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Executives

Eric Elliott – VP, IR

Keith Myers – Chairman and CEO

Pete Roman – SVP and CFO

John Indest – President and COO

Analysts

Art Henderson – Jefferies & Co.

Ralph Giacobbe – Credit Suisse

David MacDonald – SunTrust

Darren Lehrich – Deutsche Bank

Newton Juhng – BB&T

Sheryl Skolnick – CRT Capital Group

Eric Gommel – Stifel Nicolaus

Bill Bonello – Wachovia Securities

LHC Group, Inc. (LHCG) Q2 2008 Earnings Call Transcript July 31, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 LHC Group Inc. earnings call. My name is George, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Eric Elliott, Vice President of Investor Relations. Please proceed, sir.

Eric Elliott

Thank you, George, and welcome everyone to LHC Group's Second Quarter 2008 Financial Results Conference Call. In a moment, we'll hear from Keith Myers, Chief Executive Officer of LHC Group, John Indest, President and Chief Operating Officer, and Pete Roman, Chief Financial Officer.

Before that, I would like to remind everyone that statements included in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, comments regarding our financial results for 2008 and beyond.

Such statements are subject to a number of risks and uncertainties such as changes in reimbursement, changes in government regulations, changes in the company's relationships with referral sources, increased competition for its services, increased competition for joint venture and acquisition candidates, and changes in the interpretation of government regulations. Therefore, actual results may differ materially from any financial outlook presented herein.

Further information or potential factors that could affect the company's financial results can be found in the company's Form 10-K for the year ended December 31, 2007. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events. Now I am pleased to introduce the CEO of LHC Group, Keith Myers.

Keith Myers

Thanks, Eric, and welcome, everyone.

This morning I'd like to start by introducing members of our senior management team. As Eric mentioned, you'll be hearing from John Indest, Pete Roman and myself this morning. Also joining us for the call this morning are Don Stelly, our Senior Vice President and Director of Operations, Daryl Doise; our Senior Vice President, Director of Corporate Development; Richard MacMillan, our Senior Vice President who serves as Senior Counsel, Chief Compliance Officer and Director of Government Regulatory Affairs; and a new addition to our senior management team, Pete November, Senior Vice President, General Counsel and Director of Mergers and Acquisitions.

By every measure, the second quarter of 2008 was a breakout quarter for the LHC Group family. Being here since day one, I can say without hesitation that LHC Group is stronger today than we've ever been in the 14-year history of the company. Our clinical operations team continues to drive our success by providing higher quality and more cost-effective care to the patients, families, and communities we serve than ever in our history.

The investment we've made in our back office support services over the past year, especially in the area of revenue cycle management, has resulted in a complete turnaround, with cash collections as a percentage of revenue never higher, and DSO never lower since our initial public offering in June of 2005.

Our management team continues to be the clear industry leader in management team effectiveness in terms of long-term measures such as return on assets, return on capital and return on equity. Given our significant financial strength and flexibility, we are better positioned to take advantage of the opportunities ahead of us than in any point in the history our company. We have never been more confident in our proven operating model and we look forward to increasing our already impressive pace of acquisitions, with an increased appetite for larger opportunities in the future.

Now I'll touch on some of the highlights of the quarter and then turn it over to Pete and Johnny for further review. Starting with acquisitions in Q2 of 2008, on April 1st, we acquired 100% of the assets of Home Care Connections and Rivercrest Home Health Care. This acquisition consisted of four locations in Amarillo, Odessa, Uvalde and San Antonio, Texas. The service area of these acquisitions spans 64 counties in Texas, which brought LHC Group's total service area in Texas to 102 counties. The primary service area of this acquisition has an estimated total population of 4.8 million, with almost 11% over the age 65 and total annual revenue of approximately $8.4 million.

On May 1st, we acquired 100% of the assets of River West Home Care located in Plaquemine, Louisiana. The primary service area of this acquisition has an estimated total population of 1.3 million, with almost 11% over the age of 65 and total annual revenue of approximately $700,000.

On May 19th, we acquired 100% of the assets of Home Care Solutions, Inc. The acquisition consisted of eight locations in Tennessee and two locations in Virginia, and represented LHC Group's initial entry into the State of Virginia. The service area of this acquisition covers 60 counties in Tennessee, which expanded LHC Group's total license area to the entire State of Tennessee and seven counties in Virginia. The primary service area of this acquisition has an estimated total population of 2.6 million, with almost 14% over the age of 65 and total annual revenue of approximately $11.9 million.

On June 1st, we entered into two separate joint ventures. We entered into a joint venture relationship with Jefferson Regional Medical Center, a 471-bed hospital located in Pine Bluff, Arkansas to provide home health services. The company also entered into a joint venture relationship with Community Medical Center of Izard County, a 25-bed critical access hospital located in Calico Rock, Arkansas to provide home health and hospice services. The combined primary service area of these agencies has an estimated total population of 700,000 with almost 14% over the age 65. Total combined revenue for 12 months for these agencies was approximately $3.0 million.

In the first half of 2008, we have added 21 locations in seven states through acquisitions with combined annual revenue of approximately $29.9 million. De novo locations continue to contribute significantly to our growth. In the first half of 2008, we opened eight new de novo locations in five states. We have 16 additional de novo locations scheduled for opening in the second half of 2008.

With regard to our acquisition pipeline, we continue our disciplined process of identifying targets that are fairly priced and have significant upside potential through internal growth and geographic expansion through new de novo locations. Because of our stringent criteria, only a small percentage of the opportunities presented to us are approved by senior management for consideration. In the second quarter, we once again realized an increase in the volume of opportunities presented to us, which has resulted in a continued increase in pipeline activity.

We will address only those opportunities that have reached the internal approval process and which have been approved by senior management. At this time, we're in active negotiations with 19 acquisition candidates that have been approved at the senior management level. These 19 current opportunities include 43 existing locations in 15 states and approximately $63 million in annual revenue. In response to the continuing increase in pipeline activity, we've increased our line of credit with Capital One from $37.5 million to $75 million during the second quarter of 2008.

I'd like to give you a quick update on the progress that we are making concerning commercial payors. As you know, during the first and second quarters of this year, we terminated 285 commercial and managed care contracts because of substandard reimbursement. During the second quarter, we have successfully renegotiated agreements with a number of commercial payors, with new rates substantially equivalent to Medicare. Negotiations are continuing with other commercial and managed care payors in various states.

Commercial and managed care net service revenue per admission for the second quarter of 2008 was $2,831, as compared with $1,945 for the second quarter of 2007. Now, while this represents an approximate 46% increase in reimbursement per admission, it's important to note that the skill mix requirements and costs are higher for these patients, meaning that these rates are still below Medicare equivalency. Most of the deficit is from services provided prior to the effective dates of termination of existing agreements.

We continue to make progress and we are definitely trending in the right direction. I'm confident that we've turned the corner with commercial and managed care payors and that we will continue to add new contracts in the future and at rates which are at least equal to the prevailing Medicare rates for home health services in the market.

And now I'll turn it over to Pete Roman for a more detailed review of our financial results. Pete?

Pete Roman

Thank you, Keith.

Net service revenue for the quarter ended June 30, 2008, increased 27.7% to $90.1 million, compared with $70.6 million in 2007. For the three months ended June 30, 2008 and 2007, 82.9% and 82% respectively of net service revenue was derived from Medicare. For the second quarter, home-based services accounted for 84.8% of revenue compared with 82.2% for the comparable prior year quarter.

Income from continuing operations for the second quarter of 2008 totaled $6.4 million or $0.35 per diluted share, compared to $5.4 million or $0.30 per diluted share for the second quarter of 2007. Net income for the second quarter of 2008 totaled $6.3 million or $0.35 per diluted share, compared to $5.0 million or $0.28 per diluted share for the second quarter of 2007.

The effective tax rate quarter ended June 30, 2008 and 2007 was 38% and 36.4% respectively, and we expect the effective tax rate for the remainder of the year to be around 38.5%. Net service revenue for home-based services for the three months ended June 30, 2008, increased 31.8% to $76.4 million, compared with $58 million for the three months ended June 30, 2007. Internal growth in net service revenue and in Medicare net service revenue for the home-based services for the three months ended June 30, 2008 is 13.6% and 16.1%, respectively, as compared to the same period in 2007.

We define internal growth as a combination of organic growth and internal acquisitions growth. Internal acquisitions growth is revenue growth over the historical average achieved in an acquired company in the first 12 months after the acquisition. Internal acquisition growth in the net service revenue and in Medicare net service revenue for the three months ended June 30, 2008 was 2.6% and 3.1%, respectively.

For LTACs, net service revenue in the three months ended June 30, 2008 increased 8.9% to $13.7 million, compared with $12.6 million for the same period in 2007. In the second quarter of 2007, we recorded a $1.1 million cumulative adjustment to the LTAC revenue related to contractual adjustments that had not previously been reported.

Now turning to the six months ended June 30th, net service revenue increased 24.6% to $173.6 million, compared with $139.3 million for the same six-month period in 2007. Medicare revenue for the six months ended June 30, 2008 and 2007 was 82.7% and $82.0% of net service revenue, respectively. For the first half of 2008, home-based services accounted for 83.4% of revenue, compared with 81.2% for the comparable six-month period in the prior year.

Income from continuing operations for the six months ended June 30, 2008 was $11.8 million, or $0.67 per diluted share, compared to $11.4 million or $0.64 per diluted share for the same period in 2007. Net income for the six months ended June 30, 2008 totaled $11.7 million or $0.66 per diluted share, compared to $10.8 million or $0.61 per diluted share for the same period in 2007. Net income for the six months ended June 30, 2008 includes a $167,000 after-tax loss from discontinued operations, which resulted in a $0.01 decrease in earnings per share. The effective tax rate for the six-month periods ended June 30, 2008 and 2007 was 38.0% and 37.5%, respectively.

Net service revenue for the home-based services for the six months ended June 30, 2008 increased 28.1% to $144.8 million, compared with $113.1 million for the same period in 2007. Internal growth in net service revenue and in Medicare net service revenue for the home-based services for the six months ended June 30, 2008 is 11.5% and 14.1%, respectively, as compared to the same period in 2007. Internal acquisition growth in the net service revenue and in Medicare net service revenue for the six months ended June 30, 2008 was 2.5% and 3.3%, respectively.

For LTACs, net service revenue in the six months ended June 30, 2008 increased 9.8% to $28.8 million, compared with the $26.3 million for the same period in 2007. The increase relates to a slightly higher occupancy and higher acuity patients in the first half of 2008, compared to the same period in 2007, and as previously mentioned, $1.1 million cumulative contractual adjustments to the LTAC revenue that was recorded last year in the June quarter.

There has been a lot of interest caused by the increase in gas prices. Our transportation costs in the home-based segment, which includes the expense of reimbursing for business mileage, was $2.9 million or 3.7% of home-based net service revenue during the three months ended June 30, 2008, as compared to $2.2 million or 3.8% of the home-based net service revenue in the same period in 2007. We expect transportation costs to remain between 3.7% and 4.0% of revenue for the remainder of the year.

For the six-month period ended June 30, 2008 transportation costs in our home-based segment was $5.1 million, or 3.5% of home-based net service revenue, as compared to $4.0 million or 3.5% of the same net service revenue in the same period in 2007. Gas provided by operations for the six months ended June 30, 2008 was $31.9 million, with $15.4 million provided in the current quarter.

CapEx for the six months ended June 30, 2008 was $6.5 million, of which $940,000 related to the June quarter. The second quarter CapEx is primarily related to equipment acquired for the LTAC operations and expenditures on information technology. The Company also purchased a new aircraft in the first quarter of the year. Depreciation expense was $1.8 million for the six months ended June 30, 2008 and $880,000 for the June quarter.

During the six months ended June 30, 2008, we acquired 21 locations for $32.5 million in cash, including acquisition costs, of which 18 locations were acquired in the June 2008 quarter for $17.7 million in cash excluding [ph] acquisition costs.

Day sales outstanding, or DSO, at June 30, 2008 was 60 days, as compared to 75 days at June 30, 2007, and 74 days at the end of the last quarter. Included in accounts receivable at June 30, 2008, are $5.4 million in receivables generated by acquired agencies and which remain unbilled, awaiting approval of the change of ownership from the fiscal intermediaries. After adjusting for these unbilled accounts receivable, adjusted DSO at June 30, 2008 is 55 days compared to 70 days at June 30, 2007 and 56 days at the end of the last quarter. The 14-day reduction in DSO from the end of the last quarter represents approximately $13.8 million in cash flow to the Company.

Bad debt expense for the three months ended June 30, 2008 was $3.6 million or 4.0% of revenue, compared to $2.3 million or 3.2% of revenue for the same period last year. For the six months ended June 30, 2008, bad debt expense was $7.7 million or 4.4% of revenue, compared to $4.1 million or 2.9% of revenue for the same six-month period last year. Our allowance for uncollectible accounts at June 30, 2008 was $8.9 million, which is approximately 13% of patient accounts receivable.

At December 31, 2007, the reserve was $9.0 million, which was about 11.3% of total receivables. Over the last six months, we have continued to calculate our reserve consistently, using the method adopted at the end of the last year. I expect to retain the level of conservatism that we've established in the reserve for uncollectible accounts for the remainder of this year. However, through improved collections and efficiencies in the billing process, we have reduced the average age of receivables, and I expect that for the last two quarters of 2008 bad debt expense will be around 3.0% of revenue or less.

As evident by our continued decrease in DSO in the second quarter of 2008, we were in the middle of a pronounced turnaround in the revenue management department. The investment made over the last year in people and programs is evident in the financial results we are reporting. We have, with the assistance of Simione & Associates, reorganized the department, added key personnel and developed a quality leadership team. I expect that Simione will continue to support both the management and assist in collecting claims for the remainder of this year.

The outsourcing of LTAC billing to the Advanced Billing Solutions Company has reduced the LTAC DSO from 91 days at June 30, 2007 to 27 days at June 30, 2008. We've engaged them to process billing for our hospice operations, allowing us, here at home office, to focus on home health billing. We are very pleased with our progress to date in the billing and collections area and I certainly want to congratulate the entire revenue management team for all of their hard work, dedication and loyalty. However, I don't believe we are quite done yet. We will continue to focus on improvements and efficiencies in this department and develop and apply best practices. We can drill down on these results further during Q&A if anyone desires.

Now I'm pleased to have Johnny Indest, our Chief Operating Officer, take over to review the details of our operations. Johnny?

John Indest

Good morning, everyone and thanks, Pete.

First, I would like touch on the operational data from the second quarter of 2008. Total new admissions to home nursing climbed 24.7% to 13,499 in the three months ended June 30, 2008 from 10,825 in the three months ended June 30, 2007. New Medicare admissions rose 34.8% to 10,107 in the three months ended June 30, 2008 from 7,500 in the three months ended June 30, 2007. Internal growth on total new admissions decreased 2.0%, while new Medicare admissions increased 5.0%. The decrease in internal growth in total new admissions is due to our reduction in new commercial admissions in the quarter.

For the second quarter of 2008, our home-based average weekly patient census was 20,469, an increase of 25.7% as compared to 16,283 patients for the second quarter of 2007. Average weekly Medicare patient census rose 35.4% to 16,544 in the three months ended June 30, 2008 from 12,222 in the three months ended June 30, 2007. Internal growth on home-based average weekly census and Medicare average weekly census for the second quarter of 2008 was 6.7% and 13.3%, respectively.

We had 28,925 completed Medicare episodes in the second quarter of 2008. Total growth in Medicare episodes was 48.7% for the three months ended June 30, 2008, as compared to the same period in 2007, while internal growth in Medicare episodes was 31.6%. Our average case mix for completed Medicare episodes in the second quarter of 2008 was 1.25, with an average reimbursement of $2,343 per episode. In the second quarter of 2008, we had 526,756 total home nursing visits, of which 407,680 were Medicare visits for an average of 14.1 visits per completed Medicare episode.

Touching briefly on our seven LTAC locations, patient days decreased 1.4% to 11,298 in the three months ended June 30, 2008, from 11,453 in the three months ended June 30, 2007. Patient acuity mix, however, increased in the three months ended June 30, 2008 to 0.962 from 0.897 in the three months ended June 30, 2007. These seven locations, all located in Louisiana, continue to be stabile, consistent contributors to earnings, sharing operational synergies with our home health agencies in the markets they serve.

Earlier, Keith referred to our acquisitions of Home Care Connections, Rivercrest Home Health Care, River West Home Care and Home Care Solutions. In addition, Keith referred to our joint ventures with Jefferson Regional Medical Center and Community Medical Center of Izard County. I cannot be more pleased with these additions to the LHC Group family of home care locations. I fully understand the concern in the minds of each employee as they transition from their former owners to a new company, of which they have little knowledge.

I first want to thank each and every employee in these agencies for their dedication to those patients entrusted to their care and for the trust they have placed in our Company. I also want to thank our LHC Group team members who worked so hard to make these deals come to fruition and who are on the frontline transitioning these agencies in the LHC Group culture and model of providing care. It is this team that continues to impress me with their ability to assimilate into the LHC Group the large number of agencies that we have added in the past, and therefore gives me great confidence, moving into the future, to continue our controlled yet aggressive expansion.

Along with the active acquisition pipeline, we continue with our de novo locations. In the second quarter of 2008, we established de novos in Branson, Missouri, Beckley, West Virginia and Sevierville, Tennessee. As Keith alluded to earlier, our plan is to open 16 de novos in the second half of 2008.

As is customary, I would like to update you on our quality initiatives. While the effectiveness of these initiatives is measured in many different ways and by many different entities, I want to focus on two of the key components. First, and in relation to our home care compared results, we continue to show consistent improvement in our nationally reported outcome scores. In this last reporting period, we have shown improvement in 11 of the 12 measured categories. We have now demonstrated this consistent improvement in the last five CMS reporting periods. At this time, we are meeting five of the 12 nationally reported outcomes.

Secondly, I want to touch on our strategy to obtain Joint Commission Accreditation for each of our home care and hospice agencies. As one of the most important seals of approval in the healthcare marketplace, the Joint Commission presently accredits 39 of our home care agencies. Since our last call, our senior management team, in concert with our quality council, has approved a plan to add the remainder of our agencies into the present survey scheduled, which began again in early June.

In closing, I would like to offer my congratulations to our operations team. This team has proven its ability to manage through many challenges over the years and they have proven themselves once again. As Keith reported earlier, this second quarter was the first true indication of how we would perform under the new reimbursement guidelines. There was a great deal of speculation about the new rule and how LHC Group might be affected. As is our custom, we studied, we evaluated and set forth a plan that would assure our success, while maintaining our focus on what drives us all at LHC, providing the highest level of service to those patients entrusted to our care.

I could not be more proud of our team. We have celebrated our success, but not for long. We fully realize that we have a big job ahead of us. We are focused on our current operations, always exploring ways to do our jobs better. We have also set our sights on the opportunities that lie ahead and we believe they are numerous. Like Pete, I'll gladly take any questions you may have concerning operations in a moment.

Keith Myers

Thanks, Johnny.

Our continued success is the result of the hard work and dedication of every member of the LHC family and is driven by the vision, passion, and leadership of our senior management team, with more than 100 years of combined industry experience. They are the best team that I've ever worked with and I consider myself fortunate to be part of the team. The depth and experience of our management team continues to provide us with a competitive edge and our continued success acknowledges the long-term commitment to excellence that is ingrained in our culture and in every member of the LHC Group family.

A strategic vision does not define a company's success. It's people do. We realized long ago that our Company's most important assets are the vast knowledge base and experience that reside in our people. Over the years, the LHC family has learned what works and why, and equally as important what doesn't work and why. Failing to tap this vast warehouse of experience would be a failure on the part of management. We know that input from all levels of the organization is an essential element in developing best practices, as we continue to reinvent ourselves to keep up with constant changes in the industry.

In today's competitive and ever-changing environment, no organization can afford to rest on its laurels. With each day comes new opportunities to grow and improve. The LHC Group family has achieved many significant milestones over the past 14 years, but we know that the best is yet to come. We've only just begun. The outstanding success of the LHC Group family stands as a testament to what can happen when you combine a team of highly motivated, talented people within a value-driven organization, with a clear mission and vision and a well thought out, disciplined, long-term strategy for success.

I want to say thank you to all of our shareholders for your investment, confidence, and support. We work hard every day to provide you with a good return on your investment and to build long-term value in a way that contributes positively to the society in which we all live. We have never been more confident in the collective ability of our team and we could not be better positioned for the future.

In the coming months, we will elect a new president in the U.S. and we believe that with a new administration comes an opportunity to fundamentally address the way we deliver care to the rapidly growing, age 65-plus population of our country. Both candidates strongly support home health services, recognizing it as the most cost-effective and least restrictive method of providing care and understanding that it's the preference of patients and families when given the choice.

Following the election, in 2009 and beyond, policy-makers will be back at the table addressing the much-talked about issues surrounding healthcare costs, and the role of home healthcare will continue to expand, especially in the area of disease management and chronic long-term care for the age 65-plus population in the U.S., which will more than double over the next 30 years. 83% of the aged 65-plus population has at least one chronic condition and 23% have five or more chronic conditions and account for 68% of all Medicare spending.

At less than $50 per patient day on average, the costs for home health services are less than 10% of the more than $500 per patient day costs for SNPs care and less than 1.0% of the more than $5,000 per day for in-patient hospital charges. Through improved care coordination and the sharing of data across settings, healthcare providers will be forced to work more collaboratively in the future to provide a higher level of patient-centered care, which will improve efficiencies by making sure that patients are always receiving the appropriate level of care in the most cost-effective setting.

We know that the key to reducing healthcare costs is to more proactively manage our high-risk population and avoid unnecessary utilization of more costly in-patient services such as recurring trips to the emergency room where many patients are referred to as "frequent flyers" by ER staff. It's no secret that utilizing home health services to manage beneficiaries with chronic conditions significantly reduces costs and results in substantial improvement in patient satisfaction scores. Patients form a relationship with their home health nurse or therapist and know that they are on 24-hour call for them. So when they need help, the first call is to their home health agency, instead of an often-unnecessary trip to the emergency room in the middle of the night.

Perhaps, Secretary Michael Levitz said it best in a speech at the World Health Congress in February of 2005, “Providing the care that let's people live at home where they want to be is less expensive than providing care in institutional settings.” This lowers costs and frees up resources to help more people as our aging population continues to grow and obviously people are happier living at home.

In the future, successful healthcare providers will be those who are able to deliver appropriate levels of patient-centered care when and where it is needed as opposed to the outdated one-size-fits-all model where the same level of care is delivered to all regardless of need and delivered when and where it is scheduled, rather than when and where it is needed. At LHC Group, we are excited about the future and look forward to being part of the solution to the healthcare crisis we face in our country.

Finally, in closing, I want to take this opportunity to increase our guidance for 2008. We anticipate revenue for 2008 of $350 million to $370 million, an increase from previous guidance of $340 million to $360 million. We also anticipate fully diluted earnings per share of $1.35 to $1.45, an increase from our previous guidance of $1.30 to $1.40. This guidance does not take into account any future acquisitions or de novo locations.

Operator, at this time I think we'll take calls.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Art Henderson, from Jefferies & Co. Please proceed.

Art Henderson – Jefferies & Co.

Hi, good morning. Congratulations on very nice quarter. A couple of quick questions. Keith, could you comment – I know you made – you gave some – a detailed overview on the acquisitions and how you're looking at them. But could you go into a little bit more color? With the Medicare changes that have occurred, is your phone ringing off the hook more now than it was previously with smaller providers struggling under the case-mix reforms? And what areas are you looking at? Are you more rural focused, are you more urban focused? What's your appetite at the moment?

Keith Myers

Yes, thanks Art. Definitely the activity has increased. I think, with the change in reimbursement methodology, it's more complex and it requires more of an investment in infrastructure. And we're finding that some providers that may have been marginally profitable under the old system are making the decision not to make that significant investment and look for a partner to come in and take their agency to the next level. As for rural versus urban focus, I think I would say we no more are less focused in rural areas than we have been in the past. I mean, I think we'll continue to be about 50% rural. The industry is 20% rural, on average. But we tend to focus in bedroom communities outside of urban areas and push out even into rural designations in some, but we haven't changed that part of our strategy at all.

Art Henderson – Jefferies & Co.

Okay. And then when you talked about increased appetite for larger acquisitions, what sort of size are you talking about there?

Keith Myers

Well, I mean, I think – I don't know if we've discussed a limit on size. I think what I'm trying to communicate is that our experience with integrating acquisitions through all of our startup teams, and Johnny can perhaps expand on that a little bit, has been so tremendous. And now with increased confidence in all of our back office systems, I believe we're going to be able to leverage the synergies in larger acquisitions and our confidence level is quite high. We're just ready to take on bigger deals. I don't know if we have a limit.

Art Henderson – Jefferies & Co.

Okay, all right. That makes sense. And then just one follow-up, I guess it's a two-part question. First, Pete, expectations going forward for DSOs, if I missed – I might have missed this, but should we expect the DSOs to continue to trend down, looking ahead over the next few quarters and is there a sort of targeted level you're looking to go to?

Pete Roman

I certainly would be disappointed if they didn't trend down, but I'd be – it would surprise me if – it wouldn't surprise me if we stayed right where we are right now. I think that we've done a lot of things back in the back office to make us a lot more efficient. And applying those efficiencies has really – has helped us to get these numbers down, but it has been faster than I expected, I mean, to be perfectly honest. I think that we're at – that the DSO right now is lower than I would have thought it was going to be, if you were asking me six months ago. I think that what's the bottom is a real good question and I don't know that I have the answer yet. I know it's not where we are right now. I think it's going to continue to go down, but what the target is and how we approach that, I don't really have a great answer for you at this point in time. I just know that I'm happy with where we are. I'm very pleased with the results that we've gotten so far in the last six months, and I do expect us to continue to move the number down as best we can.

Art Henderson – Jefferies & Co.

Okay, that's helpful. And then, on the managed care front, are you structuring those contracts on – are they one-year contracts or are they multi-year?

Pete Roman

For the most part, they're one-year contracts right now. Some are even – some were even six-month contracts on some of the early ones we signed, because we're having to step them into accepting Medicare rates. And I think I've said this before, what I found is that there was no great conspiracy among commercial and managed care payors to pay less than Medicare rates. It's just that home health is such a small piece of their business they just never focused on it. So no one ever presented them with a compelling argument of how we could add value and lower their costs. So it's really relationship building, is what I'm finding.

Art Henderson – Jefferies & Co.

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Please proceed.

Ralph Giacobbe – Credit Suisse

Good morning, thank you. I just want to go to the guidance, the raised guidance. Is that related to sort of upside from the previous acquisitions you've made? Is it sort of just the upside from the quarter that we saw or is that upside from base operations as we think about the second half of the year?

Pete Roman

We – this is the second time – we raised it originally, I guess a couple of months ago and that really took into consideration the acquisitions that we had in place. This increase really more relates to what we see as being a very effective application of how we approach the final rule and how we provide our services to our patients. And I think we're just recognizing that the operating results were a little bit faster and a little bit better than we had originally anticipated, so I would say it's more related to operations than it is acquisitions

Ralph Giacobbe – Credit Suisse

Okay. And then maybe on the acquisition front, just wondering if you can comment on pricing. Are we seeing that come down at all or were we maybe optimistic in thinking we'd see sort of the multiple compress?

Keith Myers

Yes, I can't say that we've seen any great shift. I mean, perhaps some very slight move downward, as a percentage of revenue. But what we're really seeing, I think, is higher quality opportunities coming to market. So, apples to apples, I think pricing is coming down, but just we're buying higher quality for the same money.

Ralph Giacobbe – Credit Suisse

Okay. And then I just want to go to the fuel cost side of it. I guess, is your sense that most other providers are bumping up that reimbursement for fuel as well? And then, I guess, to the extent that they aren't, is that helping you all in terms of recruiting? Or is that maybe a little bit of a stretch or at least helping to recruit or any relief to wage pressures?

John Indest

Ralph, this is Johnny. I think the entire industry is struggling with the whole increase in fuel costs. We have been increasing. We reevaluate our fuel reimbursement on a quarterly basis, on a state-specific basis. I can't say that it has helped our recruiting or hurt our recruiting. People are all over the board in a lot of different methodologies as they reimburse their fuel costs. We are doing a lot of evaluating to make sure that the actual recording of our fuel costs are accurate. Pete reported a great number, saying that we're basically holding our fuel costs, as a percentage of net revenue, pretty flat as we move forward. But I can't say that we have lost or gained any great recruiting advantage because of fuel cost.

Ralph Giacobbe – Credit Suisse

Okay, great. And if I could, just one more. On the de novo front, I think you said through the first half of the year, I think, you opened eight and 16 are scheduled in the second half of the year. I guess how comfortable are you with that target and are there still sort of the delays on the regulatory side?

John Indest

We're very confident with what we've laid out. We have specific locations laid out. We have specific timeframes laid out for those locations. There still is somewhat of a slowdown on the regulatory side, but we have been dealing with that for over a year now and have worked well through that. But we're very confident about our strategy for the remainder of 2008.

Ralph Giacobbe – Credit Suisse

Okay. And just to make sure of that, those 16 that are scheduled in the second half of '08, that is or is not included in guidance?

Pete Roman

It's not.

Ralph Giacobbe – Credit Suisse

It's not, okay.

Pete Roman

We don't include in guidance any future acquisition or future de novo.

Ralph Giacobbe – Credit Suisse

Okay, great. Thank you.

Pete Roman

Okay.

Operator

Your next question come from the line of David MacDonald from SunTrust. Please proceed.

David MacDonald – SunTrust

Good morning, guys. Hey, Keith, can you talk just a little bit in more detail about the managed care repricing initiative, can you give us some sense of – if you look at the book and the number of contracts that you guys kind of walked away from, where are we on a percentage basis in terms of how many of those have been taken care of? How many you're still negotiating with, et cetera, just so we can kind of get a sense of where we are in the game here?

Keith Myers

Sure. I'll try, David. Let me say that first of all it's a little bit of a moving target, because after you move into new markets, you're dealing with different payors. But when we started the initiative, 70% of all commercial claims for the company were really with five different payors. So we had multiple contracts with the same payors in different states, but really we only had a handful of organizations to have conversations with, and we've renegotiated and signed contracts with more than half of those in the major payor category.

David MacDonald – SunTrust

Okay.

Keith Myers

So, but the challenges continue, because every time we go into a new market, we're presented with contracts that the target agency had in place, and our first order of business is to cancel the contracts with those payors. And so we have to get to the table, and it's adversarial for the first six months or so, as you can imagine, as you try to come to terms.

David MacDonald – SunTrust

Okay. And then just one other question on the acquisition. I mean, you talked about 19 candidates, $63 million in revenue, which suggests about $3 million, $3.5 million per property, which I'm sure is not uniform across all 19. Are there any big ones in there? Is there one or two that are significantly outsized relative to the other 17 or so?

Keith Myers

Yes, they're not evenly distributed. There are a couple of larger opportunities in multi-site locations in there.

David MacDonald – SunTrust

Okay. Thanks very much.

Operator

Your next question come from the line of Darren Lehrich from Deutsche Bank. Please proceed.

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everyone. Good job in the quarter. I guess I'll give you a fun fact. You generated more cash from operations in the first half than Gentiva did, so obviously a good job with the collection side. I want to just ask a couple questions there, just so we're clear on what you've been able to do, Pete. Can you just tell us whether there's a significant amount of receivables you collected that were previously written off? Was there any element to it on that side?

Pete Roman

No.

Darren Lehrich – Deutsche Bank

Okay.

Pete Roman

No. Those are not recoveries. And just to be real clear, when we reserve, they may have been – because we reserve based on the aging buckets and we just establish a value, you might say, on that aging bucket, it's not specific identification of a receivable as being uncollected until we actually write it off. So I don't want to say that we didn't have reserves out there that we might have overestimated because of this calculation method, but nothing that we wrote off – if it was, it's a very, very tiny amount was recovered so that's not where that's coming from.

Darren Lehrich – Deutsche Bank

Okay. And then I guess another thing just to clarify. Were there any big claims or I guess groupings of claims with a common single payor that came in all at once? I just want to get a sense for – you've been working a lot of these aged receivables and what exactly were you able to accomplish with the number that big across lots of smaller claims?

Pete Roman

You –?

Darren Lehrich – Deutsche Bank

So I guess the question is were there any like – from a single common payor, were there any big, big claims that you were able to bring in all at once?

Pete Roman

Like did it kind of fall from the sky all in one number? Yes.

Darren Lehrich – Deutsche Bank

Those are your words, yes.

Pete Roman

Yes. That wasn't the case. The – we – the way we solved these whole problems, you have to go all the way back to the very beginning when we started to determine that the department back there needed to be restructured. And then adding Simione to come in and help us do that, evaluating and developing the people that we had back there, adding some oak [ph], some team leadership in the group, applying a software package to do the scrubbing. Engaging Simione to do the – to help us with – to sort of outsource some collections. All of those efforts really were the syllogism that got us to where we are right now. And you can't really look at one or the other as being more significant or more important, because they really all work together.

Darren Lehrich – Deutsche Bank

Sure. And your clean claim percentage at this point in home nursing?

Pete Roman

Yes, the last number that we had was about a 50%, and I can tell you that the scrubber program that we put in place is only in place in our Louisiana server, which is obviously our biggest server. So I'm really not ready to put out that number yet. I'd really like to – can we hold onto that until the September quarter? Because we will, at that point, have all the servers going through the scrubber and I can probably give you a pretty good number.

Darren Lehrich – Deutsche Bank

That's great. A couple more things on just the revenue cycle issue, because I think it's pretty important, obviously. With regard to bonuses that you may pay for some of the collection results that you've achieved, are there any that you have yet to accrue in the back half of the year? I just wasn't sure if there were any special bonuses that were planned for all these collections. And then do you expect to continue to grow your revenue cycle staff? In other words, did you staff up to a certain level to work it down and then you shrink the department? I just want to get a sense for where you are with that.

Pete Roman

Regarding the bonuses, we constantly look at compensation and incentive pay, and that's something that we evaluate all the time for all departments, and the revenue department staff is no exception. If you're looking for an individual significant bonus that maybe we would be having to accrue because of the Simione assistance, that is not yet in the books, no. We accrue it as they earn it and that's the way we've been doing it. On the staffing, yes, we definitely want to grow the staff. We want to grow it commensurate with the actual activity growth and it's a little tricky, because we continue to have – when we acquire a location, we roll all of those claims into our existing department, so it’s tricky to balance that out. But thus far, we've been pretty successful in balancing out the growth here in Lafayette and also in the billing office that we have up in Kentucky, and I think that that's how we're going to continue to staff it going forward.

Darren Lehrich – Deutsche Bank

Okay. And then just last thing here for me is, I think if we're looking at the cash flow statement right, there was an asset sale of some sort in the quarter. Can you just remind us what that was?

Pete Roman

Yes. It actually wasn't in the quarter. It was in the first quarter. It was the –.

Darren Lehrich – Deutsche Bank

That was the plane. Okay.

Pete Roman

Planes, yes, right.

Darren Lehrich – Deutsche Bank

Yes.

Pete Roman

And so the gain was then.

Darren Lehrich – Deutsche Bank

I see, okay, excellent. Thanks very much.

Pete Roman

Great. Thank you.

Operator

Your next question come from the line of Newton Juhng from BB&T. Please proceed.

Newton Juhng – BB&T

Thank you. Most of my questions have actually been answered already, but I did want to ask a couple here. One on just with the fuel cost, have you given what the general mileage reimbursement is that you're at right now and kind of what's the expectation for it to move going forward?

Keith Myers

Newton, this is Keith. I'll take the first side of this. We reimburse mileage based on regional fuel costs, so that would require us to add up all the miles and so we don't put out an average. Johnny, do you want to say anything more?

John Indest

No. I mean, it fluctuates, again, depending upon region. And also, as we bring new companies in, a lot of them have varying mileage rates, so it really fluctuates throughout the company.

Newton Juhng – BB&T

Okay. Well, let's move off of that then. I don't expect you to make that calculation right now. In terms of the LTAC side of the business, the revenue actually came in a little bit lower than we were expecting, about $13.7 million. And the fall-off, sequentially, we were expecting some, but can you speak a little bit more as to how the volumes were out of this business this quarter and also should we expect a rebound as we move through the year?

John Indest

Yes, this is Johnny. I'll take that question. Part of the reason for the drop in patient days is that we are under, as you are aware, restrictions from the host hospital on the percentage of patients that can be admitted from the host hospital. We have to make adjustments periodically to make sure that we're staying comfortably within those ranges, and therefore have to defer referrals to other providers or to not accept referrals, when we exceed, when we are getting close to not meeting those ranges, and that's what happened in the second quarter.

Newton Juhng – BB&T

Okay. Is that done on a weekly, a monthly basis? What's the cap there?

John Indest

We review that on a weekly basis to see how we're doing. Because, again, if you're not within the limitations at the end of your fiscal year for the average length of stay – I'm sorry, not average length of stay, for your referrals from the host hospital, you convert to a much lower reimbursement. So we're evaluating that on a consistent basis.

Newton Juhng – BB&T

Okay. And then Johnny, in terms of projection for going forward, could we see a little bit of a rebound in the revenue there on that side of the business?

John Indest

I think there might be a slight rebound, but I mean, we're extremely proud of our LTAC performance. We're very pleased with what they have done. They have been in the crosshairs of CMS for quite a long time now, and I think you could see a modest rebound. When we reported our first quarter, we clearly indicated that that was a great quarter for us, that that was a quarter that could not be expected going forward. But I think we would probably see a slight rebound from the second quarter.

Newton Juhng – BB&T

Great. Thanks for the comments, John.

Operator

Your next question come from the line of Sheryl Skolnick from CRT Capital Group. Please proceed.

Sheryl Skolnick – CRT Capital Group

Good morning and very nice job in a number of different ways. Can I go back to cash flow, if I can, and then I have a question about case-mix and a few other things related to your Medicare home health business.

Keith Myers

Sure.

Sheryl Skolnick – CRT Capital Group

In your cash flow, which absolutely spectacular job in whipping that problem child into shape, you generated $11.74 million in cash, if my math is right, in the receivables as a cash inflow during the quarter. Presumably – and a very significant swing from the first quarter of about $21 million – so presumably that represents the dramatic reduction in DSOs in the LTAC business as well as in the home health business. So is that likely to be repeated? I mean, can – or will we go back to a – if you said that you could get a few more days, maybe, but reduction in DSOs, it sounds to me like this is the big sort of catch up collection, and then your collections will return to a more normal pattern where you're going to be balancing growth in the business versus growth in collections in your change in AR.

Pete Roman

Yes. I think that's accurate.

Sheryl Skolnick – CRT Capital Group

Okay.

Pete Roman

And the only thing I would add to that is that we have about $5.0 million of suspended billings at the end of the quarter, and as soon as we get the go-ahead to bill those, that that $5.0 million will collect very quickly. I think that's part of what you saw in the DSO improvement that we had, $16 million at the end of last quarter, part of which we got the authorization to go ahead and bill. And so we got a lot of that collected in. So that $5.0 million would be outside of the analysis that you just gave.

Sheryl Skolnick – CRT Capital Group

Okay. And then might that be sort of offset by any new acquisitions that you would do, for whom you don't have tie-in notices?

Pete Roman

It would be if that's how you want to look at it. I mean, if you just want to –

Sheryl Skolnick – CRT Capital Group

Okay. But if the estimates are done without future acquisitions, then I'm going to do the cash flow without the future acquisitions and de novos.

Pete Roman

Yes.

Sheryl Skolnick – CRT Capital Group

Okay, that's fair enough. That's very, very fair. Okay, thank you. And then my question on the case-mix, on the Medicare business, relates to the case- mix and the average revenue per episode, which appears to be in the neighborhood of $2,300. That is below your peers as just reported were in the sort of neighborhood of $2,800, recognizing that the wage index doesn't favor rural, but it still seems fairly low. So I'm curious about how your case-mix changed year-over-year? Has it gone up or is it stabile or down? And what you can do to improve your revenue per episode and whether you believe you're adequately capturing, for lack of a better word, that your charge capture is adequately capturing the secondary and tertiary diagnoses, as well as any third or later episodes?

John Indest

Sheryl, I'll take the first part of that. Our case-mix has shown a decline from previous quarters and that's to be expected. That's the new rule, particularly since we are majority of a rural provider. We budgeted for that. We expected that and we were prepared for that. So the first answer to your question is that, yes, case mix has declined. I think the second part of your question, though, is yes, we have adapted mitigation strategies for our case-mix, and that has to do in a centralized coding team. We have found that we had a lot of improvement that could be made on how we're coding claims and you're right.

Looking at the secondary and other diagnoses within the OASIS and in the plan of treatment, last time I looked at it, we we're looking at approximately 40% of all OASIS documentation and all plans of care for coding accuracy. I'm pleased that in many instances, we have been able to see an increase in our case-mix by accurate coding, but in some instances, we've also seen declines in case-mix, because the coding was more accurate. So, it's a give and take, but because of this team, we have seen a consistent, month-over-month increase in our case mix within our company. And our goal, by approximately October 1, is to be reviewing 100% of our plans of care with certified coders.

Sheryl Skolnick – CRT Capital Group

Okay. That's very, very helpful, and very interesting that you sometime pick up a situation where you have to reduce the coding and that's to be commended. My final – just a question on the revenue, approximately $1.1 million in revenue in the LTAC business. That was prior period if I heard you correctly?

Pete Roman

Yes. I probably didn't say that very well. What I'm talking about there is the adjustment that was recorded last year in the June quarter. That was a contractual – it was a cumulative adjustment on the contractual adjustments related to the LTAC business.

Sheryl Skolnick – CRT Capital Group

Okay, okay.

Pete Roman

Yes. And all I was trying to do was trying to compare the June 2008 revenue to the June 2007 revenue and give you the bridge between those two.

Sheryl Skolnick – CRT Capital Group

Right. So last year had the $1.1 million?

Pete Roman

That's right. Yes.

Sheryl Skolnick – CRT Capital Group

Not this year. I knew about last year. I was trying to figure out if it was this year as well. Okay and then –

Pete Roman

Nothing like that this year

Sheryl Skolnick – CRT Capital Group

Okay. And then finally, my understanding is that maybe the only benefit of the new reimbursement system is that for therapy episodes, if the number of visits required by the patient increases under the new rule, you actually, in your final reimbursement, will get paid that higher amount. Whereas the way it used to work was only if the number of therapy visits increased, you wouldn't get the higher amount, but if it decreased you would get a lower amount. So it went from being as negative adjustment to a potentially balanced or positive adjustment. Are you seeing any of that positively impacting your revenue this quarter?

John Indest

It has had some positive impact on our revenue. We continue to focus on our therapy visit and establishing the proper visiting pattern for our patients. I can tell you that one thing that we have done and we continue to work on. One of the real – one of the therapy components that was hit very hard when prospective payment came into effect on October of 2000, was speech therapy. And the reason for that was that speech therapy, almost by its very nature, is a long-term therapy.

Sheryl Skolnick – CRT Capital Group

Right.

John Indest

And therefore providing – going out, soliciting the business for a lot of speech therapy, you're providing a great service and getting financially, really hurt financially for providing that long-term service. Under this new methodology, we're finding ways to have multiple therapies in the home, and therefore increase somewhat our therapy utilization. We're certainly working more and more on getting appropriate levels of therapy services and getting multiple disciplines in the home when they're appropriate and working with the physician. So, in my opinion, we have continued room for improvement in that area.

Sheryl Skolnick – CRT Capital Group

Great. Thank you so much.

Operator

Your next question come from the line of Eric Gommel from Stifel Nicolaus. Please proceed.

Eric Gommel – Stifel Nicolaus

Good afternoon, just two questions. In your guidance, you gave the top line sort of range. I'm curious if you get to the higher end of your guidance, are you embedding any type of margin expansion, or are you essentially assuming sort of a flat margin consistent with second quarter?

Pete Roman

We are considering flat margins consistent with the second quarter. I think one thing that you have to remember, we've been talking a little bit about de novos and the – we saw, in the second quarter some improvement in the operating margin related to de novos that actually we started last year. It's about a six-to-nine-month process from when we started to when it generates profit, appropriate profit. And so you kind of have to build that into your numbers, when you're talking about the second half of the year. So, if we are going to establish a significant number of de novos, they will probably drag earnings for the first six months and that's what you're talking about.

Eric Gommel – Stifel Nicolaus

Great. And then my second question, relative to the acquisition pipeline, Keith, and I guess you said 19 acquisition candidates, $63 million in annual revenue, can you give us a sense of maybe the typical margin at that business or average margin of those businesses and if you don't care to do it for those, I mean, historically how the margins for acquired businesses look?

Keith Myers

Yes. Eric, usually in our model, we don't count on very much contribution in the first 12 months. I mean it's really a period where we stabilize and put our model in effect in place and then look for that after the first four quarters. However, I said earlier to – I forget whose question it was that while we aren't seeing prices go down, we're seeing higher quality opportunities come to the table. And case in point was Home Care Connections and then Home Care Solutions. We're seeing opportunities come to the table that are accretive on day one. So, there's a blend in there, but in our guidance and in our thinking, we always anticipate no contribution in the first four quarters.

Eric Gommel – Stifel Nicolaus

Okay. Well, thanks for answering my questions and good quarter.

Keith Myers

Thank you.

Operator

Your final question comes from the line of Bill Bonello with Wachovia Securities. Please proceed.

Bill Bonello – Wachovia Securities

Good morning, guys. I just actually have a couple of follow-up questions to some of the things that were asked earlier, particularly in Sheryl's questions. So I guess the first thing that I just wanted to make sure I understood was, Pete, when you talked about suspended charges that you're waiting for authorization, can you just explain that a little bit more?

Pete Roman

Sure. When we acquire an agency or a license, you have to go to CMS to get approval of that, and that's a process that the last number I looked at takes about 270 days. So, during the period prior to approval, you're able to provide services to patients, accrue that revenue, but you're not actually able to bill that and collect it to the intermediary. You're only able to actually release that bill to the intermediary after you get approval from CMS to an authorization, and even after that when you get electronic funds transfer authorization. So it's a pretty long process. The suspended billings that I'm talking about are claims that we have provided service for, that we've recognized revenue on, but were not able to submit for payment because we haven't yet received an authorization.

Bill Bonello – Wachovia Securities

Okay. And so why wouldn't that be a fairly consistent number from quarter-to-quarter? It just varies by the timing and size of acquisitions or something?

Pete Roman

Yes. The fiscal intermediaries are actually not very consistent within themselves. Like we have a lot of ours with PTPA [ph] and they are taking a great deal of time, Cahaba doesn't take as much time. So it's both the size of the agency and the volume that they generate, as well as which fiscal intermediary you're dealing with.

Bill Bonello – Wachovia Securities

Okay. That's very helpful. And then on the – when you were talking about the average revenue per Medicare episode and, Johnny, you were talking about 100% of the plans certified with coders and I just to make sure I heard what you're saying. So, can you just basically repeat what you were saying about the 40% versus the 100%, what it is you're talking about there?

John Indest

Sure. When a patient is admitted to home care services, we have in most instances an RN who goes out and does the admission. In some instances it might be a physical therapist, but those are a small percentage. Either of those professional clinicians going out and admitting the patient, they are very astute at assessing a patient and helping assess what the diagnoses are that we want to, either from the discharge from the hospital, talking with the physician or talking with the patient, what their diagnoses are. What they are not professionals at is coding those diagnoses and putting those diagnoses in a proper order. It makes a difference whether you put a diagnoses as a primary diagnosis or a secondary diagnosis or on down the line, and then applying the proper codes to those diagnoses. And these professional coders are able to do that and therefore we have more accurate coding of our claims.

Bill Bonello – Wachovia Securities

Okay. And just how that actually works, I mean does the coder have the liberty to just go ahead and actually change the diagnoses or change the order of the diagnoses? Or do they have to go back and have a discussion with the clinician who made the initial diagnoses and the clinician actually has to make the change?

John Indest

The answer to your question is absolutely not. The nurse, the admitting nurse, the team leader, the director of the agency are the ones that have responsibility for the clinical documentation. Coders make recommendations and they communicate with the agency related to that. We do not have coders making independent decisions and basically altering our change in documentation. That would be called fraud.

Bill Bonello – Wachovia Securities

Well, I thought that was the case, so I just had to make sure. It sounded a little funky. Okay, that makes sense. And then, just, I guess one last question on the DSO improvement. I just want to see if my math, if I'm thinking about this correctly. I mean, obviously a huge chunk of it is better collections. But in literally the calculation of DSO, does the fact that you sort of had this drop in commercial contracts, and so your growth is heavily weighted towards Medicare where I assume there's a lot less self-pay, I assume that kind of influences the DSO stat that we're seeing as well?

Pete Roman

To some extent. If you just look at them, at the mix in receivables, Medicare, Medicaid and commercial, the most efficient collection process in the business is Medicare, because it's all electronic and you can work the claims online. They pay very consistently. The least efficient is commercial. So while you're correct in that effect of collecting Medicare did have an impact on the DSOs, really the adjustments in our contractual relations with those commercial payors has also had an impact, just not as significant, first of all, because the balance is not as significant, but secondly because it just simply takes a longer time. So an improvement there is not going to be quite as material to the receivables.

Bill Bonello – Wachovia Securities

Okay. And then I just have to ask this last question as ridiculous as it sounds. But almost universally across the provider space we're seeing, believe it or not, some economic impact on utilization, and I would assume that there's just essentially no sensitivity to the economy in ordering home health or maybe even it's beneficial if the economy is weak that people seek a lower-cost setting. Is that a reasonable assumption or not necessarily?

Keith Myers

This is Keith. I guess I'll try – no, I don't think so. I mean, it's – with Medicare, it's 100% pay, I mean, and there's no co-pay. So I don't see patients or physicians factoring that into their decision-making.

Bill Bonello – Wachovia Securities

Right, okay. And do you think you'd see any boost because of it? I mean, do you think the odd patients being treated in the home, that are opting out of an assisted living facility or that sort of thing?

Keith Myers

That could be. That could well be. I mean, if someone's in an assisted living facility that they're paying for privately and then the family chooses to move them back home to reduce costs, home health is certainly a service they would depend on for that. But we haven't measured it, so it'd be hard for me to opine on what that impact would be. It's a good point, though.

Bill Bonello – Wachovia Securities

Okay. Thank you very much.

Operator

This concludes the question-and-answer session. I would now like to turn the call over to Mr. Keith Myers for closing remarks.

Keith Myers

Okay, thank you, George. On behalf of all of us here LHC Group, I want to thank you for taking the time to listen in and participate in our call this morning. And as always, we're available to answer any follow-up questions you may have that come up after the call or between our formal earnings calls. Have a great day and thank you again for supporting and believing in the LHC Group family.

Operator

Ladies and gentlemen, this concludes your presentation. You may all now disconnect. Good day.

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Source: LHC Group, Inc. Q2 2008 Earnings Call Transcript
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