Gentiva Health Services Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Gentiva Health (GTIV)

Gentiva Health Services (NASDAQ:GTIV)

Q1 2013 Earnings Call

May 09, 2013 10:00 am ET


John N. Camperlengo - Senior Vice President, General Counsel and Secretary

Tony Strange - Chief Executive Officer, President and Director

Eric R. Slusser - Chief Financial Officer, Executive Vice President and Treasurer


Bradley D. Maiers - Piper Jaffray Companies, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division


Good morning. My name is Paula. I will be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, May 9, 2013.

It is now my pleasure to turn the floor over to John Camperlengo, General Counsel. Sir, you may begin your conference.

John N. Camperlengo

Thank you, Paula, and good morning, everyone. Welcome to Gentiva's First Quarter 2013 Earnings Conference Call. Speaking on the call today are Tony Strange, our CEO; and Eric Slusser, our CFO. We hope that each of you had a chance to review the company's earnings report, which was released this morning.

All statements made during this call relating to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statements contained in our press release and on our website.

Our call today will be consistent with the SEC's Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that can be made in individual inquiries. Today's call also conforms to Regulation G regarding the reconciliation of GAAP and non-GAAP disclosure. As a result, we will not discuss non-GAAP financial measures on this call, except for those set forth in our press release.

You may access a telephone replay of this call later today through May 16. A transcript of the call will be posted on our website and will be available for the next 12 months. Following today's prepared remarks, we will open the call to questions. [Operator Instructions]

And with that, I'll turn the call over to Gentiva's CEO and President, Tony Strange.

Tony Strange

Thank you, John, and good morning, everyone. Thank you for joining our first quarter earnings call for 2013. We've got a lot to cover this morning, as there are a few moving parts in our results. Volumes in hospitals and physician practices continue to be muted and overall health care sector continues to be peppered with uncertainty. But with that said, I believe that we're a step closer to removing some of the overhangs that have plagued our industry.

As harmful as it is for our country as a whole, sequestration is here, and with it, comes the removal of an unknown. I continue to believe that home health and hospice industry and more specifically, Gentiva, are well positioned to capitalize on the exploding demographics as the post-acute landscape becomes clearer.

Home health and hospice provide a cost-effective clinically appropriate and most importantly, patient-preferred health care solutions to our aging senior population. And Gentiva is well positioned to continue its role as a leader in providing post-acute care to our seniors. But in the near term, these uncertainties and rate reductions are taking the toll on our industry.

Many smaller providers that don't have the size and scale to withstand the rate pressures are beginning to raise the white flag, providing opportunities for consolidation. I believe that compelling demographics, the cost-effective alternative and increased consolidation will converge, creating opportunity to create significant shareholder value.

With that as a backdrop, let's jump right into our results. Our overall results are in line with our expectations for the quarter, highlighted by strong home health admission growth within the Medicare population and positive admission growth within hospice. We maintained a strong overall cash position which allowed us to make a voluntary debt repayment, as well as gives us the flexibility to continue to grow through acquisition.

For the first quarter, revenues for continuing operations were $416 million, and adjusted EBITDA from continuing operations was $39 million, producing earnings of $0.23 per diluted share, which includes an approximately $0.02 negative impact from sequestration. Our adjusted EBITDA margins were 9.4% for the quarter, roughly flat with the quarter a year ago, despite the additional rate reductions. These results are in line with our internal expectations given the typical Q1 increases in the death and discharge rate for hospice, as well as the higher payroll taxes experienced in the first 2 months of the year.

Looking first at our home health division. Revenues from continuing operations for the quarter were $236 million, and EBITDA from continuing operations was $30 million or 13%, which is roughly flat with Q4 despite the rate reductions. During the quarter, year-over-year Medicare episodic volumes and admissions grew 5%, excluding the impact of closed or sold locations, which is consistent with the results that we've seen since we've revamped our sales force in early 2011.

While Medicare admissions continue to grow at mid-single-digit pace, you'll note that total episodic admissions and volumes were flat due to a change in the mix between our non-Medicare and our Medicare episodic business. As I have mentioned in the past, we do not comment on specific contracts. However, this change in mix is consistent with our strategy of being very selective about the business that we do. Capacity is a precious asset in our industry, and we have chosen to preserve our capacity for those payers who recognize the value of the services we provide.

Given the softness in hospital and physician volumes, I am extremely pleased with the performance of this division. In addition to the volume results, the sales leadership has done a great job of developing a deep team while also bringing down our turnover levels, which has further helped our sales productivity. They're also doing a good job of managing expenses and identifying opportunities to further improve branch efficiency through improved processes and increased use of technology. What I am most proud of is the care that we deliver to our patients each and every day. Through the compassion of these employees, we deliver quality, cost-effective care to more than 70,000 patients on any given day.

Turning to our hospice division. Revenues from continuing operations for the quarter were $180 million, and adjusted EBITDA was $27 million or 15%, which is down from 17% last quarter. During the quarter, we saw the first positive admission growth that we've seen in over 5 quarters. While admissions grew 1% overall, ADC declined 5% due to an extremely high death and discharge rate. As I indicated on our February earnings call, the death and discharge rate usually runs higher in January and February. However, the death and discharge rate continued and EBIT increased through March and even into the first part of April. As a result, we had lower levels of patient days and higher staffing costs associated with the increased number of patient admissions and discharge activities which drove down margins during the quarter. On a positive note, we have seen the death and discharge rate trend return to historical normal levels.

To get the revenue and the margin levels back within our expectations, we're continuing to focus on increasing admissions through our current sales initiatives and some new ones that I'll discuss in just a minute. And from a cost perspective, we are systematically reviewing all of our operations to ensure that we have the right level of staffing for the current ADC and reviewing other opportunities to further improve operating efficiencies.

Beneath our 1% admission growth this quarter, our North Central region grew at double-digit pace and our Southeast region grew in the single digits. With our successes in North Central and the Southeast region, we've demonstrated that the model works and we can successfully grow this business. Now we need to accelerate the growth in the other 2 regions and get the overall business performing at a consistent level.

While not fully reflective in our growth rates, the hospice team is executing on the growth playbook that I outlined for you on our previous calls, which includes ensuring that we have the right level of sales resources and providing our sales team with the latest training and technology and analytical tools needed to be successful.

To augment these sales efforts, we're rolling out our new hospice memory care program later in May. Dementia, which includes Alzheimer's, is the sixth leading cause of deaths for those patients who are aged 65 and older and impacts nearly 50% of the people who are over 85. The program we've developed features specialized clinical training in a number of areas, including fall prevention, behavioral and symptom management and caregiver support. All of our clinicians are receiving advanced memory care training, which will be a valuable resource for our patients and their caregivers. We expect to have this program rolled out in all of our hospice markets by -- later on at the end of the summer, which will provide another point of differentiation in the markets that we serve.

Additionally, we're also in the process of rolling out the new Gentiva hospice television and radio advertising in select markets as a part of our rebranding effort. The ads are primarily focused on building awareness and providing solutions for hospice caregivers that are struggling to take care of loved ones. Oftentimes, the caregivers are the adults and children looking after a senior parent, which represents a new point of referral for us.

The ads highlight the full range of hospice services we provide and other useful information such as which costs are covered by the benefit, which many of the caregivers are not aware of. Thus far, the ads have been very well received, and we have seen a corresponding pickup in admissions and ADC in the Florida and Alabama markets where we've been piloting. We plan to roll this out to additional markets during the remainder of this year in a measured way to ensure that we continue to receive the return on investments that we expect.

In summary, hospice provides a valuable component of the health care continuum. I am very proud of the compassionate care that our hospice team provides to our patients and their family. I am additionally proud of the fact that more families will get to experience this compassion due to the return to positive admission growth. While the growth in ADC is not where I'd like it to be, I do believe that our team is doing the right things to produce long-term sustainable growth within the hospice division.

Let's turn our attention toward our activities in D.C. As you may have seen, in late April, CMS issued a proposed rule for the hospice outlining the changes for reimbursement in 2014. As proposed, after the adjustments, the 2014 hospice rate is scheduled to increase approximately 1.1% on October 1, 2013, before any potential impact of sequestration.

In the proposed rule, CMS provided an update on their payment reform efforts. They discussed the need to consider rebasing in the near term to align costs with payments. They've made recommendations on changes to the cost report and proposed the possibility of a site of service adjustment for hospice in the nursing home. And finally, they outlined next steps for quality measurement, including patient family experience and public reporting.

As for home health, we expect the 2014 proposal, including insight into rebasing, to be out sometime in late June or July, with the final rule being issued in late September or October. To date, there has been nothing published by CMS on how rebasing would occur.

As I discussed on our last call, our industry advocates in Washington are taking the stance that through the 11.5% reductions in reimbursement that we've already suffered over the past 3 years, the effects of rebasing have already occurred. This becomes even more apparent when you consider that since 2010, home health spending has been cut by over $54 billion over a 10-year period compared to the original rebasing savings estimate of approximately $14 billion.

On the regulatory side, in late April, CMS announced a temporary delay of Phase 2 of the PECOS system. While our team has been working diligently to get all referring physicians signed up, there are physicians who are not or have not been able to enroll. Hopefully, with this delay, all physicians will be provided sufficient additional time to complete this time-consuming process.

In the face of this reimbursement and regulatory uncertainty, The Partnership for Quality Home Healthcare, along with our National Trade Associations, continue to be very active in D.C. During the past few months, the partnership has met with numerous policymakers and legislators to provide a longer-term discussion on post-acute care considerations. We continue to promote the value of home health and hospice as a part of the solution to the fiscal crisis facing our country's health care delivery system.

The community has offered legislative recommendations to address these aberrant practices, we refer to our efforts as the Fight Fraud First campaign. These policies aim targeted cuts at bad providers producing real savings, while preserving the ability of quality providers to service our seniors.

In closing, home health continues to perform very well, and I remain confident that we're taking the right long-term steps to improve our hospice growth. Additionally, we closed the quarter with a continued strong cash position which provides us with significant flexibility. The additional reimbursement pressure is driving consolidation, especially amongst the smaller provider community. We have seen an increase in activity where smaller providers are struggling with the reduced reimbursements compounded by a restricted cash flow. I believe that this trend will continue, creating the opportunity for small tuck-in acquisitions while balancing our commitment to pay down debt.

No doubt, there remains a great amount of uncertainty in Washington related to our economy, our nation's debt and our overall healthcare spending. But one thing that I'm absolutely certain of is that 10,000 Americans are turning 65 every day. And by the year 2030, over 65 -- the over-65 population in the U.S. is expected to grow by approximately 32 million people. These Americans are going to live longer and they're going to consume healthcare services at unprecedented rates.

Our country's economic survivability will mandate that these services be provided in the most cost-effective manner possible. Home health and hospice offer services that are clinically sophisticated, cost effective and preferred by the patient, which uniquely positions our industry as a compelling solution. And while there continues to be uncertainty, companies with size and scale are well positioned to create opportunities out of the uncertainty. I'm very proud of the way that our leadership team continues to work together to navigate these turbulent times.

In today's difficult healthcare environment, we often overlook the value of a strong management team. Our management team, most of which have been together for more than a decade, has been tested time and time again. And each time, they find a way to be successful in the face of uncertainty and chaos. I'd like to thank each one of them for the role that they play in our success. I'd also like to thank all of our employees for what you do. Despite of all the reimbursement pressures, the one thing that I can count on is that you're doing the right thing for our patients. Keep up the great work.

And with that, I'd like to turn the call over to Eric for some further insight into our results. Eric?

Eric R. Slusser

Thanks, Tony, and good morning. Before I discuss our results further, I'd like to cover a couple of other matters to facilitate your review. As discussed on previous calls, we undertook a comprehensive review of our branch locations, support infrastructure and other significant expenditures in the second half of 2011 in response to the Medicare cuts we were facing heading into 2012.

In total, we sold or closed 46 home health locations and 13 hospice locations related to this review. Additionally, the company closed several other locations in 2012 and completed the sale of its Phoenix area hospice operations during the fourth quarter of 2012. Based on all these transactions, net revenue comparisons for the quarter were negatively impacted year-over-year by approximately $9 million.

Also note that the company recorded a noncash impairment charge related to our hospice segment of approximately $224 million during the quarter based on an interim impairment test of the company's goodwill and other long-lived assets. Finally, I want to remind everyone that similar to previous quarters, we will be highlighting results from continuing operations during our discussion.

Now to the results. For the first quarter of 2013, total net revenues were $415.6 million compared to $435.7 million in the prior year. On a reported basis, home health episodic revenues were down approximately 2% in the first quarter to $207.4 million. Home health revenues were negatively impacted during the first quarter by an approximate 1% reduction in the 2013 Medicare reimbursement rate and a 2% reduction from sequestration on Medicare episodes that remained open at quarter end.

Hospice revenues were $179.5 million in the first quarter, down 8% compared to $195.7 million in the first quarter of 2012 based on the lower ADC growth Tony discussed and the reduced revenues from closed and sold locations.

Turning to our home health revenue metrics. During the first quarter of 2013, there were approximately 50,400 admissions on an episodic basis and approximately 72,200 total episodes. On a year-over basis -- year-over-year basis, excluding the impact of branches sold or closed, Medicare admissions and episodes both grew approximately 5%.

The number of episodes per admission was 1.43 for the 2013 first quarter, consistent with recent quarters. Revenue per episode for the first quarter was approximately $2,875, up just slightly year-over-year.

On the hospice side, our consolidated average daily census for the first quarter of 2013 was 12,700, down approximately 5% from the first quarter of 2012, after excluding the impact of closed and sold locations. Our consolidated admissions were approximately 13,500, up 8% sequentially and 1% year-over-year, after excluding the impact of closed and sold locations. Our consolidated average discharge length of stay for the first quarter of 2013 was 99 days compared to 93 days in the first quarter of 2012.

Our net patient service revenue per day in the first quarter of 2013 was $157, up slightly compared to the first quarter of 2012. The mix in our levels of care for our billable days for the first quarter of 2013 was approximately 98% for routine care and 2% for all other levels.

Our Medicare cap for the first quarter of 2013 was essentially 0, which improved from $2.1 million in the prior year first quarter. Total company gross profit as a percent of net revenues was 46.7% in the first quarter of 2013, up slightly compared to 46.5% in the first quarter of 2012 and 46.1% last quarter.

During the first quarter, home health gross margins were 48.6%, slightly higher than the 47.8% last quarter, but below 48.9% in the first quarter of 2012. Hospice gross margins were 44.2% this quarter, up from 43.7% in the first quarter of 2012 and 43.8% last quarter.

Turning to our selling, general and administrative expenses. Excluding charges related to cost savings initiatives, restructuring, merger and acquisition activities and legal settlements, SG&A expenses in the first quarter of 2013 were $159.7 million, down from $168.3 million in the first quarter 2012, and up from $156.7 million last quarter. SG&A as a percentage of net revenues was 38.4% for the 2013 first quarter compared to 38.6% in the prior year period and 36.9% last quarter.

From an adjusted EBITDA perspective, earnings before interest, taxes, depreciation and amortization, excluding charges related to restructuring, merger and acquisition activities, legal settlements and nonrecurring gains, were $39.1 million or 9.4% of net revenues in the 2013 first quarter, down from $41.9 million or 9.6% in the prior year quarter.

Our effective tax rate on continuing operations was 39.9% in the first quarter of 2013 compared to 41.7% in the first quarter 2012. After excluding special charges and other items, first quarter 2013 adjusted income on a diluted basis was $0.23 compared to $0.24 in the prior year, before adding back $0.03 for credit amendment expenses in 2012.

As a reminder, the first quarter results are impacted by the seasonality of federal and state unemployment taxes, which have a much more pronounced impact in the first quarter when many employees reach the wage limit. These taxes had a negative $0.06 impact sequentially compared to the fourth quarter, but moderate significantly as we move through the year.

Switching to the balance sheet. Cash and cash equivalents continue to be strong as we close the quarter at $159.6 million. DSOs remained in the low 50-day range, closing the quarter at 52 days. First quarter 2013 net cash from operations was a negative $20.6 million, and free cash flow was a negative $23.3 million. As expected, cash flow for the quarter was impacted by the timing of both interest payments on the company's senior notes and payroll and related taxes and annual compensation-related payments.

From a debt perspective, we paid down $25 million on our term loans during the first quarter, bringing our total debt outstanding at the end of the quarter to $910.2 million. We have no further mandatory principal payments due this year.

The company leverage ratio for the first quarter of 2013 was approximately 4.8 compared to a maximum allowed level of 6.25. On a net basis, the leverage ratio was just under 4x.

Going forward, we will continue to focus on deleveraging through debt pay-down and/or strategic acquisitions. Additionally, we will continue to monitor opportunities to leverage our capital structure and cash position to further reduce our interest expense.

Looking at the remainder of 2013, we continue to expect full year 2013 net revenues to be in the range of $1.69 billion to $1.73 billion and adjusted income to be $0.90 to $1.10 on a diluted share basis.

In summary, the quarter came in generally as expected aside from weaker hospice census. Against an environment of low levels of health care utilization, reimbursement pressure and reimbursement and regulatory uncertainty, our focus for the rest of 2013 is squarely on driving admission and census growth while closely managing expenses and seeking further operating efficiency gains.

Additionally, from a balance sheet perspective, our cash position remains strong and provides us with significant financial flexibility to drive value through accretive acquisitions or debt repayment.

With sequestration now a reality, we remain hopeful that we will have greater reimbursement clarity in the second half of 2013, as we get further information on any potential home health rebasing for 2014.

That concludes my comments. Operator, let's open the call up for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Kevin Ellich of Piper Jaffray.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

This is actually Brad in for Kevin. Just regarding the acquisition opportunities that you had mentioned, do you think you'd be pursuing any of those before you find out rebasing? Or do you think that would -- they would mainly come after that?

Tony Strange

Well, Brad, that's a good question, and maybe what we ought to do is kind of divide the idea of acquisitions into 2 buckets. And let's look at -- I think your question is really referencing a larger strategic regional type of acquisition where we might even use some of our cash or either some of our debt instruments, and the answer is no. I don't think we would do anything like that until we had further clarity into what rebasing is going to look like on the home health side. But the smaller type tuck-in acquisitions where we already have density in the market and there is a struggling provider and that we could go in and on a very much on a reduced multiple where we have the synergies associated with already being in that market and having no rift, I don't know that the impact of rebasing would affect that decision. So I've divided your question into 2 and gave you 2 different answers.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

Great. And then just a quick follow-up. Do you guys still expect free cash flow for the year to be about $40 million to $50 million?

Eric R. Slusser

Yes, Kevin. This is Eric. Based on current projections, yes, it would still estimate it in that range.


Your next question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank AG, Research Division

I guess I just wanted to ask with regard to the hospice segment, really in the context of your guidance and the goodwill charge that you took, the footnotes in the release suggest that I guess your hospice is below your company's longer-term model, yet you're confirming guidance. So can you help us just reconcile those 2 things? And as far as hospice goes, what set off really the goodwill charge?

Tony Strange

Well, Darren, I'm going to divide the question really into 2 pieces. One is the current outlook and where we are right now. And then kind of second -- and I'll address that and then we'll come back and address how we got to the decision to go ahead and make an impairment charge. In terms of the outlook, our hospice business will grow. And I think that's one of the reasons that we feel confident in confirming our outlook. Our hospice business will grow. Matter of fact, if you -- in my prepared remarks, you heard me talk about the extremely high death and discharge rate. Just to quantify that for you, typically, that number runs at about 26%, 27% or so. And in the first quarter all the way through the beginning of April, that number was running higher, somewhere in the 31% range. That -- and I think I even said that, that number has come back down to historical levels. So the death and discharge rate within our hospice division has subsided back to normal. Matter of fact, in many circumstances, it's actually running a little bit below normal. So as I sit here today halfway through the second quarter, our hospice business, our ADC, is growing today. And I feel confident when I say that -- when I think about our ADC in Q2 compared to Q1, that number will be higher. My guess is it will probably be flat with a year ago, but certainly, sequentially, we will see growth in hospice. So that gives me confidence. Our home health division continues to perform well. I don't see any reason why that ought to change, so I'm confident that they will continue to do well. As Eric mentioned, I think in great detail, in Q2 and subsequent quarters in 2013, our payroll taxes will be at normal levels. So while we don't give quarterly guidance, we expect kind of a Q1 impact from some of these things. Eric also mentioned that our cap liabilities are down, and we see no reason for those to go up for the remainder of the year, given some of the closed or sold locations where we had gotten out of that business related to markets that had high cap exposure. There is a small -- there also is a small hospice increase that we'll experience in October. I think Eric mentioned that our interest rates, as well as our amortization, is lower than it has been running, and that's going to help us with that outlook. So all those things combined, I think, give us the confidence to reconfirm our guidance for the year. Now with that said, the big assumption there is that hospice is going to grow and that our home health business and volumes will maintain. But I don't see any reason why -- for that to be suspect today, but that is the assumption of getting there. What led us to really looking at the impairment, I'll let Eric address that. Really, it's more driven by the out-years.

Eric R. Slusser

Yes, Darren. This is Eric. And so given our hospice results, we've been reviewing, as is required by generally accepted accounting principles, the hospice segment each quarter, including our normal fourth quarter review that we did of goodwill and fixed assets at year end. In our year-end review, they passed step 1 of that test, so no further valuation was required. With the results of the first quarter not being at our expectations, we had to perform that review again at the end of the quarter. And as a result of the review this time, they simply didn't pass the step 1 requirement, which then requires you to go to the step 2, a full-blown market-based valuation which we completed, which also led to that impairment charge.

Tony Strange

Yes. And Darren, the other thing related to the out-years, when you look at some of the headwinds that the hospice industry is facing, we just changed some of the assumptions in the out-years related to our growth. So I think all of that made us comfortable with, let's go ahead, take that and get that out of the way.

Darren Lehrich - Deutsche Bank AG, Research Division

Got it. And if could just -- on hospice, putting the discharges aside, I know you can't do that. You ended with the census you ended with. But Tony, are you basically giving us a signal here that you're starting to feel better about admissions growth and how the sales effort is coming together? Maybe just wanted to get your updated thoughts on that.

Tony Strange

Well, Darren, that's -- it's a qualitative question, I understand that. I think I mentioned in my remarks that 2 of our 4 divisions had positive admission growth, and we feel comfortable that the things that we're doing there can work in the rest of our regions as well. I mentioned that we had tried a different approach to some advertising campaigns, and we have gotten some early -- albeit early, we've gotten some very good success from that, that we're going to look at doing in other markets. So I think we're doing all the right things. And as I sit here today, we have positive admission growth year-over-year, and I see no reason for that to change today. But Darren, I don't -- a 1% admission growth in the fourth -- in the first quarter doesn't make a trend for me. So I am cautiously optimistic. I am confident that our -- since our ADC is growing today. It did not grow in the first quarter just because we had just an inordinate amount of death and discharge in the quarter. But that number has come back to levels that seem more realistic long term. So I am confident that we're doing the right things to grow. I'm not going to predict for you whether that's going to be 1% or 2% or any number, but I do believe we're doing the right things. I am confident that our hospice division provides great care to our patients on a daily basis, and the word-of-mouth referrals from our patients to other families is paying off, and that I believe that hospices are the right long-term strategy for a company that's building a post-acute care solution.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. And just so I'm clear in your discharge rate, was it driven by live discharge or was it -- can you just comment in your live discharge rate in the period versus prior?

Tony Strange

Yes, that's a great question, Darren, and thank you for reminding me. I don't think we have disclosed our discharge rate between our deaths versus live discharges. But what I can tell you is that our live discharges has remained consistent. We've not seen a spike in live discharges, and that our live discharges are below the national average.


Your next question comes from Whit Mayo of Robert Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Tony, can you maybe comment a little bit just on Medicare Advantage? I know it's not a big piece of your business, but just what you are seeing in terms of behavioral changes with those health plans.

Tony Strange

Sure, Whit, I'd be happy to. I think as everybody on the call is probably aware, there have been certain Medicare Advantage plans that have moved their business from an episodic reimbursement to a pay-per-visit reimbursement, and that's affected the market fairly well. And I think I said in my prepared comments that we've been very selective about the people that we do business with. We've been very, very selective about the types of contracts that we'll take or not take. And in our business, capacity is king. There is limited capacity to take care of seniors, given the requirement for nursing and physical and speech occupational therapy and even home health aides. We're going to preserve our capacity for payers who recognize the value of our services and are willing to pay us appropriately. So we have said no to some payers who really want to commoditize the service that we provide. With that said, we've also signed several new contracts with Medicare Advantage plans that do see the value of home health and the role that it can play in reducing hospitalizations and rehospitalizations. And so we are constantly looking at how we're going to allocate our capacity to take care of these patients with people who are willing to pay us. So we're going to continue a very disciplined approach to how we go after that business. Does that help in answering your question?

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Yes, it does. But maybe if you could frame up what percent of your revenues are MA now and maybe what percent they were 12 months ago or so?

Tony Strange

Eric, have we disclosed that?

Eric R. Slusser

We don't do.

Tony Strange

I think what we have said in investor conferences, we have -- what we have talked about publicly, and these numbers haven't changed dramatically, is that if you think about Medicare episodic reimbursement accounts for about in the mid-80% of our business and then Medicaid and the other is -- so at less than 15% would be things that are paid on a non-episodic basis, just within home health.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. Okay. In the press release, you commented on a decision to replace some business intelligence software. Can you kind of discuss what prompted that disclosure and kind of how much this new system will cost? And was that included in your original plan for the year?

Eric R. Slusser

Yes, Whit. This is Eric. Yes, that was -- that charge was a little over $1 million that we had built a -- had an outside organization build a facing page for our data warehouse. And we have come to the conclusion that, that page is not going to work for our home health and hospice needs. And so we are reengaging this year. Don't expect that to be any type of material capital expenditure, and we're looking right now at various options to replace it. But again, it was really nothing more than that.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And maybe just one last final one. Can you provide what your interest coverage was at quarter end?

Eric R. Slusser

Yes. 2.48, John? It's 2.4, excuse me.


[Operator Instructions] Your next question comes from Sheryl Skolnick of CRT.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Tony, Mr. Strange, because I know how you're [indiscernible] with me, you mentioned something about in your policy and advocacy work in D.C., the industry is trying to work on ways to target the cuts at the bad providers. I'm very curious about that. How do you do that? Is there a specific proposal that's being made? Or -- because I'm sure everybody has a mind share on that this would be a good idea, but how do you actually do that?

Tony Strange

Well, Dr. Skolnik, that is a very good question, and I appreciate you asking it. The -- and I'm going to come back to it because I'm going to give you some history and then bring you back up to the current date. CMS, in 2000 -- late 2011, adopted a policy by which they implemented an outlier reimbursement cap. In other words, if you look at the business within Gentiva, our outlier reimbursement has been in the ballpark of 1% or so. Certainly, less than 5% of our revenues is paid through the outlier provision for reimbursement. CMS implemented a cap that capped providers by provider number, it says no more than 10% of your revenues could be derived through outlier reimbursement. There is -- there were many providers who outlier reimbursement represented 80% of what they did. You just can't have that kind of adverse selection. The outlier reimbursement policy was designed to cost share patients who were extremely high cost to provide service to. For example, a blind diabetic who could not draw their own insulin because they couldn't see and they were receiving lots of service. 40% of the outlier reimbursement in the United States occurred in Dade County in Florida. You just -- it is just impossible to have that kind of adverse selection. So that clearly was aberrant behavior related to outliers. The home health industry actually developed that policy. CMS took the policy and implemented it on their own in 2011. CBO at that time had scored at 0 in savings. CMS has now come back and confirmed that they're saving over $11 billion over a 10-year period related to that particular policy. The financial impact to Gentiva related to that policy was 0. So fast-forward, the industry has gotten together and said, are there other things that we can do like that, that really target aberrant behavior but doesn't have the impact on providers that are trying to do the right thing? And we have several different ideas, and I'm not going to go into great detail with you, I'd be happy to do that offline or even connect you with some of our folks in Washington, if you like. But for example, episodic limits would be an example of a policy that we could develop. I think Eric mentioned the fact that our episodes for the quarter were 1.43 episodes per admission. If you look over the last 10 years, that number has run between 1.4 and 1.5. And it could be 1.47, 1.41, but the number doesn't vary a lot. There are providers in the U.S. where that number is in excess of 5 episodes per admission. That's aberrant behavior. And I'm not suggesting that there's not a patient that's appropriate for 5 episodes in a row. I'm not suggesting that at all. But for a single provider to have all of their patients be that long of a length to stay, more than likely that's some type of aberrant behavior. We could develop an outlier limit or cap by provider number that would save significant dollars, and yet to providers that are operating within the normal levels across the country, it would not have a lot of impact. And I give that as one example. We probably have 3 or 4 different examples like that, that we're working on. We've even had them formed into a bill. Now we're not going to -- the home health industry is not going to be successful in getting a standalone home health bill passed, but we're working with several people that if there is some other type of Medicare legislation, we could get these types of policies intertwined with that and again help flush out some of the -- what could be fraud and abuse in the industry.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Yes, it's very hard to pick patients that perfectly. I would tend to agree with you. And if I -- if you said this, I apologize, but just to follow up, these are great and constructive and very valuable insights to help CMS make their payment process much more accurate and specific, which is terrific. But by the same token, there's also a lot of discussion about the uniformed approach or a consolidated approach to parts A and B and copayments and deductibles. Have you done any work on what the impact to the industry might be if a co-payment or deductible were applied to home health and hospice?

Tony Strange

Well, again, I think that's a great question. If you look back -- for those of us who had been in this industry now for a long, long time, for in excess of 25 years, if you go all the way back to the late '70s, there was a co-pay in home health. Matter of fact, there was a co-pay in home health before there was a DRG system for hospitals. And -- but when they were trying to implement the DRG system and move away from cost-based reimbursement for hospitals, one of the big pushbacks of hospitals was that you can't do this because patients don't want to leave the hospital and go home, where they have to make a co-payment that they don't have to make by -- after they've been in the hospital for their first admission. And as a response to that, we ended up eliminating the co-pay for home health to avoid the unintended consequences of having patients stay in the hospital longer. I personally believe that the implementation of a co-pay within the lowest cost setting is going to have an unintended consequence of keeping patients in a higher cost setting because they don't want to have the duplication of another co-pay to go home. I've already met my co-pay here, I'm just going to stay here. And so I think that's the kind of a macro look at the impact of the co-pay that has a far greater reach than just looking at the economic impact of well does a $100 co-pay save x number of dollars. So yes, we have laid that out I think pretty succinctly, taking that information to CMS. I was just at MedPAC with a group of my peers 2 weeks ago. We laid some of this information out for MedPAC. We have had follow-up conversations. I met with 2 different senators while I was in D.C., walked through that. We're going to continue to take the message to Washington, to policymakers and legislators alike, that home health and hospices are the solution. What you've got to do is to give us a fair chance and an adequate margin in order for us to be here, and because we think that the impact that the industry can have overall is far greater than the issues that we're trying to conjure. And that's one of the reasons that caused us to want to do things to look at the aberrant behavior within our own industry because we want to get past the fact that there are fraudulent providers in home, and we know that. And we want to do everything within our power to flush that out of the system.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Yes, it can't make it easy when you have one of your publicly traded peers that's still under investigation that hasn't ended yet either. But -- so I sympathize with your efforts. I guess what I would be concerned about and will let this go, but -- is that there is no self-rationing mechanism. And wouldn't that be an appropriate way to ensure compliance for people who actually has skin in the game and are making some choices with their own money? Isn't that a very, very effective tool to help prevent fraud as well? And I wonder why that wouldn't be part of the things that should be on the table. But we can have that discussion in another time. I really appreciate your insights.

Tony Strange

Well, Dr. Skolnik, I think the way you're looking at it, I certainly understand the way you phrase that. However, I do want to comment on your -- about the skin in the game comment. When a patient goes into a hospital -- or a nursing home for that matter, Medicare and Medicaid pays not only for the health care that they receive, they pay for the room and board, they pay for the meals, they pay for the housekeeping, they pay environmental services. They do all of that. The skin in the game when a patient goes back at home, the only thing that Medicare pays for is the skilled care that we provide. The patient buys their own food, they pay for their own housing costs, they pay for their own cleaning, they pay all of those environmental services. So in my opinion, when a patient receives their health care at home, they are putting skin in the game. So -- but I do appreciate your comments.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

That's another way to look at it. I appreciate that very much. As always, it's a pleasure to hear what thoughts are on your mind, Tony.


There are no further questions at this time. I would now like to turn the floor back over to Mr. Tony Strange for any additional or closing remarks.

Tony Strange

Thank you for joining our call, and I look forward to sharing our results for the remainder of the year with you, as time comes up. I would like to say once again thanks to all of our employees and a special thanks to our management team. I think you guys are doing a great job. Thank you.


Thank you. This concludes your conference. You may now disconnect.

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