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Executives

Steve Paige - SVP, General Counsel, Secretary

Ron Malone - Chairman & CEO

Tony Strange - President & COO

John Potapchuk - CFO

Tom Boelsen - SVP, CareCentrix

Analysts

David MacDonald - SunTrust

Ralph Giacobbe - Credit Suisse

Darren Lehrich - Deutsche Bank

Newton Juhng - BB&T Capital Markets

Bill Bonello - Wachovia

Sheryl Skolnick - CRT Capital Group

Art Henderson - Jefferies & Co.

Eric Gommel - Stifel Nicolaus

Douglas Tsao - Lehman Brothers

Reid Walker - Walker Smith Capital

Gentiva Health Services Inc. (GTIV) Q1 2008 Earnings Call May 1, 2008 10:00 AM ET

Operator

Good morning. My name is Nelson, and I will be your conference operator today. At this time I would like to welcome everyone to the Gentiva Health Services first quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Steve Paige. Sir, you may begin your conference.

Steve Paige

Good morning, everyone. I am Steve Paige, General Counsel of Gentiva Health Services, and this is Gentiva's first quarter 2008 earnings call. On the call today are Ron Malone, Gentiva's Chairman and Chief Executive Officer; Tony Strange, our President and Chief Operating Officer; John Potapchuk, our Chief Financial Officer; and along with us are Tom Boelsen, Senior Vice President, CareCentrix and other key executives.

We hope that each of you had a chance to review the company's earnings report, which we released earlier 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 the 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 and 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 replay of this call on our website for the next seven days. A transcript of the call will be posted to our site within the next 36 hours and will be available for the next twelve months. Following today's prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up, so that we can accommodate as many callers as possible in the allotted time.

Let me now turn the call over to Gentiva's Chief Executive Officer, Ron Malone, for comments on our first quarter activity.

Ron Malone

Thanks, Steve. Good morning and thank you for joining us today. As we indicated in this morning's news release, first quarter was very much a transitional period for us. We were pleased with overall revenue growth in the quarter, and our fundamentals remain strong. It is clear, though, that our achievements were moderated somewhat by several events that we believe had short-term impact. The most notable events were changes to Medicare Prospective Payment rules effective January 1st and the implementation of two contract renewals in CareCentrix.

Before Tony and John discuss highlights of the first quarter, let's take a brief look at some key measures reported in our news release. Companywide revenues for the first quarter increased 8% while gross profit for the quarter was up nearly 5% from the prior year period. Net income and diluted EPS both increased approximately 13% and EBITDA was up 3% versus the prior year period.

Our Home Health segment revenues rose about 6% over the prior year, while the Home Health operating contribution increased about 4%. Our Medicare revenues increased 7.3% while the combination of episodic revenues for Medicare PPS and Medicare Advantage plans increased 11% from the prior year period.

CareCentrix revenues grew more than 18% for the quarter while its operating contribution declined 9% due to several factors, which we will discuss shortly. And at the end of the quarter our long-term debt was $322 million, an increase of $12 million from year end 2007, as we used some of our revolving credit facility for the Home Health and Hospice acquisition in Mississippi. Our leverage ratio at the end of the quarter was just under three times, and this allowed us to maintain interest rate reductions, lower interest rates that we discussed during our last earnings call.

At the same time, we experienced some short-term transitional events that affected our financial results for the quarter. These included our transition to the new Medicare PPS rules, incremental costs related to employee training for adoption of the Medicare PPS changes as well as recruiting and other employee expenses, the successful integration of our recent Mississippi acquisition, several factors involving CareCentrix and our continuing efforts to improve performance in the other related services segment.

Most of these events had a moderating effect on first quarter results. As we go forward, we are adapting our operations to the Medicare changes, working to drive revenues from new business opportunities in all segments and focusing on our year-over-year record of improved earnings performance.

As a result, we are pleased to reaffirm the financial outlook that we announced in February. With that, I'd like to thank our employees for their contributions and turn the call over to Tony Strange for more color on the first quarter. Tony?

Tony Strange

Thanks, Ron. And good morning to all of you. During the first quarter our Home Health revenue growth remained strong due to several factors. We maintained our trend of solid Medicare admission growth in the high single digits with our total episodic admission growth reaching the low double digits. We reported positive contributions from our specialty programs, which grew to 240 locations during the quarter with additional expansion planned for the remainder of the year.

In addition, we will continue to pioneer new specialty programs and set the standard for others to follow. We had an increase in Home Health commercial revenues, a sign that our pricing strategy is working as some previous commercial customers have returned to us at more favorable rates. This is a plus for our commercial margins since we are seeing rates that are on average substantially higher than they were just a couple years ago.

We also reported a significant increase in Medicare Advantage business under which Gentiva is paid by the episode at rates that are at or very close to Medicare PPS reimbursement. And as Ron mentioned, the combined revenues from Medicare PPS and this Medicare Advantage business were up about 11% year-over-year even with the adverse effect of the PPS rule change.

And finally, Home Health revenue was also up due to the Mississippi integration, which has thus far been a success. This recent acquisition has added about $3 million to our first quarter revenues. If we look at Home Health operations for the quarter, we were very pleased with the way that our employees have adapted to the new PPS rules, and we should be ramping up their extensive training and education in the next few weeks. Despite the adverse effect of the rules, which I will discuss more in a moment, we have continued to submit our bills to Medicare with limited delays in cash collection.

This is also a quarter in which we took aggressive steps to increase capacity and productivity. We added 150 new full-time clinicians, about twice the usual number. This is a very positive development and another sign that Gentiva is becoming the employer of choice, even though we know it typically takes these employees two to three months to reach their full productivity. We added another 200 full-time clinicians through the Mississippi acquisition, taking the total number companywide to approximately 4000 or about 10% more full-time clinicians than we had a year ago.

We are also transitioning more new and existing full-time clinicians to pay-per-visit arrangements. In the first quarter of 2008 nearly half of our full-time clinicians were paid on a per-visit-basis, compared to less than one-third in the prior year period. And finally, we continue to focus on the strong retention efforts which allowed us to significantly reduce turnover among this group in 2007.

Now let's turn to the events that moderated revenue and profit growth in Home Health. The changes to the PPS represent the most significant development in Medicare Home Health reimbursement since October of 2000. Even with the positive impact of this year's 3% Medicare market basket increase, our Medicare revenues declined just under 2%, primarily due to the PPS changes.

At Gentiva we have taken a thoughtful and conservative approach as we have adapted to the rules, practicing our clinical excellence and ensuring that our patients receive exactly the services that they need in this new environment. Given the significant change in reimbursement, we want to share some detail that has not been made available to date so that investors can better understand our revenue trends. John will have more to say about this in a moment.

There were several other factors moderating Home Health profitability in the quarter, primarily the incremental cost of education and training related to the PPS changes, as well as higher expenditure for mileage reimbursement. The rising cost of fuel is putting pressure on everyone including our clinicians as they go out to make patient visits. As a result, our mileage reimbursement to those clinicians now represents the second largest expense item on our P&L after employees.

It is worth mentioning that the current Medicare reimbursement rates for Home Health are based on cost report data that is several years old at best, yet fuel costs have more than doubled since that time. This is an industry-wide problem, and we need to be sure that CMS officials and members of Congress are aware of it as they make their decision on Medicare funding.

Turning to CareCentrix, that segment had solid revenue growth in the first quarter. This was due primarily to the continuing trend towards servicing higher member enrollments among some CareCentrix customers, including CIGNA HealthCare and other new business relationships. We are very pleased to reach a contract renewal with CIGNA that takes our relationship through January 2011, as well as another renewal of a capitated contract during the quarter.

About a month ago CIGNA completed its acquisition of Great-West Healthcare, a transaction we understand increases their membership by approximately 1.4 million. As CIGNA works to integrate this acquisition, we believe CareCentrix is in a position to service much of this added membership. John will have more to say about the CareCentrix operating contribution in a moment.

We continue to be pleased with the overall strength and growth prospects of this business segment. Turning to other related services, we experienced good first quarter hospice admission growth as a result of the investments that we made in new sales resources over the last six months. The admission growth was offset somewhat by a higher rate of patient discharge and an increase in our accounts receivable reserve that related to 2007 dates of service. We continue to be optimistic about the future of hospice.

Looking ahead, we remain confident about Gentiva's prospects for the rest of the year. With that, let me end my remarks by thanking our employees for their efforts during the quarter and welcoming our new employees from Gilbert's to the Gentiva family. I would like to now turn the call over to our CFO, John Potapchuk. John?

John Potapchuk

Thanks, Tony. And good morning, everyone. Over the next few minutes I'd like to comment on our financial results and operational trends relating to the 2008 first quarter as well as our full year outlook.

Total net revenues increased by about $24 million or 8% during the first quarter. Home Health and CareCentrix each reported $12 million revenue increases compared to the first quarter of 2007. Home Health revenue growth was driven primarily by two factors, an increase of about $10 million or 7.3% in Medicare PPS revenue and an increase of over $5.5 million in non Medicare PPS revenue, which we have said is Medicare Advantage business paid on an episodic basis at or near regular PPS rates.

These increases were offset somewhat by a continuation of our strategy to reduce or eliminate non Medicare business with lower gross margins. As Tony mentioned, the combination of Medicare PPS and the Medicare Advantage revenues grew about 11% in the first quarter of 2008 versus the prior year period.

We thought it would be useful to provide you with certain operational statistics about the Home Health business that we have not detailed in the past. The information should give you a better understanding of our revenue trends as we adapt to the Medicare reimbursement changes and focus on growing episodic revenues.

In this regard there were about 40,300 Medicare admissions during the first quarter of 2008, an increase of over 8% compared to the first quarter of 2007. There were also about 44,000 episodic admissions, representing both Medicare PPS and Medicare Advantage business. This amounted to a 12% increase in episodic admissions versus the prior year period.

During the first quarter total episodes approximated 60,000, nearly 13% more than we achieved in the prior year period. And net revenue per episode was just above $2600, a decrease of 1.5% compared to the first quarter of 2007.

Staying with Home Health for a moment, our specialty programs continued to make strong contributions to revenue growth. In the first quarter of 2008 the specialties contributed approximately 28% of total Medicare Home Health revenues, and this compares to 22% in the prior year period. As we've said before, we believe there are many untapped opportunities for expansion of these programs into other markets, especially acquired locations.

Turning to CareCentrix, this business unit continued its trend of double-digit revenue growth with an 18% increase in the first quarter. This was the fourth consecutive quarter of double-digit revenue increases versus the corresponding prior year periods. Tony covered the reasons for this growth in his comments.

If we look at revenue by payer source, Medicare represented 49% of total company revenues in the first quarter of 2008 versus 50% in the prior year period, with the difference due primarily to the impact of the PPS changes. Medicaid and local government business declined by 11% of total company revenues in the most recent first quarter, down about two percentage points from the prior year period.

Commercial insurance and other business reached almost 40% of total company revenues versus 37% in the prior year period. This increase was due primarily to the commercial revenue growth from both CareCentrix and Home Health.

Revenues from CIGNA represented about 20% of total company revenues in the first quarter. Looking at our margin performance, reported EBITDA increased 3% to $23.8 million. The increase in total company EBITDA resulted from improvements in Home Health operating contribution and lower corporate expenses. These were offset somewhat by a reduction in profitability in CareCentrix and other related services business segments.

Operating contribution, which represents EBITDA before corporate expense allocation, increased in the Home Health segment by $1.2 million or 4% in the first quarter of 2008. As a percentage of net revenues operating contribution in the Home Health segment declined from 14.6% in the first quarter of 2007 to 14.4% in the 2008 first quarter.

Increased revenues from higher gross margin businesses drove improvements in operating contribution dollars in the 2008 period. However, Home Health operating margins were adversely affected by training and education costs of nearly $1 million associated with the implementation of the new Medicare PPS rules and the hiring of a significant number of new, full-time clinicians in the first quarter as well as incremental fuel cost and selling expenses.

CareCentrix operating contribution decreased by a bit more than $600,000 in the first quarter of 2008 versus the prior year period. The operating contribution margin for CareCentrix was 8.1% for the 2008 first quarter, down from the 10.6% reported in the prior year period due primarily to these factors.

First, we experienced higher utilization of services in our capitative business, which affected us by about $800,000, a situation that should be offset by seasonal changes in utilization and future price increases in some of our contracts as the year continues.

Second, the implementation of the new CIGNA contract involves some changes in product mix that are expected to be more than offset by the long-term benefit gain from this extended relationship. This affected operating contribution by about $700,000.

And third, CareCentrix incurred incremental first quarter expenses in excess of $200,000 to continue its investment in an expanded sales force. Although CareCentrix margins have shown some seasonal variability from quarter to quarter, overall margins for this business have averaged about 9% of revenue for the past three years.

We expect operating margin performance at that level for the full year 2008. First quarter operating contribution in the other related services segment was $2.8 million, a decline of about $1.1 million from the prior year period. Operating contribution margin in this segment was 9.5% in the first quarter, below the 13% reflected in the first quarter of 2007.

Corporate expenses declined by about $1.2 million in the first quarter of 2008 compared to the prior year quarter due to cost reduction in baseline information technology, finance and other functional areas. I would now like to comment on our capital structure and leverage ratio.

In two years since the Healthfield acquisition we have repaid $60 million of our original $370 million term loan. During the first quarter of 2008, we incurred $12 million of revolving credit debt to help fund the Mississippi acquisition. As a result, our long-term debt was $322 million on March 30, 2008. As we have mentioned on the last call, we benefited from two 25-basis point reductions in interest rates since August 2007. At March 30, 2008 our leverage ratio stood at just under three times. And as a result, we are able to maintain the lower interest rate margins.

Another effect of the PPS changes has been to increase our day sales outstanding from 60 days at the end of 2007 to 63 days at the close of the first quarter. On our last call we signaled a modest increase in DSOs during the first quarter but indicated that we expect DSOs to go below 60 days before the end of 2008.

Let me take a moment to speak about our 2008 outlook. On our last earnings call we provided an updated view of 2008, incorporating current business trends and a series of operating assumptions. As noted in this morning's news release, we are now reaffirming the outlook for 2008. As compared to our current run rate, we expect bottom line results for the remainder of the year to benefit from the impact of the Mississippi acquisition, which is expected to contribute between $0.03 and $0.04 per diluted share during the remainder of the year.

For Medicare revenues per episode, they are expected to improve without the first quarter's transitional impact from improvements in CareCentrix results due to the full period impact of recent price changes, a return to lower seasonal utilization patterns with respect to capitated arrangement and increased volume from the CIGNA contract and new business relationships. And finally, from normal growth in company earnings as the year progresses at a rate comparable to that which we have experienced during the past couple of years.

While the first quarter of 2008 was certainly a transitional period in many ways, we are confident that the long-term trend of growth and improved financial performance for Gentiva can be achieved, once again, for the full year. That sums up my comments on the quarter and our prospects for the balance of the year. Now, we would like to open up the call to questions.

Question-and-Answer-Session

Operator

(Operator Instructions)

Our first question is coming from David MacDonald with SunTrust.

David MacDonald - SunTrust

John, can you just -- I just want to make sure I have these numbers right -- just a couple of details on some of the variable costs that it sounds like you expect to go away. Did you say there was nearly $1 million of incremental spending from the training in the quarter?

John Potapchuk

That's correct.

David MacDonald - SunTrust

Okay, and then it sounded like that training is wrapping up but wasn't completely done by the end of 1Q. Is that correct? So there will be a little bit of spillover into the second quarter?

John Potapchuk

A little spillover in April, yes. I might also add, David, that while I did comment that overall our corporate expenses are down relative to fourth quarter, they are up somewhat. Some of that is a reclassification. I will also say there is some incremental IT cost in the first quarter associated with the PPS changes also, a few hundred thousand there.

David MacDonald - SunTrust

Okay. And then, can you just talk a little bit about the spending on recruitment? Is this more an issue of kind of a timing dislocation between people coming on and before they actually become productive?

John Potapchuk

Yes, when you hire full-time clinicians, there clearly is -- number one, there is a training period. And then there is a period of time before they reach full capacity. Tony, I don't know if you have any –

Tony Strange

David, it is probably more related to the second issue about the on-boarding process as opposed to the dollars in recruitment.

David MacDonald - SunTrust

Okay, and is it still -- Tony, is 90 days still kind of a good number in terms of how long it takes to get these folks ramped up?

Tony Strange

I would think that it should be -- that we should be able to do it in less than 90 days.

David MacDonald - SunTrust

Okay, and then just last question John, can you give us some sense of what your expectations are for cash flow and free cash flow generation in 2008?

John Potapchuk

Last year we reported operating cash flow of about $63 million. And I think this year we are in that neighborhood in the high 50s to mid-60s as the expectation. And we did say on our last call that CapEx we thought would be between $22 million and $24 million.

David MacDonald - SunTrust

Thank you very much.

John Potapchuk

Sure.

Operator

Thank you. Our next question is coming from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

Good morning. Thank you. Just going back to some of the stats -- they were helpful on the Home Health side in terms of Medicare admissions and the episodic admissions. Have you guys broken out -- I may have missed it -- is there sort of an organic or sort of same-store number that you guys can provide in terms of a top line and maybe a volume stat?

John Potapchuk

Well, Ralph, just to give you a sense, I did mention that total episodes in the first quarter approximated 60,000, which was 13% increase from the prior year period. Included in there is the one-month impact of the Mississippi acquisition, which had an impact of maybe about 1% or so, just slightly over 1%. And the rest is in our mind organic.

Ralph Giacobbe - Credit Suisse

Okay.

Ron Malone

Does that help, Ralph?

Ralph Giacobbe - Credit Suisse

Yeah, now it does on the volume side. I guess is there a way to think about -- I guess we could do that same exercise for revenue. I guess what I'm just trying to do is sort of separate out what pricing volume and then total revenue was on an organic basis.

Ron Malone

We did say that the impact of the Home Health care affiliates acquisition was about $3 million in revenue. And the Medicare component of that is 2.2, 2.3, something like that. Does that help?

Ralph Giacobbe - Credit Suisse

Yeah. Now, I think I can back into the numbers. That's helpful. Going back to CareCentrix, I just want to make sure I sort of understand; it sounds like margins were down a little bit. I know the CIGNA recontracting probably played some role. Can you maybe detail a little bit? I think you mentioned CIGNA product mix, exactly kind of what that means and how that goes away longer-term or how you will be able to manage through that?

Tom Boelsen

Yeah. Hi, this is Tom, Ralph -- Tom Boelsen. Within the renegotiation of the CIGNA contract, with the size and scope of the contract that we have throughout the negotiations over those months, there were a couple of services that we now have included in the contract that were previously not included and some that were excluded in terms of the new contract going forward over the next three years. So, the first quarter we really saw the exclusions come out of our relationship with the inclusions that come in over time.

Ralph Giacobbe - Credit Suisse

Okay but that doesn't relate at all to the capitated agreements and moving that to fee for service at all?

Tom Boelsen

No. That's unrelated. That would've been related to the exclusions that we have now out of the contract and the ones yet to come are all related to the fee for service business.

Ron Malone

Ralph, what you are referring to, though, is just the ongoing membership changes in CIGNA. I think CIGNA had announced that from December their membership has gone up a net of 2%; from last year their membership is up 5%. But the components of that are that the cap membership is down about 15% and the fee for service open access plans are up double digits. So, that revenue on the fee for service side comes in during the year as people required services.

Ralph Giacobbe - Credit Suisse

Okay, that's helpful. And then just my last one, just I know you sort of reiterated guidance and in the release you mentioned the top line number and the EPS number. There was no mention of EBITDA guidance. Should we assume that that stands as is?

Ron Malone

Yes, we reported the outlook of 1.12 to 1.17. I think we are still in that range.

Ralph Giacobbe - Credit Suisse

Okay, great. Thank you very much.

Ron Malone

Sure.

Operator

Thank you. Our next question is coming from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank

Good morning, everyone. I do have a few things here. Just back to the margin question; I want to make sure I am understanding what was transitory and what wasn't. I heard the $1 million number, John, but I also heard that there were some additional costs related to staffing capacity and some other factors. So, could you give us just a spot number of what you thought was really one-timish or transient in this quarter that we might expect to fade over the next few quarters?

John Potapchuk

Darren, let me start with the training and education cost. We said that is about $1 million. That had an impact -- and I'll stay on Home Health for a minute -- of 0.3% to 0.4% on margins. So, that's something that will fade away over time.

We did mention increased mileage. That had an impact of about 0.3%, but clearly that is not going to go away at this stage. The impact of the training of the newly hired caregivers, that is a little more difficult to capture given the timing. But there is clearly some impact on that.

If I turn to the CareCentrix side, I really mentioned three components. The utilization component of about $800,000 in the first quarter, that we are very confident will improve over time, as well as on the second piece I mentioned, which was the impact of changes of product mix on the contract. That is going to improve as the year goes on due to increased revenue.

I will also say that I made mention of the fact that there are changes in rates on a couple of capitated contracts. That didn't come into being on January 1st. It came in during portions of the quarter, so we get the full benefit of that as the quarter goes on. So those are just a few things that I think I would highlight.

Darren Lehrich - Deutsche Bank

Okay, that's helpful. I guess not to beat a dead horse on training, but the rule was finalized last summer, so I guess I just wanted to sit back and get your thoughts on how you guys operationalize this and how we should be thinking about training on a new system that is occurring as it is being implemented when you had the rules in place some time ago?

Tony Strange

The rule was finalized in August, and we began making the system changes immediately and had the system changes in place prior to January first and then started training the folks in the field on the element of system changes.

Darren Lehrich - Deutsche Bank

Okay. I guess I just want to skip over to CareCentrix again as it relates to margins. And I thought what I heard you say was you expected 9% margin. Is that what you expect from the business longer-term? I just wanted to put this 8% margin in the context of whether you think that is an acceptable range or not, and whether you think that 9% target for '08 has some ability to grow into '09?

Tony Strange

I think the 9% is clearly a good number for this current year. And as you go along, depending on new contracts that are signed and variables, I think there is a reason to think there is some uptick of that. But that range of 9% to 10% seems pretty reasonable to me over long term.

Darren Lehrich - Deutsche Bank

Okay. And then last thing from me, just gross margins, John, you have given us commentary in the past about your gross margins in Home Health by different payer categories, maybe you can bracket them, but it sounds like you have gotten some commercial rates that are better than what you've seen previously. So, I would love to get your thoughts where those margins are coming out at this point?

John Potapchuk

I think in the past, Darren, you are referencing to the fact that we've talked about Medicare gross margins just kind of an industry sort of thing in the 50% to 60% range and the commercial business in that mid-30s to mid-40s. And then Medicaid kind of being all over the lot.

What you are seeing here is I think a continuation of those margins but with the emphasis on Medicare Advantage at PPS rates, you are seeing the margins on that aspect of the business certainly going up. And I will say overall when you look at our gross margins on Home Health in this quarter versus the first quarter of last year, they are actually up slightly.

Darren Lehrich - Deutsche Bank

Very good. Okay. Thanks, guys.

John Potapchuk

Thanks, Darren.

Operator

Thank you. Our next question is coming from Newton Juhng of BB&T Capital Markets.

Newton Juhng - BB&T Capital Markets

Thank you very much. Gentlemen, I was wondering a little bit about your specialty programs and how they are pushing across to your -- to further agencies, one. And also looking at one of your competitors trying to do something similar in their platform, I am wondering how you are viewing that as a competitive challenge and the impact that you might see going forward?

Ron Malone

Well, Newton, the first part of your question about the expansion, I think you've seen from quarter-over-quarter results we continue to expand specialties throughout our locations. We are doing that in a very thoughtful manner. We are looking at markets where we think certain programs can be successful. We have had a lot of growth in our Safe Strides program, and we continue to have both opportunities to expand specialties in our existing location. But as John mentioned on the call that we are really excited in new acquisitions, being able to expand specialties across their footprint as well.

To the second part of your question, we are aware that there are competitors that are trying to do programs that would simulate the specialty programs that we've already developed. And we watch that. We are always mindful of our competitors. However, in some ways we are flattered that they believe that our specialty programs have been so successful that they would like to emulate it.

Newton Juhng - BB&T Capital Markets

Okay, thanks for the comments Ron. Actually, beyond that, the other follow-up question is on the other services segment. Are the changes that you are talking about operationally specific to the DME and infusion space or are we more broadly dealing with the unit as a whole? And whether or not there is some businesses there that are underperforming to the point where you might be thinking about divesting at some point?

Tony Strange

I think, Newton, I think we mentioned on the last call that in our other related services business which is made up of several other businesses, the largest being hospice, we are very committed to hospice. We believe that hospice has a place in this is space on a long-term basis.

I think Ron mentioned on our last call in some of the other related businesses that we are going to have to continue to monitor those performances and continue to evaluate whether they -- how they are going to continue through our overall story.

Newton Juhng - BB&T Capital Markets

Okay, great. Thanks for the comments, Tony.

Ron Malone

Thank you, Newton.

Operator

Thank you. Our next question is coming from Bill Bonello of Wachovia.

Bill Bonello - Wachovia

John, I just wanted to revisit at the end of the conference call when you sort of were getting us to what gave you confidence in maintaining the guidance for the year. You mentioned a couple of things that I am not sure I completely understood. So, I just wanted to revisit. One was you talked about the Medicare revenue per episode should improve, and you specifically mentioned the transition. And I think what you are getting at is that there was actually a period of time where you were getting lower rates than what you got last year and probably lower rates than what you will get going forward. But I'm not totally sure. So, could you elaborate on that?

John Potapchuk

Yes, we've talked a lot, Bill, about the training and education. And I think if you recall from prior calls Ron has mentioned that there is a period of time, a period of transition and whether that is one quarter or two quarters, we are working through that in terms of educating the clinicians on the proper way of completing the documentation and the fact that now there is reimbursement for secondary and tertiary diagnoses. So, it is a question of capturing all of that as the year continues. And I think we are confident of some increase there. That was one of the three or four comments I made with respect to the outlook.

Bill Bonello - Wachovia

Okay, so it really has nothing to do with the actual rate that you are getting paid? It has to do with the -- it will, but it has to do with the coding, not with some transition payment period?

John Potapchuk

Yes.

Bill Bonello - Wachovia

Okay. And then just as the follow-up, if you could just elaborate a little bit more too, you talked about the expected improvement in CareCentrix and I think part of that was obviously just the capitated utilization that you don't expect to recur, but felt as if you expect to improve it at CareCentrix?

John Potapchuk

Well, it is the seasonal utilization changes. It is the fact that I mentioned before that we've had changes in capitated rates that we didn't see the full benefit of in the first quarter but we will as the year continues. And then that issue of growing the business, particularly with the CIGNA fee for service membership that naturally will grow as a result of the change in membership and the benefits of the great West contract.

So, I guess maybe, Bill, a way of looking at it is if you go back to 2007 our operating contribution in CareCentrix was just about $29 million. If you annualized first quarter, you are not going to get that number but we are very confident we will be around that $29 million number for 2008.

Bill Bonello - Wachovia

Okay, that's great. Thank you very much.

Ron Malone

Thank you, Bill.

Operator

Thank you. Our next question is coming from Sheryl Skolnick of CRT Capital Group.

Sheryl Skolnick - CRT Capital Group

Thanks for taking my questions. One question that I do have and maybe you can help me understand is, if I understand what you're saying about the improvements in revenue per episode as people become more familiar with, accustomed to and better trained on filling out the assessment forms is, in essence a case mix increase relative to the first or second time that they fill it out. That is based on better understanding of the form and not anything inappropriate, but I'm curious as to how quickly -- first of all, what happened to your case mix index in the quarter? Does it even make sense to compare it to a pre-new-rule environment? And second, how quickly can that case mix index change either sequentially or on a year-over-year basis do you think?

Tony Strange

Sheryl, first of all -- this is Tony. There's a couple of things that go into that, and I think you can back into what you are referring to as case mix. I think John shared with you the revenue per episode, and we talked about -- I think he shared with you between 1.5% and 2% a reduction in that revenue per episode in Q1 compared to prior periods. So, you can kind of back into kind of what prior year revenue per episode were.

The other thing that goes into that and we've kind of touched around it is that if you look at the first quarter, when we talk about the transition, you have to remember that there are patients who are coming in episodes that are under the old reimbursement system that affect revenues in January and February because of the nature of it or the definition of an episode.

And so as you get -- as we get those patients off of service and start experience 100% of our revenues in a quarter are paid on a per visit -- under the new PPS reimbursement system, we believe that that number will actually improve slightly. That might not be necessary connected to behavioral changes. Does that make sense?

Sheryl Skolnick - CRT Capital Group

It sure does because there might be some inefficiencies in the way they did the blend rate.

Tony Strange

Correct.

Sheryl Skolnick - CRT Capital Group

Okay. And I am curious as to the significant decline in cash flow from operations from last year to this year, yet you expect cash flow from operations for the year to come in at or slightly below where you were for last year. So, can you walk me through what timing differences there might have been in this quarter and why you were at roughly $8 million from roughly $15.5 million last year?

John Potapchuk

Sure, I think, Sheryl, the biggest thing to look at was the DSO. And we did say that we thought there would be some slight uptick in the first quarter. And just to put it in perspective every day for us is about $3.5 million, so that is clearly the biggest issue right there.

Sheryl Skolnick - CRT Capital Group

Looked like there were some other issues with accrued expenses and payables, I think if I remember correctly.

John Potapchuk

Well, on that one, if you are comparing to year end, what happens is we have -- on our casualty insurance programs, we are self-insured for the first million dollars. We do have coverage up to $25 million above that $1 million. And those coverages change on March 15th.

So, if you are looking at the balance sheet, you're going to see an increase in our prepaid expenses and an increase in accounts payable. We put those in effect and we've made those payments in early April.

I will also say that our insurance premiums relating to these programs are down significantly versus the prior year, somewhere around $1 million. And when I talk about changes in results from the remainder of the year, I certainly have that in mind also.

Sheryl Skolnick - CRT Capital Group

Okay, and did the leap day have any effect given your odd fiscal year end?

John Potapchuk

I'm sorry? Sheryl, I just didn't hear you.

Sheryl Skolnick - CRT Capital Group

I'm sorry. I have the flu. Did the leap day have any effect on your business do you think given the odd year end?

John Potapchuk

No, because the way we end our period the last Sunday closest to the end of the quarter, so we have 91 days in each period.

Sheryl Skolnick - CRT Capital Group

Excellent. That's what I thought. Thank you so much.

John Potapchuk

Yeah, sure.

Ron Malone

Thank you, Sheryl.

Operator

Thank you. Our next question is coming from Art Henderson of Jefferies & Co.

Art Henderson - Jefferies & Co.

Good morning. Just a couple of questions. John, could you remind us, you referenced fuel costs earlier, and is there a way to think about what that might be as a percentage of your revenue just as a context?

John Potapchuk

Yes, in the context it is about, just on the productive side -- and again, I am focused on Home Health at the moment.

Art Henderson - Jefferies & Co.

Understood, yes.

John Potapchuk

It is just under 3% of our revenue. If you add in the administrative people, it is probably just over 3%.

Art Henderson - Jefferies & Co.

And is that of Home Health revenue or of total revenue?

John Potapchuk

Of Home Health.

Art Henderson - Jefferies & Co.

Okay, of Home Health. Okay, that's helpful. And just given the case mix reform changes that have occurred and the new therapy threshold and stuff, are there specialty programs that you guys are looking to do that you may not be doing today?

Tony Strange

I think we mentioned that we continue to work on and pioneer new specialty programs. We mentioned that we started a newer rehab program, I think in the -- we've talked about that on our fourth quarter call. We have three or four sites that are up and running with that, and those patients seem to do very well under the new reimbursement system. Our Safe Strides specialty will perform very well under the new reimbursement system.

So, those are examples of two therapy-related specialties that will do very well.

Art Henderson - Jefferies & Co.

And Tony, is the neuro rehab focused on stroke patients; is that what that is?

Tony Strange

Yes, but it is broader than just stroke patients. But a typical Medicare recipient stroke patient would be someone that would be kind of in the sweet spot of that program.

Art Henderson - Jefferies & Co.

Okay, then one last question and I'll jump back in the queue. Acquisitions, you've obviously done a nice acquisition in Mississippi. Are you guys out looking at stuff still or you comfortable with what you've purchased so far and you're going to kind of focus on core business? How should we think about your acquisition appetite?

Tony Strange

Art, I think we've mentioned on previous calls -- and I can reaffirm that -- is that we are back out in the marketplace. We are looking for transactions, but we're going to be very disciplined about how we do it. We mentioned some of our criteria on the calls before. We are going to be looking for density and critical mass. We're going to be looking for well-run companies. We are not really in the business of doing fixer-uppers.

We are looking for Home Health with high Medicare mix business. So, we are not looking for any and all acquisitions. We are looking for good strategic fits, and we're going to be very disciplined about how we do it and our capital structure and how we buy them.

Art Henderson - Jefferies & Co.

Okay. Thank you, sir.

Ron Malone

Thank you, Art.

Operator

Thank you. Our next question is coming from Eric Gommel of Stifel Nicolaus.

Eric Gommel - Stifel Nicolaus

I really just have one question related to hospice. You know, the proposed changes to the -- I think it is the budget neutrality adjustment factor that were introduced I think earlier this week. I mean, how does that impact your business relative to hospice?

Tony Strange

Eric, we've modeled that out. And if everything were to go the way they have said it would go, it would be about a 1% reduction to our revenues.

Eric Gommel - Stifel Nicolaus

And do you have any thoughts -- I mean you said if it happens as it's proposed, do you foresee some relief relative to the rule and the final rule that is coming out?

Tony Strange

Well, let me clarify that a little bit. I said it is about a 1% reduction to revenues, but -- it basically would be a 1% reduction to revenues, but in addition to the 3% increase in October. So, it is really not a 1% reduction to our current revenue. It would be a 1% reduction to the revenue that we would anticipate after we got the 3%, which is the normal market basket increase in October. Did that make sense, because I didn't want to mislead you?

Eric Gommel - Stifel Nicolaus

Yes, that made sense. I think I was just wondering, do you think that the final rule may be softened relative to what was introduced?

Tony Strange

We are certainly going to fight for that. Again, and I know we made a statement in our remarks that was really directed to Congress and to CMS related to the rising cost of fuel. That same fuel cost is there in hospice, as well. And I think we need to use that.

I think that our folks that are making the rules and understanding how we're going to spend the Medicare dollars need to keep in mind that those kind of costs are increasing at a rate that is faster than the market basket can keep up with.

Ron Malone

Eric, it's Ron. While I certainly can't predict the outcome, I will tell you there is some political pressure and pushback for that change to the hospice rule. So, we could get some relief there. I just don't know yet.

Eric Gommel - Stifel Nicolaus

Great, thanks.

Operator

Thank you. Our next question is coming from Douglas Tsao of Lehman Brothers.

Douglas Tsao - Lehman Brothers

Just in terms of the training costs that you have spoken about, I was wondering, John, if you could provide some context where we should -- those have been showing up in the P&L. Is that in the SG&A line, or does that impact the direct costs and account for some of the slippage we saw in the gross margins in the quarter?

John Potapchuk

No, it's in the SG&A line.

Douglas Tsao - Lehman Brothers

It is in the SG&A line.

John Potapchuk

Doug, let me just clarify. On the gross margin line, I mentioned earlier that within the Home Health segment our gross margins actually were up, but the blend when you think about the fact that CareCentrix, which is typically a lower gross margin business, that was up over 18%, just the mix of all that business would have driven that gross profit margin overall down a little bit.

Douglas Tsao - Lehman Brothers

Okay, so Home Health was up. So it was CareCentrix that was down. And then on a go-forward basis, do you expect to see some recovery in CareCentrix or should we think about this level of gross margin for the remainder of the year?

John Potapchuk

No, I think the comment that I made about seasonal changes in utilization -- utilization going down on our cap business as well as the impact of rate changes that we didn't get the full benefit of in the first quarter, those aspects would have a direct impact on the gross margin line of improving that as the year goes on.

Douglas Tsao - Lehman Brothers

Okay. Very good. And then in terms of the restructuring cost that we saw this quarter, are those still related to the Healthfield acquisition, or are the new charges related to the Home Health care associates -- Home Health Care Affiliates acquisition?

John Potapchuk

The restructuring is really down to a trickle, it was under $300,000. I think the majority of that was still some carryover on Healthfield with respect to some filling system personnel and that sort of thing. It was a little bit on Mississippi but not much.

Douglas Tsao - Lehman Brothers

Okay, and do you anticipate on a go-forward basis any charges related to the Mississippi thing, or is that going to be de minimis?

John Potapchuk

There will be some, but it is not going to be a significant issue now.

Douglas Tsao - Lehman Brothers

Okay. Thank you very much.

Ron Malone

Thank you, Doug.

Operator

Thank you. Our next question is coming from Reid Walker of Walker Smith Capital.

Reid Walker - Walker Smith Capital

Thanks for all the answers to the questions. Tony, how many new clinicians? We talked about that in Q4, as well, but how many new clinicians excluding the Mississippi acquisition have we added in the last two quarters?

Tony Strange

Well, that's a good way to ask the question because it is a net number. This one was net about 150. And I believe last quarter on our call we talked that number -- John is going to confirm those (inaudible).

John Potapchuk

Fourth quarter it was about 70. Third quarter was about 110 or so.

Reid Walker - Walker Smith Capital

Okay, so we are still seeing a little deleverage there. And then to follow up a little bit on Newton's question on other, obviously we understand hospice is going through a transformation but it seems like that took another tick down. Are we close to getting some return on the investments for what we are trying to figure out there or is that just ongoing?

Tony Strange

I think so. Again, our admission growth in hospice was really strong in the first quarter. And I was really pleased with that because we did make a -- we made a pretty significant investment in the fourth quarter related to some -- in the first quarter related to some new sales people.

Our death rate, our discharge rate in the first quarter was just higher than normal, signifying a shorter length of stay. I guess as a mixed blessing, it confirms we have no cap [liabilities].

Reid Walker - Walker Smith Capital

Cap issues, yes.

Tony Strange

But…

Reid Walker - Walker Smith Capital

Were the other businesses with the DME and other, were you disappointed with, or how are those doing?

Tony Strange

In the other businesses and other related outside of hospice, I was disappointed with our results, yes.

Reid Walker - Walker Smith Capital

Okay, and then I guess Bill's and kind of follow-up on Cheryl as well, but the 2% Medicare decline you said was thoughtful and conservative. Obviously that your public peers have done a little bit better but maybe they have been a little quicker. I mean, is it a guess of zero to minus one is going to be the full impact once you figure out kind of training in the field, etc., and catching up?

Tony Strange

I don't think we've given a prediction because really what you are talking about is our revenue per episode. And I think --

Reid Walker - Walker Smith Capital

There are some mix issues there.

Tony Strange

Yes, John and I -- we all made the decision to begin to share some of that information with the public so that we could help the public better predict that business. What I will tell you is -- and I think John alluded to it -- that as we see the second quarter and third quarter, we believe that number will increase, especially as we move away from the transitional patients that are -- I think one of the analysts called it straddle patients -- where patients are straddling episodes that go into Q1. We believe that number will go up, and that is the number that I've said that given the magnitude of the change we have taken a conservative look at how we are going to do that.

Reid Walker - Walker Smith Capital

And as it relates to the $1 million in training costs in Home Health for the PPS transition, were there consultants out in the field and is it any way related to some of the LifeSmart integration or rollout, as well? Are those kind of combined to affect those?

Tony Strange

Not really. The training that we were doing out in the field really was not related to LifeSmart. As it relates to LifeSmart, we expect the final version to be finished on May 16th, and we will have it in our hands to begin implementing it after that date. And we have planned before the end of the second quarter to have LifeSmart in three or four locations.

Reid Walker - Walker Smith Capital

Okay, and then Tom, one question on CareCentrix. It was -- maybe we misunderstood, but we thought net of the CIGNA business was going to be similar profitability. It sounds like it is going to be lower gross margin percentage but a similar amount of gross margin dollars because of just increased revenues there. But it also sounded like some of it was related to Q1; you had incremental cost, but you weren't able to bill for all the services provided on some of the add-ons. Do you still think that CIGNA is going to be a similar gross margin percentage or gross margin dollars on a bigger revenue number?

Tom Boelsen

Reid, I would say it would be more along the lines of similar gross margin dollars over time, especially as John alluded to earlier today they announced the 2% membership growth off of the end of the year. So, we are looking at similar gross margin dollars over the course of this year.

Reid Walker - Walker Smith Capital

Okay. And then John, one final question for you. As we look at the sequential uptick of about $4.9 million in SG&A, $1 million of that was training in the field. How much of that is reclassification? How much of it is transitional costs? And how much of it is maybe just the Mississippi add and some of the other incremental cost, just for modeling purposes?

John Potapchuk

Yes, there was a re-class that I mentioned earlier relating to corporate was about $0.5 million. The Mississippi piece was in the $600,000 to $800,000 range. And then as I mentioned the training costs and then certainly just incremental cost of servicing the incremental volume.

Reid Walker - Walker Smith Capital

Okay. So, how much of it would you consider to be temporary and transitional?

John Potapchuk

Somewhere in the $1.5 million range. I say that because you've got the training costs and you have some incremental IP costs associated with the PPS.

Reid Walker - Walker Smith Capital

Okay, and none of the stuff that you walked through is included from the CareCentrix stuff as you walked down with the detail, which I appreciate, that is not included in that, correct?

John Potapchuk

That's correct.

Reid Walker - Walker Smith Capital

Okay. Thanks, guys.

John Potapchuk

Sure.

Ron Malone

Thank you very much. I'd like to thank each of you for your participation this morning and for your continued interest in Gentiva. We look forward to keeping you all informed of our progress during 2008.

Operator

Thank you. This does conclude today's Gentiva Health Services first quarter 2008 earnings conference call. You may now disconnect your lines, and have a wonderful day.

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