Executives
Steve Paige – SVP, General Counsel and Secretary
Ron Malone – Chairman and CEO
Tony Strange – President and COO
John Potapchuk – EVP, CFO and Treasurer
Analysts
Art Henderson – Jefferies & Company
Ralph Giacobbe – Credit Suisse
David MacDonald – SunTrust
Sheryl Skolnick – CRT Capital Group
Newton Juhng – BB&T
Eric Gommel – Stifel Nicolaus
Bill Bonello – Wachovia
Douglas Tsao – Lehman Brothers
Darren Lehrich – Deutsche Bank
Tony Campbell – Knott Partners
Gentiva Health Services, Inc. (GTIV) Q2 2008 Earnings Call Transcript July 31, 2008 10:00 AM ET
Operator
Good morning. My name is Pam; I will be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions) Thank you.
It is now my pleasure to turn the floor over to your host, Steven Paige, General Counsel. 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 second quarter 2008 earnings call. On the call today are Ron Malone, Gentiva's Chairman and Chief Executive Officer; Tony Strange, President and Chief Operating Officer; and John Potapchuk, our Chief Financial Officer. Also 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 forward-looking statements because of a number of risk factors and uncertainties that are discussed in our annual and quarterly SEC filing 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 disclosures. 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 the 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 12 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 second quarter and the first half 2008 activities.
Ron Malone
Good morning. Thank you, Steve, and thanks to everyone for joining us this morning.
Gentiva's outstanding second quarter results completed a strong first half of the year. We are especially proud of these results given the significant work required to help our clinicians adapt to the new Medicare PPS rules, closed two Home Health acquisitions that took us into two new states, and added important Certificates of Need and secured the early renewal and implementation of the CIGNA contract in CareCentrix. We worked on all of these initiatives while also continuing our ongoing drive to build profitable growth in our Home Health segment, and grow our leading specialty programs at a rate significantly faster than that of the market.
Success in these areas has been a team effort. Our expanded sales force is driving admission growth. Our human resources and recruitment teams are focused on increasing both capacity and productivity, and our specialty teams, including our highly trained therapists and nurses, are doing an outstanding job expanding these programs. And finally, and most recently, we announced the appointment of a new chief clinical officer to continue our drive for clinical excellence and innovation and focused on increased use of technology. These achievements have created positive momentum for the year and as a result we are raising our 2008 outlook today.
So with that, I will cover a few highlights for the first half of 2008, then turn the discussion over to Tony and John. Year to date, we reported $0.68 in diluted earnings per share, up more than 21% over the first half of last year, on a 10% revenue increase to about $670 million. Those results, as I've said, put us well on track to meet our revised 2008 goals. Our EBITDA was more than $55 million, up over 11% over the first half of last year. Our Home Health segment revenues are up almost 11% through the first half of the year to $454 million, and the Home Health operating contribution has grown approximately 16% to almost $71 million. Margins have continued to expand in this segment and reached nearly 16% for the first half of 2008 compared to about 15% for the same period last year.
Turning to the CareCentrix segment, revenue growth was nearly 13% for the first half of 2008. While operating contribution was below the prior year, we did see modest sequential improvement as utilization and decapitated portion of this business began to move in the right direction as we anticipated it would. We are also seeing improved trends within our other related services segment, which includes hospice care.
I would like to touch on two more highlights, both of them related to Gentiva's clinical leadership. First, we recently announced the appointment of Charlotte Weaver as our new Chief Clinical Officer. Charlotte is a recognized nursing expert and an authority in healthcare informatics. She is going to play several key roles at Gentiva. One of those is spearheading our continuous improvement in and commitment to excellence in the clinical care we provide to our patients. In doing so, she will be focused on making Gentiva a destination of choice for clinicians so we have the capacity and productivity to grow our business. Her background positions her very well to be a vocal advocate for home healthcare that is cost effective, innovative, evidence-based and overwhelmingly preferred by patients.
A second clinical development was our recent announcement two days ago of successful outcomes for thousands of our Safe Strides balanced therapy program patients. Safe Strides was launched in 2003 and has now treated over 58,000 patients. We continue to refine Safe Strides and all of our specialty programs to provide optimal clinical outcomes for our patients.
Successes like these play an important role in elevating the profile of Gentiva and home health in our country. We are committed to telling the home health story more vocally in Washington and in the states as we engage more actively with policymakers. The recent passage of Medicare legislation by Congress was a step towards stabilizing the home health reimbursement outlook for the balance of this year and next. But there remains a significant amount of work to do as we continue to advocate the benefits of Home Health care for our nation's aging population.
With that, I would like to welcome Charlotte Weaver as Gentiva's Senior Clinician, thank all Gentiva employees for an outstanding first half of the year and welcome our new colleagues in Colorado. Now let's turn the call over to Tony.
Tony Strange
Thank you, Ron, and good morning to everyone.
On our first quarter call, we indicated confidence in our full-year outlook due to a few factors that we were expecting to play out in our businesses, including improved Medicare revenue per episode, contributions from our Mississippi acquisition and improvements in CareCentrix relative to Q1. These factors contributed to our strong second-quarter performance while also adding to our confidence in raising our 2008 revenue and earnings outlook. I will add some color around these factors as I talk through our segment performance.
Our home health business continues to generate strong revenues driven by Medicare admission growth of 10% and total episodic growth paid at PPS rates in excess of 13%. Our Mississippi acquisition completed in the first quarter is contributing in line with our expectations, and we've done a good job integrating approximately 200 of their clinicians. Near the end of the quarter, we also entered Colorado with the acquisition of a home health business. We are now in the integration process and believe it will be a positive contributor to revenues in the second half of the year. I would like to take this opportunity to welcome our new Colorado employees to Gentiva.
As previously mentioned, we remain pleased with the growth of our specialty programs which are now available in 250 locations. Throughout the remainder of this year, we will continue to invest in the expansion of existing programs and capturing outcomes data and in the development of new and innovative programs. Ron mentioned our recent press release reporting our annual outcomes for the Safe Strides program which showed that 96% of the patients tested experienced a reduction in their risk of falls and 80% reported a reduction in pain as a result of our program. Results like these support our firm belief that we are providing effective and cost-efficient outcomes for the thousands of patients who have benefited from our services.
Increasing both the capacity and productivity of our clinicians is another strategic focus in Gentiva. We are continuing our active hiring practices, generating a net addition of approximately 140 full-time caregivers in the second quarter, which is roughly the same amount of increase as last quarter. In the first quarter, we talked about how we are also migrating a growing percentage of our clinician base to a pay-per-visit model as opposed to a salary. Over the last year, we've moved this number from about 30% pay-per-visit to about 50% in Q1, and that number increased again to 53% in Q2. So by focusing on both overall growth of our clinician base and moving to a more variable clinician cost structure, we are positioning Gentiva to drive top line growth while gaining more control over productivity and margins. In addition to our success in recruiting, we've improved our turnover again in the second quarter and now mark six straight quarters of sequential improvement.
Now I would like to briefly discuss CareCentrix and add to Ron's comments on this segment. Revenue growth remains solid, and margins improved slightly on a sequential basis as utilization has begun to improve in the capitated side of the business. Our go forward fundamentals are improving as we expected, and we are focused in a couple of areas, improved utilization rates within the capitated segment and increased volume of services on the fee for service side. To the latter point, CIGNA is working on the integration of their Great West business, which provides an opportunity for future growth.
In the meantime, growth is coming in part from the new contracts we signed in the latter part of 2007 and increased membership levels. Our business development team continues to manage a pipeline of new opportunities and despite a lengthy sales cycle that we’ve discussed on previous calls, this remains a significant priority for CareCentrix in the second half of the year.
Our hospice business, which represents more than half of our other related services, grew its revenues sequentially by about 2% in the second quarter. We are beginning to see positive affects of the sales investments that we made in the beginning of the year. We have made a few strategic clinical hires in an effort to enhance our best practices and are confident that this business will continue its improvement throughout the remainder of 2008. While significantly smaller, our respiratory HME business also had a good quarter, and congratulations to those employees as well.
With that, I would also like to add my thanks to Gentiva employees across the country for their continued outstanding performance. Now I would like to turn the call over to John for a financial discussion.
John Potapchuk
Thanks, Tony, and good morning, everyone. I am very pleased with our financial performance in the second quarter.
Let me take a few moments to comment on the quarter and year-to-date results and trends and then discuss our improved outlook for the full year 2008. During the second quarter, our total net revenue grew to $346.2 million or an increase of nearly 13% versus the same period last year, driven by strong growth in our Home Health segment. About 3% of our second-quarter revenue growth can be attributed to current year’s acquisitions.
Our EBITDA results were very good, as well. Reported EBITDA increased 19% to $31.5 million and EBITDA as a percentage of net revenues increased from 8.6% in the second quarter of 2007 to 9.1% in this year's second quarter. The growth in EBITDA margins demonstrates the leverage we can generate as we add revenue, especially a better mix of Medicare and higher gross margin revenue, both organically and through acquisition.
Our net income rose 34% for the quarter and 25% year to date. That translated into reported per diluted share results of $0.41 in the second quarter and $0.68 per diluted share through the first half of 2008. Excluding restructuring and integration costs, diluted earnings per share for the second quarter were $0.42 in 2008 versus $0.32 in 2007 and were $0.69 for the first six months of 2008 as compared to $0.59 for the same period of last year.
Turning to our Home Health segment, we continued to show strong momentum as revenue increased in the second quarter by $32 million or nearly 16% versus the same period last year. On a year-to-date basis, Home Health increased almost 11%, and our growth continues to be driven primarily by two factors. The first is increased Medicare contribution to our revenues. We are continuing to execute on our strategy of moving away from lower margin payer sources and focusing more on higher-margin areas like Medicare and acceptable rate commercial programs.
Total episodic revenue for the quarter grew $32 million or about 22% with over $24 million of the increase coming from Medicare PPS. The Medicare portion is up 18% over the prior year period, improving on the 7% growth we reported in the preceding quarter. This comparison was impacted slightly by $1.5 million or 1% positive change in estimated Medicare revenue, which was recorded in the second quarter but which related to first-quarter activity. For the six months, episodic revenue was up nearly 17% with Medicare growing 13% during that period. Through the six months, 72% of our total Home Health revenue was paid on an episodic basis, and all but 5 percentage points of that figure was Medicare revenue.
The second driver of Home Health revenue growth is our continued leadership and specialty programs. During the quarter, our specialty programs comprised 31% of our total Medicare home health revenue compared to 28% in the first quarter of 2008, and 26% in the second quarter of last year. Both of these factors, increased Medicare contribution and specialty programs growth, led to improved margins. Operating contribution in the Home Health segment, which represents EBITDA before corporate expense allocation, increased by over $8.3 million or 27% in the second quarter of 2008 versus the second quarter of 2007. For the first six months of 2008, Home Health operating contribution increased $9.5 million or 16% versus the same period last year.
I will review now some of the underlying operational statistics that are supporting our Home Health segment growth. During the second quarter, there were about 40,400 Medicare admissions, an increase of 10% from the same period last year. For the year to date, we have had 80,700 Medicare admissions, an increase of 9% over the first six months of 2007. With regard to episodic admissions, we experienced 44,200 admissions in the second quarter and 88,200 admissions year to date. This represents both quarterly and half-year increases of about 13%. For the six months, total episodes approximated 121,800, grown 14% from the same period last year. Revenue per episode was just under $2,720, an increase of about 2.4% over the same period from 2007.
Turning now to our CareCentrix business, revenue grew by 8% to $79.3 million in the quarter and 13% for the six months as compared to the prior year periods. As expected, the majority of the revenue growth came from fee for service business through membership increases within CIGNA and other existing customers as well as new contract activity. CareCentrix operating contribution of $6.5 million was down about $1.5 million or 18% from the year ago quarter, a bit more than half of the decline involves selected changes in pricing and product mix resulting from the early renewal of the CIGNA contract, which became effective in February 2008.
We believe the impact of these changes will be more than offset over time by incremental business from CIGNA's growing membership base. On a sequential basis, operating contribution margin within CareCentrix improved from 8.1% in the first quarter to 8.2% in the second quarter as we began to see expected reductions in service utilization in the capitated business. We expect further improvement in margin performance as the year progresses.
Other related services also showed some improvement in the quarter with a modest increase in segment revenue. Hospice, which at $16.4 million in second-quarter revenue contributed more than half of the segment total, is starting to see positive trends. Our quarter end hospice census of about 1350 patients was an increase over the end of the second quarter of 2007, the year 2007 and the first quarter of 2008. Hospice performance isn't where we want it to be yet, but the census increase is a good sign.
Corporate expenses increased as compared to both the preceding quarter and the prior year's second quarter due to incremental cost in information technology, finance and other functional areas in support of the Company's organic and acquisition growth. Shifting now to cash flow and balance sheet highlights for the Company, operating cash flow was nearly $21 million for the first half of 2008, comparable to the prior year first-half period. We expect operating cash flow for the full year 2008 to approximate $60 million in line with the prior year's results. We also expect capital expenditures to approximate $24 million for the year.
We reduced days sales outstanding or DSOs by two days to 61 days at the end of the second quarter. As we indicated during our last call, we continue to expect DSOs to go below 60 days before the end of 2008. We incurred revolving credit debt of $12 million in both the first and second quarters of 2008 to help fund the Mississippi and Colorado acquisitions. However, we reduced our debt by $3 million during the second quarter, which brought our leverage ratio down to 2.8 times at the end of the period. By the way, we repaid an additional $5 million in revolving credit debt yesterday.
Now let me speak briefly about our full year 2008 outlook. The first half of the year has ended largely where we thought it would. As we look over the balance of the year, our visibility and confidence has increased, and today we are increasing our projected range of net revenues to $1.32 billion to $1.35 billion with the low end of this range representing the high end of our prior range of $1.28 billion to $1.32 billion. We are also raising our outlook for diluted earnings per share to a range between $1.36 and $1.43, as compared to our original range of $1.32 to $1.40.
We anticipate our payer mix to continue its movement away from lower margin sources and maintain its upward trend within Medicare. Further, we expect the buildout of our specialty programs to continue to have an increasingly important impact on both our top and bottom line. Finally, with this focus and the recently passed Medicare legislation, we feel the reimbursement environment has become more stable for home health care through 2009.
That sums up my comments for the second quarter and the first half of 2008. Now we would be happy to open the call up for any questions. Operator?
Question-and-Answer Session
Operator
Thank you. (Operator instructions) Your first question is coming from Art Henderson with Jefferies & Company. Please go ahead.
Art Henderson – Jefferies & Company
Hi, good morning, and very nice quarter. A couple questions for you. The guidance that is the renewed guidance that you've given, the $1.36 to $1.43, what are the swing factors that get you to the high end versus the low end, John?
John Potapchuk
Art, I think a couple things. One is certainly the revenue range as we get closer to that higher end of the revenue range, that helps. I think if we maintain the current interest rate environment that certainly would help, meaning that we wouldn't have increases in our LIBOR rate as the year continues. And I think if we continue to push on changing that mix, and granting more Medicare and Medicare like services with higher margins, that certainly will help also.
Art Henderson – Jefferies & Company
That's helpful. My follow-up is kind of a two-part question. Ron or Tony, could you characterize sort of what the M&A environment is looking like now that you've got increased visibility, I guess, with Medicare reimbursement, and you've had a real full quarter of adjusting to the case mix reforms. And then also, Tony, if you don't mind commenting on as to how long it might take or at least what your steps are to getting clinicians on that variable comp structure. I think you said you were at 53% now but what are your expectations over the next couple quarters? Thanks very much.
Tony Strange
Okay, I'll address the first part. As it relates to acquisitions, the pipeline is – I think we talked about on our last call that that continues to be pretty robust. There is not a lot of big deals out there. There's not a lot of – there's just not a lot of big home health companies but that small to medium-sized range acquisition, there seems to be plenty of opportunity. We haven't seen really a decline in multiples. I think that there is just probably more opportunity.
As it relates to the second part of your question, if you recall probably over the last couple years, we've talked about migrating clinicians to a pay-per-visit basis based on as need. And so I don't think we've given any kind of indication that says okay, by the end of next year we will be completely done with that, because we may have some markets where going to a pay-per-visit structure may actually be harmful to the business as opposed to helpful. I would expect that 53% to continue to increase. Matter of fact, most of the net clinician adds that we had in Q2 were on a pay-per-visit basis. Matter of fact, more – we had a reduction in the salaried adds and more hires in the paid per visit adds, so the net of 140 might have included say 200 that were actually moving to a pay-per-visit model. So as time goes on, 53 will continue to increase, but there is not necessarily an end date in sight that says by this date everybody is going to be converting.
Art Henderson – Jefferies & Company
Okay, that's great color. Thanks very much.
Ron Malone
Thank you, Art.
Tony Strange
Thanks, Art.
Operator
Thank you. Your next question is coming from Ralph Giacobbe with Credit Suisse. Please go ahead.
Ralph Giacobbe – Credit Suisse
Good morning, thank you. Just wanted to revisit the guidance; if we run rate sort of the 2Q results you would be sort of already at the top end of, I guess, not only the revenue, but the EPS range. So, I just I guess I want to know if I'm missing anything in the second half that I should be aware of in terms of either revenue potentially slowing down or margins contracting at all, based on your comments with the specialty programs and the continued mix to more Medicare. I guess I'm just sort of trying to balance out what happens sort of in the second half of the year.
John Potapchuk
Sure. Hey, Ralph, a couple things. One is I probably used the full first half of the year as a springboard to the second half of the year rather than focusing just on the second quarter. With that, I will also mention that keep in mind that the third quarter we said in the past is generally a period of seasonality period where we have some declines. As a matter of fact, last year, our Q3 EBITDA was about between $1.5 million and $2 million less than the second quarter, so that had some impact. And then as we go forward in the year and begin the implementation of the LifeSmart program, there are going to be some incremental costs that one needs to be cognizant of. So those are just factors to keep in mind here.
Ralph Giacobbe – Credit Suisse
Okay, and then just my follow-up. I guess can we – is there – I think you said same – is it fair to say same-store top line was 13%? Is that right? Do we have to back out 3%? I guess all I am looking for is an internal – I am looking for I guess some sort of internal organic top line growth and then the breakdown between how it went from price and volume.
John Potapchuk
Well, total company – I think in my prepared remarks I said that total revenue was up 13% and 3% was acquisition. So same-store total company is up about 10% if that is the question.
Ralph Giacobbe – Credit Suisse
Okay, why don't we focus on Medicare then? Medicare Home Health, is there anyway you break down total revenue and then price mix –I'm sorry price mix and volume between the two?
John Potapchuk
Yes. I think if you look at Medicare for the second quarter, we said that that was up revenue wise 18%. I think it is fair to say that that same-store is between 12% and 13%, the rest coming from acquisitions. And then if you look at that 12% to 13% increase in Medicare same-store, about 5% of that is episodes, about 7% of that is the improvement in revenue per episode.
Ralph Giacobbe – Credit Suisse
And just to make sure I got the stat right, the revenue per episode number I think you gave, it was 2720, up 2.4% versus '07?
John Potapchuk
That is on a six-month basis, and that is the revenue per episode on all episodic activity, Medicare and Medicare Advantage paid at PBS rates, although I will say those numbers are pretty comparable.
Ralph Giacobbe – Credit Suisse
And do you have the 2Q numbers?
John Potapchuk
If you back into, you know, just do the math, I think on the last call we had said that first quarter we were just slightly above 2600, so what that would do is make second quarter somewhere like 2830, something like that.
Ralph Giacobbe – Credit Suisse
Okay, thank you.
John Potapchuk
Yes.
Operator
Thank you. Your next question is coming David MacDonald with SunTrust. Please go ahead.
David MacDonald – SunTrust
Good morning, guys. Congratulations. A couple things. First of all, can you guys just give me the specialty number again? I missed it. I think you said 240 or 250 locations. Is that correct?
Tony Strange
We said about 250 locations, correct.
David MacDonald – SunTrust
Can you give us a sense of – I mean, how many new locations are being rolled out either quarterly or say a year from now where should we expect that number to be? Can you just give us some sense in terms of the pace there?
Tony Strange
I think if you go back to Q1 that number was just under 240, so that was somewhere around 12 to 15 a quarter if you look at this past quarter.
David MacDonald – SunTrust
And Tony, is that kind of a typical quarter? I mean is that kind of a good run rate number that we should expect on a quarterly basis?
Tony Strange
Well, actually our goal is to increase that number slightly between now and the end of the year. I think we can kick that up a notch. I think in our call we mentioned that we were investing some additional resources, and probably want to get a little more aggressive between now and the end of the year.
David MacDonald – SunTrust
Okay. And then can you guys give a little bit more detail? I know that the turnover has improved pretty dramatically over the last year and a half and it continues to improve. Can you talk about some of the things that you think you are doing that is helping to improve the turnover amongst your clinicians?
Tony Strange
Sure. It goes back – it is not anything necessarily specific to Q2. But if you remember, in some of our previous calls we talked about investing additional dollars into our benefit structure. We’ve enhanced the benefits at Gentiva each year for the last two years. That’s played a big role. We've done some additional training out in the field with our supervisors, and that has had an impact. We have refined our own boarding and orientation process as well as some other different types of programs like clinician recognition and those types of things as some examples.
Ron Malone
I think I would point out two other things, Dave. One is with the complexity and the complexity of our specialty offerings, I believe we offer a unique career track for clinicians entering our company that can aspire to be treating clinicians for most of their career or can go into many avenues of leadership in the company. I think that I would not underestimate that. I think the second thing is we have connected, I believe, the accountability on turnover from the lowest ranked branch leadership up through the executive ranks. If you know, we would have seen that in our proxy, that we are all connected to continuous improvement in that area. It has been a focus of the committees of the board that oversee the company, and they have certainly reinforced with us the importance and we absolutely agree. We believe there is an important gain in productivity and knowledge base, which will lead to better clinical outcomes, higher productivity and greater profitability well within the long term if we stick to that path.
Tony Strange
That's a good point, Ron, and matter of fact, we’ve even had the field managers compensation, a portion of their compensations tied to their turnover results.
David MacDonald – SunTrust
Okay and just to follow up on that point, is the continued mix shift toward the per visit payment system also perceived by the clinicians as maybe giving them a little more flexibility and that is perhaps contributing to the decreased turnover?
Tony Strange
I don't know that I can say that it is or it is not contributing to a reduction in turnover. As a general rule where we have implemented the pay-per-visit structure, it has been perceived positively, and we've not had turnover because of it.
David MacDonald – SunTrust
Okay.
Tony Strange
I can say that the inverse is not true.
David MacDonald – SunTrust
Okay. And then just one last question. John, you had mentioned it sounds like there were some revenues that will pull forward to the second quarter. Can you just give us a little bit more detail on that? Was that number 1.5 million?
John Potapchuk
Yes, I said it was about 1.5 million. And if you recall, Dave, on our first quarter call, we did say that we were taking a conservative approach with respect to our Medicare recognition, Medicare revenue recognition, since we didn't have a long history under the new reimbursement environment. And now we do have that history, we do have that clarification, and we had that adjustment in the second quarter.
David MacDonald – SunTrust
Okay, thanks, guys.
Ron Malone
Thank you, Dave.
Operator
Thank you. Your next question is coming from Sheryl Skolnick, CRT Capital Group. Please go ahead.
Sheryl Skolnick – CRT Capital Group
Good morning, gentlemen. Excellent job, and thank you for stressing the first half versus the rest of the year. That was an important thing to note with that little additional revenue. So I'm going to ask a question about that revenue and I gather then if you are feeling more comfortable in the revenue recognition, is this – I would like you to help me to understand how the training dollars that you've spent appear to be helping to mitigate the negative impact and maybe even to help you to optimize reimbursement under Medicare. Are you at a point now where you feel that everyone is well-trained and you are capturing all the secondary diagnoses, the co-morbidities as well as any later episode payments? And that your clinician familiarity with the new OASIS questions and answers is optimal or is there still more improvement that we can expect? And then I have a follow-up.
Tony Strange
Well, Sheryl, this is Tony. Gosh, I don't think we are ever going to be through improving. I think we are going to constantly get better at that. I think you are referring to the roughly the $1 million of training that we did in the latter part of '07 and then Q1 of '08. We have begun seeing some of the impact of that training. For example, I think we are doing a much better job capturing secondary tertiary diagnoses. We have seen changes in our clinical scores, in our functional scores, and those are contributing to some of the changes you've seen in revenue.
Perhaps in addition, when we first looked at our business under the new PPS reimbursement in '07, since that date we have shifted some of our business to some higher therapy utilization type services, for example our Safe Strides program and the specialties that we talked about. As we began getting more and more admissions related to some of our specialty programs, we would expect that case mix in revenue per episode to go up even further because that is a different kind of patient requiring a different kind of service. However, I don't want to say that we are done improving. I think we are going to continually get better at this. I don't think it is – I never think you are in a static state when you talked about training and education for clinicians in the field. I think that is something we are going to be working on on an ongoing basis.
Sheryl Skolnick – CRT Capital Group
That's great. And I guess my follow-up question is, with all of the improvements that we are seeing in revenue and margin related to just simply excellent execution throughout the business, why is the cash flow only flat with last year? I know there is a bit more debt but still why is it only flat?
John Potapchuk
A couple things, Cheryl, one being that – and we had signaled an increase in DSO in the early part of the year. So, while we were down two days in the quarter, we are up one day from year-end. Every day is about $3.7 million. I did say that we expect while it is 61 now, we expect to be below 60 at the end of the year, so you can do the math and the expectation of a swing there, $10 million, $12 million from my perspective. The other thing is, you may recall that we have had NOLs. We've utilized those NOLs and did have to make a cash tax payment in the second quarter. We are changing a methodology in relating to tax methodology in the second half of the year and I think our cash tax payment is going to go down significantly. So that is going to help also. And those are a couple of reasons. We also have things in the first half of the year like incentive payments and our insurance is due on March 15 and those sorts of things happen in the first half and will not recur in the second.
Sheryl Skolnick – CRT Capital Group
Right, but your guidance for the year was basically stable and flat with last year, so that is why I was asking sort of about the second half. But the tax issue, I guess, the NOL is one of the bigger issues.
John Potapchuk
Right. I mean when you look at tax into for the year, we likely will be paying taxes relative to our pretax of 15% to 20%, but last year we were below 5%. That difference is $10 million to $12 million, right there.
Sheryl Skolnick – CRT Capital Group
Okay, that helps. Thank you so much.
John Potapchuk
Thank you, Sheryl.
Ron Malone
Thanks, Sheryl.
Operator
Thank you. Your next question is coming from Newton Juhng, BB&T. Please go ahead.
Newton Juhng – BB&T Capital Markets
Thank you very much. Good morning, gentlemen. I wanted to ask a quick question here about the guidance again and then a follow-up on G&A. But just with regard to the $0.41 posted in the quarter, it sounds like that $1.5 million, if I am doing my numbers correctly impacted it by roughly an extra $0.03 of upside. So if we move that out to get to more of a $0.38 normalized number, we are really looking at the back half of the year on a per quarter basis being kind of towards the top-end of your guided range. I am just wondering if you built in a little bit of conservatism here even taking into account that third-quarter sequential weakness.
John Potapchuk
I think our history has been to try to be a conservative lot, so I think that is a fair comment.
Newton Juhng – BB&T Capital Markets
Okay. And then the follow-up on G&A, I guess, is just about last quarter there was about a $1.5 million of transitional or temporary costs that you talked about. I'm just wondering if all that flushed out in the first quarter or were some of those types of costs built into the $126 million SG&A number that you posted this quarter.
John Potapchuk
I think those transitional costs in the first quarter actually affected the direct cost line. Some of them did. Some of them were in G&A. They did flush out in the second quarter, but there were some incremental amounts in the second quarter; not to that same extent, but the $0.5 million, maybe a little bit more than that.
Newton Juhng – BB&T Capital Markets
Okay, that is helpful; just wanted to make sure that we are looking at a good run rate here. And then if I can just do one more, your cash position down at about $22 million at the end of the quarter, if I'm not mistaken, that is kind of the level of restricted cash you actually need to maintain. So the question going forward is with the cash flow accordingly – is there any point where you may need to tap into your credit facility a little bit more just for your day-to-day operations? Or do you expect to generate enough in the free cash flow to maintain position above what you are at now?
John Potapchuk
Yes, I think maybe the way to look at that free cash or operating cash flow was about $21 million in the first half and to get to our guidance for the year is going to be close to double that, so we are feeling pretty comfortable. I did mention that we actually repaid $5 million of our revolving credit facility yesterday, and we did make a change earlier in the year with respect to that restricted cash. We took that restricted cash out and actually replaced that with letters of credit. So that $22 million. There are some segregated funds of about $5 million to $6 million, but beyond that we have no incumbencies on the cash.
Newton Juhng – BB&T Capital Markets
Okay, John. That's really helpful. Thanks.
John Potapchuk
Sure.
Ron Malone
Thanks, Newton.
Operator
Your next question is coming from Eric Gommel with Stifel Nicolaus. Please go ahead.
Eric Gommel – Stifel Nicolaus
Good morning. We have another national provider that has talked about rolling out specialty programs I guess focusing on rehab, and you guys have done this for several years now or have been doing it for the past couple years. Are you seeing increased competition, I guess in your market for rehabitation? Are you seeing other providers rolling out specialty programs, I guess me-too kind of programs? I was just curious what you're observing out there.
Ron Malone
We have seen a lot of me-too activity from small to large providers. We have not seen anybody invest in the type of infrastructure that we believe is necessary to adequately manage, train people and develop these programs over time.
Eric Gommel – Stifel Nicolaus
Okay, thanks.
Ron Malone
You bet.
Operator
Thank you. Your next question is coming from Bill Bonello with Wachovia. Please go ahead.
Bill Bonello – Wachovia Capital
Great. Thank you. Just you mentioned a little bit incremental cost that you are expecting for the back half of the years of training costs and what not. Can you just elaborate on that and maybe even quantify?
Tony Strange
I don't know if we can quantify, but as you know, we have been heavily involved in our LifeSmart technology project, and we expect to continue that throughout the rest of this year and putting it into some branches. And there will be some cost associated with that. While it is in our projections those are some additional costs. And again, I think John mentioned again a while ago that the third quarter is a slower time of the year, and so as a percentage you would expect the cost to go up during that quarter.
Bill Bonello – Wachovia Capital
Right, okay, and just sort of as maybe a counterpoint to that, can you give us a sense of kind of how much of a drag maybe adding all those new salespeople was in the quarter? And whether the – if we think about the big chunk you added in Q1, were they – should we sort of still think of them like 300, not salespeople, clinicians, should we think of all 300 as almost a drag in the quarter that you leverage going forward, or how do we think about that?
Tony Strange
I think that was kind of the message we were trying to deliver, that adding – we talked in the first quarter about roughly 140 and another 140 net adds, that is a positive thing. I think the way I think about it is that is going to be having those clinicians go through orientation in that quarter and then in the next quarter they should be fully productive. I think that is going to be an ongoing trend in our business. You've heard Ron say several times that at the end of this whoever has the clinicians will win. And I think as the business – as the demand continues to grow and outstrip the supply, I think we are always going to be trying to add 140 new caregivers every quarter.
Ron Malone
Two years ago, Tony, we were telling this group that we were proud to have added 50 per quarter, so that tells you how much we have accelerated our efforts. And when you combine that with a sharply decreased turnover rate, a pretty powerful driver for future growth. I am very proud, for instance, in the admission growth.
Bill Bonello – Wachovia Capital
Okay, that's very helpful. And then I'm going to cheat and ask a third question since other people cheated too. Can you just tell us whether you have any Medicaid concerns?
Tony Strange
I don't. Again, Medicaid is not a – Medicaid is not a focus of our business. There is a fair amount of Medicaid that we do that is a part of our business. But it is usually tied to referral sources that are sending us higher margin business. So in my mind it is a necessary evil, but it is not something that is a big percentage of our business. Matter of fact, if you had been to some of our presentations, we actually show a slide about Medicaid as a percent of our total revenue and that number continues to come down.
Bill Bonello – Wachovia Capital
What is it right now?
John Potapchuk
I think it is about 11%, Bill.
Tony Strange
At our last – when we looked at it in our Q1 presentation it was about 11%. But it’s –
Bill Bonello – Wachovia Capital
Any particular state cuts if they were to occur would just be pretty unlikely to move the dial?
Ron Malone
Yes, that’s right.
Tony Strange
Yes, it is 11%, and it is spread across 38 states, and it is just not a big issue.
Bill Bonello – Wachovia Capital
Great. Thank you.
Tony Strange
Sure, Bill.
Operator
Thank you. Your next question is coming from Douglas Tsao with Lehman Brothers.
Douglas Tsao – Lehman Brothers
Quick question. John, I think you referred to the 12% same-store – increased same-store Medicare revenues. I was just wondering you did refer to a 5% increase in the number of episodes and 7% increase in revenue per episode. I was wondering if you could provide a breakdown between – of that 7% how much is due to increases in prices versus mix shift towards more specialty programs.
John Potapchuk
That number, that revenue per episode number, to break that down any further I think would be – it's pretty difficult because we are shifting – within Medicare shifting the mix of patients. And as we do more specialties, there is a higher revenue per episode associated with that. We certainly year-over-year have implemented the new Medicare PPS rules, which on the surface would have suggested a reduction in rate, but again the mix of patients is a really significant aspect here.
Ron Malone
And I – and Douglas, from my perspective, there is no rate increase. Matter of fact, there is a rate reduction. The change in revenue per episode is not really coming from rate. It is all coming from the different kind of patient or the different level of acuity, or better capturing through this training we've been talking about, i.e. secondary diagnosis and those things on existing patients. But it is not coming from a rate increase per se where the base rate has changed.
Douglas Tsao – Lehman Brothers
And as a follow-up then, how is it that the mix has been able to shift so quickly in this sort of really matter of one quarter?
Ron Malone
It hasn't. The mix hasn't shifted, and I think Cheryl kind of pointed it out in her question, that the difference is that we are getting the training that we've done, we continue to get better at capturing appropriate clinical information. To use one example, the change in reimbursement secondary diagnoses, co-morbidities actually changed the clinical score of the HHRG. This training that we did is we are beginning to see that we are getting better at capturing that additional clinical information, which changed our clinical score, which changes our reimbursement pipe.
Douglas Tsao – Lehman Brothers
Okay. Thank you very much.
Operator
Thank you. You next question is coming from Darren Lehrich with Deutsche Bank. Please go ahead.
Darren Lehrich – Deutsche Bank
Thanks. Good morning, everyone. I came in a little late, so I apologize if any of this has already been asked, but I want to just get some more commentary from you with regard to margins and your SG&A levels. And I guess specifically just would like to get a better understanding of whether you think the contribution margin for your Home Health segment is sustainable in this mid 16% range. And John, we also would like to know how much segment level G&A is in each of your reportable segments. I think in the past you've given some commentary on that and that helps us think about gross margins. And then I guess the last thing would just be do you think your corporate SG&A can level out here at about $17 million a quarter?
John Potapchuk
Okay. Darren, there are a bunch of questions, let me try them. With respect to home health and the margins there, which we said were 16.6% in the second quarter, and close to 16% for the year to date, I think that that is a fair number. Actually I think the final number is 15.6% year-to-date. The only thing to keep in mind though, is again that third quarter where we do have the seasonality issue and we still have full-time clinicians and the issue of productivity is such that hits us a little bit in the third quarter. I think if you go back to last year, you see a little bit of a dip in margins in the third quarter, so that is just something to be cognizant of.
Darren Lehrich – Deutsche Bank
But John you would agree I guess just with the observation though, that you started to break out a bit with regard to your margin levels? I just want to get kind your affirmation on that point.
John Potapchuk
Sure, yes. Absolutely, yes. I am not in any way warning of a significant downturn. I am just being cognizant of third quarter. But when you look at where we are today at that 16.5% level in the quarter, 15.6% for the year to date, that is a point, 1.5 points more than it was last year, and the mix is certainly a big driver of that. And just the productivity and the way we really changed our caregiver base even to the pay-per-visit model, all that is helping and will continue to help us as time goes on.
Tony Strange
But Daren, what John said though, all those things that we are doing did kind of I'll call it tweak those numbers, the change of clinician base to pay-per-visit. O the flip side of that, we have increased fuel prices. Those are the things that really kind of just tweak that number. The real driver in that change is that 68% of our revenues in Home Health came from a higher-margin payer sources. As that number moves, that number, the 16% you are talking about can increase.
Darren Lehrich – Deutsche Bank
Okay, great. And then G&A levels in the segments and the corporate?
John Potapchuk
On the SG&A, I will put them all together here. On Home Health care, for the quarter was just under $85 million; for CareCentrix was $8.1 million, and for other related services was about $11 million.
Darren Lehrich – Deutsche Bank
$11 million, okay. And corporate, do you think – I think it was $17 million I guess roughly in the quarter. Do you think that levels out? And I guess the other part of that question is, can you give us the split at this point of your corporate staff FTEs between Melville and Atlanta? And I guess JC?
John Potapchuk
In terms of leveling out, let me answer that one. Relatively stable in the corporate during the second half of the year, but keep in mind there are still costs associated with the project, LifeSmart project, that some of those costs need to go through P&L. So that is a variable cost, if you will, as we get into the second half of the year. I think with respect to Melville and Atlanta, I will say there are more people in Atlanta, fewer people in Melville today than there were a year ago. I just don't have the numbers off the top of my head.
Darren Lehrich – Deutsche Bank
And do you have – last thing from me, I promise here. Do you have any update about the lease in Melville, at last I recall that was mid-2010. Have you changed the terms or length of that lease in any way?
Ron Malone
We haven't gotten around to that. It is the same lease.
Darren Lehrich – Deutsche Bank
Same lease.
Ron Malone
Yes, thank you very much.
Darren Lehrich – Deutsche Bank
Thanks.
Ron Malone
We have time for one more question, I believe.
Operator
Thank you. Your last question is coming from Tony Campbell, Knott Partners. Please go ahead.
Tony Campbell – Knott Brothers
Congratulations, and thank you for taking my questions. I also want to applaud you on giving really good clarity on where your Medicare growth is coming from, giving us episodes per admission and revenue per episode growth unlike one of your major competitors. So my two questions basically are, could you give us a little guidance for the second half in terms of the tax rate? How can we get the rate a little lower? And then the second question would be the DSOs, is there any reason why we can't get those DSOs to 50 or under over time?
John Potapchuk
First question, Tony – this is John. Our projection for the full year is in fact a number of about 41.5%, fairly close to where we have it this year through the first half. I think over time there is a way of getting that down slightly, and I will say from the standpoint of, there are some tax reserves that we have. And as statute of limitations expire and concerns free up, we will be able to knock that down slightly although probably not in 2008. I will say over time as we go through – we are now in the third year of FAS 123.
That stock option statute has had an effect of increasing our tax rate by a couple percentage points as we roll through that the ability to slightly reduce that. But I think what is as important if not more important is the cash taxes and we are doing things there. I think if you – my comment earlier regarding changing the methodology to reduce some of our cash tax payments in the second half of the year, that is being implemented and that will be done, so that will be a positive.
On the DSOs, directionally, we are looking clearly to come down below 60. I didn't give a number on that. I don't think – let's say in the near term I don't think Ron would be pleased with 59; I think we need to go a little further than that. But also let me keep in mind that our mix of business while increasing Medicare we still have a significant amount of non-Medicare business, and that is a little bit more – that's certainly more challenging from a collection standpoint.
Ron Malone
Thank you, Tony. I particularly appreciate your second question. I wanted to hear the answer to see if it was the same one I've gotten earlier, because I do believe this is an area we can improve in. Again, I want to thank everyone in this room as well as all of Gentiva for the outstanding results we posted. I want to thank you all for joining us today, and we appreciate your continued interest. Look forward to speaking with you again soon. Take care.
Operator
Thank you. And this concludes today's Gentiva Health Services second quarter 2008 earnings conference call. You may now disconnect your lines, and have a pleasant day.
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