Hanger Orthopedic Group Inc. Q1 2010 Earnings Call Transcript

Apr.27.10 | About: Hanger, Inc. (HNGR)

Hanger Orthopedic Group Inc. (HGR) Q1 2010 Earnings Call April 27, 2010 9:00 AM ET

Executives

Tom Kirk - President and Chief Executive Officer

George McHenry - Executive Vice President, Chief Financial Officer & Secretary

Tom Hofmeister - Chief Accounting Officer & Director of Investor Relations

Analysts

David Macdonald - Suntrust Robinson Humphrey

Bryan Sekino - Barclays Capital

Fred Buonocore - CJS Securities

Dawn Brock - Kaufman Bros.

Daniel Owczarski - Avondale Partners

Michael Petusky - Noble Research

Operator

Good morning. My name is Christopher and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger Orthopedic Group, first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

I’d now like to turn the call over to Tom Kirk, President and CEO of Hanger Orthopedic. You may begin your conference.

Tom Kirk

Good morning, and welcome to Hanger Orthopedic Group’s discussion of our first quarter results. Before starting the discussion, let me ask Tom Hofmeister, our Chief Accounting Officer and Director of Investor Relations, to review with you our declaration on forward-looking statements.

Tom Hofmeister

Thank you Tom. During this call management will make forward-looking statements relating to the company’s results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements.

Statements relating to future results of operations reflect the views of management. However, various risks, uncertainties and contingencies could cause actual results or performance to differ materially from those expressed in or implied by these statements, including the company's ability to enter into and derive benefits from managed care contracts, the demands for the company's orthotic and prosthetic services and products, and the other factors identified in the company's periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

The company disclaims any intent or obligation to update publicly these forward-looking statements whether as a result of new information, future events or otherwise.

Now I’ll turn the call back over to Tom.

Tom Kirk

Thanks Tom. Overall the first quarter contained several noteworthy points. We grew consolidated sales over the first quarter of last year by 5.4%, in spite of some difficulties due to adverse weather and the continuing unemployment conditions.

This sales performance combined with cost management yielded $0.16 earnings per share, excluding the cost associated with our relocation. This equates to a 14.3% growth over last years first quarter, and I’d like to add that the relocation is tracking on plan and we still anticipate a move-in date of about mid August. This quarter makes the 17th consecutive quarter, where we have met or exceeded first call estimates.

Now I’ll turn it over to George, our Chief Financial Officer, who will review our financial results and balance sheet changes in detail.

George McHenry

Thank you Tom. Good morning everyone and thank you for joining us. I’ll comment on the income statement first. Q1 was another solid quarter for the company. The important take away is on our operations are as possible.

We met estimates as Tom mentioned, recording $0.16 excluding relocation cost. Our operation income increased by 7.5%, and our margin improved by 20 basis points, excluding the relocation cost.

You may recall that our operating margin actually declined 10 basis points last year in the first quarter, so we are pleased with these results, and it puts us in good position for the balance of the year.

Our sales increased by 5.4%. Patient Care made up a significant potion of the increase, with a 3.6% increase in same-center sales, and our distributing segment reported a 4.3% increase.

Our comp rate of 30.1% is comparable to the prior quarter, and the rate for the full year after the fiscal inventory adjustment, so we are in good shape there. We continue to do an incredible job of managing our expenses, personnel and other operating costs, are in-line are below our budgeted expectations. Operating expenses only increased $900,000 in Q1 of 2009 in fact, and that’s including cost associated with some acquisitions that were made late in the year.

As discussed in our year-end call, we are in the process of moving the corporate headquarters from the Bethesda, Maryland to Austin, Texas. In this quarter we incurred $2.1 million of employee termination and other relocation related expenses. These expenses are non-recurring and are shown on a separate line in our income statement. I’ll talk more about the move in a couple of minutes.

D&A and interest was about $200,000 below last year. Our tax rate was consistent with prior periods at 40%. All the factors I’ve just discussed led to a 14% increase in pro-forma EPS for the quarter, so we are happy with our results.

Moving on to the balance sheet; our AR decreased $6.2 million from year-end and our DSO’s dropped to 46 days, a four-day improvement compared to year-end; that’s the lowest we’ve ever reported. The quality of our receivables is excellent and we are comfortable with our reserve for doubtful accounts. Our collections remained strong.

Our inventory increased by $1.8 million to $93.1 million, from $91.3 million at the end of last year. Inventory turns improved slightly to 4.3 times from 4.2 times a year ago. Our sales backlog remains strong at quarter end, and our inventor is at appropriate levels to serve our patients.

Capital additions for the quarter was $7.9 million, which is $5.1 million higher than last year. During Q1 of 2010 we did accelerate some equipment purchases in order to take advantage of special pricing. As I mentioned during the 2009 year-end conference call, our capital additions could be in the $28 million to $30 million range this year, depending on the status of the development of our new billing system.

Cash flow used in operations for the quarter was $12.1 million, that’s an $8.4 million increase over the last year. Increase in cash used was due to normal working capital expenditures. Keep in mind that during the first quarter of every year, we do not generate cash from operations due to Q1 being a seasonally low sales quarter, and a quarter in which we pay out our variable incentive compensation for the prior year.

Looking at our liquidity, the company currently has total liquidity of $127.6 million, that’s comprised of $64.1 million in cash, and $63.5 million in availability on our revolver. Total leverage for our bank calculation remains below three times at 2.99. You should expect our leverage to increase slightly in the first two or three quarters of this year, as we record the expenses related to our cooperate relocation.

Moving on to the Austin Move. The move is underway and on schedule. We have begun construction on our new office space, which is scheduled to open as Tom mentioned in August. We opened our temporary space in March and we are in the process of hiring and transferring personnel. We expect to record the charges that were discussed in the press release though the third quarter of 2010.

Now moving on to guidance. We are confident about the balance of our year and we are reaffirming guidance for 2010. We expect net sales in a range of $815 million to $825 million, that’s a growth rate of 7.2% to 8.5%. Our goal will be to improve pro-forma EBITDA leverage by 20 to 40 basis points in 2010; as I mentioned we got up to a good start in Q1. Our full year EPS guidance, excluding the cost of relocating our corporate offices are $1.27 to $1.29, which is growth rate of up to 14%.

That concludes my comments and now I’m going to turn the call back over to Tom.

Tom Kirk

Thanks George. Now I’ll add a little color on the business drivers form an operations perspective. Our patient care segment achieved a $5.4 million increase or 3.6% same center sales growth rate for the quarter compared to Q1 of last year. We estimate that approximately 1% to 1.5% of this increase can be attributed to price, resulting from the rollout of the fee schedule increases that we received in 2008 and 2009, and the balance in attributable to volume and mix, and we estimate that that’s about a 50/50 split.

The programs that we have in place that dive the volume and mix are the following: First, the continued improvement in our Linkia book of business. Let me remind you again that HPO is the primary vehicle for the delivery for most of the services under Linkia contracts. On an overall basis, the revenue from the Linkia design contracts is up 9.2% for the quarter.

Second on our patient evaluation clinics, which in this quarter produced about $3 million incremental revenues, and that of course is when we ask our patients to come back in, we provide them with education and counseling on the fit and functionality of their devices.

Third are our sales, marketing and public relations efforts by our practitioners and those that support them in identifying opportunities specific to their local businesses, such as the opening of satellite offices, and the launching of certain kinds of marketing programs. I would like to add that they really did a fantastic job in this quarter, in getting all of our patients in, in spite of some real nasty weather conditions. So we were able to schedule them and get them in before the end of the quarter.

The percentage of unemployment currently stands at 9.7%, up from 8.6% at the end of Q1 from last year. The good news is that the administration in Congress have extended unemployment benefits in health insurance. Our practitioners and our administrators are working with the patients to identify other sources of assistance for their co-insurance and co-pays.

We’ve been working very diligently on the recently passed healthcare legislation. Our efforts have been in concert with the Amputee Coalition of America, and the American Orthotics and Prosthetic Associations. There are a series of pluses and minuses associated with this new legislation. Right from the beginning it does admit over 30 million new potential patients into the system, without rejection for pre-existing conditions, which is a huge positive when we think of patient population.

Now there are other conditions regarding reimbursement and competition, which are yet to be defined. During this quarter we did secure the 19 State Utah, on state parity, and there are over 20 states that have parity legislation in process, and we will keep you advised as the healthcare reform becomes a little bit clearer on those terms that I mentioned regarding reimbursement and competition.

Now lets discuss SPS. Their upside sales were up approximately $900,000 or 4.3% compared to the first quarter of ’09. During Q1, SPS added a new product line to its product portfolio on a solo basis, and this one-stop shopping that they can offer to the independent customers; combined with their outstanding customer service, allow them to continue to grow.

SureFit continues to make progress on improving their marketing, sales and infrastructure processes. We added a new line of shoe designs to our product portfolio, and expect to introduce new scanning technology to the podiatric and the orthotic markets later this year. We hired a new general manager last fall and he is settled into place, and he will be driving these new changes.

Now lets turn to Linkia. They continue to execute the new mission of building volume while negotiating a fair price for services, and the value they provide to their customers. The payers tell us that they recognize the value that Linkia brings to them in helping them control costs, while ensuring good clinical care and high levels of customer satisfaction.

Their sales as I mentioned before, are up 9.2% for the quarter, clearly a validation of the value of their offer. In addition, Linkia is advancing the piloting of other services that they could incorporate into their model to provide extra benefit to the payers. On the marketing side, they are continuing discussions and negotiations with key nationals and large regional healthcare management companies, as well as the firms in the workmen’s compensation segment.

Now lets turn our attention to Innovative Neurotronics. Their sales were up 43% above sales from Q1 of 2009, and as discussed in February, we are continuing to work with outside research institutions to assist them in gaining higher approval for our second clinical trial.

The in-stride trial is an IDE designed and approved trial to enroll 1,100 patients at 30 sites throughout the US. We’ve activated two of the 30 sites, and are working to activate the rest. We expect to start patient enrollment this quarter, and we will keep you informed as we reach major milestones.

Finally, a few words on our acquisition program. In 2010 we are targeting to complete acquisitions, which would have about $20 million of annualized sales. This is comparable to prior years. As we’ve said in the past, the strategy is to look for tuck-in candidates that have straight value to us in the form of location, quality practitioners and/or favorable product service mix.

I’m proud of our ability to grow the top line despite the challenging environment that we saw in the first quarter. In addition, we have contained, and in some cases reduced costs without sacrificing clinical and operational excellence. We expect these efforts to continue throughout the year.

Now let me turn it over to Chris, and we’ll be happy to take any questions if you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Macdonald of Suntrust; your line is now open.

David Macdonald - Suntrust Robinson Humphrey

Good morning guys. A couple of questions on the corporate headquarter move. Can you talk about any senior positions or seats that haven’t been filled? George, would there be any tax benefits when we think about 2011 taxes? Will those come down because the state tax I assume will be lower?

George McHenry

I’ll answer the tax question, and I’ll pass it over to Tom for the question on our headcount. The TART [ph] acquisition remained the same in the 40% range. Moving to Texas won’t necessarily make a large change in our tax rate since we are moving our corporate headquarters and most of those costs are overly allocated at the various states where we have operations, so it should be somewhat of a non-event.

Tom Kirk

David with respect to personnel, all of the two of our senior executives are going to be making the move, and for those two, that’s the VP of HR, and our Chief Information Officer, we have identified and hired a replacement Chief Information Officer. He is onboard and is in the transition right now, working with our former Chief Information Officer and she has agreed to stay on and assist us for a couple of months through this transition.

In terms of the VP of HR, we have identified the leading candidate, and he has accepted, but has not made an official announcement yet, so we will certainly let you know once that announcement comes out, but we would expect that to occur in a couple of weeks.

David Macdonald - Suntrust Robinson Humphrey

Okay, and then guys can you just give a little bit more detail of what you are seeing on the private pay side with WalkAide. I mean, you guys are still having basically close to a 100% hit rate in terms of these claims that are being kicked back and then appealed, etc., and are you seeing any incremental traction with some of your payers on that side, on the private pay side?

Tom Kirk

Yes, we are still seeing that high success rate, albeit after a lengthy procedure sometimes it can up to four iterations, four different appeals, and in one case a large insurance company did come to us and said “Its just too expensive for us to incur the legal expenses of defending each one of these. Why don’t we get together and negotiate a fair price for this device.”

So, as we have expected throughout this process, its one of demonstrating the efficacy of the device, and its one of making the argument in terms of your patient, being an advocate for the patient, and that’s what’s led to the large success rate. We have processed over 1000 claims, and as I said it takes some time, roughly about 25% of those have been authorized. We expect to get the other 75%; it just take time.

David Macdonald - Suntrust Robinson Humphrey

Okay, and then just a final question on Linkia. I realize there is an enormous lead time to kind of nail down a contract there, so I’m not sure how much visibility you have here, but should we expect maybe an incremental contract or two there at some point in 2010, or is that a little too squishy at this point?

Tom Kirk

No, I think that is a fair expectation. Linkia, as I mentioned in my comments is in discussion with other insurance companies, and so while they all may not be blockbusters, we will take them all if you will, big or small.

So with this 9.2% growth rate that comes from two sources; one, is picking up some new business where people who are trimming their network, and so we have a preferred contract and we get more of that insurance company’s business, as well as picking up new business by adding new insurance companies into the Linkia roster. So it’s a valid expectation that we’ll pick up a little additional business as we go through the year.

David Macdonald - Suntrust Robinson Humphrey

Okay, thanks guys.

Operator

Your next question comes from the line of Bryan Sekino from Barclays; your line is now open.

Bryan Sekino - Barclays Capital

Good morning guys, how are you doing?

Tom Kirk

Great thanks.

Bryan Sekino - Barclays Capital

I was wondering if you could tell me a little about your bad debt in the quarter. If there was any additional pressure in co-pays?

Tom Kirk

The bad debt for the quarter ran by at 2%, which is a shade under where we budgeted, and also was about 20 decibel over where we ended up last year. So we did not see any increased pressure on co-pays. We saw strong collections. As I mentioned the DSOs came down, and overall the AR looks pretty healthy.

Bryan Sekino - Barclays Capital

Okay great, thanks. And on the level of growth that you showed for the SPS, I guess it was 4.3 right? Is that something that we can expect kind of in that level for the remainder of 2010 in the guidance?

Tom Kirk

We think the growth rate should be a little higher than that 4.3; still in the single digits, but in the 7% to 9% range would be more reasonable. SPS like many other companies impacted again by the weather and people managing their inventory, so they are coming back into form, so we would expect our growth rate to go up in the first quarter. It’s traditionally always the slow quarter in O&P, simply because its difficult for our patients to get around, and this certainly was no exception with the kind of weather that we had.

George McHenry

I would say, SPS was probably more impacted than HPO, because HPO can reschedule patients. The short bit sales are in SPS’s number and [Inaudible] is closed, you probably are more likely to loose a sale than we would be in O&P.

Bryan Sekino - Barclays Capital

Okay, and then just one last question here. You guys have been very vocal about the process related to your managed care contracts, how they roll every three years, and you get those Medicare prices, each for the past three years. Is that still the case going on? Like are you seeing any pressure from the payers because their margins are under pressure themselves. I just wanted to know if you can still count on that same dynamic?

George McHenry

Well, the negotiations with the payers are always spirited of course, and they are looking to maximize their profits, which means to reduce their costs of care, but I would say that it hasn’t increased, so its pretty much the same as it’s always been.

One of the things that we are watching very closely is what’s the impact of this new healthcare legislation going to have on these insurance companies. We look at Massachusetts, and we look at California, and there you see that it does put pressure on the insurance companies, and it really depends on the ability for the insurance companies to get healthy people into the system, and of course that is mandated under this new legislation.

So not only do they have to take people with existing conditions, but also are dependent upon their ability to get in healthy people to offset that. Its sort of the pool mentality if you will. How that plays out, we’ll be watching very closely, because we would expect to see that reflected in the negotiations with them.

So at the end of the day, one of the things about orthotics and prosthetics is that is a good solid business. People need the care, so we don’t think either the government or the insurance company wants to eliminate the provision of this kind of benefit, because its absolutely necessary. So we’ll be watching that very closely, but we haven’t seen any change to-date.

Bryan Sekino - Barclays Capital

Okay, thanks for taking my call.

Tom Kirk

You are welcome.

Operator

Your next question comes from the line of Larry Solow from CJS Securities; your line is now open.

Fred Buonocore - CJS Securities

Yes, good morning. Actually, this is Fred Buonocore calling in for Larry who had a conflict this morning. My first question is, were you able to quantify the impact of weather in the quarter?

Tom Kirk

For the most part, we think that we captured most of the patients. As I mentioned, our practitioners did an excellent job of trying to get them rescheduled and get them back in. When we look at a region like the mid Atlantic, here in the Virginia, Maryland area severely, there were several weeks where we had facilities that were completely closed.

We think that we have captured most of that business, but frankly its very difficult to say that with absolute certainty. But I think based on the numbers and the way we saw the revenues in January, February, and March, I think we were able to pick it all up. It wouldn’t have surprised me to say that there is probably still a few folks that are out there, that we’ll be bringing in April, but its not going to be a material amount.

Fred Buonocore - CJS Securities

Got it. So, it’s fair to say that you have seen a pick-up in activities since the January-February timeframe?

Tom Kirk

Yes, and February was a very difficult month with the weather, and March was a very good month. We were able to get those patients rescheduled. We for a while were open on some Saturdays just in the evenings in some practices, just to facilitate our availability for our patients.

Fred Buonocore - CJS Securities

Great, and is it really just the economic pickup we are starting to see? Are you starting to feel any benefit from that?

George McHenry

We wish we could announce the results like some of the other firms that are doing their first quarter announcements, but the nature of our business is probably, it’s a lot steadier, it doesn’t lend itself the big swings up and down. So the thing that we are watching and that’s why I quoted it is the unemployment percentage.

When people go back to work and they get their insurance coverage, that could make a difference, but for the most part, the extension by the government of health benefits has really helped out quite a bit. The credit to our practitioners and our administrators for helping our patients were co-pays, and co-insurance payments were required.

They have really worked with them to try and find other organizations to assist them in meeting their financial responsibility, but we won’t get a big bang like some of the other ones, but certainly as the unemployment goes down, we will all feel a lot better.

Fred Buonocore - CJS Securities

Right, all that makes sense. Then you cited a couple of areas where healthcare reform could be a benefit to you. What about as it relates to the excise tax that some of the manufacturers of the components you use will be facing in a couple of years. Do you expect to have them passing those costs along to you?

Tom Kirk

Well, its certainly going to be a topic for negotiation, but that 2.3% tax on class 1 items will have to be absorbed in the system somewhere. It was regretful that they did move from the class 2 level and dropped it down to class 1, so that the providers of some of these O&P devices will be included in that, and that certainly is going to be a debate between the purchaser and the seller.

So we will have to figure out how it gets absorbed into the system one way or another. It remains to be seen. I guess that’s all we can say at this time.

Fred Buonocore - CJS Securities

Very good. Okay, thank you very much, I appreciate it.

Tom Kirk

You are welcome thanks.

Operator

Your next question comes from the line of Dawn Brock from Kaufman Brothers; your line is now open.

Dawn Brock - Kaufman Bros.

Good morning, and thank you for taking my question.

Tom Kirk

Good morning Dawn, how are you?

Dawn Brock - Kaufman Bros.

I’m well, thank you. I got a couple of questions Tom. In your prepared remarks you talked about the advancement of piloting of new services in Linkia. Could you just give us a little bit more detail around that?

Tom Kirk

Well, a couple of things that we are looking at. Some of the insurance companies have asked Linkia to take a look at mastectomy as an area where perhaps we could use the Linkia network or establish a mastectomy network where Linkia would manage it, so that’s one we are looking into.

There is another service that they have asked us to perform for them, and we have that in pilot, and that is where we review invoices that the insurance receives to make sure that all the charges on those invoices, this is coming out of the rehab area, particularly O&P, that all those charges are valid, and they work together.

For example, you certainly wouldn’t expect to see a brace on a patient that just received a microprocessor knee. So its to correct any kinds of errors that maybe present, and we would certainly do that as a service, but we would get paid for it. So they are the two big ones that we are looking at.

Dawn Brock - Kaufman Bros.

Excellent, thank you. The second one is on the latent HPO with regard to volume. In the fourth quarter and really throughout all of 2009, you had a really high quality replacement volume. Did you see that same trend in the first quarter or is that something that really does progress throughout the year, and with kind of the roll out of more patient evaluation clinics.

Tom Kirk

Its the latter. As those clinics go up, the purpose of those clinics is to make sure that the integrity of the device is correct, and to make sure that they can function at the maximum level and when there is a deficiency in either of those or perhaps there is some new technology that they can and should have, that would be medically necessary as determined by their doctor, that’s when we would request them to go back to the doc, get a prescription, and then come on back and see us for that device.

Throughout the year, and actually with nicer weather, we can hold more clinics and that gives us more opportunity to see all those patients, an what we say is, throughout the year, we expect each one of our patient care centers to have atleast one of our patient evaluation education clinics. So that will be building.

We didn’t do very many in February, simply because scheduling those and trying to get paid was not a good use of their time and also is subject at some of the patients to a little more danger than they should have to have in the winter time.

Dawn Brock - Kaufman Bros.

Understood. The 3.4%, 3.6% same center revenue growth number was really on more normalized replacement from a mix perspective, so okay, I got it, that’s great. So the last thing is just George, would you consider giving us an update on the callable note, and maybe any plans you guys have?

George McHenry

Well, as everyone knows, our end of the quarter notes are called on June 1, and we are looking at that very closely right now, and do expect that given current market conditions that we will be doing something with that, but we don’t have anything ready to announce yet.

Dawn Brock - Kaufman Bros.

Okay. Appreciate it. Thank you very much.

Operator

Your next question comes from the line of Daniel Owczarski, from Avondale Partners; your line is now open.

Daniel Owczarski - Avondale Partners

Yes, thanks and good morning.

Tom Kirk

Good morning Dan.

Daniel Owczarski - Avondale Partners

You talked a little bit about spirited discussions that you are having with the privates and I was going to ask you about Linkia, and whether these discussions and these discounts that you are contracting today, if they are similar to the kind of discounts that you had been given in the past.

I’m just trying to feel if you are able to maybe negotiate a little bit more favorable DO’s to offset some of the CMS flattening out. We are just out of those discounts specifically. Do they track with historical or are you able to overcome some of the pressures on the public side.

Tom Kirk

They are pretty much in-line with the historical Dan. By spirited, I didn’t mean to imply that they were different than they had been in the past, but it always is an interesting exchange when you start taking about discounts, because we know that two parties faces the situation from the opposite side.

Linkia has been successful in getting some price increases. Just last year we had three increases. So that is helping us offset some of the CMS, but its really difficult when CMS accounts for roughly 40% of your volume, and you are getting a 5% price increase, its really difficult to offset that.

But nevertheless, Linkia has been able to get some price increases, and every little bit of help as we have talked about in here, we are picking up 1% to 1.5% price in our revenue, which is the roll through of some of those prior contracts, both at CMS and at the insurance companies, because we see those on a three-year cycle.

So nothing outside the norms at present, and as I mentioned before, we are watching very closely to see what impact that Healthcare legislation may have on this whole area.

Daniel Owczarski - Avondale Partners

Okay, and then to stay with Linkia, did you give the number of how many independents are part of the Linkia network, and how that’s trending versus historical? Are you building that?

Tom Kirk

Its pretty much constant. We reported 326 the last time, and I think we might be up just a few more above that, but pretty much constant, and that’s by design. We work with each of the insurance companies to understand their -- I guess you might want to call it their member benefit strategy; in other words, how much service they want in a given area, per how many members they have in an area, and once we hit that point, there’s really no reason to bring in other care providers, because the work is fully accounted for and that’s part of the beauty of the Linkia model.

We want to reserve it for what we call our platinum providers, and so its reserved for the best that are out there, so that we can deliver that high quality service. But the short answer is, pretty much constant around 330.

Daniel Owczarski - Avondale Partners

Great, thank you.

Tom Kirk

You’re welcome. Thank you.

Operator

Your next question comes from the line of Michael Petusky from Noble Research; your line is now open.

Michael Petusky - Noble Research

Good morning guys.

Tom Kirk

Good morning Mike.

Michael Petusky - Noble Research

A few questions around WalkAid to start. The hard number on Walk innovative by now you said is up 43%, what is the actual revenue number?

Tom Kirk

For the quarter, at 1.2 I think; excuse me, 1.7.

Michael Petusky - Noble Research

All right. In terms of that large insurer you mentioned, maybe looking at making a -- if I am over stating this, please correct me, but I heard you just say that they maybe looking at an institutional coverage decision. Do you have any sense of if its possible by the next conference call, you guys may actually be able to say, “Hey, we’ve gotten this nailed down and identify that insurer” or will that be more slow-moving?

Tom Kirk

Well, I don’t want to speak for the Linkia folks, but certainly in the second or the third quarter, we would like to have someone else on board. I think you were referring to the question that was asked before, would we expect to sign up any new Linkia contracts?

Michael Petusky - Noble Research

I’m sorry Tom. Actually I was referring to -- I thought you said that regarding WalkAide?

Tom Kirk

I did say that, and we are in discussions with that insurance company on a negotiated rate for WalkAide, and we would hopefully get that thing settled by mid-year.

Michael Petusky - Noble Research

And I guess if you are optimistic and you can get that sell back quickly, you’ve probably had some price talk at this point?

Tom Kirk

Yes. That’s been the nature of the discussion. Its rather than spend money on lawyers to go back and forth, why don’t we just agree on price [Multiple Speakers].

Michael Petusky - Noble Research

Understanding that the pricing may not be as attractive as what you maybe getting at CMS, is that always been in the ballpark?

Tom Kirk

Reasonably so. It’s not over till its over. I think for right now, the key thing to keep in mind is that for those devices where we are obtaining reimbursement, on average it’s been about from $4,500 to $4,800 on average. So it’s a very attractive price point which as time goes on we expect to see the volume come up, and naturally there will be some discussion around how would that increase volume? Can you give me a little bit of a break on the price, but we are not at that point yet. We are doing almost $5,000 each.

Michael Petusky - Noble Research

I am only asking, and I understand I am going to ask you to speculate a little bit here, but if you were to nail down some kind of an institutional coverage decision with this insurer, is this insurer the type of insurer that other insurers like us would look at and say “You know what, why don’t we also talk with Hanger and work this out?” And I guess essentially what I am asking is, are you optimistic or have you thought about maybe this could be a catalyst for other positive institutional coverage decisions?

Tom Kirk

That’s the goal certainly, and when we look from an historical perspective at other devices like micro processes, this was the same way that they proceeded, so that would certainly be our hope. I don’t want to speak for any insurance company that’s out there, but we would try to work with them, so that their membership could enjoy the benefits of this device at a set of price that’s acceptable to them and us.

Michael Petusky - Noble Research

And last one on WalkAide real quickly. In the last conference call, I think you had said that there had been 1,100 claims out there, and you’ve gotten positive coverage decisions roughly on 25% of them, and this time you roughly said the same things. Do you have any hard numbers, kind of updated numbers on how many claims you actually have out there?

Tom Kirk

It’s about the same as the last time.

Michael Petusky - Noble Research

Is there any reason that that number hasn’t gone up at all. Well, it’s just different claims as claims process through.

Michael Petusky - Noble Research

Okay.

Tom Kirk

You do it, it’s a moving average. Of course, the goal is to speed down through that process, so that we don’t have 1,100 of them sitting out there. In an ideal world we would like to have zero of them sitting out there, and they would just get off the rise as they came up.

Michael Petusky - Noble Research

Okay, let me ask it this way. How many positive coverage decisions have you got since the last time we got together?

Tom Kirk

A couple of 100.

Michael Petusky - Noble Research

Okay. And just a last question; I think the last time we talked about your pricing expectation for CMS for 2011, based on the CPI, is still 1% to 3% of that still what you are thinking or anything changed from that?

Tom Kirk

That’s the current thinking. We know the long-term average is about 2%. We are still waiting to see how the healthcare legislation and reform could impact all of this. We know that the CPIU is the driver, but there is some other pluses and minuses in this. I had mentioned there was some reimbursement considerations in the middle of that legislation, so we are still waiting to see how those things play out.

Michael Petusky - Noble Research

Okay, so some of that could come in as there only is 2011 potential there?

Tom Kirk

We certainly would be hoping to get a price increase in ’11. We didn’t see one in ’10. So the long-term industry, I mean we feel that we are productivity personified here, because the long-term increase in CPIU since they’ve gone on to this system is over 100%, and yet our industry has been able to recapture only about 36% to 37%. So we have had to find ways to improve productivity and take costs out of the equation, so you just never know, and I don’t want to speak for government.

Michael Petusky - Noble Research

Fair enough, thank you.

Tom Kirk

Thank you.

Operator

There are no further questions at this time.

Tom Kirk

Okay, I would like to thank you all for joining us this morning. Wish you a good second quarter, and we look forward to talking with you at the end of July when we report our results from the second quarter. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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