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Amedisys (NASDAQ:AMED)

Q3 2012 Earnings Call

November 06, 2012 10:00 am ET

Executives

Kevin B. LeBlanc - Director of Investor Relations

William F. Borne - Founder, Chairman, Chief Executive Officer, Chief Executive Officer of Amedisys Specialized Medical Services Inc and President of Amedisys Specialized Medical Services Inc

Ronald A. LaBorde - President, Chief Financial Officer and Director

Analysts

Darren Lehrich - Deutsche Bank AG, Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Kevin Campbell - Avondale Partners, LLC, Research Division

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

John W. Ransom - Raymond James & Associates, Inc., Research Division

Operator

Good morning. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Amedisys Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. I'd now like to turn the call over to Mr. Kevin LeBlanc, Director of Investor Relations.

Kevin B. LeBlanc

Thank you, Kyle. Good morning and welcome to the Amedisys investor conference call to discuss the results of the third quarter ended September 30, 2012.

A copy of our press release is accessible on the Investor Relations page on our website. Speaking on today's call from Amedisys will be Bill Borne, Chairman and Chief Executive Officer; and Ronnie LaBorde, President and Chief Financial Officer.

Before we get started with our call, I would like to remind everyone that any statements made on the conference call today or in our press releases that express a belief, estimation, projection, expectation, anticipation, intent or similar expression, as well as those that are not limited to historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today, and the company assumes no obligation to update these statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties which may cause the company's results or actual outcomes to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K, 10-Q and 8-K.

The company disclaims any obligation to update information provided during this call other than as required under applicable security laws. Our company website address is amedisys.com. We use our website as a channel of distribution for important information, including press releases, analyst presentations and financial information regarding the company. We may use our website to expedite public access to time-critical information regarding the company in advance of or in lieu of distributing a press release or a filing with the SEC disclosing the same information. In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website on the Investor Relations page under the tab Financial Reports, Non-GAAP.

Thank you. I'll now turn the call over to Mr. Bill Borne.

William F. Borne

Thanks, Kevin. Good morning and welcome to our third quarter earnings call. Overall, we were pleased with bottom line results for the quarter and remain on pace to meet our earnings plan for the year. Our results benefited from job and investment tax credits recognized during the quarter, which had a positive $0.08 impact on operations. Underlying this favorable tax impact, operating results were mixed.

Regarding year-over-year volume, same-store episodic admissions grew 2%. We continue to see growth in our managed care business, with non-episodic admissions up 44% from last year. Now total hospice average census was up 15%. However, admissions in both home health and hospice were lower during the quarter than we expected with slight decline sequentially in each business unit. EBITDA margins stayed essentially flat at 6.6% in the third quarter from 6.8% in the second quarter. Ronnie will discuss third quarter operating results in more detail.

Last week, we announced that we entered into a new $225 million unsecured credit facility. This credit facility included $165 million 5-year revolving credit line and a $60 million 5-year term loan. We also amended our senior note agreement to allow for a partial prepayment of those notes and to conform certain provisions of that agreement to our new credit facility. These agreements will lower our ongoing interest cost while improving the financial flexibility of our capital structure.

Amedisys continues to build our foundation for long-term growth. First, we are focused on our base business of delivering high-quality and efficient home health and hospice care. Second, we have ongoing efforts around implementing post-acute care initiatives such as bundles, ACOs and other care management solutions. In the near term, we are working to generate efficiencies in our base business. We're in the process of reducing staffing levels at our care centers to better align staffing with volume trends. To date, we have reduced more than 180 physicians systemwide, and we anticipate additional reductions as our review is ongoing. We will have certain severance-related charges in the fourth quarter associated with the elimination of these positions.

Also on the efficiency front, we remain on track to complete our hospice point of care technology rollout by the end of the year. This technology will automate how we manage documentation, compliance and clinical management in our hospice business.

Now turning to our growth initiatives. Building our managed care portfolio is a strategic imperative for Amedisys. We recently completed a new contract with Humana, which is important given the sizable population Humana serves in many of our markets. In August, we completed an acquisition of 5 hospice operations in North Carolina for $5.8 million. While these are all relatively small operations, they have enhanced our geographical footprint within the certificate of need state.

One of the key elements of our growth strategy is to support our hospital partners in their efforts to reduce hospital readmissions. Our Care Transitions program, where specially train nurses, help patients safely return home from the hospital for post-acute care, are helping us reduce avoidable admissions. This program includes medication management to follow through with the patient's primary care physician. Our Care Transitions coordinators are sought out resources by our hospitals and physician partners. So we are expanding this program and adding Care Transition coordinators in those markets where our hospital partners are experiencing challenges with readmission penalties.

Turning to Washington. CMS has recently released its 2013 final rule for home health care. The rule was largely similar to the proposed rule issued in July. Reimbursement in 2013 will be essentially flat compared to 2012 prior to any impact from sequestration. Hospice reimbursement changes for 2013 went into effect October 1. These changes resulted in a positive 90 basis point net impact to reimbursement, again, before any impact of sequestration. We continue to be active in Washington and through our participation with the Partnership for Home Health Quality, the Alliance of Quality Health Care and Innovation and the National Association of Home Care and Hospice, we're working to have our voice heard on changes that would affect home health and hospice. I will now turn the call over to Ronnie to discuss our third quarter results in more detail and then we will open it up for questions. Thank you.

Ronald A. LaBorde

Thank you, Bill. First a reminder that in the third quarter of 2011, we recorded a $574 million goodwill impairment charge. Comparisons to last year in my comments will be adjusted for this charge. With that said, let me provide a summary of our operating results. During the quarter, we generated revenue from continuing operations of $376 million. This was up $5 million year-over-year and down $3 million sequentially. Our hospice operations generated $75 million, a $10 million increase versus last year and flat sequentially.

Non-episodic home health revenue of $30 million was up $11 million versus last year and up $1 million sequentially. Episodic home health revenue of $271 million was down $16 million versus last year and down $5 million sequentially.

Net income for the quarter was $10 million or $0.33 per share compared to $0.42 per share in the third quarter of 2011 and $0.27 sequentially. EBITDA for the quarter was $25 million or 6.6% of revenue compared to $29 million or 7.8% last year and $26 million or 6.8% sequentially.

I'll now provide more detail around these results. Our 16% growth in hospice revenue year-over-year was driven by higher same-store average daily census up 11%. Acquisitions and startups contributed 4% while pricing made up the remaining 1%. Our 57% growth in non-episodic home health revenue was being driven by our focus on adding managed care contracts. The 5% decline in home health episodic revenue is mostly due to a 4.7% decline in revenue per episode from the cut in our reimbursement rate in 2012. Lower recerts also contributed to the decline, with our recert rate dropping to 43% compared to 45% in the third quarter 2011. 43% is on the low side of our range over the last 10 quarters and offsetting this decline was a growth in admits, up 2% from last year on the same-store basis.

Turning to margins. We generated a 43% gross margin for the quarter, a decrease of 240 basis points from last year and down 90 basis points sequentially. The decrease from last year was due to our home health operations, largely from the cut in our reimbursement rate, but also from a higher cost per visit. This decrease in our home health gross margin was partially offset by improved gross margins in our hospice business. The increase in our home health cost per visit was 3.3% year-over-year and 2.8% sequentially. The largest drivers of these increases for the full quarter impact of wage increases granted in the second quarter and additional clinical resources added during the quarter.

General and administrative expenses decreased $4 million versus third quarter 2011 and $5 million sequentially. The largest component of this decrease is a decision we made to reduce the size of our therapy management infrastructure, 60 management positions were removed from G&A with approximately 60% of these employees transitioned into field clinician roles, contributing to the increase in our per visit cost during the quarter. We expect these resources will become more productive over time, relieving this pressure on per visit cost.

Our provision for doubtful accounts was $5.7 million, up $1.3 million year-over-year in our managed care business. Sequentially, our provision was up $1 million, reflecting a favorable adjustment we recorded in the second quarter results.

Now let me comment on our balance sheet and liquidity. During the quarter, we generated $22 million in cash flow from operations, spent $12 million on capital expenditures and made debt repayments of $8 million. Our cash balance at the quarter-end was $39 million, up $2 million from the previous quarter. Our DSO was 39 days, an increase of 1 day sequentially.

We ended the quarter with $122 million in debt and a leverage ratio of 1.24. As Bill discussed, subsequent to quarter end, we entered into a new unsecured bank credit facility and amended our senior note agreement. Under the bank facility, we borrowed $60 million under a term loan and prepaid a like amount of senior notes, leaving a remaining balance under the senior notes of $40 million. The prepaid senior notes had fixed interest rates of between 6.1% and 6.5%, while borrowings under our term loan are floating and currently priced at LIBOR plus 250 basis points or approximately 2.7%. We paid fee to the senior note holders associated with this prepayment of approximately $3.6 million. This charge will be reflected in our fourth quarter financial results. The only outstandings under our new revolving credit facility are letters of credit of approximately $20 million, leaving $145 million in unused availability.

On another matter, we uncovered some apparent improprieties at 2 of our hospice care centers concerning clinical documentation and patient eligibility. While the review is in its early stages, we have a disclosure on this matter in our 10-Q, which will be issued later today. The review is ongoing and we have engaged counsel to examine this matter.

Finally, I'll turn to guidance. This morning, we are revising our revenue and EPS guidance for the year. We anticipate revenue to be in the range of $1,485,000,000 to $1,505,000,000. We expect our earnings to be in the range of $1 to $1.06 per share from continuing operations on an estimated 30.2 million fully diluted shares outstanding. This guidance implies a fourth quarter earnings per share range of $0.19 to $0.25. This was reflective of earnings pressure associated with the new Humana contract, a slightly lower view of fourth quarter volumes relative to our plan. We are excluding from this guidance charges in the fourth quarter associated with the financing we just closed and severance-related charges associated with eliminated positions.

That concludes our prepared remarks. We thank you for your attention. And operator, would you please open the call for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Darren Lehrich from Deutsche Bank.

Darren Lehrich - Deutsche Bank AG, Research Division

So just wanted to start out to clarify with regard to your pending disclosure on the hospice program. Is this a matter that's been self-reported or is this a matter that was initiated by a government investigation?

William F. Borne

Darren, this is Bill. It's something that we self-reported. It's isolated to 2 centers, and it's early in the stage, so we really can't comment a whole lot further.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. So the thrust of my questions really are just around your cost structure. Obviously, your margins are under significant pressure, and you've got this Humana re-contract to deal with. I guess I just want to understand how you're thinking about your cost structure. You commented a bit here in the call about lowering staff. But it seems to me that there would need to be more radical change to your organization to manage margins given the volume levels you have and given the relationships you have with managed care companies. So just stepping back, can you help us think about how you get your margins back to more of a normal level?

William F. Borne

Darren, I don't know what a normal level is, but I can say this, that our focus is not just on managed care, it's also on Medicare and in the 2 States that are not servicing Humana at this time, have an extraordinary focus on managed care. And we feel -- or Medicare and we feel very positive about that. Also there's a lot of additional managed care business that we have identified, and we have available staff to care for. So it's not just a proportionate reduction in staff for the Humana contract, but we're looking at staffing company-wide and making the applicable reductions understanding the pricing pressure that we're going to have for Medicare as well. So it's ongoing, our portfolio review is ongoing and we'll continue to enforce enhancements and opportunities where we see those.

Darren Lehrich - Deutsche Bank AG, Research Division

And just on the managed care strategy, obviously, we're going to see a lot more non-episodic now. Is this really the new normal in terms of how you'll be structuring relationships with managed care? In other words, we're back to more of the visit-based type of reimbursements and maybe some perspective on why you think that shift has taken place.

William F. Borne

Well, again, our focus is on Medicare. We want to continue to push our Medicare and episodic portfolio. However, most of the population that converts into the Medicare population every year now, a lot of those are converted to managed care. So our intention is to be and continue to be the largest Medicare provider as well as to be the largest managed care provider. And managed care contracting is going well. We're adding new providers all the time, and the rates that we're getting, although they're per visit, are good rates and is helping us with our incremental cost. So our intention is basically to -- be the largest Medicare and managed care provider, which will help us we believe to position in the future, which is allow us to align ourselves with opportunities and bundles and ACOs as we mentioned. And we just believe that our overall strategy will give us some more balanced portfolio.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. And last thing for me here is just -- there was some discussion in the final rule for home health, recently about rebasing of the market basket and I know some of that was just realignment of the market basket weightings. Can you just talk a little bit about your interpretation of that and whether if there's any read through into how rebasing more broadly speaking will play out in future rules?

Ronald A. LaBorde

No, Darren, this is Ronnie. No read through yet on how rebasing will ultimately play out. So we'll certainly work through that and see what we learn from that. But we don't have any more meaningful read on that, looking into rebasing at this point.

Operator

Your next question comes from the line of Kevin Ellich from Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Just wondering if you guys have any update on any of the investigations. I'm not sure if you guys saw, but one of your competitors announced the conclusion of the SEC investigation with no action being taken.

William F. Borne

Kevin, this is Bill again. We've cooperated fully. We haven't seen any activity with the SFC or the SEC at this point in time. And we're still providing information to the DOJ and cooperating with them fully.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. So would you say the SEC investigation is still ongoing? Are they still asking for more information?

William F. Borne

They haven't asked for any information recently. So I can't tell you if it's still ongoing. But we provided everything they have asked for to date.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it, okay. And then thinking about the environment that you guys are operating in with the relatively weaker hospital utilization trends, is that what's really weighing on the business in terms of lower admission growth and the negative mid-single-digit recertification growth or is there something else structurally that's going on?

William F. Borne

I think as an industry, we see that the hospital volume has had some pressure. I think that directly reflects to us. The majority of our referrals come from hospitals. And we're working closely with our hospital partners right now on their challenges. So I think it's just the ebb and flow of the way volumes are moving around right now, in the pressure that we're feeling. We don't feel that there's any underlying issues that are there. We think that the repositioning of the portfolios to look at the impacts of ObamaCare and everybody's just trying to figure out what the next step is. So we're doing the same, and we have initiatives that we put in place as we mentioned with our care transition coordinators. We added about 50 of them in the latter part of September and the beginning of October, to help partner with these hospitals transitioning into the future. Again, that managed care is important because we think if we can take all the volume from our referral sources, it would help actually with our Medicare business. So we think we're well-positioned not only for the short term, but for the long-term strategy of the company and the trends as they evolve.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then with the Care Transition coordinators, you said you added about 50. Is that a good number or do you need to add more in Q4 and I guess how has it gone so far? I know it's still early days with that process probably.

William F. Borne

You're correct. And it's a good number to start. My belief is that we will continue to add on especially as we identify hospitals that are willing to work with us along with Care Transitions. And these are the ones obviously, that are sensitive to the potential penalties that they will have. So that will be an ongoing initiative as we move and develop and refine our clinical components of care.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then last question for me is, thinking about the election tonight and obviously, the challenges that Medicare faces, after the election with sequestration, fiscal cliff and the FCR doc fix, have you guys picked up anything on Washington, on how some of these things will be funded?

William F. Borne

Anybody's guess. If I could figure it out, I'd probably place a bet on it. But we think that nobody's sure if something is going to happen in the lame duck or they're just going to sort of kick the can down the road as they talk about it in Washington and try to address it in the first session next year. So we really can't comment. I will say this though, that our strategy for mid- to long-term I think goes unchanged, no matter who gets elected. I think we're all moving to some type of global-based relationships with providers to focus on the outcomes of care and not necessarily get paid in components of care.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then actually, Bill, have you heard of anything on the regulatory front that could be positive for the home health industry?

William F. Borne

Not necessarily on the regulatory front. But in Washington, we're hearing all kinds of things that could be positive. I think the regulatory front and the political environment certainly understands the value of home health. The alliance has put out some good data a couple of 3 weeks ago showing that admissions to home health actually does in general reduce hospital readmissions. And with hospital sensitivity to that, we've seen a lot more interest from hospitals in reference to the impact that home health can provide. And I think the regulators and legislators get it. I think there's just a huge pressure from a fiscal perspective as it relates to the population demographics. So we'll see what happens. And again, I think we have a good voice in Washington right now that's well received. We're not looked at controversial. We've actually looked at as advisers and we think that'll be helpful having that relationship with the regulatory and the political environment.

Operator

Your next question comes from the line of Ralph Giacobbe from Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

You talked about a little bit the softer volume expected in kind of the fourth quarter. I guess first, do you expect or have you baked any disruption in from the storm in terms of guidance in 4Q or is there something else driving that volume lower? And then maybe if you can reconcile that with your comments about readmission, you would think -- or the expectation would be maybe that you get more volume. So if you could sort of triangulate those things.

Ronald A. LaBorde

Ralph, this is Ronnie. First, yes, we've seen a little disruption in the Northeast with the storm certainly admits in that region are -- reflected the disruption last week. So we'll see ultimately the impact that, that will have for the quarter. Overall, our view on volumes, they've been really pretty stable throughout the year. They're just -- we're not growing them at the rate that we had planned. But they've been pretty stable, and while our recert rate is reflecting a lower rate than prior years, it's really been pretty stable throughout this year just with respect to the episodic resource that we have and a growing level of non-episodic resource. So overall, volumes are pretty stable. We're just not growing quite at the rate we thought we would do it at the back end of the year, but still in a positive and stable environment. And that's just all going to continue work and our work to be partners with hospitals and be helpful partners to reduce their readmission rates. We think that all just folds in, and we're hopeful that our work there will continue to show benefits.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then maybe remind us, what percentage of your revenue is managed care?

Ronald A. LaBorde

It is well, $29 million of the $373 million.

Ralph Giacobbe - Crédit Suisse AG, Research Division

$29 million of the $373 million is managed care. And then -- I mean you're obviously seeing big increases in bad debt. So can you maybe help us understand what percentage of the managed care book is typically out-of-pocket and what percentage you collect?

Ronald A. LaBorde

Yes, and again, we've been -- I think we're -- certainly, we're approaching bad debt at this point from what I would characterize as a conservative view. We've been reserving in the 9% to 9.5% range of revenue and then recouping as collections improve and we realize collections. So in fact, 6 of the last 7 quarters, we had a little bit of a credit that will flow through that provision because of improved collections. And that's kind of the difference you saw between the -- sequentially between the second and third quarter. Really, the reserve we put up was about 9.5% of revenue. But we had a little bit bigger credit going through the second quarter. So we are focused on, certainly focused on improving revenue cycle issues with our managed care and that's critical. Obviously, it's a lower margin business and collections are more important, and in some cases, more challenging. So it will remain a focus. It's stable. We think we're approaching it conservatively. And we'll continue to work to improve that.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Is that something that you negotiate with managed care? Do you have limited -- in terms of how much they sort of force on to out-of-pocket onto the consumer, do you have a sense of that, or do you just see it sort of show up and you have to go and bill and collect yourself?

Ronald A. LaBorde

Well, both, it's still -- largely, the issue is still the receivables are going to be commercially related to payor-related, and a smaller portion of that, patient liability. The patient liability is something we're working on to get better at. But our fundamental issue certainly at this point is, remains with the payor.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. That's helpful. And then just my last one. You've talked in the past about JV-ing with hospitals and looking at even do deals with larger systems if possible. I guess, where do you stand with that and what's the reception been particularly in the context of readmission?

Ronald A. LaBorde

That's -- thanks for the question. We continue to [indiscernible]. We have a good strategy that, we think, works well with joint venturing with hospitals. We have ongoing relations and discussions with many hospitals in reference to that. And we think, as home care comes under more pressure, if we see sequestration this year or as we look at rebasing, that hospitals would be more and more interested in one, in managing their base business better. But as importantly, it's not -- even more importantly in the long run, too, allowing their home health agency to be a strategic component of managing that post-acute care environment. Because as hospitals move into some kind of risk arrangement, they're going to have to not only manage the patients more effectively in the hospitals, but they're going to have to manage them around the clock. And that's where we see the real value with our technology, our systems, our new clinical protocol in aligning ourselves in being partners with hospitals.

Operator

Your next question comes from the line of Sheryl Skolnick from CRT Capital group.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

May I ask a question? I have a few follow-up questions on the Humana contract, if I may, and also a clarification. The $29 million, let's start there, that you quoted that you said with managed care, that's a non-episodic revenue. But isn't the Humana contract currently episodic revenue in the quarter? And won't that -- part of the issue be, that it's transitioning to visit-based?

Ronald A. LaBorde

Sheryl, this is Ronnie. That's absolutely correct. The -- certainly, in the third quarter, the Humana contract is about -- will be about 6% to 7% of that revenue as we transition that into the non-episodic of the managed care. That's where it will be in the fourth quarter predominantly. There will still be some transition at quarter-end with episodes in progress. But just as that looks going forward, that will be about a 25% impact, positive impact to our non-episodic business.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

So the $29 million and change your recorded for this quarter would grow by 25%?

Ronald A. LaBorde

Approximately, yes.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Approximately, okay. And that's very helpful. And just the other follow-up on this, so if I understood your press release on the subject correctly, will there -- will you be covering the same geographic territory? My sense is that there not only is an impact on price, but potentially an impact on the scope of customers served, and that it might become a smaller contract in terms of the attainable volume as well.

Ronald A. LaBorde

Well, that's correct. And that's all kind of baked into our -- the numbers we've shared about the reduction of revenue from Humana, and that's part of it is pricing, part of it is all markets will not go forward under the contract. We do have a national contract, but different markets have made different decisions about participation. So that's all reflected and -- into our anticipated revenue going forward.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

So I mean, I don't want to beat the dead horse here, but I am a little bit concerned that perhaps folks get the message that you would like them to send, which is that the challenge going forward is that you're taking something that I presume was a margin comparable to what you were getting on your core Medicare business, and you're converting it to something that's potentially a much lower margin business even on the volume that you retained. Is that not correct?

Ronald A. LaBorde

That's certainly the transition. Yes, no question about it.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. So we're all on the same page. So as -- so as we look at the impact on that on the fourth quarter, it's not a pure impact because presumably, you had patients on service at the end of the contract who were going to be transitioned under the former terms. And so fourth quarter is a mixed quarter sort of partially in, partially out.

Ronald A. LaBorde

Sheryl, that's correct. And we thought early on as we worked through that, that the full impact could be seen in the first quarter of '13. And I would say we're probably going to see a little bit more of an impact in the fourth quarter just as we have transitioned the business. But again, that's all reflected in contemplating the guidance we provided.

William F. Borne

Sheryl, the only thing I would add is that I wouldn't assume that the episodic reimbursement was similar to Medicare, because there was some discounts that we provided there as well.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

So you gave them a discount off of -- off your Medicare as part of a negotiated contract?

William F. Borne

That's correct.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay, all right. So -- because I'm obviously, concerned that we've got some estimates out there for 2013, including mine, which is low, and everyone else's, which is much higher. And I'm curious as to why you haven't chosen to give us some more specific or even general visibility into 2013 versus this year, especially in view of the conversion of the Humana contract, and as well as now you do have visibility on what final rates are ex-sequestration. I'm curious as to what the moving parts and pieces are that are preventing you from giving us better visibility into 2013? Because quite frankly, I'm concerned either I'm way too low, or everyone else is way too high. But the Street really, I don't think, has good visibility into what you potentially could do next year. And that creates a problem both ways for owning the stock.

William F. Borne

Sheryl, we have, as I mentioned earlier, nobody can predict what they're going to do with sequestration, SDR, how rebasing will come out. Hopefully, we'll have more clarity with that as we get new legislation and that process develops. The second thing is that Humana is significant. They have a lot of volume in a lot of areas, but there are a lot of managed care contracts that we have opened the doors to over the last 3 months. I'm not going to get specific, but there are large opportunities up for us in the managed care business with decent pricing. So while that's important, we see our focus, which is basically 2 states that have elected to go with other vendors in the whole Humana system. But our focus in those 2 states have actually -- they improved [ph]. So a new and renewed focused on other managed care opportunities as well as other Medicare opportunities. So our future and our whole guidance is not dependent on one single contract. So as all of the pieces come together and that we have more color and when we do, then we can provide more certainty or forecast with more certainty, we'll provide that to the market.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. So if I could just -- it seems like well, I heard you say that you're still focusing on Medicare. I would agree that you're getting a lot of conversion of new lives and some even of the existing Medicare lives to managed care. My sense is that your converting from a higher margin business to something of a different margin business, as well as something that had a low DSOs to sequentially, likely to continue to see higher DSOs as your business increasingly takes on more of a managed care flavor. Is that fair?

William F. Borne

Yes.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay, that's what I thought. Okay, and then finally, there's one line item on the balance sheet that I hope you can clear up for me. Did I miss a significant joint venture that you've done with -- I think it's a $17 million line item that you disclosed on a minority interest in consolidated subsidiaries?

Ronald A. LaBorde

I'm looking Sheryl. See, you didn't miss a joint venture, that is...

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. It seems like a pretty significant one for the non-controlling interest line.

William F. Borne

Okay, no. That is an investment we have in another entity that we've had for now, 1.5 years or so. And that's what that reflects.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Okay. But it wasn't on the December 31 balance sheet?

William F. Borne

No, there's been a consolidation of that in this quarter just because of transitioning -- governance related to that. And so we're now in a position to reflect that on consolidated basis as opposed to realizing our -- the equity in the earnings of that -- and the details surrounding that will certainly be in the 10-Q.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Did it add anything material to the performance on the income statement this quarter?

Ronald A. LaBorde

No.

Operator

Your next question comes from the line of Kevin Campbell from Avondale.

Kevin Campbell - Avondale Partners, LLC, Research Division

I'm curious, just to ask one more question about the Humana contract. I know you basically said the revenues would be cut in half. Can you give us a sense as to the impact to EBITDA? Is that going to be cut? It sounds like by more than half of what it was before? Is that fair?

Ronald A. LaBorde

That's -- yes. A little bit more than that, yes.

Kevin Campbell - Avondale Partners, LLC, Research Division

A little bit more than half? Okay. So in the, call it, 50% to 60% range, is that fair?

Ronald A. LaBorde

Kevin, I'll do some little precise math on that just to respond to that. I'll get back to you.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay, great. And then on the -- obviously, we're only a month into the hospital readmission policy sort of being implemented. But have you seen, in that month, an increase in demand for home health services?

Ronald A. LaBorde

We've seen, Kevin, an increase in discussions. And it seems like hospitals had moved very quickly and wanting to have these type of discussions on a national basis. To be honest with you, we're a little surprised the discussions didn't happen earlier because they have to have some planning and some ramp-up. Also realize that not all hospitals are going to be impacted, right? So we see the ones that feel that they may be impacted, having a little more vigor in their step and wanting to have a higher level of conversations quicker.

Kevin Campbell - Avondale Partners, LLC, Research Division

So you're having this more at a national, sort of system-wide basis with the larger entities? Okay.

William F. Borne

That's correct. And we also put some special tools in to help us identify our readmission trends that align with hospital readmission trends. Because remember, the reporting that we have on CMS is admissions. And it's over a 60-day period. So there's a lot of confusion out there with competitors that are providing CMS-related information that doesn't line up with the hospitals' 30-day readmissions that are on very specific diagnoses. So what we've done is we've aligned our reporting, and we can do that with our technology to line up with hospitals' challenges. So we can do an apple by apple comparison. And that's received very well in the market.

Kevin Campbell - Avondale Partners, LLC, Research Division

Yes, can you maybe comment about what your readmission rate is relative to peers in your markets?

William F. Borne

You can look at the CMS and look at admissions. And obviously, we're a tad below in all of our markets and we are seeing significant improvements with our Care Transition program. But we're not going to get into specific methods on that.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. And then just a couple of modeling questions here. I know you mentioned that salaries and benefits went down by $5 million sequentially, and that was because you were pushing the corporate G&A down to the local level, is that right?

Ronald A. LaBorde

That's part of it, yes. That's part of it. We took a layer of therapy management and moved that out into the visiting basis on that. So that's come out of G&A. We did enjoy a little bit lower [indiscernible] professional in the quarter. I wouldn't -- I'm not ready to bake that into the run rate. So just the benefit we had this quarter.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. And then a run rate going forward, maybe is a little bit higher from where we were, $81.5 million to maybe in the $82 million to $83 million for the million range?

Ronald A. LaBorde

Yes. That's fair. And another way to look at it is if you look at the segment note, broken out between home health, hospice and corporate, I think if -- we have pretty good run rates, what we see there on home health and hospice. And maybe kind of sequentially split the difference on corporate.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay, great. And then the equity comp also trended down about $1 million. Is that anything unusual there, and what should we expect maybe going forward?

Ronald A. LaBorde

I'm sorry. Repeat that question, please.

Kevin Campbell - Avondale Partners, LLC, Research Division

So the stock comp was down about $1 million sequentially, $2.3 million to $1.3 million. Is there anything unusual there and what's the run rate?

Ronald A. LaBorde

Nothing unusual there. That's kind of a onetime adjustment that we had.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay. So really, it should be back up with that $2.3 million or so level going forward?

Ronald A. LaBorde

Yes.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay, great. And then last question on the cost of service per visit. How do you, guys, think about that in terms of the inflation rate there? Is that going to -- is turnover low enough now that you're seeing sort of minimal inflation there in the 2% sort of range or -- you're still seeing a strong demand for home health nurses and that's kind of -- the wage inflation is still high because of that?

Ronald A. LaBorde

Bill?

William F. Borne

Well, first of all, I think we've seen a reduction in turnover that's significant, which is helpful. And I think there are pressures all over, and our competitors are feeling the same pressure. So that's also helpful with managing wage increases going forward.

Operator

Your next question comes from the line of Brian Tanquilut from Jefferies.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Bill, just over the last few years, you guys have done a good job, really cutting as much as you could out of the expense line, both corporate and field level. So as you look down, and you've got rebasing coming up, how much more do you have in terms of your opportunity to cut expenses or basically labor costs?

William F. Borne

Well, there's always room for improvement, Brian. As we mentioned, we have 180-person reduction that, that we put into place over the literally the last 6 weeks. We think that there's more there to align staffing with productivity with volume. And to be candid, as you're well aware of, our growth strategy in the past was acquisitions and doing startups. We have a lot of startups out there that are smaller, that are -- we expect the volume to come back up, and we're holding on to them. So we always have the opportunity to look at our portfolio. Right now, we don't have any definitive plans. We're hoping that the volume comes back and our Care Transition efforts will be fruitful in those markets. But we have an ongoing room. The question is, do we want to sacrifice tomorrow for today? And I think that's the challenge in our part [ph] that we have as leaders to making sure that we keep as many of our agencies as viable and give them the potential to be successful. So we have that opportunity. But we haven't discussed taking a look at that portfolio. We are really focused on getting that volume up and then reducing cost where we can.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

So Bill, you -- can you just talk about that portfolio evaluation? So where do you stand right now, you're not contemplating any restructuring like you've done in the last 3 years?

William F. Borne

No, I didn't say that. I said basically, we have an ongoing review of that and our expectations is that if we can get volume up in those markets, we'll be good. If we can't get the volumes up in those markets, we have to make other decisions. But we're putting some initiatives in place. Hopefully, that will get the volume up. As I mentioned, we added about 50 Care Transition coordinators, and we target the markets we put those in. We put a lot of time and effort and energy in getting those agencies up and running. And we don't want a cycle downturn to prevent us from enjoying those opportunities in the long term.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay. And then Ronnie, to your comment on Humana, I hate to go back to the Humana issue, but from a cost perspective, are we correct in thinking that the cost of providing care to a Humana patient is basically the same as a Medicare patient?

Ronald A. LaBorde

Yes, Brian, that's the same. I mean, you can look at it as our visits and our cost per visit, it's substantially the same.

Operator

Your next question comes from the line of Whit Mayo from Robert Baird.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Just a couple last-minute questions here. I guess I'll just ask the question a little bit more directly. But as you size up all the headcount reductions and changes that you're making, both at the field level and in corporate, there were some additions and some subtractions here. Can you maybe just size up for us what you expect to be the annualized net savings that you hope to accrete from some of those changes going into 2013?

Ronald A. LaBorde

Thanks for the question, Whit. We could, but for this call, we think it's a little early in the cycle. I just wanted to put a couple of thoughts is that the reductions, and again, they're ongoing. So we'll probably see additional reductions. You can't take it dollar for dollar. Certainly, you have the cost of benefits that's a dollar for a dollar. Some of the reductions in just fee for service staff. So you've got incremental costs associated with administration in that type of activity. So it's not a dollar for dollar, but it's significant. And we -- we were expecting volumes to come up as we had predicted in our guidance and they didn't. The Humana contract was another twist that we had to adjust for. So it's work in motion, but we're going to do the responsible thing not only for the market but for our staff and our local agencies and be respectful of everyone. So it's a work in progress.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

I got it. Maybe ask the question, maybe a slightly different way. Again, it sounds like there's some additions and some subtractions here just with headcount, but what do you -- when you look out -- when you look back over the past 3 months or so, what's the net change in total headcount at field and in corporate?

William F. Borne

Right, it's a good question. It's going -- it's going down if you net them all together.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. So you mentioned that there was -- trying to look back in my notes, 180.

William F. Borne

180.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

180 that was reduced but there's -- you don't have a net number?

William F. Borne

Oh, not one that we're ready to share with the market at this time. But again, Whit, it's ongoing. And when we get into the -- through the year-end, we'll be happy to share all of that information. Some of it will be reflected simply in the severance costs.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it, okay. That's helpful. And maybe, I don't think you gave an update on IT and the initiative there. Can you just remind us, Bill or Ronnie, where you are, what big IT spending items you have kind of coming up over the next year and just maybe remind us how much a year you're spending sort of into your entire IT initiative?

Ronald A. LaBorde

Whit, it's Ronnie. And certainly, the biggest initiative we have is our AMS/3 platform. And that's ongoing. We are -- I think we're looking at a total project cost of $45 million to $50 million range. And so we're about, I think, about half of that expended in this year roughly, and so we expect that platform to -- if things work well, it will come on -- begin to come on stream fourth quarter of 2013. So that's the big spend there. We do other things. Certainly, we have other spend with our computer and peripheral equipment, some software. But by and large, it's the AMS/3 that is going to drive that over the next -- this year and next.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Okay. So half of the $40 million to $40 million -- I'm sorry, half of the $45 million to $50 million has been spent in 2012 and you expect to spend the balance of that in 2013?

Ronald A. LaBorde

Yes. I think if we look at it to date, we spent about $32 million, a little less than half of that, probably would be at this point on our AMS project, by the time we end the year, our projection is about $45 million in CapEx, probably about 45% to 50% of that maybe, it will be on the AMS/3 project.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it, okay. And maybe just one last one. I don't know if you gave this number, Ronnie, I may have missed it. But I just wanted to get the G&A numbers per segment, just trying to square the -- my model up right now.

Ronald A. LaBorde

Sure. Home health and hospice was, for the quarter, $69.9 million. I mean, excuse me -- home health was $69.9 million, hospice $14.3 million. Corporate was $47 million.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Got it. Yes.

William F. Borne

Kyle, we have time for just one more call.

Operator

Your last question comes from the line of John Ransom from Raymond James.

John W. Ransom - Raymond James & Associates, Inc., Research Division

I'm sorry, if I may have missed this, but outside of Humana, is there another med -- Medicare Advantage contract that is of material size that conceivably could convert from episodic to per visit?

William F. Borne

Not that we have on our episodic basis right now, but there are a lot MA plans, such as the United that we did on a pay-per-visit and there are a lot of other opportunities that are out there, John, to pick up some significant volume such as in Infusion side. So we're actually pretty optimistic about blending our revenue, about continuing to drive our cost down and being a leader in that managed care and eventually, aligning ourselves with a part of that at taking risk base. So we think that this is a significant strategy to be acting on a long-term basis. But without failing to remember that we are focusing on Medicare in a big way as well, we actually think that it will enhance our Medicare revenue by having the managed care business, we'll just make sure that our referral sources need to be aware of that.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Okay. And then secondly, I think I know the answer I'm going to get to this question but I'll try it anyway. If you were to net the Humana cuts and sequestration and the update against your cost cuts, is there a ballpark number we should think about? So if we took your kind of pro forma numbers from 3Q and factored in these things, is there a kind of a net number we could be at least thinking about as we plug our '13 models? Kind of getting to Sheryl's question.

Ronald A. LaBorde

John, not yet. We're working through that. And so we'll just hold off on giving that kind of framework.

John W. Ransom - Raymond James & Associates, Inc., Research Division

Is that -- do you plan to wait until your 4Q or is there going to be any kind of interim communication?

William F. Borne

I'd say, as we said, we'll plan until we -- wait until we issue Q4. But knowing the timing there if it's appropriate, we -- there's certainly a potential for an interim communication. But we'll weigh facts and circumstances at that time.

Okay. Well, we thank everybody for their questions. And operator, thank you. And I want to thank everyone who joined us on the call today. We sincerely appreciate your interest in the Company. We also would like to recognize and thank all of our caregivers on the excellent care that they provided to our patients on each and every day. We appreciate their support and the support of all of our stakeholders. We look forward to sharing our fourth quarter results with you in March and hope that everybody has a great election day. Thank you, all.

Operator

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

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