Q3 2019 Earnings Call

[laughter] [noise].

[laughter].

Thanks, Jennifer.

On the Pdgm.

We believe there strong support center clear message of their understanding of the need to preserve access to home health services to all Medicare beneficiaries, particularly in rural areas, which was health and in which helped to bring a heightened sense of awareness to the issue.

I would also like to thank CMS administrative seam of Paramount and her staff as well as that of HHS leadership for multiple meetings with us and their willingness to work collaboratively and to listen to our concerns.

While we are pleased with the improvement in the final rule.

We remain concerned with the lack of transparency and CMS is use of assumptions to establish payment policy and adjustments.

We urge CMS in the office of the actuaries to be fully transparent with data used to make any future payment adjustments, so that high quality home health providers in the industry may provide valuable feedback in the construct of new payment policies.

We continue to see values it encouraging CMS to be more transparent in the calculation of payments to provide us under the Medicare home health benefit.

And in our ongoing support for payment reform that as evidenced based.

We are a big proponents of the focus Pdgm places on patient characteristics.

More importantly.

Pdgm recognize as a critical role that in home health care plays as the most appropriate and most efficient setting for delivering high quality care and the privacy and comfort of the homes of primary our primary place of residents of those we serve.

This ruling and a couple of others I will touch on also reinforces the importance of accelerating our joint venture strategy and on securing our seat at the table with new payer models and value based arrangements.

While LHC is fully prepared and has completed extensive testing of our clinical care model systems and overall operations to began to operate under Pdgm.

The final rule provides a measured approach in the first year, there will give LHC and the industry time to adjust to the new model.

The certainty of this approach as presented in the final rule provides LTC with a strong position.

And clarity for the growing number of patients we serve each day.

Now I'd like to spend a few moments on the detailed work we have been doing to be prepared for PDGF.

There has been a lot of commentary in the industry about how providers will offset the adjustments on the PBT up.

For some it's been a financial pathway.

To living with Pdgm.

For LHC group, we've created a clinical pathway to thrive on the Pdgm.

We have an executive clinical leadership team that has been working on Pdgm preparedness for almost a year now leading into the implementation of the pilots we talked about on our last call.

On the week of July 15th we went live with our pilot locations.

These pilots across walk the 153 current payment groups to the new 432 different pdgm payment groups.

And looked at how we could improve efficiencies in care delivery and how we could better managed care of our patients in order to maintain our industry, leading patient outcomes and satisfaction.

We also tested increasing the use of telephonic teaching and training business.

The care model, we developed is patient specific based on co morbidities functional scores and diagnosis. Each category model also represents a frequency that historically yielded the best outcomes for patients with similar characteristics in stores.

To ensure we maintain our industry, leading quality, we will be increasing our overall patient encounters.

We will accomplish this by increasing utilization of Tele medicine, and our care models.

The technology I mentioned, a moment ago proved to be very effective in the pilots.

With this new proprietary technology will.

Given clinicians access to best practice benchmarks for optimal outcomes and the palm of their hands at point of service, thus, enabling them to make better clinical data driven decisions regarding patient care at the point of service.

As a result, we expect we will be able to deliver care in a more efficient manner and deliver optimal outcomes.

Go ahead of some providers already laying off there at this and cutting back on other clinical staff.

We are instead opening onboarding and training centers across the country in anticipation of this growth to ensure that we have the clinicians necessary to continue to deliver on our high standards of quality care.

Pdgm isn't the only big change that is happening in the industry.

In late October CMS also released its final rule on the.

Phase out from the request for anticipated payments or wraps starting in 2020 and full implementation in 2021.

To wrap has been targeted by CMS and the he'll for some time as part of the efforts to eliminate the full on both pay in chase.

And it's been a way for many people to get into the business with Medicare with medicare's financing their business venture.

Combined with the 230 day payments periods under PDGF.

The elimination of the rap should lead to more consolidation in the industry than we've experienced in the last two decades.

It will hit cash flows hard for the smaller agencies, but for the large agencies such as L.A.C., we would expect minimal impact.

In late September CMS released its final rule, making changes to discharge planning performance for home health providers that should make patients more engaged in their care transitions from the hospital to other care settings.

This was a long overdue stem and the industry welcome these changes.

There are a couple of aspects that are worth noting that demonstrate how well we are positioned to benefit.

Under the new discharge planning route patients and their families are required to have information necessary to make informed decisions about their post acute care options, including data on quality measures.

Home health agencies also required to provide relevant data on quality measures.

As the industry's leader in quality and patient satisfaction.

LHC group can be front and center with patients and their families as well as our existing referral sources.

On October nine HHS published proposed changes to the physician self referral law, commonly known as the stark law and to the any kick back statute.

The proposed rules are coordinating by CMS, and HHS and NOI G.

This announcement Wasnt as widely covered are discussed in the investment community as recent rulings are for the most part the home health industry.

But these proposed rules are some of the most significant changes to these laws in many years.

The LHC group they have the potential for positive changes on our joint venture strategy and more specifically to our participation in value based arrangements.

The proposed dark law changes would include new exception to enable value based care arrangements and the any kicked back statute changes would modify existing safe harbors create new safe harbors and create new exceptions.

Some of the eight Ks safe Harbor changes will be for value based arrangements patient engagement.

CMS Monson models and personal services among others.

They are common threads and all of these rules and changes and they are all winters fillets equal.

For one they shift care into the home and encouraged payment models built on delivering value.

Decided numerous andrew industry sources.

Predicting that pdgm and the elimination of the wrap alone will lead to the closure of over 30% of existing home health agencies.

For those of you the follows closely we've been able to deliver strong growth over the last few years.

When I look at the growth potential of LHC group for 2020, 2021 and beyond across a national platform that extends across 35 states today in the district of Columbia, Colombia.

Reaching 60% of the population a 65 and over.

Even more excited.

I see our growth coming in many forms.

Some are firing on all cylinders right now such as legacy LHC organic growth.

Post conversion almost family locations and our M&A activity.

Others are just beginning to ramp up such as revenue synergies and growth strategies with almost family.

And our buy and Tri level Denovo growth.

And on others, such as our managed care relationships value based arrangements.

The Hcl business and future consolidation opportunities.

We have only scratched the surface of what we can do.

I hear as Josh to provide highlights on our financial results in 2019 guides Josh.

Thank you Keith and good morning, everyone. Thank you all for joining our call as always I began my prepared remarks by saying how much I appreciate all of our clinical professionals across the country and what they do each and everyday.

It is a privilege to serve you as you tirelessly serve others.

I would also like to thank our home office support teams, whose level of commitment in service to the field is greatly appreciated I.

I'm, so proud to work alongside and to support you all.

It is because of all of your hard work and execution that we were able to report yet another strong quarter of results.

I would also like to thank our executive clinical leadership team and our teams in our Pdgm pilot locations for leading the way to ensure that are 25 year unwavering commitment to industry, leading quality and clinical outcomes remains the number one priority as we approach another new reimbursement model.

Our supplemental financial information posted on the website provides more detail on the breakdown among sector performance guidance and assumptions.

I will reference that supplemental deck and my summary remarks this morning.

For the third quarter financial results here are the big takeaways.

Revenue across all segments for the quarter met or exceeded our expectations, especially on the legacy LHC assets.

We continue to see slower growth in the fan home health assets, which we expected due to the continued system conversion that will end in the fourth quarter.

Our adjusted earnings per share was $1.26 cents in the third quarter.

These results included five cents and tax credits and six cents and improved implicit price concession in our hospice segment due to better cash collections, especially on recent acquisitions.

While the hospice implicit price concession was a benefit to Q3 it brings our annual until as the price concession amount inline with our annual expectations.

Looking ahead for a moment to Q4 EBITDA to normalize the run rate you have to adjust the 3 million Q3 hospice benefit and the 3 million we received from our Medicare shared savings payment in our HCR segment that we receive every Q3.

When taking each of those into account, we do expect normalized EBITDA growth in Q4.

As it relates to EPS for Q4, we expect the tax rate to be approximately 27% to 28%.

Now back to the third quarter highlights.

Incremental margin improvement has continued across our hospice and HCB segments on a year over year basis.

Organic growth continued to lead the way for us with an 11.1% increase and home health admissions excluding a fan.

Our industry, leading quality and patient satisfaction scores were the main factors here as well as the incremental growth we've generated from previous acquisitions in joint ventures.

In addition to the accelerated growth, we anticipate from Pdgm disruption in the marketplace that Keith discussed earlier.

Another significant incremental organic growth opportunity as we head into 2020 is of course, our expected admissions acceleration from the almost family locations.

In the 130 almost family locations fully converted to LHC group's instance of homecare homebase prior to the third quarter, we demonstrated sequential organic growth in home health admissions of 1.2% in the quarter as compared to the second quarter. Despite the fact that Q3 is typically a seasonally lower.

Volume quarter than Q2.

Another very positive trend and Sam admissions growth is that sequential same store growth from Q3 2019 to Q4 2019 is currently pacing to be approximately.

In Q3 was a 30 basis point improvement year over year, and a 100 basis point improvement through the first nine months of 2019 versus 2018.

Consolidated adjusted Gionee expense as a percent of revenue was 26% in the third quarter, which was down 150 basis points from the 27.5% in the same period, a year ago and down 130 basis points from the second quarter of 2019.

Our adjusted consolidated EBITDA was 11.3%, which is up 170 basis points year over year and up 110 basis points from Q2.

This improvement across all metrics continues to be broad based.

Pages 10 through 16 of the supplemental deck highlight the results on page six knows the key staff by segment.

Of note out.

Particularly like to briefly highlight the improvement we have continued to experience in each of our hospice and HCB segments.

With regard to hospice for the first nine months of 2019, we're now delivering a 12.3% EBITDA margin, which is attributable to lower DNA expense solid volume growth in 2019 and improved cash collections on our hospice receivables.

In regards to our HCV EPS segment, we are pleased with our 7.2% EBITDA margin in the third quarter, which was driven by improvements in gross margin and DNA expense.

Turning to page 21 of the supplemental deck, we've outlined a number of our debt and liquidity metrics, including the fact that adjusted free cash flow was 108.6 million for the nine months ended September 30.

Dsos were slightly up in the third quarter to 50 days from 47 days in the same period, a year ago due to a build up of Aer in recent home health acquisitions.

However, we fully expect to collect on those receivables once the channels are in place and for Dsos to remain in the 45 to 50 day range that we previously projected for Dsos in 2019.

To date in 2019, we have either completed or announced acquired annualized revenue of $86.7 million through joint ventures, both new and extensions of existing partnerships as well as strategic acquisitions and tuck in acquisitions.

Our earnings release highlighted these recent transactions, including the continued extension of our relationship with Lifepoint health that has been a source of significant growth for us since the inception of our system wide partnership we entered into in 2017.

This latest announcement with Lifepoint represents the beginning phase of bringing the former RCC H home health and hospice assets into our LHC group Lifepoint partnership.

We cannot be more pleased with how our partnership with Lifepoint health has progressed from 30 locations with annualized revenue of approximately $70 million in 2017 to now 49 locations with annualized revenue of over $120 million today.

As Keith alluded to earlier the impact of Pdgm is expected to create a historic opportunity to consolidate the home health industry in 2020 and beyond through higher organic growth from market share gains and through inorganic growth acceleration.

With the M&A environment expected to heat up and our value proposition expected to become even more compelling among our partners and potential new partners, we possess a strategic asset and our capital structure and available liquidity.

Net leverage at quarter end was 0.93 times adjusted estimated EBITDA for 2019.

With over 245 million available on our credit facility and an accordion feature that can provide an additional 200 million of capacity, we are well positioned to remain in growth mode.

As you noticed we are increasing our EPS guidance for full year 2019 to a range of $4 in 35 cents to $4.45, while affirming our revenue and EBITDA guidance.

The increase in EPS guidance is mainly due to the tax credit as well as our improvement in hospice and CBS margins that I spoke of earlier.

The details of this guidance on page 17 of the supplemental deck.

At the midpoint of this range, we are expecting adjusted EPS growth of 23.9% net service revenue growth of 16.9% and adjusted EBITDA growth of 34% as compared to last year.

Turning now to a few brief thoughts on Pdgm.

As we've mentioned in the past, we fully believe and reaffirmed with our pilot locations that we can offset around half of the revenue impact from the previous 8% cut while offsetting the rest with our cost reduction initiatives.

Now that the behavioral adjustment has been reduced to 4.3%. We believe we will mitigate the cut from a revenue standpoint, and have EBITDA upside related to our cost reduction initiatives.

In summary, the key components of our growth story remain intact.

Let's see organic growth continues to exceed our long long term targets with market share gains built on quality and patient satisfaction differentiation.

Post conversion growth at almost family home health locations is ramping up and generating the growth, we anticipated and our de Novo growth strategy is also accelerating.

Combined with a strong momentum in our joint venture partnerships and a robust acquisition pipeline, we are well positioned to capitalize on the significant consolidation that pdgm and the elimination of the ramp payments will bring in an industry that for now remains largely fragmented.

We are excited about the potential we have for LHC group to capitalize on the potential market share that will be created from this consolidation.

That concludes my prepared remarks, and I'm happy to answer any questions. During Q in a im now pleased to turn the call over to Don.

Thank you, Josh and good morning, everyone.

No doubt, we are where we are day because of the hard work and commitment from our 32000 team members, who care for patients and families that we're privileged to serve each and every day.

Simply put heartfelt. Thank you for all that you do.

My turn this morning, and I'd like to focus on organic growth at LHC legacy locations as well as the recent converted almost family locations as well as a little detail on the critical pathways that we've taken to prepare for the Pdm changeover.

Our organic growth continues to exceed our long term targets with home health admissions up 11.1% for the quarter and 8.6% for the year hospice admissions up 2.1% for the third quarter is 5.9% for the year.

This growth, which we have typically targeted in the range of 5% to 7%.

As a result of market share gains.

The incremental benefit from previous acquisitions.

Our joint ventures, which had been added to the base.

Certainly the improvements that we put into place last year for our hospice business.

We're also seeing the benefits from the organizational improvements made to the home and community based services businesses earlier this year that we talked about.

From our segment results on page 14 of the supplemental deck, you can see that our home and community based services segment.

Adjusted EBITDA margin was up 460 basis points for last year and up 170 basis points from the second quarter. We do expect the improvement in this business line to continue.

Our quality scores, which are outlined on page 20 of the supplemental.

We continue to see strong same store LHC quality scores in October at 4.65, and almost family improving to a quality score of 3.82 in October as compared to 3.78 in July .

As of today, 87% of the almost family home held locations have been converted to the LHC Group instance of homecare Homebase and have completed with the conversion of the payroll processing these coordinate with losses.

As Josh noted earlier, we are seeing incremental growth to the fully converted locations and definitely expect to see more through the balance of this year and into 2020.

Together with the incremental improvement in the quality scores were almost family, we announce move into the stage of capturing revenue synergies from this acquisition.

There is weren't final, but important aspect of pdgm than I want to cover and Thats, how we execute everything Keith and Josh mentioned from a clinical perspective and at the same time maintain our high standards of quality and clinical excellence.

The answer lies an increase in patient encounters and touches while becoming more efficient with our home visits.

We have proven this to work in our pilot locations with quality metrics, improving our remaining consistent sets of our high now.

I cannot say enough about the clinical team and appealing state than process that we went through all 432 clinical groups under Pdgm to develop these best pathways for each patient that we're going to care for.

For the last year, plus we said that we will be ready for Pdgm no matter, what and we are.

We are ready from a clinical perspective to ensure that patient encounters will actually increase with the right clinical protocols and models of care that have been tested in the pilots that we've mentioned.

We are ready with a highly motivated and committed team to ensure that quality patient satisfaction will continue to lead the industry is fulfilled a critical need.

Patients families and hospital partners note is best met through in home care.

And we're ready for what we believe will be a historic opportunity for market share gain consolidations that even us has not seen in last two decades.

Again, thank you to all of my LHC group family colleagues and thank you for listening on our call today Letif. We are now ready to open the floor for acuity.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby walk we've compiled the Q in a roster.

Our first question comes from a line of Brian Tanquilut of Jefferies.

Line is open.

Hey, good morning, guys.

Keith I guess my first question for you as they think about almost family. It seems like the growth there's still a.

A little bit negative, but showed good improvement in the ones that have seen the conversion so much walking us through how you think that growth will progress over the course of the next 12 months and then what is what is it that happened with those 130 locations.

Qualitatively if you can share with us what changes happened as you converted that drove that upside.

Over Q3 versus Q2.

Don you want to think of course.

Yes, given that this is Don I think first of all we all along we talked about the conversion to this instance, being a distraction and it was I mean, you've got to think in these agencies there already taking care patients and doing the day to day necessity and then we add this on top of it but the real answer lies in the quality improvement the clear.

Nickel processes, because we have to remember other than our internal benchmarks, which we used with as HP.

The quality results that we report or in arrears, but the the referral sources the physicians the hospital partners see it concurrently so we're having a much better products for sale number one number two with that conversion behind us in the salesforce have in the product and having the metrics that we overlay.

There's much greater efficiency and Proficiencies the sales cycle. So you add those two together and that's what we're seeing and I think it really gives us a lot of confidence that we're going to boat in 2020.

Okay, Let me.

And then I guess Josh.

I think about the margin performance in the home health business is there anything you'd call out as I look at the gross margin line.

Declining 90 basis points year over year.

Yes, no Brian again, thanks for the questions nothing I would call out I mean, the 90 basis points year over year. As you know just your typical you know wage increases merit increases things of that nature on the gross margin line I'm very pleased that were still able to.

Leverage more of our DNA and our back office infrastructure and deliver an almost 11% EBITDA margin, which is consistent.

From year over year period, and that's a really good EBITDA margin for our home health segment as we highlighted our other segments continue to grow but to be at around 11% EBITDA margin for home health, we feel really good about that.

Yep.

Well that segment.

Brian I can just chime in on that.

Yes.

You know thinking back of the whole history of LHC certainly from the time, we went public in 2005 to now that's been a consistent theme all alone we've always.

We've always had.

A little more of our dollars going through the patient care level and have have done a better job controlling.

Controlling DNA I mean it.

I think that'll that'll just all always be the case, we're very much a clinically driven organization and and.

So weve you know from the very beginning even before we went public.

When it went up when I was trying to manage finances agenda agenda with managing the clinical team Trust me that.

Priority was spending dollars.

In the clinical team at the bed side of patients so.

I just think thats.

Thats, where we are but we do a good job controlling gionee and and we're going to continue to them.

No that's definitely a true I guess in the last question Keith I think about your comments and Pdgm and.

For the efforts that you're putting through to prepare for that operationally does anything change with a cut being cut in half in terms to your views on the pace of mitigation efforts that you're putting through or the changes are going through and then or we changing the strategy at all in terms of the occur.

Cost of revenue mitigation efforts that you contemplated.

You know I mean, it's just it's a sample no Brian I mean it.

It Doesnt change anything.

The.

The only thing is I guess, the only thing it it changes for us is.

In all areas around the things, we're doing on innovation, especially payer innovation to prepare to be.

To a more quickly move more value based type arrangement I mean, those kind of investments that's what it allows us to do but the clinical model as Tom alluded to earlier.

You know that was a year long process and that had everything to do is going to 432 categories to 30 day payment models.

That's the same playbook.

Regardless of what the outcome of the root again.

All right appreciate it thank you.

Thank you. Our next question comes from John Mccain's <unk> of Bank of America. Your line is open.

Thank you so you're just to stay on this topic for US you slip back more.

Pdgm in terms of.

Preparations.

You know how quickly I guess can you just kind of phase two last CNO first it's how you were talking about this last quarter in terms of how quickly you can adjust.

Thanks around staffing or.

How do your thinking about how you can't just elimination of visits per episode appreciate a comment about using wash.

Not a fan to output with patient.

The patient or I guess facing us.

Oh visits so could you kind of.

Same perhaps how do you think about all the changes pacing into it 2020 now how quickly you can make these changes you get the staffing and any other changes to plan to make.

Yes, that's a great question. Thank thank you John I'll I'll, just keep I'll I'll just start with a few high level comments in this Don and Josh I'll I'll chime in.

So.

You know I mean, I I would say that we're is fully prepared as.

As I could imagine we could be at this point you implemented and that's because in January .

We were.

We are absolutely certain that pdgm would be a reality and and we were certain about.

We were certain that we would see.

30 day payment periods and.

Certainly would see the expansion of the categories.

You know so we went we accepted that and went to work with the development of.

Drastically new models.

Yes, we've not changed.

Change this significantly in over 20 years as I said in my prepared comments since BB 97.

So.

So we were switching for that model, we prepared for it we powder and we're ready to deploy it the only unknown was what the rates would be for the model, but we knew what the model would be so that's how that that's that's how I would say about it. So weve you know the all of the training and education.

For the deployment of that model and I mentioned, the new technology in our proprietary model now, it's Rob that's going to put.

Benchmarks in the hands of clinicians into feel as a bad side.

All of that that training and deployment is already underway. So we weren't waiting for the final rule to do any of those things.

Don maybe you first.

It is a good question and I'll go back to what would I said on the last call.

And here's the why we think that by mid 2020, we are fully deployed in how we're going to mitigate all of the things to the clinical model that does not mean, we're not going to beginning in January but first no join is that you've got crossover episodes that are already in play right. There those care plans et cetera, so when you're going to reach.

Where do we do some of those things there is some of that behavior that are transferred on number two key talked about the readiness to deploy the education and training and that is a fact.

But there's also a balancing act operationally because both Keith Josh and myself talked about 32000 people out there need to perform this education be deemed competent and really get an understanding at the same time, we're also balance and things like SW be in DNA. So all too.

Cold as I said last call I'll reiterate we're fully ready we're fully committed to the deployment, but it's going to really take hold and gain steam somewhere around April may and June gosh, Yeah. Nothing came down you both really summarized it well the only thing I would maybe highlight is Keith reference the.

Training that has been going on.

And the the feedback that we have been receiving here at the home office from the training that have already occurred throughout the country has been extremely positive. So the receptivity to the the clinical focus and the clinical pathways that have been developed and are being deployed has really been a great thing to see which give.

That's even more confidence that as you start going through next year, you're really going to see a picking up in Q2 and as Don alluded to I'd say the back half a year, we'd be fully deployed.

Okay, and there's just to close that topic on that.

Actions.

Or you know I guess between 21.

But the impact would be to Leo cashless in Q1.

Yeah, I joined a great question anti I think I talked about this on the last call, but just a you know maybe touch on it again cash flows will be impacted really in the first quarter, probably you know color January through March maybe with an increase of dsos around five days or so.

Then you know heading into Q2, it would get back to normalized level. So you know for US we don't envision any issues from a cash flow perspective.

Just because of our size in the strength of our balance sheet and only five days a V. S. I wasn't going to really make that big of a difference. However, when we talk about the impact of some of the smaller you know folks in the industry that will definitely continue to accelerate the consolidation that Keith and I, both talked about in the prepared.

Remarks.

Okay, great. So I just wanted to make sure Theres no update it piece. That's it. Thank you for a slight decrease comments on could you just on just the next I guess topic next area Hum held in terms of that contracting with Medicare advantage plans. So any update every time, so if any incremental.

Guess contracts you enter into any update on on doorstep running on kind of wrap it up can you just talk about sort of stepped out that between.

Right I actually see for surface style, but that you currently seeing any kind of great great interest going forward. Thank you.

Sure. Thanks, Ryan and I'm glad you brought this went up but I didn't know if the whole call would be pdgm and growth for next year, which we're extremely excited about both but I'm happy to speak about our continued efforts on the managed care front.

We have continued to have those conversations I'm as I've alluded to on each call. It's a journey and there's not a light switch or anything that's going to flip overnight, but incrementally we do continue to see.

Great improvement even in you know just our our contracts that were either newly negotiating or updating.

And that's just on the base rate so that gap you alluded to between Medicare and managed care continues to shrink.

And I think I've mentioned this before but we were probably somewhere between eight and 10% rate increase from around 2015, 16 to where we sit today just in our average rate per visit.

We're also better marginalizing that business, which I've talked about in the past, where we've got lower bad debt I'm on that business as well as just leveraging gionee and better you know operationalizing. It at the field level I'm on the on the more value based side, we have entered into two more pilots since our last call.

That have value based parameters around them and we've also increased the number of preferred provider agreements that we have entered into with axios across the country up to now around 40 of those so we've got a lot of activity going on in that area.

So it takes 20 Fiveish appreciate I'll go back and acute.

Thank you. Our next question comes from Scott Fidel of Stephens. Your line is open.

Hi, Thanks, good morning.

First question just was hoping maybe to get some more beat on the bone or just sort of clarity on the comment in the press release in terms of the growth acceleration. That's expected for 2020, I know that you highlighted number of different tailwinds around growth that you're expecting a during the prepared remarks, but ah but maybe.

Just to specify around that I was there any any setback sorta framework in terms of revenue growth EBITDA growth organic growth, you know sort of M&A or just sort of all these different factors just want to make sure I sort of fully explain that over on to understand that common in the press release.

Yes.

Yes. So this is Keith I'll take that.

Yeah, so that comment.

It was really speaking to emin, M&A growth and and market share growth in any in existing markets.

The contributing factors to.

To that or.

Of course the.

The prediction by industry consultants and experts as the like consensus out there that.

Belief that approximately 30% of the roughly 12000.

Providers or are likely not to survive under the new Pdgm room.

You know given the elimination of rap, which is which usually impacts small small small providers.

I mean to the point of they depend on after they financing.

But then also all of the complexities. So we think the.

When that.

When that market consolidation occurs because of our quality scores and.

And reputation the industry and.

All those things combined we think we are well positioned to pick up a significant portion of that disruption in patient flow.

With regard to M&A.

The providers that don't.

The don't close or go out of business or or I'm more interested in exploring alternatives.

Perhaps selling and where they find a good home for their people and and some of the people who were previous owners and some of these agencies quite often I mean.

I don't know if it's 50% of the time, but I would bet, it's somewhere in that 40% ranges. So.

They come on as employee of LHC in different roles you know there experienced leaders in the industry. So that's all part of consolidation that's load a tremendously for us in 2000.

19, because of the uncertainty.

They didnt know they didn't know what their financial picture would look like in 2020, and we could negotiate based on trailing financials, because we didnt know how to model going forward. So you know this closure around pdgm.

Brings clarity to all though all of those things so we have.

There are.

A number of transactions that are in our pipeline so to speak that that we've had deep discussions with but we're on hold for because we couldn't come to terms on pricing.

So now that barriers on the way. So it's up you know I believe that we're going to see record growth in in both those areas, especially in M&A.

Over the next several years and I would I'll wrap this part up by saying.

There's evidence to support that so I'm, a big data God, if I look back at the history of LHC group.

There's a significant spike in M&A activity in the two to three years.

Following a significant change and reimbursement like this and this one is the most significant we've seen since BB 97.

The change of baby and BB 97.

Led to our public offering in 2005, so that's how significant these things can be.

Don or Josh on it.

Yeah I'm.

Scott This is Josh that the only thing I would add so Keith you know did a great job highlighting the PDG and its effect and then the M&A pipeline I want to double down and highlight a fan, which we talked about an hour prepared remarks.

When we wrap up the conversions toward the end of this quarter and go into next year, not only with the quality momentum that Don spoke about earlier, but we're already seeing the evidence of the growth momentum as we put some nuggets out around the sequential growth quarter over quarter not only in the agencies that converted.

But also just in the whole book of business I think you're going to really see some good growth in almost family in 2020 that we'll continue to bolster our overall growth for next year, Yes, Scott just last comment on that I mean, if you look back remember even prior to the merger almost family hadn't grown in quite some time. So we've got the agent.

Relation the lack of growth that lead us to up real high level of confidence that we'd go grow these things.

God I understand that thanks for all that color.

And then my follow up question just on the hospital segment I just was hoping for some color on a couple of a driver is oh, we get the revenues around the 3 million a benefit from the unpleasant price concession maybe can you talk a bit about sort of what you're seeing on length of stay trends.

Like those might be rising over the course of the year, but just just want to clarify that and then I'm on the cost of service. It looks like that's been down nicely year over year. So maybe just on length of stay in constant service is sort of underlying trends, there and sort of what sort of organic and what's being impacted by M&A.

And that's it for me thank you.

Well. Thank you said you gear, what's being impacted by M&A out, though that the Josh because you're spot on there what I would say in short is on the legacy side, we've not seen a lot of that change because we still have the same nursing home versus non mix as well as the GE IP sides <unk> from a model standpoint, that's not going to move the bar a lot, but you just talked about M&A in Josh.

Would you like there yeah, no I'm very very intuitive question and as Don mentioned, our based length of stay for our kind of core hospice patient population. If you will is not changing the change really lies in and I think we've talked about this in the past, but in a lot of our recent acquisitions, especially in our.

Joint ventures with hospitals and health systems, you have the majority of their hospice patient population, we're coming out of their systems at the time, we joint venture and they didn't really have a growth strategy out in the marketplace. You tend to have a lower length of stay for hospice patients that come out of hospitals. So we continue to take.

Those patients as appropriate but have also then going out an added feet on the street with new sales.

Efforts to grow other hospice business and it's a different patient type that you get from the market, which typically would have a little bit longer length of stay. So I think you've got that dynamic in place as well, but I do want to just overall tip my hat to our hospice operations team, we've been talking about incremental improvement in hospice March.

Wins for the better part of the last probably 18 months or so and we had a good milestone earlier this year at the 10% EBITDA margin Mark and we had been signaling to you guys that the goal was to get it to 12% or above and now that were there over the first nine months I just want to recognize everybody's hard work and efforts that have contributed to making that happen.

Okay. Thank you.

Thank you. Your next question comes from Justin Bowers of Deutsche Bank. Your line is open.

Hey, good morning, So I'm I'm just a two part question on on kind of PDG.

One Keith can you I'm, just give a sense of some of the dialogue that you're having with.

Congress and some of the constituents of the partnership post the rule and then.

Our two is just operationally appreciate all the color on on the pilots can you.

Can you just tell us about some of these some of the things you're seeing in terms of or somebody outcomes, you're seeing in terms of quality and then and then also maybe put some brackets around the cost savings on those sites since July .

Sure.

I can start to take the first part and then I'll.

As Don and Josh to to help out on the second part.

So the.

So we're still early.

In the in the process of digesting.

The final rule from from CMS.

As I said in my prepared remarks.

So we're we're pleased with the improvement.

And the reduction.

And.

Because of the.

Of the relief if you will be to give the industry and working through this adjustment to this because.

Graphically.

Different model for home health.

It is hard work to digest. This I mean, you know we said we've been working on this a year.

And and report a lot of resources into that this year and we'll be doing a treat teaching and training next year.

It's hard for me to even understand.

How a smaller provider would begin to prepare for that so and as an industry advocate I mean of courseware and LHC I wish that have been and this so long.

Consider myself in industry advocates I think about how it affects all of our colleagues that are you know are smaller.

So saw sale of that to say that.

So while this provides some relief.

You know, we're we're still we're still grappling with.

The issue of.

Assumed behavioral changes.

That are not based on evidence.

And.

And are not transparent.

Where we have data.

That we can analyze.

And understand how CMS gets to.

Gets to be its conclusions around reimbursed.

And and we're concerned about future changes in reimbursement.

If that same approaches use.

So the all of the sponsors that that have stood up in such strong support for the home health industry are concerned about that very thing.

With us.

And so we're thinking through ways that we.

We might.

And you know advance something that would.

That would protect the industry from those type of changes being made.

In in the future.

No I want to make a real strong point to say that.

I don't want what I, just said to be interpreted as reluctance resistant to change I mean changes inevitable that change is good and necessary when done in the right way.

And we participate in anything were invited to participate in.

By CMS on technical expert panel.

We love, having dialogue and bring the benefit of our experience to the table and also appreciated that in this process from administrators seam of our man and all of her staff.

So we'd like to see a continuation of that more transparency more involvement.

So that weekend.

Further perfect.

The reimbursement methodology to protect the Medicare Trust fund at the same time not put those we serve at risk by overreaching or doing something that we made a regret.

So keep now following with the quality question, Josh you can go with the financials.

First let me ground you remember in my prepared comments I talked about LHC legacy being at 4.65 and that our pilots where either improving or stay in the site.

I want to make sure that we believe that and you know that stay in the same as a very good thing because if your four and a half a five star agency.

Sealant is near in the ground quite far so you don't want to fall back and so as such a high performing organization. We're looking at this into domains one.

For episode when a.

The bigger that we're focusing on his emergent care rehospitalizations acute hospitalizations that actually is coming down which is in bedded store. If you would inside of the overall star ratings. So from a quality perspective, let me put a ball around this.

We first if we are five star agency have to ensure that the things that we do in how we do it don't put us further back and that is in fact happening and then lastly, especially with what Keith and Josh talked about about going at risk and value based programming, we have to prevent non.

Unnecessary emergent care and Thats also happened in the key Josh will talk about as we're doing it in a very efficient manner. So Josh go to the financials, Yes, just and then I'll try to be brief on how to respond to this part as we said the powerful thing going on since mid July so you're only three or four months Ann.

And as we've alluded to even as we go into next year.

It's a gradual improvement from the financial perspective.

So we're seeing evidence of that which is what gives us so much confidence the focus of the things that in my prepared remarks about.

Offsetting the cut and having margin expansion so.

I don't want to give any specific nuggets, because if you think about before pilots we chose though very deliberately you've got certain ones in urban markets Rural markets have therapy locations lower therapy locations. So the learnings we've gained from that.

Are we will be able to extrapolate across the company for purposes of not only our budgeting for next year, but for when we issue guidance, but we're still in month four of those pilots and harvesting those learning. So I'll just tell you. We've got the confidence that there will be margin expansion and more to come on the detail.

Got it.

I appreciate I appreciate that color and Don Yeah, I mean, I think it's.

From the outside is definitely difficult to appreciate how hard it is to maintain those scores win.

The bias is definitely.

Towards to the lower scoring.

Facilities or at least the gains that they can make but.

Okay. So just and then just a quick follow up the organic growth.

Growth numbers on and home health, just been impressive and grow and just expanding sequentially. This this year so.

I'm just trying to get a sense of what are you guys seeing anything in the market like are we already are we are already seeing like some some impact from pdgm in terms of some of your competitors out there in the market I'm, just trying to get a little sense, a better sense of I've kind of.

What else is driving the gains.

Or or if that's having any impact and I'll leave it up.

Yes. So so it is having it is having.

So the consolidation or market because of Pdgm.

We are beginning to see a slight impact so I.

I don't I never like to say those kind of things without giving you a evidence.

Supported.

Our Rev cycle Department <unk> reported three our first heard this a couple of months ago.

There are there are small consultants that do billing for billing and collections far smaller home health agencies.

Around the country, but there are some in our region.

And Oh, Kimberly see more that runs our Rev cycle Department came to me and said that she was.

She was having the opportunity to pick up some really good staff members from some of these smaller billing.

Organizations that we're reaching out to her to ask if she had positions because they had really good people.

And they were planning to.

Either reduced the size of their staffing or some close their doors, because they're smaller clients were telling them that they were planning to either sell or shut down.

In the fourth quarter as a result of PD, Jim just being too much.

So that was ever but that was a very real signaling that is actually happening. So so she's picking up some of those volume.

And so you know I don't have that level of detail a direct contact to why some of its have some of the shift is happening in the field, where we see.

Our locations.

Picking up market share and we see that incrementally trending month over month, and you know direction.

But.

You know there's.

I think there there is.

There's also a movement within referral source, especially hospitals and health systems.

Have a a narrowing of networks around.

Quality providers.

And not just in terms of star rating around re hospitalization rates and those things that affect the financial performance and potential penalties in hospitals.

Just think all all of those are all of those things are becoming.

Important at the same time that we're having a rule that's going to cause consolidation industry.

Got it. Thank you appreciate it.

Thank you. Our next question comes from Matt Leroux of William Blair. Your line is open.

Good morning, I perceived screening in its one of the next follow up on the pilots again.

That's a little bit more thinking given it sounds firms or what it looks like in a pilot practice, that's sort of care that does politicians versus control in terms of higher deploying in.

The telemedicine and sort of telephonic interactions what technologies airplane.

And then.

You have a sense, whether this will increase or decrease your total cost right. So.

So that so this is don.

It's a really good question. So let me take you back the first thing that we did when we mapped over the patient characteristics in PD, Jim to the distant population.

Is look at what did we do for those patients in today's world.

That led to the outcomes were experiencing.

Once we looked at that.

For example, did we teach and train do we debris alone did we change medications did we ambulate, a patient who couldn't walk.

Next we said how often do we need to do that statistically to correlate to the outcome in the last how can we do it and for what disciplined must go out.

So the pilot locations and what we've alluded to have higher touches whether it's through telephony telephone teaching and training whether it's through telemonitoring, whether it's through other adjunctive mesh methods that I'd I'd kind of not like to go out there right now because I mean, it's going to be a competitive advantage for us.

And then the skill mix in the disciplined when you add all of that up we are touching the patient more so than we ever have so that gives us.

The confidence that we've talked about I'll call, but it would of course, we have to do that in the most efficient manner. In it is not increasing cost you know Josh was very careful not to go out with a number but our first goal was to to mitigate all of this in a net neutral fashion and that was when we were looking at an 8%. So when you.

Wrap all that up we like where we are and again even off line, we need a little more granular if you need to to give you specificity, but the bottom line is it looks different because not it's no longer centric to just visiting a patient and stepping inside at home.

Yeah, Matt This is Josh how we've talked a lot about substitution every types of visits and that could be substituting a tech or an aid for a P.T. or a P.T. today that could be substituting a teaching and training, where if you know more telephonic touches and encounters is don's describing so each of those believers that you pull.

You'll have a cost reduction component to them. So I definitely want you to to make sure that from the financial standpoint, and the margin expansion standpoint, you know, that's where that's coming from.

And then thanks and have to imagine that east the capabilities and the new approaches to episode, you're developing and you have to be of interest.

Yeah, certainly to you at this point, but eventually.

The parent at some point to new your ability to incorporate different skill levels technology capabilities, and keep driving down cost of care, while improving quality.

Absolutely not I mean from my the conversation is finally maturing to one where you're discussing total cost of care I'm glad you just use that phrase and in order to do that the managed care payer can no longer just pay you per visit for every time you walk in the front door, they've got to start, allowing us to utilize technology and some of these other things.

We are starting to have some evidence based result off of that will really go toward being able to go to negotiate more power to more opportunities with them because when you're having those conversations they want to see some level of evidence that you've done it before and not just I Trust me approach. So the PDGF efforts that were using.

We'll also very much so play into that progression.

Okay I appreciate it thank you.

Thank you. Our next question comes from Frank Morgan of RBC Capital markets. Your line is open.

Good morning, I'll be brief I notice of running on that but just for the record since you've gotten this somewhat of a relief in the final rule are you going to pursue or is this legislative approaches this officially Dan them.

No I wouldn't I wouldn't say its officially it's officially dead. So I think there's.

There's a possibility that the legislation might be modified.

And Mike move fall, a little bit more targeted on.

On a how future reimbursement changes on me or made specifically around a.

Transparency and and being more evidence based and.

Thanks, I'm not sure if that if that there if that's going to be the direction RF legislation is a move forward.

I'm I'm only.

I'm only saying that those are this the discussions I'm hearing about that our ongoing now just trying to decide because there was.

You know the good news about that is that you know we have such strong support and such clear understanding of the issue by leadership.

And by top leadership on both sides and and bought leaders within the the.

But that the different committees that they're concerned about it and they're concerned about you know are we gonna be facing the same type thing again next year. So no decisions have been made but those conversations are ongoing and and you know I would imagine within the next several weeks, though we'll have some direction.

Where they want to go I'll just close by this.

Oh.

We have you know where we're really blessed to have this strong support and who it and who are we to now go and say to them to ER.

Pencils down I mean this is this is still a serious issue we have relief from there from a cuts but the underlying problem still remains in its their ability to CMS his ability to make these type changes without.

Evidence or transparency of process.

One more on PGM, just the I think you called it five days of Dsos.

Another competitor had said something in that range around six or seven days in than we've had sort of an outline number of 20, but it is the five to six days that you're talking about is that assuming kind of a perfectly frictionless transition in could could that dsos number actually be higher and is that the in bad days is that roughly 20 million 30 million Bucks.

Yeah, Frank that's about right and [laughter] frictionless, that's a I guess, that's a good way to put it.

I would say you know.

That's based on how we expect this to roll out and for the government and others to be prepared because you've got you know not only the governmental payers, but certain other players that are going to be rolling through as well. So I mean, if there's some significant hick up from there and on their systems, obviously, we're not baking that in but if that.

The definition of Frictionless, then yeah, I would say that's probably the way we're modeling it.

Got you Okay. One last non Pdgm question, just I don't milk you called this out but in terms of this new joint venture about rolling in the regional care facilities or or agencies or did you size of what may be the revenue opportunity isn't the growth opportunity is there and I'll hop off thanks.

Sure.

The one that we press released earlier this week.

As a little over 3 million a in current revenues are three locations.

And then there's a few more that will be coming on the heels of that hopefully, we'll be able to announce and discuss here in the next month or so as we get closer to finalizing. The addition of those into the into the fold. So you know not a significant immediate revenue, but if you look at.

Now the Lifepoint assets have been growing since weve brought them into the JV as with most we think there's some real upside and growing these as well.

Thank you.

Thank you. Our next question comes from Whit Mayo of you'd be yes. Your line is open.

Hi, Thanks, I'll just keep it at one given that we're well over the hour Mark how much EBITDA do you think that almost family contributes this year just in the home health segment, either with or without synergies just trying to put a finer point on on this question.

When we had this is josh with synergies that would be hard for me to try and come up with off the cuff here because a lot of our margin expansion throughout the whole business. This year has banned the realization and acceleration of our synergy capture if I think about you know just at a high segment level you know.

Hey fans mm 100, 4000, 45 million of home health revenue and if you apply side you know a 10% to 11% EBITDA margin you know those assets are quite probably at the full 11 that the rest of the businesses running that would give you you know kind of a range from a EBITDA margin contribution.

From a fan and then when you look at the H.C.B.S. segment I mean, that's almost all exclusively all a fan because our HCB segment was relatively immaterial prior to that so all of that margin is directly attributable to a fan.

So I guess long winded way of saying it really has been a major contributor to our success story. This year from a margin perspective, and then I'll you know triple down some thought double down earlier on the growth trajectory and increased contribution from a fan into 2020.

Yeah, so 10% to 11% margin in the home health segment that somewhere in that that ranging inclusive of the synergies that you capture this year and any way to think through either the dollar.

Contribution from anticipated efficiencies and and synergies next year.

I would say went from a synergy perspective.

And any material way either in our run rate now you know we have got well north of 30 million of a fam synergies and that's kind of in our run rate.

They will always be.

Some incremental opportunities and in the AIU fan business that we continue to tomorrow through part of that frankly in the third quarter was in HCB segment. You know as you see that margin lift we've really you know better Operationalized then if you want to say synergize that business, even at the back office in the local level.

So I think in a material way, we've already captured it and then you'll see a little bit more maybe as we move forward.

Okay and then just on that question, maybe up a second point, sorry, just Florida I know, it's been a little bit more disruptive other market versus you know your average Interstate that you operate and is that getting better at this point is it visit.

Not making any improvement any qualitative commentary would be helpful. Thanks sure sure. So Florida, a is really likely to be one of the underpinnings success stories as we go into 2020, if you think back to almost family prior to our coming together you know they tended to really.

You know either call, Florida out in a negative way or accept them out we've we've put a lot of intense focus on that state.

First and foremost from a clinical and a quality product perspective, and making sure that we differentiated ourselves in that market and just like we have with all of a fan Florida is really coming on strong from high quality standpoint.

Then we had to frankly get better margins out of the state of Florida, Florida wasn't just a issue from a lack of growth over the years, but it really was not running at anywhere near corporate margins for LHC group and and I can you know very much affirm that over the course of this year weve.

Much more marginalize the business and it's contributing more to the bottom line and then lastly from a growth perspective.

As I mentioned a fan in general is showing signs of sequential positive growth from Q3 into Q4, and Florida is one of the big contributors to that so we are finally, starting to get kind of hersey legs under her with some growth momentum in the state of Florida, So from a quality standpoint, a margin standpoint and growth.

I'm looking forward to talk more about Florida, as we head into next year.

Perfect. Thanks.

At this time I'd like to turn the call back over to Keith Myers for closing remarks.

Okay. Thank as always thank you everyone for dialing in this morning for all of the questions.

As always between called if you would like to speak to myself or any members of management team. Please contact Eric Elliott with always make ourselves available to thank you. So much at all again and thanks for your support and confidence LLC.

Yes.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.