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Executives

Eric C. Elliott - Vice President of Investor Relations

Keith G. Myers - Co-Founder, Chairman and Chief Executive Officer

Peter J. Roman - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Donald D. Stelly - President and Chief Operating Officer

Analysts

Ralph Giacobbe - Crédit Suisse AG, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Kevin Campbell - Avondale Partners, LLC, Research Division

Bradley D. Maiers - Piper Jaffray Companies, Research Division

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

Wes Huffman - Avondale Partners, LLC, Research Division

LHC Group (LHCG) Q3 2012 Earnings Call November 8, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen. Welcome to the LHC Group Third Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. Now I'll turn the conference over to Eric Elliott, Senior Vice President of Investor Relations for LHC Group. Please begin.

Eric C. Elliott

Thank you, Tyrone, and welcome, everyone, to LHC Group's earnings conference call for the third quarter ended September 30, 2012. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy along with other key information about LHC Group and the industry on our website at www.lhcgroup.com. In a moment, we'll hear from Keith Myers, Chief Executive Officer, Don Stelly, President and Chief Operating Officer; and Pete Roman, Chief Financial Officer of LHC Group.

Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2012 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.

Now I'm pleased to introduce the CEO of LHC Group, Keith Myers.

Keith G. Myers

Thank you, Eric, and good morning, everyone. Like so many along the eastern seaboard, many of our LHC Group employees and shareholders for that matter, are dealing with the effects of Hurricane Sandy. I'd like to first take a moment and let those impacted know that our thoughts and prayers are with you and your families. A total of 30 of our LHC locations were in the storm's path and I'm so proud of our employees who continue to go above and beyond to help ensure the well-being of our patients.

Like all residents along the Gulf Coast, LHC Group grappled with many short-term challenges from Hurricane Isaac. This slow-moving storm affected 85 of our locations for an extended period. However, we are proud of the dedication exhibited by our clinicians, who helped make sure every patient was safe before, during and after the storm. Our LHC Group team continues to show resiliency in the face of challenge and adversity. Once again, we have clearly demonstrated our ability to operate efficiently, delivering high-quality care in a cost-effective manner, even under the most difficult of circumstances. Our industry-leading model of post-acute care partnerships with hospitals and health systems positions us well for the future and we are well poised to continue delivering value to our patients, our partners and our stakeholders.

I also want to recognize our outstanding team members for their commitment to clinical excellence. We recently learned that nearly 60% of our LHC Group Home Health agencies were honored as HomeCare Elite in 2012. HomeCare Elite status recognizes the top 25% of Home Health agencies in the country based on quality of care, quality improvement, patient experience, process, measure, implementation and financial performance. This honor is proof positive of our company's commitment to always putting quality first.

Today, I want to briefly discuss CMS's final rule for 2013. CMS estimates the net impact on the home health industry to be $10 million, or 0.1% overall reduction in payments in 2013. Specifically components of the proposed rule are: a small increase in the proposed base rate to $2,137.73 compared to the 2012 rate of $2,138.52, a market basket update of 2.3 versus the proposed rate of 2.5, a 1% reduction mandated by the Affordable Care Act, a 1.3% reduction related to case mix adjustments that would carry over from 2012 and wage index updates that would decrease industry payments by an estimated 0.4%.

In addition, other notable changes in the rule are an improvement to the face-to-face requirement that would allow nonphysician practitioners in an inpatient setting to perform the encounter and inform the certifying physician, and an improvement to therapy assessment addressing missed reassessment visits and establishing ranges for reassessment visits. At LHC Group, we estimate the impact of proposed rules to be a reduction to Medicare revenue of approximately 0.50% in 2013 due to the changes to the wage index. This estimate does not include any projection of the potential deficit reduction sequester approved earlier by Congress as it is unclear whether or not that reduction will take effect. If the sequester is imposed, it would become effective in January 2013 and will reduce payments by an additional 2%.

Now turning to our acquisition pipeline. As you know LHC Group is a national leader in post-acute care partnerships with hospitals and health systems around the country. In the third quarter, we welcomed Texas Health Resources and Methodist Health System as significant new partners in the North Texas market, and we continue to engage in active conversations with potential partners around the country. As you would expect, however, these partnerships take time to develop as we work from point of initial contact to formation of the joint venture. As such, we have adopted a 2-pronged approach. During these times when conversions are occurring on the joint venture side and until pricing on the freestanding side falls to a level that we feel appropriate, we will continue to be acquirers of our stock. We began this process in June and have since repurchased 1.3 million shares.

I'll now turn the call over to Don and Pete, but before doing so, I want to once again commend and thank our experienced leaders throughout our company, as well as our dedicated hard-working employees for their commitment to those who are privileged to serve in communities throughout the country. I'm proud to be part of the LHC Group team and know we have assembled a group of dedicated clinicians, employees and leaders, who, through their hard work, ingenuity and commitment to excellence, have built a foundation for our company that will serve our patients and shareholders long into the future.

And now I'll turn it over to Pete. Pete?

Peter J. Roman

Thank you, Keith. Good morning, everyone. For the third quarter of 2012, our consolidated net service revenue was $158.9 million and net income attributable to LHC Group was $6.3 million, or $0.36 per diluted share. We benefited from tax credits under the Work Opportunity, Enterprise Zone and Renewal Community Jobs Credit Program. The tax credit reduced our income tax expense for the period and engagement costs related to the tax credits increased our G&A. The net effect was to increased net income of $505,000, or $0.03 a share. We recorded in the quarter a $650,000 impairment charge, about $0.02 a share, related to our annual a valuation of recorded intangible assets not subject to amortization. The impairment charge resulted in writing 2 intangible assets down to their fair value.

We estimate that we lost approximately $570,000 in revenue in the quarter, about $0.02 a share, from the business disruption caused by Hurricane Isaac. Home-based segment revenue was $140.3 million and all but $1.8 million is organic. Total Home-based revenue growth is 3.9%, while Medicare revenue in the quarter is approximately same as it was this quarter last year. The increase in Home-based revenue is due to an increase in average daily census in our Home Health business, principally related to our commercial and commercial advantage payors and an increase in census and patient days in our hospice business.

Facility-based segment revenue was $18.7 million in the third quarter, and LTAC revenue was $18 million. Facility-based segment revenue was higher than last quarter due to higher acuity and higher revenue per patient day, with fewer unpaid days this quarter. This increase was partially offset by fewer total patient days in the quarter. Our consolidated gross margin was 42.6% in the third quarter of 2012, slightly up from last quarter and about the same as the third quarter of last year, and includes a benefit from lower group health care claims expenditures in the quarter, which was offset in part by higher service costs relative to revenue from acquisitions in the quarter.

Our G&A expense increased to 33% of revenue from 32.3% in the third quarter of last year and 32.2% last quarter. The increase is due mainly to an increase in consulting expenses related to the tax credit engagement I described above, higher workers' compensation claims and the local G&A added from the quarter acquisitions. Operating results from our acquisitions in the quarter generated costs over revenue of about $500,000, or $0.01 per share in the quarter. We believe these operations will break even in Q4 and then be profitable going forward into 2013.

For Q4 of 2012, we expect gross margins in the range of 42% to 43% of revenue and G&A in the range of 31% to 32%. Bad debt expense this quarter was $3 million, or 1.9% of revenue compared to 2.1% in Q3 of 2011. We expect bad debt expense to remain below 2% of consolidated net revenue for the remainder of 2012. DSOs in the quarter were 52 days, about the same as the last quarter. Commercial receivables remain about 33% of total receivables at September 30, which does cause our DSO to be higher. We expect DSO to be remain about 50 days throughout the end of this year.

In Q3 2012, our tax rate was 34.9% due to employment tax credit that we talked about above. Excluding the effect of those credits, our effective tax rate was 40.6% in the quarter, and we expect that rate to apply through the fourth quarter. We are adjusting our 2012 revenue guidance to the range of $635 million to $645 million and our fully diluted earnings per share to the range of $1.45 to $1.55. This guidance does not take into account the impact of any future acquisitions or future share repurchases, if made; de novo locations, if opened; future reimbursement changes, if any, and excludes legal and other expenses associated with the company's ongoing investigations.

We can drill down into these results further in Q&A. Now I'm pleased to turn the call over to Don Stelly. Don?

Donald D. Stelly

Thank you, Pete, and thanks, to all of you for joining us this morning. Before jumping into my operational update, I also wish to acknowledge all who have and are still dealing with the adversity brought forth by Hurricane Sandy. From our patients to our employees and partners, your resiliency never ceases to amaze.

Now turning toward operations. This third quarter saw our team go through quite a bit: 105 joint commission surveys in the quarter, 26 Homecare Homebase conversions, a partnership with 2 nationally recognized health systems, a 2013 budget buildup from both sales and operations and not to mention, a hurricane affecting 31% of our locations, some for days. Even so, during the quarter, our organic growth in total new Home Health admissions was 3% compared to the same period prior year and our organic growth in new Home Health Medicare admissions was down 1.8% as compared to the third quarter of 2011. Without those 85 locations being affected by Hurricane Isaac, we estimate our organic growth would have been around 5%. So with that and considering where we sit today in relations to admissions in this fourth quarter, I will again reiterate our expected 5% to 7% organic growth rate for the year.

Turning to the census, our Home Health ADC increased 4.1% to 32,605 in Q3 of 2012 as compared to 31,311 in the third quarter of last year, while organic growth in our Home Health average daily census was 3.2%. We also like where we sit with our incremental census growth since closing out Q3, as our Home Health ADC in October came in at 32,840.

Next, I'd like to update you on our continued deployment of point of care. Adding in the 24 Home Health and 2 hospice agencies converted in the third quarter, we now have 90 Home Health locations on Homecare Homebase and 7 hospice locations inside this point-of-care model. And we plan to convert another 14 Home Health agencies during the remainder of this year. We remain pleased with our conversion process and performance results of the respective agencies. And as usual, I commit to keeping you all informed as we get ready to head into '13's schedule.

Next, I'd like to extend my congratulations to the teams inside of our 134 Home Health agencies named to that 2012 HomeCare Elite group. As Keith mentioned, this is an independent rating of the top 25% of Home Health agencies across the country, a rating based on the quantity of care provided to our patients and the efficiency with which we operate.

In closing, we used every 1 of the 92 days in this past quarter to execute our approaches and obtain our goals set forth. I'm proud of our team and I'm honored to be part of them.

I will now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Keith, can you -- I think you talked about the sort of buyback over deals near term, if I heard you right. Can you maybe help us understand where multiples are right now? And it just seems, I guess, a little surprising given all the cuts over the last few years, why is that sort -- there the reluctance to sell or bring down the price, in your opinion?

Keith G. Myers

Well, I don't know, if I know the answer to that, Ralph, I mean, why pricing isn't coming down. The only answer I can imagine is that the pain hadn't gotten bad enough with some providers. I'll tell you what we are seeing, though, we -- periodically, we poll all of our locations, and Don actually does this, and just to keep a handle on how many agencies are consolidating and going out of business, and we saw a very measurable uptick in that volume in the last quarter. I'll let Don say a little bit more about it. Maybe he can give more specifics. So I guess, what I'm saying is I think that's really turning right now. And with regard to multiples, it's hard to use an EBITDA multiple, as you can imagine, with so many moving parts going on in reimbursement. We prefer to apply our model and to a volume base, and our comfort level is somewhere around 1/2 -- 50% of trailing revenue right now. And even then, we're looking for acquisitions that have upside potential. If they've tapped out on market share and we're just going in trying to cut cost and maintain, those that aren't very attractive. So we're just -- when we do our analysis right now, we believe if we can't find those deals where -- and given where the stock is trading at, there's a better return for us to purchase our stock than to make a bad acquisition, to be -- just to say it simply. Don, you want to talk about the closures?

Donald D. Stelly

Ralph, kind of like Keith, I'm not sure about pricing either. But what we do is we keep talking about the period of consolidation. So we do poll, and I did that about 3 weeks ago, and for the first time, we had over 50 markets that we saw either competition closing, consolidating or merging, which is, honestly, part of our excitement about the potential for growth that I'll talk about, I'm sure, when you ask the questions later. But the other part is, and I don't know how to measure this, but we'll certainly maximize on the environment, the number of Z picks out there on the competition, I mean, it's a small world and a small market, is astounding. So I guess what I'm trying to say is between the closures, consolidation and the mergers, and the pressure that they're getting from post respective reviews, we do believe that our 13% market share that we have in our 790 counties, that's going to lead to the success more so going forward than it has in the past couple of years.

Ralph Giacobbe - Crédit Suisse AG, Research Division

I guess, somewhat along those lines or talking about sort of the pressures, can you talk about the shift to Medicare Advantage? Maybe help us understand what the average price differential is sort of on a like-for-like basis relative to fee-for-service and maybe what you can do or potentially do to combat that pressure.

Keith G. Myers

Sure. So, I guess, all in, when you -- if you look at that business compared to Medicare business, and I think you could see this in our numbers probably. We're seeing Medicare margins for us right now, given the scale and all at 10% to 11%, probably in that range, and I'm kind of looking at Pete here. And then on the -- all in, on the managed care side, we're probably closer to 5%. And so obviously the managed care business is not business we go after very much. I mean, we really take it -- if we have excess capacity. But then primarily as part of our hospital joint venture strategy, I mean, we do it to help our hospital partners out. So I mean, that's how we approach it. The ones that are paying an episodic rate generally pay us about 10% less than Medicare rates on the episodic rate. We pick up a little bit of efficiency maybe with maybe some documentation that they don't require, but I think you spend it all back on the back office because they're hard to collect from and then have a bad debt to deal with and all. So it's an okay business to have right now if you have a proper blend of Medicare business but if you get too heavily weighted in that business, it's hard to operate a quality organization with what they're paying today. So, did I answer your question or...

Ralph Giacobbe - Crédit Suisse AG, Research Division

Yes. I guess I was also asking sort of what else you can do, I guess, besides just choosing whether or not to bring sort of the incremental volume in? Is there other things you can do to, I guess, combat the pressure because part of this is just a natural increase in penetration of seniors that are going to be choosing MA over fee-for-service going forward?

Donald D. Stelly

This is Don. I'll take part of that. The answer is yes. But the first thing you've got to do is you've got to look at the characteristics of the patient population, building this base up. And what we found, it's younger patients with different chronicity factors than our average age, which is almost 80 inside of the traditional Medicare benefit. So why do I even bring that forth? There is a difference -- and you're talking about Medicare Advantage replacements, the majority of that is still on an episodic basis, but we all know that's switching. So the key to it, in addition to what Keith talked about, is making sure that we shift from a Medicare-centric care management mindset in Home Health to that of case management. And that may not sound like it's a whole lot different, but I'll give you one small thing. There's no way without changing the skill mix of the visit pattern, even if it's the same visits per episode or per admit, will we be able to mitigate the pricing pressures? So the key to it then is, to take the best practices with the highest outcome and the biggest skill mix differential and input a care plan for that. And because it's care management versus case management, and added to that fact that you have someone on the other line helping you make those decisions, we think that we're in a pretty good spot as we go forward and get more of this business in some of these markets.

Operator

Our next question is from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank AG, Research Division

Wanted to just pick up a little bit on the business development activity and maybe get an update. You commented a bit on acquisitions. I guess, the other part of it, and probably the more valuable part perhaps, is as you build your relationships with your joint venture partners, and I'd be looking for an update on how you see that playing out. It sounds like just given the size of some of those organizations, they're taking time to work through the system and for you to get in a lot of those markets. So maybe just help us think about how that plays out? What it entails from here and what are some of the key things we ought to be looking for.

Keith G. Myers

Really, not much has changed in the strategy, other than our focus has shifted to larger, multisite systems. I guess, that would be the biggest shift. I don't want to leave you with -- I hope I didn't lead you to think that we didn't have any of those conversations ongoing. We have a number of them all at various stages of maturity. We just don't like to give specific numbers around it or because it might lead people to think that the closing was imminent. And sometimes we'll get into a conversation and when we enter -- let me be more clear, when we enter the conversation, we'll put an expected closing date. That's what we typically do here. And what we've seen as we go to the large organizations, most often we don't hit that expected closing date. When we get into the negotiations, there are some finer points, there are more attorneys involved and it takes more time, so we may end up closing them 6 months beyond where we initially anticipated. Years back when we used to talk about a pipeline, we were working with a lot of smaller hospital JVs and we just didn't have that. It was pretty predictable. So that's kind of why, it may seem like we're being a little vague in that, but we're still active in that and that's a sweet spot for us and we see more hospitals coming to us with conversations right now. So there's no tailing off in that. It's just that it's taking more time to get them closed. But then when you do get one, like THR, there are 23 hospitals in the system, so it's equal to many joint ventures then maybe a year's worth of joint ventures in years past.

Darren Lehrich - Deutsche Bank AG, Research Division

Sure. No, that's helpful. And then I guess the other part of that is just within the existing relationships that you have announced, some of the bigger ones, how does that play out in terms of new joint venture locations as you build out within that system that you already have the relationship with?

Keith G. Myers

Oh, I got you. So branch locations. Well, a good example of that would be with Mississippi Baptist. Mississippi Baptist is one, I think, that was 2005 or '06, I'm looking at the guys here, something like that. So when we developed all the bedroom communities around Jackson, Mississippi, we did so by opening satellite offices. We were on all scripts and we were on paper. Going forward, if we do another Mississippi Baptist, we probably would have only half of the satellite offices because with Homecare Homebase, remember that our reach is further, we will have less local G&A cost, less physical plants, and nurses don't have to come to the office every day. So the model might look a little different.

Donald D. Stelly

Darren, this is Don. I'll give an example at THR. Pete, in his prepared comments, said that it did drag when we first started and expect it to be positive. Not all of that was by design, but much was expected. But now that we have the foundation set, we're going to be in 19 different markets in an 18-month span. In years passed, that would've been $3 million in G&A that we'd have added. And right now, we're not going to do that because we'd do everything that I just told you with point-of-care. And so to tag on to what Keith said is, while the luminous nature of the transactions may not be in the hospital JV sites, what we do have in our portfolio and in our sites are substantially larger with that kind of upside and so we're excited about where we sit. And like I said, to date we have almost 800 counties and we're not scratching the surface on the market share. So the upside for organic growth is truly there, but it's the balance between when you're trying to roll all these doggone things up, it's tough to focus equally on both of them. And I guess, what I'm telling you now is while we were purchasing shares, we're pushing on organic. If the pipeline starts shifting that way, then we'll save those for a little bit more rainy days. But the truth is we've got great upside with some of what we have in the portfolio right now.

Darren Lehrich - Deutsche Bank AG, Research Division

And just as it relates to the readmission work that you've been doing, I know you've given us some information just about the impact you've had and some of that was piloted. Is there anything new to share there, Don, on that front?

Donald D. Stelly

Probably not nothing new, but 3 years ago I couldn't sit here and tell you that we were in a good position with readmission rates, because we weren't, and there were a lot of reasons. What I can say right now is when we have a willing partner, a physician constituency that truly does want to be aligned with that, we can get these rates substantially lower than the 29%, or 27% that it is right now. We're just starting to figure that out collectively with our JV partners because you'd be amazed. Not all of them really even understood their potential hit. So we're in good shape, the pilots are working and the programs are working, it's really getting to the table in the instituting and executing.

Darren Lehrich - Deutsche Bank AG, Research Division

I just had a couple of numbers questions and one last thing for Keith, I guess. Just, Pete, what was the average share price of the stock you bought back in the quarter? I think I saw it in the cash flow statement, there was about $19 million year-to-date in the quarter, if you could give us some detail.

Peter J. Roman

It's actually a table that's in the back of the Q and I don't have it in front of me, Darren, but I think it's somewhere in the upper $17 range, it's $17.80, $17.60, something like that.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay, we'll check out the Q then. And then you said the tax rate in the -- I missed it for the fourth quarter. What was your estimate?

Peter J. Roman

The 40.6 is where we'll go forward. It's creeping up just slightly and that all relates to state taxes and where we're actually making our money. And then we have, I think, 3 entities that are C corps within our group. And so that just -- I don't know how tight you guys get with the tax rate but, I mean, it brings it up 0.10% here, and 0.10% there. Right now, we're thinking 40.6% is the go-forward rate.

Darren Lehrich - Deutsche Bank AG, Research Division

And then you mentioned DSOs. They are obviously in a band but a little bit higher. Can you just help us think about that? Is there something you're waiting on? Is there a payor that you're in any kind of dispute with? What do you think DSOs, where do you think they'll land?

Peter J. Roman

Yes, it moves a little bit and what ends up happening is when you -- we have $90 million, $100 million worth of receivables and the lion's share of those receivables are Medicare. While Medicare by and large is a pretty consistent homogeneous-type environment, so one Medicare receivable and another Medicare receivable are kind of the same. The things that you need to do to complete the billing process and get that thing collected, it's relatively routine and you can get that done. It's just the opposite with commercial. Every payor that you have has a different billing and collection routine and you have to go through that. So just by that -- by the nature of those receivable,s, it takes a little bit longer. In our case, when we -- we don't necessarily have contracts with every payor when we accept a patient. Sometimes we admit a patient on a one-off and that requires a separate letter of authorization that we negotiate independent of a contract with that particular payor. The more you have of those, the more complex the collection process is. So in the past, we've talked about prepaid audits and the effect that that's had and that volume and activity increasing and having an impact on our claims. We have internal bill holds related our internal compliance program that causes an impact. But, in my mind, the largest contributor to both DSOs and to bad debt expense is the one-off relationships that we establish in order to -- in order, honestly, to admit patients because it's important in our -- with our relationships with, as Keith alluded to earlier, our joint venture partners. It's very important that we admit patients when they're referred to us.

Donald D. Stelly

Darren, this is Don. I'll take a bullet for Pete. Operationally, we changed some things inside of the third quarter -- going forward to actually affirm that process. We weren't as tight on LOA admission and control as we now are to date. And so I don't know that effect, Pete, but I did want to say that, that was a variable contributing to DSOs that we've corrected.

Darren Lehrich - Deutsche Bank AG, Research Division

And like I said, I think it's in a band, that's helpful color. Last thing, I appreciate you taking all the questions, but Keith, we obviously got the final rule and they did ease a bit on therapy assessment. Obviously, there's another court ruling out there just about progress and status of patients over the course of their therapy. And I'm just wondering if you could maybe sort of wrap that up into a thought for whether it's helpful for volumes next year? Do you think it's just there and not helpful? Maybe just some color on how you think about that.

Keith G. Myers

I mean, I'm sure I'm certainly hopeful. I think everybody would be there, but I'd be really hesitant to say that -- to predict any volume increase because of it. I'll say this, it's certainly, to me, a sign that the number of people who recognize the value and the leverage potential of Home Health providers is -- continues to grow. And I mean, that was a real positive sign certainly, with that article. But there are other things out there. I mean, the dialogue with MedPAC that we have as an industry, I think, is more positive data than it's ever been. It hasn't resulted in any kind of recommendation that would give us a reason to jump up out the seat yet, but the dialogue is more positive. They're asking the right questions and we have dialogue and are able to present information to them. So I'm very encouraged about it but I don't know if it's next year. I think this is still a long-term play.

Operator

Our next question is from Kevin Campbell of Avondale Partners.

Kevin Campbell - Avondale Partners, LLC, Research Division

Back to your relationship with your joint venture partners, can you tell me a little bit more about what drives that structure and what or who are some of the providers you consider to be the most important and how does that impact future partnerships and how do you present a value perspective, and what do you consider to be the longer-term outcome?

Keith G. Myers

When you say what providers, are you talking about specific hospitals?

Kevin Campbell - Avondale Partners, LLC, Research Division

Right. I mean, are hospitals the most important? I mean, what type of value proposition are you bringing to the hospitals and are they receptive to that value?

Keith G. Myers

Okay. Sure. Well, I'm certainly not going to mention any names on specific health systems or anything but I'll speak to the second part. I mean, the -- and I think I've said this before on previous calls, back in the '90s, late '90s, when we first started with hospital joint ventures, the value that we brought to the table was taking Home Health agencies that had not made the conversion from cost or were not going to make their conversion from cost reimbursement to PPS and taking a losing asset off of their hands and then managing it profitably. Now it's more about being integrated to help them control readmissions and with some of the larger ones now, it's being at the table and participating with them in capitated arrangements or ACO models or those things. So we bring value now in those 2 ways. Yes, there's still a bottom line financial impact that's just associated with the day-to-day operations of the Home Health agency. I mean, they bring us in as a successful improvement Home Health operator to get our arms around that. But then at the same time, we're in the room with discussions around how we plug into to larger integrated models.

Kevin Campbell - Avondale Partners, LLC, Research Division

Now within that integrated model, do you isolate the different payors? And what is occurring among some of the various payors? What are some of the things you're thinking about as it relates to like a commercial payor versus a Medicare payor and how does that dynamic impact the structure of the partnership in the future?

Keith G. Myers

So if it's with a hospital partner, we're a participant in the negotiation with that payor, but we're not negotiating with the payor directly. We're functioning as a department would in a health system.

Operator

Our next question is from Kevin Ellich of Piper Jaffray.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

This is actually Brad in for Kevin. A lot of the questions have been answered, so just a couple of quick ones here. Have you guys been able to quantify any potential impact on the 30 locations from Hurricane Sandy?

Donald D. Stelly

Brad, this is Don. We have, right now, at both our run rate in those 2 states, 36% down. That's the bad news, but the good is that we were having a hell of a month so far on our other locations. And so as I sit right now, I don't expect the Hurricane Sandy to change the trajectory of the 5% to 7.5% growth that I talked about for the year.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

And then just one other one as it relates to -- on health reimbursement. Any thoughts on rebasing coming in 2014? I know it's difficult to know but do you have any additional thoughts.

Keith G. Myers

No, not really. I mean, I really don't. I have some -- we look at data to try to estimate what all in industry margins are and it would be available to any of you out there. I think you know this, we use OCS on national research, and they have the ability to take 2012 actual claims data and utilization, number of visits being made to patients. And then they can take cost report data from previous years and gross that up for cost increases. And they can estimate with what I consider to be reasonable accuracy the profit margins. They're never that far off. And if you look at what those margins are for 2012 now and you put another cut on for 2013, we're getting really close to a point where -- I have to believe we're almost already rebased. I mean, that's my view. And I think that's what you're asking me for. Other than that, I would really continue to point you to Eric Berger, the head of our partnership in Washington DC. Eric's kind of the central point for this and I think he's a great resource. He's closer to the ground on this than I would be.

Operator

Our next question is from Whit Mayo of Robert W. Baird.

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

I was just curious, Don, how much time you're spending looking at LTACs now with the moratorium expiring in January, just kind of curious what the appetite is for potentially expanding the footprint there over time, and frankly, just sort of curious what do you think happens with deals in that sector next year.

Donald D. Stelly

I got to tell you, I think for the first time in a long time we actually feel very good about the potential of expanding into different markets where we have great partnerships with LTAC. Specifically, I will tell you we've been contacted by 3 of our hospital partners within the last 6 months. But because I think we all believe that this service, much like Keith was talking about home care, I mean you see what the future has for it with MMSEA and where it went. We have our homework done in our existing group of hospitals because we're HIH. And so while I don't want to put out and give you an expectation that we go at these to -- our facility-based segments, I would be remiss to say that we're not open to do it and I would also say that I could see possibly having conversations as eminently in the next month or so that we could possibly do one.

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

How do you think about them? Just with your existing facilities now, I mean obviously you're going to have the capabilities now to expand those if you would choose to do so. So do you anticipate maybe adding some existing beds to your -- or adding future beds to your existing facilities next year.

Donald D. Stelly

Two of them, yes.

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

Any way to kind of frame up the size of the potential expansion?

Donald D. Stelly

Honestly, no, because I don't know how many beds we would be allotted by the host right now. I will tell you this, when we put out our guidance for 2013, I will have better clarity for you. It's just too preliminary right now to put that forth and ahead and you bake that into your model.

Wes Huffman - Avondale Partners, LLC, Research Division

And the conversations you're having, just to be clear, with hospitals or systems right now, would you be taking over their current LTACs or would it be potentially partnering to build out new LTACs?

Donald D. Stelly

Specifically, one would be a start up in that community and one, there is an existing license that we would actually go purchase and then partner with them in that manner.

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

Are most of these hospitals existing joint venture partners on Home Health or are these kind of new partnerships?

Donald D. Stelly

The first, they're existing partners.

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

Well, I guess we'll just kind of wait to hear a little bit more granularity on the strategy there next year.

Donald D. Stelly

Yes. And honestly, Whit, it's great questioning, and I don't mean to be vague, but if I get anymore pinpoint than that, then I'm getting ahead of myself because -- and you know us, I'm not going to do that and mislead you.

Operator

And this ends the Q&A portion of today's conference. I'd like to turn the conference over to Keith Myers for any closing remarks.

Keith G. Myers

Okay. Thank you, operator. On behalf of all of us here at LHC Group, thank you for taking time to listen in and participate on the call this morning. As always, we're available to answer any questions that may come up between our calls. So have a great day and thank you for supporting the LHC Group family.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may have may disconnect, and have a wonderful day.

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Source: LHC Group Management Discusses Q3 2012 Results - Earnings Call Transcript
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