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LHCG > SEC Filings for LHCG > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for LHC GROUP, INC


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis contains forward-looking statements about our future revenues, operating results, plans and expectations. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in Part I, Item 1A. Risk Factors. Also, please read the "Cautionary Statements Regarding Forward-Looking Statements" set forth at the beginning of this Annual Report on Form 10-K.

Please read the following discussion in conjunction with Part 1 of this Annual Report on Form 10-K as well as our Consolidated Financial Statements and the related notes contained elsewhere in this Annual Report on Form 10-K.

Overview

We provide post-acute health care services primarily to Medicare beneficiaries throughout the United States, through our home nursing agencies, hospices and LTACHs. Our net service revenue increased $3.7 million to $637.6 million for the year ending December 31, 2012 from $633.9 million for the year ending December 31, 2011. During 2012, we acquired three home nursing agencies. As of December 31, 2012, we operated 285 locations in the following 19 states:
Alabama, Arkansas, Florida, Georgia, Idaho, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, West Virginia and Washington.

Segments

We operate in two segments for financial reporting purposes: home-based services and facility-based services. We derived 88.4%, 88.0%, and 87.9% of our net service revenue during the years ended December 31, 2012, 2011 and 2010, respectively, from our home-based services segment and derived the balance from our facility-based services segment.

Through our home-based services segment we offer a wide range of services, including skilled nursing, private duty nursing, physical, occupational and speech therapy, medically-oriented social services and hospice care. As of December 31, 2012, the home-based services segment was comprised of the following locations:

                           Type of Service
                           Home Health              232
                           Hospice                   32
                           Private Duty               4
                           Specialty Services         3
                           Management Companies       3

Of our 274 home-based services locations, 140 are wholly-owned by us, 124 are majority-owned or controlled by us through joint ventures, seven are controlled by us through license lease arrangements and the remaining three are management companies in which we have no ownership interest. We intend to increase the number of home nursing agencies that we operate through continued acquisitions and organic development. As we acquire and develop home nursing agencies, we anticipate the percentage of our net service revenue and operating income derived from our home-based services segment will continue to increase.

We provide facility-based services principally through our LTACHs. As of December 31, 2012, we owned and operated six LTACHs with nine locations, of which all but one are located within host hospitals. We also owned and operated a pharmacy and a health and fitness center. Of these 11 facility-based services locations, six are wholly-owned by us and five are majority-owned or controlled by us through joint ventures.


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Development Activities

The following table provides a summary of our acquisitions, divestitures and
internal development activities from January 1, 2010 through December 31, 2012.
This table does not include the three management services agreements under which
we manage the operations of three home nursing agencies, through our home-based
services segment.



                                                     Home-Based Services                                     Facility-Based Services
                                  Home Nursing            Hospice            Specialty and          Long-Term Acute  Care
                                    Agencies              Agencies           Private Duty                 Hospitals                 Specialty
Year
Total at January 1, 2010                    230                  21                       9                              8                   3
Developed                                    12                  -                       -                              -                   -
Acquired                                     20                   6                       1                              1                  -
Divested/Merged                              (5 )                (1 )                    -                              -                   -

Total at January 1, 2011                    257                  26                      10                              9                   3
Developed                                     6                  -                       -                              -                   -
Acquired                                      5                   8                      -                              -                   -
Divested/Merged                             (21 )                (2 )                    (3 )                           -                   -

Total at January 1, 2012                    247                  32                       7                              9                   3
Developed                                    -                   -                       -                              -                   -
Acquired                                      3                  -                       -                              -                   -
Divested/Merged                             (18 )                -                       -                              -                   (1 )

Total at December 31, 2012                  232                  32                       7                              9                   2


Recent Developments

Home-based services

Home Nursing. In 2010, the PPACA was enacted, which made 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 PPACA that began on or after January 1, 2011 are:

a reduction in the market basket adjustment to be determined by 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 PPACA: 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.

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.


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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 effective January 1, 2013 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 PPACA 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 the deficit reduction sequester approved earlier by Congress. The sequestration cut to Medicare will begin on April 1, 2013 and will reduce Medicare payments for patients whose service dates end on or after April 1, 2013 by 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.

Hospice. The following table shows the hospice Medicare payment rates for fiscal year 2012, which began on October 1, 2011 and ended September 30, 2012:

              Description                     Rate per patient 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 fiscal year 2012 which increased Medicare reimbursement payments by 2.5%. The 2.5% increase consisted 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:

Changed 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.

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

Allowed 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.

Implemented a hospice quality reporting program, which includes a timeframe for reporting, as required by section 3004 of the PPACA. The measures that are being adopted in this final rule for the fiscal year 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 fiscal year 2013, which increases Medicare reimbursement payments by 0.9% over fiscal year 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 PPACA, and a 0.1% reduction related to the wage index changes. The 0.9% does not include the deficit reduction sequester approved earlier by Congress. The sequestration cut to Medicare will begin on April 1, 2013 and will reduce Medicare payments for patients whose service dates end on or after April 1, 2013 by 2%.

The final rule also provides:

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.


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The following table shows the hospice Medicare payment rates for fiscal year 2013, which began on October 1, 2012 and will end September 30, 2013 (the payment rates do not reflect the 2% sequestration cut):

              Description                     Rate per patient 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 fiscal year 2012, which spans from October 1, 2011 through September 30, 2012. In aggregate, payments for fiscal year 2012 increased 2.5% from fiscal year 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 PPACA; and (3) a reduction in the high cost outlier threshold per discharge from $18,785 in fiscal year 2011 to $17,931 in fiscal year 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 included:

Three quality measures to begin reporting October 1, 2012 that will affect payment in fiscal year 2014.

Clarification that the 25-day average length of stay ("ALOS") calculation includes both traditional Medicare Fee-For-Service and Medicare Advantage stays but this calculation began January 1, 2012.

On August 1, 2012 CMS released its final rule for LTACH Medicare reimbursement for fiscal year 2013 which spans from October 1, 2012 through September 30, 2013. In aggregate, payments for fiscal year 2013 will increase by 1.8% over fiscal year 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 PPACA. 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 the deficit reduction sequester approved earlier by Congress. The sequestration cut to Medicare will begin on April 1, 2013 and will reduce Medicare payments for patients whose service dates end on or after April 1, 2013.

The fiscal year 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.


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2012 and 2011 Operational Data

The following table sets forth, for the period indicated, data regarding
aggregate admissions and Medicare admissions to our home health agencies and
patient days for our LTACHs. Certain historical data has been included in order
to present a more comparative analysis of the statistical data.



                                Three Months             Three Months               Three Months                  Three Months
                               Ended March 31,          Ended June 30,           Ended September 30,           Ended December 31,
                                    2012                     2012                       2012                          2012
Home Health Agencies:
Average census                           32,608                  32,988                        32,605                       33,103
Average Medicare census                  24,689                  24,858                        24,279                       24,765
Admissions                               27,696                  26,498                        27,301                       27,443
Medicare admissions                      19,046                  17,837                        18,415                       18,665
LTACHs:
Patient days                             16,191                  15,822                        15,335                       15,552

                                Three Months             Three Months               Three Months                  Three Months
                               Ended March 31,          Ended June 30,           Ended September 30,           Ended December 31,
                                    2011                     2011                       2011                          2011
Home Health Agencies:
Average census                           34,466                  33,937                        31,311                       31,692
Average Medicare census                  26,570                  26,192                        24,076                       24,301
Admissions                               26,194                  24,935                        25,787                       25,410
Medicare admissions                      18,589                  17,477                        18,445                       17,803
LTACHs:
Patient days                             15,333                  15,268                        15,385                       15,953

Consolidated Results of Operations

The following table sets forth, for the periods indicated, the consolidated results of our Company (amounts in thousands):

                                                              Year Ended December 31,
                                                       2012            2011            2010
Consolidated Services Data:
Net service revenue                                  $ 637,569       $ 633,872       $ 631,567
Cost of service revenue                                365,752         352,346         326,521

Gross margin                                           271,817         281,526         305,046
Provision for bad debts                                 11,875          12,320           7,607
Settlement with government agencies                         -           65,000              -
General and administrative expenses                    205,637         210,588         201,837

Operating income (loss)                              $  54,305       $  (6,382 )     $  95,602
Interest expense                                        (1,550 )        (1,018 )          (134 )
Non-operating income , including gain on sales of
entities and assets, net                                   184           1,781             805
Income tax expense (benefit)                            17,511          (1,968 )        31,727
Income attributable to noncontrolling interests          7,988           9,593          15,787
Redeemable noncontrolling interests                         -               -               41

Net income (loss) available to LHC Group, Inc.'s
common stockholders.                                 $  27,440       $ (13,244 )     $  48,800


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The following table sets forth the consolidated results of our Company as a percentage of net service revenue, except income tax expense (benefit), which is presented as a percentage of income from continuing operations available to LHC Group, Inc:

                                                               Year Ended December 31,
                                                           2012         2011           2010
Consolidated Services Data:
Cost of service revenue                                     57.4 %        55.6 %        51.7 %
Gross margin                                                42.6 %        44.4 %        48.3 %
Provision for bad debts                                      1.9 %         1.9 %         1.2 %
Settlement with government agencies                           -           10.3 %          -
General and administrative expenses                         32.3 %        33.2 %        32.0 %
Operating income (loss)                                      8.5 %        (1.0 )%       15.1 %
Interest expense                                             0.2 %         0.2 %         0.0 %
Non-operating income (loss), including gain on sales
of entities and assets                                       0.0 %         0.3 %         0.1 %
Income tax expense (benefit)                                39.0 %       (12.9 )%       39.4 %
Income attributable to noncontrolling interests              1.3 %         1.5 %         2.5 %
Net income (loss) available to LHC Group, Inc.'s
common stockholders                                          4.3 %        (2.1 )%        7.7 %

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net Service Revenue

Consolidated net service revenue for the year ended December 31, 2012 was $637.6
million compared to $633.9 million in 2011. Net service revenue growth in 2012
was primarily due to an increase in census and increase in admits. Net service
revenue was comprised of the following for the periods ending December 31:



                                              2012         2011
                   Home-based services          88.4 %       88.0 %
                   Facility-based services      11.6         12.0

                                               100.0 %      100.0 %

Revenue derived from Medicare represented 77.9% and 79.7% of consolidated net service revenue for the years ended December 31, 2012 and 2011, respectively.

Cost of Service Revenue

Consolidated cost of service revenue for the year ended December 31, 2012 was $365.8 million compared to $352.3 million in 2011. The increase in cost of service revenue was related to the following factors:

an increase of costs related to 2012 acquisitions;

cost of living increases;

an increase in insurance; and

additional field staff included in our existing home based agencies.

Provision for Bad Debts

Consolidated provision for bad debts for the year ended December 31, 2012 was $11.9 million compared to $12.3 million in 2011. Beginning January 1, 2011, the period allowed to file Medicare claims was reduced to twelve months from the end of episode date. This change resulted in a greater number of Medicare claims being denied for timely filing requirements in 2011.


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General and administrative expenses

Consolidated general and administrative expenses for the year ended December 31, 2012 was $205.6 million compared to $210.6 million in 2011. The decrease was primarily due to our incurring higher legal fees in 2011 associated with the settlement with the United States of America. In addition, we eliminated salaries and benefits, consulting, travel and hotel costs incurred in 2011 related to the conversion of four legacy billing systems to our point of care platform. We accelerated this transition in order to replace the legacy billing systems which remained from previous acquisitions. The accelerated transition was completed in the first quarter of 2011. We also entered into fewer acquisitions and incurred lower acquisition related costs during the twelve months ended December 30, 2012. Finally, cost reduction initiatives begun last year reduced personnel costs and other corporate costs in the twelve months ended December 31, 2012 as compared to the twelve months ended December 31, 2011.

General and administrative expenses consist primarily of the following expenses incurred by our home office and administrative field personnel:

Home office and field administration:

salaries and related benefits;

insurance;

costs associated with advertising and other marketing activities; and

rent and utilities.

Supplies and services:

accounting, legal and other professional services; and . . .

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