Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Almost Family, Inc. (NASDAQ:AFAM)

Q1 2013 Earnings Call

May 7, 2013 11:00 AM ET

Executives

Nick Laudico – IR

William Yarmuth – Chairman and CEO

Steve Guenthner – President and Principal Financial Officer

Analysts

Brian Tanquilut – Jefferies

Frank Morgan – RBC Capital Markets

Kevin Campbell – Avondale Partners

Operator

Greetings and welcome to the Almost Family, Inc. First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 of The Ruth Group. Thank you, Mr. Laudico. You may begin.

Nick Laudico

Thanks, operator. Joining me on the call today are William Yarmuth, Chairman and Chief Executive Officer, and Steve Guenthner, President and Principal Financial Officer.

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; health care reform; pricing pressures from Medicare, Medicaid and other first-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.

I would now like to turn the call over to William.

William Yarmuth

Thanks, Nick, and thank you all for joining us on our first quarter conference call. We began the first quarter in many ways like we ended 2012, with a number of industry headwinds that have made the operating environment in home health a challenging one.

In addition, the first quarter of 2013 brought new challenges in the form of sequestration enactment and a difficult comparison to last year due to an abnormal change from traditional Medicare to Medicare Advantage shift in one of our states as well as a fewer business days on a comparable quarter basis.

While all of this has made for a noisy quarter, this noise was largely expected, and we are generally pleased with our results. Our perseverance through all of these challenges in Q1 produced roughly flat total admissions year-over-year and about 1% overall admission growth in our VN segment.

The shift in Medicare Advantage business from an episodic to a per-visit payment system continues across the industry. However, in our business, during this particular quarter, we experienced an abnormal shift in an isolated geography from traditional Medicare to Medicare Advantage.

At the end of 2012 the Commonwealth of Kentucky decided to convert a significant number of its retirees to Medicare Advantage. While in most cases that conversion happens at the patient level, in this case, we believe patients were largely unaware of the switch combined with the change in payment methodology by the managed care organizations from episodic to per advice the payment, we experienced a meaningful change in the financial performance in this area.

Given the state of Kentucky represents about 18% of our admission, the impact was exacerbated in our first quarter results.

In summary, the end of year decision by large governmental insurer in the state that makes up roughly half of our Medicare Advantage business drove and isolated short-term impact on our EPS.

In our other geographies, we continue to be selective in which Medicare Advantage business we choose to take focusing on that business that further anchors a strong referral source or strengthens our position in a strategic local market, we feel is important to our long-term growth. It is important to note that in Florida, we have traditionally not taken any Medicare Advantage business.

As you all know the industry is in a bit of holding period as we await the preliminary rule from CMS on rebasing. We remain focused on operating our business day-to-day while at the same time preparing ourselves for additional clarity as we expect to see in the next 90 days or so.

To that degree, we have a number of near-term business development opportunities we’re evaluating in strategic markets that will expand our platform and we look forward to providing you with more details as the potential transactions come to fruition.

As you know, we recently hired Daniel Schwartz, Senior Vice President of Operations. Daniel has a broad range of experience across both the senior and post-acute care markets and we think his perspective will be valuable as we consistently try to strengthen our day-to-day. We welcome him to the team and look forward to his contributions.

While it is difficult – sometimes difficult to cut through the noise of one particular quarter, we as a management team view it from the perspective of being in a bit of and industry transitional period and think to some degree, it masks the true long-term growth potential of our business.

To pick up on a metaphor used on our last call, we continue to see clearer seas ahead and are now a few more nautical miles closer to smoother waters. We continue to have confidence about the outlook for our business in 2013 and even more confidence in the outlook for home health over the long-term. As a preventive low costs solution to institutional care and a true practical way to bend the Medicare costs curve.

Our focus for the remainder of 2013 will be to continue to of delivering high-quality care to the patients in the communities we serve while looking for strategic opportunities to further develop our business and expand our footprint.

I’ll now turn the call over to Steve for his review of our financial results. Steve?

Steve Guenthner

Thanks, William. As William mentioned, we have several items creating some noise around the underlying fundamentals of our business this quarter. They are more particularly evident in the year-over-year results, but also to a smaller degree evident sequentially.

First is the unusual calendar differences. We estimate that about 2% to 3% – we had about 2% to 3% shorter effective number of business days to generate revenues in 2013 than in 2012.

Some of the analysts reporting on other healthcare companies have noted this and also commented on the Easter holiday coming earlier this year falling into Q1 instead of Q2.

Changes in managed care penetration and managed care approach to home health reimbursement created a mixed shift. As William talked about and as we have reported in the past few quarters many of the M&A plans that previously reimbursed on episodic basis like traditional Medicare stopped that practice and began moving to a per visit rate at substantially lower rate. So far we have elected to continue to accept these patients to avoid disrupting referral relationships and this has created a drag on earnings.

Expanding just a little bit on William’s comment additionally Medicare Advantage enrollment data from CMS continues to indicate increasing penetration of Medicare Advantage plans into the Medicare population. For example, while total Medicare eligible population grew about 1% from 2012 to 2013 traditional Medicare enrollment actually shrunk about 1% and M&A enrollment grew about 5%.

As we move forward into the year, we’ll be evaluating the best way to manage the situation and see if we can find better ways to optimize our mix. However until we improve our performance in this area you should keep your expectations muted. I want to talk for a moment about some revised statistical presentation that we’ve put into our 10-K –excuse me – 10-Q in our earnings release this quarter.

For those who have heard in our investor presentations we’ve talked about our mission of helping the Medicare program figure out how to care for 50 million Medicare beneficiaries and that 50 million number includes all Medicare beneficiaries whether they elect Medicare Advantage plans or traditional coverage. We are improving our presentation of our visiting nurse segment operating metrics to provide more information on the mix of business in line with the evolution of management’s views about the business.

In addition to grouping our visiting nurse metrics in terms of Medicare and non-Medicare where we define Medicare as payment sources that originate from the federal government whether they ultimately come through the traditional program or through the Medicare Advantage program we are now providing more clarity regarding the payer mix of our admissions within those Medicare and non-Medicare categories.

Talking now about the M&A shift and limiting the discussions to just our service territories traditional Medicare enrollment in our service territories was 1.4% lower in Q1 of 2013 than in Q1 of 2012.

Combining this with the calendar difference between years of about 2.5% that means we faced about 4% combined calendar and enrollment headwinds and in the face of this we were able to hold our traditional Medicare admissions flat at just about 13,800 each period. So, in some respect that the equivalent of generating about 4% organic growth and likely reflects an increase in our market share.

Turning now to the numbers, on a consolidated basis earnings-per-share were $0.35 in the first quarter of 2013 compared to $0.53 in the prior year. We had no transaction or investigation costs in our numbers. Our consolidated revenues were $86.8 million versus 89.5 – 89.9 – excuse me – in the prior year. Total visiting nurse admissions grew just under 1% despite the unfavorable calendar and enrollment change I talked about previously. They also increased about 5% sequentially.

During the quarter we generally maintained good overall costs controls. On an EPS basis the Medicare Advantage or M&A shift that we discussed previously lowered earnings-per-share by about $0.06. The calendar effect between quarters lowered revenue by about 1.5 million and EPS by about $0.04 and sequestration lowered our earnings per share by about $0.02. In our unallocated overhead you will note that it was lower by about $400,000 or about three pennies due to lower incentive accruals.

Our effective tax rate was 36.9% lower than normal by the Work Opportunity Tax Credit or WOTC credit, which improved earnings-per-share by about a penny.

In the visiting nurse segment the calendar effect on revenues was about $1.3 million, the MA shift lowered revenues by about a million in the rate cut from sequestration lowered revenues by about $300,000, and as discussed earlier, our true admission performance is being somewhat masked by the calendar and MA shift.

In our Personal Care segment we do have some mixed shift issues impacting our margins. The calendar effect did also cause a decline in revenue there. General administrative costs are fairly consistent as a percentage of revenue at 20%.

On a sequential basis, it’s important to note about $0.07 decline in earnings-per-share from Q4 to Q1 on the reset in payroll tax rates that happens every year. So those – that reset in payroll tax rate disproportionately affects the Personal Care business margins when you look at Q4 to Q1. So you should he see some uptick as we move forward in the year from the payroll tax rates.

Moving on to financial condition and liquidity, our accounts receivable DSO was 52 days the first quarter, 13 and 53 days in the first quarter of ‘12 and about 52 days in the fourth quarter.

Operating cash flow for the quarter was about $9 million exceeding net income of $3.2 million, driven by the combination of tax – the timing of tax payments and changes in timing of payment of related to payroll and other taxes. Investing cash flows included about $690,000 of capital expenditures.

At the end of March we had $34.6 million in cash on hands up from 26 million at the end of December. Total receivable from $49.4 million, down slightly from $50 million at the end of the year. Again no outstanding balance on our revolving credit facility. Net of insurance letters of credit about $90 million is available for use based on trailing 12-month EBITDA of about $30 million. William?

William Yarmuth

Thanks, Steve. We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Brian Tanquilut with Jefferies. Please state your question.

Brian Tanquilut – Jefferies

Hey, good morning, Steve and William. First question for you guys. On the payer mix shift, Steve, it sounded like you have a very cautious tone, so in your mind is there still a lot left in terms of Medicare fee-for-service to Medicare Advantage shifting that we should expect going forward.

Steve Guenthner

Well, let me address the question since you addressed it to me, Brian, I will talk first but then ask William to comment as well. With regard to the Medicare Advantage plans that pay episodically, as you can see in our new disclosure, we had about 5.1% of our admissions in the first quarter of last year were paid episodically.

We’re down about 2.7% at this point, so we have lost already about half of that. So there’s a fairly fine item not left to lose and then I think the issues with regard to the changing enrollment, those are I guess fair game for anybody’s judgment going forward around what’s going to happen with Medicare Advantage enrollment.

I think there’s some guidance from – or suggestion from CDO in the way they think about the baseline and the CMS office of the actuary where they suggest sort of broadly maybe a topping out in the low to mid 30% penetration over the next few years.

I think nationwide the penetration has been on a slow creep. It’s been moving 1% or 1.5% a year for awhile and then I think what we saw in Kentucky as William was saying is just sort of abnormal.

William Yarmuth

Yes. Brian, I think as you think about Medicare Advantage you kind of think about it both on a national standard which is around 28%, 29% penetration and then you have shifts every year. So I think what we experienced in the first quarter of 2013 was an abnormal shift in Kentucky, which is a meaningful part of our business, where Medicare Advantage penetration moved on a national average about 1% and Kentucky moved close to 6%.

So we had this sort of first a major shift from traditional to Medicare Advantage participation largely driven by a decision that at the state level relative to its employees that drove a meaningful number of people – of their retirees into the Medicare Advantage plan.

That was exacerbated in our perspective in Louisville and Lexington and Elizabethtown Owensboro for us exacerbated by the fact that the managed care providers shifted from an episodic reimbursement to a per visit. So we kind of got the proverbial double whammy in the first quarter and, you know, it’s happened, it’s likely not to happen again in Kentucky because they can’t go that way again. It can only go the other way.

So we’ve sort of managed through from my perspective that change. Will that change happen in other states? It could potentially happen. But as Steve said, the general consensus is that Medicare Advantage penetration will move somewhere from around a 30% to 33%, 35% penetration rate across the country.

We think our average is a little bit – is right around that number and, therefore, we’ll kind of deal with the national average. It’s just in this quarter we kind of had this sort of odd phenomenon.

I don’t want to use the word perfect storm, but the odd phenomenon that caused us to see what – you know, get to experience what we did relative to both population shift and reimbursement shift.

Brian Tanquilut – Jefferies

Got it. And then, William, you talked about business development. How do you approach potential sellers at this point given the uncertainty in rates going forward? I mean, what are those discussions like and how receptive are they and are you guys at this point in terms of trying to do a deal today versus waiting for the rebates to come out and get done before closing deals.

William Yarmuth

I’ll kinds of give you a general comment and let Steve sort of make his comments given he’s a little bit closer at the – in terms of the transaction by transaction basis. But, we feel very confident – feel comfortable that we are moving towards trying to do more transactions today than we were a year ago.

So we have – over time I think been consistent in our development strategy about trying to develop within our geographic clusters and what we call densification and densifying the areas in which we are operating and we continue to pursue that in our development activities.

We see greater opportunities to – to develop – to do that or accomplish that in the near-term relative to where we were a year or so ago. So – and we see I would say generally more willingness on the – on the – from the perspective of sellers to say we’re willing to kind of try to make a decision in our world about how we move our business or what we do with our business going forward. So I would say from our world we are very optimistic and confident that there’s going to be M&A activity for is in the future in the areas that we want to develop and – and at prices that we think are reasonable for us.

Steve Guenthner

And not to sound too much like a broken record, but people sell their businesses for a lot of reasons and transactions that fit the profile that William just talked about where the seller has some compelling reason that they want to sell their business, they want to retire, they want to reposition assets from one category of investment to another, there’s a lot of reasons why people decide to transact and those kind of deals are still in the marketplace. There’s only so long that those kinds of deals can be pent up and they’re going to have to come free at some point here.

I think that we’re seeing very similar sentiment that we have always seen around gosh, why don’t I just go ahead and wait until I gets to the rebasing answer, I’ve waited this long why don’t I just go ahead and wait the rest of the time because it’s not that long, it’s just July. And then, there’s some other transaction opportunities of course in personal care and other places that really don’t have that much to do with the rebasing answer, so we’re – our review is to – is to sort of push on the accelerator a little bit more than the brake here given the amount of time it takes to get transaction flow happening and how soon that rebasing answer is coming.

William Yarmuth

Steve, a last point.

Steve Guenthner

Sorry. Go ahead.

William Yarmuth

Brian, I was just going to say that, our – our attitude about this is that, we’ve been waiting around for the last couple of years for rebasing and it’s only a few months away from our perspective that it’s going to be – we’re going to have an idea where we think it’s going to come out.

We are more optimistic about the opportunities and think that the opportunities for is to continue to – to grow through and M&A will – will increase once we get that answer so we’re kind of trying to move a little bit ahead of the answer, but we believe that at the end of the day there will be real opportunity for anybody in the industry that has the ability to execute on transactions to take advantage of that later on in the year.

Brian Tanquilut – Jefferies

Yes. And then thanks for all the thoughts. Last question, Steve, for you on the rebasing point. In your mind as we think about 2014, I know you don’t give out guidance. But absent acquisition and after factoring rebasing should we expect earnings growth next year?

William Yarmuth

Well, I appreciate the invitation. I think there’s a lot of variables that go into that not the least of which is how significant the rebasing answer is. You have a range from, essentially zero to 3.5% rate cut before one contemplates the market basket updates, et cetera. Organic growth is something that for a lot of years a lot of companies would look at organic growth as solving a lot of problems. So there’s going to be some opportunities, I think, to take share but it’s probably where we are at this point is taking share.

I don’t think there’s a demographic wave to ride. Now we’re okay with that. We don’t mind competing and I think a lot of things that we’ve done over the last year improving our clinical programs, improving our operational line management. I think all of those things will help is to take share out in the marketplace. And then the final component is the degree to which we’re able to take costs out of the cost structure.

And so an important component of what we’re working on during 2013 is ways to increase our operational efficiencies for 2014. I think there’s too many moving pieces in there for us to tell you that that’s going to result in earnings improvement. It’s certainly our goal for all of those things to result in earnings improvement. And I do think that getting underutilized cash to work certainly has the opportunity it gives us the opportunity to drive earnings improvement in our business.

Brian Tanquilut – Jefferies

Got it. Thanks for your thoughts, guys.

William Yarmuth

Thank you.

Operator

Our next question comes from the line of Frank Morgan with RBC Capital Markets. Please state your question.

Frank Morgan – RBC Capital Markets

Good morning. With this growth in the Medicare Advantage side of the business, do you expect that will affect your cash flow. I mean, I think of managed care payers as being very slow in paying their bills. So is this not yet manifested in your DSO, would you expect that to build up.

Steve Guenthner

Well, it’s sure not going to help. Some of these payers are pretty problematic and sometimes if you can get a large enough concentration in a small enough group of them, you can potentially move things along.

William Yarmuth

Hello? You there?

Operator

(Operator Instructions). Your teleconference will resume momentarily. Thank you. You may resume.

William Yarmuth

We apologize. We had – obviously a technical issue, with our phone system so we are now on cellular so if the quality of the call is different, please bear with us. So I think, Frank, we were talking to you, right?

Frank Morgan – RBC Capital Markets

Can you hear me?

William Yarmuth

Frank, can you hear us?

Frank Morgan – RBC Capital Markets

Yes.

William Yarmuth

Yes. We apologize. Anyway, I think what we were saying is that relative to the whether the managed care organizations pay or don’t pay, they ultimately pay the timing of them may be different, but I think from our perspective it’s not a question of when they pay. It’s a matter of what they pay and that’s something that I think all of us in the industry are trying to deal with relative to managed care’s – I would use the word maybe appreciation of the value that home healthcare can offer to the delivery system and the way in which they pay.

So we have a meaningful difference between what traditional Medicare pays for home health and what managed care pays for home health, especially when they go to a per-visit basis. That’s what we’ve experienced in the first quarter of this year relative to the first quarter of last year. But – I’m sorry. Go ahead.

Frank Morgan – RBC Capital Markets

Yes. I was just saying, how big is the delta between fee-for-service and Medicare Advantage? Is there an average rule of thumb there?

William Yarmuth

You are talking about timing of payment or rate of payment.

Frank Morgan – RBC Capital Markets

No. Just rate of payment. I guess you have to put it on the same basis, so if you were to convert a episodic base per day rate to just so you could compare apples-to-apples what be the difference in a per day rate of a Medicare fee-for-service Medicare versus Medicare Advantage?

Steve Guenthner

Yes. There is some variation depending upon the plan which gets to their hole selective thing, but right now that market appears to about $0.60 on the dollar in rate.

Frank Morgan – RBC Capital Markets

Okay.

Steve Guenthner

I think on an episodic basis is what you’re saying, on an episodic basis.

Frank Morgan – RBC Capital Markets

Okay. Yes on any kinds of basis, just to kinds of get a magnitude.

Steve Guenthner

Yeah.

Frank Morgan – RBC Capital Markets

Okay. And then on – this is sort of a naive question how does the state have the ability to move somebody out of fee-for-service Medicare onto Medicare Advantage? I mean, it seems like that’s a – I don’t really understand how you do that. Could you help is there?

William Yarmuth

Well, Frank, we don’t really have the answer. What we’re hearing in the marketplace is essentially one of the phenomenon’s about the ability to move a large group of people with certain information that you give them and Steve can supplement my comments at any rate once that done.

But essentially what we understand is that the state they made the decision, they wanted to try to drive their retirees into a Medicare Advantage plan and through the communication essentially said we’re going to – where they might have paid for some supplemental benefits historically they eliminated that and essentially said we’re going to – you have a choice, you can either go to the Medicare Advantage plan where you will get paid 100% or you can go to – remain in the traditional plan where you will be covered but some of the supplemental coverage that historically paid for wasn’t paid for.

So it’s a little bit of a – sort of a presentation standpoint and if you think about it, if you were sitting in that situation, how might you react and you might react that same – if I had to put more money out of my pocket to continue where I was versus go someplace else where I have no money out of my pocket, then I’m likely to kind of say I’ll go wherever you want me to go if I don’t have to put any money out of my pocket. We believe that’s what happened. Does that make any sense?

Frank Morgan – RBC Capital Markets

Absolutely. Oldest answer in the word, it’s all about money. Last – I’ll hop off on this one. Recertification rates down. Was that driven by MA or any other phenomenon there and then I’ll hop off? Thanks.

Steve Guenthner

The MA plans tend to re-cert at a slightly lower rate, not dramatically lower. I think we’ve seen a little bit of a trend line of this sort of thing happening broadly in the home care industry. There’s also the seasonal implication of this in our case because a lot of the re-certs that happen in the first quarter or from patients that were admitted in the fourth quarter. So when you see an uptick at 5% sequential uptick in admissions, it means that obviously the lower – the lower admissions in Q4 gave us smaller number of patients to re-cert.

We’re not particularly concerned about this at this point. We’ve got about a 3.8% I guess in the Medicare world, about a 3.8% decline in the re-cert rate – or in the number of re-certs. But I think in the percent of our episodes started that our research we’re still within what we would consider to be a normal range.

Operator

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

Kevin Campbell – Avondale Partners

Good morning. Thanks for taking my questions. I just wanted to start to confirm was the Kentucky change implemented January 1, and did it what – did it just happen sort of right away and affected your business immediately, or was it sort of more faced in and, therefore, sort of maybe worsened throughout the quarter?

William Yarmuth

Kevin, I think this is phenomena and that takes place every year on January 1 as you go through the open enrollment period for Medicare Advantage, and so it effectively took place January 1 of 2013.

Kevin Campbell – Avondale Partners

Okay. And, William, you kind of talked about it being, I think in your prepared remarks maybe a short-term impact. Why do you view it as such? I mean, what can you do about – to your – with your business to make it short-term and not have $0.06 sort of each quarter for the next three quarters?

William Yarmuth

I appreciate the question. And one of the first – it’s one of those things where you – a shift like what we experienced in Kentucky was unusual relative to the – to a year-over-year shifts that we’ve seen both in our other areas and naturally in terms of shift from traditional Medicare to Medicare Advantage.

So this was a little bit of a – I would say a shock at least in terms of that change and what the state did, and whether we should have known about it or should not have known about it, it took place January 1, I would think probably we shouldn’t be unrealistic to think that we should have known about it, but it’s a one-time impact and I think what I would say to you relative to our management of that change would be.

We have a historical approach towards the business that we focus on traditional Medicare beneficiaries and kind of to some degree shy away from it, so I think what we are doing internally is trying to figure out ways that we can manage the change and mitigate the impact of that in the – on an ongoing basis and certainly it shouldn’t have the impact going forward that it had in the first quarter.

Kevin Campbell – Avondale Partners

So, in other words, you have – potentially over time sort of transition away from those types of patients within Kentucky as you’ve done sort of throughout the company historically and shift back towards more traditional fee-for-service with that...?

William Yarmuth

I think, yes. Yeah, I think – I would say that going forward you should look at – we would look at our overall mix of business across all of our geography in a similar way and so our – in short-term challenge as to how do we manage within those specific markets to kind of bring that alignment back into the norms with the rest of our business.

Kevin Campbell – Avondale Partners

What are you guys seeing on the M&A front in terms of the multiples that sellers are expecting either from a revenue, multiple or EBITDA multiple?

William Yarmuth

Not as much change as one would yet think. Perhaps with the implementation of sequestration, and then eventually when we get this rebasing answer, which is now what, only about 60 or 90 days out at this point, and I think we might see some differences.

We continue to see as I mentioned earlier in response I think to Brian’s question a lot of folks just sort of on the side line timing their come to market. I’ve been saying that for a couple of years now.

Kevin Campbell – Avondale Partners

Do they still think they’re worth one times revenue or rate, EBITDA or...?

Steve Guenthner

Yes, they do. Unfortunately, a lot of them do, which is why I don’t think – that’s why you’re not seeing a lot of volume flow...

Kevin Campbell – Avondale Partners

Yeah.

William Yarmuth

Of course transactions at this point.

Steve Guenthner

Yeah. Kevin, I think, obviously, when rebasing comes out we’ll have a much better clarity about where the future is on reimbursement. And I think movements in expectations from sellers will – you will see that change happen once we get some sort of visibility on it. So we’re really close.

I mean that’s the message here is we’re really close and we’ve been talking about this for a couple of years. But we’re like within 90 days away from sort of getting a better perspective on what the long term reimbursement is for our business. And when that happens, we’ll – I think expectations between buyers and sellers will become much more aligned once we have certainty.

Kevin Campbell – Avondale Partners

Yeah. What did you guys think of the – setting aside the President’s budget in terms of probability of being enacted, but just the proposal on co-pays in there and what – have you looked at it and thought about the percentage of your episodes that might be impacted by that co-pay proposal.

Steve Guenthner

We are, sort of, of a position that we’re not excited about co-pays. Obviously, that’s not something that we’re excited about or think is great. We haven’t done the analysis on it, but as I understand the President’s proposal, it’s relatively limited and – to in terms of those people that would be subject to it.

Kevin Campbell – Avondale Partners

Yeah.

Steve Guenthner

And relative to our mix of business it’s probably not a significant percentage of our business that would be subject to co-pay, but we prefer there not be one, obviously. But I think there’s some limitations on it that would cause us not to be overly concerned in the overall scheme of things relative to our industry and its future. To us it’s not a major – the way the President proposed it, right, a major variable.

William Yarmuth

Kevin. Go ahead, Steve.

Steve Guenthner

The thing that has to be contemplated with co-pays is also what happens to supplemental coverage. So to the extent that supplemental coverage is in place to help beneficiaries with their co-pays and deductibles it really doesn’t have much of a barrier effect.

Right. So there’s a general concept or a thought process or philosophy along some regulators that we just got to have a co-pay in home care because that’s going to somehow constrain the rate growth in utilization. You only have to look at Part D expenditures, almost all of which have a 20% co-pay and are the fastest growing component of the Medicare spend to suggest that putting a co-pay in is not really going to do anything.

So it’s not constraining the rate of growth of outpatient expenditures or any other Part D expenditures, so why would it suddenly constrain the rate of growth in healthcare expenditures. It’s not very logical. But what might have a difference, though, is when you start talking about uniform costs sharing reform, which also has some supporters in Washington, politically and socially both, just in terms of what’s good policy, where we might take the existing pays myriad co-pay and deductible programs that are in existence today and try to turn them into a uniform program and at the same time reform the Medicare supplemental insurance rules.

So to the extent that beneficiaries can go out and buy supplemental coverage, you can cross shift by having them pay the premium and having the insurance company pay that part of the claim. It’s probably not going to have a whole lot of effect on utilization.

Kevin Campbell – Avondale Partners

That makes sense. Have you guys calculated the percentage of your episodes that would theoretically qualify under that?

Steve Guenthner

Well, there is...

Kevin Campbell – Avondale Partners

Sorry, go ahead.

Steve Guenthner

Yeah. There are several different proposals out there, a lot of different things being kicked around. I think the one that – and I’m going a little bit from memory here, but I think the President’s plan was to charge $100 an episode co-pay on episodes not preceded by inpatient stay and also not to charge it to anybody who is dual-eligible, which knocked the number down somewhere to about a third of the patient population nationwide. We’re probably not a whole lot different than that.

And then you’d have to go underneath that to say, now, how many of those people don’t have supplemental coverage? And the answer to that question is about 20%. So that 80% of what’s left have supplemental coverage anyway.

So when William said, “Gosh, it didn’t seem like it’d make a whole lot of difference other than the administrative headaches around it, I think, that’s kind of where that all – how you kind of stitch that all together.

Kevin Campbell – Avondale Partners

Okay. That’s helpful. Thanks. And I think I – or can you give us an estimate on how we should think about sequestration sort of the – obviously, I know we only had a partial period impact in the first quarter. Is it basically $0.02 in Q1 and it will be an extra $0.02 on top of that in Q4 or was it kind of 50/50 the way – I’m sorry not Q4 – in Q2, is it sort of 50/50 the way it played out?

Steve Guenthner

Well, I think it will probably turn out to be a little bit more than that – the sequestration effect for episodes ending April 1 and later. So it was any of those episodes that started in the quarter that were still open at the end of the quarter.

So I think it will probably turn out to be – probably, the easiest way to think about it, Kevin, is to look at our Medicare revenue for the 2012 out of the 10-K and take 2% of that number. It’s probably the easiest way to think about it.

Kevin Campbell – Avondale Partners

And then...

William Yarmuth

And then, hopefully, apply growth rate to it. Wouldn’t that be nice? Although it would be more than 2% of that number, because hopefully we’ll grow in that.

Kevin Campbell – Avondale Partners

Let me ask you one last question on sort of the concept of costs and taking them out of the system. Have you guys started that in any – to any great degree and that had an impact in Q1 and it will improve? Have you – do you expect – is it just sort of an ongoing process you’ve been doing it for years and you’ll just continue to do it or is there some sort of renewed focus or effort that we should expect given the continued headwinds?

William Yarmuth

I would say, Kevin, based upon our history, you should not expect anything dramatic that comes out of us in terms of our management of costs. We have sort of constant check on quality outcomes and all of those things that we think are important for us as an organization.

So unlike maybe others in the industry, we’ve not gone to any sort of dramatic cost reduction at this point in time. And it probably would be sort of later in the – in the continuum or later in the process to do that because we feel very strongly that we kind of operate our businesses and our business in a way that has appropriate cost controls and costs management relative to the business that we’re in and the reimbursement. So, kind of going forward, I would sit there and say until we say otherwise probably continue we would have a constant diligence towards controlling our costs as it relates to our revenue.

Kevin Campbell – Avondale Partners

Okay. Great. Thank you very much.

Operator

Thank you. This brings is to the end of our Q&A session. I’d now like to turn the floor back over to management for closing remarks.

William Yarmuth

Thank you, operator. And we appreciate the opportunity to share first quarter results with you and our discussions around first quarter and the future. And I want to thank all of our employees who have been diligently managing and taking care of the seniors that we care so much about and that we’re in the business of serving. And look forward to talking to you at the end of next quarter, hopefully, with some better vision about the future. Appreciate your time and look forward to talking to you in the future. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Almost Family's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts