LHCG

LHC Group (LHCG)

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LHC Group, Inc. (LHCG)

Q4 2008 Earnings Call

March 11, 2009 10:00 am ET

Executives

Keith G. Myers - Chief Executive Officer

John L. Indest - President and Chief Operating Officer

Donald D. Stelly – Senior Vice President of Operations

Peter J. Roman – Senior Vice President and Chief Financial Officer

Eric Elliott - Vice President of Investor Relations

Analysts

Arthur Henderson - Jefferies & Co.

Kevin Ellich - RBC Capital Markets

Ralph Giacobbe - Credit Suisse

Darren Lehrich - Deutsche Bank Securities

Eric Gommel – Stifel Nicolaus

Newton Juhng – BB&T Capital Markets

Sheryl Skolnick – CRT Capital Group

Tony Perkins – First Analysis

Greg Williams – Sidoti

David MacDonald – SunTrust

Presentation

Operator

Good day and welcome to the LHC Group year end 2008 earnings conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Eric Elliott, Vice President of Investor Relations.

Eric Elliott

Welcome everyone to LHC Group’s 2008 fourth quarter and year end earnings call. In a moment, we’ll hear from Keith Myers, Chief Executive Officer of LHC Group; John Indest, President and Chief Operating Officer; Don Stelly, Senior Vice President of Operations; and Pete Roman, Senior Vice President and Chief Financial Officer.

Before that I’d like to remind everyone that statements included in this conference call may constitute forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, comments regarding our financial results for 2009 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LHC Group shall have no obligation to update information provided on this call to reflect subsequent events.

Before I turn it over to Keith, I want to point out that in this call we have elected not review all the financial and operational statistics which we have included in a table in our earnings release.

Now I’m pleased to introduce the CEO of LHC Group, Keith Myers.

Keith G. Myers

Good morning, everyone. We are very happy this morning to present another very strong performance from the LHC Group family. Without question, 2008 was a great year for the company. Our management team and caregivers continue to prove that they are truly best of class. During 2008, we added 63 locations in 13 states through acquisitions with combined annual revenue of approximately $73 million. We also opened 20 de novo locations in 8 states during 2008. We ended 2008 with 250 locations in 17 states as compared to 172 locations in 11 states at the end of 2007. Also at the end of 2008 we had 206 home nursing agencies across 17 states serving 656 counties with a population of 45.3 million in which about 14% is over age 65. At the end of 2007 we had 144 home nursing agencies across 11 states.

We have also grown our hospice division; from 9 locations in 2007 to 19 locations at the end of 2008. Our continued ability to deliver a strong return on assets, return on capital, and return on equity was recognized in 2008 when we were named #8 on Forbes 2008 List of Best Small Companies in America, the second year in a row that LHC Group made to top 10.

We saw great improvement in our DSOs in 2008. DSOs improved 22 days in 2008 as compared to 2007. This improvement is a credit to our hardworking staff and the continuing relationship with our consulting partner, Simione Consultants.

During 2008, we made great progress in preparing LHC Group for the future. We made significant investments in quality through our Joint Commission Accreditation strategy and enhancements to our performance improvement team. We also made a significant investment in our revenue cycle department which accounts for our improvements in DSOs.

Throughout the organization we also strengthened the quality and depth of our management team. However, despite our strong 2008 results, at LHC Group we’re always focused on our long-term goals and objectives. Therefore, in 2009 we intend to continue making significant investments in people and technology to become even more efficient and deliver even higher-quality outcomes to every patient we serve. We believe these investments in our future will allow us to provide the highest quality of care to our patients, adapt to the changing reimbursement environment, and continue providing the return on assets, capital, and equity that our shareholders have come to expect.

One of the tools we intend to leverage more in the future is point of care technology. We currently have 23 locations on point of care; in Maryland, Tennessee, and Virginia. These locations are generating financial results comparable to our other non point of care locations and are serving as good beta testing sites for our point of care valuation.

Compared to 5 years ago, when 30% to 40% of home health agencies and only about 5% of hospices utilized point of care technology, today 65% of home health agencies and 30% of hospices utilize point of care. Five years ago, point of care tools did not have predictive to disease management capabilities built in; today, they do. Today, 55% of all Americans already have broadband access at home, up 47% in 2007 according to the July Pew Internet and American Life Project report. The study also found that 38% of rural Americans have broadband at home, an increase of 23% from the previous year.

$7.2 billion of the $787 billion federal stimulus package is set aside to expand the reach of broadband to rural areas. This supports the increasing ability for real-time transfer of information from the field to the office and presents a more compelling quality and efficiency ROI.

I know that many of our shareholders are focused on the proposed budget outline that President Obama unveiled on February 26th. We know that in 2009 we will receive a 2.9% market basket adjustment which will be offset by a 2.75% case creep adjustment to the base rate; the result being that Medicare reimbursement rates in 2009 will be effectively over 2008. In 2010, we know the overall proposed cut in home health is $550 million. At this time the manner in which the $550 million savings will be achieved has not been fully explained by the administration. However, based on the information we know today, we believe we’re well prepared to adapt to the potential 2010 reimbursement changes.

In 2011 and beyond, the proposed cuts in home health reimbursement are more significant. Again, we do not have full details on how those cuts were calculated, but if the proposed budget follows the MedPAC recommendations, it would involve a rebasing of rates by CMS to reflect the average cost for providing care. According to the National Association for Home Care, if the proposal is adopted as is, over 60% of home health agencies in the country would have negative margins in 2011. I think we should all remember that this is just a budget proposal and if history tells us anything we expect there to be many changes in this budget proposal between now and 2011.

It is also worth reiterating that much of the proposed budget appears to be a recitation of this year’s MedPAC recommendations that have not been adopted or endorsed by Congress. Historically, we have seen positive modifications between the MedPAC proposal and what is ultimately adopted. MedPAC remains an advisory body in nature and its recommendations do not carry the force of law. Further, we believe that the home health industry has strong data to counter MedPAC’s inaccurate average margin calculation.

Something else to consider; it’s not clear in the broad outlines of the plan that we’re seeing how Medicaid would be affected. We do know that Medicaid today represents the largest single item in each state’s budget. On average, it accounts for $1 out of every $5 of state budget increasing to 25% or more in some states. Long-term care under Medicare constitutes one of our healthcare system’s greatest challenges. Despite the fact that all states in 2004 or earlier began a program to rebalance Medicaid moving patients from institution of care to community-based care, the burden is now untenable for states who rely on property tax revenues.

Read the rest of this transcript for free on seekingalpha.com