Gentiva Health Services Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Gentiva Health (GTIV)

Gentiva Health Services (NASDAQ:GTIV)

Q2 2013 Earnings Call

August 01, 2013 9:00 am ET

Executives

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

Analysts

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Darren P. Lehrich - Deutsche Bank AG, Research Division

Shubhomoy Mukherjee - Barclays Capital, Research Division

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

John W. Ransom - Raymond James & Associates, Inc., Research Division

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

Operator

Good morning. My name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, August 1, 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, Angie, and good morning, everyone. And welcome to Gentiva's Second Quarter 2013 Earnings 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 on our website.

Our call today will be consistent with SEC's Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that could be made in individual inquiries. Today's call 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 August 8.

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, Tony Strange.

Tony Strange

Thanks, John, and good morning, everyone. I appreciate you joining our 2013 second quarter earnings call. Today, I'm going to focus my comments on our second quarter results, followed by an update on our reimbursement environment, and then I'm going to wrap up with some updated thoughts on Gentiva's strategic priorities and the role that we think we'll play in the evolving post-acute care continuum.

So let's get started with our results for the quarter. Home health once again led the way for us, delivering strong Medicare admission growth despite the continued softness in hospitals and physician volumes. Additionally, cash flows remain strong for the quarter, which led to an increase in our cash balance of $185 million, which provides us significant flexibility to execute on our strategic initiatives. For the second quarter, net revenues were $414 million, and adjusted EBITDA from continuing operations was $39 million, producing earnings of $0.22 per diluted share. Our adjusted EBITDA margins were 9.4% for the quarter, consistent with last quarter, despite the full quarter impact of sequestration in our second quarter results.

Looking first at our home health division. Revenues for the quarter were $235 million, and adjusted EBITDA before corporate overhead was $30 million or 13%, which was consistent with last quarter, again despite the full impact of sequestration. During the quarter, year-over-year Medicare admissions increased 4%, while Medicare episodes grew 5%, excluding the impact of the closed or sold locations, which is consistent with the results that we've seen over the past couple of years since we reengineered our sales force. Given the muted levels of hospital and physician volumes, I continue to be extremely pleased with the performance of this division. They're also doing a really good job of managing expenses and identifying opportunities to further improve branch efficiencies through improved processes and the increased use of technology, while at the same time, providing great care to over 150,000 patients during the quarter.

Turning to our hospice division. Revenue for the quarter were $179 million, and adjusted EBITDA was $26 million or 15%, which was down just slightly from last quarter, again almost mitigating the impact of sequestration. While admissions continue to show a decline year-over-year, we did see a small increase in ADC compared to Q1. This division continues to be a work in progress for all of us, as we're not able to hold our admission growth trends that we saw earlier in the quarter.

We're targeting the consistent growth that we had anticipated by using the same strategies that we use to create our growth story in home health. As a result, we're making some changes to improve sales performance, while at the same time, focusing on employee retention. These changes target presenting a unified Gentiva to our referral sources to meet the needs of our patients, further positioning Gentiva as the leading provider of post-acute care services. I'll provide some more detail around these changes on our next call as we get further along in implementation.

On a positive note, we rolled out our new hospice Memory Care Program shortly after quarter end, which should provide additional growth opportunities over the upcoming quarters. As you'll recall, memory care issues are the sixth leading cause of death for seniors in this country and affects over 50% of the population of 85 years old and older. All of our clinicians have now received advanced memory care training, providing a valuable resource for our patients, as well as their caregivers, as they face this debilitating disease. This program has been very well received by our clinicians, patient caregivers, as well as our referral sources, and we've seen some early successes in our first markets to be rolled out.

Also, we continue to successfully roll out the new Gentiva hospice television and radio advertising in select markets during the quarter. The ads are primarily focused on building awareness and providing solutions for hospice caregivers that are struggling to take care of their loved ones. Thus far, the ads have been very well received, and we've seen a corresponding pickup in admissions and ADC in the 4 Southeastern markets that we've been targeting. Based on these successes, we will continue to expand these efforts into additional markets during the second half of the year.

In addition to these revenue growth initiatives, we're also systematically reviewing all of our operations to ensure that we have the right level of staffing for the current census level and to further improve our operating efficiencies. Until we get back on a more consistent growth trajectory, we will remain laser focused on cost to ensure that we can protect our margins.

While the growth in ADC is not where I'd like it to be, I continue to believe that our team is doing the right things to produce long-term sustainable growth within our hospice division. And what I'm most proud of is that our executive directors, our branch personnel, and most importantly, our field clinicians are delivering compassionate care to almost 13 families daily during the most difficult times in their lives. We have a great story to tell, and eventually, hospice will be a significant component of our growth story.

Let's turn our attention toward our activities in Washington. As you're well aware, CMS issued its proposed 2014 home health reimbursement rule in July. The proposal included the maximum rebasing allowed by law of 3.5% for the years 2014 through 2017. CMS estimates that the net impact of the market basket increase and the proposed reduction will approximately be about 1.5% decline for 2014. On the hospice front, we expect the net impact of the rate changes to equate to approximately a 1% increase beginning in October of 2013, which will help offset the impact of the reduction in home health. Needless to say, we're disappointed with this 14%, 4-year cut that is outlined in the proposal and are consequently investing significant amount of time and resources in Washington, explaining to legislators the drastic impact that this would have on our industry, as well as seniors over the next few years.

To put this in perspective, it has been estimated that 75% of all providers will be operating at a loss based on the current proposal. This draconian action will have a serious repercussion on our seniors' access to care. The partnership for quality home health care, as well as our national trade organizations, has done extensive work analyzing this proposal and believes that the proposal does not factor in the impact of sequestration, productivity adjustments scheduled to begin in 2015, recent regulatory burden such as face-to-face and major upcoming changes such as the cost associated with the adoption of ICD-10. Additionally, the partnership believes that proposal considers only the industry impact for 2014, not the full 4-year period as required by law.

In the face of this significant challenge, the industry is mounting an all-out rebuttal campaign through legislators and grassroots efforts. We've met with numerous legislators in the Senate and in the House to educate them on the issues and the possible repercussions for seniors and asked for their engagement. We're working on a bipartisan support letter, which will be provided directly to the White House, as well as continuing to have direct communications with CMS on modeling.

Additionally, the community has offered legislative recommendations to reduce health care costs and address the aberrant practices in our industry. We refer to these efforts as our Fight Fraud First campaign. These policies aim targeted cuts at bad providers, producing real savings, while at the same time, preserving the capability of quality providers to service seniors.

From a grassroots and public relations perspective, we're not leaving any stones unturned, so seniors and local communities understand the impact of this proposal and can help support our physician. In short, we're doing everything possibly that we can do to affect the changes in the proposal before the final rule is issued sometime in late September or October. While we are feverishly fighting for a viable alternative to the proposed rule, we're making some plans to navigate some very choppy waters in the near term.

With that said, opportunities are created by uncertainty. We believe that we'll continue to see shifts from acute care to post-acute care and continuing on to what I refer to as pre-acute care. We believe that reform will continue within the pre- and post-acute care space with payment models and delivery systems evolving over the next several years. We believe that states will take a more active role in managing the dual eligible populations, searching for more cost-effective solutions to acute care and skilled nursing facilities. And as a result, we believe that there exists long-term opportunities for companies that have the size and scale and can offer cost-effective alternatives in this pre- and post-acute care delivery system.

Gentiva will continue to position itself as a leader in this evolving health care continuum. First and foremost, we're going to continue to invest in our clinical delivery system because we believe that those who lead with clinical innovation will sit in the driver seat.

Secondly, we're going to concentrate in markets where we have density and we can provide a pre- and post-acute care solution to our customers.

Thirdly, we're going to look at ways to expand our service offerings, focused on the highest at-risk population such as the frail and elderly and the dual eligible populations.

And fourth, we will look for ways to refine our operating model to present a unified, comprehensive and equally important cost-effective solution to our referral sources: one employee, one patient and one Gentiva.

And finally, we plan on growing. This uncertain environment will create a demand for consolidation, and we intend on being the leader in consolidation. While these are no doubt challenging and uncertain times for our home health industry, the one thing that I'm absolutely certain of is that 10,000 Americans are turning 65 every day. By 2030, the over 65 population is expected to grow by approximately 32 million people, almost double. These Americans are going to live longer, and they're going to consume health care services at an unprecedented pace. Our country's economic survivability will mandate that these services be provided in the most cost-effective manner possible.

In closing, I want to thank our home health and hospice employees for the compassion that you bring to our patients' home each and every day. I'd also like to thank our corporate support center employees for the work that you do behind the scenes to keep the deal going. Our executive management team, as well as our Board of Directors, are unified in our commitment to our patients, our employees and our shareholders, and we're committed to our visions of being the leader in the industry in providing compassionate, cost-effective services to our seniors.

With that, I'm going to turn the call over to Eric and ask him to give us some further insight into our results for the quarter.

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 closed or sold a significant number of branch locations in the second half of 2011 and throughout 2012 in response to the Medicare cuts we were facing in 2012. Based on all these transactions, net revenue comparisons for the quarter were negatively impacted year-over-year by approximately $5 million. Finally, I want to remind everyone that similar to previous quarters, we will be highlighting results from continuing operations during our discussions.

Now on to our results. For the second quarter of 2013, total net revenues were $414.4 million compared to $427.7 million in the prior year. On a reported basis, home health episodic revenues were flat with the second quarter of last year. Home health revenues were negatively impacted during the quarter by approximately 1% reduction in the 2013 Medicare reimbursement rate, a 2% reduction from sequestration on Medicare episodes and the reduced revenues from closed or sold locations.

You will note the sequestration went into effect on home health and hospice Medicare revenues starting April 1, although our home health division was also negatively impacted in the first quarter by episodes that were opened at the end of the quarter. The impact in the second quarter from sequestration was a reduction to revenues of approximately $7 million and diluted earnings per share of $0.14.

Hospice revenues were $179.2 million in the second quarter, down 7% compared to $192 million in the second quarter of 2012 based on the lower ADC growth Tony discussed, the impact of sequestration and the reduced revenues from closed or sold locations.

Turning to our home health revenue metrics during the second quarter of 2013. There were approximately 48,300 admissions on an episodic basis and approximately 71,000 total episodes. On a year-over-year basis, excluding the impact of branches sold or closed, Medicare admissions grew 4% and episodes increased 5%. The number of episodes per admission was 1.47 for the 2013 second quarter, consistent with recent quarters. Revenue per episode for the second quarter was approximately $2,910.

On the hospice side, our consolidated average daily census for the second quarter of 2013 was $12,800, down approximately 4% from the second quarter 2012, after excluding the impact of closed and sold locations. Our consolidated admissions were approximately $12,100, down 3% year-over-year, after excluding the impact of closed and sold locations.

Our consolidated average discharge length of stay for the second quarter of 2013 was 97 days compared to 86 days in the second quarter 2012.

Our net patient service revenue per day in the second quarter of 2013 was $154, flat with the second quarter 2012. The mix in our levels of care for available base for the second quarter 2013 was approximately 98% for routine care and 2% for all other levels, consistent with recent quarters. Our Medicare cap for the second quarter of 2013 was 0.5%, essentially flat with the prior year's second quarter.

Total company gross profit as a percent of net revenues was 47.2% in the second quarter of 2013 compared to 47.9% in the second quarter of 2012 and 46.7% last quarter.

During the second quarter, home health gross margins were 49.1%, down from 49.8% in the second quarter 2012, due to the impact of the aforementioned Medicare cuts. Hospice gross margins were 44.6% this quarter, down from 45.6% in the second quarter of '12 but up from 44.2% 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 second quarter of 2013 were $161.2 million, down from $163.9 million in the second quarter of 2012 as a result of lower incentive compensation expense in the current year. SG&A as a percentage of net revenues was 38.9% in the 2013 second quarter compared to 38.3% in the prior year period.

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 $39.0 million or 9.4% of net revenues in the 2013 second quarter, down from $48.3 million or 11.3% in the prior year quarter but flat with the first quarter of 2013. Our effective tax rate on continuing operations was 41.2% in the second quarter of 2013 compared to 40.5% in the second quarter of 2012. After excluding special charges and other items, second quarter 2013 adjusted income on a diluted basis was $0.22 per share compared to $0.35 in the prior year.

Switching to the balance sheet. Cash and cash equivalents continued to be strong as we closed the quarter at $185.1 million, up from $159.6 million at the end of the first quarter. Capital expenditures for the first 6 months were $7.5 million or approximately 1% of net revenues. DSOs remained in the low 52-day range, closing the quarter at 52 days. Second quarter 2013 net cash from operations was $30.7 million, and free cash flow was $25.9 million.

From a debt perspective, we ended the quarter at $910.2 million in debt, consistent with the end of the first quarter, as we held our cash in anticipation of greater clarity associated with rebasing. The company's leverage ratio for the second quarter of 2013 was approximately 5.1 compared to a maximum allowed level of 6.25. On a net basis, the leverage ratio was 4.1.

Looking ahead to the second half of the year, we will continue to focus on de-leveraging through debt paydown and or strategic acquisitions to ensure our leverage ratios stays within acceptable levels. Additionally, we will continue to monitor opportunities to leverage our capital structure and cash position to further reduce our interest expense.

Turning to our outlook. We now expect full year 2013 net revenues to be in the range of $1.67 billion to $1.7 billion. Additionally, we expect adjusted income attributable to Gentiva shareholders to be within our previously communicated range of $0.90 to $1.10.

In summary, our results this quarter were once again highlighted by solid admission results from our home health division and strong cash flows. On the reimbursement side, the rebasing proposal was clearly disappointing for the industry. While we are doing everything we can to get relief in the final ruling, we are preparing for the worst-case scenario, which includes looking for ways to redefine our operating model to be more efficient and better serve our customers and identify new ways to grow. Based on our free cash flow this quarter, we exited the quarter in an even stronger cash position, which provides us with significant financial flexibility to drive value through accretive acquisitions or debt repayment as we move through the second half of the year. Longer term, we continue to believe there are significant growth opportunities to handle the health care needs of the rapidly growing senior population.

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

Question-and-Answer Session

Operator

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

Kevin K. Ellich - Piper Jaffray Companies, Research Division

I guess, Tony, first of all, could you talk about the volume trends that you're seeing both in home health and hospice? It sounds like you've implemented a number of strategic initiatives to help improve it such as the advertising rollout. Would love to hear more about what you're seeing generally and when we should see a turn in the hospice business.

Tony Strange

First of all, thanks for the question, Kevin. I'll try to start at 50,000 feet, then we can drill as deep as you'd like to go. Yes, I'm very pleased with our growth story in our home health division. Two years ago, we went through a similar period -- a little over 2 years ago, we went through a similar period with home health, right after the industry was faced with the Senate Finance Committee letters and then the SEC investigations and the face-to-face regulation when it first came out. Our home health industry went through this period where it was a pretty dark cloud over the industry and growing in home health was pretty difficult. And we made some significant changes to our sales strategies within home health about 2 years ago, and we are now seeing the benefit of that. We have had consistent growth story at home health. Our admissions have grown kind of in that mid-single-digit kind of level. Our Medicare admissions have grown, as well as our overall volumes. So we believe that we've done the right things in home health to have that sustainable growth there. I think our hospice industry right now, the industry as a whole, is in that same kind of dark cloud right now. There's ongoing investigations across the hospice industry. I think we're getting mixed messages through referral sources, whether we want people to use hospice or not. And I think we're fighting our way through that. There's more regulations. And so I don't think Gentiva is unique from that perspective. With that said, we're going to return our hospice to a growth-oriented story. We've used the same playbook now for just over a year. This is the fifth quarter that we've used the same playbook in hospice that we used in home health. And quite frankly, we have not gotten the results that we got out of home health. And so because of that, our leadership team, both Jeff and David, are working through some ideas of how we might make some changes that would -- that maybe do things a little bit differently. One thing that we consistently heard from our referral sources is that you guys are, in this market, a great home health provider and a great hospice provider, but we might be confusing about how we're presenting one company to one referral source. So I think we're going to continue to look at ways to refine our sales efforts in hospice. You asked specifically about the advertising, and I think I told you last -- on the last call, we have tried that in 4 separate markets in Southeastern United States and have seen some very early successes from that. And we've seen in those markets, we've seen growth in admissions and growth in ADC. So it's something that is working, and we are planning on expanding that to very select markets. So we don't do that everywhere. Some markets are -- it's cost prohibitive to advertise. But in markets where it makes sense, and we believe that we have the right infrastructure in place with the right relationships. I think you'll continue to see us through the rest of the year expand that. One of the things that you didn't ask about was really our Memory Care Program, and the hospice team just finished last week rolling out the Memory Care Program to all locations and training all of our caregivers, and that's something that I'm very excited about. We've seen some very early successes from the pilot sites that we did. There is an unmet need out in the community of family members struggling to find solutions to take care of their parents and their seniors that have memory care issues. And especially when they get in late stages of what can end up being the terminal part of that diagnosis, they're really struggling. And we've seen very good success with the rollout of memory care. And I think as we go down the road, when we find a way to marry up our advertising campaign along with our memory care clinical delivery system, I think we're going to really see some positive impact from those 2 things combined. So with that said, I'm not happy with where we are from a growth perspective today, but I am absolutely convinced that hospice is going to be a key driver in Gentiva's growth story in the future.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Sure. That makes a lot of sense. Just wondering if you could give a little bit more color on how many more markets you plan to roll out the advertising in the second half and how much we should expect in terms of operating expense. What's the split, too, between television and radio? I guess is there one method you guys like better -- one channel you like better than the other?

Tony Strange

Good question. We're going to be -- Kevin, we're going to be very selective about this process we're rolling out. We're not at the place where we're saying, "This is great. Let's roll it out to 160 locations tomorrow." It is very expensive. So because of that, we'll be very judicious in how we select these markets. We've rolled it out into 4 markets today. And by the way, all of that expenses of that advertising is embedded in our numbers. So in terms of the cost that you're seeing for the rollout, that's already in our numbers. So we'll cover that cost as we go. We will probably do somewhere, call it, another half dozen markets between now and the end of the year and really monitor closely the impact where we have success, and quite frankly, where we don't have success and learn as we go. As it relates to the mode of advertising, right now, we're splitting that between television and radio, about 50-50. And over the next several months, we're going to probably learn where we have the biggest impact. I can tell you, this is just a personal comment, when we first started this process, I wasn't so convinced about the radio advertising, and I'm proud to say that I was wrong, that I think our radio advertising is having an equal impact, if not even a better impact than television. So I think on a go-forward basis, while we learn how to navigate this advertising world, we'll probably stay kind of in the 50-50 range. Until we learn that one works better than the other, then we'll go all in.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. Just one more, if I could, Tony. Capital deployment, you stockpiled a lot of cash on the balance sheet. Wondering how you envision deploying that capital.

Tony Strange

Well, I think Eric said it best in his prepared remarks. We've got 2 ways that we can prepare that -- we can use that cash, both of which are accretive to our shareholders. We can either pay down debt or we can grow through acquisition. I think in this uncertain environment that we're in, there's going to be opportunity for a leader in consolidation to emerge, and I think that's a role that we're prepared to take on. We're going to balance that with our debt structure and managing our leverage ratio, and we're going to manage that leverage ratio to a place where we're comfortable. And so I think we're going to continue right down that path. I think Eric and his team has done a great job of protecting our cash and preparing us. The good news is we have options. We can move in either direction. We can respond to strategic acquisitions as they come available. And at the same time, we've got plenty of cash on the balance sheet to manage our debt. So that's kind of where we are at this point.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Darren P. Lehrich - Deutsche Bank AG, Research Division

So obviously, you're seeing good volume success in the home health side. I really wanted to focus more on hospice with the question. As you sort of changed the playbook, if you will, Tony, do you expect the volumes to get worse before they get better? Maybe just comment a little bit on the shorter-term perspective for hospice as you try out some new ideas here. And also, if you could just comment on the margin structure as this transition plays out over the next few quarters.

Tony Strange

Well, Darren, let me state the obvious. What I originally expected was that our playbook that we used in home health will produce the same results in hospice, and that hasn't obviously been the case. So with that said, I'm not afraid to admit that we've got to try something different. As far as your question related to do I think we're going to see a decline since we move -- as we try some different things, I don't think -- I think the answer is no. I think we've kind of -- we've been watching our census, and I think we've kind of hit that sweet spot. I think we're at kind of, call it, the 12,800 range. I think that's where we're going to stay until we begin to see some of the improvements in the sales. I'm really expecting the memory care to -- I'm really expecting memory care to be rolled out to all of our locations. I expect that we'll see some increase from that, but I'm not expecting anything. I don't see anything on the horizon that would cause me to believe that our census is going down. Now with that said, there's some changes in the Medicare reimbursement that take effect in October, and I think we as Gentiva as well as we as an industry have to be very careful about how we implement those changes and making sure that we're doing the right things for our patients. But I don't see anything on the horizon that makes me think that from a sales perspective that our census is going down.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Okay. And then just so I'm clear in terms of what the feedback is from referral sources, are you suggesting that your marketing message as a single organization didn't resonate, and so you have to separate the message somehow? I mean, maybe if you can just clarify what it is that you think you're learning relative to the old playbook.

Tony Strange

Well, let me -- in order to answer that question, Darren, I want to go to -- down to the place where the referral happens. If you can think about an assisted living facility in Hickory, North Carolina, today, we have a sales associate from Gentiva home health calling on that assisted living facility and asking to be a part of their home health needs for their patients in that assisted living facility. In addition to that, we have a hospice sales rep who calls on that same assisted living facility, who are asking to take care of their hospice patients. And in some markets, we do a good job of those 2 people coordinating with one another. In other markets, we don't do such a good job of coordinating that sales effort. When I talk about presenting one Gentiva to our customer in an assisted living facility in Hickory, North Carolina, we won't to go in and be one Gentiva with -- and be able to take care of all of their post-acute needs such as home health and hospice as opposed to being 2 different divisions for that one customer. I think that's the thing that we've learned over the last couple of years, and that's the feedback we're getting from our customer. Does that answer make sense to you?

Darren P. Lehrich - Deutsche Bank AG, Research Division

Yes, no, absolutely. And so the logical next question is, do you need less resources to be effective then?

Tony Strange

Yes. I don't think we're operating at that level today. I'm not anticipating that we need less resources. So if you're asking me do I envision some big reduction in force coming related to sales, the answer is no. I think in this environment, we are in a very difficult health care environment position. Volumes are down. Hospital volumes are down. And I think we have to work for every single referral that we get. And as far as I'm concerned, it's all hands on deck.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Got it. And then just one last thing here for Eric. Is it safe to assume that you won't be addressing anything significant with your capital structure until after we see the final rebasing rule? I mean, I'm just wondering if you've got any possible plan to get at that beforehand.

Eric R. Slusser

Yes, Darren. Well, certainly, with the rollout, we're looking at it as a worst-case scenario and operating today based on what we know. As I've stated in my comments, we were going to look at opportunities. We're certainly not going to pass on a strategic opportunity, something that's a strategic fit with our business from an acquisition nature. But it's unlikely we would do a lot of movement on debt, barring significant movement or opportunity in the credit markets. Should that come available, we certainly wouldn't pass on that opportunity. So we're taking this a day at a time and looking at opportunities and how we're going to deploy it, but I don't see that as a point that we're going to hold off and not do a thing until we get to that point.

Operator

Your next question comes from the line of Shubhomoy Mukherjee with Barclays.

Shubhomoy Mukherjee - Barclays Capital, Research Division

A couple of questions. One is can you just talk about what you're hearing on the Hill in terms of a potential doc fix and how do you see the company being exposed to that risk of further cuts beyond rebasing on that front? And secondly, you just mentioned about, I mean, reducing leverage. Do you have a target leverage level in mind that you want to run this business at?

Tony Strange

Well, we're going to divide your question into 2. I'll take the first half, and then I'll let Eric talk about the leverage piece. The first half of your question, there is the SGR, the physician, the doc fix has to be addressed between now and the end of the year. And any time where they're going to have to put money into a program, I think all programs are at risk for being paid for in that scenario. So I think that we're going to have to be very, very careful in making sure that we don't get slipped in as a pay for in the doctor fix. Now you asked a question referenced to rebasing. Rebasing is a regulatory initiative. So the rebasing numbers come from CMS. Any exposure we have in the doctor fix would come legislatively, and we're flooding the legislators right now with the impact of this proposed rule and getting them to help us manage CMS as a rebasing piece. So I'm hoping that, that will help the defensive strategy related to any paperworks within the doctor fix. Eric, I'm going to let you address his question about do you have a targeted leverage number you're looking for.

Eric R. Slusser

Well, my answer is no. We're comfortable with where our leverage is today. And as you know, a lot of that has been driven by the Medicare reimbursement environment and cuts every year since we did the Odyssey acquisition. Obviously, absent those , we would have anticipated to be in a different place. But now that the home health rebasing proposal that's been hanging over our heads for 3 years is out, we know the worst case, we all hope it gets better in the final rule, but we're going to operate on what we know today. And now we look at it, we've got a place to start. Now we're going to start focusing on how we bring that number down. I don't want to give a specific number of where we want it to be. We're comfortable today. All of our credit agreements had anticipated the increased leverage. And so we'll continue to manage through this and manage it downward over time.

Shubhomoy Mukherjee - Barclays Capital, Research Division

Yes, and one final question. So along with the rest -- along with the fact that you're reiterating your EPS guidance, are you also reiterating your cash flow guidance for the year?

Eric R. Slusser

Well, we didn't really give cash flow guidance. On a couple of calls, we talked about free cash flow roughly in the range of $40 million to $50 million. And with the downward trending of the revenue guidance, we would expect that probably to trend more to the bottom of that range.

Operator

Your next question comes from the line of Sheryl Skolnick with CRT Capital Group.

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

Nice job in a difficult environment. My question relates to your passionate comments about the situation with CMS and the rebasing, and I'm a little bit confused about the commentary that you made that CMS didn't take into account sequestration, the productivity cuts and all the other pressures that have come before and are scheduled to come after on Medicare home health rates. I went back and I looked at the language of the law just to make sure here. It doesn't seem to me that the Secretary was directed by Congress to take any of that into account. So Congress wrote the rule. Whether we like it or not, it's the law of the land. They can pretty much take into account anything they want to but must take into account the things that I think are specified in the law, and the rest of it is up the Secretary's discretion. So I don't understand the industry's position saying that they should have taken this into account. They weren't bound to. And in fact, there's no explicit instruction to. And if anything, it seems like the intent of Congress was to layer rebasing on top of everything else to eliminate the -- what's viewed as the excess margin in health care -- in home health care. So tell me how it is you can actually argue that, please.

Tony Strange

Well, first of all, Dr. Skolnick, you started your comments with a good job in a tough environment. That was a compliment. We will take that and celebrate that for just a second. As it relates to your question, you are 100% correct. The Secretary was not directed by Congress to take anything into consideration. So we agree with you that the Secretary had very wide discretion as to how this rule got evaluated. Our comments really were historically the way the Secretary would approach a rebasing exercise is they do that based on what's in the cost reports. And the industry's position is that the cost reports, while they're consistent, don't take into account all the costs associated with running the business. For example, taxes are not included in the cost report. Interest expense is not included in the cost report. So that's the first point. The second point is that the most recent cost report data that they have to review is 2011. And so because of that, there are a lot of costs that are incurred in our business that will be included on cost reports in '12 and '13 and '14 that aren't yet reflected in 2011. For example, in 2011, you could buy a gallon of gas for somewhere around $2.40. Today, that number is about 30% higher than that, and fuel expense is our second largest expense line on our P&L. So when you go through an analytical process to evaluate the cost in which you're going to rebase to and you're using cost report data that, a, doesn't have all the cost in it; and b, is been dated by about 2 years, we think there's a lot of room to underestimate the impact of rebasing. The third point to your question is that CMS, at least the best we can tell -- now we don't have access to all of their work, which is another thing that is bothersome. We think it ought to be transparent in the work that's been done to calculate rebasing. But without having access to the work, it does not appear that the law does state that you are to implement rebasing in equal components over a 4-year time period. It appears that they looked at the impact of rebasing in 2014 without the consideration of the impact of the layering of the cuts over the following 3 years. And so because of that, it looked -- our analysis, which showed that just over 75% of the home health providers today, based on their cost reports, with the implementation of this rebasing rule, would be in a loss. And we're kind of back to where we were in 1997 when the industry went through such terrible time, and my guess is they're going to continue this approach until they begin to see a reduction in the numbers of providers. So somewhere in all that, I hope I answered your question.

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

Yes, you did. I would actually agree with you that the goal here is to take over 12,000 agencies down to the post -- BBA prospective payment levels of closer to 9,000 and then let it grow as the number of beneficiaries actually using the service grows, which it really hasn't. And the moratorium they just implemented in certain markets would suggest that they're really taking a very tough stance here. But again, even on the taking into account the impact, is that mandated by the law anywhere? Because I don't see that either. The impact on the -- phase in years after 2014.

Tony Strange

No, it's not. There is nothing mandated after that. Now there's some productivity adjustments that are in the Affordable Care Act, but there's nothing else mandated to the Secretary after that. But I think you're spot on with your observation. The Secretary was given a very wide discretion as to how rebasing would be implemented.

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

Yes. Okay, I understand that. I guess your comment that it takes you back to the 1997 environment should be pretty chilling to people because it wasn't good news back then. So in terms of what you think might actually happen to agencies, if this legislation were to go through, do you think it's a 2014 event where you get significant market exits and disruption? Or do you think that it's really a go to for a year and then the fallout happens? And does that make it even more difficult to get any relief later on?

Tony Strange

I think it's going to be all of the above. I think we'll begin to see it. I think we'll see some of it in 2013. Sequestration alone is enough to take some providers under -- I'll digress. We picked up a small business in the middle America where they couldn't make payroll after the sequestration reduction started to happen, and we took the patients and their employees and helped them come in for a soft landing. We're going to see more of that throughout 2013. I think that will accelerate in 2014. I want to agree with you that there was no good news in '97, '98, '99, and I think we're in that same environment today. I think the term I used in my prepared remarks were some very choppy waters. And I think that's the environment that we're in and we're going to be in for a little while. With that said, though, there is opportunity that will get created. This industry will go through consolidation. 12,000 providers will go to a new number. I don't know if it's going to be, 6,000 or 8,000 or 4,000. But the companies that have size and scale, have the discipline around managing their balance sheets, invest in clinical delivery systems, and I think those companies will survive and eventually will flourish, and that's the same thing that we saw happen in the late '90s.

Operator

Your next question comes from the line of John Ransom of Raymond James.

John W. Ransom - Raymond James & Associates, Inc., Research Division

I mean, you have piled up lot of cash. Can you remind us your credit covenant ratios, kind of where you stand with your debt ratios? Is that a net debt or a gross debt number? And just, yes, if you were to go spend every last dollar on growth, what that number -- what kind of flexibility do you have?

Eric R. Slusser

Yes, John, this is Eric. So as I indicated on the call, right now, we're at 5.1. That's a gross leverage number, 4.1 on the net. Our credit agreements are all at gross. The leverage max is 6.25. Starting in Q4 of '14, that drops to 5.75 and stays there. From an interest coverage, we're at 2.4. The credit agreement is at 2.0 and drops to 1.75 starting the third quarter this year through next year. So we're significantly above that. And as far as cash deployment, as I talked about in the past, some of our cash is restricted because of our captive insurance company. But again, we're going to look at that cash. And we're comfortable with deploying every bit of it that we have subject to what we need to operate our business on a daily basis. And as we go forward, we'll look to do that between either debt paydown or acquisition.

John W. Ransom - Raymond James & Associates, Inc., Research Division

So does that look like $50 million to $100 million that you can theoretically put to work, something like that?

Eric R. Slusser

Yes, I like the -- somewhere in that $60 million to $70 million on a daily basis is what we like to keep given our restricted. And our biggest swings as the Medicare reimbursement cycle, the cash comes in, in the latter part of the month, much more than the first. So you manage through that. You manage your payroll. Those are the 2 biggest impacts to cash. So as we've looked at this, we're comfortable within that $60 million to $70 million to manage on an ongoing basis.

John W. Ransom - Raymond James & Associates, Inc., Research Division

So just to state the obvious, given where prices are in the private market and given where they're, I guess they're likely to go, would it be net deleveraging for you to go by home health at this point for, what, 0.6x, 0.7x revenue? Or is it -- so in other words, you're paying less than 5x EBITDA? Could you now deleverage? Because the bank will give you credit for not showing EBITDA, right?

Eric R. Slusser

Yes, I think you could. I think an acquisition strategy could be a deleveraging strategy in this environment. Certainly, as the rate reductions get worse, assuming that the proposed rule doesn't change, I think your question becomes more and more compelling as the years go on.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. So you think the prices haven't yet hit bottom?

Tony Strange

I don't think the prices have hit bottom.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And then my other question is if you look at your portfolio pro forma for the cuts, maybe out 1 or 2 years, do you -- would you have a significant number of branches that would be EBITDA negative? And do you have an opportunity to continue to prune? Or is that behind you now?

Tony Strange

Well, John, I'll answer that question the way I've answered it in the past. I think we look at our branches and our business mix every day, every month, every quarter, without regard to any mass event. There are things that change in markets that make some markets better and more viable than other markets, and I think we're just constantly evaluating all of our business on what makes sense for us today. In my prepared remarks, I made the comment that we're going to focus on markets where we have density. We do believe that density matters. And so with that, we have no project coming where we're going through some pruning exercise. I think we've been through that, done it. But we do still evaluate all of our businesses every single day.

Operator

Your final question comes from the line of Whit Mayo with Robert Baird.

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

Tony, in your prepared remarks, you referenced the duals and sort of pre-acute in the same breadth as you talked about investing into the clinical delivery system. Is this something new that we should be mindful of? Maybe if you could just elaborate on those comments, that would be helpful.

Tony Strange

Well, Whit, we take care of dual eligible populations today. And if you look within our home health business, as well as our hospice business, we have patients who are Medicare and Medicaid that we're providing services to. And so I think where I was referencing in my comments, that we're going to look for ways to expand our services to that most at-risk population, and we believe the dual eligibles are a very much at-risk population. Likewise, we believe that the frail and elderly, the over 85 population is a high-risk population. And so what we are in the process of doing is evaluating. Yes, today, we do supply home health and hospices, those patients, but are there other things that we can do that have a positive impact on the overall health care delivery to patients that are in those most at-risk categories? I think if the answer is yes, then it's something that we should consider.

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

Does that mean looking at that patient population through your Medicare home health chassis today? Or do you think about adding on the Medicaid home and community base, that side of the business, to provide care to that patient population?

Tony Strange

I think -- again, I haven't been that specific. I think the answer to your question is yes. We have delivery -- to using your word, we have delivery chassis today in home health and in hospice. And I think that we're going to use everything that we have, as well as explore other alternative ways to address that population. We're really focused on the patient more so than the chassis.

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

Yes, no, that makes sense. Do you have a sense today for what percent of your admissions are or your sense as, however you want to look at it, percent of your business is dual eligible?

Tony Strange

I don't think we've disclosed that number in the past, Whit, but it may be something that if it's helpful, we will evaluate whether it's something we want to put in our disclosure. But I don't think we've broken that down at this point.

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

No, no. I'm just curious. I have a number in mind, and it's probably different than what yours is. We can talk about that later. And I guess I just have one last final question for Eric. The disclosures you gave around the same-store home health volumes, I think you said up 4% on admissions, maybe 5% on episodes. Maybe I got those numbers wrong. I'm just having kind of a difficult time fitting those numbers with reported revenues and squaring that with the flattish revenue per episode, pricing numbers? Are you talking just about the same-store Medicare fee-for-service volumes?

Eric R. Slusser

Yes. And you're spot on with the 4% increase in admissions and the 5% increase in volumes was a Medicare metric. It was Medicare and not overall volumes. So for example, I think we've talked on the last several calls that we have seen some changes in our total episodic business, which included some of the Medicare Advantage plans, and we've seen that number shift, that number go down, and our Medicare volumes have gone up. And so maybe that's where the incongruity is.

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

No, that's helpful. And maybe just, sorry, one last final one is just without maybe disclosing, can you maybe provide directionally where your visits per episode have been trending? And I'll hop off.

Eric R. Slusser

Is that something that we've disclosed past? Well, I don't think we disclosed that, Whit. However, what I can tell you is that it's pretty flat. Around our home health metrics, whether it's visits per patient, per episode or if you'd back into the number of episodes per admission, those numbers have been consistent now for years, and we really haven't seen any change.

Operator

There are no further questions at this time. I would like to turn the floor back to management for any additional or closing remarks.

Tony Strange

Well, I'd just like to once again say thank you to all of our employees and our leadership team. I especially would like to say thanks to the executive management team. You guys -- and this is a very tough environment, and our management team has stuck together for years now, and I'd put this management team up against anybody. And also, for our board members who are on the call, I'd like to say a special thank you to you. You guys have been great in this environment. And Rod, I'd like to say to you that it's really good having you involved on a daily basis again and bringing your vision. And so with that, again, thanks to our employees, and we look forward to talking to you and update you soon.

Operator

Thank you for participating in today's conference call. You may now disconnect your lines at this time.

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