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LHCG > SEC Filings for LHCG > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for LHC GROUP, INC

Form 10-Q for LHC GROUP, INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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 1933, 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," "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, 2012;

our critical accounting policies;

our participation in the Medicare and Medicaid programs;

the impact of healthcare reform;

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

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

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

the impact of legal proceedings;

our compliance with health care laws and regulations;

our compliance with Securities and Exchange Commission ("SEC") 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-kickback 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, 2011 (the "2011 Form 10-K"), as updated by subsequent filings with the SEC. 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 by providing quality cost-effective health care services to our patients. As of September 30, 2012, we had 291 service providers in 19 states: Alabama, Arkansas, Georgia, Florida, Idaho, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington and West Virginia. Our services are classified into two segments: (1) home-based services offered through our home nursing agencies and hospices; and (2) facility-based services offered through our long-term acute care hospitals ("LTACHs").


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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, 2012, the home-based services segment was comprised of the following:

                        Type of Service         Locations
                        Home Health                    238
                        Hospice                         32
                        Private Duty                     4
                        Specialty Services               3
                        Management Companies             3

Of our 280 home-based services locations, 146 are wholly-owned by us, 124 are majority-owned by us through joint ventures, seven are license lease arrangements and we manage the operations of the remaining three locations. We intend to increase the number of home nursing agencies and hospice locations that we operate through continued acquisitions and development.

We provide facility-based services through our LTACHs. As of September 30, 2012, we owned and operated nine LTACH locations, of which all but one are located within host hospitals. We also owned and operated a health club and a pharmacy. Of these 11 facility-based services locations, six are wholly-owned by us and five are majority-owned through joint ventures.

The percentage of net service revenue contributed from each reporting segment for the three and nine months ended September 30, 2012 and 2011 was as follows:

                                    Three Months Ended           Nine Months Ended
                                       September 30,               September 30,
                                    2012           2011          2012          2011
        Home-based services            88.3 %        88.0 %         88.3 %       87.9 %
        Facility-based services        11.7 %        12.0 %         11.7 %       12.1 %

                                      100.0 %       100.0 %        100.0 %      100.0 %

Recent Developments

Home-based services

Home Nursing. The base payment rate for Medicare home nursing in 2012 is $2,138.52 per 60-day episode.

In March 2010, the Patient Protection and Affordable Care Act was enacted and was amended shortly afterwards by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively referred to as the "Affordable Care Act"). The Affordable Care Act makes a number of changes to Medicare payment rates, including, the reinstatement of the 3% home health rural add-on, which began on April 1, 2010 (expiring January 1, 2016), Other changes from the Affordable Care Act that began on or after January 1, 2011 are:

a reduction in the market basket adjustment to be determined by The Centers for Medicare & Medicaid Services ("CMS") for the calendar years 2011, 2012 and 2013 by 1%;

a full productivity adjustment beginning in 2015; and

rebasing of the base payment rate for Medicare beginning in 2014 and phasing in over a four year period - the amount of the rebasing is uncertain at this time.

On October 31, 2011, CMS issued the final rule covering payment rates for home health services in calendar year ("CY") 2012. CMS set the base payment rate for Medicare home nursing at $2,138.52 per 60-day episode for CY 2012, a decrease of 2.4% from the CY 2011 base payment rate of $2,192.07. The decrease for CY 2012 includes the following adjustments to the base rate, as compared to the CY 2011 base rate, in accordance with the Affordable Care Act: a reduction of 1% to the 2.4% inflation update increase to the market basket; and a 3.79% case-mix weight adjustment decrease. These changes are effective for all episodes completed during 2012.

The case-mix weight adjustment reduced Home Health Prospective Payment System ("HH PPS") rates 3.79% for CY 2012 and an additional 1.32% reduction for CY 2013.


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This rule also finalizes structural changes to the HH PPS by removing two hypertension codes from the case- mix system, lowering payments for high therapy episodes, and recalibrating the HH PPS case-mix weights to ensure that these changes result in the same amount of total aggregate payments.

Under current Medicare policy, a certifying physician or an allowed non-physician practitioner must see a patient prior to certifying a patient as eligible for the home health benefit. The rule also finalizes added flexibility to allow physicians who cared for the patient in an acute or post-acute facility to inform the certifying physician of their encounters with the patient in order to satisfy the requirement.

On November 2, 2012, CMS issued the final rule regarding payment rates for home health services in CY 2013. In the CY 2013 issue, CMS is:

* Decreasing the base payment rate to $2,137.73 in 2013 as compared to $2,138.52 in 2012. The decrease is made up of a market basket increase of 2.3% less a reduction of 1% to the market basket as defined by the Affordable Care Act and less a 1.32% case mix adjustment carried over from 2012.

* Rebasing of the wage index and increasing the labor related portion of the base payment rate from 77.082% to 78.535% which decreases payments to the home health industry an aggregate of 0.37%.

* The estimated 0.1% reduction to home health payments does not include any projection of the potential deficit reduction sequester approved earlier by Congress as it is unclear whether or not that reduction will take effect. If the sequester is imposed, it would become effective in January 2013 and would reduce payments by an additional 2%.

* Face to Face-CMS will allow non-physician practitioners in an acute or post-acute setting to perform the encounter and inform the certifying physician.

* Therapy-CMS will also revise the regulation to state that in cases where multiple therapy disciplines are involved, if the required reassessment visit was missed for any one of the therapy disciplines for which therapy services were being provided, therapy coverage would cease only for that particular therapy discipline. Therefore, as long as the required therapy reassessments were completed timely for the remaining therapy disciplines, therapy services would continue to be covered for those therapy disciplines.

Finally, with respect to the therapy assessments timing, CMS revises the regulations to clarify that in cases where the patient is receiving more than one type of therapy, qualified therapists could complete their reassessment visits during the 11th, 12th, or 13th visit for the required 13th visit reassessment and the 17th, 18th, or 19th visit for the required 19th visit reassessment.

* Sanctions-CMS will have additional sanctions for enforcement of survey deficiencies that will include the following: (These are not mutually exclusive. CMS can impose any or all of the following, including termination.) Each of these sanctions requires a prior 15 day notice.

(a) Civil money penalties

(b) Suspension of payment for all new admissions and new payment episodes

(c) Temporary management of the HHA

(d) Directed plan of correction

(e) Directed in-service training

The final rule goes into effect on January 1, 2013.

Hospice. The following table shows the hospice Medicare payment rates for Fiscal Year ("FY") 2012, which began on October 1, 2011 and ended September 30, 2012:

                                                    Rate per
                                                     patient
                     Description                       day
                     Routine Home Care              $  151.03
                     Continuous Home Care           $  881,46
                     Full Rate = 24 hours of care
                     $36.73 = hourly rate
                     Inpatient Respite Care         $  156.22
                     General Inpatient Care         $  671.84


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On July 29, 2011, CMS issued its final rule for hospice for FY 2012 which increases Medicare reimbursement payments by 2.5%. The 2.5% increase consists of a 3.0% inflationary market basket update offset by a 0.5% reduction for the third year of CMS' seven-year phase-out of its wage index budget neutrality adjustment factor. The final rule also will:

Change the way CMS counts hospice patients for the 2012 cap accounting year and beyond, The final policy for counting the number of Medicare hospice beneficiaries in care for a given cap year calculates the cap based on the number of days of care the patient received in that cap year for each hospice. This rule also finalized that the new counting method be applied to past cap years in certain instances.

Allow hospice providers who do not want a change in their patient counting method to elect to continue using the current method.

Allow any hospice physician to perform the face-to-face encounter regardless of whether that same physician recertifies the patient's terminal illness and composes the recertification narrative,

Implement a hospice quality reporting program, which includes a timeframe for reporting, as required by section 3004 of the Affordable Care Act. The measures that are being adopted in this final rule for the FY 2014 program are one measure endorsed by the National Quality Forum related to pain management and one structural measure that assesses whether a hospice administers a Quality Assessment and Performance Improvement (QAPI) program that contains at least three indicators related to patient care.

On July 24, 2012, CMS issued its final rule for hospice for FY 2013 which increases Medicare reimbursement payments by 0.9% over FY 2012 rates. The 0.9% increase consists of a 2.6% inflationary market basket update offset by a 0.6% reduction for the fourth year of CMS' seven-year phase-out of its wage index budget neutrality adjustment factor, a 0.7% reduction for the productivity adjustment, a 0.3% reduction to the market basket as defined by the Affordable Care Act, and a 0.1% reduction related to the wage index changes. The 0.9% does not include any projection of the potential deficit reduction sequester approved earlier by Congress as it is unclear whether or not that reduction will take effect. If the sequester is imposed, it would become effective in January 2013 and would reduce payments by an additional 2%.

The final rule will also provide:

Clarification regarding diagnosis reporting on hospice claims:

CMS is concerned that hospices reporting a single diagnosis on claims are not providing an accurate description of the patients' conditions, and believes that providers should code and report coexisting or additional diagnoses in order to more fully describe the Medicare patients they are treating.

Hospice payment reform update:

CMS indicates that it is moving forward with hospice payment reform efforts and will continue to investigate Medicare Payment Advisory Commission, Office of the Inspector General, and Government Accountability Office recommendations, as well as other payment options, as part of this comprehensive effort. CMS does not, however, provide an anticipated timeline for public release of information about proposals to alter the current hospice payment system.

The following table shows the hospice Medicare payment rates for FY 2013, which began on October 1,2012 and will end September 30, 2013:

                                                    Rate per
                                                     patient
                     Description                       day
                     Routine Home Care              $  153.45
                     Continuous Home Care           $  895.56
                     Full Rate = 24 hours of care
                     $37.32 = hourly rate
                     Inpatient Respite Care         $  158.72
                     General Inpatient Care         $  682.59

Facility-based services

LTACHs. On August 1, 2011, CMS released its rule for LTACH Medicare reimbursement for FY 2012, which spanned from October 1, 2011 through September 30, 2012. In aggregate, payments for FY 2012 increased 2.5% from FY 2011. Included in the final regulations was (1) a 2.9% market basket increase to the standard payment rate; (2) an aggregate reduction in the standard payment rate of 1,1% mandated by the Affordable Care Act. and (3) a reduction in the high cost outlier threshold per discharge from $18.785 in FY 2011 to $17.931 in FY 2012. The final rule resulted in a 1.8% increase in average Medicare payments to LTACHs. Some of the other changes in the final rule include:

Three quality measures to be reported starting October 1, 2012 which will affect payment in FY 2014.

Clarification that the 25-day Average Length of Stay calculation includes both traditional Medicare Fee- For-Service and Medicare Advantage stays but this calculation did not begin until January 1, 2012.


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On August 1, 2012 CMS released its final rule for LTACH Medicare reimbursement for FY 2013 which spans from October 1, 2012 through September 30, 2013. In aggregate, payments for FY 2013 will increase by 1.8% over FY 2012 rates. The 1.8% increase consists of a 2.6% inflationary market basket update offset by a 0.7% reduction for the productivity adjustment, a 0.1% reduction to the market basket as defined by the Affordable Care Act. LTACH payment rates will also be reduced by approximately 1.3% to 0.5% for the "one-time" budget neutrality adjustment for discharges on or after December 29, 2012. The 0.5% does not include any projection of the potential deficit reduction sequester approved earlier by Congress as it is unclear whether or not that reduction will take effect. If the sequester is imposed, it would become effective in January 2013 and would reduce payments by an additional 2%.

The FY 2013 rule also includes:

* A one-year extension of the existing moratorium on the "25 percent threshold" policy, pending results of an on-going research initiative to re-define the role of LTACHs in the Medicare program.

* A reduction to Medicare payments for very short stay cases in LTACHs to the Inpatient Prospective Payment System comparable per diem amount payment option for discharges occurring on or after December 29, 2012 and an increase to the high cost outlier payment.

RESULTS OF OPERATIONS

Three months ended September 30, 2012

Consolidated financial statements

The following table summarizes our consolidated results of operations for the three months ended September 30, 2012 and 2011 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):

                                                                                                     Increase        Percentage
                                         2012                          2011                         (Decrease)         Change
Net service revenue                    $ 158,926                     $ 153,398                     $      5,528              3.6 %
Cost of service revenue                   91,234        57.4 %          87,815        57.2 %              3,419              3.9 %
Provision for bad debts                    2,987         1.9 %           3,199         2.1 %               (212 )           (6.6 %)
General and administrative expenses       52,464        33.0 %          52,656        34.3 %               (192 )           (0.4 %)
Other intangibles impairment charge          650         0.4 %              -                               650               -
Settlement with government agencies           -                         65,000        42.4 %            (65,000 )             -
Income tax expense (benefit)               3,388        34.8 %(1)      (18,130 )      32.3 %(1)          21,518             >100 %
Noncontrolling interest                    1,556                         1,997                             (441 )             -
Total non-operating income (loss)           (311 )                       1,179                           (1,490 )             -

Net income (loss) available to LHC
Group, Inc.'s common stockholders      $   6,336                     $ (37,960 )                   $     44,296

(1) Percentage of income from continuing operations attributable to LHC Group, Inc.'s common stockholders

Home-based services segment operating results

The following table summarizes our home-based results of operations for the three months ended September 30, 2012 and 2011 (amounts in thousands, except percentages which are percentages of home-based net service revenue):

                                                                                             Increase         Percentage
                                        2012                      2011                      (Decrease)          Change
Net service revenue                   $ 140,256                 $ 134,950                  $      5,306               3.9 %
Cost of service revenue                  80,579       57.5 %       77,331        57.3 %           3,248               4.2 %
Provision for bad debts                   2,669        1.9 %        3,097         2.3 %            (428 )           (13.8 %)
General and administrative expenses      47,110       33.6 %       47,522        35.2 %            (412 )            (0.9 %)
Other intangibles impairment charge         650        0.5 %           -                            650                -
Settlement with government agencies          -                     65,000        48.2 %         (65,000 )              -

Operating income (loss)               $   9,248                 $ (58,000 )


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Net service revenue

The following table sets forth home-based services revenue growth, admissions, census and episodes for the three months ended September 30, 2012 and the related change from the same period in 2011 (in thousands, except census and episode data):

                                                                                   Organic                                           Total
                                       Same           De                            Growth                                          Growth
                                     Store(1)       Novo(2)       Organic(3)       (Loss) %         Acquired(4)        Total       (Loss) %
Revenue                              $ 138,518     $      16     $    138,534            2.7 %     $       1,722     $ 140,256           3.9 %
Revenue Medicare                     $ 107,366     $      15     $    107,381           (0.5 )%    $         964     $ 108,345           0.4 %
New Admissions                          27,667             4           27,671            3.1 %               747        28,418           5.8 %
New Medicare Admissions                 19,134             4           19,138           (1.4 )%              293        19,431           0.2 %
Average Census                          33,344             4           33,348            3.5 %               278        33,626           4.3 %
Average Medicare Census                 25,083             4           25,087            0.7 %               121        25,208           1.2 %
Episodes                                41,498            -            41,498            0.7 %               201        41,699           1.2 %

(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.

Total organic home-based revenue for the three months ended September 30, 2012 increased 2.7% compared to the three months ended September 30, 2011, while organic Medicare revenue decreased 0.5%. The primary cause for the increase in organic revenue in the home-based segment was an increase in census, admissions, case mix and episodes for the three months ended September 30, 2012 compared to the same period in 2011.

Average home-based patient census for the three months ended September 30, 2012 was 4.3% higher than the same period in 2011.

Total home-based admissions increased 5.8% to 28,418 during the third quarter of 2012.

Organic growth is generated by population growth in areas covered by mature agencies, agencies five years old or older, and by increased market share in acquired and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first 24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage, in the second full year of operation after the acquisition.

Cost of service revenue

The following table summarizes home-based services cost of service revenue (amounts in thousands, except percentages):

                                            Three Months Ended September 30,
                                       2012                        2011
      Salaries, wages and benefits   $ 69,428       49.5 %(1)    $ 66,605       49.4 %(1)
      Transportation                    6,211        4.4 %          6,363        4.7 %
      Supplies and services             4,940        3.6 %          4,363        3.2 %

                                     $ 80,579       57.5 %       $ 77,331       57.3 %

(1) Percentage of home-based net service revenue

Salaries, wages and benefits increased during the three months ended September 30, 2012 compared to the same period in 2011. The increase was primarily due to an increase in employee positions and the effect of the acquired agencies that occurred during the three months ended September 30, 2012.

Provision for bad debts

Provision for bad debts decreased during the three months ended September 30, 2012 compared to the same period in 2011. During the three months ended September 30, 2011, commercial receivables both in dollars and as a percentage . . .

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