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Edited Transcript of AMED earnings conference call or presentation 19-Feb-20 4:00pm GMT

Q4 2019 Amedisys Inc Earnings Call

BATON ROUGE Feb 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Amedisys Inc earnings conference call or presentation Wednesday, February 19, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Gerard

Amedisys, Inc. - COO

* Nick Muscato

Amedisys, Inc. - VP of Strategic Finance

* Paul Berthold Kusserow

Amedisys, Inc. - Chairman, President & CEO

* Scott G. Ginn

Amedisys, Inc. - CFO

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Andrew Harris Cooper

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Brian Gil Tanquilut

Jefferies LLC, Research Division - Senior Equity/Stock Analyst

* David Samuel MacDonald

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Eric Joseph Glynn

BMO Capital Markets Equity Research - Associate

* Frank George Morgan

RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

* Justin D. Bowers

Deutsche Bank AG, Research Division - Research Associate

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Matthew Richard Larew

William Blair & Company L.L.C., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Amedisys Fourth Quarter and Year-End 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Nick Muscato, Vice President of Strategic Finance. Thank you, sir. You may begin.

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Nick Muscato, Amedisys, Inc. - VP of Strategic Finance [2]

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Thank you, operator, and welcome to the Amedisys Investor conference call to discuss the results of the fourth quarter and year ended December 31, 2019. A copy of our press release, supplemental slides and related Form 8-K filing with the SEC are available on the Investor Relations page of our website.

Speaking on today's call from Amedisys will be Paul Kusserow, President and Chief Executive Officer; and Scott Ginn, Chief Financial Officer. Also joining us is Chris Gerard, Chief Operating Officer; and Dave Kemmerly, General Counsel and Senior Vice President of Government Affairs.

Before we get started with our call, I would like to remind everyone that statements made on this conference call today may constitute forward-looking statements and are protected under the safe harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today. The company assumes no obligation to update information provided on this call to reflect subsequent events other than as required under applicable securities laws.

These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results or actual outcomes to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our forms 10-K, 10-Q and 8-K.

In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measure mentioned during our call today to the most comparable GAAP measure will also be available in our forms 10-K, 10-Q and 8-K.

Thank you. And now I'll turn the call over to Amedisys' CEO, Paul Kusserow.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [3]

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Thanks, Nick, and welcome to the Amedisys 2019 Fourth Quarter and Year-End Earnings Call.

We have 3 things to talk about today, past, present and future: 2019, 2020 and 2021 and beyond. We generally try to avoid hyperbole on these calls, but it would be inaccurate not to describe our performance in 2019 as tremendous.

Some of the highlights were: We had the great honor of caring for over 50,000 patients each day, making more than 12.3 million visits across our 3 lines of business.

At least 91% of all our home health care centers achieved a star score of 4.0 or above. We lowered total voluntary turnover to 16.9%, our lowest level to date. We grew our adjusted EBITDA 25% from $181 million to $225 million, while expanding EBITDA margin 70 basis points to 11.5%. We closed on the acquisitions of Compassionate Care Hospice and RoseRock hospice, while closing Asana hospice on January 1, 2020.

I'd like to welcome all of the Asana associates to the Amedisys family. On that note, we are truly excited to have you join the organization. Your unwavering drive to provide the highest quality hospice care to all your patients, fits perfectly with the culture we have created at Amedisys.

Next, we expanded our relationship with Medalogix by increasing our care centers on the Touch and Care products from 10% to nearly 50%, further safeguarding our PDGM transition.

For those of you newer to our story, Touch is a program focused on hospitalization reduction and Care is a program focused on providing individualized care plans to both optimize patient outcomes and utilization.

Next, we executed an innovative nationwide personal care partnership with ClearCare giving us a needed personal care service at scale as we work towards further care coordination.

And last, we practiced, practiced and practiced for PDGM. And thus far, our prep is paying off. None of this would be possible without our over 21,000 employees, whose unwavering commitment and focus on providing outstanding care to our patients in their homes has made this great quarter and year possible. I want to thank every one of you for helping to deliver such great care and strong results.

With that, let's now take a look at the fourth quarter and the full year 2019 results, as it relates to our 4 strategic pillars: quality, people, operational efficiency and growth.

Always first is quality. If you don't hold yourself accountable to deliver the best care and put everything you have into it, what's the point of us getting up in the morning? It's a nonnegotiable. And in my opinion, it's the reason why we have been so successful to date. We achieved a quality of patient care star QPC score of 4.26, and we had 15% of our care centers at 5 Stars, while 91% of our care centers were 4 stars as of the April 2020 quality of patient care preview.

Our hospice business, once again, outperformed the national average in all hospice item set measurement categories and is at the top of the national players we benchmark against.

Secondly, people. If you don't have passionate, productive employees, who want to practice their art with you and who vote to work for you every day, you can't deliver great care. In that, we drove total voluntary turnover, excluding PRN to 16.9%. These are our best full year results ever.

Third, operational efficiency. Great people need great processes and great tools to be able to deliver great care and to maximize their productivity and impact. Our focus on operational efficiency has once again driven margin expansion in all of our lines of business, and we ended 2019 with an adjusted EBITDA margin of 11.5%, 70 basis points higher than 2018.

And finally, growth. If you have the best people with the best tools, delivering the best care, you should grow disproportionately. For home health, we grew same-store total admissions 4% for the quarter and 7% for the year, ahead of our guidance range of 5%. In hospice, we grew same-store ADC 8% for the quarter and 7% for the year.

On the inorganic front, we closed the Asana hospice deal on January 1, adding 450 ADC to our census. We continue to be very interested in hospice tuck-ins, and we'll look to do more this year. In home health, we have already seen early signs of the disruption caused by PDGM, having already absorbed one asset in Missouri, while more and more have been calling. We will continue to grow share via absorption, but are also interested in strategic inorganic opportunities as they present themselves, particularly in CON states.

As you can see, we had another great quarter and an incredible year on all fronts. Our, of the people, by the people strategy of quality, people, operational excellence and growth is working. We outperformed our twice increased guidance ranges, and we have set ourselves up for continued growth and success in 2020.

Again, thanks to all the Amedisys employees for all you've done to drive this success. You continue to prove that focusing on our people and patients drives increasingly better and better results without an end yet in sight.

Before I turn it over to Scott to discuss guidance and the financial results, I want to touch on a few key initiatives that we will be keenly focused on during 2020, all of which will help us deliver the highest quality care to our patients across all lines of business.

Our single biggest initiative in 2020 is PDGM, which we have discussed at great length over the course of the last 20 months. Between revenue drivers to offset the behavioral assumption impact and cost levers such as LPN and PTA utilization and visits per episode optimization, we stand ready to thrive and grow under the new payment system.

In Q4, '19, we increased our LPN utilization to 42.3%, up from 38.6% in Q4 '18 and we increased our PTA utilization up to 44.4%, up from 41.7%. We also continued to expand Medalogix' care within our care center portfolio and now have 60 of our home health agencies optimizing utilization to get the best quality and the most efficient results for our patients.

Care uses ours and others' data and robust analytics to deliver a patient-specific individualized care plan that helps ensure we are optimizing visits per episode with the most appropriately skilled clinicians based on each patient's individual needs.

The results have been promising as this quarter, we reduced our visits per episode to 17, down from 17.7 in Q4 '18, while the quality ratings are holding strong, and in many cases, improving.

With nearly 7 weeks of PDGM under our belts now, I am pleased to report our early experience has been quite positive. CMS claims processing has gone smoothly thus far, and our clinical and back office teams have not experienced much disruption. As expected in the broader industry, we are seeing an uptick in smaller operators reaching out for help. We absorbed one asset late in 2019 and have a growing pipeline of similar opportunities we are evaluating this year.

Our tireless preparation for PDGM is paying early dividends in 2020. And I am confident that our success will continue throughout the remainder of this year. We'll know much more in March when we have a cleaner view of PDGM's impact in full. But so far, so good.

Our next big 2020 initiative is delivering on the Compassionate Care Hospice EBITDA contribution of $34 million to $36 million. We have developed a fine-tuned integration engine and outperformed our initial expectations in 2019. This asset is poised to grow and operate more efficiently, and we remain confident that we will deliver the EBITDA we promised.

Continuing the progress we made in 2019, consistent above-market growth in all 3 lines of business will be a major focus of 2020. We have become more and more sophisticated with our usage of data related to business development staff activity and referral source patterns and expect 2020 to be a year of outsized consistent growth across all our lines of businesses as we build proprietary sales and marketing tools and capitalize on the advantages we've built in quality and people.

Finally, continuing to build the infrastructure necessary to truly operationalize our personal care network will be a focus for our team in 2020. The innovative arrangement we executed in 2019 with ClearCare was just step one in what will be an iterative process to build the pieces necessary to provide truly coordinated care to our patients and payers.

2020 will be a year we continue to invest in this build out and to feed the network.

We are most excited, though, about 2021 and 2022. By then, the early shock of first half 2020 PDGM should we -- be well behind us. Our new hospice assets will be fully integrated and operating at our legacy growth rate and margin levels, and we are focusing and betting that integrated home health will be a differentiator for MA plans wanting to keep their chronic members at home. We will update you on these initiatives throughout 2020 and beyond, as we reach the major milestones.

And with that, I'll turn it over to Scott Ginn, who will take us through a more detailed review of our financial performance for the quarter and year as well as our guidance for 2020. Scott?

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Scott G. Ginn, Amedisys, Inc. - CFO [4]

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Thanks, Paul. I'm very pleased to report another excellent quarter and full year financial results.

For the fourth quarter of 2019 on a GAAP basis, we delivered net income of $0.83 per diluted share on $501 million in revenue, an increase of $66 million or 15% compared to 2018. For the year, we delivered net income of $3.84 per diluted share, an increase of $0.29 or $2 billion in revenue, an increase of $293 million or 18% compared to 2018.

For the quarter, our results were impacted by income or expense items adjusting our GAAP results that we have characterized as noncore, temporary or onetime in nature.

Slide 16 of our supplemental slides provides details regarding these items in the income statement line items each item -- each adjustment impacts. For the quarter, on an adjusted basis, our results were as follows: revenue grew $66 million or 15% to $501 million. EBITDA increased over $8 million or 19% to $52 million, EBITDA as a percentage of revenue increased 30 basis points and EPS increased $0.03 to $0.94 per share.

For the year, on an adjusted basis, our results were as follows: revenue grew $297 million or 18% to $1.96 billion. EBITDA increased an impressive $45 million or 25% to $225 million, EBITDA as a percentage of revenue increased 70 basis points and EPS increased $0.77 or 21% to $4.40 per share.

As our results indicate, 2019 was a tremendous year for Amedisys, as we continue to successfully execute on our plan to deliver financial results that match our clinical excellence while executing on our inorganic growth strategy for our hospice segment.

Before I turn to segment performance, I want to remind you of a few items that impacts our sequential performance in Q4. Planned wage increases effective August 1, added approximately $2 million in cost and seasonality of health insurance claims and workers' comp added approximately $5.5 million.

I will now turn to our fourth quarter adjusted segment performance. Keep in mind, segment level EBITDA is pre-corporate allocation. In home health, revenue was $316 million, up $12 million or 4% compared to prior year, driven by a 4% increase in both same-store total volume and admissions. Visiting clinician cost per visit increased $1.55, mostly driven by planned salary increases. Overall cost per visit increased $1.90, a 2% increase over prior year.

Our gross margin improvement of 160 basis points was driven by rate increases across all payers as well as a year-over-year decrease in visits per episode from 17.7 to 17. We have seen sequential improvement in this year-over-year comparison throughout 2019 as we began Q1 of '19 slightly ahead of 2018.

EBITDA was $48.1 million, up $4.7 million with an EBITDA margin of 15.2%, representing a 90 basis point improvement. The segment's EBITDA margin was 16.3% for the full year of 2019, which represents a 120 basis point improvement over prior year and a 310 basis point improvement since 2017.

Other items impacting the fourth quarter results of our home health segment include: G&A as a percentage of revenue was 24.1% for the quarter, which is up 70 basis points compared to 2018. A shift in our staffing model and raises drove the increase. Finally, effective November 1, 2019, one of our episodic payers phased out their plan offering, and the members are transferred over to plans and pay per visit. We expect minimal financial impact.

Now turning to our hospice segment results. For the fourth quarter, revenue was $165 million, up $56 million over prior year, an increase of 51%. Same-store average daily census was up 8%. Net revenue per day was up 1% to $153.42, and cost of service per day was up 5% to $83.13. G&A for the segment increased $15 million to 23% of hospice revenue, which is inclusive of acquisition activity, which added $12 million.

EBITDA was $38 million, up $8.5 million over prior year, an increase of 29%. EBITDA margin was impacted by the inclusion of the CCH and RoseRock acquisitions.

Excluding the impact of these acquisitions, our hospice EBITDA margin improved from prior year. For the quarter, the CCH and RoseRock acquisitions added $46 million in revenue and $4 million in EBITDA to our hospice segment. For the year, CCH and RoseRock added $174 million in revenue and $23 million in the hospice segment pre-corporate EBITDA.

Our personal care segment generated approximately $20 million in revenue in the fourth quarter and improved EBITDA margin by 110 basis points over prior year. Higher difficulties, driven by the strong economy continue to limit our growth. Our results are not comparable to prior year as they are inclusive of acquisitions.

Turning to our general and administrative expenses. On an adjusted basis, total G&A was $154 million or 30.7% of total revenue. Total G&A increased $25 million over prior year, driven by approximately $14 million related to our hospice acquisitions and $5 million for additional sales employees to support growth.

Additionally, we have made purposeful G&A investments of nearly $7 million in 2019 for the following: PDGM preparation, including pay practice redesign and staffing model changes; IT security enhancements; innovation pilots and expansion of de novos.

Our significant improvement in cash flow continued in the fourth quarter. We generated $75.2 million in cash flow from operations and paid down nearly $70 million on our revolving credit facility, bringing our net leverage ratio to approximately 0.7x.

Our DSO declined 3.8 days sequentially to 40.9 days. As we promised excluding the funding of the Asana acquisition at the end of Q4, we fully paid off all revolver borrowing line of the CCH acquisition. For the year, we have generated $202 million in cash flows from operations and $193 million in free cash flow.

I'm very pleased with the progress of our inorganic growth strategy. During 2019, we completed 2 hospice acquisitions, closed an additional acquisition on January 1, 2020 and ended the year with 11 de novos.

Finally, as you can see on Page 18 of our supplemental slide deck, we are releasing our guidance for fiscal year 2020. Our guidance range is our revenue of $2.12 billion to $2.16 billion, adjusted EBITDA of $250 million to $260 million and adjusted EPS of $4.90 to $5.13.

There are several key factors impacting 2020 guidance outlined on slides 18 through 22 of our supplemental slides.

First, Amedisys' specific PDGM pricing headwind of 2.8%. Our hospice reimbursement is up approximately 50 basis points. However, the majority of the increase will be passed through to general inpatient and rest of facilities, translating to a negative 50 basis point margin impact.

For CCH, we are estimating EBITDA in the range of $34 million to $36 million. CCH will be included in our same-store numbers as of February 1, 2020. Planned wage increases of 2% to 3% that will be effective in the second half of the year. Keep in mind, our first half 2020 results will be impacted by raises given in August of 2019. In total, the impact to 2019 and 2020 raises is approximately $20 million to $23 million of increased spend.

Our effective tax rate assumption is approximately 26% with an estimated cash tax rate of approximately 24%. Continued incremental investments in the business of approximately $12 million, which includes the following: PDGM resources approximately $5 million; additional de novo spend of approximately $4 million; and investments in innovations and projects, including future build-out of the personal care partnership of approximately $3 million.

As Paul mentioned, we are very confident in our preparation efforts around PDGM. As we discussed throughout 2019, the cost leverage needed to offset the impact will be heavier weighted in the back half of 2020. Accordingly, we expect our EBITDA performance in 2020 look much different than our historical patterns.

There are also some additional [milestones] I'd like to call out that will cause our sequential EBITDA progression from Q4 2019 to Q1 2020 to feel different than prior year. These items include: the impact of $5 million related to rate, noting 2019 was a positive for both home health and hospice; contributions from CCH EBITDA, which we are now in our year-over-year comps, which accounts for approximately $4 million; and the benefit of nonrecurring fleet gains realized in 2019 of approximately $1 million.

Finally, this guidance assumes a fully diluted share count of 33.4 million shares. We believe that our efforts around PDGM that will materialize in the second half of 2020 combined with the continued growth in the contribution from our hospice acquisitions will translate into a meaningful upside as we move to 2021 and beyond.

This will conclude our prepared remarks. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brian Tanquilut with Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [2]

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First question for you, Paul. So as I think about growth, Q4 growth kind of decelerated a little bit from what you did for most of the year. I know you beat the guidance for the year on organic growth. But how should we be thinking about the factors that impacted the growth performance for Q4? And I noticed that you're forecasting an acceleration for both the hospice and home health segments for 2020.

So if you don't mind, just bridging us through how you're thinking about growth, exiting that Q4 run rate or the Q4 performance into 2020?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [3]

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Sure. Thanks for the question, Brian. Yes, Q4 was an interesting time for both home health and hospice in the sense that home health, we were heads down on PDGM prep. And in hospice, we were heads down on CCH integration, finally finishing the home care home-based integration and then starting to build out the management teams.

So I think what we did is, I think, the growth in Q4 due to the concentration on these areas wasn't what we desired. And I think we have a lot of confidence, though, with the head of steam we're bringing in, in terms of this year. So we're confident we're going to hit the numbers, particularly in hospice, we know that we're building out. We have the reps that we need out there. There was a bit of a lull, while we were concentrating on all these other issues in terms of hiring. So we got a little behind, not like we did prior, where we were 120 off. We were about, in certain cases, maybe 10, 20 reps off. But we've corrected that. And the first -- we know that we have to accelerate on the growth to get through what we need to.

So we're feeling quite good about it thus far. I don't know, Chris, any?

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Christopher T. Gerard, Amedisys, Inc. - COO [4]

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Yes, just a little color on kind of Q3, Q4. There is a little bit of comp noise in those numbers as well. What we did is we layered our 2017, '18 and '19 growth out on the chart, and the trend lines show consistency across each year with progression.

A couple of examples is Q4 this year, our Medicare growth was 1% on a comp of 2018 of 3%, and our Q3 was 5% on a comp of flat.

And then our total growth -- our total admissions for Q4 was 4% on a comp of 6% and 9% on a comp of 4%. So we just had a little bit of a better quarter kind of noise and some of the other factors, I feel confident that our trend line is consistent. Our 2020 trend line should not deviate much from what we've seen in the progression from '17 to '18, '18 to '19, and we should see the same thing in '19 to '20.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [5]

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No, I appreciate that. And then I guess, Scott, in your prepared remarks, you talked about acceleration in 2021 and beyond. If you don't mind just walking us through how you guys are thinking about reimbursement?

How you're thinking about, again, growth in volumes as you think about the M&A environment and think about the absorption that you guys mentioned? How do you put all that together, past the noise of 20?

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Scott G. Ginn, Amedisys, Inc. - CFO [6]

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Yes. I think -- I still think all of that activity is still, if you think about just starting with kind of the end of your questions there around the -- what we can absorb from everything else going on, whether it's some consolidation, MA.

I still feel that in the back half because that's when most of the pain will be felt from the cash flow impact. So we still think it's a heavy back-end loaded if you think as we move forward. I said, our impact was about 2.8% on the revenue piece. I think we're going to probably be -- from our modeling and a little bit of adjustment, our comorbidity offset, I think we're going to probably be short on that, probably about $2 million in Q1 and then we cover that up. So on average, we'll be fine for a full year. So that gets there.

And then from the visits and the mix, mix piece around LPN and RN and PT, PTA, we think we're going to get to 50%, probably in Q4. And we'll average one visit for the year, but you'll see that picked up in the Q4. I just think it looks different well into Q3 and Q4. Typically, Q2 has been our best quarter, and we pull that down in Q3. I think that's out the window for how we look. I think we still continue to build performance Q2 forward and how we're thinking through all the different movements in the levers.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [7]

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And then 2021, Scott, just -- is that another acceleration year, you think?

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Scott G. Ginn, Amedisys, Inc. - CFO [8]

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I think it's a tremendous opportunity. If you just -- in our entire modeling and look at the multiplier on exit run rate as we hit these levers coming through, it's a tremendous upside. And we've got continued upside around the CCH. So yes, I think as our plans lay out even if there's some chop in the first quarter, those exit rates in Q4 2022 is up '21 pretty exceptionally for us.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [9]

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Yes. So we're feeling good about where all this is going on the long view. So -- and we think we're in pretty good shape in terms of how we're heading into the second half of the year where we're going to need to really rely on the cost levers in home health, and then we'll be fully integrated on hospice. So we should be cooking with gas. So we feel and generally quite good about this.

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Operator [10]

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Our next question comes from the line of Matt Larew with William Blair.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [11]

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I wanted to follow-up quickly on Brian's first question around the fourth quarter.

Paul, you alluded to, obviously, the heads down on PDGM and I imagine that was not only at a management level, but also kind of an operational level, whether it's talking to referral services about what new information you need or maybe agencies focused on staffing mix. Can you just give a sense for the things that affected growth in Q4, do you feel like they're largely in place at this point? Or will some of that linger into Q1 and Q2 as your agencies and your sales folks are continuing to focus on PDGM?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [12]

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Yes, I think we are seeing -- I think we're encouraged about what we've seen so far. I think that we have to put a little note of caution in there, we'll be full out on PDGM in March. So we'll start to see the full impact of PDGM in March.

I think where there will be some -- we still will experience more or less disruption around us. Because, as I indicated in my remarks, there's a lot of people picking up the phone and calling us now more than I thought. And so I think there will be disruption around us. I do think that affects the referral sources to a certain degree. And -- but I don't think -- we saw it a little in the fourth quarter. And then, yes, at the care center level, it was heads down. It still is, but heads down on PDGM execution in home health. And then integration on CCH and bringing that asset in line with our legacy operations. But we're still on track on both of them. So we feel very good about it.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [13]

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Okay. And then following up on the care center you absorbed and some of these phone calls you're taking, can you just give us a sense for when you decide to sort of give an absorption a greenlight? Just walk us through some of the logistics, the time line? How quickly once the opportunity is right, can you really bring these folks and these patients into the fold?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [14]

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Yes. I think the key is where we -- there's 3 buckets, if you will.

There's one, which is where some of these folks overlap with our licenses. And so that's about 16% of the United States at this point, where we have that coverage. So we believe that we can do some good absorption. And thus far, it's where there has been overlap with our licenses. That's what -- that way, we can just bring in the business, we can bring in some select employees, and we don't have the liability that a provider number would bring with it.

That in home health, there is a unique thing that's called a look back, a 6-year look back. And so when we go outside our license area and acquire a provider number, we have to be very careful because then we're liable for some of the things that occur in that 6-year look back.

The other third bucket is a CON bucket, where we're pretty interested in seeing anything in a CON state, because these are more difficult markets. And obviously, people tend to do better in CONs. There's a higher value associated with them. So those are the 3 buckets we're looking at. The easiest one, obviously, is where there's overlap within our license area.

I don't know, Chris?

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Christopher T. Gerard, Amedisys, Inc. - COO [15]

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Yes. And just to go a little deeper on kind of that process is when we get approached or we hear of an agency that's struggling financially that has a base of patients and employees, we have a toolkit deployed at all of our care centers out there. We have a dedicated team also running the project management to make sure that we're evaluating our capacity, bouncing that against what the agency may have that they're needing to transition, identifying if there's an opportunity to hire clinicians. We have a kind of a fast track hiring process that we can deploy at the locations and it's a matter of patient choice. If the patients do choose to move to our agency and a physician will sign the orders, then evaluation and admission and absorb -- we absorb them into our business.

I will say that early experience is that this is on a sample of really 2 is about 50% of the actual patients end up qualifying for home care based on our assessment standards. So it's not a full redistribution of the patients.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [16]

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Yes. Okay. And then if I could just sneak one more in and it's on Medalogix, you mentioned you're increasing some of the investments there. I think apart from PDGM prep. Could you just give a sense for what are the things you're looking for in terms of incremental work with Medalogix?

Is that just rolling out the tools to more agencies? Or are there other tools or strategies that you're working on?

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Christopher T. Gerard, Amedisys, Inc. - COO [17]

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Yes. So we're currently focused on 2 tools that Medalogix has right now. It's Care, which is really, I'd say, more of a PDGM kind of episode optimization kind of model, our system. And then Touch, which is really what we deployed in late 2018, that's really more around hospitalizations. We got through pilot phase on both of them in 2019. We started to expand to other care centers, both products in late 2019.

And now it's really deployment of those 2 products into all of our care centers. We have a plan to have Care deployed throughout the organization by the end of Q2. And then, we'll have Touch done by the end of Q3, I believe. So it's really more just kind of fees and training and rolling out rollout costs associated with those products.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [18]

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And I think the idea is that, obviously, Care is essential for PDGM, so that's primary. That's what we want to make sure is pushed out. But the Touch product for us is very important as we're in our discussions with Managed Care, obviously, reducing -- if we go at risk, often what Managed Care wants to -- for us to go at risk on is hospital readmissions. And this has helped us very much in our reduction of hospital readmissions where Touch has been in -- put in place, the results have been very strong for us.

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Operator [19]

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Our next question comes from the line of David MacDonald with SunTrust.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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Paul, can you just spend a quick minute on the ClearCare partnership? And what has that done in terms of the conversation with the MA plans, kind of in the construct of value-based care, potential additional services that you guys would be providing? Just anything in terms of how the conversations have changed now that you have that capability in place?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [21]

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Yes. The conversations have -- it's been, obviously, I think, a real enhancement. The key thing is there's 2 parts to it.

One is building the network, which is kind of what we've done, and that happened in a big bang approach. So all of a sudden, it was there. And now we need to feed the network. So Chris is working on that. We're largely doing -- as we establish that, we're largely doing that through cross referrals, and we're seeing some good early results. We still have work to do on that. But since it's emerged, we're encouraged by what we've seen.

The next piece is working with our partners at WellSky and ClearCare to integrate our information that we have from home care, home base and home health and hospice. And then the information that we're going to be getting through our personal care group at ClearCare, we have to then integrate that all together so that we can fundamentally optimize which caregivers are best and then we have, obviously, the -- what we've been able to build with the Care product at Medalogix is fundamentally individualized care planning. So we're very excited.

The plans seem to be very excited about the idea that we have access to a variety of different resources that fundamentally can deliver really good care for the lowest possible cost. So that's -- but that's -- so the talk is really good. I think all the pieces are kind of loosely being assembled. Now we have to put it all together, but there seems to be a lot of enthusiasm around it. We had some -- we've been having some good early conversations.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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Okay. And just on Medalogix, can you talk a little bit about a little bit of the incremental opportunity around capacity that it likely frees up? And more importantly, does that tool give you the opportunity to potentially accelerate the staffing mix shift? And I know we've kind of talked about a 50-50 type number. With the Medalogix tools in place, is there an opportunity to maybe do a little bit better than that?

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Christopher T. Gerard, Amedisys, Inc. - COO [23]

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Yes. So I'll answer that one, Dave. So with regards to Medalogix, I think it's going to be really visit optimization, making sure we're providing the right number of visits for our patients. If the data plays out, and we do achieve like a one visit reduction per episode, obviously, that does create capacity at our care center level. I don't think it really influences our skill mix from a PT to PTA or an RN to an LPN.

More importantly, what I think accelerates that we're -- and we're already seeing it coming out of the gate is our pay practice change that we did in Q4 of last year. That was our biggest barrier to getting optimized on that mix. And we got through the pay priorities change. 9,000 of our clinicians fundamentally had a change in the way that they were paid. And it really kind of encouraged them working at the top of their license. So that's what gives us confidence to get to the 50-50, possibly beyond that, but we're feeling good about it.

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David Samuel MacDonald, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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Okay. And then just last question. Look, is the impact of the reimbursement changes and RAP payment and all that stuff kind of kicks in and some of the smaller players struggle, do you think the government may revisit the look back here? I mean, in some cases, I would imagine there's not a lot of incentive to take that risk on. And you could end up with some bare counties or whatever you want to call it in terms of access to care issues? Is that an area that you think the government may be willing to take a look at a little bit more closely?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [25]

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Yes. I've been trying to -- that's a good question, Dave. I've been trying to work with CMS on this. We had some good early discussions with CMS on this, but since have -- they've kind of gone dark on us.

I think at some point, they will be like food deserts. I think there potentially could be home health deserts, particularly in some of the rural areas where you're losing the roll add on, plus you're getting the RAP issues, plus you're getting the cuts, it's going to be -- I think there will be some places. At that point, we'll see if CMS can come back to the table.

Obviously, I think if CMS is -- if CMS really wanted to facilitate consolidation in this industry, which it seems like they do with this. I think the first thing they did by eliminating the RAP is, is fundamentally tried to push out a lot of fraudulent players and tried to limit people from coming in, particularly smaller players. But I think the idea is that if they really want to foster consolidation and there were no liabilities that we had to scrub, scrub and scrub. And you can imagine some of the small players, we go in that are paper-based or that have documentation that's somewhat suspect, it's pretty difficult. So we've been bugging them about this, at least I have. And my hope is that if they do create these deserts, if it is -- if we really have some dips, they're going to have to come back to the table and figure out how to entice people to get back in.

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Operator [26]

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Our next question comes from the line of Frank Morgan with RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [27]

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I guess might be a Scott question. But you called out, I think, somewhere around maybe $10 million of items, EBITDA adjustments that would be affecting the first quarter versus the fourth quarter of '19. I just wanted to -- is it as simple as just taking that out of that $52 million adjusted EBITDA run rate in the fourth quarter, and that's a good place to start for 1Q? I guess, that's the first question.

And then I think you also commented about how the -- you'd be accelerating with nice growth by the fourth quarter going into next year. Just any kind of guidance around sort of what would be the implied run rate as you exit 4Q '20?

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Scott G. Ginn, Amedisys, Inc. - CFO [28]

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Thanks, Frank. I'll start with that and just kind of reiterate the numbers. But I think the simple answer is yes, I think that's a good way to -- how you're thinking about the start. And a lot of this is just things that came through as we went from Q4 to Q1. And as I talked about, the fact that we added CCH in Q1 of last year was about $4 million. We had a rate good guy of about 3 and then fleet was 1 good guy. So that's about 8 there. And then the other piece of it was the fact that we'll be a little slower, probably about 50 bps off from kind of overcoming 100% of that rate, 2.8% initially, kind of really more January, February. So that's another 2. So that's where that came from.

So I think that's a good -- when you're thinking about seasonality, we grew about $11 million last year, sequentially Q4 to Q1. So I think that's a good way to start thinking about it and then building from there as we -- as the other cost levers and the finalization of the 50 bps on rate comes through I think that's a good way to think about it.

And the other piece was around growth and acceleration.

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Christopher T. Gerard, Amedisys, Inc. - COO [29]

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Just the growth trajectory and the acceleration. So that's -- Frank, its Chris.

Yes, we expect -- as we planned out this year, we think that it will be a little bit more back-half loaded on the growth side, the total admission side. What we did not bake into our forecast or to our guidance is any of the kind of disruption and rescues from other agencies, they go out of business that we absorb. So any of that, that happens in the second half of the year can be tacked on top of kind of our growth trajectory that we are already expecting.

This year, we're investing a little bit more heavily into our BD staff and as well as adding incremental leadership in both lines of business, which is a senior level position and a significant investment on our part. They'll be kind of onboarded and up and running by the end of Q2. So we don't expect to really see the pull-through from that until later in the year. But all indications are it's going to be a nice exit as we go out of '20 into '21.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [30]

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Would you say that the...

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [31]

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I think we -- is that hopefully, the goalpost will stop moving at this point in the sense that our self-imposed growth in terms of hospice looks very good. So we're heading in. We also have got some good market baskets we're heading into.

And then the -- on the home health side, we've got some stability there, and we'll be I think cooking with gas on PDGM, having worked through the 2.8%, and then starting to deliver on the cost side. So I think we feel very good about it.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [32]

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Is it fair to say that the fourth quarter will be the highest quarter of EBITDA contribution for the year?

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Scott G. Ginn, Amedisys, Inc. - CFO [33]

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Think the way as we build to it, I think that's -- yes, I think that's a good assumption as you really, everything will be in place at that point. That's correct. So remember, it's just in our normal kind of EBITDA progression that means you're still going to have high health insurance. So it just kind of speaks to how good of a quarter that would look like if we get to an exit rate.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [34]

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I think what we're saying is that there's a new paradigm in terms of how this is going to look. It's not going to follow the traditional Q2 is the best. And then I think we're telling people that, that -- it's not going to work that way, it's going to be a hockey stick in the second half of the year.

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Scott G. Ginn, Amedisys, Inc. - CFO [35]

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Yes. The other thing I would just -- as people are thinking, Frank, around the modeling piece is cost per visit. It certainly, if you think about a differential, we say, let's use we're somewhere around $90 per visit. We think about 75% of that is really a fixed cost or it is a fixed cost piece of it. So yes, 25%, I'm sorry is the inverse there.

So 25% is fixed. So as we take out one visit, for example, it could increase. It will increase our cost per visit, especially early until we get the staffing mix and everything right just thinking about the math through that. So that's important to keep in mind. What will help us in the back half is as we give raises, it will help us overcome some of that year-over-year impact from a raise perspective.

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Frank George Morgan, RBC Capital Markets, Research Division - MD of Healthcare Services Equity Research & Analyst [36]

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Got you. Maybe just one more and I'll hop. Obviously, we talked a lot about the adjustment related to PDGM on the traditional part of the business, but what are you seeing out of managed care plans? And I think you made reference to something that converted from a -- was that a Managed Care payer that had converted from episodic to per diem. So just any color around that whole on the MA side as it relates to PDGM? I'll hop.

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Christopher T. Gerard, Amedisys, Inc. - COO [37]

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Frank, it's Chris again. So on the latter part of the question, yes, we did have a significant volume payer that had an episodic product with us that they did sunset last year at the end of last year. Those patients who -- or those members were redistributed amongst -- across their other service offerings and -- or plan offerings, of which we had contracts with.

Our Managed Care team did an excellent job in working through that transition with the payer to make it a net neutral for us economically. But what we'll see is a big shift in our episodic admissions versus our private per visit admissions as we go forward. But again, it was something that we were able to actually negotiate a nice rate.

And then the bigger picture is, we're having -- almost every negotiation that we're having or conversation around either new contracts or renewing contracts has some component of gain share that's being contemplated. So we're not only inching along in terms of getting our base rates on the per visit side when we're dealing with the per visit contract, we're also getting some opportunity -- upside opportunity negotiated in with regards to the quality that we produce. So we see that trend continuing. And it gives us the incentives to make sure that we'd lead with quality, and we get paid on quality. And -- but we're dealing with plans that are not quick to open up the purse strings -- so loosen-up the purse strings.

So it's just taken us a little while to get there, but we're excited. We know that Medicare Advantage is not going to slow down in penetration. We have to be able to play in that game very well and be a good partner. And we have a lot of energy around that.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [38]

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Yes. Just following up on Chris' point, Frank, is our at-risk pieces on a gain share last year was 5% of our Medicare Advantage or non-Medicare book. It will be quadrupled this year to 20%. So we are taking more risk, and we are doing more, but it's largely gain share. So there's not downside on it. But we're trying to get involved as many as these as we can because we believe that's where the future is going.

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Operator [39]

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(Operator Instructions) Our next question comes from the line of A.J. Rice with Credit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [40]

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Just asking about the cash flow and your expectations for 2020. I have -- in '19, you did operating cash flow of roughly $202 million and $194 million free cash flow. I know you've got, obviously, the growth of the business, but you're also pointing to higher cash taxes, the impact of the RAP payments, and there was a 3.6 day decline in DSOs at the end of the year. I don't know where you think that will be this year, whether that will sustain or not. But any sort of directional comments on where you think cash flow will come out for 2020?

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Scott G. Ginn, Amedisys, Inc. - CFO [41]

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Sure. Thanks, A.J. We're looking at kind of $160 million to $165 million range for cash flow from ops. I think what you'll see is the disruption in Q1 that we've been talking about. I think we're -- we believe it's somewhere in the range of $60 million related to the RAP change. And then our number will progress from there and get back to somewhat of a normal. DSO, you'll take a hit and then stabilize, and you'll see us build cash again.

So we're -- feel good about where we're heading into for the rest of the year, still be in great shape. We drew on the revolver to fund the Asana deal right at year-end. I mean, as we're looking at it now, we think we'll pay that back down, probably a majority of it in the Q2, have a small portion left into Q3. So we think cash flow still is absent that Q1 disruption, a nice story for 2020 as well.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [42]

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Okay. And then a quick follow-up is, obviously, you've even done a deal already. I wonder whether in the light of PDGM, are you seeing pricing on deals change in any way yet? And what is the competition? Or are you one of the few that are stepping up to be on the buy side? Or is -- are you still seeing the same usual players?

And I wondered in the -- on the deals, also, does that have any spillover on the hospice side since that tends to be the same buyers of hospice and home health in many cases?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [43]

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So we've seen, at least on that front. We've seen that thus far, if you tuck something in, it's generally free. So the idea is you have some conditions there that you hire certain people. But generally, the patients come. So when it's in our license area, we don't expect to pay anything.

Is there competition? Yes. Is -- but I think the key is that we're interested in, I think, people -- again, our quality wins. I think our ability to absorb employees wins. The fact we have a very good playbook that Chris talked about wins. So we know what to do, how to get licenses up, how to get people working.

The other thing on the hospice side, though, no, the prices -- Scott can talk more particularly about this. Unfortunately, the prices haven't followed with hospice. There's still -- there's not much left out there. There's some medium-sized assets, but they're going to -- they are coming to market. And everybody is coming to market now because the prices are so high. So it's a tough market for hospice. Although we're still seeing some pretty decent deals. But...

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Scott G. Ginn, Amedisys, Inc. - CFO [44]

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Yes, that's fair, Paul. I mean I think hospice has been pretty frothy. Home health, as Paul said earlier on, we think we've got an absorption opportunity. I think the more quality assets will become available that you'll have some bidders out there for that. If you have some larger plays that you can move on because they're looking to move out of this PDGM world. And we'll see where pricing lands there. But hospice definitely remains expensive.

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Operator [45]

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Our next question comes from the line of Justin Bowers with Deutsche Bank.

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Justin D. Bowers, Deutsche Bank AG, Research Division - Research Associate [46]

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I'll keep this quick. I know we're running towards the top of the hour, but just wanted to be -- just wanted to clarify the cadence. I'm just trying to -- parsing some of the statements during the call together. And it sounded like you were saying 3Q would be higher than 2Q? And then if all -- everything is in place, then you're going to exit 4Q with 4Q being the highest. So it just sounds like there's going to be a sequential ramp throughout the year in terms of the EBITDA? Is that a fair characterization?

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Scott G. Ginn, Amedisys, Inc. - CFO [47]

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That's fair.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [48]

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I think because of the way that we're going to -- that we have to implement our Care product to drive the savings to make a full reduction and then to get our ratios on 50-50 on LPNs and PTAs, we're going to need to -- we're going to come to that full fruition in Q4. And so that's where you're going to see the margin expansion.

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Scott G. Ginn, Amedisys, Inc. - CFO [49]

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Yes. Because you have 2 things at play there. Just to remind everybody. So we've got the leverage going on from a PDGM perspective as you kind of build most of the revenue leverage as you start off Q1, a little bit of a miss there. It gets in, you build that into Q2. The cost levers start ramping up. And then if you come back and think about that incremental dollars around CCH, ADC, as we exited Q4 was a little lower. We've got to build that back up. So you'll see a benefit of that as we get to that full $34 million to $36 million, we're talking about. That's going to be through an ADC build for the rest of the year. So you'll have both of those helping prop that number up in the back half.

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Justin D. Bowers, Deutsche Bank AG, Research Division - Research Associate [50]

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Got it. And then just in terms of a quick follow-up on hospice too, some healthy double-digit growth you're forecasting. There's some moving pieces in there as well. Is -- should we be thinking about the growth profile of that business kind of similarly as well accelerating throughout the year?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [51]

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Yes.

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Scott G. Ginn, Amedisys, Inc. - CFO [52]

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Yes. And just keep in mind, again, what's showing that -- if you look at that, we have 14% guide on hospice admit growth, CCH is coming into that number in Q2. I mean, I'm sorry, in February, so that's in my same-store metrics. So they're used in that growth rate in our guided number.

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Operator [53]

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Our next question comes from the line of Matthew Gillmor with Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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I wanted to ask you about the margin performance with your Medicare Advantage book and home health. And the growth rates for the non-Medicare business were again favorable, but you're still able to expand margins, even though these tend to be lower paying and another payment rate is coming up.

So just sort of what's going on there? Are you just getting more efficient elsewhere? Or are you better able to match sort of the resources with what the Medicare Advantage payers are expecting?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [55]

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I love that question. Scott? This is a playdown.

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Scott G. Ginn, Amedisys, Inc. - CFO [56]

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Well, I think, you're hitting. So if you just step back, we've certainly have gotten increases on the Medicare Advantage. And I'll let Chris he runs that team for us, add a little bit more color to that. But -- so we're getting increases across the board there.

If you look at our overall margin profile, if you look year-over-year from a revenue [perspective] on the Medicare side, we're up [$25] and then we took out 0.7 off a visit. So you're getting more and more efficient there as we move forward. So that's flowing through from both a cost perspective and a top line perspective. So that certainly helped feed our margins there. Chris, I don't know if you want to add that?

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Christopher T. Gerard, Amedisys, Inc. - COO [57]

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Yes. I would say it's equal parts to us getting a little bit better rates from the Managed Care organizations, and that's bringing that we're starting to inch up, and we're seeing that sequentially and year-over-year as well as us moving the mix and being able to optimize our Care staff as we're providing these visits. Because they're a little bit lower margin than the traditional Medicare, we're being more purposeful around kind of how we're deploying our clinicians so that we're kind of optimized in terms of that skill mix.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [58]

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Okay. I think what we're going to do is push through is, I think we're going to continue to take questions, even though it's -- it will be over the time. If those -- for those who want to still hang on, we can still just go through and answer the question. So if people are -- have the time to extend beyond 11:00, which I think is almost there now, we'll stay on.

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Operator [59]

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Our next question comes from the line of Andrew Cooper with Raymond James.

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [60]

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And I'll be kind of quick, but just kind of wanted to take another cut at the admission or admit growth you called out for 2020 versus 4Q. Obviously, 4Q at 4%, I think, overall -- at 3.9% overall and a little bit better than flat in Medicare and home health versus the 7% guide. Just sort of -- I know you called out comps. But other than that, how should we think about that pacing through 2020, if we think about BD reps that you mentioned as well? And just kind of any other kind of way to think about that and make sure we have it sort of framed right as to why 4Q was a little bit lower? And why we're getting back to sort of what you saw in the first 3 quarters for the year overall?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [61]

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So this is a prove-it-to-me questions. Chris?

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Christopher T. Gerard, Amedisys, Inc. - COO [62]

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Yes, sure. Well, I mean, I think we've talked about the comp side of it that does distort it a little bit on the 4.4% total admin growth for Q4 and they're 1% or 0.7% on the Medicare side. The one thing that we did have a lot of kind of internal focus on PDGM and pay practice and things that were affecting impacting our care centers on a pretty much a daily basis.

And the one area that I think that we failed to execute on that had a lingering effect on us through Q4 was when we grew our BD staff, our FTEs, our number of reps out there calling on referral sources, we had subsequent -- growth in the subsequent quarters and years from that growth of staff. What we did is we did not grow our BD staff from the end of Q2, all the way through the end of Q4. And it was really kind of more of just -- we were focused in other areas. We had some leadership changes at the front line manager level that slowed down the hiring process. We've identified it. I think we've got a good line of sight to get there out of the gate in 2020. We're really close to our budgeted number. We're looking to add about 8% in BD heads in 2020 over 2019, plus the incremental addition of the leadership that I mentioned should give us a lift coming into the second half.

And what we're doing now is we're just getting more purposeful with our data. We have a ton of data. We have claims data that we break it, slice in many different ways. But we're finding that we're spending a lot of unnecessary energy on unproductive waters. So what we're doing is getting more purposeful around how we're spending our time.

And through that, we expect to see some incremental opportunity and increased productivity from our reps so I have a good high confidence level and our ability to hit our 7% admit growth in 2020. Just to kind of -- just to frame it up one more time. 2018, we had 2% total admit growth; 2019, 5%. I mean, '18, 5%; in 2019, 7%; and we added reps in '18 and we added just reps in the first quarter of '19. So I still feel like we've got the right strategy, we've just got to execute on it.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [63]

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Yes. And I think, Andrew, one other thing is we've dealt with this twice now. So it's not going to be a third time, where we've been caught short on reps, where we -- it's just not going to happen. So...

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [64]

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Okay. And then just kind of as a quick follow-up. Of that 7%, how much is sort of just natural absorption that you would call out as PDGM-driven as opposed to sort of a long-term sort of volume run rate, if any?

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Christopher T. Gerard, Amedisys, Inc. - COO [65]

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That has no PDGM assumptions in it.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [66]

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Yes. We have no...

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [67]

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So any absorption would be above and beyond that, that admin growth?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [68]

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Any absorption would be above and beyond. And if there's 12,500 providers out there and we have a 16% -- roughly 16% overlap, it's rough rough, about 2,000 players. And we'll see what the shakeout levels are, but there's a significant amount of absorption we could do. Again, assuming that there's significant shakeout, 20%-ish or something like that. So there's significant out there. We'd obviously have to fight for it.

And it's -- I think one of the things that Chris pointed out, which is really interesting, is what we've been looking at is, we're taking maybe 50%, 60% of the business of these folks that are out there. The rest isn't -- is frankly not suitable. So it's quite interesting from that perspective, how the scrutiny when you pass it through the filter, all the patients got [to go through] entirely.

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Operator [69]

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Our next question comes from the line of Joanna Gajuk with Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [70]

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So we see wholly in there. A lot of questions have been asked. But 2 questions on some of these comments you were making in terms of continued investments in 2020. So you're calling out $5 million on PDGM resources. There's also investments in innovations. So to me, it sounds like despite all the disruption from PDGM and [you be see] what hospice ramp up, you're still making some efforts in finding the next, I guess, new thing in terms of investments. So can you talk about that?

And also specifically on PDGM, what exactly is the $5 million, you still expect to spend, as you discontinue to prepare or go through the implementation in 2020?

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [71]

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It's mainly Medalogix. So we consider that an investment because it's incremental, and it's money well spent. The other is the de novo bucket that we're doing and the other one is the ClearCare bucket, which is the -- so those are the -- fundamentally the 3 buckets where we're spending the growth money.

I don't know. Scott has all the details.

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Scott G. Ginn, Amedisys, Inc. - CFO [72]

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Yes. I think you've captured -- I mean, the PDGM resource piece, as Chris alluded to earlier. So you've got Care and Touch rollout across the organization. There is some management-type pieces we're putting in place in small dollars, not a ton of people, but there is a little bit of incremental there. So that's kind of your $5 million number. There's de novos as we continue to look at those, we end up -- we're sitting around 11 that we started since '18 into '19. So we feel good about that process. So we've got some more kind of targeting around 10-ish there for next year. So that's something we're looking at. And then the rest is you build out of that ClearCare partnership, we're running some other innovation-type people processes. So we're -- look, we think we'll get through PDGM. We've got our core teams focused on that. But we see this and are very bullish on 2021 forward, and we're going to continue to build this business and add resources that we think will be important as we look to play more in the Managed Care world.

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Operator [73]

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Our next question comes from the line of Matthew Borsch with BMO Capital Markets.

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Eric Joseph Glynn, BMO Capital Markets Equity Research - Associate [74]

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This is Eric Glynn on for Matt. Just looking at the CCH 2020 EBITDA guide at $34 million to $36 million. Would you say this is -- this increase in EBITDA is driven from margin expansion, with the $10 million in projected 2020 synergies? Or would you attribute it more to top line growth in the CCH business?

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Scott G. Ginn, Amedisys, Inc. - CFO [75]

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If I had to look at -- I mean, I think it's a combination, but I would say more on growth. I mean, basically, as you were -- probably a little different answer if we would have exited a little differently, of course. But we've got opportunity in both. We'll hit our full run rate on synergies as we get into that, we'll still have -- in Natural, if you think about from a cost per day in fixed costs through there and how we staff that, you're going to naturally get some margin progression is that that top line grows. So it will be a combination of both. The top line will be very important. We've got to get that census back up.

When we went forth and talked about this deal, we talked about making investments in BD staff in order to grow and we said, look, we like this company because they have a lot of smaller census care centers, which was like what we looked at -- looked like by 3 or 4 years ago. We did a tremendous job growing that, but we did it by adding sales folks in the right areas. And we were behind on adding sales folks. We started off well in Q1, but we really kind of missed the mark there. It helped us in savings, but it was probably penny-wise and pound foolish. So we'll push forward and get some heads back in and really grow that ADC. That's what we want to do. If we're going to get to that $50 million opportunity. There'll be plenty of margin opportunities as we get these census numbers to really much higher levels.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [76]

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Yes, we have to -- there's a point where you can really start to click in and get a lot of efficiencies and expand your margin on ADC. And one of the reasons why we did this acquisition was because it was suboptimal from an ADC perspective. And so we see the ability to grow this margin, get the ADC up to decent levels. And then we'll see natural margin expansion as a result of that. That's what we've seen in our core operations.

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Operator [77]

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Our final question comes from the line of Whit Mayo with UBS.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [78]

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I'm just kind of curious, my question is really just around the review choice demo and how you feel about the preparation for that? And how you're balancing the prep with PDGM and kind of how you're contemplating or underwriting, any impact that you may see with your internal plan, if any?

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Christopher T. Gerard, Amedisys, Inc. - COO [79]

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Yes. So we have it going on right now in Chicago. And obviously, we're not huge there. We have 3 locations. We're doing very well. We're having virtually 99 point something percent affirmation rate is running well. We basically use the same process that we did the first time. It was in place before it was put on hold.

Next state is slated to be Texas. We only have one location there. The next state of any size, states of any size that it will roll out into that will impact us will be in North Carolina and Florida. We feel like what we have is a scalable model. It does require a little bit of an incremental investment in an individual or 2 depending on the size of the -- how many locations you have in the state. But from a processing perspective, we've had very good luck with, number one, first round affirmations. Number two, the MACs are better at actually processing this. So for us, it's just not really kind of a -- any kind of a barrier that we see for now.

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Operator [80]

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There are no further questions at this time. I'd like to turn the call back over to Mr. Kusserow for any closing remarks.

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Paul Berthold Kusserow, Amedisys, Inc. - Chairman, President & CEO [81]

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Thanks, Michelle. And I want to thank everyone who joined us on the call today, and I want to, again, thank all our employees, who delivered this great year of results. Keep doing what you're doing, taking care of the people who need us the most. We hope that everyone has a really good day and look forward to updating you on our ever-evolving process and purposeful work on our next quarterly earnings call or out on the road and talk to you soon. Take care, everybody.

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Operator [82]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.