KND
#Well, I think on the margin improvement side, first of all you have to look at home health and hospice, I think, separately on the margin side.
I think that on the home health side, look, you are dealing in a very tough rate environment.
You've got ---+ you are heading into next year, the last year of Medicare rebasing for the home health business.
On the hospice side, we've just gone through this very significant change to the U-shaped curve.
And I think, <UNK>, that all of those things with reimbursement, we are going to talk I'm sure about pre-claims review and some of the other legislation that has come down the pike.
All of those things have a tendency to mute what happens with margins.
Having said that, I'm just incredibly impressed with David Causby and Brandon Ballew and the team at Kindred at Home, and what they've been able to accomplish.
Our five regional presidents across the country that just do a fantastic job running this business, they continue to develop specialty programs and the ability to deliver on a higher acuity patient in a way that I think actually singularly represents what's happening in the home health space, better than most of our competitors out there.
So, to that end, I've been surprised that even in some of the rate pressure environment that we've been in, we've been able to grow revenues as effectively as we have.
So we will keep an eye on that as it relates to margins.
I wouldn't expect to see significant margin improvement over the course of the next year, because of the reimbursement pressures that are on.
But I do think that we can continue to drive revenue at a pretty meaningful clip.
And I think that you will see us do that into next year and the future.
Sure, yes.
It does not run through the core cash flow numbers.
It does run through the GAAP cash flow numbers.
But then there is a whole bunch of other stuff that is wrapped inside your GAAP cash flow numbers as well.
So probably the ---+ so there is that reconciliation table on page 20 of the release.
The easier way to think about it probably, <UNK>, is you can just add $30 million on top of the $126 million, or on top of the $83 million.
That kind of gets you to the same place, with less brain damage.
Let me try and take the parts ---+ take the pieces apart, if I could, in what I know is a little bit of a complicated environment.
So, A, we were trying to be helpful with going back and looking at the last four years or five years ---+ I think it's even better if you go back even further ---+ just to talk about the seasonality effect of what happens from Q3 to Q4, primarily driven by our LTAC business.
And while you are exactly right, the composition of our businesses has changed significantly, and I am going to get to that in a second.
The point is that because the LTACs typically have this tough seasonal third quarter, you do typically see this return to normalcy in Q4, and you do have a lift.
We were asked by a lot of analysts over the last ---+ since we reported last night, and some investors ---+ how do you get from $0.07 to $0.20.
And we were simply reminding folks it's not that big of a lift when you look at what has happened historically.
Secondly, to answer your question a little bit more specific, as I said, I would pull the pieces apart ---+ I want to talk about some of the pieces that we think are happening to get from the midpoint guidance in Q3 to the midpoint guidance in Q4.
Number one, yes, there is that seasonality lift.
You should expect to see some lift in our hospitals and others as we get into the winter months, as we see sicker patients toward the end of the year.
We typically see a bit of seasonality moving from Q3 to Q4, and that is what is in the number.
The conservative nature of your question is that we have guided investors on in the context of our guidance is that we have a $30 million impact, the impact of criteria built into our guidance over the last 4.5 months of the year.
That's a month and a half here in Q3, and that's three months of that $30 million in Q4.
So we think we've taken a very realistic look at, yes, we will have seasonal growth in the LTACs.
But on the other side, there's clearly going to be an impact from LTAC criteria in an environment that we will start to be able to mitigate against some of the criteria effect as we move into the end of Q4.
But that mitigation really kicks in for us in 2017 and beyond.
In the last point that I would mention, in terms of the conservatism, if you will, that's in the number, or why we feel good about the bridge going from Q3 to Q4, is because you have to remember, you have to look at Kindred at Home and you have to look at our IRF business.
And you have to look at some of the faster growing parts of what we are doing, the continuation of the synergies we've achieved from Gentiva.
And you have to say, there are a lot of really nice growth stories in this Company as we move from Q3 to Q4 as well.
If you take the combination of seasonality, growth stories in our other businesses, historical precedent over being able to move EPS by, on average, about $0.12 over the last four years, netted against a conservative view of criteria, $30 million of effect that's built into this guidance, and that's kind of all the moving pieces.
So I think that's about as clear as I can be on why we feel like the numbers are absolutely what we said they would be.
As a reminder, we sit here at the middle of this year at about $0.63 of earnings.
We had guided investors to a midpoint of $0.90 for the year.
We are reaffirming that guidance.
We are trying to, because of all the moving parts, be really specific, to hold everybody's hand through what we think Q3 and what we think Q4 is going to look like.
And I think we've been very transparent, if you will, about where Q1 was going to be, where Q2 was.
And that's all we're trying to do for Q3 and Q4.
Here's what's happening mechanically.
And I'm not sure, <UNK>, I follow the $0.30 to the $0.02.
I don't know what (multiple speakers).
Yes, $0.38.
Mechanically, <UNK>, what happens is ---+ and this is ---+ it's interesting; because we have talked about this a lot.
It may be disappointing in the context of looking for big bells and whistles to go off in terms of what happens.
It's going to be very much methodically moving forward, kind of in the same path that we've been on.
What you are going to see is is that we will continue, because of our approach in our LTACs, to take all patients that we believe are medically appropriate for an LTAC level of care.
Any referral source that wants to send us an LTAC that we think either meets compliance or can ultimately be a medically complex, site-neutral patient, we are going to take.
Once those patients come to our facilities, our facilities will identify, once and for all, whether they are going to meet a full LTAC DRG on the one hand, or whether they will fall into the medically complex side, on the other hand.
Then, depending ---+ as we always do, and focused on quality, and focused on what the patient needs ---+ with a medically complex patient, you should assume acuity will probably be a little bit less.
Lengths of stays will go down.
And you will start to see the mitigation take hold by the reduction in length of stay on those patients that wind up on the medically complex side of the house, if you will.
In addition, we will continue to go after and work towards finding more post-intensive care patients on the other side.
The net effect is going to be that on our full LTAC DRG post-intensive care patients moving forward, you should see rates go higher.
You should see lengths of stay probably go a little bit higher on that side.
And on the medically complex side, you will see rates be lower and you will see lengths of stay be lower, all of which we hope will ultimately lead towards higher occupancy in the hospitals in total; and will allow us, as we work towards this, to mitigate into Q4, into Q1 of next year, and beyond.
That's mechanically how it will all work.
It's possible, Josh.
I would say slightly; but I wouldn't say that there won't be any effect.
I mean obviously these hospitals, first of all, are running very well.
They've done a great job of keeping their focus, and on running their business just like we'd want them to do, all the way through the tape of getting this deal done.
We want to make sure that we are being really good partners to our friends at Nautic and Curahealth who are buying these.
And I think that they are taking 12 hospitals that are going to be in great shape when they take them over.
There is clearly going to be an effect of criteria on these hospitals, and that was not contemplated in our guidance.
So there may be a little bit of upside there, to your question.
It was also contemplated, quite frankly, as the Nautic and Curahealth folks evaluated what they were willing to spend on this, and how we came to obviously a transaction point.
So I think both of us are walking into this with our eyes open.
But, yes, I think it could be slightly positive for us after we close the deal.
Yes.
Well, I am looking down at the table at my Chief Operating Officer, and Kent is telling me that we have not negotiated a budget yet, so please don't make his budget for next year quite yet.
(laughter) Look, I will just speak to it at a high level, if I could, Josh.
I think that it shouldn't surprise you, many of the trends we expect to continue to see in 2017.
You should see outpaced growth in our home health business, hopefully in the mid-single-digit levels, revenue-wise.
You should see outpaced growth in our hospice business at those same levels.
I think that as our IRF pipeline continues to fill, and as our IRFs business continues to grow, you will obviously continue to see outpaced growth there.
I think you will continue to see a stabilization in our RehabCare segment inside of KRS.
And I would expect that we will do much better in that business segment next year than we did it this year.
I think nursing centers are still a little bit of a question, as we sort of watch as the year unfolds.
But I would think growth there will be pretty muted next year, clearly.
And then you get back to the LTACs, Josh.
And that's obviously the effect of wildcard towards how do you get back to that $1 billion.
And on that front, look, we've been pretty clear about what we think the mitigated effect of LTAC criteria is from 2016 to 2017.
As a reminder, what we said in the last investor call was you would have a $30 million impact this year, and then you would have an incremental $25 million to $30 million impact next year.
More of that will come in the first part of the year.
And then mitigation obviously will unfold, and we will start to mitigate that in the back half of next year.
So, that will ultimately ---+ those puts and takes will get you to at least a $1 billion number.
We've done a great job in terms of continuing to, as I talked earlier, drive synergies at Gentiva.
Although I think we are getting close to the end on that; we are almost up to the $85 million level there.
We have always done a really nice job here at Kindred on something that we call continuous improvement, which is where we are always looking to take money out of ---+ resources away from the bedside.
And there will be a piece of that, I think, in our plan next year.
We are still working on health benefits and insurance.
So there's a lot of moving parts, I think, still.
But generally, those are the pieces that as we think about getting back to at least $1 billion next year, that's how we feel pretty good about getting to that point.
Really, we are trying to play this pretty much straight down the fairway, A.
J.
It's really about what we thought.
It's probably ---+ the best way to describe it, I would say, it's kind of the midpoint of the scenario.
There's a better case and there's a worst-case.
We think $30 million is kind of the midpoint.
And that's just playing it straight as we can.
That is still our view.
Well, first of all, the 25% rule, let me start with ---+ it's bad policy.
It doesn't make any sense.
You have LTAC criteria in place ---+ which is presumably created by Congress, signed off into law by the President, which is pretty declarative about what an LTAC patient is or isn't ---+ the 25% rule seems to be an archaic relic of an old legacy system that just, quite frankly, doesn't make any sense.
I always like to fall on what is good policy and what's bad policy.
And my view is the 25% rule is bad policy.
That having said, we haven't given up hope yet that talking to our friends in Washington, when they come back and maybe after the election, that there is still a chance that we can hopefully try and get something done.
I think it's the right thing to do.
As it relates to our model and the effect of the 25% rule, a reminder that since 80%-plus of our hospitals are freestanding hospitals in their own unique location, the 25% rule for us is not of no impact;, but it is fairly de minimis, I think, in the context of the rest of the trends that we see and the various things that we are dealing with.
So we haven't really quantified a specific dollar amount, other than to say it is contemplated in our guidance and in our at least $1 billion for next year that we will be dealing with the 25% rule.
But I still remain hopeful that legislatively, we can work through what, as I said again, is that policy.
On the home health side, again, we've been dealing with rebasing.
Now we have this pre-claim review issue, and there's no question that there is an impact to that.
That is also already contemplated in the guidance that we give.
And we will have to ultimately see.
The home health rule is not finalized yet for next year; so when it is, we will ultimately give some more granularity on that.
There is no question it will have some impact on our business as these reimbursement cuts have had in the past.
But you know, we are pretty good about just putting our heads down and trying to work our way through them.
I suspect we will do the same thing next year.
Sure, thanks, A.
J.
Look, we still have deep affection for our nursing center business.
We still believe it to be an extraordinary value proposition in the marketplace today.
I remind investors all the time, if you have walked into one of our new transition of care centers and seen the kinds of patients we take, what the rehab gyms look like, the outcomes that we are producing, these are not your parents' or grandparents' nursing centers anymore.
These are highly active, very capable facilities of taking care of a complex patient at a pretty low price point.
The problem is, obviously, today, you've got all of these pressures with what MA wants to see happen, with what conveners want to do, with what the consumer wants to do.
People want to be home.
And in some cases, that's the assisted living facility; and in some cases, that's home.
And it's having this pressure effect, if you will, on our nursing center businesses.
But we still think that it's a very viable business, and it's still very important.
As it relates to the dispositions that we did over the last couple of years, look, I appreciate your comment.
Paul and I, I think, worked hard over the last couple of years to try and figure out where we wanted this business to go.
We worked hard with our partners at Ventas, and Debbie, to make sure that we were all collaboratively thinking about this in the right way.
And I think that for all us, we have made the right decisions for our companies in terms of the position we took to kind of move in the direction away from nursing centers.
The interesting thing ---+ to your longer, broader question about how we feel about nursing centers ---+ is that even today, with our 90-plus nursing centers that we have across the country, we don't have great geographic positioning in all of our integrated markets.
So that leads me to the second part of your question, which is we want to partner with other nursing center providers in markets where we don't have full coverage.
We think that as we evolve and become what we call a post-acute benefits manager, our key relationships with hospitals as a trusted partner ---+ both in the context of caring for patients and in the context of coordinating care for patients ---+ means that more and more, we are going to reach out to partners and create, as I've been calling them, these high-performance virtual networks.
That means we want to work with lots of other nursing center companies across the country that think about things the way we do; that think about their star ratings the way we do; that think about outcomes the way we do.
And I think you will see more of those partnerships, not less.
So it's really kind of a yes, A.
, to both of your questions.
And we will see how it plays out over the course of the next couple of years.
We've got time, operator, for one more.
I think that when you look at ---+ it's a complicated question, <UNK>, when you start to think about our Q3 and our LTAC business is going to look like compared to Q3 last year.
On the one hand, I agree with you.
We had a very poor Q3 in our hospital business last year, coming off of what was a very good Q1 and Q2.
I don't want to take everybody back to the horror shows of the summer of last year, where we had all this displacement with the acute care hospitals and everything that was happening in the marketplace.
It was a tough summer last year, as I recall, for everybody in the healthcare acute services side.
And our hospitals obviously felt some of that.
But I think that as you think about this year, <UNK>, not only does criteria start on September 1, but as <UNK> mentioned in his prepared remarks, we have the first probably half of August where all of those patients that are in-house are going to be affected by that as well.
And <UNK>, there's really not much mitigation, I think, in the first 45 days that we can do.
We are going to take the patients.
The rates are going to be applied.
You can do the math on what the rate degradation is going to be for those that move into medically complex.
And I think that's going to pressure margins in the quarter.
That's why we've guided the way we've guided.
And that's why probably you will see some pressure on margins in Q3 this year versus Q3 last year, even though it's coming off of a not-so-great comp.
It is probably little bit of both.
It probably is, on the margin, easier to take a 30 bed hospital and reconfigure and do what you want to do, than it is to take an 80-bed hospital and do what you want to do, just because of size and complexity.
Hard to argue that.
But, I do think we have different approaches because the makeup of our buildings is different.
I think that our ability to manage a medically complex patient and to grow occupancies in our hospitals ---+ because we've got a lot of fixed cost, and we want to continue to cover that by putting more heads in beds ---+ makes the right sense for us.
And I'm not sure that it's any more complicated or less complicated.
It's just a different approach.
And as I said, our folks are well prepared and ready for the challenge.
That's a good question as it relates to 2017.
I think we are watching the labor pressures unfold.
They are real.
As I've talked about publicly, when you are into the mid-4% unemployment levels, and you've got a busy healthcare environment where everybody seems to want the same nurse or the same CNA, particularly in these institutional environments, there's absolutely an inflationary perspective to what's going on.
We probably had more contract labor in this quarter than we've had in our hospitals ---+ and, really, at Kindred, in a long time.
We are usually very, very diligent about that.
But we've had to go that path, just to fill staff.
I think, <UNK>, probably my view is we are at kind of a run rate on where we think labor is.
I'm not sure we are going to see and acceleration.
It's pretty tough, and summer seems to be always the toughest part of the year, labor-wise, for us also.
People go on vacations.
People start to retire.
People think about different things.
So, I don't think we've contemplated much of a change from our run rates into our 2017 guidance.
Let's see how the rest of the year plays out.
If labor continues to spike higher, we will obviously address it.
But for right now, I think we feel pretty comfortable with the run rate on labor, and where our forecast is for 2017 being okay.
Thank you, everybody, for a very detailed and robust conversation.
Obviously a lot of moving parts in our business.
Again, we are very pleased with our Q2 performance, our cash flow; very pleased to reaffirm guidance for the rest of the year.
We are ready to head into the challenge of LTAC criteria.
And we appreciate everybody's questions and support and interest in the Company.
And we will talk to you all next quarter.
Thank you very much.
