This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements and information that may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements relate to future plans and strategies, anticipated events or trends, future financial performance and expectations and beliefs concerning matters that are not historical facts or that necessarily depend upon future events. The words "may," "will," "should," "could," "would," "expect," "plan," "intend," "anticipate," "believe," "estimate," "project," "predict," "potential" or other similar expressions are intended to identify forward-looking statements. Specifically, this report contains, among others, forward-looking statements about:

• our expectations regarding financial condition or results of operations for periods after September 30, 2009;

• our critical accounting policies;

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

• our participation in the Medicare and Medicaid programs;

• the impact of the President's budget proposal;

• 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 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;

• 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 Securities 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 SEC, including our annual report on Form 10-K for the year ended December 31, 2008. 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 and long-term acute care hospitals. Our founders began operations in 1994 with one home nursing agency in Palmetto, Louisiana. Since then, we have grown to 269 service providers in 18 states: Louisiana, Mississippi, Arkansas, Alabama, Texas, Virginia, West Virginia, Kentucky, Florida, Georgia, Tennessee, Ohio, Missouri, North Carolina, Maryland, Washington, Oregon and Oklahoma as of September 30, 2009.

Segments

We operate in two segments for financial reporting purposes: home-based services
and facility-based services. The percentage of net service revenue contributed
from each reporting segment for the three months and nine months ended
September 30, 2008 and 2009 was as follows:



                                  Three Months Ended          Nine Months Ended
                                    September 30,               September 30,
                                  2009          2008          2009          2008
      Home-based services           88.1 %        86.1 %        88.3 %        84.4 %
      Facility-based services       11.9 %        13.9 %        11.7 %        15.6 %

                                   100.0 %       100.0 %       100.0 %       100.0 %

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 September 30, 2009, the home-based services segment was comprised of the following:

                         Type of Service        Locations
                         Home Health                  223
                         Hospice                       21
                         Diabetes Management            2
                         Private Duty                   4
                         Specialty Services             3
                         Management Companies           4

Of our 257 home-based services locations, 135 are wholly-owned by us, 110 are majority-owned or controlled by us through joint ventures, eight 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.

We provide facility-based services principally through our LTACHs. As of September 30, 2009 we owned and operated five LTACHS with eight locations, of which all but one are located within host hospitals. We also owned and operated two medical equipment locations, a health club and a pharmacy. Of these 12 facility-based services locations, four are wholly-owned by us and seven are majority-owned through joint ventures. We also manage the operations of one inpatient rehabilitation facility in which we have no ownership interest.

Recent Developments

Home-Based Services

Home Nursing. The base payment rate for Medicare home nursing in 2009 is $2,272 per 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. CMS establishes 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.

On July 30, 2009, CMS issued the calendar year 2010 proposed rule covering agency payment rates for home health services. The proposed rule provides for the following adjustments to the base rate: a 2.2% market basket increase, a 2.75% "case mix creep" decrease, and a 2.5% increase resulting from a modification to the current outlier policy. The new outlier policy proposes to cap outlier payments at 10% per agency and targets total aggregate outlier payments at 2.5% of total home health payments. The current aggregate target is 5.0% and there is no per agency limit. CMS also identified 1.81% in additional "coding creep," leaving 6.89% in total cuts that could be implemented. The proposal lays out three scenarios for addressing the coding creep: 1) maintain the current 2.75% reduction for fiscal year 2010, 2) re-distribute it over two years (3.5% cut in both fiscal year 2010 and fiscal year 2011), or 3)accelerate the entire 6.89% in fiscal year 2010. Each of these scenarios would be offset by the 2.2% market basket increase and the 2.5% increase in the base rate for the outlier adjustment. This proposal goes into a 60-day comment period, and a final rule is expected out thereafter.

The United States Congress is currently working on legislation as part of the "Healthcare Reform" that could impact the amounts that we are paid by Medicare for services provided to Medicare eligible patients. As of the date of this filing, the legislation has not been finalized and thus we cannot estimate the impact of such potential changes but continue to monitor these actions closely.

Hospice. On August 8, 2008, CMS issued the Hospice Wage Index for Fiscal Year 2009 Final Rule. This 2009 final rule provides for a payment increase consisting of a 3.6% market basket increase less a 1.1% decrease in the Budget Neutrality Adjustment Factor ("BNAF"). The 3.6% increase is applied to the national base rates from CMS Transmittal 1570 dated August 1, 2008, and the 1.1% BNAF reduction is applied to the geographically adjusted wage indices as indicated in the Federal Register dated August 8, 2008.

On August 6, 2009 CMS released its Final Fiscal Year 2010 Medicare hospice wage index rule, which will increase hospice rates by 1.4% in FY 2010. The rate increase reflects a 2.1% increase in the hospital market basket, offset by a 0.7% decrease resulting from the phase out of the hospice wage index budget neutrality adjustment factor (BNAF). CMS is phasing out the BNAF reduction over 7 years, with a 10% BNAF reduction in fiscal year 2010 and successive 15% reductions from fiscal year 2011 through fiscal year 2016. The rule is effective October 1, 2009.

Facility-Based Services

LTACHs. On May 6, 2008, CMS published an interim final rule with comment period, which implements portions of the Medicare, Medicaid and SCHIP Extension Act of 2007 ("MMSEA"). The interim final rule addresses: (1) the payment adjustment for very short-stay outliers, (2) the standard federal rate for the last three months of rate year 2008, (3) adjustment of the high cost outlier fixed-loss amount for the last three months of rate year 2008, and (4) the basis and scope of the LTACH Prospective Payment System ("LTACH-PPS") rules in reference to the MMSEA.

On May 9, 2008, CMS published its annual payment rate update for the 2009 LTACH-PPS rate year ("RY") 2009 (affecting discharges and cost reporting periods beginning on or after July 1, 2008). The final rule adopts a 15-month rate update, from July 1, 2008 through September 30, 2009 and moves LTACH-PPS from a July-June update cycle to the same update cycle as the general acute care hospital inpatient rule, currently October - September. For RY 2009, the rule increases the Medicare base rate 2.7%, to $39,114.34 from $38,086.04. The rule also increases the fixed-loss amount for high cost outlier cases to $22,960, which is $2,222 higher than the 2008 LTACH-PPS rate year. The final rule provides that CMS may make a one-time reduction in the LTACH-PPS rates to reflect a budget neutrality adjustment no earlier than December 29, 2010 and no later than October 1, 2012. CMS estimates this reduction will be approximately 3.75%.

On May 22, 2008, CMS published an interim final rule with comment period, which implements portions of the MMSEA not addressed in the May 6, 2008 interim final rule. Among other things, the second May 22, 2008 interim final rule defines a "freestanding" LTACH as a hospital that: (1) has a Medicare provider agreement,
(2) has an average length of stay of greater than 25 days, (3) does not occupy space in a building used by another hospital, (4) does not occupy space in one or more separate or entire buildings located on the same campus as buildings used by another hospital, and (5) is not part of a hospital that provides inpatient services in a building also used by another hospital.

On August 8, 2008, CMS published the final rule for the inpatient rehabilitation facility prospective payment system ("IRF-PPS") for fiscal year 2009. The final rule includes changes to the IRF-PPS regulations designed to implement portions of the SCHIP Extension Act. In particular, the patient classification criteria compliance threshold is established at 60% (with co-morbidities counting toward this threshold). In addition to updating the various values that compose the IRF-PPS, the final rule updates the outlier threshold amount to $10,250. CMS also updated the CMG relative weights and average length of stay values.

On July 30, 2009, CMS published its Final Rule updating payments to LTACHs for the RY 2010. The Final Rule adopted a 2.5% inflation update which will apply to discharges and cost reporting periods beginning October 1, 2009, ending September 30, 2010.

The standard federal rate was raised from the rate proposed in CMS' Proposed Rule ("NPRM") published on May 1, 2009. Likewise, the high cost outlier ("HCO") threshold was lowered from that published in the

NPRM. The federal standard rate will be $39,896.65 per Medicare discharge and the HCO threshold will be lowered from $22,960.00 to $18,425.00. Both of these developments will have a small positive impact on reimbursement in RY 2010.

The standard federal rate is increased or decreased based on each Medicare patient's case mix index which measures the severity of the patient's condition. The HCO threshold is the limit that triggers additional high cost outlier payments to an LTACH.

Another change to the LTACH PPS worth noting is the labor related share for rate year 2010 will relate to 75.559% of the standard federal rate compared to 75.662% of the standard federal rate for rate year 2009.

Contrary to an earlier notice published by CMS in its June 3rd Interim Final Rule ("IFR"), CMS is not making any adjustment to the LTACH rates in RY 2010 to adjust for the effect of changes in documentation and coding that occurred in fiscal year 2008, the first year of MS-LTC-DRGs. CMS is, however, finalizing its earlier proposal to adjust the RY 2010 LTACH rates by -0.5% to account for the effect of documentation and coding changes in fiscal year 2007.

The Final Rule also implements the corrections to CMS fiscal 2009 LTACH payments for patients discharged on or after June 3, 2009, through September 30, 2009, that were initially adopted in the June 3rd IFR.

To recap, the standard federal rate uses a 2.0% update factor based on a market basket update of 2.5% less an adjustment of 0.5% to account for changes in documentation and coding.

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 2009 workplans, the OIG indicated its intent to study topics relating to, among others, home health, hospice and long-term care hospitals. 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 September 30, 2009, the Company's allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 12.7%, or $10.0 million, compared to 14.0% or $10.0 million at December 31, 2008.

The following table sets forth as of September 30, 2009, 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:

                                              0-90          91-180        181-365         Over 365         Total
                                                                        (in thousands)
Payor
Medicare                                    $ 40,823       $  9,581       $  6,373       $    1,381       $ 58,158
Medicaid                                       2,377            601            962              394          4,334
Other                                         12,144          2,570          1,320              216         16,250

Total                                       $ 55,344       $ 12,752       $  8,655       $    1,991       $ 78,742

Allowance as a percentage of receivables         5.7 %         14.4 %         38.0 %           84.4 %         12.7 %

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 the aging categories because of the mix of claims in each category.

The following table sets forth as of December 31, 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:

                                              0-90          91-180        181-365         Over 365         Total
                                                                        (in thousands)
Payor
Medicare                                    $ 41,772       $  6,806       $  2,678       $    1,305       $ 52,561
Medicaid                                       2,807          1,081          1,108              946          5,942
Other                                          7,656          3,239          1,219              883         12,997

Total                                       $ 52,235       $ 11,126       $  5,005       $    3,134       $ 71,500

Allowance as a percentage of receivables         6.9 %         15.8 %         33.0 %           94.3 %         14.0 %

Consolidated Net Service Revenue

Consolidated net service revenue for the three months ended September 30, 2009 was $132.5 million, an increase of $34.5 million, or 35.2%, from $98.0 million for the three months ended September 30, 2008. Consolidated net service revenue for the nine months ended September 30, 2009 was $389.3 million, an increase of $118.1 million, or 43.5%, from $271.2 million for the nine months ended September 30, 2008.

Home-Based Services. Net service revenue for home-based services for the three months ended September 30, 2009 was $116.7 million, an increase of $32.2 million, or 38.1%, from $84.5 million for the three months ended September 30, 2008. Total admissions increased 52.2% to 21,485 during the current period, versus 14,113 for the same period in 2008. Average home-based patient census for the three months ended September 30, 2009, increased 29.5% to 28,150 patients as compared to 21,733 patients for the three months ended September 30, 2008.

Net service revenue for home-based services for the nine months ended September 30, 2009 was $343.7 million, an increase of $114.4 million, or 49.9%, from $229.3 million for the nine months ended September 30, 2008. Total admissions increased 44.2% to 59,368 during the nine months ended September 30, 2009, versus 41,168 for the same period in 2008. Average home-based patient census for the nine months ended September 30, 2009, increased 39.6% to 28,454 patients as compared with 20,386 patients for the nine months ended September 30, 2008.

As detailed in the table below, the increase in revenue is organic growth and the growth from our acquisitions subsequent to the period ending September 30, 2008.

Organic growth includes growth on "same store" locations (those owned for greater than 12 months) and growth from "de novo" locations. The Company calculates 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.

The following table details the Company's revenue growth and percentages for organic and total growth:

Three Months Ended September 30, 2009 (in thousands except census and episode data)

                                                                              Organic                                       Total
                            Same Store(1)      De Novo(2)      Organic(3)     Growth %        Acquired(4)       Total      Growth %
Revenue                    $        96,630    $      1,517    $     98,147        16.1 %     $      18,599    $ 116,746        38.1 %
Revenue Medicare           $        81,085    $      1,239    $     82,324        15.6 %     $      14,981    $  97,305        36.6 %
Average Census                      23,745             450          24,195        11.3 %             3,955       28,150        29.5 %
Average Medicare Census             19,283             341          19,624        10.2 %             2,862       22,486        26.3 %
Episodes                            33,230             851          34,081        13.3 %             5,597       39,678        31.9 %

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

Nine Months Ended September 30, 2009 (in thousands except census and episode data)

                                                                              Organic                                       Total
                            Same Store(1)      De Novo(2)      Organic(3)     Growth %        Acquired(4)       Total      Growth %
Revenue                    $       291,039    $      2,354    $    293,393        28.0 %     $      50,309    $ 343,702        49.9 %
Revenue Medicare           $       245,202    $      2,024    $    247,226        29.1 %     $      39,682    $ 286,908        49.9 %
Average Census                      24,075             418          24,493        20.1 %             3,961       28,454        39.6 %
Average Medicare Census             19,789             318          20,107        22.5 %             2,761       22,868        39.4 %
Episodes                           104,846           1,102         105,948        24.4 %            12,100      118,048        38.6 %

(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) 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 September 30, 2009, increased $2.2 million, or 16.3%, to $15.7 million compared to $13.5 million for the three months ended September 30, 2008. Patient days increased to 13,043 in the three months ended September 30, 2009 compared to 10,930 in the three months ended September 30, 2008. Patient acuity also increased during the three months ended September 30, 2009 compared to September 30, 2008.

Net service revenue for facility-based services for the nine months ended September 30, 2009, increased $3.7 million, or 8.8%, to $45.6 million compared to $41.9 million for the nine months ended September 30, 2008. Patient days increased to 37,904 in the nine months ended September 30, 2009 compared to 34,262 in the nine months ended September 30, 2008. Patient acuity also increased during the nine months ended September 30, 2009 compared to September 30, 2008.

Cost of Service Revenue

Cost of service revenue for the three months ended September 30, 2009 was $69.2 million, an increase of $22.0 million, or 46.6%, from $47.2 million for the three months ended September 30, 2008. Cost of service revenue represented approximately 52.3% and 48.2% of our net service revenue for the three months ended September 30, 2009 and 2008, respectively.

Cost of service revenue for the nine months ended September 30, 2009 was $197.7 million, an increase of $64.6 million, or 48.5%, from $133.1 million for the nine months ended September 30, 2008. Cost of service revenue represented approximately 50.8% and 49.1% of our net service revenue for the three months ended September 30, 2009 and 2008, respectively.

Home-Based Services. Cost of home-based service revenue for the three months ended September 30, 2009 was $59.6 million, an increase of $20.2 million, or 51.3%, from $39.4 million for the three months ended September 30, 2008. Cost of home-based service revenue for the nine months ended September 30, 2009 was $170.6 million, an increase of $61.5 million, or 56.3%, from $109.1 million for . . .