On March 6, 2008 we completed our acquisition of VistaCare. Following the completion of the VistaCare acquisition, we now serve approximately 12,000 patients and their families each day. Our financial results for the year ended December 31, 2008 include results for only ten full months of VistaCare operations. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a more detailed description of the transaction.
On August 11, 2005 we announced the adoption of a stock repurchase program in which we intended to repurchase up to $20.0 million of our common stock over a twelve-month period. The timing and the amount of any repurchase of shares during the twelve-month period was determined by management based on its evaluation of market conditions and other factors. We completed this stock repurchase program in August 2006 and repurchased an aggregate of 973,332 shares of our common stock at a total cost of $16.8 million (average cost of $17.30 per share). The stock repurchases were funded out of our working capital.
On November 21, 2006 we announced the adoption of a new stock repurchase program to repurchase up to $10.0 million of our common stock over a twelve-month period. The timing and the amount of any repurchase of shares during the twelve-month period was determined by management based on its evaluation of market conditions and other factors. We completed this stock repurchase program in May 2007 and repurchased an aggregate of 801,683 shares of common stock at a total cost of $10.0 million (average cost of $12.47 per share). Of this amount, 59,477 shares for approximately $0.8 million was repurchased in 2007. The stock repurchases were funded out of working capital.
On May 4, 2007 we announced the adoption of a stock repurchase program to repurchase up to $50.0 million of our common stock over the twelve month period beginning on May 4, 2007 either in the open market or through privately negotiated transactions, subject to market conditions and other factors. The repurchased shares were added to our treasury shares and may be used for employee stock plans and for other corporate purposes. The stock repurchases were funded utilizing working capital. The stock repurchase program expired on May 4, 2008. We repurchased 1,056,623 shares of common stock for approximately $13.1 million (average cost of $12.42 per share) during this program. No shares were repurchased during 2008. The terms of our credit agreement restricts our ability to repurchase any additional stock until our leverage ratio reaches a certain level, which is not expected to be reached within the next twelve months.
Developed Hospices
We have developed the following hospice programs since January 1, 2006:
During 2006, we received Medicare certification for our Miami, Florida hospice program operated by our wholly-owned not-for-profit subsidiary, Hospice of the Palm Coast, Inc. We also received Medicare certification in 2006 for our Lubbock, Texas; Rockford, Illinois; Miami, Florida; Tyler, Texas; and Bryan-College Station, Texas hospice programs. We continued the development of hospice programs in Ventura County, California; Boston, Massachusetts; and Fort Wayne, Indiana.
During 2007, we received Medicare certification for our Boston, Massachusetts; Ventura County, California; and Fort Wayne, Indiana hospice programs. We continued the development of hospice programs in Dayton, Ohio; Augusta, Georgia; and Alameda, California.
During 2008, we received Medicare certification for our Augusta, Georgia and Dayton, Ohio programs. During the third quarter of 2008, we converted our Dayton, Ohio program to an alternate delivery site of our Columbus, Ohio program. We continued the development of hospice programs in Alameda, California and Salem, Oregon.
Once a hospice becomes Medicare certified, the process is started to obtain Medicaid certification. This process takes approximately six months and varies from state to state.
Acquisitions
We have acquired the following hospice programs since January 1, 2006.

During 2006, we acquired one hospice program for $25,000, which we integrated into one of our existing hospice programs. We financed this acquisition with cash generated from operations.
During 2007, we acquired one hospice program for approximately $0.2 million, which we integrated into one of our existing hospice programs. We financed this acquisition with cash generated from operations.
During 2008, as discussed above, we completed the acquisition of VistaCare on March 6, 2008 for approximately $149.5 million which includes $2.4 million in transaction costs. We financed the VistaCare acquisition primarily with a $130 million term loan from General Electric Capital Corporation. See Note 11 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In addition, on December 31, 2008, we acquired a hospice program in Flint, Michigan for approximately $0.5 million. We financed this acquisition with cash generated from operations.
We accounted for these acquisitions as purchases.
As part of our ongoing acquisition strategy, we are continually evaluating other potential acquisition opportunities.
Goodwill from our hospice acquisitions was $189.5 million as of December 31, 2008, representing 94.7% of stockholders' equity and 41.1% of total assets as of December 31, 2008. Prior to June 30, 2001, we amortized our goodwill over 20 years for acquisitions completed through June 30, 2001. We did not amortize goodwill for acquisitions subsequent to June 30, 2001 based on the provisions of Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are not amortized but are reviewed for impairment annually (during the fourth quarter) or more frequently if indicators arise. As of December 31, 2008, no impairment charges have been recorded. Other intangible assets continue to be amortized over their useful lives. See Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Discontinued Operations
During the second quarter of 2006, we decided to sell our Salt Lake City, Utah hospice program ("SLC"), located in our Mountain region based on an ongoing strategic review of our hospice programs. The sale of SLC was completed in July 2006. Certain assets such as furniture/fixtures, equipment, computer hardware, leasehold improvements, prepaid expenses, office lease deposit and licenses were sold to the purchaser. Except for obligations under certain assumed contracts, no other liabilities were assumed by the purchaser. We recognized a pretax loss of $0.2 million related to the sale of the program during the second quarter of 2006.
During the first quarter of 2007, we announced that we would exit the Tulsa, Oklahoma hospice market which is located in our Central region and in February 2007, we sold our Tulsa hospice program. As part of the sale, the purchaser assumed the office lease and purchased certain assets such as furniture/fixtures, equipment, deposits and licenses. We recognized a pretax loss of $0.1 million related to the sale of the program during the first quarter of 2007.
During the second quarter of 2007, we decided to sell our Valdosta, Georgia; Columbia, South Carolina; St. George, Utah; Rockford, Illinois; and Allentown, Pennsylvania hospice programs and the Huntsville, Alabama alternate delivery site ("ADS"). We completed the sale of our Valdosta and Columbia programs which were located in our Southeast region in June 2007 and recognized a pretax loss of $0.1 million in the second quarter on the sale of the programs. We completed the sale of our Huntsville ADS and our St. George and Allentown programs which were located in our Southeast, Mountain and Midwest regions, respectively, during the third quarter of 2007 and recognized a pretax loss of $44,000 in the third quarter for the disposition of the programs. We completed the sale of the Rockford program which was located in our Midwest region during the fourth quarter of 2007 and recognized a pretax gain of $0.1 million in the fourth quarter on the sale of the Rockford program.
During the fourth quarter of 2007, we decided to sell our Odessa, Texas; Big Spring, Texas; Cincinnati, Ohio; and Wichita, Kansas hospice programs. We completed the sale of the Odessa and Big Spring programs which were

located in our Mountain region on January 1, 2008 and recognized a pretax loss of $17,000 during the fourth quarter of 2007 related to the sale of the Odessa and Big Spring programs. We completed the sale of the Cincinnati and Wichita programs, which were located in our Midwest and South Central regions, respectively, during the first quarter of 2008 and no material amounts were recorded as a result.
During the first quarter of 2008, we decided to sell our Baton Rouge, Louisiana; Ventura, California; Fort Wayne, Indiana; and Oklahoma City, Oklahoma hospice programs, which are located in our Southeast, West, Midwest and South Central regions, respectively. We also decided to close the Bryan/College Station, Texas hospice program and the Dallas, Texas inpatient unit. The closures of the Bryan/College Station program and Dallas inpatient unit, which were located in our Texas and South Central regions, respectively, resulted in a pretax loss of $1.5 million during the first quarter of 2008, which included an accrual for the future lease costs of these closed programs of $1.2 million.
During the second quarter of 2008, we decided to close the Colorado Springs, Colorado inpatient unit and the Tucson, Arizona VistaCare hospice program. The closures, which were located in our Mountain and VistaCare West regions, respectively, resulted in a pretax loss of $2.3 million during the second quarter of 2008, which includes an accrual for future lease costs of the closed programs of $2.1 million.
During the third quarter of 2008, we completed the sale of the Baton Rouge hospice program, which was located in our Southeast region during the third quarter of 2008, and no material amounts were recorded as a result.
During the fourth quarter of 2008, we completed the sale of the Ventura and Fort Wayne hospice programs which were located in our West and Midwest regions, respectively, during the fourth quarter of 2008, and recognized a pretax gain of $0.1 million for each of these programs. The Oklahoma City program and the Oklahoma City inpatient unit that we decided to sell in the first quarter of 2008 remain held for sale as of December 31, 2008.
During the years ended December 31, 2006, 2007 and 2008, we recorded a charge of approximately $2.4 million, $3.9 million and $5.3 million, respectively, net of taxes, or $0.07, $0.12 and $0.16 per diluted share, respectively, which represents the operating losses and loss on disposals for discontinued operations. These charges are included in discontinued operations for the respective periods.
Our results of operations and statistics for prior periods have been restated to reflect the reclassification of these programs to discontinued operations. Net Patient Service Revenue
Net patient service revenue is the estimated net realizable revenue (exclusive of our provision for uncollectible accounts) from Medicare, Medicaid, commercial insurance, managed care payors, patients and others for services rendered to our patients. To determine net patient service revenue, we adjust gross patient service revenue for estimated contractual adjustments based on historical experience and estimated Medicare cap contractual adjustments. Net patient service revenue also does not include charity care or the Medicaid room and board payments. (See "Item 1. Business - Government Regulation and Payment Structure- Overview of Government Payments"). We recognize net patient service revenue in the month in which our services are delivered. Services provided under the Medicare program represented approximately 92.7%, 92.4% and 92.5% of our net patient service revenue for the years ended December 31, 2006, 2007 and 2008, respectively. Services provided under Medicaid programs represented approximately 4.3%, 4.6% and 4.1% of our net patient service revenue for the years ended December 31, 2006, 2007 and 2008, respectively. The payments we receive from Medicare and Medicaid are calculated using daily or hourly rates for each of the four levels of care we deliver and are adjusted based on geographic location.
The four main levels of care we provide are routine home care, general inpatient care, continuous home care and inpatient respite care. We also receive reimbursement for physician services, self-pay and non-governmental room and board. Routine home care is the largest component of our gross patient service revenue, representing 87.8%, 88.5% and 89.7% of gross patient service revenue for the years ended December 31, 2006, 2007 and 2008, respectively. General inpatient care represented 7.2%, 7.4% and 7.2% of gross patient service revenue for the years ended December 31, 2006, 2007 and 2008, respectively. Continuous home care represented 4.1%, 3.2% and 2.1% of

gross patient service revenue for the years ended December 31, 2006, 2007 and 2008, respectively. Inpatient respite care and reimbursement for physician services, self pay and non-governmental room and board represents the remaining 0.9%, 0.9% and 1.0% of gross patient service revenue for these periods, respectively.
The principal factors that impact net patient service revenue are our average daily census, levels of care, annual changes in Medicare and Medicaid payment rates due to adjustments for inflation and estimated Medicare cap contractual adjustments. Average daily census is affected by the number of patients referred and admitted into our hospice programs and average length of stay of those patients once admitted. Average length of stay is impacted by patients' decisions of when to enroll in hospice care after diagnoses of terminal illnesses and, once enrolled, the length of the terminal illnesses. Our average hospice length of stay remained unchanged at 85 days for 2007 and 2008.
Payment rates under the Medicare and Medicaid programs are indexed for inflation annually; however, the increases have historically been less than actual inflation. On October 1, 2007 and 2008, the base Medicare payment rates for hospice care increased by approximately 3.3% and 3.6%, respectively, over the base rates previously in effect. These rates were further adjusted geographically by the hospice wage index. On July 31, 2008, CMS published the final rule that modifies the hospice wage index by phasing out over a three year period the budget neutrality adjustment factor. According to the final rule the phase out would occur over a three year period beginning on October 1, 2008, with 25% of the phase-out becoming effective on October 1, 2008, 50% becoming effective on October 1, 2009 and the balance on October 1, 2010. Subsequent to year-end, as part of the recently enacted American Recovery and Reinvestment Act of 2009, the implementation of the phase-out of the budget neutrality adjustment factor has been delayed until October 1, 2009. CMS has indicated that it will begin paying providers the estimated 1.1% increase in hospice rates from October 1, 2008 by the middle of 2009. This increase will result in additional revenues for 2009 from Medicare and Medicaid of an estimated range between $1.5 million to $2.0 million related to services performed from October 1, 2008 through December 31, 2008. CMS has also indicated that beginning October 1, 2009 the phase-out of the budget neutrality adjustment factor will begin with 75% becoming effective on October 1, 2009 and the balance on October 1, 2010. We believe the implementation of the phase-out of the budget neutrality adjustment factor on October 1, 2009 will reduce our net patient service revenue by approximately 3.3% beginning on October 1, 2009. We expect this reduction to be offset, at least in part, by the market basket increase in our base payment rates that we receive each October 1st under current law. Expenses
Because payments for hospice services are primarily paid on a per diem basis, our profitability is largely dependent on our ability to manage the expenses of providing hospice services. We recognize expenses as incurred and classify expenses as either direct hospice care expenses or general and administrative expenses. Direct hospice care expenses primarily include direct patient care salaries, payroll taxes, employee benefits, pharmaceuticals, medical equipment and supplies, inpatient costs and reimbursement of mileage for our patient caregivers. Length of stay impacts our direct hospice care expenses as a percentage of net patient service revenue because, if lengths of stay decline, direct hospice care expenses, which are often highest during the earliest and latter days of care for a patient, are spread against fewer days of care. Expenses are generally higher during the earliest days because of increased labor expense to evaluate the patient and determine the medical and social services needs of the family. Expenses are also normally higher during the last days of care because patients generally require greater hospice services including drugs, medical equipment and nursing care at that time due to their deteriorating medical condition. In addition, cost pressures resulting from the use of more expensive forms of palliative care, including drugs and drug delivery systems, and increasing direct patient care salaries and employee benefit costs will negatively impact our profitability.
For our patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, we contract with nursing homes for room and board services. The state must pay us, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to at least 95% of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under our standard nursing home contracts, we pay the nursing home for these room and board services at 100% of the Medicaid daily nursing home rate. We refer to these costs, net of Medicaid payments, as "nursing home costs, net." See Note 1 to our consolidated financial statements.

General and administrative expenses for hospice care primarily include non-patient care salaries (including salaries for our executive directors, directors of patient services, patient care managers, community education representatives and other non-patient care staff), payroll taxes, employee benefits for our employees at our hospice programs, office leases and other operating costs.
General and administrative expenses for our support center primarily include salaries, payroll taxes and employee benefits for employees located at our support center. These expenses also include our stock-based compensation, office lease, professional fees and other operating costs.
The following table sets forth the percentage of net patient service revenue represented by the items included in direct hospice care expenses and general and administrative expenses for the periods indicated:

                                                                   Year Ended December 31,
                                                            2006             2007            2008
Direct hospice care expenses:
Salaries, benefits and payroll taxes                         39.0 %          39.1 %          38.3 %
Pharmaceuticals                                               5.3             5.2             4.8
Medical equipment and supplies                                5.3             5.3             5.8
Inpatient costs                                               2.5             2.2             2.2
Other (including medical director fees, contracted
patient care services, nursing home costs and
mileage)                                                      6.6             6.9             7.6

Total                                                        58.7 %          58.7 %          58.7 %


General and administrative expenses - hospice care:
Salaries, benefits and payroll taxes                         13.7 %          14.5 %          14.0 %
Leases                                                        2.7             2.9             2.8
Other (including insurance, recruiting, travel,
telephone and printing)                                       3.7             4.0             4.2

Total                                                        20.1 %          21.4 %          21.0 %


General and administrative expenses - support
center:
Salaries, benefits and payroll taxes                          4.4 %           4.6 %           5.9 %
Stock-based compensation                                      1.5             1.0             0.7
Leases                                                        0.4             0.4             0.4
Legal and accounting fees                                     1.3             1.9             1.1
Other (including insurance, recruiting, travel,
telephone and printing)                                       2.8             3.8             3.2

Total                                                        10.4 %          11.7 %          11.3 %

The following table sets forth the cost per day of care represented by the items included in direct hospice care expenses and general and administrative expenses for hospice care for the years ended December 31, 2006, 2007 and 2008, respectively:

                                                               Year Ended December 31,
                                                          2006           2007           2008
Direct hospice care expenses:
Salaries, benefits and payroll taxes                    $  53.87        $ 55.76        $ 56.06
Pharmaceuticals                                             7.35           7.43           7.05
Medical equipment and supplies                              7.25           7.53           8.44
Inpatient costs                                             3.44           3.09           3.18
Other (including medical director fees, contracted
patient care services, nursing home costs and
mileage)                                                    9.06           9.89          11.07

Total                                                   $  80.97        $ 83.70        $ 85.80


General and administrative expenses - hospice
care:
Salaries, benefits and payroll taxes                    $  18.91        $ 20.69        $ 20.52
Leases                                                      3.68           4.14           4.04
Other (including insurance, recruiting, travel,
telephone and printing)                                     5.13           5.65           6.13

Total                                                   $  27.72        $ 30.48        $ 30.69

Stock-Based Compensation Charges
Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified prospective transition method. Under this method, stock compensation expense was recognized beginning January 1, 2006 for all share-based payments granted prior to, but not yet vested at January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and for all share-based payments granted subsequent to January 1, 2006 at the grant date fair value estimated in accordance with the provisions of SFAS 123R. Because we elected to use the modified prospective transition method, results for prior periods have not been restated. We recognized $5.6 million, $3.8 million and $4.3 million in stock-based compensation expense related to SFAS 123R for the years ended December 31, 2006, 2007 and 2008, respectively. We recognized approximately $0.9 million, $1.4 million and $2.8 million in stock-based compensation expense related to grants of restricted stock awards for the years ended December 31, 2006, 2007 and 2008, respectively.
In February 2008, the Compensation Committee of the board of directors (the "Committee") approved, for certain executive officers, the exchange of selected "underwater" stock options for restricted stock. The Committee was concerned that the underwater stock options provided little or no financial or retention incentives to the executive officers. The Committee believes that the exchange of the underwater stock options for the restricted stock adequately addresses those concerns. Stock option awards of 685,000 shares, with a weighted average exercise price of $17.35, were exchanged for 126,146 shares of restricted stock. Of the stock option awards exchanged, 287,500 shares were unvested. The shares of restricted stock had a fair value of $8.72 per share and vest ratably over a three year period beginning February 12, 2009. There was not a material change to our share-based compensation expense from the exchange. Provision for Income Taxes
Our provision for income taxes consists of current and deferred federal and state income tax expenses. We estimate that our effective tax rate will be approximately 36.0% during 2009. See Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Certain of our accounting policies are particularly

important to the portrayal of our financial position and results of operations included elsewhere in this Annual Report on Form 10-K and require the application of significant judgment by us; as a result, they are subject to an inherent degree of uncertainty. In applying these policies, we use our judgment to determine the appropriate assumptions to be used in the determination of certain estimates. These estimates are based on our historical payment experience, our observance of trends in the industry and information available from other outside sources, as appropriate. . . .