• adverse changes in reimbursement levels under Medicare and Medicaid programs;

• adverse changes in the Medicare payment cap limits and increases in our estimated Medicare cap contractual adjustments;

• decline in patient census growth;

• increases in inflation including inflationary increases in patient care costs;

• our ability to effectively implement our 2009 operations and development strategies;

• our ability to successfully integrate and operate acquired hospice programs;

• our dependence on patient referral sources and potential adverse changes in patient referral practices of those referral sources;

• our ability to attract and retain healthcare professionals;

• increases in our bad debt expense due to various factors including an increase in the volume of pre-payment reviews by Medicare fiscal intermediaries;

• adverse changes in the state and federal licensure and certification laws and regulations;

• adverse results of regulatory surveys;

• delays in licensure and/or certification of hospice programs and inpatient units;

• government and private party legal proceedings and investigations;

• cost of complying with the terms and conditions of our corporate integrity agreement;

• adverse changes in the competitive environment in which we operate;

• changes in state or federal income, franchise or similar tax laws and regulations; and

• adverse impact of natural disasters.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Many of these factors are beyond our ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which reflect management's views only as of the date hereof. We undertake no obligation to revise or update any of the forward-looking statements or publicly announce any updates or revisions to any of the forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events,

conditions, circumstances or assumptions underlying such statements. Reference is hereby made to the disclosures contained under the heading "Government Regulation and Payment Structure" in "Item 1. Business" and the disclosures contained under the heading "Item 1A. Risk Factors" in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 13, 2009.
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.
OVERVIEW
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 three months ended March 31, 2008 include financial results for only one full month of VistaCare operations. See Note 2 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a more detailed description of the transaction.
We are one of the largest providers of hospice care in the United States in terms of both average daily patient census and number of Medicare-certified hospice programs. As of March 31, 2009, we operated 92 Medicare-certified hospice programs, serving patients and their families in 29 states. We operate all of our hospice programs through our operating subsidiaries. During the three months ended March 31, 2009, our average daily census was 12,186 patients, which represents a 33.5% increase over our average daily census of 9,125 patients for the three months ended March 31, 2008. Our average daily census increased by 3,061 patients due primarily to our acquisition of VistaCare. Our net patient service revenue of $167.5 million for the three months ended March 31, 2009 represents an increase of 36.4% over our net patient service revenue of $122.8 million for the three months ended March 31, 2008. We reported income from continuing operations of $8.9 million for the three months ended March 31, 2009, which represents an increase of 150.1% from our income from continuing operations of $3.6 million for the three months ended March 31, 2008. We reported net income attributable to Odyssey stockholders of $8.7 million, which includes a $0.1 million loss from discontinued operations, net of taxes, for the three months ended March 31, 2009, compared to net income of $1.5 million for the three months ended March 31, 2008, which includes a $2.1 million loss from discontinued operations, net of taxes.
DEVELOPED HOSPICES
During the first quarter of 2008, our hospice program located in Augusta, Georgia received its Medicare certification. During the second quarter of 2008, our hospice program located in Dayton, Ohio received its Medicare certification. During the third quarter we converted our Dayton, Ohio program to an alternate delivery site of our Columbus, Ohio program. During the three months ended March 31, 2008 and 2009, we incurred pre-tax start-up losses of approximately $0.7 million and $0.4 million, respectively.
Once a hospice becomes Medicare certified, the process is started to obtain Medicaid certification. The process to obtain Medicare and Medicaid certification takes approximately twelve to eighteen months and varies from state to state.
ACQUISITIONS
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 $130.0 million term loan from General Electric Capital Corporation. See Note 2 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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 March 31, 2009, representing 89.5% of equity and 40.6% of total assets as of March 31, 2009. We do not amortize goodwill for acquisitions 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 March 31, 2009, no impairment charges have been recorded. Other intangible assets continue to be amortized over their useful lives.
DISCONTINUED OPERATIONS
We conduct ongoing strategic reviews of each of our hospice programs from which we evaluate hospice programs and decide to sell or close certain hospice programs.
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, along with the Oklahoma City inpatient unit, that we decided to sell in the first quarter of 2008 remains held for sale as of March 31, 2009. This is our only program that is held for sale as of March 31, 2009. We have been in negotiations with a prospective buyer for several months in regard to a sale of the Oklahoma City program including the respective inpatient unit.
During the three months ended March 31, 2008 and 2009, we recorded a charge of approximately $2.1 million and $0.1 million, respectively, net of taxes, or $0.06 and $0.01 per diluted share, respectively, related to these programs in 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 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 does not include charity care or the Medicaid room and board payments. We recognize net patient service revenue in the month in which our services are delivered. Services provided under the Medicare program represented approximately 92.5% and 92.9% of our net patient service revenue for the three months ended March 31, 2008 and 2009, respectively. Services provided under Medicaid programs represented approximately 4.0% of our net patient service revenue for both of the three months ended March 31, 2008 and 2009, 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 89.0% and 88.3% of gross patient service revenue for the three months ended March 31, 2008 and 2009, respectively. General inpatient care represented 7.7% and 8.1% of gross patient service revenue for the three months ended March 31, 2008 and 2009, respectively. Continuous home care represented 2.2% and 2.6% of gross patient service revenue for the three months ended March 31, 2008 and 2009, respectively. Inpatient respite care and

reimbursement for physician services, self-pay and non-governmental room and board represents the remaining 1.1% and 1.0% of gross patient service revenue for the three months ended March 31, 2008 and 2009, 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 and commercial contractual adjustments. Average daily census is affected by the number of patients referred and admitted into our hospice programs and the 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 is 82 and 83 days for the three months ended March 31, 2008 and 2009, respectively.
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, the Centers for Medicare and Medicaid Services ("CMS") published the final rule that modifies the hospice wage index by phasing out over a three year period the budget neutrality adjustment factor ("BNAF"). 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. In February 2009, as part of the recently enacted American Recovery and Reinvestment Act of 2009, the implementation of the phase-out of the BNAF has been delayed until October 1, 2009. CMS began paying providers the estimated 1.1% increase in hospice rates from October 1, 2008 during the second quarter of 2009. This increase resulted in $1.4 million recorded in additional net patient service revenue for the three months ended March 31, 2009 from Medicare related to services performed from October 1, 2008 through December 31, 2008. On April 21, 2009, CMS issued a proposed rule to update the Medicare hospice wage index. The proposed rule would implement the phase-out of the BNAF beginning on October, 1, 2009. According to CMS, payments to Medicare participating hospices are estimated to decrease by approximately 1.1% beginning on October 1, 2009. The decrease in the hospice payments is the net result of a 3.2% reduction in payments due to the phase-out of the BNAF, partially offset by an estimated 2.1% increase in the base payment rates for the annual market basket update.
MEDICARE REGULATION
The Medicare Cap. Various provisions were included in the legislation creating the Medicare hospice benefit to manage the cost to the Medicare program for hospice, including the patient's waiver of curative care requirement, the six-month terminal prognosis requirement and the Medicare payment caps. The Medicare hospice benefit includes two fixed annual caps on payment, both of which are assessed on a program-by-program basis. One cap is an absolute dollar amount; the other limits the number of days of inpatient care. The caps are calculated from November 1 through October 31 of each year.
Dollar Amount Cap. The Medicare revenue paid to a hospice program from November 1 to October 31 of the following year may not exceed the annual cap amount, which is calculated by using the following formula: the product of the number of admissions to the program by patients who are electing to receive their Medicare hospice benefit for the first time, multiplied by the Medicare cap amount, which for the November 1, 2007 through October 31, 2008 Medicare fiscal year was $22,386. The Medicare cap amount is reduced proportionately for patients who transferred in or out of our hospice services. The Medicare cap amount is annually adjusted for inflation, but is not adjusted for geographic differences in wage levels, although hospice per diem payment rates are wage indexed. On May 5, 2009, CMS announced that the Medicare cap amount for the 2009 cap year is $23,014.
Inpatient Care Cap. A hospice program's inpatient care days, either general inpatient or respite inpatient care and regardless of setting, may not exceed 20% of the program's total patient care days in the Medicare cap year. None of our hospice programs exceeded the payment limits on general inpatient care services for the years ended December 31, 2008.

The following table shows the amounts accrued and paid for the Medicare cap contractual adjustments for the year ended December 31, 2008 and for the three months ended March 31, 2009, respectively:

                                                                              Accrued Medicare Cap Contractual
                                                                                        Adjustments
                                                                        Year ended                 Three Months Ended
                                                                       December 31,                     March 31,
                                                                           2008                           2009
Beginning balance - accrued Medicare cap contractual adjustments      $        21,682              $            23,719
Medicare cap contractual adjustments                                            6,852 (1)                        1,332 (2)
Medicare cap contractual adjustments - discontinued operations                    (27 )(3)                          62 (3)
Payments to Medicare fiscal intermediaries                                    (12,996 )                         (4,347 )
Balances acquired from the VistaCare acquisition                                8,208                                -

Ending balance - accrued Medicare cap contractual adjustments         $        23,719              $            20,766

(1) Includes additional accrual of $1.5 million related to the 2006 Medicare cap year.

(2) Includes additional accrual of $0.1 million related to the 2007 Medicare cap year.

(3) Medicare cap contractual adjustments reclassified to discontinued operations are related to all programs we have discontinued and/or sold during 2006, 2007 and 2008.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs.
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.
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." We refer to the payable related to these costs as accrued nursing home costs.
General and administrative expenses 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, office leases, 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 hospice care for the three months ended March 31, 2008 and 2009, respectively:

                                                                       Three Months Ended
                                                                           March 31,
                                                                      2008             2009
Direct hospice care expenses:
Salaries, benefits and payroll taxes                                   38.3 %          38.9 %
Pharmaceuticals                                                         4.6             4.7
Medical equipment and supplies                                          5.5             5.5
Inpatient costs                                                         2.5             2.0
Other (including nursing home costs, net, mileage, medical
director fees and contracted services)                                  7.3             7.7

Total                                                                  58.2 %          58.8 %

General and administrative expenses - hospice care:
Salaries, benefits and payroll taxes                                   15.3 %          13.4 %
Leases                                                                  2.8             2.8
Other (including insurance, recruiting, travel, telephone
and printing )                                                          4.1             4.0

Total                                                                  22.2 %          20.2 %

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 three months ended March 31, 2008 and 2009, respectively:

                                                                      Three Months Ended
                                                                          March 31,
                                                                     2008             2009
Direct hospice care expenses:
Salaries, benefits and payroll taxes                              $    56.70         $ 59.37
Pharmaceuticals                                                         6.84            7.18
Medical equipment and supplies                                          8.09            8.38
Inpatient costs                                                         3.69            3.13
Other (including nursing home costs, net, mileage, medical
director fees and contracted services)                                 10.74           11.71

Total                                                             $    86.06         $ 89.77

General and administrative expenses - hospice care:
Salaries, benefits and payroll taxes                              $    22.58         $ 20.53
Leases                                                                  4.17            4.29
Other (including insurance, recruiting, travel, telephone
and printing )                                                          6.04            6.00

Total                                                             $    32.79         $ 30.82

PROVISION FOR INCOME TAXES
Our provision for income taxes consists of current and deferred federal and state income tax expenses. Our effective tax rate for the three months ended March 31, 2008 and 2009 was approximately 36.1% and 37.6%, respectively. The increase in the effective tax rate for 2009 is related to a higher percentage of taxable earnings due to our increasing income before taxes and our lower tax-exempt interest income earned which is due to lower interest rates. We estimate that our effective tax rate for 2009 will be approximately 37.5%.

RESULTS OF OPERATIONS
   The following table sets forth selected consolidated financial information as
a percentage of net patient service revenue for the three months ended March 31,
2008 and 2009, respectively.

                                                                       Three Months Ended
                                                                            March 31,
                                                                      2008             2009
Net patient service revenue                                           100.0 %          100.0 %
Operating expenses:
Direct hospice care                                                    58.2             58.8
General and administrative - hospice care                              22.2             20.2
General and administrative - support center                            11.4              9.4
Provision for uncollectible accounts                                    1.8              1.4
Depreciation and amortization                                           1.4              0.7

Income from continuing operations before other income
(expense)                                                               5.0              9.5
Other income (expense), net                                            (0.4 )           (1.0 )

Income from continuing operations before provision for
income taxes                                                            4.6              8.5
Provision for income taxes                                              1.7              3.2

Income from continuing operations                                       2.9              5.3
Loss from discontinued operations, net of income taxes                 (1.7 )            0.0

Net income                                                              1.2 %            5.3 %
Less: net income attributable to noncontrolling interests               0.0             (0.1 )

Net income attributable to Odyssey stockholders                         1.2 %            5.2 %

. . .