Kindred Healthcare's (KND) CEO Paul Diaz on Q2 2014 Results - Earnings Call Transcript

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 |  About: Kindred Healthcare, Inc. (KND)
by: SA Transcripts

Kindred Healthcare (NYSE:KND)

Q2 2014 Earnings Call

August 07, 2014 10:00 am ET

Executives

Patrick J. Watson - Senior Vice President and Principal

Paul J. Diaz - Chief Executive Officer, Director and Member of Strategic Development Committee

Stephen D. Farber - Chief Financial Officer and Executive Vice President

Benjamin A. Breier - President and Chief Operating Officer

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Phillip Kim

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Operator

Good day, everyone, and welcome to this Kindred Healthcare Second Quarter 2014 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Pat Watson with Corporate Communications. Please go ahead, sir.

Patrick J. Watson

Thank you, and good morning. Welcome to the Kindred Healthcare second quarter conference call. This is Pat Watson. Before the company's presentation, I would like to read the cautionary statement.

This conference call includes forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involves a number of risks and uncertainties. Such forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company and its management are unable to predict or control, that may cause the company's actual results and performance to differ materially from any future results or performance expressed or implied by such forward-looking statements.

The company cautions participants that any forward-looking information is not a guarantee of future performance, and that actual results could differ materially from those contained in the forward-looking information.

The company refers you to its reports filed with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K, the company's other reports filed periodically with the SEC and its press release regarding the second quarter operating results for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management.

The company cautions investors that any forward-looking statements made by the company are not guarantees of future performance. The information being provided today is as of this date only, and the company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Certain references to operating income or EBITDA and core free cash flows, as well as other non-GAAP disclosures, have been reconciled to the company's consolidated operating results and are available on the company's website, www.kindredhealthcare.com.

In addition, please access the website to view updated investor slides, which accompany today's presentation. It is now my pleasure to introduce the participants in today's call: Paul Diaz, Chief Executive Officer; Ben Breier, President and Chief Operating Officer; and Stephen Farber, Executive Vice President and Chief Financial Officer. Mr. Diaz will begin the call.

Paul J. Diaz

Thank you. Good morning, everyone, and thank you for joining us. We are very pleased with the results for the second quarter 2014 and the strong first half of the year that we'll be discussing this morning. Again, I want to refer everyone to the slides we posted last night on our website that we'll be referring to throughout the course of this morning's update.

Again, I'll just sort of begin on Slide 3 and turn it over to Stephen and Ben and have some comments at the end about our strategic plan and opportunities going forward. I'll just start by noting that we're incredibly pleased with the progress that we've made over the last year, as we've worked through sequestration and other reimbursement cuts, and completed the repositioning of our businesses and capital structure.

More importantly, I'm just incredibly proud of our team, our clinicians and operators, who maintained their focus on our patients and operations through this time of enormous change. We'll continue to deliver on our promise of hope, healing and recovery to the patients we serve.

More specifically, in the first half of this year, we saw a continued improvement in our employee engagement surveys and reduced turnover across our enterprise, improved quality measures in clinical outcomes that our patients depend on and increased patient satisfaction in all of our business segments.

As reported last night, we had strong second quarter financial results that Stephen will take you through, and Ben will discuss the specific operations. I also want to note, though, that through all this, we've continued to advance our integrated care market strategy and the development of care management capabilities, which we think will be enormously important going forward.

Ben will discuss further our growing home-based primary care business that we're incredibly excited about, and our recent investment in ACO in Nevada, Silver State, which also we are very excited about.

As we mentioned, the last year has been a tremendous amount of change in terms of repositioning our businesses, the wholesale refinancing of our debt and our most recent successful equity offering. But also, it's important to note that today, we feel better about our team, our systems and processes, our balance sheet and our industry-leading infrastructure, which we think really positions us for growth in a way that we've really not had over the last decade that I've been here.

We're very excited about the opportunity in our acquisition pipeline that we'll talk about, and more broadly, the role that we believe that we can play as an organization in a quickly evolving and changing U.S. health care delivery system that continues to reflect the needs of growing aging population with very complex needs. That affords us, as we see, enormous opportunities for growth through our Continue the Care strategy in our integrated care markets and organic growth and strategic acquisitions as we build a company that we think will help shape the American health care delivery system.

As Gentiva reported during its earnings call on Tuesday, our 2 companies have recently entered into a nondisclosure and standstill agreement in order to conduct due diligence and to discuss a potential transaction. We are very excited to engage with the Gentiva Board and management team in this process on a potential combination and look forward to beginning our work. However, due to the agreement, we do not expect to provide updates regarding our discussions, unless and until the parties have entered into a definitive agreement on a transaction or discussions between the parties have terminated.

So now, let me turn it over to Stephen.

Stephen D. Farber

Thanks, Paul, and good morning. Turning to our second quarter.

Slide 4 breaks the numbers down at a high level. Our non-GAAP diluted earnings per share increased 26% to $0.34, growth from revenue and core operating income growth of more than 7% year-over-year, primarily from improved hospital alliance, a strong rebound in our Care Management division, growth from acquisitions and solid cost controls throughout the company. We also took additional actions to enhance our financial flexibility, which I will discuss in a moment.

Turning to Slide 5. Our efforts to operate efficiently, integrate our acquisitions and manage through reimbursement cuts have allowed us to drive solid core operating margins. In fact, I'm pleased to share that we've achieved full recovery from the impact of Medicare reimbursement cuts and sequestration compared to the prior year.

As you saw on our earnings release yesterday, we also reaffirmed our full year earnings guidance, adjusted for the increased shares outstanding following our successful equity offering.

As we've outlined on Slide 6, our assumptions for full year 2014 remain the same, and we continue to expect income from continuing operations for the year of $58 million to $68 million. Under Kindred's full year weighted average share count of 58.3 million shares, these numbers equate to $0.96 to $1.14 per diluted share.

For the third quarter of 2014, we expect diluted earnings per share from continuing operations of approximately $0.05 to $0.15. This compares to diluted earnings per share for last year on the same basis of $0.10, excluding certain disclosed items and adjusted to reflect our recent equity offering. We have typically seen and expect again this year a stronger fourth quarter to achieve our full year targets.

Turning now to our recent recap on Slide 7. We are pleased to have completed a major recapitalization of the company, with both a $2.25 billion debt refinancing and a 9.7 million share equity offering. The equity offering raised $221 million in net proceeds that we have initially used to reduce borrowings under our revolving credit facility, which had available borrowing capacity at quarter end of approximately $652 million. Together, these activities significantly improve our financial position, provide quite a bit of financial flexibility and reduce our interest expense.

Turning for a moment to our leverage. We currently have total adjusted debt-to-LTM EBITDAR of a little under 5.2x. And as we've said frequently, our long-term target leverage is around 4.5x, with an operating range, depending on transaction volume, of 4.5x to 5.5x.

In summary, we've made a ton of progress with our balance sheet, are in a very strong capital position and are in a great place to fund our growth.

And with that, I'll turn it over to Ben.

Benjamin A. Breier

Thanks, Stephen, and good morning, everyone. I'd like to start, as I usually do, by first thanking our 63,000 -- our more than 63,000 teammates here at Kindred. They continue to demonstrate a level of commitment and care that fundamentally is what makes our company such a special place to be. So thank you to all of them for all of their hard work.

Let me give you an overview of the performance of each of our operating divisions, starting with the Hospital division, please, on Slide 9. We're very proud of the team in the Hospital division and the work that they have done, and we're experiencing continued success with low rates of rehospitalization. Despite rate pressures resulting from regulatory changes, we've seen strong growth in volumes.

Same-store hospital admissions increased a little over 3% in the second quarter, representing our first quarterly admissions increase since the third quarter of 2012. I should point out that this is the first quarter with the full impact of sequestration baked into both periods, and for the second quarter, revenues were up 4.2% year-over-year, reflecting both the strong admission growth I spoke of and a 1.8% increase in revenues per patient day.

In comparison, our core operating costs per patient day increased only 1.3%. And with this excellent expense control, our contribution operating income grew 6.3% for the quarter.

EBITDA margin in the Hospital division expanded 40 basis points, really a terrific all-around performance out of our Hospital division. One item of note that I think investors will find interesting in the Hospital division is the growth that they saw in both Medicaid and in the commercial mix, managed Medicaid, specifically. We believe, as many hospital companies have previously reported, that this reflects the beginning of a broader trend, driven by the Affordable Care Act and, specifically, Medicaid expansion in many of the states we serve.

Moving over to Slide 10, our RehabCare division. We continue to make great progress, as evidenced by the sequential operating income growth and margin improvement we are seeing. Like our other divisions, RehabCare is focused on reducing cost and driving efficiencies and is really executing at a very high level.

On the development front, we've added 57 new sites of service in our skilled rehab service line, and we added 5 total hospital rehab service contracts. And we're especially pleased today to point out that when you take Kindred and RehabCare with both our freestanding inpatient rehab facilities and our managed acute rehab unit business, that we are today running one of the largest IRF operations in the country. We're very excited about the many opportunities we're seeing to grow this business, both organically and in our ability to allocate capital and grow externally as well.

Moving over to Slide 11. Our efforts to reshape our Nursing center division continue to pay off as we achieved a significant improvement in operating margins in the second quarter. We love when we see reduced nursing turnover and improved retention rates, which we think help support organic growth and promotes stability, and we had a great move in the right direction in that number this quarter.

Revenues grew 5.8% year-over-year, and admissions were up 1% year-over-year. In addition, after a lot of work, nearly all 59 nursing centers leased from Ventas were divested as of August 1, the remaining few set to transition over the next few months. Meanwhile, we're developing 3 additional transitional care centers in Indianapolis, Phoenix and Las Vegas, and we think that these new transitional care centers will add to the growth momentum in this division going forward.

Lastly, turning to Slide 12, our Care Management division continues to make impressive progress with its operational performance. Ongoing improvements in our Home Health and Hospice operations, including enhancing our team, processes and technology, have really gained great traction.

Our Home Health outcomes measures are outperforming national benchmarks, and we intend to continue the aggressive growth of this business, both organic and through acquisitions. Our investments in an industry-leading infrastructure are the key to generating exciting results as our platform grows. And with respect to the second quarter, Care Management and Kindred at Home delivered an outstanding 66% revenue growth, and core operating income doubled year-over-year.

Our acquisition of Senior Home Care has gone impressively well. And in addition, our recently announced acquisition of the Silver State Accountable Care Organization in Las Vegas has been very exciting, a great transaction for Kindred. And this partnership marks our first ownership in direct management of an ACO anywhere in the country.

So all in all, as you look at our operations, a very busy but very encouraging quarter across the Kindred enterprise. These results, we think, have been driven by a relentless focus on executing our Continue the Care strategy. Our care management and integrated market development continues to provide exciting opportunities to create value, improve volume, drive rates and what we think most importantly, make the post-acute patient experience more user-friendly.

I'll close my remarks by turning to Slide 13, which we think demonstrates that the efforts we have taken over the past 3 years have made a significant impact in improving our financial performance. We're very pleased that we have the financial flexibility to return capital to our shareholders through a recurring quarterly dividend, while at the same time investing in our business and pursuing accretive external growth opportunities.

And with that, I'll turn it back over to Paul. Paul?

Paul J. Diaz

Thanks, Ben. Thanks, Stephen. So I'm just going to pause and stare at Slide 13 for just a moment because I think it's the right inflection point of kind of where we've come from and now where we think our opportunities are going forward.

And as Ben and Stephen have both described, seeing now, with the team that we have, the quality of the assets, the focus that we have internally in our core operations that you saw in this quarter in each of our business segments, the opportunity to continue to grow top line at 7%, to continue to grow operating income at, hopefully, at this 10% to 11% operating growth rate, and those of you that understand the leverage in our operations and capital structure can see how that results in substantial shareholder opportunities, both in terms of share price, dividends and free cash flow for reinvestment and growth.

The visibility that we now have in our operations in the regulatory environment was LTAC criteria. And now turning to '14 that we have having completed our repositioning of both our businesses and the recapitalization of our capital structure, affords us tremendous opportunities for growth in all of our business segments going forward.

It's particularly exciting for me to look at where we are today in terms of our business mix, having grown almost double RehabCare, our rehab business; the significant growth in our Care Management division, including Kindred at Home; and really a Nursing center business, a subacute business today that, quite frankly, is very positioned to take advantage of the demand for subacute services in integrated care models as well.

So as we look forward, we see the benefits of our efforts resulting in an accelerated opportunity to grow our top line, improving margins, as depicted on Slide 14, profitability and cash flows.

With respect to the capital structure, as Stephen talked about, as you look at our capital structure today and the significant reduction in capitalized leases, eliminating the earnings leakage that the company really had for many, many years and the efficiency and flexibility of our capital structure going forward, as Stephen mentioned, it really positions us in a market where we could expect to see continued consolidation and continued opportunities for both organic and transactional growth in a pretty sweet spot relative to our peers.

If you look at Slide 16 for a moment, these statements are not based on hubris or anything other than a proven track record over these many years of integrating both small and large acquisitions and delivering, as we've committed to our board, on the results of those acquisitions.

If you look at Slide 17, which is something new, it just gives you a snapshot of, since RehabCare, how busy we have been in the acquisition front, quietly and not so quietly growing revenues, redeploying the capital and the management team from some of the divestitures we've done, and achieving a post-acquisition purchase multiple of about 5.6x EBITDA and delivering almost $0.01 per share in the context of these acquisitions. This gives us great confidence as we look again at our core operations, our balance sheet and our opportunities going forward.

I'll share for just a minute and happy to talk off-line about it more, on Slide 18, about how we look at these development priorities and opportunities and the disciplined way that we've attempted to do this over the years. We think a lot about advancing our Continue the Care strategy as we think about opportunities in each of our business segments, making sure that we believe that we can achieve strong returns on invested capital in each asset class and, obviously, building out our care management capabilities in our integrated care markets.

So with that, I'll say that we continue to be very excited, as you look to Slide 19, about opportunities, as Ben mentioned in our Hospital business with expanding our IRF portfolio and RehabCare, our new transitional care centers, and to continuing to grow Kindred at Home and our hospice services.

With that, we thank you for your support through this period of enormous change, and we will open it up for questions about the slides or any other aspects of our business.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

The 3.1% growth in hospital admissions, Ben, if I'm hearing you right, are you saying you think that was largely sort of the flow-through of benefit that the acute care guys are seeing from health reform or is it broader than that maybe?

Benjamin A. Breier

It's hard, A.J., to parse it out specifically. But if you look at the segment data in our Hospital division, the Medicare fee-for-service, Medicare Advantage components of our business, relatively flat to up a little bit year-over-year. It's really on the Medicaid and on the commercial side where you saw the big volume spikes and, specifically, Medicaid managed inside the commercial mix. What we think and what we hear from our operators and our sales folks out there is really there's 2 things that are driving it. One, we are bullish on the effects that the Affordable Care Act and the Medicaid expansion in these markets that we serve is having on inpatient volumes in the short-term acute hospitals. We've watched, just as you have, and listen to them report some improvement in those inpatient volumes. So there's no question that we believe that, that is starting to flow down into our business. We also think that many of the dual eligible programs that have been initiated in many of these states are starting to take patients and manage them more carefully as they manage Medicaid-type patients. In California, for instance, that's a state that we're seeing this happen a lot. And so we think it's really a glass-is-half-full for us. So more heads in beds and more patients coming our way. We're happy to see and anxious to see how the back half of the year plays out.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then in the skilled nursing area, you highlighted it last night, the productivity gain, obviously, we're sort of late in the economic cycle. And in fact, if the economy turn around, you might actually see productivity go the other way. What -- I mean, obviously, that's beneficial for you what you saw. What do you think's behind that again?

Benjamin A. Breier

Are you talking about in our RehabCare skilled nursing business, A.J. or...

Albert J. Rice - UBS Investment Bank, Research Division

Right, right, right, the 44% to 40.7% swing.

Benjamin A. Breier

I'm sorry, say those statistics again? I'm not sure...

Albert J. Rice - UBS Investment Bank, Research Division

Yes. You were talking about a productivity -- or turnover rate of 44% going to 40.7%. That seemed like a big improvement to me.

Benjamin A. Breier

Yes. I'm sorry, A.J., I just want to make sure I understood your question. The turnover number in the nursing centers, which went down almost 350 basis points, we were really happy to see, I mentioned in my prepared remarks. I think that when you think about the Nursing center division, all they've been through over the last 1.5 years with divestitures and changes of leadership, I think I would point to that statistic as much as any to show that this really is the return of real normalization and stabilization in our business going forward. Mike Beal and his team in that division are doing a great job, now thinking about the future of what subacute delivery should be. And so the drop-off in turnover, the increased retention, we think both of those are really positive signs of the return to normalcy in that business.

Albert J. Rice - UBS Investment Bank, Research Division

Okay. And then my last question, just can't let Stephen off the hook here. I guess you guys updated your cash flow guidance. Can you just talk a little bit about what the moving parts are there?

Stephen D. Farber

Yes, sure, A.J. The main moving part really is around growth in AR. I mean, as always with cash flow, there are a bunch of items going in both directions. But I guess the simplest way to think about a big piece of it is if you look at our DSOs, for this year over the first half of the year, our DSOs went up about 6 days. Last year, the same period, our DSOs went up about 3.5 days. So there's about a 2.5-day incremental DSO move over the first half of the year, so a little more than our normal seasonal capital cycle. It runs us about $15 million per day of DSO. So that's a good part of it. And it's a combination of some items that we think are temporary and are likely to reverse and some items, like Ben was speaking about, in terms of Medicaid growth. I mean, look, we're perfectly happy to have incremental Medicaid volume and managed Medicaid volume. But there are also -- Medicaid tends to be the slowest payer on planet Earth. So if we -- we're happy to have incremental volumes, but there's a working capital cost that goes along with it.

Operator

Next, we'll hear from Chris Rigg with Susquehanna Financial Group.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Just wanted to follow up on A.J.'s first question there. Just with regard to some of the incremental volume you're seeing from the ACA, particularly in Medicaid. What's the acuity level on that population? Is it comparable to sort of the traditional Medicare-like admissions?

Benjamin A. Breier

It's a little bit lower, I would say, on average. But remember, these were patients -- a lot of these expansion patients, Chris, are patients that we think previously, potentially, were in the uninsured ranks that have now come in under the ACA and is part of the Medicaid expansion that they're now getting benefits. And so we're watching and learning a lot from an acuity perspective about what we're seeing. Obviously, the rates are a little bit lower on the Medicare-managed and the Medicaid -- on the Medicaid-managed and Medicaid side than what we're seeing on Medicare fee-for-service. So we're measuring acuity and measuring margin that we can get from those patients. It's still a little early in the game to give you a full diagnosis of that. But generally, look, these are very LTAC-appropriate patients, and they're adding to the volumes in our business. And we're excited about continuing to take them in our hospitals.

Paul J. Diaz

So Ben, if I can just add a little commentary. So Chris, this is the beginning of what we have talked previously about in the context of a changing beneficiary landscape under the ACA of the opportunity for us to care for patients who are LTAC-appropriate under the criteria and a level of payment that approximates the site-neutral rate, where -- when we start thinking about hospitals, as you mentioned or A.J. mentioned, getting busier. And the care for patients who are now being covered by the exchanges or by Medicaid, the opportunity for us to provide, as we've been doing for many, many years here at an acute level of care around rates that approximate the site-neutral payment, might come from exchanges, might come from managed Medicaid. And we believe that the incremental volume there and our ability to manage the care and the cost there is part of the growth opportunity for our LTACs. And the criteria just gives us more credibility to do that as the payer landscape continues to evolve. So I believe it is the beginning of what we've talked about of the volume opportunity around what will look more like the sort of site-neutral rates under the Medicare program.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And I guess the follow-up to that would be, you obviously have the criteria, have you actually been educating your people in the fields as of right now to immediately drive that volume through the facilities?

Benjamin A. Breier

Well, I would say it's a process. Look, as we know, one of the benefits of the new LTAC criteria was that we do have some time as it sort of calendarizes in and we move to 2016 and ultimately, it's not fully implemented, as you know, Chris, until 2018. But yes, we have tried to have a balancing act of trying to educate our folks on what is coming, be prepared for the ability to take all kinds of patients that we might not previously have taken before the ACA sort of really fully started around out and kick in like it has here in the first half of the year. And then, thirdly, behind-the-scenes, back here at the Hospital division support center, we are doing enormous amounts of strategic planning and thinking about what this transition will ultimately look like and what we will have to do from an education and training perspective with our facilities going forward. At the end of the day, the one thing we've always said to our folks is, if you're giving really great quality care and you're taking care of the sickest kinds of patients, there's a -- and you're doing it with the kinds of what we believe to be lower-cost option that you can get in one of our LTACs, there's going to be a place for patients, for the consumer, and we're going to thrive going into the future. So we're learning and we're educating, but we're excited about what the future holds.

Operator

Next, we'll hear from Gary Lieberman with Wells Fargo.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

This is Ryan Halsted on for Gary. I guess a question on the Gentiva due diligence, any sense of a timeline on that? And would you categorize -- any engagement in discussion with the company or any other detail around that?

Paul J. Diaz

We really can't add any more than the prepared comments that I mentioned before. We're excited to -- and to start doing our work. We're excited to start working with the Gentiva management team to better understand their business plan. We're -- we congratulate them on the progress they made in the second quarter, and we think that's just great for everybody. And so we're doing our work, but I really can't comment on timelines or where we are in that process at this point.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay. And I guess, on the final LTAC rule, anything noteworthy that you would highlight, anything you've had a chance to think about?

Paul J. Diaz

I'll just echo what Ben said. We're still in a learning mode in hospital-by-hospital, trying to figure out what the impact and how we will be able to grow the Medicare and Medicare Advantage business in the context of the criteria. But as I said, and we've commented on before, we have time to adjust to those new rules, quite a bit of time, given our cost reporting period. But in the meantime, the opportunity to reeducate people of the value proposition of our LTACs and what they can do for patients and at what cost across a broader array of payers is what we're excited about in the near term. So we're going after new business in -- for our LTACs. And we are excited about that in advance of the criteria being implemented.

Operator

Next, we'll hear from Kevin Fischbeck with Bank of America Merrill Lynch.

Phillip Kim

This is actually Phil Kim on for Kevin. My first question was actually regarding the cash flow guidance. So you had mentioned the accounts receivable build up, which is reflected in the guidance. Do you expect that trend to go forward and continue?

Stephen D. Farber

I think it's a mix. I think there's some elements that are temporary, and then some elements that will be driven by things like growth in Medicaid and managed Medicaid and Medicare Advantage volumes. To give one quick example, a temporary -- for example, we had 3 states that suspended their Medicaid payments at the end of their fiscal year, which was a July 1 new fiscal year start and carry things over into Q3 for us, so that would be a temporary difference.

Phillip Kim

Got it. And also one thing I noticed from the press release was that the length of stay for the Medicaid group decreased pretty significantly. And given that the Medicaid admissions had begun to grow a little bit, can you give us any color on that and what happened there?

Benjamin A. Breier

Yes, we saw that, too. We were down about 5 days. We're going to watch that carefully. I think it's as much the numerator growing in terms of having more Medicaid patients kind of settling out on -- with an LTAC patient. If you see the length of stay, it's still, what, upwards of around 35 days I think the LOS is, which is still well above what our Medicare length of stay is and still above what our commercial length of stay is. We think it still prescribes itself to being a pretty sick LTAC patient. And while it did come down, it'll take us another couple of quarters. It still represents a pretty small percentage of our total payer mix. And so we'll take the next couple of quarters to kind of watch it play itself out. But I think it's as much the math of just more Medicaid patients and it kind of flowing through into kind of what a normal LTAC hospital patient would be.

Paul J. Diaz

We're happy to take more patients at a lower length of stay, and that has great flow-through in our operating model.

Operator

Next, we'll hear from Rob Mains with Stifel.

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

Just one follow-up on the volume question at the hospitals. When I see more Medicaid, more commercial insurance, I'm thinking of a younger patient. Is the sort of demographics of who is showing up at the hospitals shifting at all? Are you seeing a larger percentage of non-senior citizens?

Benjamin A. Breier

No, I wouldn't say that, Rob. Again, the shift is sort of occurring in front of us, and so we'll take our time to kind of see what the demographic change is. Certainly, from an acuity perspective, it's very similar to what we have seen. It's possible that the group, the cohort gets younger, but I wouldn't say that's anything that we've seen so far, no.

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

Because the newly insured are going to be under 65 because the over 65, obviously, has insurance?

Paul J. Diaz

Rob, it's way early. I mean, the beneficiaries are moving around, and I think we're just in the early innings of people going into Medicaid, the exchanges. The bigger point, I think, is what you're seeing is more people being covered. And what's happening in the short-term acute care hospitals, when they get busy, we get busy. And when they get paid, we're in a better position. So the expansion of coverage does have a trickle-down impact, but we think it's very early to see how that plays out. And while we think it will support our top line growth, there are impacts like on the receivables. And again, it's early in the process to sort of make any predictions. Generally, we think it's a very favorable trend.

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. So can I infer from what you're saying that what we might be experiencing here is a kind of increased activity on the part of the short-term hospitals to refer patients or to relinquish patients, however you want to look at it, to you?

Paul J. Diaz

That could be part of it. It's just when they get busy, we get busy. And I think our shared service group of -- that Ben has built with Franke Elliott, our Chief Managed Care Officer, there's just enormous activity and interest of the payers for the kind of integrated care that we're trying to provide through our Continue the Care model. And so as we have said, we think one of the biggest opportunities for Kindred now being repositioned, re-based and recapitalized is growing our Medicare Advantage, managed Medicaid business. And given our discipline around cost, managing cost per patient day and delivering high clinical results in a very transparent way, we just think there's a lot of organic growth as the landscape evolves here over the next couple of years.

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Then given that, you kind of called out the potential impact of the ACA on the Hospital business. It sounds like this is something that could drive volumes in all the business lines.

Paul J. Diaz

We believe that for the first time in many, many years, as Ben said earlier, that each of our business lines now are at the right place in terms of team, systems, processes, allocable capital structure to drive organic growth, and that includes our Nursing center business. We opened up a brand new Transitional Care Center in Indianapolis South Point this week, a grand opening, it was attended by 150 people. I believe that new Transitional Care Center will be as successful as Bridgewater, which is in the north end of town. As Ben mentioned, we're opening new Transitional Care Centers in Phoenix, in Las Vegas. We're very bullish on where subacute services and their value proposition ecosystem, just like our LTAC business.

Operator

Next, we'll hear from Frank Morgan with RBC Capital Markets.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

It's nice to see all of the segments across the enterprise doing so much better here. But I'm curious, if you had to characterize what you're seeing, would you attribute it more to the assets that you have today due to the repositioning? And how much would you attribute to the fact that just the underlying businesses and the industry is improving?

Benjamin A. Breier

I think it's both, Frank. I mean, there's no question that we went through this asset and balance sheet change for a purposeful reason, which was we wanted to have the assets in the places that we wanted to have them, with the kinds of buildings that we wanted to have, and we made that very clear. That's probably 50% of it. But I also think that there are some underlying currents, as we've talked about, whether it's through expansion, whether it's through some economic pickup out there, whether it's through things just sort of look settling down in the marketplace a little bit. We're not through all the, I don't think, the macro fog yet as a country, but I think we're heading in the right direction, and I think we're seeing some of the benefit of that. So it's both. And I couldn't quantify if it's -- let's go with 50-50 for now.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Certainly, you've called out a lot of things on the LTAC side in terms of the admission growth you're seeing there. But sort of the same phenomenon on the SNF side where you did have better admissions, but length of stay continues to come down and, thus, driving down census. Do you have any sense at all? Or do you have any feel how close we are to an inflection point in terms of just this whole pressure we've seen in length of stay, which puts so much pressure on your SNF census?

Benjamin A. Breier

I think we're getting closer to the bottom because at some level, we need a certain amount of days to be able to provide appropriate care for the residents that we're treating. There's no question, though, that as patients shifted into the Medicare Advantage side, away from fee-for-service that were getting pushed harder and harder by the payers to utilize care even more aggressively, we're obviously taking a different kind of patient today than we've taken in the past, a little higher acuity, a little more rehab-intensive. And we're trying to turn people with quicker stays than we have before. So I think the pressure is going to remain, Frank. I mean, I think it's going to incrementally slowdown in terms of the drop. Hard to predict where the bottom exactly will be, but I would suspect we'll continue to see pressure on the length of stay. We're probably not at the end yet.

Paul J. Diaz

Keep in mind, Frank, that the whole essence of our strategy to continue the care for our patient through their complete recovery is often starts on an LTAC or an IRF, continues in a subacute facility, and that recovery is completed at home with Kindred at Home. And that is a significant differentiator, and we think those trends are accelerating. I was hearing anecdotal stories about our transition care coordinators in Boston and how successful they are reducing length of stay, yes, which pressures our inpatient business, but how that's resulting in great care coordination and admissions to Kindred at Home in Boston. So I mean, the strategy is working, and we're going to be part of that change as opposed to being on the tail end and behind it. And that's part of what this strategy is about as well.

Benjamin A. Breier

Yes. And I would just echo that it's part of the reason why we're having so many exciting discussions with our payer partners and physician friends about getting more into the population management risk side of the world, where we're taking it very seriously and carefully. But we are going to be, we think, as a provider, to Paul's point around our Continue the Care strategy better positioned than anybody out there to start taking different kinds of payment methodologies. We're already piloting those, as many of you know, in many markets into the future.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Okay. One final one and I'll hop off. Just with the final rules coming out recently on LTAC and SNFs, any kind of final thoughts, anything that you saw in the final rules, what is in the proposal that you think are interesting that you can call out?

Paul J. Diaz

No, I think everything is slightly positive on all the rules. Quite frankly, the CMS deferring the interrupted stay policy was helpful. I mean, as we advocate it, we think there ought to be a broader discussion about rehospitalization across the whole recovery period. And again, it kind of goes to our Continue the Care strategy. But at the margins, really all the final rules were slightly incrementally positive. And that obviously helps us in the fourth quarter and gives us good momentum and regulatory stability going into '15. And again, I can't underscore enough that the changes in the organization, having the assets that we have going into '15 and having more regulatory and payment stability than we've had in 5 years, gives us tremendous opportunity to grow our core in the back half of this year and, particularly, a lot of momentum going into '15.

Operator

That will conclude our question-and-answer session. I will now turn the call over to Paul Diaz for any additional or closing comments.

Paul J. Diaz

Great. Well, we thank you, all, for your time this morning and just conclude with again thanking our teammates, Ben, for his tremendous leadership and, Stephen, for really taking the reins here as our new CFO. We've made tremendous progress this year, advancing both our core operations and our strategic plan. Looking forward, we are very focused on the opportunities we have for organic and transactional growth. We've got a very robust pipeline of opportunities that we're continuing to advance. And we believe this will all result in tremendous value-creation for our patients, our customers, our teammates and our shareholders going forward.

With that, thank you, again, for joining us this morning.

Operator

That does conclude today's conference call. Thank you for your participation.

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