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BUSINESS OVERVIEW
Overview
We are a leading provider of high-quality, low-cost home health services to the chronic, co-morbid, aging American population. We were originally incorporated in Louisiana in 1982 by William F. Borne, our founder, Chief Executive Officer and Chairman of the Board; transferred our operations to a Delaware corporation, which was incorporated in 1994; and became a publicly traded company in August of that year. Our common stock is currently traded on the NASDAQ Global Select Market under the trading symbol “AMED”. Our services, which we provide on a nationwide basis, include both home health and hospice services and are primarily paid by Medicare, which represented approximately 87%, 89%, and 93% of our net service revenue in 2008, 2007 and 2006, respectively. As of December 31, 2008, we owned and operated 480 Medicare-certified home health agencies and 48 Medicare-certified hospice agencies and managed the operations of four Medicare-certified home health and two Medicare-certified hospice agencies in 37 states within the United States, the District of Columbia and Puerto Rico. The following is our national geographic footprint. See Item 2, “Properties” for additional detail about the location of our agencies.
Our typical home health patient is Medicare eligible, approximately 82 years old, takes approximately 12 different medications on a daily basis and has multiple co-morbidities. For our home health patients, we typically receive a 60-day episodic-based payment from Medicare. This payment can vary and depends on the type of care provided, acuity (how sick or debilitated a patient is) of the patient’s condition and amount of services required. Some patients require one episode of care to achieve clinical goals, while others require multiple episodes of care based on the acuity of their condition. Our care for each home health patient focuses on improving their quality of life by evaluating their health condition; developing a doctor approved plan of care to achieve certain goals, which can be followed up with additional episodes of care, if deemed necessary; and educating them on how to either maintain or continue to improve upon their health after they leave our care.
During the past three years, we have more than doubled our net service revenue from $541.1 million in 2006 to $1,187.4 million in 2008 and have increased our diluted earnings per share by 87.2% from $1.72 per share in 2006 to $3.22 per share in 2008. Additionally in 2008, we completed the acquisition and conversion of 131 home health and 14 hospice agencies to our operating systems and Point of Care (“POC”) network. These acquisitions include our largest acquisition to-date, TLC Health Care Services, Inc. (“TLC”), which added 92 home health and 11 hospice agencies to our operations.
Our Philosophy
As one of the leading providers of home health care and hospice services, we strive to maintain our vision, purpose, strategy and mission:
Our Vision. To be the premier home health care company in the communities we serve.
Our Purpose. To assist patients in maintaining and improving their quality of life.
Our Strategy. To offer low-cost, outcome-driven health care at home (see “Our Strategy” below for details on how we intend to achieve this strategy)
Our Mission. To provide cost-efficient, quality health care services to the patients entrusted to our care.
Our Market and Opportunity
Home Health
The United States Census Bureau reported that as of July 1, 2004, there were 36.3 million people in the United States who were Medicare eligible at 65 years of age or older and that it estimates this number will more than double to 86.7 million by 2050, as the baby boomer generation ages and become part of this age demographic beginning in 2011. As the number of Medicare beneficiaries increases, future home health care expenditures are projected to increase to over $65.0 billion through 2017, as reported by the Office of the Actuary of the Center for Medicare and Medicaid Services (“CMS”). This expected increase is projected to result in growth in total health care expenditures outpacing growth in the Gross Domestic Product (“GDP”) of the United States over the next decade, causing such expenditures to increase from 15% of GDP today to 20% by 2016, as reported by CMS. As a result of these factors (increased beneficiaries and increased costs), we believe the Federal and state governments will seek ways to manage/reduce their overall health care expenditures through payment rate reductions and/or continued adjustments to the Home Health Prospective Payment System (“PPS”) (described below), which will lead to an evolution within the industry where home health providers will look to become more efficient through various means, such as incorporating technology within their processes and/or centralizing certain activities. We also believe the Federal and state governments will encourage health care providers to seek care for their patients in the home setting as opposed to facility-based/acute inpatient hospitals, as it typically costs less to provide care in the home. (Given this anticipated evolution, we believe that we are well positioned to address these challenges.) As a nation, we are currently positioning ourselves to better allocate our resources to provide people with access to high-quality care and appropriate services that maintain health and functioning in the face of disease progression and ensure that this care is coordinated across multiple providers and payors, particularly through the end of life.
Additionally, as there were over 9,200 provider numbers issued for home health agencies in the United States as of the end of 2007, as reported by the Medicare Payment Advisory Commission (“MedPAC”), we believe that certain home health providers will leave the industry due to competitive pressures and/or inability to change as the home health industry evolves. We believe this will provide additional acquisition opportunities for us and other home health providers that are able to continue to provide quality care to their patients while remaining profitable.
Hospice
According to the United States’ National Association for Home Care & Hospice, at the end of 2006, there were approximately 3,000 provider numbers issued for hospice agencies in the United States, and, according to CMS, the number of Medicare beneficiaries utilizing hospice services is expected to increase at an average rate of 9% per year through 2015. As a result, we believe that the hospice industry provides us with a growth opportunity that is complementary to our home health growth strategy. With the projected growth in the hospice industry, an increased level of scrutiny is being placed on Medicare and Medicaid hospice payment methodologies. As noted by MedPAC, the hospice industry has not seen dramatic changes to its payment structure since its inception, which means that changes to the hospice payment system are likely as more data is collected on the services that are provided to beneficiaries. We believe these changes will most likely result in less efficient providers choosing to leave the industry as they become less competitive, promoting consolidation within the industry. Based on these factors and our growth strategy for our hospice operations, we believe we are in a favorable position to seek out potential acquisition and start-up opportunities as we expand our business.
Our Competitive Strengths
We believe our market share and our ability to grow our business are directly related to the following competitive strengths:
• Leading position in growing Medicare home health care industry. Our primary focus is providing quality home health services to Medicare beneficiaries, and we derive approximately 87% of our revenue from Medicare. As we provide these services, we focus on improvements to our continuum of care, continued development of our disease management programs, the development and growth of our referral network, improvements to the processing of referrals and an ongoing commitment to our patients and employees. We believe that our continued efforts in improving efficiencies and quality of care differentiate us from our competition. We also believe that these efforts will enable us to adapt to any future CMS changes to PPS for Medicare beneficiaries.
• Clinical outcomes are among the best in our industry. We believe the clinical outcomes we have achieved for our home health patients are among the best in the industry. This can be seen in collected and reported quality data from CMS, which show that we exceeded 12 out of 12 measurement categories in the regions we serve and 10 out of the 12 measurement categories when compared to the national average. We believe our clinical outcomes poise us for internal growth in admissions and revenues at our existing locations, as we continue to receive a growing number of referrals from existing sources and continue to increase the number of new referral sources.
• Experience at providing care to higher acuity patients. 41% of our patient census is admitted directly from the doctor’s office as compared to 27% at the national level, as reported by Outcome Concept Systems, Inc. (“OCS”), an independent health care benchmarking firm. We believe this difference is primarily related to the education we provide to our referral sources and our reputation for success in providing care to higher acuity patients. With a larger percentage of our patients coming directly from a physician, our patients typically require more intensive care as they have not benefited from treatment in a hospital or other inpatient care facility. As we continue to care for these higher acuity patients, we believe we will continue to gain experience that helps us to improve our ability to care for such individuals.
• Superior operating model based on balance between agency and corporate responsibilities. We have developed an operating model we believe provides a successful balance between the roles and responsibilities existing at our agencies and the roles and responsibilities existing at our consolidated corporate operations. For example, we have centralized our billing and collection efforts, accounting, regulatory, marketing, payroll, intake, risk management and quality assurance functions to reduce overhead expenses. We believe our operating model has allowed us to integrate acquisitions onto our operating and billing platform quickly and efficiently. In addition, our agencies carry both locally and nationally recognized branding and tailor their respective marketing efforts to address the specific needs of the communities, referral sources and Medicare beneficiaries they serve. Each agency has a management team that works to establish strong relationships within their communities and with referral sources. Finally, we have deployed standardized clinical programs and believe this initiative has improved our quality of care and risk management systems and helps us actively manage clinical compliance across all of our home health agencies.
• Integrated technology and management systems enhance efforts to be a low-cost provider. We have invested significant time and resources to improve our information technology and real-time management and monitoring capabilities. For instance, we have developed and deployed POC laptop devices, developed a proprietary, Windows™-based clinical software system and utilize an electronic physician order system, which together are used to collect assessment data, schedule and log patient visits, generate medical orders and monitor treatments and outcomes in accordance with established medical standards. With these integrated technologies, we believe we are able to standardize the care delivered across our network of agencies and we are effectively able to monitor the patients we treat. We believe these integrated technologies and management systems allow us to be efficient, reducing the need for additional administrative staff and related expenses, and contribute to our efforts to be a low-cost provider.
• Proven ability to identify and efficiently integrate acquisition targets. We believe we have been successful at identifying and integrating acquisitions, which fit into our vision, purpose, strategy and mission. Our post-acquisition integration efforts, which generally take 18 to 24 months to complete, include: improving operating efficiencies; recruiting, as necessary, qualified nurses and account executives; expanding relationships with local physicians and discharge planners; and expanding the breadth and quality of services offered to patients. When potential acquisition targets come to our attention, we complete an intensive review process to determine whether the acquisition fits our overall business model. We believe we employ a disciplined strategy based on defined acquisition criteria, including service quality, a sound compliance track record, a strong referral base, a compatible payor mix and opportunities for cost savings and growth.
• Significant cash flow from operations and relatively low capital expenditures. We generate significant cash flow from operations due to the profitable operation of our business and active management of our working capital. Our capital expenditure requirements are relatively low because of the nature of our services, which include providing services at the patient’s homes, thus not requiring significant office space or expensive medical equipment. Historically, our routine capital expenditures have amounted to approximately 2% of our net service revenue.
• Patient-oriented, employee-driven company culture enhances industry opportunities. We believe our culture is patient-oriented and employee-driven, with a strong emphasis on quality of care. We communicate frequently with our employees and provide educational opportunities along with competitive benefits. We reinforce our culture through an orientation program for new employees and on an ongoing basis with emphasis on the importance of high-quality patient care and the need to remain productive while keeping our costs low. We keep our employees informed about corporate events and solicit feedback regarding ways to improve our services and working environment.
Our Strategy
Our strategy is to offer low-cost, outcome driven health care at home. To achieve this strategy, we intend to:
• Focus on providing home health and hospice services to Medicare-eligible patients. The rapidly growing population of potential Medicare beneficiaries represents a compelling market for home health and hospice providers. We believe that implementation of PPS in the home health industry has created a relatively stable payment environment favoring companies that focus on providing high-quality, low-cost home health and hospice services.
• Emphasize internal growth through increased episodic-based patient admissions. We intend to emphasize the internal growth of our episodic-based patient admissions, which approximated 11% during 2008. We drive internal growth by: maintaining an emphasis on high-quality care; expanding and enhancing referral relationships in our local and regional markets; continuing to educate referral sources regarding our specialized programs that focus on our ability to care for chronic conditions and diseases; and attracting and retaining highly skilled and experienced employees through communication, education, empowerment and competitive benefits.
• Continue to grow through investment in start-up agencies . We believe that start-ups also provide a cost-effective opportunity to expand our operations. Our typical start-up agency requires an initial investment of between $0.2 million to $0.4 million, takes approximately 18 to 24 months to earn back its investment and achieves an annual revenue run-rate of $1.5 million to $2.0 million in its second year of operation.
• Continue to grow through pursuit of strategic acquisition targets. We believe our focus on Medicare beneficiaries, our size and our national reputation provide us with a strategic advantage when assessing potential acquisitions. The majority of home health and hospice agencies are owned either by hospitals or independent operators. We believe recent and other potential changes to Medicare home health payment rates will continue to pressure the home health industry to consolidate, which will give us a strategic opportunity to pursue and close acquisitions. In pursuing strategic acquisitions, we employ a disciplined strategy based on defined criteria, which include, but are not limited to, high-quality service, a sound compliance track record, a strong referral base and a compatible payor mix.
• Focus on leveraging our cost-efficient operating structure. We believe the size and scale of our infrastructure and operating systems offer the opportunity to achieve operating leverage at both the agency and corporate level. At the agency level, we have strived to develop a cost-efficient operating model. To manage our diverse network of locations, we use a proprietary information system that reduces administrative and operating costs through the integration of clinical, financial and operating functions. We manage all patient care and utilization on a real-time basis from both a clinical and financial perspective through a system of exception reporting. At the corporate level, our geographic focus, investment in infrastructure and information systems enable us to leverage regional and senior management resources and add new locations without proportionate increases in corporate overhead.
• Continue to invest in technology to gain efficiencies, enhance controls and improve patient care. We believe that our investments in technology have helped us achieve significant operating efficiencies, enhance our internal financial and compliance controls, and—most importantly—improve the quality of care we provide our patients, permitting our patients to achieve better outcomes, more rapidly than would otherwise be possible. We intend to continue to make these investments, focusing particular attention on enhancing our care coordination abilities aimed at servicing the higher acuity (sicker) population. We plan to build out these capabilities by embedding further evidenced based protocols, predictive modeling capabilities, advanced patient registry functions and expanded capabilities to interface with multiple care providers via a scalable, secure communication platform.
• Continue to develop and deploy care management programs for chronic diseases and conditions. We have developed care management services that focus on complex diseases and chronic conditions and launched programs for diabetes, coronary artery disease, congestive heart failure, orthopedics, complex wound care, geriatric surgical recovery, balance retraining and behavioral health, among others. We believe our care management programs represent an attractive growth opportunity because they combine clinical quality with the cost-effective delivery of high-quality nursing care to patients who have chronic conditions.
• Continue to develop our care coordination platform. Because our data and infrastructure systems are centralized, we are able to focus on further developing our chronic care coordination programs. Our patients generally experience multiple co-morbidities and have a high risk for unplanned emergency events. We recognize the need to manage this population much more comprehensively than the traditional home care model.
Our Operations
Home Health
We provide low-cost, outcome driven health care to homebound patients we serve within the comfort of their own homes. We believe there is no place like home for a healing, relaxing environment for patients recovering from illness, injury or surgical procedures. The home provides an environment that allows medical professionals greater access to family members who can participate in their loved one’s care, while allowing the caregivers to make recommendations based on each individual patient’s needs. In addition to the home being a preferred setting for the patient, we believe by providing care to our patients in their homes we offer a low-cost alternative to hospitals, nursing homes and other health care alternatives.
We are one of the leading providers of home-based care management programs for complex, chronically ill patients. We believe that our proprietary technologies, our “Encore” nurse call center and our evidence-based, best practice clinical algorithms are the right prescription for providing comprehensive, continuous chronic care management to our patients.
CEO BACKGROUND
William F. Borne . Mr. Borne founded our Company in 1982 and has been Chief Executive Officer and Chairman of our Board of Directors since then. He is also a member of the Board of Directors of Business First Bank of Louisiana.
Ronald A. LaBorde . Mr. LaBorde manages personal investments, which include non-public, operating companies, and provides management consulting services to various companies. Prior to March 2007, he was a principal of Miller-LaBorde, LLC, an insurance agency that specialized in supplemental employee benefits. From 1995 to May 2003, Mr. LaBorde was President and Chief Executive Officer of Piccadilly Cafeterias, Inc., a publicly traded retail restaurant business. Mr. LaBorde was appointed our Lead Director in February 2003.
Jake L. Netterville . Mr. Netterville was the Managing Partner of Postlethwaite & Netterville, a professional accounting corporation, from 1977 to 1998 and has since been Chairman of its Board of Directors. Mr. Netterville is a certified public accountant, has served as Chairman of the Board of Directors of the American Institute of Certified Public Accountants, Inc. (“AICPA”) and is a permanent member of the AICPA’s Governing Council. Mr. Netterville was appointed Chairman of the Audit Committee of our Board of Directors in February 2003.
David R. Pitts . Mr. Pitts has been President and CEO of Pitts Management Associates, Inc. (“PMA”) since 1981 and Chairman and CEO of PMA since 1999. PMA is a national hospital and healthcare management and consulting firm. Mr. Pitts has over forty years experience in hospital operations, healthcare planning and multi-institutional organizations, and has served in executive capacities in a number of hospitals, multi-hospital systems and medical schools. He also serves as Chairman of the Board of Directors of Business First Bank of Louisiana and Chair of the Church Pension Group in New York City and is a member of the North American Advisory Board of Sodexho and the Healthcare Advisory Board of Clark Consulting. He is certified in hospital and healthcare administration and is a Fellow of the American College of Healthcare Executives. Mr. Pitts is Chairman of the Compensation Committee of our Board of Directors.
Peter F. Ricchiuti . Mr. Ricchiuti has been Assistant Dean and Director of Research of BURKENROAD REPORTS at Tulane University’s A. B. Freeman School of Business since 1993, and a Clinical Professor of Finance at Tulane since 1986. Mr. Ricchiuti is Chairman of the Investment Committee of our Board of Directors.
Donald A. Washburn . Mr. Washburn, a private investor for over five years, currently serves as a director on the boards of the following publicly traded companies: (i) LaSalle Hotel Properties, a real estate investment trust; (ii) The Greenbrier Companies, Inc., a manufacturer and lessor of rail cars and barges; and (iii) Key Technology, Inc., which designs and manufactures process automation systems for the food processing and industrial markets. He also serves on several private company boards. Mr. Washburn is Chairman of the Nominating and Governance Committee of our Board of Directors.
MANAGEMENT DISCUSSION FROM LATEST 10K
You should read the following discussion and analysis in conjunction with our audited financial statements included in Part IV, Item 15, “Exhibits and Financial Statement Schedules” and Part I, Item 1, “Business” of this Annual Report on Form 10-K. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See “Cautionary Statement Regarding Forward-Looking Stagements” for a discussion of the risks, assumptions and uncertainties affecting these statements as well as Part I, Item 1A, “Risk Factors.”
Overview
We are a leading provider of high-quality, low-cost home health services to the chronic, co-morbid, aging American population. Our services include home health and hospice services and approximately 87%, 89%, and 93% of our revenue was derived from Medicare for 2008, 2007 and 2006, respectively. During 2008, we had $1.2 billion in net service revenue, exceeding the billion dollar level for the first time and recorded earnings per diluted share of $3.22 per share. Additionally, we completed our largest acquisition with our purchase of TLC Health Care Services, Inc. (“TLC”) which had 92 home health and 11 hospice agencies in 22 states. The following details our owned and operated Medicare-certified agencies, which are located in 37 states within the United States, the District of Columbia and Puerto Rico. The agencies closed were consolidated with agencies servicing the same areas.
Recent Developments
During 2008, the following events occurred that will impact the rates we are paid during 2009 by Medicare for both our home health and hospice services.
Payment
During 2008, the case-mix adjustment policy established a reduction in the market basket index of 2.75% for each of the years 2008 through 2010 and a decrease of 2.71% for 2011. Then, on October 30, 2008, the Centers for Medicare & Medicaid Services (“CMS”) gave a home health market basket index update of 2.9%. As a result of these two rate changes, the 2009 base episode rate will be $2,272 compared to $2,270 in 2008 and $2,339 in 2007.
On August 8, 2008, CMS changed the Medicare hospice wage index for fiscal year 2009 and gave a 3.6% market basket increase to Medicare hospice rates for fiscal year 2009. CMS also issued a phase out of the Medicare hospice budget neutrality adjustment over three years and clarified wage index issues pertaining to the definition of rural and urban areas and multi-campus hospital facilities.
We do not expect these changes to have a material impact on our consolidated financial statements.
Results of Operations
Our operating results are not comparable for the years presented, primarily as a result of our acquisition and start-up agencies.
When we refer to “base business”, we mean home health and hospice agencies that we have operated for at least the last twelve months; when we refer to “acquisitions”, we mean home health and hospice agencies that we acquired within the last twelve months; and when we refer to “start-ups”, we mean any home health or hospice agency opened by us in the last twelve months. Once an agency has been in operation for a twelve month period, the results for that particular agency are included as part of our base business from that date forward. When we refer to episodic-based revenue, admissions, recertifications or completed episodes, we mean revenue, admissions, recertifications or completed episodes of care for those payors that pay on an episodic-basis, which includes Medicare and other insurance carriers including Medicare Advantage programs.
Other Income (Expense), net
Other income was $6.9 million in 2007 as compared to other (expense) of $3.8 million during 2006, representing a change of $10.7 million. The primary reason for this change was related to the conclusion of the Alliance bankruptcy. On September 28, 2007, a Federal judge from the United States Bankruptcy Court in the Northern District of Oklahoma (“bankruptcy court”) overseeing the Chapter 7 Federal bankruptcy proceedings for Alliance finalized its order on the distribution of funds to creditors. As a result, of the ruling by the bankruptcy court, the liabilities of $4.2 million attributable to Alliance now will not be paid because Alliance has insufficient assets to discharge these liabilities. These liabilities were recorded on our consolidated financial statements because of Alliance’s being a wholly-owned consolidated subsidiary. Neither Amedisys nor any of our affiliates (other than Alliance), has any direct obligation for these liabilities and we do not believe there is any basis for asserting that there is an indirect obligation on our part or any of our affiliates for these liabilities. Accordingly, upon completion of the Alliance bankruptcy, we reversed the accrual for these liabilities in our consolidated financial statements, and we recognized a gain of $4.2 million as other income in our accompanying consolidated income statement during the third quarter of 2007. The discharge of the liabilities was a non-taxable event. The remainder of the increase was primarily attributable to the reduction in interest expense as a result in the decrease in our average outstanding debt for 2007 as compared to 2006 and an increase in interest income earned on our cash and cash equivalents and short-term investments due to an increase in the average cash and cash equivalents and short-term investments from 2006 to 2007. During the third quarter of 2006, we completed an equity offering with cash proceeds of $124.5 million, of which $52.0 million was used to pay off our senior credit facility and the remainder was invested in cash equivalents and short-term investments.
Income Tax Expense
Income tax expense was $38.3 million in 2007 as compared to $23.6 million during 2006, representing an increase of $14.7 million, which is primarily attributable to an increase in income before income taxes and minority interests that is partially offset by a decrease in the estimated income tax rate. Our income before taxes and estimated income tax rate was $103.4 million and 37.0% for 2007 and $61.9 million and 38.2% for 2006. The decrease in the tax rate was primarily attributable to the reversal of the Alliance liabilities resulting from the conclusion of the Alliance bankruptcy, which was a nontaxable event.
Liquidity
Typically, our principal source of liquidity is the collection of our patient accounts receivable, primarily through the Medicare program; however, from time to time, we can and do obtain additional sources of liquidity through sales of our equity or by incurrence of additional indebtedness. As of December 31, 2008, we had $2.8 million in cash and cash equivalents, $250.0 million of availability for the issuance of any combination of preferred and common stock, under our effective shelf registration statement, and $160.4 million in availability under our $250.0 million Revolving Credit Facility. We are in compliance with all of the financial covenants of our credit agreements and our recently issued debt securities as of December 31, 2008.
During 2008, we acquired 145 agencies for $471.3 million in cash and $6.8 million in notes payable, which contributed $257.3 million in net service revenue; spent $28.4 million in capital expenditures, with $18.7 million was considered routine; and borrowed $395.0 million to help fund our TLC acquisition ( described below in Indebtedness), which has been reduced to $308.0 million at December 31, 2008, as we have made our minimum required payments on the Term Loan of $22.5 million and made $64.5 million in payments on our Revolving Credit Agreement. Based on our operating forecasts and our debt service requirements (described below in Indebtedness), we believe we will have sufficient liquidity to fund our operations, capital requirements and debt service requirements over the next twelve months and into the foreseeable future.
As part of our current cash management process, we pay our outstanding debt with any available cash generated from operations and relying on availability of funds under our Revolving Credit Facility for our liquidity and acquisition needs. As we manage our liquidity needs to meet our operating forecasts, debt service requirements and our acquisition and start-up activities, we are monitoring the creditworthiness and solvency of our syndicate of banks that provide the availability of credit under our Revolving Credit Facility as well as the status of the overall equity and credit markets. This monitoring process has become more critical over the past several months as several financial institutions have either failed or have been acquired, there has been a severe lack of funds in the credit markets and the equity market has seen significant decreases in value and liquidity, as discussed in the risk factors set forth herein. As of the date of this filing, we do not believe our availability of funds under our Revolving Credit Facility is at risk; however, we continue to monitor our syndicate of banks in light of the credit market conditions. If our availability under our current Revolving Credit Facility decreases we may need to consider adjusting our strategy to meet our operating forecasts, debt service requirements and acquisition and start-up activity needs. Such changes could include, but would not be limited to, meeting our minimum debt service requirements and meeting our forecasted operating needs with operating cash flows, while retaining any surplus in operating cash flows, as deemed necessary. As we experience over a 99% collection rate on our Medicare claims, which represents 87% of our net service revenue, we believe we could adjust our cash management strategy, as deemed necessary.
Outstanding Patient Accounts Receivable
Our patient accounts receivable, net increased $79.4 million from 2007 to 2008 primarily due to $1,187.4 million in net service revenue and $43.0 million in net patient accounts receivable acquired through stock acquisitions during 2008, offset by $1,136.4 million in cash collections.
Our days revenue outstanding increased 3 days to 54.4 (gross) and 2 days to 47.2 (net) from December 31, 2007. During 2008, we converted 145 acquired home health and hospice agencies to our operating and billing platforms, which represented $257.3 million in net service revenue. As is typical with our newly acquired agencies, we experienced an increase in our aging of receivables due to regulatory and internal delays inherent in the conversion process. The issues included: change of ownership approval from CMS; compliance with various state Medicaid regulations; changing the name of provider from seller; fiscal intermediary approval and set-up; and training our agency staff on our billing procedures once the acquired agency was converted to our operating platform. Additionally, we experienced collection delays related to our private episodic-based receivables. As of December 31, 2008 and continuing into 2009, we are working with these payors as some have had difficulty converting their system for CMS’ payment changes effective January 2008 resulting in delays and errors in the processing of our claims. Also impacting our days revenue outstanding was $7.8 million in Medicare claims that we submitted between November 3, 2008 and December 2, 2008 that were held in a “pending” status as of December 31, 2008 by CMS. The delay related to duplicate document control number issued by CMS, which created a processing error on their end. The issue was industry-wide in scope and the fiscal intermediaries, the Fiscal Intermediary Shared System (FISS) maintainer, and the data centers all worked together to correct this issue. Subsequent to December 31, 2008, CMS was able to resolve the issue and we received the $7.8 million during February of 2009. If this issue had not occurred and we had received these funds prior to December 31, 2008, our days revenue outstanding would have been 52.3 days (gross) and 45.1 days (net).
Our patient accounts receivable includes unbilled receivables which are aged based upon our initial service date. At December 31, 2008, the unbilled patient accounts receivable, as a percentage of gross patient accounts receivable, was 23.0%, or $48.3 million compared to 23.3% or $26.3 million at December 31, 2007. We monitor unbilled receivables on an agency by agency basis to ensure that all efforts are made to bill claims within timely filing deadlines. The timely filing deadlines vary by state for Medicaid and among insurance companies. As discussed above, our newly acquired agencies experience billing delays related to both external and internal factors. As of December 31, 2008, agencies acquired during 2008 represented $17.0 million or 35.1% of our unbilled accounts receivable.
In establishing and analyzing our provisions for doubtful accounts and estimated revenue adjustments, we segregate our receivables into payor classes and record our provisions based on our historical collection rates which vary by payor and look at the collectibility based upon the date that the service was provided. Fluctuations in our revenue mix can result in variances in the provision recorded. Our provision for estimated revenue adjustments (which is deducted from our service revenue to determine net service revenue) and provision for doubtful accounts was $30.4 million ($24.0 million in provision for doubtful accounts and $6.4 million in provision for estimated revenue adjustments for Medicare claims) or 2.6% of net service revenue in 2008 compared to $17.1 million ($12.0 million in provision for doubtful accounts, $2.6 million in provision for estimated revenue adjustments for Medicare claims and $2.5 million in provision for estimated revenue adjustments for non-Medicare, episodic based claims) or 2.5% of net service revenue in 2007. During 2007, we recorded a $2.6 million provision for estimated revenue adjustments on private episodic-based revenue. Beginning in 2008, all reserves related to private episodic-based revenue have been included in our provision for doubtful accounts. As such our private accounts receivable is net of a provision of estimated revenue adjustment of $1.0 million and $2.5 million at December 31, 2008 and 2007, respectively. The increase in our provision from 2007 was due to growth in revenue and receivables, receivables greater than 180 days; and providing for all claims greater than 360 days.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition for the three and nine-month periods ended September 30, 2008. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included herein, the consolidated financial statements and notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 27, 2008, which are incorporated herein by this reference.
OVERVIEW
We are a leading provider of high-quality, low-cost home health services to the chronic, co-morbid, aging American population. The services that we provide on a multi-state basis include both home health and hospice services with over 14,500 employees and approximately 87% of our revenue derived from Medicare. As of September 30, 2008, we owned and operated 461 Medicare-certified home health agencies and 44 Medicare-certified hospice agencies in 35 states throughout the United States, the District of Columbia and Puerto Rico. Our typical home health patient is Medicare eligible, 82 years old (with 25% of our patient population being between 80 and 84 years old), takes approximately twelve different medications on a daily basis and has multiple co-morbidities. For our home health patients, we typically receive a 60-day episodic-based payment from Medicare. This payment can vary and depends on the type of care provided, level of acuity and amount of intensive services required. Some patients require one episode of care to stabilize, while others require multiple episodes of care based on the acuity of their condition. Our care for each home health patient focuses on improving their quality of life by evaluating the health condition of each patient; developing a doctor approved plan of care to achieve certain goals for each patient, which can be followed up with additional paid episodes of care, if deemed necessary; and educating each patient on how to either maintain or continue to improve upon their health on an ongoing basis after they leave our care.
Through our home health agencies, we deliver a wide range of services in the homes of individuals who may be recovering from surgery, have a chronic disability or terminal illness or need assistance with the essential activities of daily living. The services we provide include skilled nursing and home health aide services; physical, occupational and speech therapy; and medically oriented social work to eligible individuals who require ongoing care that cannot be provided effectively by family and friends. In addition, we have developed and offer clinically focused programs for high cost chronic conditions and various diseases, such as diabetes, coronary artery disease, congestive heart failure, complex wound care, chronic obstructive pulmonary disease, geriatric surgical recovery, behavioral health, and stroke recovery, as well as various rehabilitative programs, such as Rehab at Home, Dysphasia at Home and Balance for Life. In each case, we focus on improving the functional ability of our geriatric population and enhancing patient self-management through compliance tracking and behavioral modification.
As an organization, we continue to focus on enhancing the delivery of services to geriatric patients with chronic co-morbid conditions. We believe our services are attractive to payors and physicians because we combine clinical quality with cost-effectiveness; we provide clinical consistencies in the care we provide in each of our agencies; and we are accessible 24 hours a day, seven days a week to answer our patients’ questions and to provide for their medical needs with such services as our “Encore” nurse call center.
Through our hospice agencies, we provide palliative care and comfort to terminally ill patients and their families. We provide hospice services to each patient using an interdisciplinary care team comprised of a physician, a patient care manager, registered nurses, certified home health aides, social workers, a chaplain, a homemaker and specially trained volunteers. This team then collectively assesses the clinical, psychosocial and spiritual needs of the patients and their families and manages that care accordingly. Although we expect Medicare home health to remain our primary focus over the near and intermediate term, we believe home health and hospice are complementary services and we expect to continue to expand our home health and hospice networks through acquisitions and start-up activities.
Recent Developments
Acquisitions
During the nine-month period ended September 30, 2008, we acquired 122 home health agencies and 11 hospice agencies, respectively. Of these acquisitions, 92 home health agencies and 11 hospice agencies were acquired through our TLC Health Care Services, Inc (“TLC”) acquisition.
We have completed the conversion of the acquired TLC agencies to our operating systems and Point of Care network. In addition, we have closed all of the TLC regional billing centers and completed the conversion of all corporate departments.
Reimbursement
On August 8, 2008, CMS issued a final rule to update and revise the Medicare hospice wage index for fiscal year 2009. The final rule includes a phase out of the Medicare hospice budget neutrality adjustment over three years and clarifies wage index issues pertaining to the definition of rural and urban areas and to multi-campus hospital facilities. CMS also included a 3.6% market basket increase to Medicare hospice rates for fiscal year 2009. We do not expect the impact of this change to have a material impact on our condensed consolidated financial statements.
RESULTS OF OPERATIONS
Our operating results may not be comparable for the three and nine-month periods ended September 30, 2008 as compared to the three and nine-month periods ended September 30, 2007, primarily as a result of our acquisitions and start-up agencies. In addition, the recent turmoil related to both the credit and equity markets may have an impact on our ability to continue to follow our strategy of growing through both acquisition and start-up activity if we are not able to obtain the necessary financing. When we refer to base business, we mean home health and hospice agencies that we have operated for at least the last twelve months; when we refer to acquisitions, we mean home health and hospice agencies that we acquired within the last twelve months; and when we refer to start-ups, we mean any new location opened by us in the last twelve months. Once an agency location has been in operation for a twelve month period, the results for that particular agency are included as part of our base business from that date forward. When we refer to episodic-based revenue, admissions or recertifications, we mean revenue, admissions or recertifications of payors that reimburse on an episodic-basis, which includes Medicare and other insurance carriers as well as Medicare Advantage programs.
As indicated in the risk factors incorporated by reference or set forth herein, reductions to Medicare rates and/or changes in Medicare reimbursement methodology could have a material adverse impact on our results of operations.
Three-Month Period Ended September 30, 2008 Compared to the Three-Month Period Ended September 30, 2007
Net Service Revenue
We are dependent on Medicare for a significant portion of our revenue. Approximately 87% and 89% of our net service revenue was derived from Medicare for the three-month periods ended September 30, 2008 and 2007, respectively.
Our net service revenue increased $140.7 million from 2007 to 2008. The increase is comprised of $92.8 million in acquisition revenue and $47.9 million related to our base/start-up locations. The $47.9 million increase in our base/start-up locations includes a $45.7 million increase in episodic-based revenue, which is primarily the result of an increase in the number of patients serviced and the revenue earned on each episode of care. For our episodic-based revenue, we measure our increase in volume by analyzing our internal growth in both admissions and recertifications and we measure our increase in price by analyzing our average revenue earned on each 60-day episode of care. The following is an explanation of our internal episodic-based admission and recertification growth and average revenue per completed episode, which are the primary reasons for the increase in our internal episodic-based revenue.
During the three-month period ended September 30, 2008, we experienced a 14% increase in our internal episodic-based admissions. We have experienced a significant increase in admissions at our agencies that have been start-ups during the past three years. Over half of our internal episodic-based admission growth was attributable to such start-up agencies.
In addition to our growth in internal episodic-based admissions, we also experienced a 23% increase in our internal episodic-based recertifications during the three-month period ended September 30, 2008. Within our base or mature agencies, our average patient census includes patients who are 82 years old, on average, have a high case mix weight, more pronounced functional debilities, take an average of 12 medications and have a higher risk of hospitalization, when compared to external benchmarks such as those reported by CMS. Given our patient census, it is common for our patients to require more intensive resources in order to achieve their individual goals for recovery. In light of our extensive experience in caring for such patients, we believe we have gained a reputation among referral sources as being successful at caring for patients with a higher acuity mix with multiple co-morbidities, who require more intensive services. This is supported by our reported clinical outcomes from CMS, which show that our outcomes are at or better in 12 out of 12 categories in the footprint of communities that we serve; when our outcomes are compared at the national level, we are at or better in 10 out of 12 categories.
We have encouraged our referral sources (i.e. physicians) to utilize home care as a first stabilizing alternative to the hospital setting as opposed to the latter. As a result, we provide care to a larger percentage of patients coming directly from the physician’s office as compared to directly from the hospital setting. When compared to national external benchmarks, 41% of our patient census is admitted directly from the doctor’s office as opposed to 29% when compared to the national level, as reported by Outcome Concept Systems (As a reminder, patients who have not been stabilized by a hospital stay originally tend to be sicker and have greater resource needs upfront).
These results translate into our agencies receiving referrals for patients who on average require more intensive service with multiple episodes of care. As we enter a new community through a start-up, we begin our operations by establishing our referral sources and trying to increase our patient census through additional admissions. As the agency matures, we educate our referral sources within the community on our expertise of successfully caring for patients who have a higher acuity mix with multiple co-morbidities and our referral sources begin to see our results as we care for the patients who they first referred to us. This education and track record of success with the first patients helps to transform our agency into one that has a census more consistent with our base or mature agencies. This is a similar pattern for our acquired agencies. As the employees of our acquired agencies become familiar with our processes, they are able to achieve clinical outcomes that are similar to our base or mature agencies, and thus begin to develop their patient census into one that is more reflective of our base or mature agencies.
Finally during the three-month period ended September 30, 2008, we experienced an increase in our average revenue per completed episode. During the three-month period ended September 30, our average Medicare revenue per completed episode increased from $2,679 in 2007 to $2,879 in 2008 and our average episodic-based revenue per completed episode increased from $2,672 in 2007 to $2,868 in 2008. The increase in our average revenue per completed episode was primarily due to the development of our therapy intensive specialty programs and the focus of the new Medicare payment system on providing more reimbursement for home health agencies that have patients with a higher acuity mix and multiple co-morbidities that require more intensive services.
Liquidity
Typically, our principal source of liquidity is the collection of our patient accounts receivable, primarily through the Medicare program; however, from time to time, we can and do obtain additional sources of liquidity through sales of our equity or by incurrence of additional indebtedness. As of September 30, 2008, we had $5.7 million in cash and cash equivalents, $250.0 million of availability for the issuance of any combination of preferred and common stock, if needed, under our effective shelf registration statement, and $138.8 million in availability under our $250.0 million Revolving Credit Facility. We are in compliance with all of the financial covenants of our recently issued debt.
In addition, due primarily to the acquisitions that occurred during the first quarter of 2008 and prior periods, we completed the nine-month period ended September 30, 2008 with $359.7 million in indebtedness, which consisted of $135.0 million outstanding under our Term Loan, $102.0 million outstanding under our Revolving Credit Facility (with $9.2 million in outstanding letters of credit, primarily related to workers’ compensation insurance), $100.0 million outstanding under our Senior Notes, $22.5 million outstanding under our promissory notes (primarily related to acquisitions) and $0.2 million under our outstanding capital leases.
During the nine-month period ended September 30, 2008, we made $20.6 million in capital expenditures, of which $12.3 million was considered routine, which primarily includes equipment and furniture and computer software and $8.3 million related to the deployment of our Point of Care system to our recently acquired agencies. For the remainder of 2008, we anticipate spending approximately $0.5 million to complete our Point of Care system to recently acquired agencies and $4.0 million for routine capital expenditures, which we intend to fund with our operating cash flows.
Based on our operating forecasts and our debt service requirements (described below in Indebtedness), we believe we will have sufficient liquidity to fund our operations, capital requirements and debt service requirements over the next twelve months and into the foreseeable future. However, our liquidity is dependent upon a number of factors influencing forecasts of earnings and operating cash flows. These factors include patient growth, attaining expected results from acquisitions including our integration efforts, our ability to manage our operations based upon certain staffing formulas and certain assumptions related to our reimbursement by Medicare. Our reimbursement by Medicare is subject to a number of factors including, but not limited to, recommendations made by the Medicare Payment Advisory Commission (“MedPAC”) to the United States Congress (“Congress”), legislative changes made by Congress that directly impact the reimbursement rates paid by Medicare, or changes made by CMS. We continually monitor regulatory and reimbursement changes proposed and made to the Medicare reimbursement methodology to properly plan and manage our current and future liquidity needs.
As part of our current cash management process, we manage our interest expense and cash needs by paying down our outstanding debt with any available cash and relying on availability of funds under our Revolving Credit Agreement for our operating and acquisition needs. As a result of this process, we have seen a decrease in our current ratio (i.e. the difference between current assets and current liabilities) from $62.8 million at December 31, 2007 to $7.6 million at September 30, 2008. As we manage our current ratio and our liquidity needs to meet our operating forecasts, debt service requirements and our acquisition and start-up activities, we are monitoring the creditworthiness and solvency of our syndicate of banks that provide the availability of credit under our Revolving Credit Agreement as well as the status of the overall equity and credit markets. This monitoring process has become critical over the past several months as several financial institutions have either failed or have been acquired and as the equity market has seen significant decreases in value, as discussed in the risk factors set forth herein. As of the date of this filing, we do not believe our availability of funds under our Revolving Credit Facility is at risk for this reason; however, we continue to monitor our syndicate of banks in light of the credit market conditions. If our availability under our current Revolving Credit Agreement decreases we may need to consider adjusting our strategy to meet our operating forecasts, debt service requirements and acquisition and start-up activity needs. Such changes could include, but would not be limited to, meeting our minimum debt service requirements and meeting our forecasted operating needs with operating cash flows, while retaining any surplus in operating cash flows, as deemed necessary. As we experience over a 99% collection rate on our Medicare claims, which represents 87% of our net service revenue, we do not believe that it would be difficult to adjust our cash management strategy, as deemed necessary.
Indebtedness
Senior Notes, Term Loan and Revolving Credit Facility
In connection with our March 2008 acquisition of TLC, we incurred additional indebtedness by (i) issuing $100.0 million in senior notes and (ii) entering into a $400.0 million credit agreement that provided for a $150.0 million term loan and a $250.0 million revolving credit facility, all of which are described in detail below. See Note 2 for more information regarding the TLC acquisition.
On March 25, 2008, we entered into a new $100.0 million Note Purchase Agreement (the “Note Purchase Agreement”), pursuant to which we issued and sold on March 26, 2008, three series of Senior Notes (the “Senior Notes”) in an aggregate principal amount of $100.0 million. Interest on the Senior Notes is payable at the prescribed rates semi-annually on March 25 and September 25 of each year beginning September 25, 2008. The Senior Notes are unsecured, but are guaranteed by all of our material subsidiaries.
On March 26, 2008, we entered into a new $400.0 million Credit Agreement (the “Credit Agreement”), which consists of: (i) a $150.0 million, five-year Term Loan (the “Term Loan”) and (ii) a $250.0 million, five-year Revolving Credit Facility (the “Revolving Credit Facility”). The Revolving Credit Facility provides for and includes within its $250.0 million limit a $15.0 million swingline facility and commitments for up to $25.0 million in letters of credit. The Revolving Credit Facility may be utilized by us to provide ongoing working capital and for other general corporate purposes. The Term Loan and Revolving Credit Facility are unsecured, but are guaranteed by all of our material subsidiaries.
The proceeds of the Term Loan, our initial draw of $145.0 million under the Revolving Credit Facility, and the proceeds from the issuance of the Senior Notes were utilized by us (a) to fund the purchase price of the TLC acquisition; (b) to pay transaction and other expenses associated with the TLC acquisition and the closings contemplated by the Credit Agreement and the Note Purchase Agreement; and (c) for other general corporate purposes. In addition, in connection with incurring this new debt, we recorded $8.1 million in deferred debt issuance costs as other assets in our condensed consolidated balance sheet, which are being amortized over the term of the debt.
The Term Loan is repayable in 20 equal quarterly installments of $7.5 million each plus accrued interest beginning on June 30, 2008, with any remaining balance due at maturity on March 26, 2013. Upon occurrence of certain events, including our issuance of capital stock if our leverage ratio at the time of issuance is equal to or in excess of 2.50 and certain asset sales by us where the cash proceeds are not reinvested within a specified time period, mandatory prepayments are required in the amounts specified in the Credit Agreement and Note Purchase Agreement. Mandatory prepayments are paid ratably to the lenders under the Credit Agreement and the holders of Senior Notes, based upon the respective indebtedness outstanding. Amounts paid to the lenders under the Credit Agreement are applied first to the Term Loan, with excess, if any, applied to amounts outstanding under the Revolving Credit Facility, without reduction in the commitments to make revolving loans under the Revolving Credit Facility.
CONF CALL
Kevin LeBlanc
Thanks. Good morning and thank you for joining us today for Amedisys investor conference call to discuss this morning’s third quarter 2008 earnings announcement and related matters.
By now you should receive a copy of our earnings press release. If you did not receive the press release you may access it on Investor Relations page on our website at www.amedisys.com.
Joining me on today’s call from Amedisys are Bill Borne, Chairman and Chief Executive Officer, Larry Graham, President and Chief Operating Officer, and Dell Redman, Chief Financial Officer. Also speaking today will be Alice Ann Schwartz, Chief Information Officer and Senior Vice President for Clinical Operations and Jeffrey Jeter, Chief Compliance Officer.
Before we get started with our call, I’d like to remind everyone that any statements made on this conference call today or in our press releases that express a belief, expectation, or intent as well as those that are not 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 to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings including our forms 10-K and 10-Q.
Also, the company urges caution in considering any current trends or guidance that may be discussed on this conference call. The home health and hospice industry is highly competitive, and trends and guidance are subject to numerous factors, risks, and influences which are described in the company’s reports and registration statements filed with the SEC. The company disclaims any obligations to update information on trends or targets other than in its periodic filings with the SEC. 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 at www.amedisys.com on the Investor Relations page under the link Press Releases.
Thank you. Now I’ll turn the call over to Bill Borne. Please go ahead, Mr. Borne.
Bill Borne
Thank you Kevin and good morning. First, let me welcome each of you to this call. We appreciate the opportunity to update you regarding the company’s performance for the quarter and share our vision for Amedisys.
Today’s call will be a little different in past calls. As Kevin mentioned, we will have two additional speakers. Alice Ann Schwartz will be speaking today to provide more detail on our clinical approach and result to caring file patients. In addition, Jeffrey Jeter will be providing an overview of our compliance program.
High clinical care is the top priority in compliance essential to everything we do as a company. We like investors to fully understand our commitment to both of these components of being a healthcare provider and we believe today’s call is a great form to provide that information.
Amedisys is a leader in disposing detail information. In our effort to even be more transparent, we have changed the format of today’s call to provide a comprehensive detailed review of our process and controls as it relates to our clinical population and compliance program.
The narrative thought of this call will end approximately one hour and then we will take questions. We
will file an 8-K posing this narrative for your review as necessary.
As background, Alice Ann is our Chief Information Officer and Senior Vice President of Clinical Operations and she has been with Amedisys for 11 years. Prior to joining the company, she was employed as a nurse in the acute care-trauma and cardiovascular surgery intensive care unit at John Hopkins Hospital and Adam Crowley Shock Trauma Center. In the industry she has published an out coming proven matter and has engrained many clinical measurements within our organization.
Jeffrey Jeter has been with Amedisys since 2001 and brings the background of prosecuting health care fraud and nursing home abuse as an assistant attorney general for the state of Louisiana Department of Justice.
Both Alice Ann and Jeffrey have brought a tremendous amount of value to the company and have been an integral part of growth and success of Amedisys over the years. We’re very proud of both them and welcome this opportunity for them to share their knowledge and insight with our investing public.
We had outstanding results for the third quarter recording net revenue of 322 million and adjusted earnings per share of $0.89. This represents growth of 78% and 46% respectively over the third quarter of ’07.
For the nine-month period, we have revenue of 847 million and adjusted earnings per share of $2.33. This represents growth of 68% and 38% respectively over the first nine months of ’07. Based on this performance and our expectations for the remainder of the year, we had increased guidance for ’08.
During the quarter, we opened seven new home health agencies. As a result of the noble growth and acquisitions in previous quarters, we ended the quarter with 461 home health locations, a 150 more agencies than the third quarter of ’07. In addition, we owned 44 hospice agencies at the end of the third quarter of ’08, 17 more hospice agencies than the prior year.
Subsequent to quarter end we closed on two acquisitions that added seven home health and one hospice agency in four states. In addition, we opened a start-up in New Mexico last week, which is a new state for us. With these additional agencies, we have increased the number the states that we are now servicing to 37.
Frequently we hear that our country is headed for a health care crisis. Over the next decade if no significant changes are implemented, we will see a continued erosion of the Medicare Trust Fund. Currently, 12% of all Medicare beneficiaries account for 69% of Medicare spending. The time is now to develop ways to control future spending.
There are several legislative initiatives that are currently being considered to help better manage healthcare resources utilized by the chronic pro-morbid population. Amedisys and a coalition of leaders from the home health industry are at the forefront of this effort.
Amedisys will continue to benefit from favorable demographic trends for the foreseeable future. But more in just riding this wave, we want to position the company to address the care management needs of this aging demographic and thus maximize our growth opportunities. That is why delivering high quality, cost effective care to elderly patients with multiple chronic conditions is our (inaudible 00:13:16) with the nationwide footprint, a highly skilled and compassionate team of commissions, best practices, care management programs and a best-in-class technology platform, our focus at Amedisys is to be a key part of the solution to the healthcare crisis in our country.
I would like to extend a warm welcome to all of the new employees of the agencies we have acquired since our last earnings call. We’re very excited that you are part of the Amedisys family.
In conclusion, we are grateful to the talented employees of Amedisys that provide our competitive advantage of cost-effective, quality healthcare services to the patients entrusted to our care. Our passion for servicing our patients, commitment to our core values in the culture of hard work are the intangibles that separate us from our competition.
I will now pass this call to Dale for his financial overview. Thank you.
Dale Redman
Thank you Bill and good morning.
Our third quarter was another excellent quarter for Amedisys, highlighted by record revenue and earnings. Revenue grew 78% over the third quarter of 2007 to 322 million. And for the nine-month period grew 68% to 847 million. Acquisitions accounted for approximately 93 million of this increase in the third quarter and 218 million for the nine-month period.
Our net income for the third quarter was 23.5 million or $0.87 per share. This was a 13% increase over the 20.2 million for the third quarter of 2007 or $0.77 per share. Net income for the nine-month period was 60.3 million or $2.25 per share while 2007 was 48.4 million or $1.85 per share, an increase of 22%.
Included in the three-month and nine-month periods ended September 30, 2008 are certain TLC integration cost. This cost totaled 1.1 million or $0.02 per share during the three-month period and 3.7 million or $0.08 per share during the nine-month period. They primarily consisted of severance cost and cost related to the conversion of the TLC agencies to our operating systems.
In addition you may recall in the third quarter of last year, we had a one time non-cash gain of 4.2 million or $0.16 per share, after adjusting for this item, our earnings per share increased by 46% or $0.89 for the third quarter and 38% to $3.33 for the nine-month period. We have included these adjustments in the rest of our discussion this morning.
Our gross margin was 53% for the third quarter of 2008 compared to 53.3% in 2007 and 52.7 for the nine month period compared to 53.2 for the same period in 2007. Our G&A expense including depreciation and amortization as a percent of revenue remains flat at 39% for the third quarter compared to 2007 an increase to 40% for the nine-month period compared to 39% in 2007. EBITDA for the quarter was 49.4 million or 15.3% of revenue versus 33.7 million or 18.6% of revenue during the third quarter of 2007. EBITDA for the nine-month period was a 126 million or 14.9% of revenue versus 83.6 million or 16.6% of revenue.
Let me now take a minute and talk about our accounts receivable. As you know we adjust our Medicare home health and hospice revenue or amounts we do not expect to collect from Medicare through an estimated revenue adjustment that reduces both revenue and accounts receivable. This estimated revenue adjustment was 2 million and 4.1 million for the three and nine-month compared to 900,000 and 2.5 million for the comparable period this last year.
On the non-Medicare accounts receivable, we provided allowance for the doubtful accounts, which is netted against patient accounts receivable in the balance sheet. Our private and Medicare accounts receivable totaled 66.9 million at quarter end, 34.4 million at year end 2007, and 32.3 million at the end of the third quarter of last year.
Bad debts expense for the current quarter was 6.2 million or 1.9% of revenue compared to 30.7 million or 2% of revenue for the third quarter of last year. Bad debt expense for the nine-month period was 15.5 million or 1 (inaudible 00:18:23) of revenue compared to 9 million or 1.8% of revenue for the same period in 2007. For the last seven quarters, this percentage of expense to (inaudible 00:18:25) has averaged 1.8%.
Let me now walk you through the amounts for doubtful accounts for the quarter. We began the quarter with an allowance of $16 million. We expensed 6.2 million, we wrote-off 2.2 million, for an ending reserve of 20 million.
Days revenue outstanding increased in the fourth quarter of 2007 and the second quarter and 2008 by five days to 56.7 days. Our significant acquisition activity over the last nine months has had an impact on our billed and un-billed accounts receivables. However, we’ve seen an substantial increase in collections during October and we anticipate improvement in this metric by year end. We generated cash flow from operations of 87 million during the nine-month period. We spent 447 million on acquisitions, 21 million on capital expenditures, and we issued 412 million in new debt.
During the third quarter we reduced our notes payable under our bank agreements by $18 million with cash generated from operations. At September 30th, our leverage ratio was 1.84 times and our fixed charge coverage ratio was 2.3 times. This reduction in our leverage ratio below 2 times will reduce the margin on our bank debt facilities by 25-basis points.
For the quarter, the average increase rate on our bank debt was 4.1%. We have a $139 million available under our revolving credit facility at September 30th. Today we are increasing our revenue guidance to the range of 1,150,000,000 to 1,175,000,000 at earnings per share guidance to the range of $3.20 to $3.25 per share based on the estimated 26.9 million shares.
This guidance includes the anticipated results of our recently completed acquisitions after adding back the TLC integration cost. It does not include any future acquisitions. We made these changes to active as a net guidance primarily for the following reasons. First, integration of TLC was completed during the third quarter ahead of schedule. Second, to roll out our clinical programs under our new specialty division is also ahead of schedule and producing positive early results. Finally, the extension of a Hurricane Katrina employment credits to August of 2009 from the prior expiration date of August 2007 will cause our full year effective tax rate to be lower than we originally expected.
Now, I’ll turn the call over to Larry for his operational comments.
Larry Graham
Thank you, Dale. Our internal growth rate of episodic-based revenues for the quarter was 28% year-over-year. We define internal growth as episodic-based growth from all agencies except agencies we have acquired in the last 12 months. We believe this metric is indicative of the company’s true growth performance. The components of this metric include internal admissions, internal recertification and average revenue for completed episode.
For the quarter, our internal growth rate over last year in episodic-based admissions was 14% . Our internal recertification growth over prior year was 23%. The increase in our recertifications are the result of our admission growth, our start-up (inaudible 00:22:28) and our agencies acquired over the past two years that have (inaudible 00:22:30) to have these agencies. As an agency open, we first develop our census by obtaining patient admission. However, as time progresses these patients may require an additional episodic care and that causes our recertification rates to increase.
It is also important to note that 67% of all of our patients have only one episode of care. Alice Ann will discuss this in more detail later in our call.
To summarize this, our internal episodic-care revenue growth rate in dollars grew 28%, which consist of volume growth of 19%. As a reminder, volume growth is total episodic growth, which is admin plus research growth.
Our revenue rate growth is our revenue for episode increase of $196 applied to all of our episode. This revenue rate growth (inaudible 00:23:28) percent. Therefore, our volume growth rate of 19% plus our revenue rate growth of 9% equals our total growth of 28%.
During the third quarter we opened seven new locations. We have approximately one hundred (inaudible 00:23:45) start-ups in various stages in the (inaudible 00:23:48). Of these (inaudible 00:23:51) 40 are incurring expenses, but have not yet opened.
During the first three quarters, we opened 20 new location and anticipate opening an additional 15 agencies in the fourth quarter making our 2008 target 35 new home health agencies. Regarding hospice, while we did not open any new agencies in the quarter, we have opened four so far this year and expect one more opening in the fourth quarter.
Moving to external growth, as Bill mentioned we closed acquisitions on October 1st. We acquired six agencies from home health corporation, which consist of two agencies each in the states of Pennsylvania, Maryland and Delaware.
Revenue for these agencies for the previous 12 months ended June 30, 2008 was approximately 23 million. The second acquisition we closed was a retail home health and hospice located in the state of Washington. These agencies had revenue for the past 12 months ended August 31st of 1.7 million.
I would like to welcome all of the new employees to Amedisys who have just joined us from Home Health Corporation in the state of Washington. Our acquisition pipeline continues to be robust and we continue to analyze potential opportunities as they become available.
Our quarterly revenue and contribution margin are broken down as follows: Contribution margin is pre-tax and pre-corporate overhead. 211 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 33%. Six million in home health and hospice start-up revenue, related to start-ups open less than 12 months with a negative 1% contribution margin.
Also in the quarter we incurred approximately 3 million in costs associated with home health and hospice agencies we plan to open in the future. Twelve million in hospice revenue related to agencies we have owned longer than 12 months, with a contribution margin of 22%. Ninety-three million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 18%.
The agency integration and corporate department transition of TLC is complete. The wind down of TLC corporate staff continues to progress according to schedule. The 2 remaining regional billing centers were closed on Friday, October 24. From approximately 210 employees at the time of acquisition, TLC’s corporate staff is currently at 38 and will be reduced to 14 after Friday of this week. We believe that now with the conversion processes complete, we will see growth in revenue and contribution margin from TLC. I want to thank all of the employees of TLC for their cooperation and efforts throughout the integration process.
We launched the Balance for Life Specialty Division earlier this year and we have set up the program in 97 locations. We intend to roll this program out to 160 locations by the end of the year. It helps the elderly with their balance through more intensive therapy sessions and as a result, reimburses us at a higher rate than our average episode.
Some facts about the falls related to the elderly: In the United States, more than one-third of adults 65 and older fall each year. Among older adults, falls are the leading cause of injury deaths. They are also the most common cause of non-fatal injuries and hospital admissions for trauma.
Balance for Life is one of our 13 evidence based clinical programs aimed at improving the health of our senior population.
Before I turn the call over to Alice Anne, I want to highlight some key points related to the chronicity of our patient population.
OCS, an independent health care benchmarking firm, has just published a white paper, which will be posted on our website. I will now read from that report. I quote, “There is a difference in distribution of risk at the provider level. Not all providers have a patient risk profile that matches the national norm. Some have a higher distribution of lower risk patients. Others have patient populations disproportionately represented of higher risk patients. Amedisys is a clear example of a home health provider with a higher distribution of patients on the high end of the risk scale. More than one-half of all patients admitted by Amedisys Agencies are predicted to be of high or very high risk to hospitalization. Compared to just one-third of patients nationwide. Conversely, only 10% of Amedisys patients are assessed as low or very low risk, compared to 23% of patients nationally.
Another indicator of overall patient severity is length of stay, with higher severity patients requiring more days of service as a general rule. As patient length of stay increases, hospitalization rates also increase and many measures of patient outcomes typically decrease. The higher severity of Amedisys patients is also shown by longer length of stays than the national benchmarks, based on 2008 data.
The average Medicare patient requires approximately 1.55 episodes of care. The average Amedisys Medicare patient receives about 1.85 episodes of care. The logical result of a high risk patient population is overall lower quality outcome scores, yet despite caring for a population that is considerably higher risk, and requires a longer length of stay than the national norm, Amedisys has shown consistently higher overall quality of care as measured by the OCS Standardized Outcome Index, referred to as SOI, a proprietary measure that offers a single number representative of overall quality.
Amedisys not only has a higher SOI than the national database, but an increasing SOI score over the past several years.”
In conclusion, Amedisys excels in a complicated care management environment. As evidenced by a patient population with higher than national risk characteristics, requiring a longer length of care, and yet producing quality patient outcomes. I will now turn the call over to Alice Anne, where she will go into more detail of why we service a higher acuity patient. Alice Anne.
Alice Anne Schwartz
Thank you Larry. I will begin by sharing with our investors the clinical profile of our average patient population, some information on clinical acuity, meaning how sick or debilitated our patients are, the risk of hospitalization, length of stay information, our focus on intensive clinical strategies, and in addition, web-based information will also be posted on the company’s coding, clinical auditing, billing, compliance, recertification controls, and state survey quality trends.
Amedisys’s average patient age is 82 years-old. 25% of our patient population is between 80 to 84 years-old. If you extend that percentage segment beyond, almost 50% of our population is between the ages of 75 to 84. We service a more elderly senior, as opposed to the newly benefit eligible recipient. We will provide on our website a graphical age distribution break down of our population.
Clinical acuity, meaning how sick or debilitated a patient is, is expressed in home care by what is known as a case mix weight. This single score is a summary of a patient’s clinical needs, functional impairments, I mean how difficult it is for patients to move about, and their service requirements, whether they came from a hospital or a rehabilitative setting. We will post a three year trend of case mix weights on our website. You will note that Amedisys case mix weight is higher than both national and regional norms.
To better understand our patient population compared to external norms we frequently engage outside benchmarking firms to perform clinical comparisons. The most recent report from OCF, which Larry just referenced, has risk stratified our clinical population according to very high risk for hospitalization, high risk, moderate, and low risk. As Larry explained, we service a sicker population than average.
To further cross validate the acuity of our patients, I will review their medication trends. Polypharmacy trends are a consistent indicator of comorbidity increases. Simply stated, a doctor orders medications for a patient to treat certain diseases. We have no control over these trends and they are a very good indicator of how sick or how many clinical conditions the physician is treating.
In 2006, our patients took on average eight medications per day. In 2007, our patients took on average nine medications per day. And in 2008, our patient population is now taking over an average of 12 medications per day.
Further breaking down episodic categories, to illustrate that the patients who stay on service longer have more comorbidities, patients receiving care in one or two episodes, take an average of 12 medications per day, patients receiving care in episodes three or greater, take an average of 15 medications per day. Using that same type of cross acuity validation, functional scores and their trending are also a useful metric in understanding a population’s impairment levels.
In home care, patients are ranked on functional impairment scales ranging from F0, meaning minimal impairment to F4, maximum impairment. This would be a patient that is close to being bed bound. The new payment system does not have an F0 ranking. We will post the organization’s past three years of functional trending scores.
Investors reviewing these graphs will note a year-over-year decline of patients entering the system with minimal functional impairment, meaning scoring F0 to F1, coupled with a simultaneous year-over-year increase in patients with more debility and more chronicity, scoring F2 to F4.
Further breaking down these episodic categories, to illustrate that those patients who stay on service longer are sickest and most debilitated, patients with one or two episodes, 86% of those patients have a functional severity level of 2+ or greater. Patients with three or four episodes, 88% of those patients have a functional severity level of 2+ or greater, and patients with five or greater episodes, 93% of those patients have a functional severity level of 2+ or greater. We service a sicker population, requiring greater resource needs.
You will see that our length of stay is longer, when compared to the national averages. The OCS external report states that the average episodes per patient nationally for the first half of 2008, is 1.55 episodes per patient. Amedisys episodes per patient is 1.85. This longer length of stay is supported by our higher case mix weight, increased polypharmacy needs, indicating more clinical comorbidities, and increased functional debilities.
We will also post a patient on service graphical breakdown for all of last year. To give investors a gauge, 67% of our populations complete their care in the first episode only. 18% extend into the second episode. 7% extend into the third episode. 3% extend into the fourth episode, and so forth. Stated another way, 85% of our total population receives care within two episodes or less. 10% of the population goes into a third or fourth episode and the remaining 5% is the more chronic debilitated population extending beyond four episodes.
So as a clinical summary, our average patient age is 82 years-old with a higher case mix weight, more pronounced functional debilities, on an average of 12 medications, and has a much higher risk of hospitalization when compared to external metrics.
I’ve given a snapshot at this point at the patient level. Internal and externally validated data reveals that the organization’s burden is one of year-over-year increasing chronicities year-over-year increased polypharmacy needs, year-over-year increases in patient debility. With a trend of sicker patients receiving services each year, our approach has been to continue to develop our care management systems and evidence based clinical programs with a focus on better servicing our senior population that has multiple clinical needs.
The advanced senior who is sick and has multiple clinical needs, is not going to go away. This population will only increase year-over-year. Providers will be faced with the challenge of insuring their care management systems remain robust enough to handle these increasingly complex patients and that their disease management specialty programs are intense enough, treatments and modalities to adequately improve chronic patient functioning and clinical outcomes.
These types of clinical programs or strategies are extremely important when faced with improving outcomes in the complex patient. To give you several examples of intensive services, our centralized cardiac tele-health program monitors the care of over 800 patients throughout seven states. Tele-health increases the standard of care by monitoring the patients’ vital signs daily, as opposed to intermittent nursing visits. We deploy this to a frail subset that requires more intensive clinical monitoring.
Our multi-disciplinary wound program pairs nursing and therapy to provide a more intensive program focused on aggressive wound treatment in the patients with very complex wounds.
Multi-disciplinary care of complex disease is considered a best practice standard in geriatric medicine. In this program, the nursing aspect focuses on traditional nursing interventions such as advanced wound dressing practices, teaching and nutritional needs, and disease teaching to enhance behavioral modifications and improve patients (inaudible 00:40:11).
The therapy aspect focuses on advanced modalities that only a therapist can provide, that is proven effective in wound healing, such as electrical stimulation, ultrasound techniques, balancing and off-loading, and shards debridement. Each discipline provides a unique skill focused on complex wound healing. Therapy wound modality research will also be available to investors on our website.
Our (inaudible 00:40:45) nursing division is a team of advanced practice certified clinical nurse specialists who provide consultative wound care services and clinical education. Working off specialized clinical reports, they are able to identify the complex, high resourced, wound patients we have throughout the system and work with the specific agencies directly to insure our patients are receiving the appropriate evidence based wound protocols.
Our balance for life specialty program focuses on improving the functional outcomes of that more chronic patient with an increased fall risk, through the implementation of evidence based, vestibular balance retraining modalities. Fall risk and safety concerns are a prime reason patients end up having to leave their homes for more intensive settings. Through our disease management data tracking, we have also found that the number one reason discharged patients were going back into the hospital, post home health services, was because they had sustained a fall.
This program focuses on increasing functioning and improving balance, thereby allowing seniors to live more safely and longer at home. Mitigating fall risk is a key strategy in saving overall health care costs by reducing unanticipated hospitalizations. This is central to our mission. For investor interests, vestibular modality research will also be posted on our website.
We are often asked why we have a higher acuity or sicker patient. There are several reasons for this clinical trend. First, we spent the first two years prior to the implementation of PPF in 2000 developing our evidence based clinical disease management programs. We were prepared day one to clinically service complex resource intensive patients. Many providers at the time were unsure if they had the resource requirements that would allow them to service a complex wound patient and/or a multidisciplinary need patient. Because our standardized clinical protocols are systems were in place, we were immediately prepared to go to our physicians and referral sources and ask to service this sicker patient at a time when the industry was unsure.
Second, since PPF we have continued to focus on the highly complex patient. Growing out our partners in wound care program, chronic kidney disease at home, COPD at home, stroke recovery at home, surgical recovery at home, rehab at home, behavioral health at home, orthopedic recovery at home, heart at home, pain management at home, diabetes at home, balance for life, Tele-health at home, and dysphagia at home. These are the clinical programs that differentiate our service.
Third, our strategy has always been to approach our physician base, encouraging them to use homecare as a first, stabilizing alternative to the hospital setting as opposed to the latter. For example, 41% of our patient population comes directly from the doctor’s office, as opposed to 29% when compared to the national level. 43% of our patients come directly from the hospital, as opposed to 56% when compared to the national levels. External benchmarking referral sourced statistics will be posted for our investors. As a reminder, patients who have not been stabilized by a hospital stay originally, tend to be sicker and require greater resource needs.
Fourth and final, as we have conveyed to our investors in the past, our strategic goal has been to migrate into a chronic care coordination company. With that in mind, our systems, clinical infrastructure, clinical programs and referral strategies have all been geared to focus on the more complex population.
Shifting gears now, I would like to review with investors our field automation and business system controls. We have 461 home care locations that are all connected via a wide area network. All of our full time and consistent PRN employees in home care have laptops and are using those to input clinical visit information in the patient's home.
We had three goals when developing this system: enhance standardization with consistency and compliance controls, the ability to have most all of our notes in digital format and the ability to provide more intensive care management services to our population.
We currently have 11,200 laptops deployed nationwide, making it the largest company-centered deployment in the industry. I would like to take a brief moment to congratulate the IP staff on most recently being recognized as one of the top 50 most innovative IP divisions by information week. Each year this national publication recognizes the top 500 companies who have implemented business, technology innovations.
You will continue to see the company further integrate evidence-based clinical management standards in its technology, and expand its system capabilities. Details on our business system infrastructure will be posted on the website, including our organization coding controls, clinical auditing controls, billing controls, compliance controls, patient recertification controls and clinical auditing state survey trends.
We highly encourage our investors to review this infrastructure information because these processes are engrained in all levels of the organization and are key to understanding our business systems and control environment.
Once investors review the information posted today, they will see clinical trends from past to present that reflect the following clinical dynamics: an increasing trend of sicker patients entering the Company each year; a recurrent clinical auditing infrastructure that is proactive and aimed at reducing clinical risk; a point of care technology rolled out in 2007 that enhanced many clinical documentation, chronic care management capacities and compliance control; an organization commitment to quality with defined trends of improving quality scores; a reduction in local state survey citations from 2006 to present; an increase in deficiency-free perfect surveys from 2006 to present.
Using CMS's survey deficiency percentages as a benchmark, Amedisys's better-than-national citation percentages in 14 of the top 15 categories. Using CMS's publicly reported outcomes as a benchmark, Amedisys is at or better than its footprint in 12 out of 12 categories, at the national level, at or better in 10 out of 12. Just the beginning of the PPS environment in 2000, Amedisys is focused on caring for the complex patient.
Our focus on delivering evidence-based care to the sickest senior will not change because the demographic trends support this is where our clinical emphasis should be. Clinically we have a commitment to improving the quality of care and the outcomes of our elderly sick seniors and enhancing our evidence-based programs and chronic care management clinical systems to best serve the elderly patient who wants to remain at home for their care during their latter years. I will now turn the call over to Jeffrey.
Jeffrey Jeter
Thanks, Alice Ann. As Bill stated earlier, I will address the compliance functions that occur at Amedisys each and every day. I also recommend that you review the information contained in our investor materials with respect to our compliance program, which you can find on our website. Our compliance program features a multi-layer and recurrent approach, designed to insure the propriety of both our services and our billings.
At the outset, it must be noted that the Amedisys compliance program is based on the OIG's Model Compliance Guidance for Home Health and Hospice. As Chief Compliance Officer, I am the person responsible for oversight with the compliance functions of Amedisys. I came to Amedisys seven years ago after serving as an assistant attorney general with the Louisiana Department of Justice, where I prosecuted healthcare fraud and nursing home abuse.
It should be noted, however, that I am not the sole person responsible for compliance at Amedisys. We have an experienced team of people, not only within the compliance department but across numerous company divisions, who all play a vital role in the overall compliance efforts of our company.
We also stress compliance as a responsibility off all Amedisys employees, such that compliance is part and parcel of everything we do. Moreover, we have leveraged technology and automation to support the compliance functions of the company with the same mindset of efficiency and effectiveness that we have deployed throughout the other segments of the organization.
First and foremost, it is well established that one of the strongest compliance protections that an organization can have is the commitment to comply its training and education. Conducting adequate training often prevents problems from ever materializing. It is my belief that the vast majority of people want to do the right thing. However, as so often is the case, the regulations surrounding our business are complex and can be confusing. The goal of training is to raise awareness and educate staff on the pitfall and risks of our business so as to avoid problems in the first place.
Therefore as the government clearly recognizes, training and education of staff is paramount, and Amedisys has implemented a targeted and tiered training strategy to train all of our staff about the seminal importance of compliance in our day-to-day jobs. Every employee in the scene is required to complete general compliance training upon hire and then annually thereafter.
In addition, any staff involved in billing and coding functions, both from a corporate level as well as a local agency level, must participate in separate billing compliance training. We also require that all of our billing personnel complete annual competency testing and training. Similarly, our sales force is required to receive special compliance training concerning how they market and the constraints and legal limitations placed on their marketing activities by the federal anti-kickback law and the Stark law.
Compliance experts will also tell you that the time at the top is essential in establishing a resounding culture of compliance. Amedisys embraces this synomate. Every other month we host a program called New Employee Orientation, where we bring in newly hired employees to a regional location where the entire meeting is devoted to the Company's core principles and values.
During this orientation, Bill Borne, Larry Graham and I each speak on individual responsibility and accountability, as well as the role that each employee plays in both our success and our compliance. Beyond all the training that Amedisys requires, we also monitor our compliance and the propriety of our day-to-day activities through a number of technological and auditing controls.
I find it most useful when describing these ongoing compliance controls to stratify them in terms of their local, regional and corporate scope. Consequently I will briefly detail each strata of compliance control. Our compliance controls actually begin on the local level with our standardized clinical tracks, which are used in the delivery of care to our patients.
We employ these guidelines in an effort to ensure the consistency of care across all of our markets. Therefore our diabetic patient in San Diego, California receives the same high quality of care and the same type of services that are received by our diabetic patient in Charleston, South Carolina. These clinical tracks are rooted in best practices and demonstrate clearly how we can consistently meet and exceed national quality benchmarks for outcomes across all of our many markets.
Additionally, our Point of Care system represents a fundamental compliance control and is the sort of technology that helps us improve not only what we do in terms of clinical care, but how we do it in terms of our adherence to Medicare rules and regulations.
Through our Point of Care system, we are better able to ensure the accuracy and completeness of our documentation and when used in concert with our clinical management dashboards, allows for real-time assessment and review of our coding and documentation. One simply cannot overemphasize the importance of this technology as a means for strengthening our compliance with the law.
Based on my experience as a healthcare fraud prosecutor, I've found that a provider's documentation is often a make-or-break aspect to their overall compliance. A home health agency can be delivering the best and most appropriate care in the world, but if the documentation information the services being provided is not reflective of the billings being submitted, then the agency is placing itself at substantial risk. Amedisys's Point of Care system elevates the quality of our documentation, which goes hand in hand with better compliance.
Amedisys saw first-hand the importance of improved documentation back in 2003 in a matter that we saw purported to the OIG related to our agency in Monroe, Louisiana. As our investors will recall, we disclosed the settlement of this issue several years ago. Ultimately, several thousand dollars in overpayments because of insufficient documentation led to a $1.1 million settlement.
This experience underscored for us the inherent compliance value of an improved system of documentation which was ultimately manifested as our Point of Care system. The Point of Care used by Amedisys clinicians now helps to avoid inadvertent or erroneous omissions of information that may subsequently affect clinical quality, impact reimbursement or create survey deficiencies and legal liability.
A fundamental compliance control of our Point of Care system is the system requirement that clinicians fully complete their documentation prior to submission and where their responses are inconsistent with one another or are potentially erroneous, we have the means to identify and catch problems before these mushroom into major issues.
While we still require the actual remediation of these problems be undertaken, only with the approval of the clinician actually seeing the patient, our technology affords us the ability to scrutinize for gaps and potential problems and thereby reduce the occurrence of porous or errant documentation.
Our Point of Care system also requires the visiting staff obtain patient signatures during their visits, which are both time and date stamped. This process significantly inhibits staff from falsifying visits because we were able to note inconsistent signatures and we can identify discrepancies in visit times suggestive of a staff member not making scheduled visits.
It is also not coincidental that as Amedisys has moved our agencies to the Point of Care system, we have noted a marked increase in the number of deficiency-free state surveys that we undergo. This is a direct benefit of the better documentation afforded by our Point of Care system.
From a technology standpoint, we utilize a series of data scrubs and edits in an effort to assure that our Oasis information makes sense from both an accuracy and consistency standpoint. For example, if a clinician answers in one portion of an assessment that a patient cannot safely ambulate but in another portion of the assessment the clinician indicates that the patient needs no assistance to get in and out of the bathtub, then these answers are inconsistent with one another and one of the responses may not be accurate.
Our systems are programmed to catch these types of inconsistencies such that potential problems can be resolved on the front end. We also employ other types of technology, such as 3M coding software, to further support the propriety of our billing practices.
At a regional level, Amedisys conducts unannounced compliance and billing audits led by our regional staff to monitor compliance, review agencies deemed to have elevated clinical risk and resolve any problems that are identified. We also require their operational leadership participate in the audit process in order to actively engage those responsible for shaping and implementing corrective action plans and getting the necessary buy-ins to resolve any issues identified.
Lastly, at a corporate level, we conduct quarterly compliance oversight audits, which warrant additional discussion. This compliance oversight audit program is conducted by clinical auditors reporting to me. Let me start by saying that we have seen no trend of fraud or abuse, nor a pervasive pattern of improper activity in our audit findings since the inception of our compliance oversight audit processes in 2005.
It would be fair to say, however, that we routinely identify problems in the course of our audits, as one might expect as part of any series quality assurance process. However, these are generally found to be problems where agencies are not following the prescribed processes, or staff are not consistently documenting their work or there are educational deficiencies.
Let me briefly describe for you the compliance oversight audits that Amedisys conducts each quarter. Beginning in early 2005, we identified three key areas to which any home health care agency may be susceptible because of the inherent revenue impact of each. These are: First, excessive therapy where a high number of therapy visits are conducted which result in increased reimbursement and may be potentially suggestive of fabricated or unnecessary visits just to increase reimbursement.
Second, LUPA exaggeration, which is where an agency has an exceptionally low number of low utilization payment adjustments, otherwise known as LUPAs, which may be suggestive of potentially fabricated or unnecessary visits so as to avoid having reimbursement automatically reduced by the government. And third, upcoded case mixes, where an agency has a higher-than-average case mix weight that may be suggestive of possible manipulation of coding occasioned by scoring patients as sicker than they actually are.
These are big bangs for the buck kinds of risk areas for fraud. Since 2005, one of the primary functions that my compliance auditors have performed is the proactive review of agencies that perform well in each of these areas. We have focused on those Amedisys agencies performing very well with respect to having a higher percentage of high-profitability therapy episodes and having a lower incidence of low reimbursement LUPAs and in having overall higher reimbursement case mix scores.
Now it should be noted that just because an agency has a high percentage of high profitability therapy or a low occurrence of LUPAs or a higher case mix does not necessarily mean that there is something improper or untoward occurring. In each instance there may well be wholly-appropriate justifications for each risk category. However, because of the revenue implications of each, there exists a potential for improprieties, which we feel warrants a compliance review.
Since 2005 my staff has audited those agencies that stand out based on these high-revenue audit focus areas. In these audits, my compliance staff selects the agencies to be reviewed, conducts the clinical chart reviews and billing reviews, develops corrective action plans where problems are identified, conducts remedial training and education where necessary, and ensures that any billing adjustments are processed if warranted.
They are also responsible for monitoring the ongoing improvements that occur in those agencies. We are also continuously refining our audit processes and risk control. For example, this year we have developed a compliance risk score card that expands on the three compliance risk areas previously detailed. Under this compliance risk score card, we have identified some 43 individual risk measures, drawing on data points that are reflective of financial risks, operational risks, regulatory risks and environment risks.
For example, we still consider whether an agency has excessive therapy, exaggerated LUPAs and high case mix, and we also now take into account considerations such as high turnover, changes in agency leadership, in experienced agency leadership, startup or acquisition status, missed visits in surveyed efficiencies among many other risk factors.
All of these data points are weighted and scored and agencies are audited based on the score card results. Additionally, my compliance auditors are responsible for conducting audits related to complaints that are made on our company hotlines, as well as issues identified in exit interviews.
They also conduct special audits in my direction, which have included reviews of high-risk clinical events such as Coumadin administration, as well as other compliance risks, such as outriders and recertification patients.
Furthermore, I would be remiss not to point out that we also have annual Sarbanes-Oxley audits that are conducted by a separate department within the company as well as audits that are conducted by KPOG, who are independent auditors. Both of these groups look at our internal controls over financial reporting related to our billing compliance and revenue practices.
We also have a substantial internal audit department that conducts its own independent reviews of our processes and practices. In addition to our audit capabilities, Amedisys attempts to glean problems that may be festering by providing ample opportunities for staff to report their concerns. In so doing, we have implemented several avenues for fielding complaints from both current and former employees.
We use a confidential compliance hotline that is available 24 hours a day, seven days a week and permits employees to report problems directly to me and allows them to even remain anonymous if they so choose. This hotline also serves as our SOX whistle blower hotline. All calls come into our hotline, are reported to the company's board of directors on a quarterly basis. In addition, we maintain separate hotlines to report HIPAA violations as well as harassment issues.
We also provide every employee who leaves the company with an opportunity to complete an online exit survey which includes several specific questions about potential compliance concerns. When a former employee alleges compliance problems, my department conducts a special audit of that agency.
Moreover, earlier this year, we implemented a process in which we randomly select 30 active employees each month in my office confidentially to inquire about whether the employees have any ongoing compliance concerns that have not otherwise been reported through the compliance hotline. Any report of potential wrongdoing will be investigated and those agencies about whom complaints are voiced will be subject to a special complaint audit. However, to date, we have had no allegation of fraud identified in these survey calls.
Finally, Amedisys has long had strict enforcement policies for compliance violations. Our compliance plan articulates a zero tolerance policy for healthcare fraud and abuse. Therefore, if an employee is found to have engaged in fraud, we take disciplinary action. However, in the last few years, we have expanded our zero tolerance policy. Now, it is not only instances of wrongdoing that subject staff to zero tolerance. Rather, we also apply our zero tolerance policy where staff placed the company at risk by not following key processes, even if the failure to follow those processes has not resulted in an actual problem.
Back in 2006, we identified certain key compliance-related procedures that safeguard our billing practices. Given the importance of these controls, we regard the failure to scrupulously follow each is placing the company at greater risk.
For example, we have a series of system billing holds that will prevent a client from being billed if it has certain unresolved problems such as missing physician orders. If, in the course of an audit, we find that these controls were circumvented, then the staff member responsible for so doing is terminated. In fact, we have terminated several dozen employees for these kinds of zero tolerance violations over the past two years.
Therefore, in summation, Amedisys compliance program is driven by technology with an emphasis on training, documentation, and risk-based auditing. I hope this gives our investors a good flavor of the compliance program in practice at Amedisys. And with that, I would like to turn the call back over to Bill.
Dale Redman
Thank you, Jeffrey and Alice Ann. I hope the additional information provided today brings a clear understanding about pinnacle and compliance processes. At this time, we'll open up the call to your questions. Because of the extra time we have taken today, we ask that you please limit yourself to two questions. We may not be able to answer everyone's call today. If your question was not answered, please contact our Investor Relation department and they will be able to answer your questions. Ryan, please open the line to questions.
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Fund Letters
