§ our critical accounting policies;

§ our business strategies and our ability to grow our business;

§ our participation in the Medicare and Medicaid programs;

§ the reimbursement levels of Medicare and other third-party payors;

§ the prompt receipt of payments from Medicare and other third-party payors;

§ our future sources of and needs for liquidity and capital resources;

§ the value of our investments;

§ the effect of any changes in market rates on our operations and cash flows;

§ our ability to obtain financing;

§ our ability to make payments as they become due;

§ the outcomes of various routine and non-routine governmental reviews, audits and investigations;

§ our expansion strategy, the successful integration of recent acquisitions and, if necessary, the ability to relocate or restructure our current facilities;

§ the value of our proprietary technology;

§ the impact of legal proceedings;

§ our insurance coverage;

§ the costs of medical supplies;

§ our competitors and our competitive advantages;

§ our ability to attract and retain valuable employees;

§ the payment of dividends;

§ the price of our stock;

§ our compliance with environmental, health and safety laws and regulations;

§ our compliance with health care laws and regulations;

§ our compliance with Security and Exchange Commission laws and regulations and Sarbanes-Oxley requirements;

§ the impact of federal and state government regulation on our business; and

§ the impact of changes in our future interpretations of fraud, anti-kickbacks or other laws.

The forward-looking statements contained in this report reflect our current views about future events and are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in the Part II, Item 1A "Risk Factors," included in this report and in other of our filings with the Securities and Exchange Commission ("SEC"), including our annual report on Form 10-K for the year ended December 31, 2007. This report should be read in conjunction with that annual report on Form 10-K, and all our other filings, including quarterly reports on Form 10-Q and current reports on Form 8-K, made with the SEC through the date of this report.
You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we expect or anticipate.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Unless the context otherwise requires, "we," "us," "our," and the "Company" refer to LHC Group, Inc. and its consolidated subsidiaries. Overview
We provide post-acute health care services, through our home nursing agencies, hospices, long-term acute care hospitals ("LTACHs") and an outpatient rehabilitation clinic. Our founders began operations in 1994 with one home nursing agency in Palmetto, Louisiana. Since then, we have grown to 198 service providers in Louisiana, Mississippi, Alabama, Texas, Arkansas, Virginia, West Virginia, Kentucky, Florida, Tennessee, Georgia, Ohio and Missouri as of June 30, 2008.
Segments
We operate in two segments for financial reporting purposes: home-based services and facility-based services. During the three months ended June 30, 2008 and 2007, home-based services accounted for 84.8% and 82.2%, respectively, of our net service revenue and 83.4% and 81.2% for the six months ended June 30, 2008 and 2007, respectively. The remaining net service revenue balance relates to our facility-based services segment.
Through our home-based services segment we offer a wide range of services, including skilled nursing, private duty nursing, medically-oriented social services, hospice care and physical, occupational and speech therapy. As of June 30, 2008, we owned and operated 167 home nursing locations, 10 hospices, two private duty agencies and two diabetes self management companies. We also manage the operations of four locations in which we have no ownership interest. Of our 185 home-based services locations, 107 are wholly-owned by us, 67 are majority-owned or controlled by us through joint ventures, seven are license lease arrangements and we manage the operations of the remaining four locations. We intend to increase the number of home nursing agencies that we operate through continued acquisitions and development throughout the United States. As we acquire and develop home nursing agencies, we anticipate the percentage of our net service revenue and operating income derived from our home-based services segment will increase.

We provide facility-based services principally through our LTACHs and an outpatient rehabilitation clinic. As of June 30, 2008, we owned and operated four long-term acute care hospitals with seven locations, of which all but one are located within host hospitals. We also owned and operated one outpatient rehabilitation clinic, two medical equipment locations, a health club and a pharmacy. Of these twelve facility-based services locations, six are wholly-owned by us and six are majority-owned or controlled by us through joint ventures. We also manage the operations of one inpatient rehabilitation facility in which we have no ownership interest. Due to our emphasis on expansion through the acquisition and development of home nursing agencies, we anticipate that the percentage of our net service revenue and operating income derived from our facility-based services will decline.
Recent Developments
Medicare
Home-Based Services. The base payment rate for Medicare home nursing in 2008 is $2,270.32 per a 60-day episode. Since the inception of the prospective payment system in October 2000, the base episode rate payment has varied due to both the impact of annual market basket based increases and Medicare-related legislation. Home health payment rates are updated annually by either the full home health market basket percentage, or by the home health market basket percentage as adjusted by Congress. The Centers for Medicare & Medicaid Services ("CMS") establish the home health market basket index, which measures inflation in the prices of an appropriate mix of goods and services included in home health services.
In August 2007, CMS released a final rule, updating and making major refinements to the Medicare home health prospective payment system for 2008 (the "Final Rule"). The Final Rule, including any amendments thereto, was effective on January 1, 2008. CMS instituted these changes to the home health payment system to account for reported increases over the past several years in the home health case-mix, which CMS believes have been caused by changes in home health agencies ("HHA") coding practices and documentation - not by the treatment of resource-intense patients. CMS thus designed the new case-mix model to better predict the resource-intensity required by home health beneficiaries over the 60-day episode of care, which would, in turn, improve the accuracy of Medicare reimbursement to HHAs. To effectuate the improvements, the new model does the following: (1) enables more precise coding for co-morbidities and the differing health characteristics of longer-stay patients; (2) accounts more accurately for the effect of rehabilitation services on resource use; and (3) lessens the risk of overutilization of therapy services by replacing the single threshold (10 visits per episode) with three thresholds (at 6, 14 and 20 visits), as well as a graduated bonus system based on severity between each threshold.
Also, to address the increases in case-mix that CMS views as unrelated to home health patients' clinical conditions, the Final Rule implemented a reduction in the national standardized 60-day episode payment rate for four years. A 2.75 percent reduction began in 2008 and will continue for three years, with a 2.71 percent reduction in the fourth year. Also, in the Final Rule, CMS finalized the market basket increase of 3.0 percent, a 0.1 percent increase from the proposed rule. When the market basket update is viewed in conjunction with -
(1) the 2.75 percent reduction in home health payment rates for 2008; (2) the implementation of the new case-mix adjustment system; (3) the changes in the wage index; and (4) the other changes made in the Final Rule - CMS predicts a 0.8 percent increase in payments for urban HHAs and a 1.77 percent decrease in payments for rural HHAs. Collectively, the changes in the final rule (not including the case-mix or wage index adjustments) decrease the national 60-day episode payment rate for HHAs from the 2007 level of $2,339.00 to $2,270.32 in 2008. In July 2008, the U.S. Senate passed H.R. 6331 (The Medicare Improvement for Patients and Providers Act of 2008) which preserved the 2009 market basket inflation updates for Medicare home health care and hospice providers. The market basket increase for home health care and hospice providers is currently estimated to be 3.0 percent for 2009. The Medicare Improvement for Patients and Providers Act of 2008 did not include a rural add-on for home health providers in 2009. In June 2007, CMS announced a 3.3 percent rate increase for hospice care and hospice services provided during the twelve-month period beginning on October 1, 2007 through September 30, 2008. In addition, CMS also announced that the hospice cap amount for the year ending October 31, 2007 was $21,410.

Facility-Based Services. LTACHs are primarily engaged in the hospital treatment of medically complex patients requiring long inpatient stays. In doing so, they utilize a physician directed multi-disciplinary team of health care practitioners. Patients are assessed before admission for appropriateness and, if admitted, an individualized goal oriented treatment plan is developed with re-assessments occurring at least weekly.
Until 2002, LTACHs were paid by Medicare on a "reasonable cost" basis. Since that time, LTACHs are paid under a prospective payment system called MS-LTC-DRGs which, rather than cost, pays based on the resources typically utilized to care for patients with the same diagnoses. The standard Medicare rate per discharge for fiscal year 2009 is $39,114.36. Payments are increased or decreased from the standard rate to account for age, co-morbidities, complications, and procedures.
Beginning in 2004, LTACHs that are co-located with another hospital have special payment limitations if certain percentage thresholds of Medicare patients are admitted from the co-located hospital. Six of our LTACH locations are co-located.
On December 29, 2007, the Medicare, Medicaid, and SCHIP Extension Act ("MMSEA") became effective. Under MMSEA, the percentage threshold for each of our co-located facilities was increased to 75 percent. Consequently, beginning with our next cost reporting year, September 1, 2008, there will be no reduction in Medicare reimbursement unless more than 75 percent of Medicare patients are admitted from the co-located hospital. As none of our locations have ever admitted more than 60 percent of its Medicare patients from a co-located hospital, the MMSEA percentage threshold increase should have a positive impact on the Company.
In addition to the percentage threshold increase, MMSEA created a three year moratorium, absent qualification for narrow exceptions, on new LTACHs and satellite facilities of LTACHs, as well as a prohibition on bed increases in existing facilities. Accordingly, competition among LTACH providers during the moratorium should be limited. MMSEA also provided for a three year delay in a scheduled 3.75 percent payment reduction in the LTACH Standard Rate, as well as a delay in reduction in payments for very short stay patients.
MMSEA also imposed new criteria on providers in order to be paid as an LTACH. In addition to being required to maintain an average length of stay for Medicare patients in excess of 25 days, all LTACHs must now be primarily engaged in providing inpatient services by or under the supervision of a physician to Medicare beneficiaries whose medically complex condition require a long stay. Also, LTACHs must now document in the Medicaid record a patient review process that screens patients prior to admission for appropriateness; validates within 48 hours of admission that patients meet admission criteria for long term care hospitals; regularly evaluates patients throughout their stay for continuation of LTACH care; and assesses the available discharge options when patients no longer meet continued stay criteria. In addition, the LTACH must have active physician involvement with patients during their treatment through an organized medical staff, physician directed treatment with physician on-site availability on a daily basis to review patient progress. Consulting physicians must be "on call" and capable of being at the patient's side within a moderate amount of time.
MMSEA also requires the Secretary of Health and Human Services to conduct a study and report to Congress within 18 months on the establishment of a new LTACH payment system based on the establishment of LTACH facility and patient criteria for purposes of determining medical necessity, appropriateness of admission and continued stay.
Finally, MMSEA also established expanded medical necessity review by fiscal intermediaries and Medicare administrative contractors. The reviews are retroactive to October 1, 2007, and must guarantee that at least 75 percent of overpayments to LTACHs for medically unnecessary services are recovered.
Under Medicare, the Company is reimbursed for rehabilitation services based on a fee schedule for services provided adjusted by the geographical area in which the facility is located. On February 1, 2006, Congress passed the Deficit Reduction Act of 2005, which implemented, among other things, an annual $1,740 Medicare Part B

outpatient therapy cap that was effective on January 1, 2006. CMS subsequently increased the therapy cap to $1,780 on January 1, 2007, and to $1,810 January 1, 2008. The legislation also required CMS to implement a broad process for reviewing medically necessary therapy claims, creating an exception to the cap. The exception process, which was set to expire on January 1, 2007, was included in the Tax Relief and Health Care Act of 2006 and continued to function as an exception to the Medicare Part B outpatient therapy cap until January 1, 2008. The MMSEA further extended the Medicare Part B outpatient therapy cap until June 30, 2008. H.R. 6331 extended the therapy cap exception for outpatient rehabilitation clinics to December 31, 2009. Office of Inspector General
The Office of Inspector General ("OIG") has a responsibility to report both to the Secretary of the Department of Health and Human Services and to Congress any program and management problems related to programs such as Medicare. The OIG's duties are carried out through a nationwide network of audits, investigations and inspections. Each year, the OIG outlines areas it intends to study relating to a wide range of providers. In its fiscal year 2008 workplans, the OIG indicated its intent to study topics relating to, among others, home health, hospice, long-term care hospitals and certain outpatient rehabilitation services. No estimate can be made at this time regarding the impact, if any, of the OIG's findings.
Results of Operations
Accounts Receivable and Allowance for Uncollectible Accounts At June 30, 2008, the Company's allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 13.0%, or $8.9 million, compared to 11.3% at December 31, 2007.
The following table sets forth as of June 30, 2008, the aging of accounts receivable (based on the billing date) and the total allowance for uncollectible accounts expressed as a percentage of the related aged accounts receivable:

Payor                 0-30         31-60        61-90       91-120       121-150       151-180       181-240         241+         Total
                                                                       (in thousands)
Medicare            $ 20,662      $ 1,042      $ 3,354      $ 3,170      $  2,746      $  2,952      $  1,174      $  7,986      $ 43,086
Medicaid               2,667          474          745          540           535           976           519         3,405         9,861
Other                  6,429        1,092        1,355          985           972         1,450           406         3,180        15,869

Total               $ 29,758      $ 2,608      $ 5,454      $ 4,695      $  4,253      $  5,378      $  2,099      $ 14,571      $ 68,816
Allowance as a
percentage of
receivable               4.9 %        9.9 %        6.4 %        5.7 %         6.6 %        17.1 %        25.3 %        33.2 %        13.0 %

For home-based services, we calculate the allowance for uncollectible accounts as a percentage of total patient receivables. The percentage changes depending on the payor and increases as the patient receivables age. For facility-based services, we calculate the allowance for uncollectible accounts based on a claim by claim review. As a result, the allowance percentages presented in the table above vary between aging categories because of the mix of claims in each category.
Consolidated Net Service Revenues:
Consolidated net service revenues for the three months ended June 30, 2008 was $90.1 million, an increase of $19.5 million, or 27.7%, from $70.6 million for the three months ended June 30, 2007. For the three months ended June 30, 2008, home-based services accounted for 84.8% of revenue and facility-based services accounted for 15.2% of revenue compared with 82.2% and 17.8%, respectively, for the comparable quarter last year.
Consolidated net service revenues for the six months ended June 30, 2008 was $173.6 million, an increase of $34.3 million, or 24.6%, from $139.3 million for the six months ended June 30, 2007. For the six months ended June 30, 2008, home-based services accounted for 83.4% of revenue and facility-based services accounted for 16.6% of revenue compared with 81.2% and 18.8%, respectively, for the comparable period in the prior year.
Home-Based Services. Net service revenue for home-based services for the three months ended June 30, 2008 was $76.4 million, an increase of $18.4 million, or 31.8%, from $58.0 million for the three months ended June 30, 2007. Total admissions increased 24.7% to 13,499 during the current period, versus 10,825 for the same period in 2007. Average home-based patient census for the three months ended June 30, 2008, increased 25.7% to 20,469 patients as

compared with 16,283 patients for the three months ended June 30, 2007.
Net service revenue for home-based services for the six months ended June 30, 2008 was $144.8 million, an increase of $31.7 million, or 28.1%, from $113.1 million for the six months ended June 30, 2007. Total admissions increased 24.4% to 26,679 during the current period, versus 21,440 for the same period in 2007. Average home-based patient census for the six months ended June 30, 2008, increased 23.1% to 19,714 patients as compared to 16,009 patients for the six months ended June 30, 2007.
As detailed in the table below, the increase in revenue is explained by organic growth, our internal acquisition growth, as defined below, and the growth from our acquisitions during the three and six months ended June 30, 2008.
Organic Growth
Organic growth includes growth on "same store" locations (those owned for greater than 12 months) and growth from "de novo" locations. We calculate organic growth by dividing organic growth generated in a period by total revenue generated in the same period of the prior year. Revenue from acquired agencies contributes to organic growth beginning with the thirteenth month after acquisition. During the first twelve months after an acquisition, we are able to grow the acquired agencies revenue. This growth is called internal acquisition growth ("IAG"). Internal growth, or the combination of IAG and organic growth, provides a more complete measure of the Company's actual growth between two periods.
The following table details the Company's revenue growth and percentages for organic and total growth:
Three Months Ended June 30, 2008 (in thousands except census and episode data)

                                Same                                                    Organic          Internal          Internal                                 Total             Total
                              Store(1)          De Novo(2)          Organic(3)          Growth %         Growth(4)         Growth %          Acquired(5)           Growth           Growth %
Revenue                      $ 62,093          $    2,291          $   64,384             11.0 %        $ 65,901              13.6 %        $    12,035          $ 76,419              31.7 %

Revenue Medicare             $ 51,171          $    1,936          $   53,107             13.1 %        $ 54,551              16.1 %        $    10,345          $ 63,452              35.1 %

Average Census                 16,044                 627              16,671              2.4 %          17,369               6.7 %              3,798            20,469              25.7 %

Average Medicare Census        12,757                 508              13,265              8.5 %          13,852              13.3 %              3,279            16,544              35.4 %

Episodes                       23,416                 747              24,163             24.2 %          25,608              31.6 %              4,762            28,925              48.7 %

(1) Same store - location that has been in service with the Company for greater than 12 months.

(2) De Novo - internally developed location that has been in service with the Company for 12 months or less.

(3) Organic - combination of same store and de novo.

(4) Internal - organic plus IAG

(5) Acquired - purchased location that has been in service with the Company for 12 months or less.

Six Months Ended June 30, 2008 (in thousands except census and episode data)

                                 Same                                                   Organic           Internal          Organic & IAG                                Total              Total
                               Store(1)          De Novo(2)          Organic(3)         Growth %         Growth(4)            Growth %            Acquired(5)            Growth           Growth %
Revenue                      $ 119,997          $    3,233          $ 123,230              9.0 %        $ 126,072                  11.5 %        $    21,552          $ 144,782              28.0 %

Revenue Medicare             $  98,881          $    2,731          $ 101,612             10.9 %        $ 104,607                  14.1 %        $    18,600          $ 120,212              31.2 %

Average Census                  15,516                 542             16,058              0.3 %           16,614                   3.8 %              3,656             19,714              23.1 %

Average Medicare Census         12,160                 440             12,600              5.5 %           13,018                   9.0 %              3,110             15,710              31.5 %

Episodes                        45,555               1,095             46,650             26.7 %           49,292                  33.9 %              7,690             54,340              47.6 %

(1) Same store - location that has been in service with the Company for greater than 12 months.

(2) De Novo - internally developed location that has been in service with the Company for 12 months or less.

(3) Organic - combination of same store and de novo.

(4) Internal Growth - organic plus IAG

(5) Acquired - purchased location that has been in service with the Company for 12 months or less.

Facility-Based Services. Net service revenue for facility-based services for the three months ended June 30, 2008 increased $1.1 million, or 8.9%, to $13.7 million compared to $12.6 million for the three months ended June 30, 2007. While patient days decreased 1.4% to 11,298 in the three months ended June 30, 2008, from 11,453 in the three months ended June 30, 2007, the higher acuity of patients caused an increase in revenue during the three months ended June 30, 2008.
Net service revenue for facility-based services for the six months ended June 30, 2008, increased $2.6 million, or 9.8%, to $28.8 million compared to $26.2 million for the six months ended June 30, 2007. Patient days increased 0.9% to 23,332 in the six months ended June 30, 2008, from 23,127 in the six months ended June 30, 2007. Both the increase in patient days and the higher acuity of patients contributed to the growth in net service revenue for the six months ended June 30, 2008.
Cost of Service Revenue
Cost of service revenue for the three months ended June 30, 2008, was $45.6 million, an increase of $9.5 million, or 26.3%, from $36.1 million for the . . .