Description
LHC Group, Inc. 10% Owner Management, L Coliseum Capital bought 31,200 shares on 7-25-2012 at $ 16.87
BUSINESS OVERVIEW
Overview
We provide post-acute health care services to patients through our home nursing agencies, hospices and long-term acute care hospitals (“LTACHs”). Through our wholly and majority owned subsidiaries, equity joint ventures and controlled affiliates, we currently operate in Alabama, Arkansas, Florida, Georgia, Idaho, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, West Virginia and Washington. We operate in two segments: home-based services and facility-based services. As of December 31, 2011, we owned and operated 290 home-based service locations, with 247 home nursing agency locations, 32 hospices, three specialty agencies and four private duty agencies. As of December 31, 2011, we also managed the operations of four home nursing agencies in which we do not have an ownership interest. Our facility-based services included six long-term acute care hospitals with nine locations, a pharmacy, and a family health center.
We provide home-based post-acute health care services through our home nursing agencies and hospices. Our home nursing locations offer a wide range of services, including skilled nursing, medically-oriented social services and physical, occupational and speech therapy. The nurses, home health aides and therapists in our home nursing agencies work closely with patients and their families to design and implement individualized treatments in accordance with a physician-prescribed plan of care. Our hospices provide end-of-life care to patients with terminal illnesses through interdisciplinary teams of physicians, nurses, home health aides, counselors and volunteers. Of the 290 home-based services locations, 151 are wholly-owned by us, 125 are majority-owned or controlled by us through joint ventures, 10 are operated through license lease arrangements, and we manage the operations of four home nursing agencies in which we have no ownership interest.
Our LTACH locations provide services primarily to patients with complex medical conditions who have transitioned out of a hospital intensive care unit but whose conditions remain too severe for treatment in a non-acute setting. As of December 31, 2011, our hospitals had 220 licensed beds. Of our 11 facility-based services locations, six are wholly-owned by us and five are majority-owned or controlled by us through joint ventures.
Business Strategy
Our objective is to become the leading provider of post-acute services to Medicare beneficiaries in the United States. To achieve this objective, we intend to:
Drive internal growth in existing markets. We intend to drive internal growth in our current markets by increasing the number of health care providers in each market from whom we receive referrals and by expanding the breadth of our services. We intend to achieve this growth by: (1) continuing to educate health care providers about the benefits of our services; (2) reinforcing the position of our agencies and facilities as community assets; (3) maintaining our emphasis on high-quality medical care for our patients; (4) indentifying related products and services needed by our patients and their communities; and (5) providing a superior work environment for our employees.
Achieve margin improvement through the active management of costs. The majority of our net service revenue is generated under Medicare prospective payment systems (“PPS”) through which we are paid pre-determined rates based upon the clinical condition and severity of the patients in our care. Because our profitability in a fixed payment system depends upon our ability to manage the costs of providing care, we continue to pursue initiatives to improve our margins and net income.
Expand into new markets. We intend to continue expanding into new markets by developing de novo locations and by acquiring existing Medicare-certified home nursing agencies in attractive markets throughout the United States. We will continue our unique strategy of partnering with non-profit hospitals in home health services, as these ventures provide significant return on investment. We also plan to acquire larger freestanding agencies that can serve as growth platforms in markets we do not currently serve in order to support our growth into new states.
Pursue strategic acquisitions and develop joint ventures. We will continue to identify and evaluate opportunities for strategic acquisitions in new and existing markets that will enhance our market position, increase our referral base and expand the breadth of services we offer. We endeavor to joint venture with hospitals to provide post-acute services, such as home health and hospice services in communities served by hospitals already operating Medicare-certified home health agencies.
Services
We provide post-acute care services in the United States by providing quality cost-effective health care services to patients within the comfort and privacy of their home or place of residence. Our services can be broadly classified into two principal categories: (1) home-based services offered through our home nursing agencies and hospices; and (2) facility-based services offered through our long-term acute care hospitals.
Home-Based Services
Home Nursing. Our registered and licensed practical nurses provide a variety of medically necessary services to homebound patients who are suffering from acute or chronic illness, recovering from injury or surgery, or who otherwise require care, teaching or monitoring. These services include:
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wound care and dressing changes;
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cardiac rehabilitation;
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infusion therapy;
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pain management;
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pharmaceutical administration;
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skilled observation and assessment; and
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patient education.
We have also designed guidelines to treat chronic diseases and conditions, including diabetes, hypertension, arthritis, Alzheimer’s disease, low vision, spinal stenosis, Parkinson’s disease, osteoporosis, complex wound care and chronic pain. Our home health aides provide assistance with daily living activities such as light housekeeping, simple meal preparation, medication management, bathing and walking. Through our medical social workers, we counsel patients and their families with regard to financial, personal and social concerns that arise from a patient’s health-related problems. We provide skilled nursing, ventilator and tracheotomy services, extended care specialties, medication administration and management, and patient and family assistance and education. We also provide management services to third-party home nursing agencies, often as an interim solution until proper state and regulatory approvals for an acquisition can be obtained.
Our physical, occupational and speech therapists provide therapy services to patients in their home. Our therapists coordinate multi-disciplinary treatment plans with physicians, nurses and social workers to restore basic mobility skills such as getting out of bed and walking safely with crutches or a walker. As part of the treatment and rehabilitation process, a therapist will stretch and strengthen muscles, test balance and coordination abilities and teach home exercise programs. Our therapists assist patients and their families with improving and maintaining a patient’s ability to perform functional activities of daily living, such as the ability to dress, cook, clean and manage other activities safely in the home environment. Our speech and language therapists provide corrective and rehabilitative treatment to patients who suffer from physical or cognitive deficits or disorders that create difficulty with verbal communication or swallowing.
All of our home nursing agencies offer 24-hour personal emergency response and support services through Philips Lifeline (“Lifeline”) for qualified patients who require close medical monitoring but who want to maintain an independent lifestyle. These services consist principally of a communicator that connects to the telephone line in the subscriber’s home and a personal help button that is worn or carried by the individual subscriber which, when activated, initiates a telephone call from the subscriber’s communicator to Lifeline’s central monitoring facilities. Lifeline’s trained personnel identify the nature and extent of the subscriber’s particular need and notify the subscriber’s family members, neighbors and/or emergency personnel, as needed. We believe our use of the Lifeline system increases patient satisfaction and loyalty by providing our patients a point of contact between scheduled nursing visits. As a result, we provide a more complete regimen of care management than our competitors in the markets in which we operate by offering this service to qualified patients as part of their home health plan of care.
Hospice. Our Medicare-certified hospice operations provide a full range of hospice services designed to meet the individual physical, spiritual and psychosocial needs of terminally ill patients and their families. Our hospice services are primarily provided in a patient’s home but can also be provided in a nursing home, assisted living facility or hospital. Key services provided include pain and symptom management accompanied by palliative medication, emotional and spiritual support, spiritual counseling and family bereavement counseling, inpatient and respite care, homemaker services, dietary counseling and social worker visits for up to 13 months after a patient’s death.
Facility-Based Services
Long-term Acute Care Hospitals. Our LTACHs treat patients with severe medical conditions who require a high-level of care and frequent monitoring by physicians and other clinical personnel. Patients who receive our services in an LTACH are too medically unstable to be treated in a non-acute setting. Examples of these medical conditions include respiratory failure, neuromuscular disorders, cardiac disorders, non-healing wounds, renal disorders, cancer, head and neck injuries and mental disorders. We also treat patients diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living. As part of our facility-based services, we operate an institutional pharmacy, which focuses on providing a full array of services to our long-term acute care hospitals.
Operations
Financial information relating to the home- and facility-based operating segments of our business including their contributions to our total net service revenue, operating income and total assets for each of the three years in the period ended December 31, 2011, 2010 and 2009, respectively, is found in Note 11 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Home-Based Services
Our home nursing agencies are operated in one division that is separated into five geographical regions and further separated into individual operating areas. Each agency is staffed with experienced clinical home health and administrative professionals who provide a wide range of patient care services. Each of our home nursing agencies is licensed and certified by the state and federal governments, and 252 of our 290 agencies are accredited by the Joint Commission, a nationwide commission that establishes standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of hospitals. Those not yet accredited are working towards achieving this accreditation, a process which can take up to six months. As we acquire companies, we apply for accreditation 12 to 18 months after acquisition.
Our home nursing agencies use our Service Value Point system, a proprietary clinical resource allocation model and cost management system. The system is a quantitative tool that assigns a target level of resource units to a group of patients based upon their initial assessment and estimated skilled nursing and therapy needs. The Service Value Point system allows the Director of Nursing or Branch Manager to allocate adequate resources throughout the group of patients assigned to his or her care, rather than focusing on the profitability of an individual patient.
Patient care is handled at the home nursing agency level. Functions that are centralized into the home office include payroll, accounting, financial reporting, billing, collections, regulatory and legal compliance, risk management, pharmacy, information technology and general clinical oversight accomplished by periodic on-site surveys.
Facility-Based Services
Our long term acute care hospitals are operated in one division within one geographic region. Our facility-based services follow a clinical approach under which each patient is discussed in weekly, multidisciplinary team meetings. In these meetings, patient progress is assessed, compared to goals and future goals are set. We believe that this model results in higher quality care, predictable discharge patterns and the avoidance of unnecessary delays.
All coding, medical records, case management, utilization review and medical staff credentialing are provided at the hospital level. Centralized functions that are provided by the home office include payroll, accounting, financial reporting, billing, collections, regulatory and legal compliance, risk management, pharmacy, information technology and general clinical oversight accomplished by periodic on-site surveys.
Joint Ventures
As of December 31, 2011, we had 70 equity joint ventures including 62 with hospitals, five with physicians, and three with other parties. We also operate four agency license leasing agreements.
Equity Joint Ventures
A majority of our equity joint ventures are structured as limited liability companies in which we own a majority equity interest and our partners own a minority equity interest. At the time of formation, we and our partners each contribute capital to the equity joint venture in the form of cash or property. We believe that the amount contributed by each party to the equity joint venture represents their pro rata portion of the fair market value of the equity joint venture. None of our partners are required to make or influence referrals to our equity joint ventures. In fact, each of our hospital joint venture partners must follow the same Medicare discharge planning regulations, which, among other things, requires them to offer each Medicare patient a list of available Medicare-certified home nursing agency options and to allow the patient to choose his or her own provider.
We serve as the manager for our equity joint ventures and oversee their day-to-day operations. From a governance perspective, our equity joint ventures are either manager-managed or board managed. In our manager-managed joint ventures, we are designated as the manager, and, in our board managed joint ventures, we hold a majority of the votes required to take action. We possess a majority of the total votes available to be cast by the members of the management committee. However, in three of these joint ventures where we have partnered with not-for-profit hospitals, the hospital controls a majority of the total management committee votes. In such instances we possess the right to withdraw from the equity joint venture at any time upon notice to our partner in exchange for the receipt of a payment in an amount calculated in accordance with a predetermined formula. The members of our equity joint ventures participate in profits and losses in proportion to their equity interests. Distributions from our equity joint ventures are made pro-rata based on percentage ownership interests and are not based on referrals made to the equity joint venture by any of the members.
The 70 equity joint ventures individually contribute between 0.01% and 4.23% of our consolidated net service revenue with only one of the equity joint ventures accounting for greater than 4% of our total net service revenue for the 12 months ended December 31, 2011. Mississippi HomeCare of Jackson, LLC, in which we have a 66.67% ownership interest, contributed 4.23% to our consolidated net service revenue for the year ended December 31, 2011.
Management Services Agreements
As of December 31, 2011, we have three management services agreements under which we manage the operations of home nursing agencies. We currently have no ownership interest in the agencies subject to these management services agreements. As described in the agreements, we provide billing, management and other consulting services suited to and designed for the efficient operation of the applicable home nursing agency. We are responsible for the costs associated with the locations and personnel required for the provision of services. We are compensated based on a percentage of cash collections and reimbursed for operating expenses for one agreement and on a percentage of operating net income for the remaining two agreements. The term of these arrangements is typically five years, with an option to renew for an additional five-year term. All management services agreements will automatically renew annually unless either parties give written notice of termination.
We record management services revenue as services are provided in accordance with the various management services agreements.
Competition
The home health care market is highly fragmented. According to MedPac, there were approximately 11,400 Medicare-certified home nursing agencies in the United States in 2010. In 2009 MedPac estimated that approximately 32% of Medicare certified home health agencies were hospital-based or not-for-profit, freestanding agencies and 19% of home nursing agencies are located in rural markets. We believe we are well positioned to build and maintain long-term relationships with local hospitals, physicians and other health care providers and to become the highest quality post-acute provider in our markets. In our experience, because most rural areas have the population size to support only one or two general acute care hospitals, the local hospital often plays a significant role in rural market health care delivery systems. Rural patients who require home nursing frequently receive care from a small home care agency or an agency that, while owned and run by the hospital, is not an area of focus for that hospital. Similarly, patients in these markets who require services typically offered by long-term acute care hospitals are more likely to remain in the community hospital because it is often the only local facility equipped to deal with severe, complex medical conditions. By entering these markets through affiliations with local hospitals, competition for the services we provide is minimal.
As we expand into new markets, we may encounter public companies that have greater resources or greater access to capital. Competition in our markets comes primarily from small local and regional providers. These providers include facility- and hospital-based providers, visiting nurse associations and nurse registries. We are unaware of any competitor offering our breadth of services and focusing on the needs of rural markets.
We have also entered into various joint ventures with nonprofit hospitals for the ownership and management of home nursing agencies and LTACHs. We are unaware of any competitor with this type of ownership mix.
Although several public and private national and regional companies own or manage long-term acute care hospitals, they generally do not operate in the rural markets that we serve. Generally, the competition in our
markets comes from local health care providers. We believe our principal competitive advantages over these local providers are our diverse service offerings, our collaborative approach to working with health care providers, our focus on rural markets and our patient-oriented operating model.
Quality Control
In March 2008, we established the LHC Group Quality Council (“The Council”). The Council is responsible for formulating quality of care indicators, identifying performance improvement priorities, and facilitating best-practices for quality care. As part of this council, we adopted the Plan, Do, Check, Act methodology. We also set forth a quality platform for home care that reviews the following:
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performance improvement audits;
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Joint Commission accreditation;
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state and regulatory surveys;
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Home Health Compare scores; and
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patient perception of care.
The Council also has the responsibility to ensure that the infrastructure of the quality initiatives throughout the Company is appropriate, to oversee and evaluate the effectiveness of the quality plans and initiatives and to recommend appropriate quality and performance improvement initiatives.
In 2009, we established the Clinical Quality Committee of the Board of Directors (“The Committee”). The Committee is responsible for advising the Company’s clinical leadership, monitoring the performance of our locations based on internal and external benchmarks, overseeing and evaluating the effectiveness of the performance improvement and quality plans, facilitating best-practices based on internal and external comparisons and fostering enhanced awareness of clinical performance by the Board of Directors.
As part of our ongoing quality control, internal auditing and monitoring programs, we conduct internal regulatory audits and mock surveys at each of our agencies and facilities at least once a year. If an agency or facility does not achieve a satisfactory rating, we require that it prepare and implement a plan of correction. We then follow-up to verify that all deficiencies identified in the initial audit and survey have been corrected.
CEO BACKGROUND
Monica F. Azare has served as a director since November 2007. Ms. Azare is currently Vice President Deputy General Counsel, Video and has served as Senior Vice President of Corporate Communications for Verizon Communications since 2008. Prior to this position, Ms. Azare served as Senior Vice President-Public Policy and Government Affairs for Verizon Communications from 2006 to 2008 and before that she served as Executive Director and Senior Counsel of Federal Affairs for Verizon Wireless from 2000 to 2006. Ms. Azare’s distinguished career also includes service as Vice President, Federal Affairs for Insight Communication in New York and Chief Counsel to House Energy and Commerce Chairman Billy Tauzin.
Ms. Azare is a member of the Federal Communications Bar Association, Louisiana State Bar Association and the Corporate Counsel Women of Color, and she was selected as a 2006-2007 David Rockefeller Fellow. She currently serves on several boards of directors, including the New York City Partnership Foundation and the Louisiana State University College Advisory Board. Ms. Azare is also a member of the Executive Leadership Council. A Louisiana native, Ms. Azare received a Bachelor of Arts degree from Louisiana State University and a Juris Doctorate from the Southern University Law Center. We believe that Ms. Azare’s extensive experience in governmental affairs, combined with her leadership role with Verizon Communications, provides the board with significant value in overseeing the company’s work with regards to legislative and regulatory matters as well as communication with shareholders, employees and other constituents.
Senator John B. Breaux has served as a director since February 2007. Senator Breaux serves as Senior Counsel at Patton Boggs LLP. Senator Breaux also currently serves as a director of CSX Corporation. Until his retirement from public service in 2005, Senator Breaux represented the State of Louisiana in the U.S. Senate for three consecutive terms beginning in 1987. Prior to his tenure as Senator, he represented the State of Louisiana in the U.S. House of Representatives from 1972 to 1987. Senator Breaux began his career in 1972 with his election as a Democrat to the Ninety-second Congress in a special election. At the age of 28, he was then the youngest member of the U.S. House of Representatives. Senator Breaux was re-elected to the seven succeeding Congresses and served until January 3, 1987, when he won election as a Democrat to the U.S. Senate. Senator Breaux was re-elected in both the 1992 and 1998 elections.
Senator Breaux held numerous leadership positions during his 14 years in the U.S. House of Representatives and 18-year tenure in the U.S. Senate, where he served on the House Public Works and Transportation Committee, the Senate Finance Committee, and the Senate Commerce Committee where he was recognized as a non-partisan consensus builder. Senator Breaux also served as Chair and ranking minority member of the Senate Committee on Aging. Senator Breaux founded the Centrist Coalition of Senate Democrats and Republicans and served as Chairman of the Democratic Leadership Council. We believe that Senator Breaux’s longstanding and distinguished experience in the U.S. House of Representatives and the Senate along with his experience and understanding of the capital markets, the healthcare industry and corporate governance provides the board with significant value in overseeing the company’s ongoing quality and reimbursement initiatives with Congress and the National Association of Homecare and Hospice as well as the board’s role in overseeing the company’s governance practices and capital raising activities.
Dan S. Wilford has served as a director since November 2005. Mr. Wilford served as the President and Chief Executive Officer of Memorial Herman Healthcare System, headquartered in Houston, Texas from 1984 until his retirement in 2002. Mr. Wilford also served as Chief Executive Officer of a community-based, not-for-profit, multi-hospital system in the greater Houston area. Prior to that, he was associated for ten years with Hillcrest Medical Center in Tulsa, Oklahoma and was President of North Mississippi Health Services in Tupelo, Mississippi. Mr. Wilford currently serves as a director for Healthcare Realty Trust and twelve not-for-profit organizations, most of which are related to the healthcare industry.
In March 2009, Mr. Wilford was inducted into Modern Healthcare’s Hall of Fame. We believe that Mr. Wilford’s extensive experience in healthcare operations and his extensive knowledge of the hospital industry provide significant value to the board’s ability to provide operational oversight of management and to assist the company in carrying out its hospital joint venture strategy. Further, Mr. Wilford’s experience on other publicly traded boards provides us with valuable insight on corporate governance matters.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We provide post-acute health care services primarily to Medicare beneficiaries throughout the United States, through our home nursing agencies, hospices and LTACHs. Our net service revenue increased $2.3 million to $633.9 million for the year ending December 31, 2011 from $631.6 million for the year ending December 31, 2010. During 2011, we acquired five home nursing agencies and eight hospice agencies. We also initiated the operations of five home health agencies. We currently operate 301 locations in the following 19 states: Alabama, Arkansas, Florida, Georgia, Idaho, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, West Virginia and Washington.
Segments
We operate in two segments for financial reporting purposes: home-based services and facility-based services. We derived 88.0%, 87.9% and 88.2% of our net service revenue during the years ended December 31, 2011, 2010 and 2009, respectively, from our home-based services segment and derived the balance of our net service revenue from our facility-based services segment.
Recent Developments
Home-based services
Home Nursing. In March 2010, the Patient Protection and Affordable Care Act was enacted and was amended shortly afterwards by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively referred to as the “Affordable Care Act”). The Affordable Care Act makes a number of changes to Medicare payment rates, including the reinstatement of the 3% home health rural add-on, which began on April 1, 2010 (expiring January 1, 2016). Other changes from the Affordable Care Act that began on or after January 1, 2011 are:
• a reduction in the market basket adjustment to be determined by the Centers for Medicare & Medicaid Services (“CMS”) for the calendar years 2011, 2012 and 2013 by 1%;
• a full productivity adjustment beginning in 2015; and
• rebasing of the base payment rate for Medicare beginning in 2014 and phasing in over a four year period – the amount of the rebasing is uncertain at this time.
On November 2, 2010, CMS issued the final rule covering payment rates for home health services in calendar year (“CY”) 2011. CMS set the base payment rate for Medicare home nursing at $2,192.07 per 60-day episode for CY 2011, a decrease of 5.2% from the CY 2010 base payment rate of $2,312.94. The decrease for CY 2011 includes the following adjustments to the base rate, as compared to the CY 2010 base rate, in accordance with the Affordable Care Act: (1) a reduction of 1% to the 2.1% inflation update increase to the market basket; (2) a 3.79% case-mix weight adjustment decrease; and (3) a shift of the outlier payment allowance beginning in 2011 that will result in a one-time 2.5% reduction to the base payment rate. These changes are effective for all episodes completed during 2011. Accordingly, all episodes in progress at December 31, 2010 were impacted.
The CMS final rule also finalized two provisions of the Affordable Care Act: (1) a face-to-face encounter requirement for home health and hospice; and (2) changes in the therapy assessment schedule. As a condition for Medicare payment, the Affordable Care Act mandates that prior to certifying a patient’s eligibility for home health services, the certifying physician must document that he or she, or a non-physician practitioner that meets the requirements of the rule, has had a face-to-face encounter with the patient that relates to the condition for which the patient receives home health services. The encounter must occur within 90 days prior to the start of care or 30 days after the start of care. Documentation regarding these encounters must be present on certifications. The face-to-face encounter requirement for home health providers was to become effective January 1, 2011. However, due to concerns that some providers may need additional time to establish operational protocols necessary to comply with these requirements, CMS delayed full enforcement of the requirements until April 1, 2011. Beginning on April 1, CMS expected home health agencies to have fully established such internal processes and have appropriate documentation of the required face-to-face encounters. See below for a description of the hospice face-to-face encounter requirements.
In addition to the face-to-face encounter requirements, the CMS final rule made important changes to therapy assessment requirements. A professional qualified therapist assessment must take place at least once every 30 days during a therapy patient’s course of treatment. For those eligible patients needing 13 or 19 therapy visits, a qualified therapist must perform the therapy service required, assess the patient, and measure and document effectiveness of the 13 th visit and the 19 th visit for all therapy disciplines caring for the patient. As with the face-to-face requirements, CMS delayed the effective date for all therapy provisions until April 1, 2011 to allow time for home health agencies to take necessary steps to comply.
On October 31, 2011, CMS issued the final rule covering payment rates for home health services in CY 2012. CMS set the base payment rate for Medicare home nursing at $2,138.52 per 60-day episode for CY 2012, a decrease of 2.4% from the CY 2011 base payment rate of $2,192.07. The decrease for CY 2012 includes the following adjustments to the base rate, as compared to the CY 2011 base rate, in accordance with the Affordable Care Act: a reduction of 1% to the 2.4% inflation update increase to the market basket; and a 3.79% case-mix weight adjustment decrease. These changes are effective for all episodes completed during 2012, including any episodes in progress at December 31, 2011.
The case-mix coding adjustment reduced home health (“HH”) PPS rates 3.79% for CY 2012 and an additional 1.32% reduction for CY 2013.
This rule also finalizes structural changes to the HH PPS by removing two hypertension codes from the case-mix system, lowering payments for high therapy episodes, and recalibrating the HH PPS case-mix weights to ensure that these changes result in the same amount of total aggregate payments.
Under current Medicare policy, a certifying physician or an allowed non-physician practitioner must see a patient prior to certifying a patient as eligible for the home health benefit. The rule also finalizes added flexibility to allow physicians who cared for the patient in an acute or post-acute facility to inform the certifying physician of their encounters with the patient in order to satisfy the requirement.
Non-Operating Income
Consolidated non-operating income for the year ended December 31, 2011 was $1.8 million compared to $805,000 in 2010. In both years, non-operating income was primarily due to the Medicare Home Health Pay for Performance program. A two year demonstration was done in 2008-2009 to initiate improvement in the quality and efficiency of care furnished to Medicare beneficiaries. Agencies were measured using seven home health quality measures. For each measure, the agencies that ranked by performance in the top 20% of their state, were eligible to receive a share in the Medicare savings generated in their region. We received $1.2 million and $437,000 in 2011 and 2010, respectively.
Interest Expense
Consolidated interest expense for the year ended December 31, 2011 was $1.0 million compared to $134,000 in 2010 and related to balances outstanding on our credit facility in each year.
Income Tax Expense
Consolidated income tax expense (benefit) for the year ended December 31, 2011 was $(1.9) million compared to $31.7 million in 2010. We recognized a tax benefit on our settlement with the United States of America, reduced by $3.4 million to recognize the uncertainty of deducting the full settlement.
Net income attributable to noncontrolling interest
Consolidated net income attributable to noncontrolling interest for the year ended December 31, 2011 was $9.6 million compared to $15.8 million in 2010. The overall decrease was due to the company purchasing the outstanding membership interest of four joint venture partners, a decrease in noncontrolling interest ownership in 2011 acquisitions and an overall decrease of operating results of the joint ventures themselves.
Cost of Service Revenue
Our cost of service revenue consists of expenses incurred by our clinical and clerical personnel in our agencies and facilities. Cost of service revenue for the year ended December 31, 2010 was $326.5 million compared to $267.8 million in 2009. Cost of service revenue represented approximately 51.7% and 50.6% of our net service revenue for the years ended December 31, 2010 and 2009, respectively.
Provision for Bad Debts
Provision for bad debts for the year ended December 31, 2010 was $7.6 million compared to $4.7 million for the year ended December 31, 2009. For the years ended December 31, 2010 and 2009, the provision for bad debts was approximately 1.2% and 0.9% of net service revenue, respectively.
In July 2007, we sold our critical access hospital. The recorded receivables were not sold in the transaction. Over the following twelve months, after the sale, certain payors, including Medicare and Medicaid, paid the claims to the buyer, who failed to remit those collections to us as called for under the terms of the sale agreement. We filed a lawsuit to recover those amounts paid to the buyer. Over the same period, we fully reserved those claims. In September 2010, we were successful in our lawsuit and recovered the amounts in full. As a result of the collection of the settlement, we recorded a $477,000 reduction to the provision for bad debts for the year ending December 31, 2010.
General and administrative expenses for the year ended December 31, 2010 were $201.8 million compared to $171.7 million in 2009. General and administrative expenses represented approximately 32.0% and 32.4% of our net service revenue for the years ended December 31, 2010 and 2009, respectively.
Gain (loss) on the sale of assets and entities and Non-operating income
For the year ended December 31, 2010, non-operating income was $805,000 compared to a non-operating loss of $261,000 for the year ended December 31, 2009. Non-operating income for the year ending December 31, 2010 relates to bonus payments to our various home health agencies from CMS for participating in its “Pay for Performance” Initiative.
The non-operating loss for the year ended December 31, 2009 primarily relates to a $542,000 impairment expense on two provider numbers which were purchased in 2008. In February 2009, CMS denied our change of ownership for the provider numbers because the agency locations had been moved outside of the allowed service area. We have since received new provider numbers for these home health agencies. However, the purchased provider numbers no longer have value and were written off in 2009.
Income Tax Expense
The effective tax rates for the years ended December 31, 2010 and December 31, 2009 were 39.4% and 37.8%, respectively, of income from continuing operations attributable to LHC Group, Inc..
The Work Opportunity Tax Credit expired during 2010 causing the tax rate to increase for the year ending December 31, 2010. The Company also realized a tax benefit during 2009 by utilizing the net operating loss, on one of the Company’s joint ventures, which had previously been fully reserved. The tax benefit caused the effective tax rate to be lower during 2009.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $15.8 million and $14.0 million for the years ended December 31, 2010 and 2009, respectively. Net income attributable to noncontrolling interest consistently represented 2.5% and 2.6% of net service revenue for the years ended December 31, 2010 and 2009, respectively.
Home-Based Services Segment Results of Operations
Net service revenue from home-based services for the year ended December 31, 2010 was $555.1 million compared to $466.7 million in 2009. Total admissions increased 21.4% to 95,688 during the year ended December 31, 2010, compared to 78,834 for the same period in 2009. Average home-based patient census for the year ended December 31, 2010 increased 12.9% to 32,997 patients as compared with 29,221 patients for the year ended December 31, 2009.
As detailed in the tables below, the increase in revenue in 2010 resulted from both organic growth and the growth from our acquisitions during the year ended December 31, 2010.
Liquidity and Capital Resources
Cash at December 31, 2011 was $256,000 compared to $288,000 at December 31, 2010. Based on our current plan of operations, including acquisitions, we believe this amount, when combined with expected cash flows from operations and amounts available under our revolving line of credit will be sufficient to fund our growth strategy and to meet our anticipated operating expenses, capital expenditures and debt service obligations for at least the next 12 months.
Liquidity
Our principal source of liquidity for our operating activities is the collection of our accounts receivable, most of which are collected from governmental and third-party commercial payors. Our reported cash flows from operating activities are impacted by various external and internal factors, including the following:
• Operating Results – Our net income has a significant impact on our operating cash flows. Any significant increase or decrease in our net income could have a material impact on our operating cash flows.
• Timing of Acquisitions – We use our operating cash flows to purchase home health agencies, hospice agencies and LTACHs. When the acquisitions occur at or near the end of a period, our cash outflows significantly increase.
• Timing of Payroll – Our employees are paid bi-weekly on Fridays; therefore, operating cash flows decline in reporting periods that end on a Friday. Conversely, for those reporting periods ending on a day other than Friday, our cash flows are higher because we have not yet paid our payroll.
• Medical Insurance Plan Funding – We are self-funded for medical insurance purposes. Any significant changes in the amount of insurance claims submitted could have a direct impact on our operating cash flows.
• Medical Supplies – A significant expense associated with our business is the cost of medical supplies. Any increase in the cost of medical supplies, or in the use of medical supplies by our patients, could have a material impact on our operating cash flows.
Cash used in investing activities is primarily for acquisitions of home nursing and hospice agencies, while cash used by financing activities relates to payments on outstanding debt agreements and payments to our noncontrolling interest partners.
Credit Facility
On September 28, 2011, the Company entered into a Second Amendment To Second Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment permits the Company to borrow up to $1.5 million pursuant to a real estate construction loan extended by American First Bank in Opelousas, Louisiana. The loan proceeds are to be used by Borrower to construct a building for Borrower’s business in Opelousas, Louisiana.
On September 28, 2011, the Company entered into a Third Amendment To Second Amended and Restated Credit Agreement (the “Third Amendment”). The Third Amendment permits the Company to fund the settlement with the United States of America entered into on September 27, 2011, and more fully described in Note 10. Commitments and Contingencies . The Third Amendment revises the Minimum Fixed Charge Coverage and Leverage Ratio covenant requirements in order to remove the settlement amount from the calculation of such covenants.
On December 8, 2011, the Company entered into a Fourth Amendment to Second Amended and Restated Credit Agreement (the “Fourth Amendment”). The Fourth Amendment permits the Company to increase the sublimit for letters of credit to $7.5 million and to include provisions for a prospective increase to the total line of credit commitment from $75 million to a maximum aggregate principal amount of up to $100 million.
The Company paid $578,000 of credit fees on the Credit Facility during 2011. At December 31, 2011 and 2010, outstanding letters of credit were $3.8 million and $2.9 million, respectively, which are issued as collateral on our workers’ compensation insurance.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements with unconsolidated entities, financial partnerships or entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies
The following discussions describe our critical accounting policies, which we believe require the most significant judgments and estimates used in the preparation of our consolidated financial statements.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reported period. Actual results could differ from those estimates. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances and we evaluate these estimates on an ongoing basis.
Principles of Consolidation
The consolidated financial statements include all subsidiaries and entities controlled by us. We define control as ownership of a majority of the voting interest of an entity. The consolidated financial statements include entities in which we have the obligation to absorb losses of the entities or the right to receive benefits from the entities and have voting control over the entities or both, as a result of ownership, contractual or other financial interests in the entities.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
OVERVIEW
We provide post-acute health care services by providing quality cost-effective health care services to our patients. As of March 31, 2012, we had 298 service providers in 19 states: Alabama, Arkansas, Georgia, Florida, Idaho, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington and West Virginia. Our services are classified into two segments: (1) home-based services offered through our home nursing agencies and hospices; and (2) facility-based services offered through our long-term acute care hospitals (“LTACHs”).
Recent Developments
Home-based services
Home Nursing. The base payment rate for Medicare home nursing in 2012 is $2,138.52 per 60-day episode.
In March 2010, the Patient Protection and Affordable Care Act was enacted and was amended shortly afterwards by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively referred to as the “Affordable Care Act”). The Affordable Care Act makes a number of changes to Medicare payment rates, including the reinstatement of the 3% home health rural add-on, which began on April 1, 2010 (expiring January 1, 2016). Other changes from the Affordable Care Act that began on or after January 1, 2011 are:
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a reduction in the market basket adjustment to be determined by The Centers for Medicare & Medicaid Services (“CMS”) for the calendar years 2011, 2012 and 2013 by 1%;
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a full productivity adjustment beginning in 2015; and
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rebasing of the base payment rate for Medicare beginning in 2014 and phasing in over a four year period — the amount of the rebasing is uncertain at this time.
On October 31, 2011, CMS issued the final rule covering payment rates for home health services in CY 2012. CMS set the base payment rate for Medicare home nursing at $2,138.52 per 60-day episode for CY 2012, a decrease of 2.4% from the CY 2011 base payment rate of $2,192.07. The decrease for CY 2012 includes the following adjustments to the base rate, as compared to the CY 2011 base rate, in accordance with the Affordable Care Act: a reduction of 1% to the 2.4% inflation update increase to the market basket; and a 3.79% case-mix weight adjustment decrease. These changes are effective for all episodes completed during 2012.
The case-mix coding adjustment reduced HH PPS rates 3.79 percent for CY 2012 and an additional 1.32 percent reduction for CY 2013.
This rule also finalizes structural changes to the HH PPS by removing two hypertension codes from the case-mix system, lowering payments for high therapy episodes, and recalibrating the HH PPS case-mix weights to ensure that these changes result in the same amount of total aggregate payments.
Under current Medicare policy, a certifying physician or an allowed non-physician practitioner must see a patient prior to certifying a patient as eligible for the home health benefit. The rule also finalizes added flexibility to allow physicians who cared for the patient in an acute or post-acute facility to inform the certifying physician of their encounters with the patient in order to satisfy the requirement.
Facility-based services.
LTACHs. On August 1, 2011, CMS released its rule for LTACH Medicare reimbursement for FY 2012, which spans from October 1, 2011 through September 30, 2012. In aggregate, payments for FY 2012 will increase 2.5% from FY 2011. Included in the final regulations is (1) a 2.9% market basket increase to the standard payment rate; (2) an aggregate reduction in the standard payment rate of 1.1% mandated by the Affordable Care Act; and (3) a reduction in the high cost outlier threshold per discharge from $18,785 in FY 2011 to $17,931 in FY 2012. The final rule would result in a 1.8% increase in average Medicare payments to LTACHs. Some of the other changes in the final rule include:
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Three quality measures to begin reporting October 1, 2012 and will affect payment in FY 2014.
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Clarification that the 25-day ALOS calculation includes both traditional Medicare Fee-For-Service and Medicare Advantage stays but this calculation will begin January 1, 2012.
On April 24, 2012 CMS released its proposed rule for LTACH Medicare reimbursement for FY 2013 which spans from October 1, 2012 through September 30, 2013. In aggregate, payments for FY 2013 will increase by 1.9 percent in under the proposed rule. CMS is proposing an annual update to LTACH payment rates of 2.1 percent. In addition to this update for inflation (adjusted as required by the statute), the 2.1 percent update to LTACH payment rates will be reduced by approximately 1.3 percent to 0.8 percent for the “one-time” budget neutrality adjustment for discharges on or after December 29, 2012.
In the Medicare, Medicaid, and SCHIP Extension Act of 2007, Congress imposed a three-year moratorium that prevented CMS from implementing certain payment policies affecting LTACHs. At the same time, the law imposed a moratorium on establishing new LTACHs and LTACH satellite facilities and on increasing the number of patient beds in existing LTACHs, unless an exception applied. The moratorium was extended for two years in the Affordable Care Act of 2010. The moratorium will, therefore, expire at various times in 2012.
In the FY 2013 rule, CMS is proposing:
* A one-year extension of the existing moratorium on the “25 percent threshold” policy, pending results of an on-going research initiative to re-define the role of LTACHs in the Medicare program.
* To apply an approximate 1.3 percent reduction (first year of a proposed three-year phase-in) for a one-time prospective budget neutrality adjustment. The proposed reduction would not apply to discharges occurring on or before December 28, 2012, because the law prohibits its application before that date. The budget neutrality adjustment reduces the update from 2.1 percent to 0.8 percent for discharges on or after December 29, 2012.
* To reduce Medicare payments for very short stay cases in LTACHs to the IPPS comparable per diem amount payment option for discharges occurring on or after December 29, 2012. The law prohibits application of this policy prior to that date.
The legislative moratorium on new LTACHs and satellite facilities will expire at the end of 2012.
Accounts Receivable and Allowance for Uncollectible Accounts
At March 31, 2012, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 11.1%, or $11.5 million, compared to 10.5% or $10.7 million at December 31, 2011. Days sales outstanding as of March 31, 2012 and December 31, 2011 were each 53 days. Our calculation of days sales outstanding is derived by dividing our ending net patient accounts receivable (i.e., net of estimated revenue adjustments and allowance for doubtful accounts) at March 31, 2012 and December 31, 2011 by our average daily net patient revenues for the three month periods ended March 31, 2012 and December 31, 2011, respectively.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies
For a discussion of critical accounting policies, see Item 1, “Notes to Condensed Consolidated Financial Statements — Note 2 — Significant Accounting Policies” of this Form 10-Q.
Revenue Recognition
We report net service revenue at the estimated net realizable amount due from Medicare, Medicaid, commercial insurance, managed care payors, patients and others for services rendered.
Medicare
Home-Based Services
Home Nursing Services . We are reimbursed by Medicare for delivering care over a 60-day period referred to as an episode. We recognize revenue based on the number of days elapsed during an episode of care within the appropriate reporting period.
A portion of the estimated Medicare prospective payment system reimbursement from each submitted home nursing episode is received in the form of a request for anticipated payment (“RAP”). We submit a RAP for 60% of the estimated reimbursement for the initial episode at the start of care. The full amount of the episode is billed after the episode has been completed. Final payments from Medicare may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required in the population base. We estimate all potential adjustments to an episode based on the best information available as the services are provided and prior to recognizing revenue or presenting the final bill. Therefore, historically, we have recorded little or no adjustments at the time payment is received. Although our estimates are based on historical experience using the best information available at the time we provide service, final payments could differ from our estimates.
Hospice Services. We are paid by Medicare under a per diem payment system. We receive one of four predetermined daily or hourly rates based upon the level of care we furnished. We record net service revenue less provision for bad debts from hospice services based on the daily or hourly rate and recognize revenue as these hospice services are provided.
Hospice payments are also subject to an inpatient cap and an overall payment cap. The inpatient cap relates to individual programs receiving more than 20% of its total Medicare reimbursement from inpatient care services. The overall payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” which is calculated by multiplying the number of beneficiaries receiving services during the period by a statutory amount that is indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. We monitor our limits on a provider-by-provider basis. While historically we have not exceeded these caps, our revenue could be affected if we exceed the cap limits in the future.
Facility-Based Services
Long-Term Acute Care Services. We are reimbursed by Medicare for services provided at our LTACHs based on a predetermined fixed amount intended to reflect the average cost of treating a Medicare patient. The actual amount reimbursed can be adjusted based on length of stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted. Similar to the home health Medicare reimbursement, we estimate the adjustment based on a historical average and record revenue considering such adjustment. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Revenue is recognized for our LTACHs as services are provided. Although our estimates are based on historical experience using the best information available at the time we provide service, final payments could differ from our estimates.
Medicaid, managed care and other payors
Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as the services are provided based on this fee schedule. Managed care payors reimburse us in a manner similar to either Medicare or Medicaid. Accordingly, we recognize revenue from managed care payors in the same manner as we recognize revenue from Medicare or Medicaid.
Accounts Receivable and Allowances for Uncollectible Accounts
We report accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and primarily consist of amounts due from Medicare, other third-party payors, and patients. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value.
The collection of outstanding receivables is our primary source of cash collections and is critical to our operating performance. Because Medicare is our primary payor, the credit risk associated with receivables from other payors is limited. We believe the credit risk associated with our Medicare accounts, which represent 61.4% and 65.6% of our patient accounts receivable at March 31, 2012 and December 31, 2011, respectively, is limited due to (i) the historical collections from Medicare and (ii) the fact that Medicare is a U.S. government payor. We do not believe that there are any other significant concentrations of receivables from any particular payor that would subject it to any significant credit risk in the collection of accounts receivable.
The amount of the provision for bad debts is based upon our assessment of historical and expected net collections, business and economic conditions and trends in government reimbursement. Quarterly, we perform a detailed review of historical writeoffs and recoveries as well as recent collection trends. Uncollectible accounts are written off when we have exhausted collection efforts and concluded the account will not be collected.
CONF CALL
Eric Elliott
Welcome everyone to LHC Group’s 2008 fourth quarter and year end earnings call. In a moment, we’ll hear from Keith Myers, Chief Executive Officer of LHC Group; John Indest, President and Chief Operating Officer; Don Stelly, Senior Vice President of Operations; and Pete Roman, Senior Vice President and Chief Financial Officer.
Before that I’d like to remind everyone that statements included in this conference call may constitute forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, comments regarding our financial results for 2009 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update information provided on this call to reflect subsequent events.
Before I turn it over to Keith, I want to point out that in this call we have elected not review all the financial and operational statistics which we have included in a table in our earnings release.
Now I’m pleased to introduce the CEO of LHC Group, Keith Myers.
Keith G. Myers
Good morning, everyone. We are very happy this morning to present another very strong performance from the LHC Group family. Without question, 2008 was a great year for the company. Our management team and caregivers continue to prove that they are truly best of class. During 2008, we added 63 locations in 13 states through acquisitions with combined annual revenue of approximately $73 million. We also opened 20 de novo locations in 8 states during 2008. We ended 2008 with 250 locations in 17 states as compared to 172 locations in 11 states at the end of 2007. Also at the end of 2008 we had 206 home nursing agencies across 17 states serving 656 counties with a population of 45.3 million in which about 14% is over age 65. At the end of 2007 we had 144 home nursing agencies across 11 states.
We have also grown our hospice division; from 9 locations in 2007 to 19 locations at the end of 2008. Our continued ability to deliver a strong return on assets, return on capital, and return on equity was recognized in 2008 when we were named #8 on Forbes 2008 List of Best Small Companies in America, the second year in a row that LHC Group made to top 10.
We saw great improvement in our DSOs in 2008. DSOs improved 22 days in 2008 as compared to 2007. This improvement is a credit to our hardworking staff and the continuing relationship with our consulting partner, Simione Consultants.
During 2008, we made great progress in preparing LHC Group for the future. We made significant investments in quality through our Joint Commission Accreditation strategy and enhancements to our performance improvement team. We also made a significant investment in our revenue cycle department which accounts for our improvements in DSOs.
Throughout the organization we also strengthened the quality and depth of our management team. However, despite our strong 2008 results, at LHC Group we’re always focused on our long-term goals and objectives. Therefore, in 2009 we intend to continue making significant investments in people and technology to become even more efficient and deliver even higher-quality outcomes to every patient we serve. We believe these investments in our future will allow us to provide the highest quality of care to our patients, adapt to the changing reimbursement environment, and continue providing the return on assets, capital, and equity that our shareholders have come to expect.
One of the tools we intend to leverage more in the future is point of care technology. We currently have 23 locations on point of care; in Maryland, Tennessee, and Virginia. These locations are generating financial results comparable to our other non point of care locations and are serving as good beta testing sites for our point of care valuation.
Compared to 5 years ago, when 30% to 40% of home health agencies and only about 5% of hospices utilized point of care technology, today 65% of home health agencies and 30% of hospices utilize point of care. Five years ago, point of care tools did not have predictive to disease management capabilities built in; today, they do. Today, 55% of all Americans already have broadband access at home, up 47% in 2007 according to the July Pew Internet and American Life Project report. The study also found that 38% of rural Americans have broadband at home, an increase of 23% from the previous year.
$7.2 billion of the $787 billion federal stimulus package is set aside to expand the reach of broadband to rural areas. This supports the increasing ability for real-time transfer of information from the field to the office and presents a more compelling quality and efficiency ROI.
I know that many of our shareholders are focused on the proposed budget outline that President Obama unveiled on February 26th. We know that in 2009 we will receive a 2.9% market basket adjustment which will be offset by a 2.75% case creep adjustment to the base rate; the result being that Medicare reimbursement rates in 2009 will be effectively over 2008. In 2010, we know the overall proposed cut in home health is $550 million. At this time the manner in which the $550 million savings will be achieved has not been fully explained by the administration. However, based on the information we know today, we believe we’re well prepared to adapt to the potential 2010 reimbursement changes.
In 2011 and beyond, the proposed cuts in home health reimbursement are more significant. Again, we do not have full details on how those cuts were calculated, but if the proposed budget follows the MedPAC recommendations, it would involve a rebasing of rates by CMS to reflect the average cost for providing care. According to the National Association for Home Care, if the proposal is adopted as is, over 60% of home health agencies in the country would have negative margins in 2011. I think we should all remember that this is just a budget proposal and if history tells us anything we expect there to be many changes in this budget proposal between now and 2011.
It is also worth reiterating that much of the proposed budget appears to be a recitation of this year’s MedPAC recommendations that have not been adopted or endorsed by Congress. Historically, we have seen positive modifications between the MedPAC proposal and what is ultimately adopted. MedPAC remains an advisory body in nature and its recommendations do not carry the force of law. Further, we believe that the home health industry has strong data to counter MedPAC’s inaccurate average margin calculation.
Something else to consider; it’s not clear in the broad outlines of the plan that we’re seeing how Medicaid would be affected. We do know that Medicaid today represents the largest single item in each state’s budget. On average, it accounts for $1 out of every $5 of state budget increasing to 25% or more in some states. Long-term care under Medicare constitutes one of our healthcare system’s greatest challenges. Despite the fact that all states in 2004 or earlier began a program to rebalance Medicaid moving patients from institution of care to community-based care, the burden is now untenable for states who rely on property tax revenues.
Were this proposal to pass in its current form, we believe that it would dramatically shift billions of dollars to state Medicaid programs and what would become an unfunded mandate, it would shift onto the backs of the state the crushing burden of 3.5 million of the sickest Americans suffering from a myriad of chronic diseases. It would be undermining the infrastructure to governance and members of Congress know we need more of rather than less of.
With all that said, as you are aware, this is not the first time that our industry has faced proposed reimbursement changes, and our company has a proven track record with regard to our ability to adapt to changes and reimbursement. First, we will continue to focus our efforts on operations, quality patient care, and internal growth during 2009 and 2010. Second, we will continue implementing and focusing on operational strategies that will build our foundation for the future and allow us to adapt to whatever changes are ultimately adopted.
Johnny and Don will discuss our 2009 operational strategies in a few minutes.
Finally, we will work with the President, Congress, other members of our industry, and the National Association for Home Health and Hospice to develop reimbursement changes that reflect the value and importance of home care, but at the same time reflect the need for this country to improve the quality and efficiency of our national health care system.
2007 data shows that the Medicare program paid $5765 per day for hospital stays, $544 per day for skilled nursing facility stays contrasted with an average cost of approximately $57 per day for home health services based on 2008 data. As over 78 million baby bloomers age, it’s critical that we find ways to lower the cost of accessing health care.
Before leaving this topic of the proposed budget, I wanted to read a quote to you from Senator Blanche Lincoln of Arkansas. This quote was made yesterday during a Senate Finance Committee hearing in which Peter Orszag, the Director of the Office of Management and Budget was answering questions about the proposed home health budget. Senator Lincoln said, “I’ve been a longtime supporter of home health care as an option for seniors. I think it’s cost effective and it’s patient preferred, and it’s been my understanding and certainly witnessing that because of home care more patients are getting rehabilitation services, they’re gaining independence, and they’re staying out of more costly institutional care. How has OMB assessed the impact of these cuts on access to home care especially in rural areas; states like mine that are predominantly rural? We’re getting estimates that 56% of home health agencies in my state will have a negative margin by 2010 and 73% have a negative margin by 2011 if the President’s proposed budget cuts go through. I understand the need to be physically responsible here and tightening our belts; we all have to do that, but is there someway we can ensure that these changes wouldn’t adversely affect patient access or that the policy won’t have the opposite of intended effects with higher cost to Medicare due to beneficiaries that are going to be moving to something more costly.”
I thought this quote was important for everyone to understand that our representatives in Washington understand the value of home care particularly in rural communities and understand that home care is part of the solution.
I received many questions during the past week about our acquisition strategy in light of the proposed reimbursement changes. We do not intend to in anyway discontinue our strategy of growth through appropriately priced acquisitions that yield a strong rate of return. In fact, if history repeats itself we expect for the proposed budget cuts to result in greater acquisition opportunities at lower prices. Obviously, our pricing of acquisitions must take into consideration the proposed 2010 cuts and the unpredictable reimbursement environment beyond 2011.
At this time, we’re in active negotiations with 10 acquisition candidates that have been approved at the senior management level. These 10 current opportunities include 13 existing locations in 7 states and approximately $36 million in annual revenue. With our $75 million unused line of credit, we’re well positioned to finance our acquisition strategy. In this environment, we believe our strong balance sheet is a huge asset for our company and we intend to maintain our strong balance sheet position during 2009 and beyond.
I’ll now turn it over to Pete for a more details review of our financial results.
Peter J. Roman
Our consolidated net service revenue for the December 2008 quarter was $111.5 million, an increase of $30.3 million or 37.3% from the fourth quarter of 2007, and was $383.3 million for the year ended December 31, 2008, an increase of $85.3 million or 28.6% compared with 2007. Net income for the December 2008 quarter was $10.5 million or $0.58 per diluted share. For the year, net income was $30.2 million or $1.69 per diluted share. Revenue for the home-based segment was $96.7 million for the December 2008 quarter, an increase of $28.9 million or 42.6% compared to the same quarter in 2007. For the year, revenue for the home-based segment was $326 million, an increase of $81.9 million or 33.6% as compared with 2007.
Revenue for the home-based segment for the December 2008 quarter consists of $81.1 million in organic revenue and $15.6 million in acquired revenue. For the year, revenue for the home-based segment consists of $289.2 million organic revenue and $36.8 million in acquired revenue.
Revenue for the facilities-based segment for the December 2008 quarter was $14.8 million, an increase of $1.4 million or 10.3% over the same quarter in 2007. For the year, revenue for the facility-based segment was $53.9 million, an increase of $3.3 million or 6.2% compared with 2007. The increase over the prior year in both the December quarter and for the full year is primarily due to an increase in patient days and higher acuity patients being treated in 2008.
Medicare revenue was 83.8% of consolidated net service revenue in the December 2008 quarter and 83.1% for the entire year.
During 2008 we reemphasized cost controls, efficiencies in our mature agencies, and closed monitoring of acquired companies and de novo locations. To do this, we increased the amount of time taken to review the operating results of every business we operate and reviewed them in a more comprehensive manner. The effect of these procedures is evidenced in the financial results. Consolidated gross margin increased 3.2% as a percent of net revenue in the December 2008 quarter over the same quarter 2007. For the year ended December 31, 2008, consolidated gross margin increased 1.9% compared to 2007.
Gross margin for the home-based segment increased 2.2% as a percent of net revenue in the December 2008 quarter over 2007 and increased 0.6% in all of 2008 as compared to all of 2007. The increase in the gross margins for both the quarter and the year is due primarily to a reduction in salaries and its applied expense and extensive revenue. In part, this is caused by the operation reviews I referred to above and in part to improved margins on revenue from acquisitions and de novo locations in 2008 compared to 2007.
For example, the gross margin in the December 2008 quarter was 4.1% higher than 2008 de novo locations and 4.9% higher for 2008 acquisitions than the gross margin contributions to the December 2007 quarter that was made by the 2007 de novo and 2007 acquisition locations.
Beginning in late 2007 and throughout 2008 we invested in our billing and collections process. The investment included additional people, training, and engaging Simione Consultants to manage the billing and collections operations, to assist in collecting older claims, and to help design a department to support a billion dollar company with 500 locations.
Throughout 2008, we added resources to the acquisition department including a senior vice president and increased our transition teams and care management teams as we continued to grow through acquisitions. Including this internal investment consolidated G&A expense decreased as a percent of net revenue for the December 2008 quarter as compared to December 2007 and only increased 20 basis points for the entire year of 2008 compared to 2007.
As a result of the investments in billing and collections and the development of that department, our day sales outstanding or DSO at December 31, 2008, was 51 days. This is down from 73 days at December 31, 2007, and down from 52 days at the end of the third quarter. DSO adjusted for about $600,000 in claims that cannot be billed until approval of the change in ownership is obtained is 50 days at December 31, 2008, compared to 63 days at December 31, 2007, and 49 days at the end of the third quarter.
Our continued strong collection on receivables has also resulted in lower bad debt expense. Consolidated bad dept expense is 1.2% of net revenue in the December 2008 quarter and was 3.1% for the year ended December 31, 2008. Both percentages are lower than the same period in 2007 and have been coming down each quarter during 2008. We expect bad debt expense to be between 2% and 3% of consolidated net revenue in 2009.
Our effective tax rate for the December 2008 quarter was 36.4% as compared to 34.8% in 2007, and 37.9% for the year ended December 31, 2008, as compared to 36.4% in 2007. The increase over last year’s rate relates primarily to the absence of the WOTC employment credits in the current year and increased state income taxes as a result of our growth and expansion into new states. The WOTC tax credits were extended in the fourth quarter of 2008 for businesses in the core Katrina zone, and we expect the tax rate to be 39% throughout 2009.
Cash provided by operations for 2008 was $84.6 million with $25.2 million provided in the December quarter. CapEx which is primarily expenditures on information technology for the year was $8.5 million and was $1.2 million in the December quarter.
During 2008, we acquired existing operations of 11 entities operating a total of 43 agencies and a majority ownership in 13 entities operating a total of 20 agencies. The total purchase price for these acquisitions was $62.6 million including $2 million of acquisition related costs. These investments were funded through operating cash flow and at December 31, 2008, we have nothing drawn on the $75 million line of credit.
Just as we have in 2008, in 2009, we intend to continue making additional internal investments in people and technology. We believe these investments are necessary and will help build a strong foundation for the long-term future of our company. The cost of these investments is reflected in our updated 2009 guidance. We can drill down on these results further during Q&A if anyone desires.
Now I’m very pleased to have Johnny Indest, our Chief Operating Officer, take over to review the details of operations.
John L. Indest
First, I would like to speak about the acquisitions and de novos that were added to our family in 2008. As with any growing company, in many instances our best feature has been the experience that we have gained from the past. This was certainly true as we continue to expand our company. More and more we are fine tuning the integration of new agencies into our model. I would like to complement our business development team, our legal team, transition team, all departments within our home office, our start-up teams, and our operations team. All of these personnel have formed a superior work group and processes that enable us to integrate our new agencies into our company quicker and more efficiently.
Also as is customary in my updates, I would like to update you on our continuing quality initiatives. And this is why I compare from prior reporting periods, July 2007 through June 2008, and we have shown improvement in 10 of 12 outcomes over the last reporting period. This includes improvement in our acute care hospitalization rate, unplanned emergent care rate, and percentage of patients staying home after an episode of care. We are currently meeting or exceeding 5 of 12 national reported outcomes. Without acquisitions, same stores as this time last year, we have shown improvement in 10 of 12 outcomes over the last reporting period and have stayed unchanged in one. It is important to note that we have shown continuous improvement in these home care compare scores over the last 7 reporting periods.
As discussed in our last call, we have been working with Outcome Concept Systems, Inc., the nation’s leading post acute healthcare information company, for independent benchmarking and analysis. The standard outcome index or SOI is an index score developed by OCS that focuses on patient improvement in completed cases of care. It is designed to reflect the overall quality of care through one number. Several clinical and functional measures are included in this calculation including pain, dyspnea, urinary and bowel incontinence, pressure ulcers, surgical wounds, infusion, dressing, bathing, toileting, transferring, and ambulation. Each measure is weighted and the calculation takes into consideration the amount of improvement to augment the more straightforward perspective of improved, stabilized, or decline.
At December 31, 2008, our SOI as calculated by OCS was 1.839 while the national norm was 1.67. Our scores are significantly higher than the industry averages, but more importantly, we’re continuing to improve each quarter and continue to widen the gap between our overall quality scores and the industry mean.
In 2008, our LHC Group interdisciplinary quality council continues its active involvement in all areas of operations. With oversight from this council, we are well into our rollout plan to have all of our home care and hospice locations Joint Commission accredited by the end of 2010. In addition, the council continues to develop our corporate-wide education programs and maintains oversight of our external and internal auditing functions.
2008 also saw the formation of the LHC Group Incorporated Clinical Quality Committee. The committee’s purpose will be to provide oversight to the measuring, disseminating, and improving of clinical practices with the goals of sustaining leadership in and setting best practices for the home care industry. This committee is comprised of both board and non-director members. We could be more pleased with the results of our quality initiatives and we will continue to strive for excellence in this area as we do all things.
I would also like to take time to publicly acknowledge and thank our sales and marketing team. At no time in the history of our company have these areas been as focused as they are now. The leadership of these efforts has made 2008 a banner year for LHC Group. Our divisional sales leaders took the initiative this past year to travel throughout our company conducting small group sales training meetings. I am pleased that I was able to attend a majority of these sessions. I was particularly pleased with the tone and direction of the meetings, which educating referral sources on those Medicare patients that comprised the very backbone of the home care benefit, specifically those in need of teaching and training and observation and assessment.
These patients significantly benefit from our services. These are the patients that are most often forgotten when discharged from an acute care facility or when they leave the physician office. In many cases, these patients are not a highly reimbursed HHRG, but they form the basis for the patient population that we serve. In 2009, I intend to continue working closely with our sales and marketing team to continue growing the top line of our business.
As Keith mentioned in his opening remarks, our operations are well prepared to address the Medicare reimbursement environment in 2009, 2010, and beyond. As we do every year, we will continue to focus on key operational strategies to be certain that we’re providing high-quality care as efficiently as possible and that we are ready to adapt to any future reimbursement changes. As operators we understand that reimbursement will continue to change, and time and again, our management team and clinicians have proven their ability to overcome and prosper during these times of change.
I want to now turn the call over to Don Stelly, Senior Vice President for Operations, to discuss our key operational objectives for 2009. During 2008, Don was instrumental in developing an implementing the strategies that allowed us to successfully adapt to the changes in reimbursement. As I mentioned earlier, Don has done an outstanding job in creating an environment of operational consistency and accountability throughout the organization that will allow us to continue producing strong operational results as we continue our ramping growth.
Donald D. Stelly
Before discussing our 2009 operational objectives, I also want to thank the entire LHC team for their hard work and dedication during the past year. It was the collaborative effort of our home office, sales, and operations team members that truly allowed us to achieve the 2008 successes. This entire team also understands that we must continue to improve as we implement our aggressive growth strategy and adapt to change in political and reimbursement environment. With that in mind, we developed these key operational objectives for 2009 and we intend to focus our efforts on these and other areas in order to achieve our short and long-term objectives.
For this year, we grouped our objectives into broad categories and I’ll briefly touch on a few high points. A primary objective under the category of efficiencies is to leverage our home office overhead; a short statement, but an important objective. Also falling into this category is our use of technology. This relates to both field operations and decision support for management. Our existing relationship with OCS and Simione continues to add tremendous value as we move forward with this strategy.
A third objective classified under the category of efficiency is that of shortening our timeline for what we call operationalizing our acquisitions and de novos. Other objectives fall under our organic growth category. Certainly de novo mapping, market development, and sales initiatives are all grouped here, but we’re also focused on process changes that will support our organic growth efforts. Examples of what I’m talking about include customer service initiatives as well as our intake procedures.
Our final category that I’ll mention is portfolio management. We’re executing strategies geared to improve operations in existing service lines such as hospice, private duty, and labor business, while at the same time we’re keeping the momentum that has yielded consistent predictable operating results from our long-term acute care hospitals.
Throughout 2009 we’ll continue to keep you updated on these and other efforts in regards to these operational objectives, and again, I would like to thank our clinicians and leaders throughout this company because you truly are best of class.
I’ll now turn the call back over to Keith.
Keith G. Myers
Before we open the call up for questions, I want to take this opportunity to reiterate the increase in our guidance which was outlined in our earnings release yesterday afternoon. We’re increasing our guidance for full year 2009 which was initially announced on December 2, 2008. Full year net service revenue is expected to be in the range of $480 million to $500 million as compared to the initial guidance of $450 million to $470 million. Fully diluted earnings per share are expected to be in the range of $2.00 and $2.10 as compared to the initial guidance of $1.90 to $2.00. The increase is primarily due to the acquisitions that we acquired toward the end of the fourth quarter after giving the initial guidance. The guidance does not take into account any future acquisitions or de novo locations, but does take into account the investments in our future that Pete Roman and I have discussed.
At this time operator, we’re ready to open the call up for questions.
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Fund Letters
