some degree capturing market share. And over time, our market share in the industry should grow. So, I think that’s part of where our statement is. If we had 7% or 8% growth over a year in our Medicare admissions in Florida while their traditional Medicare beneficiary population stayed flat, we believe we’ve captured, we are increasing our market share which is an indication we’re doing the right thing. So, we should keep doing that and we have the ability to measure that.

Now you might say well, so what are you doing about the other side of it the Medicare Advantage side of it which I think would be a reasonable question? And the answer is we are evaluating that because a lot of that is not quite as easy to say we’re going pursue that or not because it’s plan by plan an area by area. And as we said in our prepared statements referral source by referral source, so that’s a little bit more complex analysis, but relative to the statement that we think we are taking market share that would be one of the ways that we would discuss with you about how we are doing it and what we are doing it in the outcome.

Matthew Gilmore - Robert W. Baird

Thanks very much, I’ll get back in the queue.

William Yarmuth

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Kevin Ellich with Piper Jaffray. Please proceed with your question.

Kevin Ellich - Piper Jaffray

Hey guys, just a couple of follow-up questions here. So, I guess going back to the previous question about the sales force expansion, should we expect anything more in the next couple of quarters or are you guys pretty much done with that?

William Yarmuth

When you say done with that, you are talking about in terms of increase in our sales force?

Kevin Ellich – Piper Jaffray

Well and major investments that we should think about for the year Bill?

William Yarmuth

We have gone through a number of experiments, tests, accounts over the year to try to improve our efficiency of our sales force and I think we’ve made some progress and we have some work to do going forward. But I think our conclusion is to some degree we need to make further investments, we want to grow our business, we need to make further investments in our sales force and we will do that in a measure of the managed way. But I would expect that our sales force will increase and not decreased over the near-term.

Kevin Ellich – Piper Jaffray

Got it and that makes lot of sense. I guess I’ll drill the question that nobody else really probably wants to or thinking about, but with the deadline looming Friday, even tomorrow how should we think about sequestration and I guess with your internal expectations and budget, Captain Steve, would you advice us to put it in or not?

Steve Guenthner

Yes.

Kevin Ellich – Piper Jaffray

Yes, thank you.

Steve Guenthner

It’s interesting.

Kevin Ellich – Piper Jaffray

Sorry and then by my calculations and maybe I am off here Steve but DSO looks like it ticked up about six days year-over-year?

Steve Guenthner

That’s right.

Kevin Ellich – Piper Jaffray

About 53.

Steve Guenthner

That’s right.

Kevin Ellich – Piper Jaffray

What really drove that, was it really the Medicare advantage change?

Steve Guenthner

No, I don’t really think the Medicare advantage have much to do with it, I think we’ve been going through the process over the course of the year of asking our managers to talk about – think about lot of different things as we’ve talked about for a while now finding – striking that right balance between growing the business and lowering the operating costs is as the challenge in and of itself. And while we don’t necessarily like the stretching out in the DSO, we have sort of intentionally I guess tolerated is probably y the right word that stretching out just because frankly the cost of capital is so low and there is cash sitting on the balance, we were just not that sensitive right at this moment to the amount of days in there from a financial perspective.

And so we’ve kind of said look, you need to focus on taking care of patients we have getting more of and doing so efficiently. And I guess if anything had to slip in order for us to be able to optimize that – that’s kind of okay for now. Now obviously that can’t continue forever. And so an important challenge to our management team internally is as we got actually be able to accomplish sort of all of the objectives on the internal managers at the brands level at the market level at the regional level we will accomplish much closer to all of their objectives. And so we are ever so optimistic that we’ll see this thing sort of stabilize out how much more to come down, I don’t know but certainly stabilized out here over the next quarter or too probably.

Kevin Ellich – Piper Jaffray

No problem.

William Yarmuth

Kevin it’s a balancing act, I mean, obviously you go through it with all of the different things that were going through and kind of using as I say the metaphor of the storm in the storm in which we’ve been working and trying to work through it has probably been one of the things that we said let’s work on other things as opposed to that. Now there are tolerances around that obviously that we have, but I think we are within our tolerance range.

Kevin Ellich - Piper Jaffray

Okay. So bottom line, Steve and Bill, you guys think maybe we can see a little moderation over the next couple of quarters, but that’s really not big of a deal and how you guys are doing at an operating the business?

William Yarmuth

I think that’s correct.

Kevin Ellich - Piper Jaffray

Okay, okay, got it. And then I guess going to the Admiral, could you give us a little updated thoughts on the Personal Care business we saw that 4% decline in volumes, wondering was there anything big behind that or what really drove that and then do you have any other planned pricing increases, startup I think 3% and which is kind of normal for what we see on an annual basis, but is that kind of a good way to think about the pricing for that segment going forward?

William Yarmuth

Well, I think relative to – Kevin relative to the volumes I think lot of what we experienced in 2012 and sort of in the quarter. We are somewhat sort of a result of the ongoing transition to Cambridge, the Cambridge acquisition that we made, and the implementation of some of our IT systems and stuff into that delivery system, and some of the impacts around that. And that was once again you talk about distraction that was a distraction. That’s over we would anticipate that we would see some improvement in that measure going forward. And so that’s pretty much the Personal Care side of it. The Personal Care business doesn’t historically have the growth attributes that we have seen in the Visiting Nurse business.

And with a lot of the issues that the states are having and we’ll continue to have relative to budgetary stuff, there is sort of an ongoing sort of thrashing around, if you will, from state to state on how they are dealing with it. Stepping back from that, we still remained strongly in the camp that states are going to utilize only community-based care significantly more as time goes on as they deal with longer term budgetary issues. And we are seeing – continue to see in a lot of the states that we are in and states that we are looking at a momentum in that direction. So, we still are very positive about Personal Care. We think it’s going to be part of our business – a meaningful part of our business going forward and there will be a lot of opportunities in that area.

Steve Guenthner

And Kevin, I just need to tell you in one point your comment on pricing change that is not really 3% rate increases, that’s really a mixed change that goes with the volume movement in here, not all states say the same, there is some skilled service in this Personal Care segment. And there is some fairly meaningfully significant differences in reimbursement rates between say places like Connecticut and places like Kentucky. And so as you have volume movements up and down in some of those different areas, it tends to get reflected as well, there is real pricing changes in there, but it’s probably more mix driven than anything.

William Yarmuth

I don’t think we have seen particularly any meaningful rate increases in our business.

Kevin Ellich - Piper Jaffray

Okay, I appreciate that clarity. Thanks Steve. And then I guess that the last thing going back to the Medicare Advantage, Steve, you gave us some good details on the, I guess, the episodic admission changes to per visit? I guess I was wondering if you would be willing to say what percent or how many of those admissions were not renewed or just altered versus moving through the per visit?

Steve Guenthner

Sure. Using the quarter, and that’s the probably the easiest number on top of my head. There were somewhere around 340 of the 600 admissions I was talking about moved from episodic to per visit and somewhere around 260, it just went away.

Kevin Ellich - Piper Jaffray

Went away. So, what’s happened to those 260? Did those go to somebody else or do they just not get a home health anymore?

Steve Guenthner

Well, the issue that we have, we are trying to evolve our understanding of this around Medicare Advantage and what their view on this is because there is a pretty big disconnect. I think the starting point around why Medicare Advantage prices were the prices, because somebody is willing to take it. Some home care agency is willing to take it at a loss. And they evolved this sort of loss leader concept, and we have frankly never seen it work. We have seen it fail a lot. We have looked at a lot of companies over the years and we have seen that not work. And so, that’s problem number one. Problem number two probably goes more to the definition of the product and how they view its value versus Medicare because managed care companies tend to have their own case management as a lot of them are managing the medications now through their Part D programs. And so probably what happens to those patients, it probably winded up at another homecare provider who maybe either for whatever reason don’t mind doing the business at a loss or maybe in some cases is small enough, but they not even know they are doing the business at a loss. So, for right now, they probably just get less care or they get it from the different provider.

William Yarmuth

Yeah, Kevin, I would say, our experience over the years has been somewhat related to the supplier providers in the marketplace. So, if you are – there is a significant number of providers in a particular marketplace, a managed care advantage provider can kind of go through that inventory of providers and see who is willing to take the case or take the care or sign a contract. The information or the numbers that Steve was talking about in our fourth quarter were largely a result of our not willing to accept the contract from our managed care provider and terminating that contract. And when we did that, we are assuming they found somebody else to take that patient at that rate.

Now, over time, way that works is usually the people that take that or the people that can’t go out and get traditional Medicare business in the marketplace, because either there is somebody else hopefully like us who have been successful in being able to take that business and do it efficiently and develop relationships with the referral source. And therefore they have nothing else to take. And so there is I think if you went back you probably see a whole lot of turnover in the number of providers that a managed care advantage plan is working with over a longer period of time as a result weeding sort of working through that part of the delivery system.

So, the way we look at it does it make sense for us we are going to do it. We will do we will work with Medicare Advantage plans if it makes sense for us. And as we said in our prepared remarks as it relates to our relationship with the other referral source because we still continue to think it’s local marketed – it’s locally market driven, it’s not a national contract business. And if you did the national contract business probably not something we were interested in because the economics of it are just not very attractive relative to the other opportunities that we think we have.

Kevin Ellich - Piper Jaffray

Sure, I appreciate the color. Thanks guys. Good to see you guys are not getting through the storm about to go Bill.

William Yarmuth

Thank you.

Steve Guenthner

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

William Yarmuth - Chairman and Chief Executive Officer

Thank you, operator. We appreciate the opportunity to share our thoughts with you on this conference call as always we want to thank our management team, all of our employees to what they do for the people we care for, the seniors we care for everyday and we will welcome the opportunity to talk with you on our first quarter of 2013 call. Thank you very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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