Q2 2019 Earnings Call

Should anyone require assistance during the conference you May proceed starts in zero on your Touchtone phone as a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Mr., Eric Elliott Senior Vice President of Finance you may begin Sir.

Like you know alone.

And I'd like to welcome everyone to LHC group's earnings conference call for the second quarter ended June Thirtyth 2019, everyone should have received a copy of our earnings release last night.

I would also like to highlight there with some supplemental information on the quarter and are today.

Steve.

Section.

The supplemental deck as well as a copy of our earnings release, the 10-Q and ultimately a transcript of this call. When available have you found on this page are supplemental deck includes all of our reconciliations and breakdown of adjustments or defer to these non-GAAP measures during our call today.

In a moment, we'll have some prepared comments from Keith Myers, Chairman and Chief Executive Officer.

<unk>, Chief Financial Officer, and bounce Delie, President and Chief operating Officer.

Before we start I would like to remind everyone that statements included in this conference call and in our press release.

In our supplemental financial information 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 2019 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 FCC filings, which triggered shall have no obligation to update the information provided on this call to reflect subsequent events I'm pleased to introduce the chairman and CEO of LHC Group Keith Myers.

Thank you Eric.

And thank you everyone for dialing in and participating in this morning's call.

Before I begin I want to take a moment to directly thank our 32000 team members serving at locations around the nation.

Your collective efforts reflect our unwavering commitment to providing the highest quality and service in our industry are true hallmark of our LHC group family.

Collectively you fulfill our commitment to being a 20 473 65 health care organization, but never sleeps and there's always there for those who placed their trust in Austin.

Please know that your efforts are noticed and greatly appreciate it.

For 25 years LHC group has done a clinically driven company.

And we reinforced that commitment with a strong addition to our team and Dr. attrition when joined US in July as Chief Medical Officer.

As a physician and business leader with experience in health systems and managed care. She has already influencing how we think about our care model already feel business and other it initiatives that should have an impact on revenue and earnings.

We value people here at LHC group is our greatest assets along with the culture, we have intentionally created.

It shows up in the high level of quality and patient satisfaction, that's consistently outpaced industry.

And it shows in our voluntary turnover rate the turnover rate at legacy LHC expanded 15, and a half for set another record low for us.

Our second quarter story is mainly about building on the strong reputation for clinical quality and an exceptionally deep team of clinicians operators and other professionals, who go out and execute on organic growth M&A integration and managed care initiatives.

The work, we did in the quarter and to date in the third sets us up for a very successful year in 2019 and to continue driving in 2020.

With a national platform that now extends across 35 states and the district of Columbia, reaching 60% of the population age 65 and older. We have many opportunities to capture market share through organic growth and noble and acquisitions.

With organic growth in legacy LHC performing ahead of our usual annual targets.

We believe once we are past the homecare homebase conversion, we will be able to drive organic growth with almost family as well.

Our target for M&A volume for 2019 has been between 101 hundred 50 million.

To date, we have announced six transactions, which total approximately 81 million in annualized revenue.

These transactions include more hospital joint ventures, several tuck in acquisitions that fill out our tri level of care strategy in existing markets.

And a strategic acquisition of visiting Nurse Association of Maryland, with approximately 35 million in annual revenue.

We have accelerated our pace of acquisitions folks the final phase of almost family integration and follow up following the completion of the two phase joint venture with CGI singer in April and June which include at home health and hospice locations in Pennsylvania, and New Jersey.

We announced DNA home health of Maryland, and late July and expect this transaction to close on September 1st.

On August 1st we made several more announcements first we closed the previously announced joint venture with capital Regional Medical Center. The purchase from SSM health the assets of three home health hospice locations, and Jefferson City, and Mexico and U.S in Missouri.

Second we completed a JV with add more county hospital to purchase a home health provider in Atmore, Alabama.

And lastly, we purchase to home and community based locations in Western Union, and Waverley, Ohio from comfort home care.

Together. These three represented approximately seven and a half million in annual revenue.

Our opportunity pipeline managed bar inhouse corporate development team remains robust.

We have the experience Corp, Dev infrastructure in house to be able to capitalize on increased industry consolidation likely on the horizon in 2020.

Particularly among the smaller providers this component of our growth story could potentially take on greater importance in the months to come.

We have been saying for some time, but it bears repeating in the contents of the focus on PDG yeah.

We expect then believe that any shift of care into the home and any payment models built on delivering value will be a net winner for LHC group.

Delivering high quality care in the privacy and comfort of the home or primary probably for residents is the most appropriate most efficient setting.

Our partners Payors and pollen policymakers recognized this.

We've seen it directly in our AC old business.

As we manage large patient populations and analyze the claims data.

Our many hospital and health system partners recognize this.

As do the many payors, we work with and again policy makers in Washington D.C.

Health care service delivery is moving to the home at a pace that will continue to increase.

When we connect our joint venture strategy, the new payer models and the new value based environment, we're headed to.

We're in a vastly different place than before.

Whether it whether it's with partners such as Austin that are on the full capitation or partner such as Guy singer that have their own health plan.

The conversations we are organizing and the solutions, we are presenting a more strategic than they've ever been.

[noise].

We've always been known for the highest level of quality.

Where these conversations are going is how we look at unnecessary hospitalizations, EDI usage and recertification and focus on total cost of care.

And sharing and those savings in the form of bonus payments.

These relationships create more upside for us in the future.

And we are very excited about where we sit in this environment with national scale, leading quality scores and a differentiated value proposition.

Now turning to.

PDG.

As many of you and you know the new payment model for Medicare Home Health services, Pdgm, which Congress enacted in 2018 is set to begin January onest of next year.

Our preparations for this change are well underway and ahead of schedule.

At the same time, how constructive dialogue with CMS and I work with Congress.

Continues to develop ways to improve P.D., Jim in its current form.

For the benefit of Medicare beneficiaries.

More specifically to avoid the unintended consequence of forcing patients back into higher cost settings to access care that could be provided in the home at a fraction of the cost.

In July CMS issued its proposed rule implementing this model increasing to 8.18, 0.01% I'm sorry, it's proposal on budget neutral payment adjustments.

Based upon assumed provider behavior.

While we are well positioned and well prepared for this change at LHC group.

We do not agree with that perspective cuts and the use of assumptions as opposed to evidence to adjust payment.

As founder and chairman of the partnership for quality home health care and as a longstanding active member in pharma <unk> Board member of the National Association for Homecare and hospice.

I've been heavily involved in the industry is lobbying efforts.

I'd like to add some more commentary on P.D., Jim and our collective efforts.

Both the partnership and dock.

Or.

In our in a lockstep I should say and with behind priority legislation to refine pdgm.

And we're generating strong bipartisan support in both houses.

Leading into resource recessed there are 45 house co sponsors and 27 co sponsors for HR 20 573.

And Senate Bill 433, respectively.

Among the close boxes are significant in crucial support from key constituencies.

And many members of the committees of jurisdiction.

The bills and momentum is building.

The lead sponsors are the PV Jim do.

Collyn stabbing now school and Buchanan, our home Health champions.

With a with a strong track record in personal knowledge and support for home health.

The Bill is well positioned with sponsors who are motivated to deliver for the home health community.

This is evidenced by their statements about the bill.

Our strategy is simple.

Bill broad congressional support for our targeted legislative approach to eliminate the most onerous component of PDG.

Use all of the muscle of the industry collaborative entity.

Share data on the potential impacts and likely consequences of BD Jim.

And be ready and positioned for allegedly legislative vehicle as it develops.

Again, the entire home health community is working collaboratively to build support for the P.D.G.M. Bill.

The National associations are working together with every state Association in the nation and nonprofits Investor owned urban suburban rural agencies are all speaking with one voice.

This effort mirrors the successful H.T.M. effort that resulted in CMS slowing down and redoing. Its original plan for payment reform of home health.

The intensity of advocacy includes a heightened push to remove any technical barriers to passage of the bill.

Especially pressure at all levels to secure a score which determines the fiscal impact of the deal.

Ill health care leaders have committed to accelerate a CTO analysis of the bill which would remove a significant process obstacles that can affect any legislation.

Congrats congressional sponsors had been assured.

That PQ Hh enough are ready and able to pivot quickly to make refinements needed to ensure budget neutrality.

In addition, an extensive grassroots advocacy effort during the August recess to communicate by email and social media to members of Congress make personal visits to members of Congress in their district offices attend how townhall meetings and community pharmacy forums and invite lawmakers on.

Home health visits to experience the power of care in the home.

Both the partnership and off also continue their grassroots media strategies, I encourage and encouraging independent voices in the field to write letters to the editor and use other social media means to build support for the bill.

While the PDG Unbilled is well positioned the focus of Congress immediately after the recess will likely be dominated by policy decisions to address tragic events of recent days.

However, the business of Congress in the fall must also incorporate action on other must pass initiative.

Constitute continuation of many provisions budget items that conclude at the end of the fiscal year.

For this reason it is very likely that pdgm will have potential vehicles on which to ride along.

Before the end of the fiscal year are certainly before Congress a giants in December .

He'll staff have also forecast the availability of a Medicare Bill this fall that would be a vehicle for the PDG legislation.

Given bipartisan action earlier this summer on the budget and debt amendments there may be legislative opportunities in appropriations or other healthcare extend of vehicles that offer our bill the chance for legislative action.

Despite these office opportunities Congress can as it has in the past delay it's a budget process by passing a continuing resolution flatlining expenditures temporarily offer a series of months.

Should this happen the other the other legislation in the healthcare space May still provide good vehicles to advance our bill.

So the bottom line is we have strong bipartisan support growing momentum.

Data and strong policy arguments to support our cause and a unified engage home health community.

I could not be more pleased with our unified industry advocacy efforts I believe that are coming together as one voice with reasonable evidence based policy recommendations supported by the majority of providers in the industry and supporting data from reputable third party firms is a recipe for success in our current and future policy efforts on behalf of industry.

And now here's Josh to provide some color on our financial results and 2019 guidance Josh.

Thank you Keith and good morning, everyone. Thank you all for joining our call.

As always I want to begin my prepared remarks by saying how much I appreciate all of our clinical professionals across the country and what they do each and every day.

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 am so proud to work alongside in support you all.

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

Our supplemental financial information on the website provide more detail on the non amongst sector performance.

Guidance and assumptions.

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

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

First our guidance for the year it for 21% growth in adjusted earnings per share at the midpoint and we are on track with that outlook was one dollar and seven cents of adjusted EPS in the second quarter.

That's a significant improvement of 27.4% year over year, and also up 9.2% sequentially from the first quarter.

Second we realized a total of approximately $7.8 million in pre tax cost synergies in the second quarter, which now brings the realize cost synergies to an annual run rate of 31.2 million from the almost family acquisition.

Next incremental margin improvement has continued across all of our segments on a year over year and sequential quarter over quarter basis.

Fourth with organic growth of 9.1% in home health and 9.6% in hospice for the quarter, our organic growth was strong in both home health and hospice, yet again, as we maintained our industry, leading quality and patient satisfaction scores.

And lastly revenue across all segments for the quarter met or exceeded our expectations.

Turning to page nine of the supplemental deck I would note that our adjusted consolidated gross margin of 37.6% in Q2 was a 130 basis point improvement year over year, and a 50 basis point improvement over the first quarter.

Consolidated adjusted DNA expense as a percent of revenue was 27.3% in the second quarter, which was down 50 basis points from 27.8% in the same period, a year ago and in the first quarter of this year.

Our adjusted consolidated EBITDA was 10.2%, which is up 160 basis points year over year, and 100 basis points from Q1 of this year.

As part of our ongoing strategy to optimize the portfolio. We also closed 13 locations that represented a total of 11.2 million in annual revenue.

In addition, we incurred some severance cost lease termination fees and impairment costs related to these closures.

All of these calls were accounted for in our adjustments. The details of those adjustments are on page 10 of the supplemental deck.

However, in addition to optimizing the portfolio through certain closures. We also continue our strategic growth efforts through not only same store organic growth and new joint ventures and acquisitions that Keith described but also through the opening and planning for opening additional de novo's across the portfolio.

So far year to date, we have opened five to know those two in home health and three in the H. CBS segments.

And we are currently underway in process or evaluating an additional 30 de novo locations to open throughout the balance of this year as we head into 2020.

[noise] our improvement across all metrics continues to be broad based.

Pages eight through 15 of the supplemental deck highlight the results on page seven those are the key staff by segment.

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 61.9 million for the six months ended June 32019.

Dsos improved to 48 days down from 51 days in the second quarter of 2018, as we continue to improve our collections on managed care receivables and receivables from the almost family acquisition.

Recall that we are expecting dsos remain close to this range if not slightly below for the balance of 2019.

Our balance sheet remains strong with a net leverage.

The foreseeable future and to take advantage of the M&A momentum, we have year to date and the opportunities. We are currently evaluating our pipeline.

We are reaffirming our guidance issued on may the nine.

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

At the midpoint of this range, we're expecting adjusted EPS growth of 21.1%.

Net service revenue growth of 16.9% and adjusted EBITDA growth of 34% as compared to 2018.

In summary, the quarter's results reinforce our growth thesis built on strong organic growth differentiation in quality and patient satisfaction scores.

The ability to move from cost to revenue synergies with almost family as we complete the homecare homebase integration by year end.

Incremental margin improvement with additional lavers, yet to be pooled and significant momentum on the M&A front.

Should there be a disruption among smaller providers due to pdgm in 2020, we will be well positioned to gain market share both organically and inorganically.

That concludes my prepared remarks, and I'm happy to further answer any questions during the Q and a section.

I'm now pleased to turn the call over to Don.

Thank you Josh and good morning, everyone as both Keith and Josh alluded, we are where we are today because of the hard work and commitment from our team the team.

Gareth for patients and families that we truly are privileged to serve each and every day.

Hi to sincerely thank you.

I do want to focus my time. This morning on some quick updates on the almost family integration our growth.

Quality scores and how we prepared for our Pdgm.

First on almost family, while I hate the eyes continue to trend in the right direction.

Contribution margin increase.

And the quality star ratings of almost family agencies up pace, an improvement is going to accelerate further when we are past the homecare homebase conversion and round out our modeling.

Both will which will happen by year end.

Turning to organic growth for the quarter, we were well above our usual, 5% to 7% annual target range with home health admissions up 9.1% in hospice admissions up 9.6%.

In hospice in particular, we clearly are seeing the benefit from the sales and operational leadership changes that we made and discussed last year.

And Thats similar vein you can see the early benefits in our home and community based services.

When the changes in the structure, we made last quarter.

From our segment results on page 15 of the supplemental deck, you can see that our home and community based service segment. Adjusted EBITDA margin was up 200 basis points from last year and up 150 basis points from the first quarter.

We expect more improvement in this business as the year progresses, as we drive both gross margin and DNA efficiencies.

Our quality our quality scores, which are outlined on page 19 of the supplemental we continue to see improvement with same store LHC quality scores.

In July from 4.65 and 4.61 in April .

Almost family improved as well with a quality score of 3.78 in July as compared to 3.76 in April .

As a reminder, CMS did change the calculation for patient satisfaction from April to the July release, we again continue to outpace the industry on those scores as well.

Looking ahead to the balance of the year end to 2020 of course, PDG and is front and center on everyone's mind.

At LHC group, we have fully incorporated the new reimbursement model in the work streams.

Clinical staffing models and our operating reviews.

We also have several pilots that are going on which have allowed us to test that you pleased with these responses.

Even if we assume the behavioral assumptions ultimately, we remain which operationally we are we're ready.

With adjustments to offset higher reimbursement cuts.

No I don't think you heard anyone from our business at this point.

Who believe they can fully offset these behavioral assumptions on day one.

That could adversely impact patient care.

We believe firmly that BT GM is manageable just as all other reimbursement changes we've seen the industry give us.

For instance, or modifications that we can make to care delivery, where we could achieve more patient touches.

Use a different skill mix of clinicians in the field to do that more efficiently.

The larger providers like us we believe pdgm has the potential to accelerate industry consolidation. Unlike any we've seen in recent memory.

We will be ready.

Thank you again to all of my fellow colleagues around this country and company and thank you for listening in on our call today.

Operator were now ready to open the floor for acuity.

Thank you ladies and gentlemen at this time if you have a question. Please press Star then one on your Touchtone phone. If your question has been answered or you wouldn't like to remove yourself from the queue. You May press the pound key to prevent any background noise. He asked you place your line on mute. Once your question has just stated.

Our first question comes from Brian Tanquilut of Jefferies. Your line is open.

Hey, good morning, guys, Keith and Don Thanks, Thanks for all the color on.

The operations wanted to ask Don on the HCM side first as we think about the rollout of homecare Homebase.

And what that's doing to the agencies I mean, if you can just give us some more color on the disruption clinician turnover and then where do you think the same store growth for that portfolio of assets actually inflects.

Great question, Brian first of all let me just give a little color on where we are on completion.

And even before that homecare homebase in the conversion to the one instance is really the mainstay, but they are tangential things that happen. For example were 88% complete we've put in one instance in their portfolio is 64% complete put in the payroll processes that coordinate with Lawson and actually.

Track the time and attendance. So I just wanted to give you that example, and color to talk about the disruption.

When you use the word disruption or how it affects it. The first thing is you are running a parallel for essentially all new AD mates and resource in a research so that takes that clinician going to systems.

So quite candidly when you look at the flatness of that growth and you also look at going pre merger that a fan wasn't growing at all.

Considering this disruption while it sounds maybe a little oxymoronic, we're very pleased with where we are with that if we see it as a win because we're really putting this into place with the model of STR short term incentives some of the other parameters of how we route plan. We're building this out to get to that same I would I would come out with a 5% to 7% annual number next year when the Mitchell middle of budget.

Process right now a bit of color that it'll next call, but I would look at the last half of 2020 being extremely similar to what we are seeing inside of LHC group right now that's what we're going to budget and Thats what were going to hold our team.

Accountable for.

Got it and then.

Keith you talked about the partnerships you have with some of these very innovative or progressive hospital systems.

I saw that option or for example is the rolling out of home hospitalization program.

I'm guessing you guys will be the partner there. So if you don't mind, just talking to us about what that does it or where do you see that going in your ability to roll that out with other partners going forward.

Sure. That's a great question, so let's start with ochsner, but that is very much.

In the developmental stage I would I would say I mean, we've been involved with them and this initiative or.

Probably a little over a year now and you can probably.

You have a little more specific but.

Really incorporating nurse practitioners and moving moving patients out of the hospital into the home quicker is what the whole initiative.

They refer to it at hospital to hospital at home.

So we're we're doing a pilot having now we're creating the value.

Obviously, the next step for us before we roll that out to disarm to determine what the economic model for a little bit like how do we share and and those savings as their partner.

And I think that's you know that's going to be.

That's going to be our reality for the next several years as we move to value based care with Payors are with hospitals.

Uh huh.

And by that I mean, positing or specific products and a model that well <expletive> documented that can be replicated.

And then determining how we score it.

And then determining how we how we share in the savings that are created because there are obviously additional cost that go far above and beyond what we provide and traditional home health RT nurse practitioners.

Telemonitoring and those type things, Bob maybe you can expand a little bit on that.

Yeah, Okay. Thank you framed it up well the add on their bodies. The reason nurse practitioners are so important is because then you take the burden to the hometown and the medical necessity inside of party benefit away because candidly the hospitals out there that that patient can drive sporadically or they don't exactly meet that criteria, but there's a huge cost and add because you can only build part D and it doesn't offset the whole cost. That's why Keith was alluding to you know how does the economics work is a little bit more complex, but but I got to tell you I think Josh would echo later.

Our partners are really starting to quote Unquote get act and so Pete you laid it out very well.

Got it and then just last question for me really quickly Josh as I think about the innovations business. There was a notable sequential drop in revenue is there anything to call out there and how should we be modeling that going forward.

Yeah, Brian .

Great question then thanks, Thanks for the questions. After this point on HCR really the revenue reduction is around the closure of the asset that was formally referred to it and Dennis if you recall in the HCR segment that we acquired from almost family member or four different really completely separate books of business, you've got imperium more to the Asia business Youve got the nurse practitioner business, you've got a long term care business.

Well that does primarily assessments for long term insurance companies I mean, you had in Janus we sold the Agenuss asset back earlier. This year, so that would explain it and then as far as the run rate goes I would factor in the same that you saw for this quarter on a go forward basis.

More of a little bit of incremental growth because we are bringing in some new revenue on the PMPM side for Imperium I am we have a few new opportunities with the Lps business.

But don't forget in Q3, we give the M.S.S.P. the Medicare shared savings payment from Imperium that we'll give a little bit more revenue in the third quarter that would be out of the norm run rate.

Awesome. Thanks, guys.

Thank you.

And our next question comes from Joanna Gajuk of Bank of America. Your line is open.

Hi, Good morning. Thank you for taking the question here. So you are you sounded quite confident in that you know in your ability I guess to to grow Onec next year.

You definitely PGM and also what is the other I guess avenues of credit Suisse.

Theres to save time, and especially but in terms of the PPG and I know I understand that you are you, saying you.

You are not saying that you can offset all of it but can you just stop spending flush out a little bit in terms of you know your ability to attack that 8% in kind of still seem a bit different and then yourself off sits and how quickly you know you're kinda kinda OCC.

Act upon Dallas.

I'm sure Don do you want to take that.

Yeah, Yeah peak I'll take the first part of the new build over to Josh to talk specifically about the numbers, but doing it in a very good question.

Remembering also alluded to it.

In my prepared comments about the initial.

The way that we've got to do that in the first quarter will look quite differently as we model it out going toward specifically into Q3 and four of next year. Let me explain it briefly the of course the biggest component is how you take the restored at diagnosis in PGM and work through providing therapy type services with a different skill mix you cant just flip a switch going between November and December . So we expect the first quarter to have a little less spinning in moving that way.

As we go through the year of course Q3 in Q4 being fully modeled.

You also talk about the way, we think through that in the offset on the financials, but I would fully expect that by Q3 and Q4 at any of those effects go away because we're fully deployed into our model, which can again just can't be pushed out their January 1st Josh Yeah, great frame up Don and join as they get more into the details of the financial implication. So as I think we said previously just to Reground, everyone based PDG has about a 1.9% reduction to LHC group, which was almost entirely offset by the market basket adjustment. So hours referred to Ace Pdgm as flat for us going into 2020, then you've got the 8% behavioral adjustment that Keith mentioned and Don just referred to.

I want to maybe take a opportunity to describe it in dollar terms that I don't think we've done before which is when you look at the new 30 day rates.

Before I knew 30 day payment period within the 60 day episode and you apply the 8%.

That represents about $140 per 30 day period.

So when you think about all the things that Don just described and the operational preparedness efforts that were put into place in some of the learnings that weve already obtained through the pilots, that's where we get our confidence Joanna that you know we feel like throughout the balance of next year, we should be able to offset and mitigate the majority of that $144 every 30 day period.

Yeah. So you know there and was kind of the financial side of it. If you will enjoy that I've not said this before but I think I need to.

The color in what I, just told you remember of course of the 432 different.

Hi, agnostic groups our preparedness.

In the aggregate of the patient population mirroring next year's patient population, if we weren't able to flip that switch I alluded no doubt, we could mitigate that effect, but what I cannot predict right now until we get further into our pilots. <expletive> I also alluded is what is the effect of quality re hospitalization and so as this year meanders through I would expect us to give you a lot more clarity even on the next call because we'll have those pilots fully mature.

Right. So on those pilots so what are some of the things you're testing out so I guess you mentioned.

Hi that you're watching the quality and Uh huh.

Let me hospitalization rates, but are you I guess testing outside you know things like labor and the utilization of say you know visits per episode I O already making these changes across the board and your first kind of testing it out and some centers to see how you know you cannot calculate PD GM payments you know versus a first since the current payment you know any color. There in terms of say you know what kind of adjustments you I know you're trying to make.

Sounds like you've been in my meetings, Jay absolutely. We're kinda pertaining if you would where outlay in the financial aspect by different episode right now see that if we actually dropped to build on the PD Jim what it would look like we're also looking at BP skilled mix as well as the quality on our SH peak and that's exactly what we're doing and that gives us the confidence brain. It. We just started so we haven't been through a full 30 and 30, yet but were also looking to see how the different luper rates would be affected based on our visit patterns. Our commissions have made and really starting to make that into a product that takes into quality financial parameters and honestly employee satisfaction, because they've got a really understand that we're going to provide greater touches greater satisfaction and a greater quality products under this new rule.

Thank God I I'll go back to the kidding.

Thank you.

And our next question comes from.

Kevin Ellich of Craig Hallum. Your line is open.

Hey, good morning, Thanks for taking the question just wanted to continue on PD, Jim to two questions here.

You know as you do your preparation and you've gone through your pilots wondering how much cost savings you might be able to attain from using extenders like Ptcs encoders.

And then the second part maybe for Keith or Don as you know with the changes to wrap payments what sort of impact do you think that will have on your business and what opportunities do you think that could drive from you know how much it will hurt some of the smaller home health providers.

All right. Thanks.

Two good questions I think.

But I think Oh and you take the first part not Josh I think actually you should take the rap.

Sounds good Kevin So I will jump in you mentioned, the extenders, specifically PPA encoders I'm going to actually take that a step.

Deeper.

We have been very prescriptive in analyzing roughly 850000 episodes on in that patient diagnostic group that mapped over to one of the 432.

What was done.

And that's what we looked at first and said just for a second forget.

What disciplined did it.

What intervention what actual.

Procedure, what teaching and training was done by that.

Person and who now in the new World could do it.

And some of those can be done by nurses. Some can be done by sea names of course, we want to use the lower cost disciplines on P.T.A.S encoders, but it's what I just kind of described in that scenario as added to what I was talking to join them out at these pilots are doing so no doubt we call. It practicing at the type of your license no doubt, we will see the extender use be a real big lever to pool.

But again it has to be based on the interventions, which lead to the quality and that's what I'm test and right now our teams in these pilots.

JP, yeah, or Kevin I want to maybe take some of what Dong has described and put some numbers around it for you that might be helpful. So when you think about the the current regulatory parameters around providing and I'll just use therapy. As an example, the Renault dawns referred to PTC Deicing therapy decks.

In the in the current home health environment, you've got to say in either a physical therapist or a physical therapy assistant out to make those visits and that runs anywhere from call. It a P.T. somewhere around $80, a visit give or take and a P.T.A. is somewhere in the 55 to $60 a visit a direct costs.

Just the labor right.

In the new environment.

Under Pdgm you are now allowed to provide services through a therapeutic or a much lower cost delivery and a lot of the pilots and the models that you know Don and Tricia and the team are working on from a clinical perspective are again, ensuring equal or higher quality outcomes and patient satisfaction, but those therapy to exit would likely be half the hourly cost of a P.T.A. For example, so you can really see just on a per visit level when I refer to the $144 roughly on average per 30 days that the 8% would represent.

How many visits that you might even be able to modify from a P.T. or P.T.A. to attack and still generate the outcomes that reduce that direct cost infrastructure. So kind of wanted to give you that framework and Kevin one more thing that I would hope everybody sees that all I know I'm trying to do today.

That is the framework, Josh just alluded to begin in January but we still have expectations that we put out for all of you and our shareholders for this year. So we've got to operate within this environment and then you've got to have those 30000 people that we talk about <unk>, you've got a short window to make sure that they understand how to get this done and that's why I'm trying to make sure you all really grasp the full effect will begin to consummate somewhere around Q2.

Late Q2 early Q3 next year, because we've got to get all of this kind of cascaded.

Almost like a wave across the United States.

Got it and what I'm, saying that payment yeah.

Yes, Josh to wrap yeah, Kevin I guess, you know from from our perspective, it's not that big of an issue.

You'll have some slower cash flows from the way, we're doing our cash flow modeling down the FERC our budget process already underway for next year.

The cash flows have slowed down from January through March and then kind of correct themselves April may so kind of call. It June forward for the rest of the year, you won't see really any different than what weve experienced historically.

But what I will say, although the larger providers like ourselves that are in the situation that I. Just described when we refer to market opportunities and consolidation the the impact on cash flow of a smaller more regional player is going to be much more dramatic and.

That's one of the reasons why the industry is finding its sort of hard because those folks that are in the smaller more regional size are going to have a much more burden caused by the rap disruption.

Got it that's helpful and then.

Keith just going back to M&A you know so the deal that you guys announcing DNA I'm just wondering does that kind of opened the door for you know further discussions and maybe more opportunities given the size of their networking present.

Nationwide.

Sure.

Hello.

Okay, I'm I'm, sorry about that.

[noise].

Keith we have last year.

Okay no bump here.

So with with regard to DNA Im sorry, I Didnt mean that was on me.

With regard to to the DNA and I think it certainly opens the door.

You know DNA was.

Well started I don't know if everyone's aware this was started back in 18 95.

As a.

A group of civic leaders got together to provide for the needs of the community and that's what started this this whole movement.

And.

And when we there was a separate DNA Association.

And then.

Almost no connection back when we started this business between DNA is and what we refer to as a quote unquote for profit.

Agencies.

You know now with all of the changes.

The lines have been blurred, especially with LHC and our culture and our history of joint venturing with so many non profit hospitals and health systems.

That becomes pretty seamless for us I mean, the short answer is yes, yes.

And.

I'd have to say that a couple of weeks ago. When when I was there with the rest of the team for the announcement and the initial integration it was amazing.

How how much of an immediate fit there was between our team and their team culturally.

And so.

<unk> really excited about it.

The other thing that's.

That's.

I think worth it worth mentioning here is.

There were there was no process in that transaction.

The the current owner of the DNA that's owned it for the last 16 years.

It was an incredible gentlemen, my name is Barry Ray he lives in Chicago.

But he was he felt like he had inherited the mission of the of the DNA and had been its custodian and Shepherd for 16 years.

And was it matter to him where that agency went so he he hand selected us and.

I came to the table with us and negotiate a transaction.

So it was quite a surprise to others in the market because there was it was no process with no.

Bankers or middle men involved.

So I think that's a credit to our entire organization and I do think it opens a lot of doors that we may have previously thought would have been close to us.

Sounds good thanks, guys.

Thank you.

And our next question comes from Matt, Let me of William Blair. Your line is open.

Hi, Good morning, I wanted to ask about the comments on to noble Jack I think you mentioned as many as 30 planes for the back half of the year could you maybe just give us a sense for.

How they shake out in terms of home health Hospice forces and home and community based services are these all co location and targets and then in terms of timing.

Any sense for how those might progress in terms of opening.

Yeah, absolutely thanks, Matt Great question.

So as I mentioned, we've we've gone live with two or home health three our H. CBS .

And we will refer to the 30.

About 20, I would put in the category of truly in process and in process. You know would refer to no seeking and you know down the road of obtaining whatever legal or regulatory approvals are needed to go lives and then another 10 that are currently in our pipeline for evaluation and you know I would say that yeah.

We've we've really matured over this last 12 18 months and developed a real pipeline of activity around de Novo growth as as we've continued to try to optimize the portfolio the way those spread mad across the segments are across all three so about 11 of those 10 or 11 or in home health, probably three or four I believer in hospice.

And the lion share of those so call it maybe about the 12 to 15.

Our in H. CBS .

The the real exciting aspect to that is this.

Delivering on what Weve been discussing around the model level in trial level strategy. So the lion's share of the H.C.B.S. and the hospice build outs are in co or trial located markets as we continue to put gas to that effort.

Okay. Thanks, and then Josh just in terms of that you know the almost family players I think you mentioned in the past that.

Hey, you eat into my closing facilities, if they were making money. So I guess, where these also a drag on EBITDA and then do you have a sense now.

Got to hear a little more than a year out from formerly closing the deal as to whether you know the number of facility closure is going to start to slowdown.

Yes, great questions and yes, and yes, our the answers Matt So on your first piece around were they a drag.

For the you know.

Locations that we've closed year to date in 2019, they represented around one one and a half million of drag dollar if you will.

So do you see that manifesting in our.

Quarter over quarter margin improvement.

And then on the second piece you know the the pace in which we've been closing I think you'll see significantly decelerate you know we had a pretty you know.

Good number of closures this quarter and year to date.

But but what I'll tell you is probably you'll continue to see a couple here and there and then as we do every year you know during the budget process and through the fourth quarter you may see a few more but I wouldn't I wouldn't say that there's a lot left from the almost family acquisition I would say that's just in the ordinary course, the other thing that I'd like to just highlight on the closures.

As you know several of those closures are not just home health and overlapping markets, where hospice in overlapping markets, but we've closed several opt to use that were dragging almost three and a half million dollars. We closed they de a legacy D. N me hold over asset that we've had for years up in West Virginia that was dragging a significant amount of dollars. So you know we've been real no targeted in what we've been closing and that's candidly help us deliver that 10.2% consolidated EBITDA margin.

Okay. Thanks, and then the last one here just for Keith and just maybe if you could address at all would seem to me that disconnect between.

CMS and some of the broader support you've had I think Congress and frankly, just throughout the healthcare space in terms of the move from care into into the home.

Is there a possibility here that CMS or makes a change in their final rule.

You know just given your position without the industry, where do you sense, the dialogue and thought process with CMS in terms of the way, they're handling PJM and the behavioral cuts.

I'm sure it's a great great question.

You know, let me, let me start with maybe gone and leads a little bit.

With.

Recent information.

So Joanne Cunningham that as our executive director for the partnership and and others I don't remember the all of the others that were worth or recently, but this isn't like within the last couple of weeks.

There was a meeting at CMS, we have a great relationship see that sit across the table I'm their peer periodically we have great conversations, but they are very they seem very entrenched and unwilling to move in their policy positions most of the time.

More so in the last several years then.

And then in the past you know, it's just my impression.

But at the last meeting that I was not present at.

They said that there were comments made by the CMS team in Baltimore that.

That they they werent confident that they were prepared.

To implement to manage the implementation of P.D. Kim I granted this is in July that they're saying that so that doesn't necessarily mean that there. They won't they don't think that will be ready by January .

But the team that was there.

Viewed those comments a significant and there's been quite a bit of discussion among the board about that.

So I don't really know what that means that I don't want to.

I don't want anyone to take that further than just a comment that was reported back to me.

But but what is a noticeable for me is the is the.

The distance between the conversations we have in Baltimore.

And the conversations we have when we visit HHS in Washington DC.

The distance is far greater than the distance to drive between the two offices. It's it's as if you're you're talking to two foreign countries.

The career people in Baltimore.

Seem to develop policies.

That the current administration doesn't it.

Isn't in alignment with let's just say.

And so that that opens the door for us to open questions and I think it also helps us with our arguments on the hill.

I don't think they are bad people are just people that have a career job there and they have a view.

And their views are informed by outside parties they contract with to do actuarial work.

And they generate a mathematical model.

With no understanding of how you would practically implemented I think it just comes comes down to that in there.

There, it's very hard to get them to open up and except.

Comments and constructive criticism anything they produce from industry leaders I think I think we are tearing those walls down.

Sovaldi by providing.

Honest accurate third party data to Oh to push back on on their assumptions.

But it is it is a marathon I'll just close with this you know in our world.

Especially where many of US were on the phone like this quarter to quarter and we tend to think of progress that way.

Uh huh.

Chairman toes and lead independent Director said to me was that when I was in my Thirty's and started working in D. C store have advocacy efforts.

I would get frustrated when I couldn't see results and I wouldn't be not even a year I wanted immediate results what I'd make a trip out there to be honest.

He said, if you're gonna survive and in this game. He says you need to accept that sometimes you have to measure success in decades.

And you know when I look at the home health industry, and where we've come from the Ninetys to today.

That's very true.

It's not something I would like to hear when I was 30, but.

And I'm, not suggesting that it'll take us decades to move CMS, but but that is the truth I mean, that's that's where the conversation isn't and there is a definite disconnect between the two.

Okay. Thanks for that perspective.

Thank you.

And our next question comes from Matthew Gilmore of Baird. Your line is open.

Hey, Thanks for the question I wanted to ask about the volume performance on the home health side. So you know overall volumes for core quite strong again, the Medicare fee for service volumes were again, a little bit softer versus some of the recent trends and can you provide some sort of color or view in terms of what's what's driving that recent divergence and secondarily are you increasingly indifferent between fee for service and on fee for service given some of the some of the changes you all have made.

So I'll start it Oh go ahead, Keith I'm sorry.

Well, yes, but yeah no. That's that's a fact you let me just start off by saying.

It depends on the reimbursement model.

So.

You know today fee for service doesn't mean.

Per visit you know, we get paid episodic way.

For for home health and we're managing patients.

For a set amount of.

Reimbursement for a 60 day period today.

And we have.

Certain outcome.

Expectations, we have to hit.

So we're very comfortable.

In that model.

We're less comfortable and.

The preferred historical model of managed care companies, whereas they want a on a per visit model.

Which really.

Which really are.

Ties our hands to provide service to patients without getting.

Pre approved to go out and make a visit not to mention it's incredibly any fish and.

From a gionee perspective, so those are my comments and Dod and maybe you could elaborate on that in addition to your other comment.

You'll get you actually I guess, we've been together. So long you said exactly where I was going with that in different no certainly with what Josh and team has done.

And he's alluded to it.

Twice already with these contracts it becomes okay to take that and we've been able to marginalize that but the fact is as we all know in this industry that traditional Medicare fee for service environment is shifting.

You couple that with LHC group's quarter over quarter year over year, we have been leading inorganic growth at 2% number is what we factored in so that when we continue to grow that at that clip.

Add those contracts that 9% to 10% you're seeing this quarter, Josh Yeah, I know and the only thing I would add I got it.

No doubt agree with everything Keith and Don said, but the the non Medicare growth is the healthiest non Medicare growth that we've experienced and you know my reason for saying that I've shared on on calls over the last year, our incremental improvements weve been making in the managed care side.

One is just on the rate so yes.

We're not indifferent and yes, we do not prefer the per visit but our our rate per visit due to a lot of hard work and effort through our team here at the home office that you know those hand to hand combat with the payers to get the new contracts. We have you know increased our rates by almost 9% on just a rate per visit level and we've also done a lot of things both in the back office in the field as well as in our revenue cycle management to reduce our bad debt expense and otherwise where weve reduced our cost per visit by about 200 basis points. So you know over the past few years as we've seen this you know not only mix shift but opportunity.

Before us, we've really hunkered down here and got more rigorous and as we get those admissions in the door. We're a lot more laser focused on getting the right admissions in the door.

That's helpful and then Josh if I if I could ask you one more on the revenue performance I think you mentioned that results were in line with expectations.

Did you mention that the revenue impact from agency that you closed and then also can you give us a sense for where the revenue dollars are for a fan just so we can model that a little bit better.

Yes, sure. So I'm on the ones that have closed year to date and home health that represents about 17 and a half million in annual revenue. So what is that four and a quarter or so per quarter.

And then on the in the seed no. The L tax where we had most closures the annual run rate is call. It 8 million. So about 2 million per quarter, and then in GNS, which I referred to earlier in the H. Yeah, I'm just trying to off my head go down by segment was about $5 million in revenue annualized so 17, and a half million in home health called another eight in L. pack and the facility based division and another five and the HCR Division. If you take those numbers and divide it by four and that would give you your quarterly impact.

For.

But what was your second question, yes, I get it and maybe I can follow up if you don't have that number handy, but just curious sort of where the almost family agencies are.

In terms of either quarterly revenue were or annual and I guess I ask because we you know I think the street keep probably modeling that number a little bit too high. So if he could level set us on on where so the almost family asset is that that might help us model better.

No I got you I gotcha.

So the <unk> consolidated almost family on a quarterly basis is thought right at 200 million in revenue.

With yeah.

About 140 to 145 of that and home health.

About 40 or so in CBS .

Call It eight to 10 in hospice and around seven and the health care innovation segment, Okay got it thanks very much.

Thank you.

And I'm currently showing no other questions in the queue I'd like to turn the call back over to Mr., Keith Myers for closing comments.

Okay. Thanks, operator, and thanks, everyone for dialing in this morning for the call as always we want to make ourselves available to you. If you have any follow up questions or need to.

Reach us between earnings calls, please reach out to Eric Elliott and Erica.

Assist you in if you need to speak to either any of us on the management team will make ourselves available for you. Thank you again for joining us and thanks for your support of our LHC Group family.

Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful day.

[noise].