LHCG
#Thank you, Vince, and welcome, everyone, to LHC Group's Earnings Conference Call for the third quarter ended September 30, 2017.
Everyone should have received a copy of our earnings release.
If not, you may obtain a copy along with other key information about LHC Group and the industry on our website.
In a moment, we'll hear from <UNK> <UNK>, Chairman and Chief Executive Officer; Don <UNK>, President and Chief Operating Officer; and Josh <UNK>, Chief Financial Officer of LHC Group.
Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
These statements include, but are not limited to, comments regarding our financial results for 2017 and beyond.
Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings.
LHC Group shall have no obligation to update the information provided on this call to reflect subsequent events.
Now, I'm pleased to introduce the Chairman and CEO of LHC Group, <UNK> <UNK>.
Thank you, <UNK>, and good morning, everyone.
Thanks for being with us today.
As part of our CHRISTUS joint venture, we entered the San Antonio area.
With the tragic events yesterday in Sutherland Springs, Texas, certainly our thoughts and prayers are with the community as well as with our LHC Group family members and patients who are directly and indirectly affected.
We also continue to keep in mind our LHC Group family members and patients and all who are still dealing with the impact of hurricanes Harvey and Irma.
Now, turning to the business at hand.
I know that the recent announcement of CMS related to the proposed HHGM reimbursement system will be a hot topic this morning.
Before we cover that, I want to make sure as a team that we first spend some time on our third quarter performance, talk about our organic and joint venture growth strategies and set the table for how we're thinking about 2018.
After nearly 2 straight years of strong growth and momentum, we seem to set the bar higher each quarter.
I'm pleased that we've been able to maintain that growth pace through the combination of organic revenue growth and contributions from a very active acquisition strategy driven by our joint ventures.
This quarter clearly demonstrates how we have been able to create differentiation through the strength of our business model and company-wide commitment to delivering quality and patient satisfaction.
Our intense focus on quality patient care aligns with our culture, core mission and values to take care of our patients.
This focus also places us high on the list of hospitals, integrated health systems, managed-care organizations, ACOs and government health care programs that need home health and hospice partners who can deliver on the goals of value-based care to improve quality while reducing cost.
Our industry is well positioned to fill this need and LHC Group is in high demand due our relentless commitment to quality national scale throughout the post-acute continuum and a proven track record over the past 20-plus years of partnering with many of the leading hospitals and health systems in the country.
Based on our success to-date with 75 joint venture partners, we're confident in the strategic opportunity and our unique ability to drive growth in all segments of our business.
Turning to our most recent joint ventures, I'm happy to report that Baptist Memorial agencies are fully integrated and benefiting from the structure and sales capabilities of our operations team.
The third phase of our LifePoint joint venture is now complete, with 9 remaining locations having converted from managed to own locations this quarter.
We now have 28 home health and 13 hospice locations in the LifePoint joint venture and are actively pursuing de novo projects and acquisitions together.
The CHRISTUS joint venture with 21 locations in 4 states was finalized on September 1st, bringing us to 108 million of acquired revenues to-date in 2017, a new record for LHC Group.
We're pleased with the progress we've made together to begin migrating these agencies into our operation model.
This is a process we do well and we expect to fully integrate across all locations by year-end and fully expect that they will be contributing to earnings in the first quarter and throughout 2018.
As many of you saw last Wednesday, CMS issued its final rule for 2018, but did not finalize implementation of the Home Health Groupings Model, or HHGM.
We would like to thank CMS, OMB, the 49 Senators and 174 House Members who engaged through sign-on letters and the many other political leaders and thousands of concerned home health stakeholders who undertook a grassroots effort to help preserve access to home health care for millions of seniors, veterans, recovering patients and others who depend on these services every day.
Their actions will enable us to continue working to improve the quality of life for America's most needy and vulnerable population.
We appreciate CMS' willingness to take additional time to further engage with stakeholders to move towards a system that shifts the focus from volume of services to a more value-based patient-centered model and we look forward to participating in that process.
The final ruling on 2018 is largely consistent with the original proposal.
There are no surprises here, with an overall impact to the industry of a decrease in payment of $80 million or 4/10ths of a percent, as estimated by CMS.
And should the rural add-on ultimately be renewed, there would actually be a $20 million positive pickup overall for the industry.
There has never been a stronger commitment to home health whether it's from government health care programs, managed-care payers or hospitals and integrated health systems.
Our business model is based on driving organic growth through a relentless focus on quality and patient satisfaction and on meeting the growing demand from our health care partners to coordinated, focused acute care in home health, hospice and community-based settings with a provider like LHC Group who shares their mission and vision for delivering patient-centered care with a collaborative culture.
This model uniquely positions us to drive as the industry transitions to value-based reimbursement coordinated care and the ongoing consolidation in the sector.
We're in an exciting position today because of the quality of the team with whom I'm privileged to work at LHC Group.
They make a difference in the lives of our patients and families every day.
They are the face of LHC Group and the true representation of our brand.
Thank you for the outstanding job you do and for all your contribution to deliver our current and long-term success.
Now, here's Josh to provide some color on our financial results and increased guidance.
Josh.
Thank you, <UNK>, and good morning, everyone.
Thank you all for joining our call and for your continued interest in LHC Group.
Let me once again begin by saying thank you to all of our clinical professionals who continue to lead the industry with the high quality patient care and exceptional service you provide to the patients, families and communities of those patients that we're so blessed to care for and all of the LHC Group family members who provide support and service to them every day.
Because of all of you, LHC Group continues to be successful in fulfilling its mission to care for the elderly and at-risk population in our service area and we are able to report the results of another strong quarter.
With regard to our financial results, net service revenue increased 18.2% and net income increased 13.5% in the third quarter of 2017 as compared to the third quarter of 2016.
Net income attributable to LHC Group per diluted share was $0.61 for the third quarter.
Included in our EPS of $0.61 was negative $0.03, 2 of which is associated with expenses related to the CHRISTUS joint venture transaction which closed on September 1st and 1 of which is related to the one-time closure cost of an agency in Oklahoma.
Otherwise, our adjusted net income attributable to LHC Group per diluted share is $0.64 for the third quarter.
Home health same-store revenue grew 10.3% in the third quarter due to our growth in same-store admissions in home health of 6.2% and an approximate 4% increase in revenue per episode.
On a consolidated basis, our gross margin was 36.7% of revenue in the third quarter as compared to 39% of revenue in the third quarter last year.
The decrease in gross margin year-over-year is due to the lower margin contribution from acquisitions that closed in 2017 than the gross margin for our more mature agencies.
Excluding these recent acquisitions, our consolidated gross margin would be 38.6% for the third quarter.
Home Health gross margin was 38.1% for the third quarter compared to 40.3% for the same period last year.
Excluding recent acquisitions, Home Health gross margin would have been 40%.
Moving to Hospice, Hospice gross margin was 33.5% for the third quarter of 2017 compared to 39.9% for the same period in 2016.
Excluding recent acquisitions, our Hospice gross margin would have been 35.7%.
Hospice gross margins are also being pressured by the decline in same-store admissions we experienced during the third quarter that Don will touch on here in a moment.
Now, moving on to general and administrative expenses, our G&A expense was 27.7% of revenue in the third quarter as compared to 29% for the same period of 2016.
Our G&A expense is lower on a sequential basis, down from 28.4% we experienced in the second quarter of this year.
The improvement in G&A expense as a percent of revenue is due to our continuous cost control efforts while growing revenue and generating additional operating leverage.
Next, our bad debt expense represented 1.2% of revenue in the third quarter of this year as compared to 1.4% in last year's third quarter.
Our lower bad debt expense is the result of continuous improvements on home health commercial and managed-care collections, improvement in our overall accounts receivable agings and fewer write-offs.
For the 9 months ended September 30, the company has continued to see significant progress with respect to its cash collections on home health receivables.
As I mentioned each of the last 2 quarters, a key contributor to our more timely cash collections is the continued maturity of our back office and field operations related both to our point of care platform and to other technology advancements in our reporting and analytics.
Also, the key performance indicators that we monitor on home heath receivables indicate substantial improvement from year-ended December 31, 2016, such as cash collections have increased 82 basis points from 98.9% to 99.7% of revenue, write-offs have decreased by 18.8% from 1.6 to 1.3 and accounts receivable over 180 days have decreased by 10.9% from 23% to 20.5% of total AR.
We also continue to see progress with respect to our cash collections on hospice receivables.
We collected 101% of revenue for the third quarter of 2017 and accounts receivable in excess of 180 days has gone from 20% of total receivables to 15% since December 31st.
For the 9 months ended September 30, 2017, our operating income as a percent of revenue has increased 5.3%, up to 9%, which is up from 7.6% in the same period of last year.
As evidenced by our recent new joint ventures with CHRISTUS Health, Baptist Memorial Health Care and LifePoint, we continue to have great momentum rolling into 2018.
Between these recent JVs and a couple of our smaller transactions that came on board at various times throughout the year, we have accumulated approximately $180 million in acquired annual revenue that will be fully recognized in 2018, up from approximately $85 million from these transactions we expect to recognize this year.
Additionally, I cannot be more excited about our robust pipeline of potential joint ventures and freestanding opportunities, while we remain well positioned to fund these pipeline opportunities by still having $95 million available on our line of credit.
Turning now to our annual guidance for the year, we are raising our fiscal year 2017 guidance for net service revenue to now be in an expected range of $1.05 billion to $1.06 billion from the previous range of $1.03 billion to $1.045 and GAAP earnings per diluted share to be in an expected range of $2.35 to $2.40 from the previous range of $2.30 to $2.40.
Our guidance does include the expenses of approximately $0.03 per fully diluted share for the third quarter of 2017 related to the CHRISTUS joint venture transaction and our 1 agency closure in Oklahoma I spoke about earlier.
Our guidance ranges do not take into account, however, the impact the future reimbursement changes, if any; future acquisitions, if made; de novo locations, if opened; or future legal expenses, if necessary.
We do continue to estimate that the CHRISTUS JV will be slightly less dilutive in Q4 than it was in Q3, but will improve steadily and contribute to our earnings in 2018.
For the full year of 2017, we expect gross margin now to be in the range of 37.2% to 37.6%, general and administrative expense as a percent of revenue to now be in the range of 28% to 28.4%, bad debt as a percent of revenue to be in the range of 1.1% to 1.3%, and excluding the discrete tax item related to the stock based compensation that resulted in an excess tax benefit in Q1, our tax rate to be in the range of 41% to 41.5%.
That concludes my prepared remarks and I'm happy to further discuss during Q&A.
I'm now pleased to turn the call over to Don.
Thank you, Josh, and good morning, everyone.
You know overall growth is built on both organic and external growth such as acquisitions, joint ventures and de novo projects and we are committed to extending our track record of results in home health, hospice and community-based services.
Focusing on home health for a bit, our organic home health admissions were up 6.2% in the third quarter and 9.7% year-to-date and we continued to experience increased acuity among these admissions.
Same-store admissions to home health from our hospital partners increased 10.9% in the third quarter of 2017 compared with the same period a year ago, reinforcing the value proposition that we provide to hospitals and health systems through coordinated care.
The addition of 63 home health, hospice and community-based health locations in the first 9 months has led to a total increase in admissions of 17.7% for the quarter and we believe quality is the #1 factor behind the growth in both organic and non-organic admissions.
We continue to be proud of our leadership in the CMS Star ratings for home health quality and patient satisfaction, and with 96% of our locations having 4 stars or greater in the most recent release, we're very pleased; and furthermore, we are also proud that more than 70% of our home health locations have now earned home care elite rankings; lastly, and LHC Group remains the only national home health provider that is 100% accredited by the Joint Commission.
Quality of course drives our sales effectiveness, and along with our ability to provide a full and scaled continuum of post-acute care, that has made us an attractive joint venture partner to a growing number of hospitals and health systems.
These partners know we are a demonstrated leader in home health.
For the quality ratings, we recently produced a score of 4.51 for the October report, which is an improvement over 4.50 from the July report and a 4.30 in October of 2016's report.
The national average has been within a range of 3.24 to 3.26 for the last 5 quarters.
We also continue to lead the industry in patient satisfaction Star ratings, with our score of 3.9 compared to the industry average of 3.4.
It is of note that CMS has recently redefined the calculation for this release by changing what's called the cut points, which cause the ratings for all providers to decrease as compared to the previous release and therefore looking a little differently.
In our Hospice segment, margins were slightly compressed, as Josh mentioned, with organic admissions declining by roughly 3.5% from prior year.
We have experienced tremendous growth in our Hospice business over the last several years and our commitment to grow this segment has never been stronger.
To underscore and fulfill this commitment and maximize the potential of our Hospice portfolio, we have bifurcated the operations role by bringing in a second divisional Vice President of operations.
We now have the segment split into 2 regions run by highly experienced and motivated professionals.
And my last note here is we've also promoted one of our top sales managers and leaders to become division Vice President of Market Development for Hospice, candidly a move already proven beneficial Q4 to-date.
In closing, we are delivering on the true potential of LHC Group and are extremely pleased at where we are in executing our operational plans for 2017.
And while we realize the opportunity to always improve areas, we're very proud of the value being created and provided to our patients, payers, partners and shareholders.
And we look forward to a strong finish in this 2017 and an excellent start to the year ahead.
To our LHC Group team, of course thank you for all that you do to make that difference we so often talk about and, yes, for producing these strong results that we've been able to disclose this morning.
Operator, this concludes our prepared remarks and we are now ready to open the floor for questions.
It's a lot of questions, <UNK>.
I'm trying to write them all down.
If I miss anything, just \xe2\u20ac\u201c- I'll let you clean up at the end and come back to me.
So let's talk about what the agency ---+ so we are already in the process of scheduling a joint industry meeting with CMS in the coming weeks as the first meeting after the final rule is out to talk about a path forward.
And what we believe a path forward looks like is a more well thought through model that would not result in higher costs by driving patients upstream and into more costly settings.
That momentum is shifting now, where we see patients move into home health.
We don't want to reverse that.
And that was one of our central arguments that essentially this was a penny wise, pound foolish rule that wasn't well thought out.
The 30-day episodes are something that we don't particularly like, but with the right case mix, it could be something that the industry could live with.
We think it needs a lot more discussion.
One thing that really resonated with CMS was the industry consensus without dissent in support of value-based purchasing.
They had never seen that from the industry before and I think it had a great deal to do with their decision to pull the rule and allow us to come back to the table.
So that's where we are with that.
I think where we land is with a revised model that could be announced in July of '18 for implementation in 2020 or beyond.
That's just what I believe.
I mean we've talked about that.
They haven't agreed to it of course.
But we look forward to engaging with CMS along with our industry colleagues and working diligently toward that.
We've made a commitment to do so and we're definitely going to live up to that commitment.
With regard to the rural add-on, we feel good about the rural add-on.
I mean there's never been any lack of support for that.
I know that there's a Senate finance proposal that's out there and I view that as a starting point.
But we have other strategies that play in the House for support of the rural add-on, the 3% rural add-on.
One idea that's tossed out is a 2-year extension of the 3% rural add-on, which is something that we would support if that got us through this legislative year.
I personally don't think there's a lot of risk of the rural add-on (inaudible).
<UNK>, you're thinking about it spot on.
Yes, we're going to have a little bit more revenue for CHRISTUS in the fourth quarter.
But as I said in my prepared remarks, it was a drag both in one-time cost as well as operationally that we've experienced in Q3.
And we expect it to improve slightly in Q4, but still not really be contributing and be a little bit dilutive to the quarter.
And then heading into next year, it will be a real contributor for us.
I'll answer not from my perspective.
It really is the acquisitions that are pulling that down.
But, Don, I don't know if you've got anything operationally to add.
Going back to <UNK>'s last observation about the VPE going up, I think that is in direct correlation to my prepared comments about the acuity going up.
And honestly, <UNK>, I don't see that moving from where it is now because of the acquisition fall-ins.
I think that we were around 18.7 all-in on those visits per episode and I wouldn't go any higher than that.
I think you're going to vibrate right there.
So just 2 quick ---+ to clarify things on the opening statements, including comments about the hurricanes.
So was there any meaningful ---+ or impact from hurricanes that you could quantify.
And then second on the ---+ clarification on the ---+ those sort of one-time costs related to deal and closure.
It's about maybe $1 million pretax, so I assume it's mostly in G&A.
And any particular segment that was more impacted than the others or should we kind of think about it spreading equally among the segments.
I'll tell you what, if Josh will go and attack the second part of your question first on the cost side.
<UNK>, you're spot on as well on the roughly $1 million in the quarter.
The majority of that is in G&A.
On the closure side, we had some intangible costs that ran through G&A.
There were some severance and associated costs that would be in SWB, but not material.
And then on the CHRISTUS side of the house, almost all of that is in G&A.
So you're right there.
And then as far as the hurricane effect, Don, do you want to take that.
Yes, we did experience as a company ---+ relatively more so with our CHRISTUS, newly acquired CHRISTUS, assets, we did experience some interruptions from the hurricanes.
But in truth, overall it is immaterial and we didn't want to call that out because really there were other factors that helped us lift through that.
My only other footnote was even though hospice ---+ and I disclosed why that was, we did have some effect especially on the East Coast in our Halcyon operations in the Greater Atlanta area.
But overall, <UNK>, that was not really a contributory factor for us and that's why we didn't call it out.
And if I may, in terms of the Home Health margins, which declined slightly year-over-year ---+ so cost of services increased 40 basis points.
I guess you just mentioned about the increased acuity.
So is that how we should be thinking about it.
Because also I just want to make sure any comments there around just labor costs in terms of any pressure you're seeing, because we are seeing that some providers, not all, but in some regions seeing some pressure.
So I just want to clarify if there's anything on the labor cost side.
Don and I will tag team this one as well.
I'll answer your first part of your question, which is, no, I wouldn't add any incremental cost for the acuity of the patients going forward.
As Don mentioned in his prepared remarks, I think we're pretty stabilized there.
That would have caused a little bit of the uptick that you're seeing, but I wouldn't run that out anymore than it is today.
And then, Don, if you want to take the second part.
Yes, I'd probably tag on and say the same thing for wage pressures.
Of course by provider and region there are some more than other pressures and availability and supply and demand of certain clinicians certainly pop up more so than in the portfolio.
But I wouldn't bake anything for that.
As a matter of fact to be candid, our fill rate has never been better and our vacancy rate never been lower.
So we feel good about going into 2018 with where we are with our labor.
If I may just squeeze a more longer term type question in terms of the outlook and what do you see with Medicare Advantage Plans and any progress in negotiating contracts there in terms of increasing the rate there per visit or shifting those into episodic contracts.
So the progress continues with managed-care negotiations.
To put a number on it, the 5% increase ---+
Yes, increase in the margins.
---+ in margins is what we've seen year-to-date.
But it's ---+ we're dealing with so many managed-care companies, so one contract only moves the needle so much.
To maybe frame of how it works, we're trying to move more towards value-based models, where we achieve a better rate based on our performance.
And we're still very much in the ---+ I would still say in the piloting phase.
I mean the more successful contracts we have a history around that we can show other payers, then we have more acceptance to that model and are able to grow our business towards those value-based models and that's what increases our margins.
So I'm happy with the progress.
It's just you have to be very patient in this process, because the managed-care payers want to make sure that that they're going to see the value before they make the value-based payments to you.
And they're ---+ we don't want to take on a lot of risk at one time.
So proof of concept is really important.
I think you'll see that ramping up as we go into 2018, because we're getting very comfortable with the value-based models we have in place.
I think with the proposed rule, the calculations we were doing, we were in line with the industry average.
And then from a rural add-on perspective, the percent that we would add back for us ---+ the annual effect on us for that is around $6 million in revenue.
So I think that probably gets you to what you're looking for.
The short answer there is no.
When we saw our volumes go down ---+ well, let me then take you back.
With us now being at 92 locations, we knew internally as a management team that hospice was somewhat of an inflection point.
And when we saw volumes going down, the changes that we made during the quarter were already in queue to be made.
So that's one point.
Admittedly, we didn't know we would decay that far, but we did.
And then we had to decide do you then take your cost down like we normally do if we had census decay.
And because we're so confident in our growth, we didn't want to do that.
So that was some of the margin compression.
And it's simple as the volume went down and the cost base on EPS ---+ then census stayed the same.
But no, no cap, nothing else.
And just to add further color, I do believe in the last call I guided the overall growth to be in between 5% and 7% for the year in Hospice.
And in my prepared remarks I talked about our divisional leader making an impact already.
We're tracking at 4.87 as we sit today.
All told, I think what I'm trying to impress upon you with a question is that it was transient in the quarter and we feel good about where we are.
Well, I\
I don't like to use the term wide open, because we're not kind of wide open at anything.
I mean everything is pretty well planned.
We view home health as being the lead still in every community we go in.
So when LHC posts up in a community, we want to be there in home health ---+ with home health first.
And then we see hospice and personal care services as natural bolt-ons to home health, when you already have established yourself as a leading home health provider in a community.
And for us, when the opportunity presents itself to be in a post up in a community with those 3 service lines and be attached to a leading hospital or health system, that's just the perfect scenario, if you will.
So we're still marching down that path and that's our vision.
And there are always exceptions for that.
In a community where there's a highly respected hospice, for example, that has a huge following and is very well supported by the community, you naturally wouldn't put a hospice in that community because it wouldn't make sense.
And then there are states where reimbursement for personal care services make it just not feasible to support the operations there, so certainly we wouldn't do that.
So there are exceptions.
But generally speaking, if reimbursement was there ---+ and the perfect combination is to have those 3 service lines all in one building with 3 separate suites, where the staff shares common working area and works together as a team.
That's when the patients really win and we can provide the most value through efficiency for whoever the payers are.
<UNK>, that's a great question, and I would answer it like this.
We've got LifePoint, as you know, phased in in 3 components throughout the year: Phase 1 in January and then Phase 2 in April and Phase 3 in September.
We're already seeing improvements obviously in Phases 1 and 2, so those should really start helping heading into the first quarter of next year.
Baptist came on board in the second quarter and then you've got CHRISTUS that came on board September.
So they each take that kind of 12 to 18 months that we've mentioned in the past of really getting them up to our same-store.
So I think some of them will be at that level in Q1 of next year and others kind of into Q2, Q3.
But I think all in, that incremental $95 million of revenue that we're not even recognizing this year in those acquisitions will be very accretive to next year 2018.
Yes.
The answer is yes.
We have 40 providers ---+ I guess I want to look at <UNK> and make sure that we want to put a number to it.
But inside of that, we only had in same-store a select number 5 that didn't have the increase to the value-based purchasing uptick.
But our acquisitions is what drove that down.
So all in, it was just under 0.5% for us in apples to apples revenue comparison.
And candidly, acquisition role independent, we see that as the floor because those operations are all going to improve in quality as we go forward.
<UNK>, any color to that.
No, that's it.
So on a revenue standpoint, it's about $0.5 million for 2018.
It's the latter.
And our innovation teams and some of the quality things that we've done to attain those star ratings is really attributable to that.
It really is the epitome of opening up the patient base.
And <UNK> has talked about this I think for every earnings call.
We truly are seeing the shift from SNFs into home health.
And when you do that, obviously you're going to get that sicker and more acuity-wise patient.
And that's really, honestly effective execution on our part because that's exactly what we're targeting.
Okay, thank you, Operator.
And thank you everyone for dialing in this morning once again.
And as always, if you have any follow-up questions, please feel free to reach out to <UNK>.
And if you need to speak with anyone on the management team, we will always make ourselves available to you.
Thank you.
