Sherri Warner - Investor Relations
Kevin McNamara - President and CEO
Dave William - Executive Vice President and CFO
Tim O'Toole - CEO, VITAS Healthcare Corporation
Darren Lehrich - Deutsche Bank
Jim Barrett - C.L. King
Chemed Corporation (CHE) Q3 2013 Earnings Conference Call October 29, 2013 10:00 AM ET
Good day ladies and gentlemen and welcome to the Third Quarter 2013 Chemed Corporation Earnings Conference Call. My name is Cilia and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Ms. Sherri Warner, with Investor Relations. Please proceed.
Good morning. Our conference call this morning will review the financial results for the third quarter of 2013 ended September 30, 2013. Before we begin, let me remind you that the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements.
Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 28 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company’s press release dated October 28, which is available on the company's website at chemed.com.
I would now like to introduce our speakers for today, Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Dave Williams, Executive Vice President and Chief Financial Officer of Chemed; and Tim O'Toole, Chief Executive Officer of Chemed’s VITAS Healthcare Corporation Subsidiary. I will now turn the call over to Kevin McNamara.
Thank you, Sherri. Good morning. Welcome to Chemed Corporations’s third quarter 2013 conference call. I will begin with some of the highlights for the quarter and David and Tim will follow with additional operating detail. I will then open up the call for questions.
During the quarter VITAS experienced significant volatility in terms of admission as well as our mix of patients within the three levels of hospice care. This resulted in VITAS net revenue for the quarter totaling $254 million which is the decline of 5.2% when compared with the prior year. Our admissions were impacted significantly by significantly fewer patients and entering hospice with a terminal prognosis failure to thrive or debility unspecified. Tim will go in the greater detail on the impact later in this presentation.
Our average daily census was essentially equal for the prior year. And however Medicare reimbursement rates decreased approximately 1.1% and our percentage of high acuity days declined to 85 basis points. This mix shift negatively impacted revenue in the quarter by approximately $6 million.
Medical decisions including levels of care and determined by our field base physicians, these doctors are no doubt aware of the federal government’s examination of individual patient charges because certainly the factors that go into the doctor’s decision to prescribe high acuity care.
Not surprising that this time side scrutiny has modestly impacted our physician’s medical determination of when the patient enters or exist high acuity care. Our doctor deferring the decision by a single day on average reduces aggregate high acuity days of care by roughly 20%.
We estimate the mixshift in the high acuity days of care negatively impacted gross profit by approximately $2 million. Our inability to forecast describe high acuity days of care has resulted in excess cost and insufficiencies within these care segments. Some of these excess costs will be mitigated over the next several quarters as we better anticipate prescribe high acuity days of care.
Longer term we will need the balance inpatient capacity and utilization between short and long term contract facilities, this will allow for reasonable margins in sort of adequate capacity to appropriately manage the inevitable episodic prices that impact the small percentage of our patients at any given day.
VITAS incurred a $3.2 million Medicare Cap billing adjustment in the quarter related to one provided number. This is a large program on the West Coast that currently has the gross profit margin improving this Medicare Cap limitation of 29%. Our VITAS has 37 unique Medicare provider numbers. 32 provider numbers have a Medicare Cap cushion of 10% or greater during the 2013 Medicare Cap year. Three provider numbers have a Medicare Cap cushion between 5% to 10%. And one provider number has a cap cushion of between zero and 5%. VITAS generated an aggregate cap cushion of $259 million during the trailing twelve-month period, which by the way is all time high for Roto-Rooter.
In October of 2013, VITAS reached a tentative settlement, subject to court approval, with a class of California employees related to wage and hour litigation. As a result of this tentative settlement, VITAS recorded an after-tax litigation expense of $6.5 million.
Now let's turn to our Roto-Rooter business segment. Roto-Rooter is having an excellent year. During the third quarter of 2013, Roto-Rooter’s plumbing and drain cleaning business generated sales of $87 million, an increase of 0.6% over the prior-year. More importantly, this revenue translated into up $16.2 million of adjusted EBITDA, an increase of over 27% and equates of adjusted EBITDA margin of 18.6%.
On a year-to-date basis, Roto-Rooter has generated total revenue of $276 million, a 3.1% increase, which translated into $52.5 million of adjusted EBITDA an increase of 28%. At this rate, 2013 has potential to be a record year for Roto-Rooter in terms of revenue and operational profitability.
With that, I would like to turn this teleconference over to David Williams, our Chief Financial Officer.
Thank you, Kevin. As Kevin mentioned, the net revenue for VITAS was $254 million in the third quarter of 2013, which is a decrease of 5.2% over the prior year period. During the quarter, our revenue growth was significantly constrained by a mix shift from continuous and inpatient care which we refer to as high acuity care, into routine homecare.
Historically, VITAS has averaged between 7.5% and 8% of total days of care been high acuity. This high acuity care declined 85 basis points to 6.7% in the quarter. Since routine homecare for per dime averages $150.76 and high acuity care averages $689.76. This mix shift negatively impacted revenue by approximately $6 million.
The third quarter of 2013 gross margin excluding the impact of Medicare Cap was 23.2%, which is 104 basis point improvement when compared to the third quarter of 2012. Our homecare direct gross margin was 32.5% in the quarter, essentially equal to the prior year quarter. Direct inpatient margins in the quarter were 1.7% which compares to 9.2% in the prior year. Occupancy of our 37 inpatient units averaged 60.1% in the quarter and compares to 73.4% occupancy in the third quarter of 2012. Continuous care had a direct gross margin of 14.8% a decline of 420 basis points when compared to the prior year quarter. Average hours billed for a day of continuous care was 18.8 in the quarter, a tenth of an hour decline when compared to the average hours billed in the prior year quarter.
Now let’s turn to Roto-Rooter. Roto-Rooter’s plumbing and drain cleaning business generated sales of $87 million in the third quarter of 2013, an increase of six tens of one percent. The gross margin for Roto-Rooter in the quarter was 47.3%, which is a 303 basis point increase when compared to the prior year. And adjusted EBITDA in the third quarter of ‘13 totaled $16.2 million, an increase of 27.6% and the adjusted EBITDA margin at 18.6% was an increase of 393 basis points. Total unit-for-unit job count in the quarter did decrease 4.9% when compared to the prior year period. This consisted of a residential drain cleaning job count decline of 6.3% and residential plumbing job decline 7.6%. Residential jobs represented 67% of our total job count in the quarter. Commercial drain cleaning declined seven-tenth of 1% and commercial plumbing and the excavation job count increased 1.8%.
Now let’s look at our consolidated balance sheet. As of September 30, 2013 Chemed had total cash and cash equivalents of $83.2 million and debt of $181 million. Chemed’s total debt equates to less than one-times trailing 12 month adjusted EBITDA.
Our capital expenditures through September 30, 2013 aggregated $18.9 million and compares to depreciation and amortization during the same period of $24.2 million. During the quarter, the company repurchased $71.2 million of Chemed’s stock. This equates to 1,032,754 shares of Chemed stock repurchased at an average cost of $68.91. Chemed currently has $25.1 million remaining under our current share repurchase plan.
Our 2013 full year guidance is as follows. On October 01, 2012 Medicare increased the average hospice reimbursement rates by approximately nine-tenth of 1%. Then on effective April 01, 2013, Medicare reduced the hospice reimbursement rates 2%, resulting in a 1.1% decline in Medicare rates when compared to the prior year. A couple for our 2013, Medicare increased the average hospice rate approximately 1.4%.
VITAS estimates revenue will continue to be constrained in the fourth quarter of 2013 as a result of mix shift from high acuity care to routine home care. As a result, full year 2013 revenue prior to Medicare Cap is estimated to be approximately 1% below the prior year. Admissions in 2013 are estimated to decline approximately 3%. And full year adjusted EBITDA margin prior to Medicare Cap is estimated to be 14.5% to 15%. Medicare Cap is estimated to be $1.8 million in the fourth quarter of 2013.
Roto-Rooter is forecasted to achieve full year 2013 revenue growth of 2.5%. This revenue estimate is based upon increased job pricing of approximately 3.2% and job count essentially equal to the prior year. Adjusted EBITDA margin for 2013 for Roto-Rooter is estimated in the range of 19% to 19.5%.
Based upon this, management estimates that full year 2013 earnings per diluted share excluding non-cash expense for stock options, non-cash interest expense related to the accounting for convertible debt, litigation and other discrete items will be in the range of $5.60 to $5.65. This compares to Chemed’s 2012 reported adjusted earnings per diluted share of $5.29.
I will now turn this call over to Tim O'Toole, Chief Executive Officer of VITAS.
Thank you, David. As we noted earlier, admissions were difficult during the quarter aggregating 14,555 which is 6.3% below the prior year. On a year-to-date basis, our admissions aggregated 47,413 which is a slight decline of 0.8%. As most of you are aware, CMS has begun the process of discouraging the [hospice] industry use of failure to thrive and debility unspecified, disease classifications when determining that the patient has a terminal prognosis. This was done with the proposed rule which would have eliminated using these two conditions as the primary reason for terminal prognosis effective October 01, 2013.
The final rule issued in August 2013 eliminates failure to thrive and debility unspecified effective October 01 of 2014. The proposed rule clearly disrupted our current admission process. In the third quarter of 2013 combined quarterly admissions for failure to thrive and debility unspecified declined 1,374 patients or 59%. Total admissions excluding failure to thrive and debility unspecified actually increased 3% in the quarter.
CMS will continue to allow admissions under these two categories through fiscal 2014. We anticipate that patients who would have been admitted as failure to thrive and debility unspecified will be admitted under other more specific disease categories.
VITAS is in the process of refining a submission criteria that will eliminate the number of patients admitted with the diagnosis of failure to thrive or debility unspecified as we get closer to the October 01, 2014 rule change.
As of September 30, 2013, VITAS employees approximately 1,150 admissions, personnel as compared to 1,113 in the prior year quarter. This consists of 345 sales representatives, 162 admissions coordinators, 387 admission nurses, 84 community liaisons, 13 long-term care liaisons and 75 admissions liaisons.
During the third quarter of 2013, admissions from hospital referrals decreased 3.5%, nursing home admissions decreased 8.4%, assisted living facilities decreased 12.7% and home-based referrals decreased 6.9%.
Our per patient per day pharmaceutical cost averaged $7.52 in the quarter and a 7.3% favorable to the prior year. Our medical equipment per patient per day cost in the quarter totaled $6.67 which is 5.1% below the prior year period.
VITAS' average length of stay in the quarter was 82.2 days which compares to 78.5 days in the prior year quarter and 84.8 days in the second quarter of 2013. Average length of stay is calculated using total discharges during the period.
Median length of stay was 16 days in the quarter. Median length of stay is a key indicator of our penetration into the high acuity sector of the market.
Our days of care totaled 1,307,147 days in the quarter, a decline of 0.3%. Non-nursing home, routine home care days increased 2.5% in the quarter and nursing home, routine home care declined 5.2%.
At September 30, 2013 we have two programs classified as start-ups. All of these start-ups are state licensed, chap accredited and certified by Medicare. Operating losses for these two start-ups totaled $380,000 in the quarter and compares to losses of $748,000 for locations classified as start-up in the prior year period.
With that, I’d like to turn the call back over to Kevin.
Thank you, Tim. I will now open this teleconference to questions.
Thank you. (Operator Instructions). The first question comes from the line of Darren Lehrich, Deutsche Bank. Please proceed.
Darren Lehrich - Deutsche Bank
Thanks. Good morning, everybody. So I wanted to focus some questions here on VITAS and I've got a few. But maybe Tim if you could help us just think a little bit more about the debility and failure to thrive topic, would you consider these to be lost patients or how do you think you can get them into hospice under different diagnosis? I think you mentioned some things that you’re working on with your admissions process, but I am just wondering how you’re thinking about these patients, are they now just lost patients?
Before I turn it over to Tim, let me start by saying that I just kind of like to invite you to read the federal register or what, just write some context what could be necessary on this. The issue really relates to the fact that CMS does not intend this to deal with the, failure to thrive would be the primary diagnosis initially. They've observed that the industry including VITAS we're seeing that about 15% of hospice patients were coming in with this, with one of these two as a primary diagnosis. And they said, look, let’s be more specific, but then they proposed the rule, they definitely said they did not see anything that they were saying or proposing reducing the universe of hospice patients.
They were basically talking about coming up with coding changes. So, I guess, I conduct them (inaudible). Yeah, I think the whole industry is going to do what they are suggesting, that is they are not going to be kicking people out of hospice, I mean the universe is not going to long term. There is dislocation presently, but the intention is not to reduce the universe of hospice patients.
But the change the coding and you got to remember that well over 93% of our patients come to us with a diagnosis that none of our employees, part time employees had any hand in, in making that diagnosis until the industry, the referring industry comes the terms with what this proposed rule change means and how it affects the coding.
We’re going to probably see these effects. But having said that, the only thing I want to leave with that preamble is to say yes, I expect VITAS of the industry to do exactly what you say and that is to come to different coding decisions, but in no way does that imply something improper or getting around in the CMS proposed rule.
Now I would just follow up on, I think absolutely there is no intend that there would be a reduction in patients and I would not expect that. We are doing a really good job educating our internal physicians about the issue. You have to educate your referral sources, your external physicians that work with you as well. And that may take a little longer as these things roll out. I think it’s good that it was delayed for a year.
And again what is really tying into this transparency around eligibility was we are full support of. And if you just think of it historically, if you have a patient that maybe was with you for a short period of time, it’s pretty clear they are eligible their terminal and you may have to some additional detail work or some observation or some testing to find out exactly which disease was the one that’s causing the major issue to cause it the patient to be terminal. So it’s really just a function of incorporating that into our process which we are doing and again to reinforce it didn’t cost disruption in the period, but we expect that to be well understood on a ongoing basis and not reduce the opportunity for eligibility for hospice.
And just sort of give you another context is order of magnitude, as this coding has changed, even though it’s not required for another year. In the last two quarters, we’ve seen the percentages of our patients who come under this coming to hospice with this primary diagnosis go from 15% to under 7%. So I am saying there is just…
It means that we are doing a better job already of identifying the underlying…
That’s exactly right. It’s nothing that it shows that we observe that there is a lot of noise and delay as we come into these additional [activities] or additional work method come to the -- come with the alt -- not really alternative diagnosis, but there really going to be the primary diagnosis would tell you to thrive and general debility being additional factors leading to the eligibility for hospice.
Now Darren I would like to point out a couple of things. One, on these patient categories, the median like to stay historically is averaged about 38 days. What that means have these patients pass away on 38 days or less and the average length of stay is basically around the 110 days or so for this category, so clearly, I mean, these patients are very sick and half of them are dying very quickly. So, clearly they are terminal.
Bu what basically is, what CMS is now putting out explicitly which was always implicit is could these very, very sick patients who maybe for specific disease category fall outside of the guidelines for traditional terminal prognosis, they want the secondary diagnosis or failure to thrive or debility to be one of the underlying factors that explains why the terminal prognosis is outside of the guidelines for specific disease category. So differently sick patients were dying and they are dying very quickly and it’s the documentation issue that CMS wants the [CSP] doing differently.
Darren Lehrich - Deutsche Bank
Okay. So I follow you I guess, but you did lose a lot of patients I think this quarter as you mentioned just given the admission trend. So just to recap what you are saying you think that the intent wasn’t to necessary reduce the interest of patients but now the onus is on you to make sure that you are capturing the right diagnosis and that may not have happened in last quarter?
Darren, CMS specifically said there is no intention by this proposal to reduce the universe of patients, but clearly this disrupted the admissions pattern, our referrals are lot for this type of patients. So in now admissions they are lot as well, so it’s a matter of training the referral sources, educating them as well as different procedures on our end.
But keep mind and that is to say that we are well underway training our internal people, you can imagine little more difficult to get the training out to the referral sources.
I mean they came out a little bit of surprise to the industry since it was published in the annual wage regulation and I think because it came out in that and the original date for implementation was pretty quick. So, I think people had to get on top of it, which we did and everyone else. And again that the good news is it’s been delayed for a year and it shows I think that the regulators did not want to make a negative impact on the industry and listen to the issues from the industry. And so again to reiterate our systems are changing, we work closer with the referral sources to get more information about specifics and we would not expect that this would reduce our admissions long term.
Right. And having said that, the thing we’re living on or living with is more than 100% of our decline in admissions is, we are (inaudible) a little bit, but it shows up in the decline just in the category for this debility and getting to thrive. So if you said, where we’re having admissions problem, you can say well more than 100% of our problems are in this category.
Darren Lehrich - Deutsche Bank
Okay, got it. And then just going back to the in-patient and really just the high acuity shift that you have been seen, it does look like there is a fair amount of embedded costs that you have on the in-patient units and to the extent that you’re seeing the strength continue. How do you take capacity out, I mean can you just help me think about what kind of actions you can take to deal with what might be a lower occupancy overall?
I mean we are in a middle of that constantly. And all I can say is that each unit, if a unit is not efficient over a longer term period time, we would not want to have it. And at the same time when we have occupancy that’s below our targets in a certain time of the year or whatever, we work very hard to minimize expenses to the extent we can there. We always -- I always like to focus also on the blend and keep in mind our gross margin for this quarter was 23% which was a full point higher than a year before, even absorbing 2% reduction of sequestration.
So with all the issues involve with the inpatient, the homecare did very well, some of our other areas of spending like ancillary costs with pharmacy, supplies equipment is doing very well. We're tightening down our management level of expenses throughout the company. So yes, if we have an inefficient inpatient unit, we’ll monetize it over time to have inpatient contract beds as opposed to that unit and we work always to minimize expenses. And this is a good time of the year as expense as the census is growing, summer is always more difficult. So we’ll get things in orders as we move into the next few quarters I am sure.
And that applies Darren to the rationalization we're doing, also applies on the continuous care. I mean, it’s clearly, the government in the lawsuit has indicated well at least at one level just the fact that we provide more continuous care than the average, that’s going to draw a lot of scrutiny. (inaudible) give55% of hospices 50 hours the last three years. So I mean, if the comparison to the average standard is a tough one. But there are costs that we're rationalizing there too to the extent that we're anticipating as I said and just the fact that if our average length of stay from continuous care falls just one day from five days to four days is a 20% cut in hours. The infrastructure surrounding that we expect to fall 20% as well.
Darren Lehrich - Deutsche Bank
Yes. And then just last thing here, on the investigation since you bring it up, I mean do you have any more insights at this point whether it is more narrowly focused on continuous care or….?
Well, let me say, if you read complaint there is 36 provisions of the complaint semi-related to continuous care and there is two generalized allegations that, and also patients have been recertified improperly. I mean it’s hard to say there has been no development in the case with regard to of any type, of any significance since the filing of it, there is still what would be considered the motion practice, we filed the motion dismiss the government has still the middle of November to respond.
I mean there has been no ability for us to certain on change in strategy by the government for instance, I think is the answer to question. We are just preparing to defend VITAS in our activities, but let me just say, the area where we seem to be a statistical outlier is in the continuous care and I think there is reasons for it. And when you go back to this call, I mean I know we have some questions saying, well, the operating metrics of VITAS is little tougher this quarter are you struggling as a result of the U.S. versus VITAS on that litigation.
We would say well, it’s never a good idea to have litigations like that pending, but when you look at the fact that we’re basically, we are the last hospice standing to get one of those. And not many healthcare companies that haven’t had a whistle blower case or action like this. So we don’t see that is still a significance, the only significance that we see regard to operating has been something that we’ve talked about and talked about today and that is human nature. We are making subjective, our doctors are making subjective determinations in the field. There is now a general allegation of fraud that they are making these decisions and for patients making it too easy for them to get in or stay in continuous care. And you mentioned this making no corporate change whatsoever with regard to direct share policy we are seeing this a slight reduction in the continuous care days of service. I mean that’s -- you asked me what the effect of that is, it’s that. And I would say at this point maybe luckily so far it’s limited to that. Would you agree with that Tim?
Absolutely. I am very encouraged by what we are seeing in the business and the comments Kevin made, I would echo those.
Yeah. Again I would say is what the interesting thing we’ve found that we have never looked at before relative to the industry as a lot of the hospices provide zero to almost no zero high acuity care. We found most hospices at exceptionally high live discharge rates. Hospices that provide significant high acuity care have much, much lower live discharges. So there is an interesting thing going on throughout the industry relative to the level of care provided and the amount of patient satisfaction, patient who retained through the point of death.
And one point I want to make that is it’s not really responsive to your question, but gets logged into my suite box. To the extent that you are talking about as Dave said if you don’t provide high acuity care the patients revoke hospice, go in the hospital and go back in the curative section running up pretty good deals. If you do provide it, that uses episodic and in continuous care the hour average is five days and then go back to the curative care section who can afford.
Let me say one thing that if you look at historically, we have provided curative care, we have provided continuous care in everyone of our programs. And the answer of all that must be, is that important to our profitability and strategy as part of those, you remember that we consistently now and previous two lawsuits lost money in continuous care at about a quarter of our programs. In other word the driving effect of rational for doing is because number one what’s was possible is acquired by continuous care is 55% of them down.
It is good for the patient. Our view is ultimately that is good and it also rebalance to our benefit with referral sources. But it’s not and I mean the reason that people don’t provided by continuous care is hard to do so and earn money doing it. And even VITAS in the quarter of their programs do not and have not earned money doing it.
So in many respect what I like to say is regardless of what happens with continuous care, it’s not similarly going to have much of a long-term impact on our profit model.
We know there is some short term run we’ve just demonstrated obviously we do less now and we have the same infrastructure there is a negative comparison, but we’ll provide whatever the level the government says and probably have an easier model for earning money doing so.
And we’ve talked about it's the model that's appropriate for the patients and it's very critical to the system right now, because as you know one of the critical issues is readmissions in the hospitals. And they are looking for hospices to care for the patients in their home and of course they come back in the hospital if necessary, but if no continues care is done and it's going back in the hospital which surely not what the regulators or policy maker or
Well, Jim, we will come up with something in their next meeting I'm sure it's on addressing it. And I mean they have already raised the red flag and this is a significant cost issue to (inaudible). But sorry, I got it a little up point there and now.
Darren Lehrich - Deutsche Bank
Okay. I appreciate the responses. Thank you
The next question comes from the line of Jim Barrett of C.L. King. Please proceed.
Jim Barrett - C.L. King
Good morning everyone. This is maybe for Dave. Dave, can you provide us the current run rate for legal expenses related to the U.S. government lawsuit?
I wish I could. Unfortunately they come in very chunky Jim. So it's very difficult to predict on a regular basis, extremely difficult.
And I would say Jim at this point, there are not a lot of depositions. And if there is just kind of, it's just not compared to some litigations, like we have some clock backs since where you are taking depositions all over the country and what not, it's not that type of thing, it's more, it's most impact at this point. Finally, the government will file the reply to our motions dismiss and then we'll provide the supplementary information to that. So it's that type of back office legal expense more so than racing around the country on some national enterprise.
Jim Barrett - C.L. King
Understood. And Tim, the one program that had a Medicare Cap billing adjustment of $3.2 million, I could guess, but could you provide what were the specifics that related to that adjustment and what’s your outlook for eliminating it or fixing that problem?
Let me just start generally and I'll turn it over to Tim and he will talk about the last part of your question. But let me start by saying, I say it’s West Coast, you don’t usually mention the names, but probably for this date it’s profitable as we said it. So our profit margin of 29% after the Cap liability that one of the problems of course the large, it grows in large part in the third quarter of the year which is the last quarter for that Cap year so not much we can do about it.
It was a program that is I’d say it’s very profitable. The problem also is our reimbursement varies geographically, higher in the high cost areas. Well, the problem is that the Medicare Cap is not adjusted as well. So to the extent that this treatment program have the reimbursement rates that’s 30% above the national average and have the same cap as the other program. So it basically has to be just to be even, has to be 30% under the cap on a normalized basis.
So it’s tough in that regard. This particular program had some regulatory issues, I mean again it’s the West Coast and by West Coast I mean California and by California I mean it’s difficult to deal with the regulatory people there. But we really, I'll just say generally speaking, let’s say it [arose] quickly.
Regulatory issue, we actually pulled sales people from a significant county just to make sure we do want to get an award with a bureaucrats and the people, whose jobs it is to regulate overseas business, I want to be in this business. And it had a significant affect of what we were in doing this program.
I’m going to turn it over to Tim, because obviously, probably he is getting a lot of tension at the highest levels of the company. And let me start at the end and say, do I expect by the end of next year it to be completely, by the end of next cap year, completely eliminated, I think that's a reasonable expectation, it’s not a certainty, but that's from my lofty vantage points, that's my conclusion. But Tim why don’t you talk about some of the things you might be doing?
Well, I think that's right. Keep in mind that sometimes in the marketplace your relationships with customers and customers keep some of the business for themselves in hospital system sometimes, sometimes they go without you and keep in mind when the census drops, they keep a little more of their business. And we have seen over this summer and this quarter, the hospital census around the country has dropped a little bit, there is a lot of, lot going on without patient work and they are all preparing for the influx of new insured beneficiary is coming in next year. So that was the issue. We had a little we have some bad execution by our local management team, some time you just have to call it like it is.
So we’re working on those issues, we reengage a lot of marketing efforts, we’re making sure our staffing is at the highest opportunity to have the best opportunity for a rapid intake and high quality here and we’re building the program back up again. So again, tough survey environment Kevin mentioned, customer turmoil in a couple of locations, management execution wasn’t there, but I feel very confident we are back on track, we are seeing better referrals everything is clarified. And I echo Kevin’s view that we’ll work our way out of this.
It’s one of the advantage, Jim of when you have a capital limitation issue you can throw money at the issue because if you don’t you are providing service for free. So it’s a good opportunity that say we literally for the few opportunities in business when you can say if cost was no object what would you do to resolve this situation, I mean that was a cap limitation as we are.
Jim Barrett - C.L. King
Understood. And Tim the failure to thrive and debility unspecified, it would seem to be an industry challenge that’s short-term in nature. Do you have a sense as to how the industry’s admission rates are performing relative to VITAS in that kind of environment?
I do not really, I mean just anecdotal information would be that it’s been, it’s affecting others in a very similar way as it’s affecting us.
I mean who know Jim as you know, I guess it even embarrasses an important a week or so. We will see what they say, I will say if you look at the last couple of quarters, they have seen what we have seen as far as some toughness on the admissions front. But again, one of the biggest hurdles we face is the fact that you got to remember we don’t, if we get the referral, if there is something that CMS has done that presents some dislocation or noise to the referral process, you’ll remember we don’t sell [prefer]. We can’t, we have to wait until that somebody throws a rock in that pond, we have to wait until the ripples kind of slowdown by themselves I mean there is more [living] and developing we can do. But as you just said, you said, is there any reason based on what CMS has said assuming this is some type of long-term dislocation, again if you, literally you wouldn’t draw that conclusion.
Jim Barrett - C.L. King
Correct. And then finally Kevin are you sufficiently or is the company sufficiently preoccupied with the challenges at VITAS to put on hold any high level of interest in seeking out the hospice acquisition at this point in time?
I would say no, I mean we have an acquisition department at VITAS (Inaudible) it seem there was technical difficulty. But we have an acquisition department that basically reviews pretty much every acquisition that comes to market. If you look at our activity in the last three years, it hasn’t been that all our forces and all men have been really doing something else. It’s been the popular prices which they will offer and some of the, just the comparisons that is what the returns on just buying our own stock would yield than more of, to put a hold on acquisition department. But at the right price a hospice that fits the right criteria that what everyone is talking about wouldn’t have any inhibition on our [proceed] at all.
But again, it’s not something that I look at for pricing that I still hear about in the few acquisitions that are being talked about out there. Pricing still looks high, our hurdle rate of the return that we would still get on buying our own stock makes me conclude that, I don't anticipated any big acquisitions in the short run.
Jim Barrett - C.L. King
Okay. Well, thank you both.
Okay. I think that's the end of the questions. So I thank everybody for their attention and I apologize for the technical glitch there a minute ago, but in any event we'll see you at again another quarter and hope for the good results.
Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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