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Gentiva Health Services (NASDAQ:GTIV)

Q3 2013 Earnings Call

November 05, 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

Darren P. Lehrich - Deutsche Bank AG, Research Division

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

Ralph Giacobbe - Crédit Suisse AG, Research Division

Shubhomoy Mukherjee - Barclays Capital, Research Division

Operator

Good morning. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, November 5, 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, Maria, and good morning, everyone. Welcome to Gentiva's Third Quarter 2013 Earnings Conference Call. Speaking on the call today are Tony Strange, our CEO; and Eric Slusser, our CFO.

We hope that each of you had a chance to review the company's earnings report, which was released this morning. All statements made during this call relating to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statements contained in our press release on our website. Our call today will be consistent with the SEC's Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that can be made in individual inquiries. Today's call also conforms to Regulation G regarding the reconciliation of GAAP and non-GAAP disclosure. As a result, we will not discuss non-GAAP financial measures on this call, except for those set forth in our press release. You may access a telephone replay of this call later today through November 12. A transcript of the call will be posted to 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

Thank you, John, and good morning, everyone. Thank you for joining our 2013 third quarter earnings call. This has been a busy quarter for us, given the Harden transaction; our new financing; the roll out of One Gentiva; our efforts in Washington; and not to mention, operating the business in a difficult and uncertain healthcare environment. Consequently, we have a lot of moving parts in our results this quarter, so we're going to walk you through each of these areas in some detail.

Let's start with our One Gentiva reorganization and our growth initiative. Today, the healthcare communities in which we serve view Gentiva as 3 separate businesses, which happen to have common ownership: home health; hospice; and with the addition of Harden, community care. On our last call, I discussed the efforts that we were taking to redefine our operating model to present a unified, comprehensive and cost-effective solution to our referral sources based on the idea of one employee, one patient and One Gentiva. Early in October, we communicated division, as well as the management structure associated with One Gentiva, to all of our employees. The new structure was developed out of our recent planning session in which we identified the following key strategic imperatives for Gentiva. First, we needed to realign the mission across all 3 divisions; second, we had to redefine our operating model and our structure; third, we had improve our hospice results; fourth, create a culture of field-focused support from our corporate support organizations; and finally, to achieve sustainable growth in all of our businesses.

The One Gentiva operating model allows us to better position our businesses by integrating our home health, hospice and community care businesses under a general management structure at a regional level. The company is now comprised of 5 regions, each led by a regional president who has general management responsibilities over the 3 business lines, each having its own functional support staffs. Each region will have a single-sales organization focused on the delivery of a unified comprehensive service offering to our referral sources. However, the product delivery systems for the 3 business lines will continue to function separately as they do today.

Importantly, the new structure provides our customers one point of contact for Gentiva to meet all of the needs of their patients. Our research indicated that this was a key opportunity for the company to better serve our customers. As a part of the reorganization, we're also realigning incentives at the market level, which will better align the missions of home health, hospice and community care, both from an operational and a sales perspective. While the genesis behind One Gentiva is to unify our business lines for our patients and referral sources, the outcome has also produced a more efficient operating model. As a result, One Gentiva will reduce field operating and sales leadership positions by approximately 100 FTEs.

Also, as a part of One Gentiva and the Harden transaction, we're going through each and every branch, evaluating the effects of the rate reductions in 2014, the impact of overlapping territories and our ability to create market density. As a result, we have or will be consolidating branches, as well as exiting certain markets and/or certain business offerings in those markets where it's no longer feasible to fulfill our commitment to our mission. While some consolidations will occur in 2014, we expect the majority of this work to be completed during the remainder of this year. We will provide further insight into the financial impact of these initiatives as we close out 2013 and we look forward and provide guidance for our 2014 results.

In summary, One Gentiva is an important initiative for the company that enables us to better serve our customer base, streamline our operating structure and be better prepared to meet the demands of an evolving pre- and post-acute care healthcare market.

Turning to our Harden acquisition. On October 18, we announced that the Harden transaction had closed. Based in Austin, Texas, Harden is one of the largest providers of home health, hospice and community care services in the United States, with operations in 13 states. With the transaction now closed, our teams are moving quickly to capture immediate savings opportunities and integrate overlapping operations. Eric will cover the integration synergies and our new credit agreement in his comments in a few minutes.

From an operations perspective, Harden's Chief Operating Officer, Chris Roussos, has been named the Regional President of our new south central region. This region includes Texas and the majority of the current Harden geographies, thereby, significantly reducing their integration risk for their existing businesses. Harden's community care division will continue to operate essentially as it does today under the leadership of Wayne Douglas and Jennifer Vogt, with minimal changes in operations, billing or other support functions. In the overlapping Harden home health and hospice markets, we're working with our local market leaders to identify the best approach for servicing each respective market.

With the transaction now complete, I'm pleased to announce that Harden's Chairman, Steve Hicks, has joined our board. Steve brings a wealth of financial and industry experience to Gentiva, and I, along with the rest of our board, are looking forward to working with him. Additionally, I'd like to thank Lew Little and Ben Hanson and Scott Ellyson for all the hard work they poured into making the transaction a reality.

Turning to our financial results. For the third quarter, revenues were $410 million and adjusted EBITDA was $35 million, producing earnings of $0.15 per diluted share. Our adjusted EBITDA margins were 8.6% for the quarter. Similar to the recent quarters, our home health business continues to grow despite the external environment and our hospice volumes continue to be soft. Both divisions, as well as our corporate support centers, are doing a very good job in managing expenses and collecting cash.

Looking first at our home health division. revenues for the quarter were $235 million and adjusted EBITDA before corporate overhead was $32 million or 14%, which is at the head of where we were last quarter. During the quarter, year-over-year Medicare admissions and episode increased 3%, excluding the impact of closed or sold locations, which is consistent with the results that we've seen in recent quarters.

Given the muted levels of hospital and physician volumes, as well as the negative headwinds associated with all of healthcare, I continue to be extremely pleased with the performance of this division. This group is also doing a good job of managing expenses and identifying opportunities to create branch efficiencies through improved processes and the increased use of technology.

On a special note this quarter, we have completed the installation of a point-of-care documentation system in our home health locations. We've been working throughout 2013 on this implementation, and I'm proud to say that we've done so with minimal disruptions to the business. Through the elimination of all of the paper recordkeeping, as well as the reduction in wasteful time and expensive driving to and from the office to turn in paperwork, we're optimistic that the system will drive efficiencies within home health, as well as provide the foundation for which to create a single-patient record throughout One Gentiva.

Turning to our hospice division. Revenues for the quarter were $176 million and adjusted EBITDA was $22 million and 13%, which was down from last quarter. This division continues to struggle with volumes as admissions declined 2% during the quarter, excluding closed or sold locations, which prevented growth in our ADC. Suffice it to say, the overall growth rate in the hospice industry has been greatly impacted by the industry headwinds. The new regulatory requirements, along with an increase in negative publicity around the hospice benefit, have some physicians second-guessing their referral patterns. A year ago, I outlined a growth plan that closely followed the one we used in home health. Due to a rapidly changing environment, we have not seen the results that were anticipated, which became one of the catalysts for our One Gentiva plan. We believe that this unified offering to our referral sources and the alignment of incentives between divisions, we cannot only be one of the largest but also one of the fastest-growing hospice companies in America. Today, less than 1 out of 2 people who qualify for hospice actually received the benefit. Hospice is an integral part of the health care delivery system, and it's role will only be enhanced as the rising cost of health care continue to plague our country's economy. I'm proud of our employees who dedicate their lives to this mission, and I am confident that hospice will play a vital role in the success of Gentiva.

Before wrapping up my comments, I'd like to touch briefly on our activities in D.C. Needless to say, home health care issues continue to be a focus in Washington. On the hospice side, the 2014 Medicare reimbursement rate increase of approximately 1% went into effect this past October 1 of this year. On the home health side, you'll recall that CMS issued its proposed 2014 home health reimbursement rules 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 be approximately a 1.5% decline for 2014. This rule has now been sent to the White House for their review. In the face of this significant challenge, the home health industry is mounting an all-out rebuttal campaign through legislators and grassroots efforts. To date, nearly 200 members of Congress, including 51 senators, have signed formal letters expressing concern with the regulation and urging CMS to evaluate the long-term impact.

Many of them have contacted the White House directly to seek a revision in the proposed rule. The partnership, as well as other industry trade organizations, has also provided extensive data, demonstrating the substantial negative impact of this rule and engaged key constituents who strongly oppose the rule, including AARP, registered voters who work in the industry, senior citizens and other grassroot advocates. We expect the final rule to be issued sometime before Thanksgiving.

In conclusion, these uncertain -- these are uncertain times in health care. Americans are confused about health insurance, federal and state exchanges and most are confused by the law itself. People are disheartened by the partisan nature of politics and share concerns that their personal healthcare lies in the balance. And this uncertainty weighs heavily on healthcare utilization across our country.

But as our leaders grapple with the rising cost to provide care to the fastest growing segment of the U.S. population, our seniors, one fact will remain crystal clear: the most effective and efficient delivery of care will be in the patient's homes. Gentiva is better positioned today to provide comprehensive home care to all seniors, including the highest cost and most vulnerable, our dual-eligible population. We're increasing density in market share through organic, as well as acquisitive growth. We're gaining in efficiencies through the refinement of our operating model and the use of technology. We are better aligning our sales organization with the needs of our customers. In short, we're building one company to meet the needs of one patient. We're building the post-acute care company of tomorrow, One Gentiva.

In closing, I'd like to thank our employees for the compassion that you bring to our patient's home each and every day. I'd also like to thank our board members, as well as our shareholders, for your continued support. And again, I'd like to personally welcome all of the Harden employees to the Gentiva family.

With that, I would like to turn the call over to Eric for some further insight into our financial results. Eric?

Eric R. Slusser

Thanks Tony, and good morning. Before I discuss our results further, I'd like to cover a couple of other matters to facilitate your review. As you're aware, we acquired Harden Healthcare on October 18, 2013. Harden's operating results will be included in Gentiva's financial results beginning in the fourth quarter of 2013, commencing from the acquisition date. Also, as discussed on previous calls, we closed or sold a significant number of our 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 $2 million.

Additionally, keep in mind that year-over-year earnings per share were impacted by approximately $0.19 due to the impact of sequestration and other home health rate cuts.

Finally, I want to remind everyone that similar to previous quarters, we will be highlighting results from continuing operations during our discussion.

Now onto our results. For the third quarter of 2013, total net revenues were $410.5 million, compared to $424.4 million in the prior year. On a reported basis, home health episodic revenues were flat with the third quarter of last year. Home health revenues were negatively impacted during the quarter by an approximate 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.

Hospice revenues were $175.6 million in the third quarter, down 7.5%, compared to $189.8 million in the third quarter of 2012 based on a decline in average daily census, the impact of sequestration and the reduced revenues from closed or sold locations.

Turning to our home health revenue metrics during the third quarter of 2013. There were approximately 48,100 admissions on an episodic basis and approximately 70,700 total episodes. On a year-over-year basis, and excluding the impact of branches sold or closed, Medicare admissions and episodes grew 3%. The number of episodes per admission was 1.47 for the 2013 third quarter, consistent with recent quarters. Revenue per episode for the third quarter was approximately $2,930, up slightly from the last quarter.

On the hospice side, our consolidated average daily census for the third quarter of 2013 was 12,600, down approximately 6% from the third quarter of 2012 after excluding the impact of closed and sold locations. Our consolidated admissions were approximately 11,800, down 2% year-over-year after excluding the impact of closed and sold locations. Our consolidated average discharge length of stay for the third quarter of 2013 was 100 days, compared to 101 days in the third quarter of 2012.

Our net patient service revenue per day in the third quarter of 2013 was $152, flat with the third quarter of 2012. The mix in our levels of care for our billable days for the third quarter of 2013 was approximately 98% for routine care and 2% for all other levels, consistent with recent quarters.

Our Medicare cap for the third quarter 2013 was 0.3%, down from 1.7% in the prior year third quarter.

Total company gross profit as a percent of net revenues was 46.3% in the third quarter of 2013, compared to 47.3% in the third quarter of 2012 and 47.2% last quarter. During the third quarter, home health gross margins were 49%, up slightly from 48.8% in the third quarter 2012. Hospice gross margins were 42.7% this quarter, down from 45.3% in the third quarter 2012 due to the impact of sequestration and declining admission trends.

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 third quarter 2013 were $159.1 million, down from $161.2 million in the third quarter 2012. SG&A as a percent of net revenues was 38.8% for the 2013 third quarter, compared to 38% 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 $35.3 million or 8.6% of net revenues in the 2013 third quarter, down from $46.1 million or 10.9% in the prior year quarter.

Our effective tax rate on continuing operations was 42.9% in the third quarter of 2013, compared to 41.5% in the third quarter of 2012. After excluding special charges and other items, third quarter 2013 adjusted income on a diluted basis was $0.15, compared to $0.32 in the prior year.

Switching to the balance sheet. Cash and cash equivalents closed the quarter at $183.3 million, down slightly from $185.1 million at the end of the second quarter.

Capital expenditures for the third quarter of 2013 were $6.7 million, slightly higher than recent quarters due to incremental investments in point-of-care devices for our home health division.

DSOs were 50 days for the quarter, down from 52 days at the end of the second quarter, based primarily on improved hospice collections. Third quarter 2013 net cash from operations was $8.4 million, and free cash flow was $1.7 million as quarter cash flows were impacted by our semi-annual bond interest payment and payroll timing.

From a debt perspective, we ended the quarter $910.2 million in debt, consistent with the end of the last quarter. Subsequent to quarter end, we closed on a new $925 million credit agreement to fund the Harden acquisition and refinance our existing credit agreement. The new credit facility includes a $100 million revolver and $825 million in new term loans. The term loans consist of a 6-year $670 million Term Loan B facility priced at LIBOR plus 5.5%, and a 5-year $155 million Term Loan C facility priced at LIBOR plus 4.5%. Both of these term loans have a 1.25% LIBOR floor. Our blended interest rate based on outstanding balances on the term loans at closing came down from 6.45% to 6.36%. Amortization on the Term Loan C facility begins next year at 7.5% and increases to 20% by 2017, while the Term Loan B amortization remains at 1% per annum through maturity. The first principal payments on the term loans are due in March 2014.

In addition to receiving a lower blended rate, we also gained significant covenant flexibility in the new credit agreement. You may recall that our prior credit agreement allowed a maximum leverage ratio of 6.25 until the fourth quarter of 2014 when the requirement dropped to 5.75. The new credit agreement permits a maximum leverage ratio of 6.75 through the first quarter of 2015 and then drops to 6.5 through the first quarter of 2016. Thereafter, the maximum leverage ratio level drops to 6.25 in the second quarter of 2016 and to 6 in the second quarter of 2017. In the new credit agreement, we also received the ability to net up the $35 million in excess cash against our debt balance, and we have other significant EBITDA add-backs in our consolidated leverage ratio calculation for costs relating to restructuring and synergy initiatives. Additionally, the interest coverage covenant was dropped in the new financing. Net-net, the added flexibility in agreement provides extra cushion as we go through the home health rebasing period.

Turning to our Harden integration activities, I am pleased with the progress our teams have made in the first couple of weeks since we announced the Harden transaction in mid-October. Prior to close, we established an integration management office to manage all integration activities across the business on a daily basis. Overall, the integration efforts are focused in 2 broad areas: back-office support and field operations integration. From a back-office support perspective, we are expecting most of Harden's corporate functions to be integrated by the end of the first quarter, with many areas targeted for a December 31 time line. Additionally, we are planning to move Harden's data center operations and transition their hospice and home health billing platforms to Gentiva beginning in the first quarter of 2014.

From a field operations integration perspective, we are moving quickly to assess and implement changes in overlapping branch locations in the regional and divisional support structures. On an annualized basis, Harden-related synergies are expected to be approximately $28 million by 2015. This includes approximately $16 million from the elimination of overlapping corporate costs, and the remainder from the consolidation of regional area and branch organizations, as well as other cost-savings initiatives.

Turning to our outlook. We now expect full year 2013 net revenues to be in the range of $1.72 billion to $1.74 billion, up from our previous range of $1.67 billion to $1.7 billion. Additionally, we expect adjusted income attributable to Gentiva shareholders to be $0.90 to $1. Note that this outlook includes the estimated operating results of the Harden acquisition from October 18, 2013, through the end of the year and the potential fourth quarter 2013 impact of the 2014 Medicare home health and hospice reimbursement rules.

As you would expect, with the Harden acquisition integration, branch closures and consolidation and our One Gentiva initiatives, there will be a lot of moving parts in the fourth quarter. The final results for the fourth quarter of 2013 will be subject to a number of factors, including the impact from additional closed or sold locations, the timing of branch consolidation, the timing of synergies, the timing of One Gentiva initiatives, the final results from the Harden business valuation and the balance sheet accounting treatment of various items related to the Harden consolidation. With all of these items impacting the fourth quarter, we will provide additional disclosures in our year-end report to help you understand the ongoing operating earnings per share numbers. Given the acquisition and all of the other initiatives, we also expect to have significant fourth quarter restructuring charges, which we will discuss further on our year-end call.

In summary, our home health division continues to perform well despite a tough environment. Additionally, we believe the organizational changes associated with One Gentiva will enable us to grow the hospice business over time as our combined company resources are much better aligned at a local market level. On the reimbursement side, we continue to do everything we can to get relief in the final Medicare home health reimbursement ruling, but we are preparing for the worst-case scenario by adjusting our strategy through efforts such as One Gentiva and the Harden acquisition to ensure we continue to drive shareholder value despite the tough environment.

Longer term, we continue to believe there are significant growth opportunities, given the healthcare 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] Our first question comes from Darren Lehrich of Deutsche Bank.

Darren P. Lehrich - Deutsche Bank AG, Research Division

I just wanted to ask about -- what you're seeing in the hospice. Obviously, Tony, in your prepared remarks, you're describing the headwinds in the industry. And I guess, as it relates to this quarter and what you're seeing, what is the impact that you've seen from the rule-making process? Was this the result of some confusion around the diagnosis categories? Or is this just broader, more general weakness?

Tony Strange

Well, I think it's a good question, Darren. I don't know how to quantify that for you. The rule-making process and the elimination of certain diagnoses from being qualifying diagnoses for hospice, all of those things combined, create just uncertainty in the market. I was -- I actually had an opportunity to meet with a physician here in the last month, and the physician made a comment because they are asking physicians to be more and more specific with -- related to hospice that they're not even sure that -- the feeling they're getting is that CMS is actually trying to discourage the use of hospice, especially as it relates to some of the oldest and most frail patients. So I don't know that it's one specific item that can be quantified other than more than anything kind of a cloud across our industry. There's been a fair amount of publicity related to some increased scrutiny from regulatory inspectors, the OIG and such. And I think all of those things converge on the hospice industry right now and really kind of drag down the ability to grow. I don't want to sound discouraged, though, because if you'll recall, our home health business was right there in late 2010 and 2011 when the additional regulatory burdens came out, specifically related to therapy utilizations, the Senate finance committee report came out, and the SEC and all of those things, this too will pass. Hospice plays an integral part in the healthcare delivery system. And when you think about the rising cost to seniors, hospice not only provides a great end-of-life solution for the patients that we serve, but it's an affordable cost effective means by which to treat these seniors. So eventually, the hospice industry will come through this cloud, and it will play a vital role in the healthcare delivery system in the United States.

Darren P. Lehrich - Deutsche Bank AG, Research Division

Okay. I guess just one follow-up. Just on the guidance, Eric, can you just help us think about what kind of underlying improvement in the base business that you're expecting to see in Q4? You can obviously layer in the timing of Harden, but just curious what's sort of embedded there.

Eric R. Slusser

Yes, Darren. Typical trends you see looking at prior years with fourth quarter seasonality, you see different trends between hospice and home health. So we'll kind of model that run rate along with the improvement we get from Harden, along with the savings we get from the One Gentiva and other initiatives that we talk about is kind of how you get to that number. But for the most part, the business, Gentiva, standalone, is consistent with the kind of trends we've seen in the third quarter.

Darren P. Lehrich - Deutsche Bank AG, Research Division

So no improvement in hospice sequentially from what we had here?

Eric R. Slusser

No.

Operator

Our next question comes from the line of Whit Mayo of Robert Baird.

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

Tony, in thought of this One Gentiva strategy, can you talk a little bit about how your sales model is changing? And how comfortable you are that this is the right incentive structure? I feel like this is -- we've seen several iterations and changes of this. So what makes you confident that this is the correct structure to move forward?

Tony Strange

Well, Whit, I think that our confidence comes from our referral sources and our customer base. The result of this planning session was us going out to the market and talking to our customers, especially where we offered multiple product lines, home health hospice and community care in the same markets. And today, if you think of -- or yesterday, I guess, I should say, when we called on a referral source in Augusta, Georgia, we had a hospice rep calling on that referral source asking for hospice business and a home health rep calling on that referral source asking for home health business. Our customers really wanted -- were really asking for us to be a single-source provider of post-acute care services with one point of contact, really, a relationship manager, if you will. And so we believe that this approach is in response to what our customers' needs are. Now with that said, we have accounts, for example, in Augusta, Georgia. We work maybe with a large orthopedic clinic. Well, we're not going to get a lot of hospice referrals from that orthopedic clinic, so we'll still have hospice specialties -- specialists who focus on -- I'm sorry, home health specialists who would focus on that rehab component of that business in an orthopedic clinic. And the same thing would be held true, for example, with a palliative care unit at a hospital. We're not going to get a lot of short-term home health patients out of a palliative care unit. So we'll still have hospice specialists as well. But to the extent where we have referral sources like an assisted living facility or even a hospital where they really want to look to Gentiva to provide -- to be their resource for home health, hospice and community care services, I think that this plan is in alignment with what our customers are asking us for. In terms of -- that's where the confidence come from. But to your point, it is new. It's another change. When we roll -- when we began developing this, we went to the field and asked the field for input. And I can say that our field embraced the changes wholeheartedly, felt like that it was the right thing to do for our customers and our patients and for our business. The alignment of the incentive plans in each market between operations of home health and operations of hospice and community care, I think, will be the last component to really try to marry those businesses up in the individual markets.

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

Now that makes a lot of sense. Any way to frame up maybe the benefit that you expect to achieve from this initiative? And I know there are probably some costs to get these savings, but any way for us to think about what the benefit could be going forward?

Tony Strange

Well, I think you should think of the benefit in 2 pieces: one, from a revenue perspective; and then two, from a cost perspective. I'll touch on the revenue first. This is a difficult environment. The healthcare environment in the United States right now is a difficult time -- physician volumes, hospital volumes, volumes across all of healthcare are down. And until that changes, I think we're going to have to take market share in order to grow. So when we -- we'll provide further insight into this in 2014 guidance. But I think, consistently, what we've said in the past, we expect growth to be in that low single digits. Now the improvement comes from, obviously, if our growth rate in our hospice businesses in the low single digits, that's an improvement from where we are today. And we think One Gentiva will get us there. I think I made a comment in my prepared remarks that the movement to One Gentiva is probably going to eliminate somewhere around 100 FTEs in our organization. And again, we'll give you further insight on the financial impact of that when we provide our 2014 guidance at the end of '13.

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

Now that makes sense. And my last follow-on was just late last week, several MACs announced that they would begin performing some prepayment reviews on non-oncology hospice patients and SNFs. And do you have a sense of how much of that represents your business? And just any general comments about how to think about those changes going forward?

Tony Strange

Well, I think I've commented before that our -- if you look at our hospice revenues that are derived from patients who reside in nursing homes, that number is less than 20%. I think I have consistently said that, and that really -- we don't anticipate that to change. We look at -- our hospice business is under so many different reviews already that I'm not concerned about further review in our business. I think you may be alluding to the question of the -- of certain diagnosis, the debility, and adult failure to thrive, that number for us is a manageable number in our business today. That number is down to under 10% of our patient population and most of those, we have been able to identify an underlying terminal diagnosis that we -- that does qualify for the patient on an ongoing basis. So we think we have our arms wrapped around that. But with that said, I do think those changes in regulatory -- in the regulatory descriptions of the benefit will continue to weigh on the ability of hospice businesses to grow for the near term. And -- but, again, like I said before, I think in the long term, hospice has to play that key role in the healthcare delivery system.

Operator

Our next question comes from the line of Ralph Giacobbe of Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

I just wonder if you could help. Are a lot of the savings front-end loaded? I just ask because it seems like a still pretty steep ramp to get to sort of the implied 4Q guidance of kind of $0.30 to $0.40 off of 3Q $0.15 base. So I know Harden is coming on. I know you talked about One Gentiva but -- and you talked about some seasonality. But anything else I'm missing there that would drive that level of sequential improvement?

Eric R. Slusser

Yes, Ralph, this is Eric. Those are the 3 key and the only other one would just be early synergies at Harden.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay, all right. So that's the answer from the...

Eric R. Slusser

So let's kind of make them the 4 components, with the One Gentiva -- One Gentiva, as Tony said, was rolled out in early October, so we'll see benefits of quite a bit of that for the full quarter.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay, all right. That's helpful. And then just -- I'm sorry, go ahead?

Tony Strange

I was just going to comment -- agree with Eric. And then in addition to that, all but 18 days. We closed the Harden transaction on October 18, so you'll have all but 18 days of Harden in the quarter.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then I just want to go back to sort of the home health side of the business and actually the non-Medicare home health revenue. I know it's a smaller component. That piece continues to come down. I'm just -- any color there? Is that market share loss? Is that just sort of lower utilization? Just, again, trying to get a sense of what's happening on that piece of the business?

Eric R. Slusser

Well, Ralph, as I've said in the past, we've been very disciplined about our business. And we believe that we provide key service for our patients in their homes, and we should be paid appropriately. So because of that, we've taken a very disciplined approach to the kinds of business that we accept and don't accept. And we have walked away from businesses, both last year and this year, to -- with organizations that we don't feel recognize the value of the services that we provide. And that's an approach that we'll carry into 2014 as well. So it's not really an underutilization of services. It's -- the business that you see in that category for us, are businesses that pay us with a rate that we think provides an acceptable margin in that business.

Operator

[Operator Instructions] Our next question comes from the line of Kyle Stockmal [ph] of Barclays.

Shubhomoy Mukherjee - Barclays Capital, Research Division

This is Shubho here from Barclays. A couple of questions. One is around your free cash flow guidance. In the beginning of the year, you had said that you expect free cash flow for Gentiva to be between $40 million to $50 million range. So far, we've seen very limited free cash in the first 3 quarters. Could you comment on what your expectations will be in the back half of the year? And secondly, any updates to the 2014 guidance for Harden, Gentiva combined that you provided when you announced the transaction?

Eric R. Slusser

Yes, this is Eric. As far as fourth quarter free cash flow, we expect it to be better than third quarter. We don't have the bond interest we had in the third quarter. We don't have the payroll timing issues that we had. And, of course, we'll have incremental cash flow from the Harden transaction. So we expect that to be improved in the fourth quarter. We also, in the third quarter, as I mentioned, had an increased capital spend from the point-of-care devices that is all behind us. And so we won't have that incremental spend in the fourth quarter. So expect it to be improved for Q4. As far as 2014, we won't be commenting further on that until we get into the early part of 2014 and announce our year-end results, at which time, we'll give the remainder of the 2014 guidance. We're still working on things that I talked about, some of the same things that impact our Q4 around the balance sheet valuation, the accounting treatment of certain costs. We still have invoices coming in related to the transaction and how those are treated capital versus expense. So all of that will get worked through in the fourth quarter, and we'll plan to talk about it earlier next year.

Tony Strange

Yes. And in addition to that, we're still waiting on the final rule to come out. So that will also have an impact on 2014.

Operator

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

Tony Strange

Well, again, we'd like to thank you for joining our call. And thank you to the Harden employees for embracing One Gentiva and becoming a part of our company. With that, we look forward to giving you an update soon. Thanks a lot.

Operator

Thank you. This concludes today's third quarter 2013 earnings call. You may now disconnect.

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