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Edited Transcript of AMED earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Amedisys Inc Earnings Call

BATON ROUGE May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Amedisys Inc earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Gerard

Amedisys, Inc. - COO

* David L. Kemmerly

Amedisys, Inc. - Senior VP of Government Affairs & General Counsel

* Nick Muscato

Amedisys, Inc. - VP of Strategic Finance

* Paul Berthold Kusserow

Amedisys, Inc. - President, CEO & Director

* Scott G. Ginn

Amedisys, Inc. - CFO

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Conference Call Participants

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* Dana Rolfson Hambly

Stephens Inc., Research Division - Research Analyst

* Frank George Morgan

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

* Jason Michael Plagman

Jefferies LLC, Research Division - Equity Associate

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* 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

* Patrick Thomas Feeley

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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

I would now like to turn the conference over to your host, Nick Muscato, Vice President of Strategic Finance. Please 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 call to discuss the results of the first quarter ended March 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 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 the 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 be available in our Form 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. - President, CEO & Director [3]

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Thanks, Nick, and welcome to the Amedisys' 2019 First Quarter Earnings Call. I'm very pleased to report that we have continued our great momentum generated in 2018 during the first quarter of 2019.

For the quarter, on an adjusted basis, we generated $468 million in adjusted revenue, up 17% year-over-year; adjusted EBITDA of $55 million, up 32% year-over-year; and adjusted earnings per share of $1.11, up 41% year-over-year. None of our performance this quarter would be possible without our over 21,000 employees whose unwavering commitment to providing outstanding care to our patients in their homes is nothing short of inspirational. I want to thank every one of you for helping us to deliver such strong results.

With that, let's dive right into the progress we've made within our 4 strategic areas of focus, beginning with clinical distinction. For the 2019 preview, our Quality of Patient Care Stars, QPCs, score was 4.27. We had 52 care centers at 5 stars. As you will recall, CMS has introduced a new measure into the calculation of the QPC and removed a measure previously used to calculate star scores. The new calculation includes improvement in management of oral meds and no longer includes drug education, a measure in which we performed extremely well. We continue to lead the industry in QPC, but we dropped slightly in the switch up. That being said, we are not satisfied with this result, and we will not be satisfied until we improve our performance with the new measure and get back to where we were.

Providing quality care to our patients is what gets us out of bed every morning, and we remain focused on driving our score higher. I would like to acknowledge and applaud all of our clinicians who are constantly providing outstanding care and always striving to best our already-impressive results. Our focus on clinical quality continues to generate financial returns as our performance in home health Value-Based Purchasing, VBP, of this pilot program indicates. For the first quarter, we received approximately $364,000 of bonus payment from CMS. We believe very strongly that quality should drive reimbursement, and we continue to advocate that this demo be expanded nationwide and institutionalized as a better way for CMS to generate significant taxpayer savings and drive quality patient outcomes.

For our hospice business, the Hospice Compare May 2019 preview of quality metrics shows Amedisys once again has outperformed the national average in all 7 measurement categories. We are very pleased with these results and expect our clinical quality to continue to improve in hospice. These quality metrics are extremely important to us as we continue to invest in and grow our hospice footprint.

Moving on to employer of choice. Turnover is another key metric and major focus area for Amedisys in 2019. Hiring and retaining our associates is extremely important for us to both the quality of care we provide and our ability to grow. As of the end of the first quarter, our voluntary turnover was approximately 17%. We are working to turn turnover into a science as we are continually testing, surveying, interviewing and refining our people processes daily as we strive to lower our turnover numbers. Much like our quality scores, we are proud of the work we have done here, but we will not be satisfied until we lower this number even more.

Now let's discuss operational efficiency. In order to maximize our operational efficiency, we must deploy clinicians with the appropriate training and skills to provide the care needed by our patients. Therefore, one of our priority 2019 operational initiatives is improving our RN to LPN utilization ratio. At the end of the first quarter, our LPN utilization ratio was 37.4%. Keep in mind that for every 1% improvement in this ratio, we save nearly $450,000. Though we continue to see our LPN utilization ratio move in the right direction, we still have work to do in making material progress towards our goal of 50%. One factor that has significant impact on our ability to move this number is having pay practices that encourage clinicians to conduct visits in which they provide care commensurate with their qualifications or as we say, practicing at the top of their license. As such, we have undertaken a redesign of our clinician pay practices that should be fully implemented in Q4. We value all our clinicians as they are most important asset and are the drivers of our incredible patient care and outcomes. This shift to utilization of more LPNs for visits where appropriate for the patient will not be disruptive to our operations and presents us with a great efficiency opportunity in the coming quarters to drive great care at less costs.

In our home health division, we had another strong volume quarter, ending the quarter at 6% same-store total volume growth, which is admissions plus recertifications. This is the number we focus on as it reflects all sources of growth. Our total same-store admission growth was 6% and our Medicare admission growth was 2%.

In hospice, same-store admission growth were up 5% and ADC was up 8%, both impressive numbers given the very strong year-over-year comps our hospice business faces every quarter. With our acquisition of Compassionate Care Hospice, we now have ADC of 9,982 making us the third largest hospice organization in the country. The integration of Compassionate Care is well underway as our first wave of care centers to convert to HomeCare HomeBase will go live today, and we wish everybody good luck on this conversion.

As we have discussed at length, we will spend most of the first half of this year converting all Compassionate Care care centers to HomeCare HomeBase and expect there to be some ADC disruption this year. Though we anticipate the HomeCare HomeBase implementation and investments will weigh down Compassionate Care's 2019 EBITDA, they will position the business for similar growth trajectories and similar margin profiles to our current hospice business and allow us to substantially grow EBITDA, both next year and in 2021.

In personal care, total hours per quarter grew approximately 11%. The team has integrated everything we've thrown at them and is now evaluating opportunities to scale, grow and expand the business both organically and inorganically across our footprint. We're excited about the options we're evaluating here.

Turning to M&A, on April 1, we completed the acquisition of RoseRock Healthcare, a very strong hospice asset in Tulsa, Oklahoma. RoseRock is another privately sourced deal, which with synergies, will turn out to being less than 9x multiple and has nice overlap with our home health assets in Oklahoma. We are delighted to welcome all our new caregivers from Tulsa.

Capital deployment on hospice acquisitions remains our priority as we look for other RoseRock and Compassionate Care-like deals. We are also excited about ramping up our de novo process and have between 7 and 9 de novos planned for the year. We will continue to remain very disciplined in our M&A function and do our best to avoid auction processes or to pay outsized multiples.

Now moving on to the regulatory and legislative scene. PDGM remains the focus of our conversations with Congress and CMS. Along those lines, I'm pleased to report that we now have 11 bipartisan Senators signed up as cosponsors, up from the original group of 7 Senators that have introduced the Home Health Payment Innovation Act of 2019 earlier in the year. Given the divisive nature on many policy fronts in today's Washington, the industry's ability to secure bipartisan support of members across the political spectrum helps showcase how important this policy is for home health agencies throughout the country. It is also noteworthy that many of the cosponsors sit on key committees: the Senate Finance Committee; the Senate Health, Education, Labor and Pensions Committee; and the Senate Special Committee on Aging.

As you recall, this legislation would prohibit CMS from making rate adjustments based on behavioral assumptions and allow only for adjustments based on observed evidence of a change in provider behavior. We also expect a bipartisan companion bill to be introduced in the House, possibly as soon as later this week. Based on our support by members of Congress in the House and Senate and a dialogue with staff, we remain confident that we will be in the best possible position to advance this legislation over the next several months.

Also, as many of you may have seen, on April 19, CMS released the fiscal year 2020 proposed rule for hospice, which includes an overall payment update for hospice providers of 2.7%. This market basket update is an increase of $540 million to the hospice sector. While CMS has proposed some restructuring of how it plans to align payment with cost, a goal that we support, we are still working through the proposal to determine the impacts of this restructuring and any potential differences that we may have with the methodology.

In sum, a positive update for hospice payments is a positive move for our industry as we see expanded use of the Medicare hospice benefit. All of this is positive for Medicare beneficiaries and for Amedisys.

As you can see, we had another great quarter and are off to a roaring start in 2019. Again, thank you to all the Amedisys employees for all you've done to drive this success. You continue to prove that focusing on our patients drives outstanding results.

With that, I'll turn it over to Scott, who will take us through a more detailed review of our financial performance for the quarter. 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 of results. For the first quarter of 2019, on a GAAP basis, we delivered net income of $0.95 per diluted share, an increase of $0.16 on $467 million of revenue and an increase of $68 million or 17% 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 14 of our supplemental slides provides detail regarding these items and the income statement line items each adjustment impacts.

For the quarter, on an adjusted basis, our results were as follows: Revenue grew $69 million or 17% to $468 million. EBITDA increased over $13 million or 32% to $55 million. EBITDA as a percentage of revenue increased 130 basis points and EPS increased $0.32 or 41% to $1.11 per share.

Before turning to our segment results, I want to comment on our sequential improvement in EBITDA. On an adjusted basis, EBITDA increased $11 million from the fourth quarter of 2018. Sequentially, home health reimbursement increase added $3 million, health costs decreased $6 million, recorded gains on sale of fleet vehicles of approximately $1 million. The Compassionate Care acquisition, which closed on February 1, added $4 million in adjusted EBITDA. These items were offset by planned increases in resources to support growth and some seasonality-related items.

Now turning to our first quarter adjusted segment performance. Keep in mind that our segment results are pre-corporate expenses. In home health, revenue was $310 million, up $26 million or 9% compared to prior year, driven by a 6% increase in same-store total volume. On a same-store basis, Medicare admissions were up 2%, episodic admissions were up 4% and total admissions were up 6%. Our Medicare recertification rate was 37%, 80 basis points lower than prior year and our Medicare revenue per episode was up 3.9%.

Visiting clinician cost per visit increased only $0.71 compared to prior year despite raises adding $1.20. Overall, cost per visit was up $0.73 compared to prior year on a 6% increase in visits, which is inclusive of 1% increase in utilization.

Segment EBITDA was $53 million, up nearly $12 million with an adjusted EBITDA margin of 17%, representing a 250 basis point improvement. This marks the fourth straight quarter of significant year-over-year improvement in EBITDA margin. The segment's year-over-year results were inclusive of raises that were effective August 1, 2018.

Other items impacting the first quarter results of our home health segment include the 3.9% increase of $110 in revenue per episode, which was driven by a 1.2% rate increase and the acuity levels of our patients. G&A was down 100 basis points compared to 2018 and was at 23% of home health revenue for the quarter. The segment was able to support a $26 million increase in revenue, while reducing overall G&A spend. A sincere congratulations to our home health team for their impressive performance.

Now turning to our hospice segment. For the first quarter, revenue was $138 million, up $40 million over prior year, an increase of 41% and includes the first quarter 2019 impact of the CCH acquisition. Same-store average daily census was up 8% and same-store admissions were up 5%. Segment EBITDA was $35 million, up $8 million over prior year, an increase of 30%, again, inclusive of the CCH acquisition. Keep in mind, as we call out in our slide deck, segment EBITDA does not include any corporate G&A expense. Net revenue per day was up 2% to $152.56 and cost of service per day was up 7% to $82.43. The hospice segment benefited from an increase in reimbursement of approximately $2 million. The segment EBITDA margin was down 230 basis points, mainly due to the inclusion of the CCH acquisition in our first quarter 2019 results.

Our hospice segment EBITDA of around 26% is consistent with past results and in line with the industry, including private providers when you factor in both our G&A expense, which many of our competitors include them in margin calculation and our business mix of routine versus other lower margin levels of care.

For the quarter, the CCH acquisition added $31.5 million in revenue and $5.6 million in EBITDA through our hospice segment. The acquisition added $1.4 million in corporate costs, which resulted in a net $4.2 million in consolidated EBITDA contribution. We're extremely pleased with CCH's EBITDA contribution during our 2 months of ownership in the first quarter. As a reminder, we're investing in CCH during 2019 to support growth and margin expansion, along with converting to HomeCare HomeBase. Our plan is to complete the conversion in 4 waves with the first wave of conversion starting today. As such, we anticipate disruption in our average daily expenses and margin deterioration to take effect in the second and third quarter and return to pre-acquisition levels during the fourth quarter of this year.

Our personal care segment generated approximately $20 million in revenue in the first quarter and grew billable hours by 11%. Our results are not comparable to prior year as they are inclusive of acquisitions. We'll look to continue to grow our personal care business via inorganic and partnership opportunities during 2019.

Turning to our general and administrative expenses. On an adjusted basis, total G&A was $139 million or 29.7% of total revenue. Total G&A was down 50 basis points as a percentage of revenue compared to prior year and flat sequentially. Our total G&A expense for the quarter includes approximately $8 million related to the CCH acquisition, which is comprised of $1.4 million in corporate and $6.6 million in hospice.

We generated $20 million in cash flow from operations for the quarter, which was impacted by a slight slowdown in collections and additional costs related to the CCH acquisition. DSO increased approximately 3 days sequentially to 41.2 and is flat over prior year. Subsequent to the CCH and RoseRock closing, we have an approximately 1.6x leverage ratio and $392 million of available liquidity, which we'll work to deploy for continued inorganic growth opportunities. On the de novo front, we're on target and will provide updates as we progress throughout the year.

Finally, as you can see on Page 16 of our supplemental slide deck, we are reaffirming our 2019 guidance ranges with our revenue of $1.94 billion to $1.98 billion, adjusted EBITDA of $205 million to $210 million and adjusted EPS of $3.98 to $4.09.

Overall, we are pleased with where we are for the first quarter. As we enter Q2 and the remainder of the year, I want to remind everyone of the following: Q2 will see planned disruptions of CCH contribution as we invest to grow and roll out HomeCare HomeBase. The second half of the year is impacted by the seasonality of health and raises, and the $7 million to $8 million additional spend for 2019 that we identified for IT security, PDGM resources, de novos, staffing model and pay practice changes are more heavily weighted throughout the remainder of the year.

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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Jason Michael Plagman, Jefferies LLC, Research Division - Equity Associate [2]

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It's Jason Plagman on for Brian. He is under the weather this morning. First question, given the confidence that you're expressing in your strong fundamental trends, is the decision to reiterate 2019 guidance, is that baking in a healthy dose of conservatism? Or are there other moving parts that would cause your momentum to slow in the remainder of the year?

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

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Sure. I'm going to let Scott answer most of that, but we started to give guidance a couple of years ago, and we want to make sure that we always hit. So we are really happy with this quarter. Clearly, we blew it away. I think what we are though doing is preparing for some elements, particularly on CCH integration that we postponed about a month that didn't take place. So we got a very good guide on CCH EBITDA that came through much stronger than we thought, and we also had ADC 200 points above what we thought we'd have in terms of ADC. So we feel, as we move into HomeCare HomeBase, we could see some projected slowdown there, but we hope to surprise everybody with the positive. But I'll let Scott fill you in on some of the other ideas we have in terms of our guidance.

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

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Thanks, Paul. I think certainly, just giving guidance recently for a full year only being through 1 quarter, I feel really great about where we are positioning ourselves for the rest of the year. I think the issues around CCH, one of the issues is timing of the rollout or what we're looking at. If you look at it, it delivered $4.2 million in EBITDA, sort of run rate at 2.1 a month. So really strong there. As Paul said, our ADC levels are really holding. We're factoring in a disruption as we talked about. There is certainly the opportunity to outperform on that. We guided to -- I think when we gave guidance said that, that positions ourselves at $12 million to $14 million for CCH. We really feel good that, that's pushing towards the top side of that. Really want to get just this quarter in, get some more data around disruption, and we'll be able to give a really good view of the rest of the year after we complete Q2.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [5]

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Yes. We feel that it's a little -- considering all the self-imposed changes we've got going on, which we think will be -- continue to drive our business and create a distinction in our business and continuing to do our de novos, continuing to do our integration. I will have to say though the integration so far with Compassionate Care has been quite extraordinary. I got to give a lot of credit to our people here who've done a very nice job bringing Compassionate Care in. So if we continue to do well on the integration as well as we've done to date, I think we should have good results there.

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Jason Michael Plagman, Jefferies LLC, Research Division - Equity Associate [6]

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Okay. That makes sense. And then the Medicare growth, 2%, a slight deceleration from Q4. What can help drive you back into that 3% to 5% range that you've previously targeted? And is that still the expectation for full year?

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Christopher T. Gerard, Amedisys, Inc. - COO [7]

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It's Chris. I will say that 3% to 5%, we feel very good about that number. We're holding true to that. We see clear line of sight to being able to deliver, hopefully, even on the top end of that range. Not a lot really driving a little bit of the slowdown in Q1. We did lose a day, an incremental day, business day in the quarter, but that was not much of a needle-mover. We did have a little bit of a dip sequentially Q4 to Q1 in our number of FTEs out in the field selling day to day. It was actually 14 incremental [business lines] and FTEs. We're on top of that. We've rebuilt that kind of that funnel and have that team back up to where we should be. So I think that fundamentals are good, and we still feel very good about our goals for 2019.

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Operator [8]

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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 [9]

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I wanted to circle back a little bit on the guidance, but more thinking in the context of CCH here. So obviously, you outperformed in the first quarter and that leaves a lighter amount that you have to achieve here in the next 3 quarters to hit that $12 million to $14 million. So Scott, can you help us think about maybe pacing of margins and contribution here in '19? And then, does the slight delay in HCHB conversion or anything you've seen since you've had the asset in-house change your confidence in $34 million to $36 million of EBITDA in 2020 from CCH?

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Scott G. Ginn, Amedisys, Inc. - CFO [10]

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Yes. I'll start with that last point on that. So I don't think the delay or in looking at our modeling, our delay is not -- won't be impactful to what we see in '19 and '20, but we still expect Q4 to be our strongest quarter relative to CCH. We'll get through disruptions starting in Q2 and then in the Q3, and we'll come back out of that really exit at a pretty strong rate. To your point, if you look at it, we did about just for easy math, $4 million in Q1. If we look at the top end of my range, I'm looking at $14 million, so it was just $10 million for the rest of the 3 quarters. I would think a lot of that would be back-end loaded. That's our key, and we're looking forward as to how we exit that Q4. And we feel very optimistic about where that number will be.

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

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Okay. Fair enough. And then maybe, I guess, switching gears away from guidance on to the personal care business, which now has TTM EBITDA margins of around 8% versus breakeven a year ago. Clearly, this doesn't have scale for you, but you alluded to some interesting ways to expand that business. Can you just give us a sense for perhaps the magnitude of growth you might be targeting? Or how you might expect to achieve that over the next couple of years? And then what kind of margin profile would be attached to that scale?

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

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That's a great question, Matt. Yes, we've done 4 acquisitions here. They've all gone well. The management team there is doing a nice job. So we feel very good about where we're at. What we do know though as we talked to Medicare Advantage plans and we look at what legislation has been coming at -- or not legislation, but some of the rules that have been coming out from CMS, there is, obviously, an understanding there of the need for unskilled care, personal care that was making sure chronically ill people have what they need to maintain their ability to live independently at home, so activities of daily living. So we're seeing this. We're talking with CMS. We anticipate more of this is going to come out. We anticipate there's going to be more ability for Medicare Advantage plans to be able to fund some of these things. When we look at capitation, it's possibly doing capitated deals with Medicare Advantage plans. This is also very important.

So what we're doing is we're constantly out there looking at deals, particularly in areas where Medicare Advantage where we had good conversations, so some of the states where we have lots of coverage. We're also looking at figuring out ways to get coverage without actually having to buy these things. And so we're spending a lot of time looking at various solutions. Hopefully, in the next couple of months, we will come out with some answers there that will give us much better coverage without actually having to go and buy 200 plans. There's 25,000 players out there in this business. They're very hard to buy and for us to get that coverage. We're trying to look at alternatives. So we feel good about it. From a margin profile perspective, I don't know what this would look like, but we're currently having lots of conversations, trying to model it out. But ultimately, the most important thing is that we do have national coverage or close to it and that's what we're aiming for. I don't know, Chris, if I missed anything there?

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Christopher T. Gerard, Amedisys, Inc. - COO [13]

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No. I think you've got it on kind of the longer-term strategy. Going back to our core personal care business, as you mentioned, we're up to an 8% contribution margin. I feel like we've got a lot of the integration of the prior deals kind of behind us. We're getting a little bit better about managing our core business. We do see some additional opportunities there. We're predominantly in Massachusetts, which is a historically kind of difficult labor market, just from a minimum wage perspective and just kind of a low unemployment rate. So our focus there is really kind of on retention and recruiting of caregivers. And we see if we continue to focus there and get better, we can drop a little bit more to the bottom line and then work on our bigger, broader strategy, as Paul mentioned.

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Operator [14]

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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 [15]

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So first, just coming back to the guidance and the comment about the push, I guess, of the HomeCare HomeBase rollout to later by 1 month. So what's the amount of costs we're talking about that were pushed essentially from Q1 to Q2? Because when I'm looking at the numbers for the guidance kept, I guess, intact. Are you saying that the seasonality will change in between the quarters, I guess? Because in the past, Q2 tends to be better than Q1, but it seems like now it's going to reverse. So any color you can give us there on the kind of the progression of the ramp up to the year. I appreciate your comment on Q4, but I'm just thinking about Q2 versus Q1.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [16]

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Great. I'm going to let Scott take this one, Joanna.

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Scott G. Ginn, Amedisys, Inc. - CFO [17]

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Yes. I think, most of that's just the timing of when that disruption would come through. Because even if we said we were kicking off that on May 1, which is the day that's when they really start using it, but the month before, you start training and dealing with -- they've got multiple computers and so forth, so you'll start disruption early then. So it's just moving that. We didn't really -- if would have with 4/1, you would have started seeing some noise in March. So we didn't have that. So it's just more of that disruption timing I would say than anything that will be impactful to us.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [18]

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So it's the magnitude of cost we're talking about here?

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Scott G. Ginn, Amedisys, Inc. - CFO [19]

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Yes. We also will have costs in our plans. We're going to add -- continue to add heads just around sales, some of the leadership positions. And we really did not see much of that come through in Q1 at all. We probably -- this is one area we are not -- being little behind on our plan actually kind of helped us a little bit for our Q2 -- Q1 results.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [20]

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Yes. I mean, I think the other thing, Joanna, that we saw in the first 2 months, and again, this is a wonderful thing, is they outperformed, way outperformed what we expected. We came in with 200-plus more ADCs than we expected. The EBITDA that we saw on a monthly basis, the first few months we had them, was double what we thought it was. So we're heading into this much stronger than we thought we would be heading into it. So we're optimistic there. We've got some cushion here that's going in. So I think for us to -- I think, our integration teams have done a great job. I think the performance of the company has turned out very well thus far on a stand-alone basis. And we are looking forward to, hopefully, getting pleasant surprises on -- with having minimal disruption as they go through HomeCare HomeBase. We base those calculations based on our own experience of our own hospice when they converted to HomeCare HomeBase. The difference is here that they were on a system that was -- it's definitely falling apart. So we have a lot more enthusiasm with the Compassionate Care people wanting to move on to HomeCare HomeBase. So thus far, the integration has gone really well. The asset has performed better on a stand-alone basis, much better than what we had initially expected. So we feel very good about this, moving into it. But we are being conservative about what disruptions can be in play, and you're seeing some of the results of that conservatism.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [21]

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And, if I may, second question on the actual results in the quarter. Obviously, home health segment did exceptionally well. So I guess, you flagged the average revenue per episode being much faster so -- growing much faster than we have thought. So is that essentially explaining the margin? Or was there anything else you could flag to as well in terms of what drove that 250 basis points or so of margin improvement year-over-year in home health?

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [22]

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Chris, you want to handle that?

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

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No. I think, it's really just kind of indicative of us actually having the growth on the top line chewing into our capacity from a leadership perspective and the field perspective. We've been true to our strategy for the last couple of years now and starting to see the top line growth and holding true to that strategy is starting to generate some incremental growth on the bottom line. I think there's not a whole lot more there under today's environment, but we're preparing for PDGM. So we have some investments around that, that will happen throughout this year as well as the disruption with PDGM. We see that the levers that are still there available for us to pull are more around productivity and our clinician mix between our RNs and LPNs and our PTs and PTAs. So that's where our area of focus is now, but the fundamentals are solid, and we expect to see similar results as we move forward.

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Scott G. Ginn, Amedisys, Inc. - CFO [24]

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Yes. Joanna, this is Scott. And just to add. I mean, if you look at that 17.1% EBITDA margin for our home health segment, I mean that's strong. If you go back at least 8 quarters, that's well ahead of where we've been. So I'm really excited about that performance. If you look in just a little bit more on that gross margin, about 200 of that basis points of that improvement on the margin line was relative to the rate [improvement guides, most] Medicare, private episodic, fee-for-service as well as private per visit, all 3 of those lines are up, so roughly 200 basis points. The rest of the differential is efficiencies coming out of our performance there. We did add about $1.20 on cost per visit relative to raises year-over-year, but you'll see it's only up to somewhere in the $0.70 range because we continue to be more efficient on that line. So as long as we're able to -- and our total volumes in that 6%, you're seeing that's continuing to move margins upward in that segment. So really excited about what that home health segment delivered for us.

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Operator [25]

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

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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I just had one question. And I was hoping to get some education from you all about how you're going to be developing care plans under PDGM. And I think in the past you talked about how you're going to start using Medalogix to help formulate those care plans. So maybe just sort of help us understand how care plans get developed today. And then how you're going to use Medalogix in that process and sort of what that means for the business.

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Christopher T. Gerard, Amedisys, Inc. - COO [27]

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Matt, it's Chris. Yes, that's a great question. And if you think about the last 20 years of how home care has been reimbursed, I think you can really look at some settling in of how basically episodes are build out for care plans, more disease-specific, but it lumps a broad range of patients with the same kind of primary diagnosis into almost more of a disease-driven pathway. So think about admitting 1,000 patients with COPD and utilizing a pathway that says, this is kind of really the right plan to get to the right outcome. But if you really look at the 1,000 patients, there's a lot of variability on those individuals, and we kind of settled into less of an individual care plan and more into a pathway-driven care plan.

Now if you take a look at Medalogix, which really is getting more to data science around the patient's very specific characteristics and really looks at all of the other factors that really identify and expose those variabilities, it's helping us drive the right number of visits for that very specific patient and also helping us to drive the right mix between skilled nursing and therapy for that patient. So I see this as really kind of helping the industry to really get to the right level of visits to drive the right outcomes for the patient. And really kind of challenges us as an industry to get more specific. The clinician's judgment will still be prevalent in this situation, but also clinicians have typically settled into some very routine patterns. So this is going to disrupt that a little bit and challenge us to think differently about how we collectively work to get to that appropriate patient outcome. I hope that gives a little color.

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Operator [28]

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Our next question comes from the line of Kevin Ellich with Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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So I don't know if I missed this or if you've previously said it, but with the 7 to 9 planned de novo openings in 2019, are all of these home health or hospice? And then, have you provided timing as to when they're going to open?

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [30]

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Sure. I'll let -- Scott's been -- it's all under Scott, but it's mainly hospice. It's about 5 hospice, and I think about 3 home health. But I'll have Scott give you the details.

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Scott G. Ginn, Amedisys, Inc. - CFO [31]

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Yes. That's about right. This is more heavily weighted hospice. We're still looking -- we've got 1 that's open that we opened late last year. The other ones, we're in various stages of getting, signing leases. It will take a little bit to get our licensings and actually seeing patients. But we're on track on all that. Really excited about it. We're really looking at some -- we may have the ability to expand that number, just depending on how we stay on track with the other ones that are in place right now.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [32]

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Got it. And then -- oh, sorry, go ahead Paul.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [33]

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Yes. Scott, do you want to just talk a little bit about the economics of de novos?

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Scott G. Ginn, Amedisys, Inc. - CFO [34]

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Yes. I mean, generally it's about a $50,000 a month burn rate on those. It kind of probably takes about 6 months to get us started on there, and we'll breakeven probably at 8 to 10 each month. So we're excited about them. We've got some great opportunities coming out of the Compassionate Care acquisition, some new territories. Really got our eye on Texas, which is where Chris has operated before. So really kind of expanded that footprint and gives us an opportunity to build off some provider numbers into some branches. So good opportunities on that front.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [35]

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Got it. That's helpful. That's exactly what I was going to ask too, Paul. And then on the hospice update, the 2.7% for the industry. I guess, how soon do you think you guys will have an update as to what the impact will be for you?

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [36]

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I think, again, I'll let Scott go into the specific impacts. We're still calculating it. But I think the impact for us is probably going to be about 1% give or take a little. And so, I think we're feeling good about it. There were some provisions in there where they were allocating more dollars into continuous care and into GIP. And most of hospice, about 98% of hospice in the industry is routine care, which is what we do. We're very reflective of the industry. But there will be even less of an increase in routine care because of continuous care and general inpatient absorb a lot more resources. And I think they want to make sure that the people who perform that are covered. We do some of it, but there is other people who make it more of a specialty.

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Scott G. Ginn, Amedisys, Inc. - CFO [37]

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Yes. And just to add on. Thanks, Paul. Some of that 1% around that number is what we would say right now, you can see that people put out numbers and CMS put out and you get that provider number. And so we're right in that band there. It could be slightly higher depending on what goes on with that wage lag they're talking about. There's some differential there. So still feel good, excited about that rate increase that we would get, effective October 1.

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

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Yes. So it's a positive, a good one.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Yes. Sounds good. And then one more, if I may. DSO, Scott. You talked about, it picked up 3 days sequentially, I think. What drove that? And really is it all CCH? And then, do you think that's going to moderate as the year goes on?

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Scott G. Ginn, Amedisys, Inc. - CFO [40]

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I do. I think that's going to give us an opportunity. I still feel good about, I guided to about $180 million in cash flow from ops. I still think we're on track for that. The DSO is more kind of a January -- first quarter-type issue. There were some Medicare dark days that slowed that down. So you saw a little bit loss of DSO and then we had a lot of cash out the door relative to the acquisition. So that will moderate as well and I'll see that start to flip on. And then the good news on it is the billing cycle under CCH right now is much slower than ours internally. So as I get them on our platform and as I said, we'll do this in 4 ways, I will get some pick-up in cash flow relative to CCH care centers getting on HomeCare HomeBase. So we'll look to see some of that as we get waves in place.

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Operator [41]

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(Operator Instructions) Our next question comes from the line of Patrick Feeley with Barclays.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [42]

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You mentioned LPN utilization was little better than 37% this quarter. It was 38% last quarter. I'm just curious what that number was in the first quarter of last year, if you have it handy? And is the high 50s the right way to kind of think about where that can go over the next year or 2? How do we think about that?

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

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I think for the next year or 2, I think, if we can get up to 50-50, that would be very good as we talked about. Each percentage point reflects about a $0.5 million. So obviously, that's something we're interested in. Mainly what we're interested though is providing the best care, and we believe that there is some RNs that are out there that are not practicing at the top of their license. That's something that's very important to us. So we would like to make sure in a very natural way that the mix of LPNs gets to about a 50-50 ratio. Could it go higher? Yes. Is it higher -- is there a possibility of getting it into the high 50s, 60 range? Yes. Probably, not this year though. I wouldn't see that. I don't know if -- Chris can be more specific about it.

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Christopher T. Gerard, Amedisys, Inc. - COO [44]

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Yes. So Patrick, I don't have the exact Q1 of last year, but I can't say that over the last 1.5 years, we've typically stayed pretty tight in the band of 36% to 38%. As Paul mentioned kind of in the prepared remarks, we're undergoing an internal kind of pay practice change. It's really going to move us more in line with industry. We have a little bit of an antiquated kind of where we pay our field clinicians. That is the biggest obstacle for us, materially moving our utilization and having our clinicians working at the top of their license, as Paul mentioned. So we've got some internal things to work through. We have a very tight strategy around this. We've been working on this almost for 1 year now, but this will be a significant undergoing for us. But it will be positive in the long run and that should free us up throughout 2020 and beyond to really move north of 50% where we feel like the industry is, and we see a pretty clear path to that. But I don't anticipate it moving materially for the rest of 2019, but we do see some movement coming up after we are through the pay practice change.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [45]

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Got it. And maybe just one follow-up on that. Are there any differences in employing LPNs versus RNs? Looking past just the sort of cost and the skill set, I'm curious if you see any differences in things like maybe turnover that might be considerations that make it either more easier or more difficult to manage the business as that moves higher. And then similarly, do you see any pushback from any direction in putting more LPNs out there versus RNs, whether it's from referral sources or plans or whoever it might be?

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [46]

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Yes. No, we don't see pushback. I mean, I think the industry really has kind of settled into your RNs are doing your OASIS required business, your admits, your research, your discharges, your changing conditions and your post-hospitalization kind of reassessments. So -- and as well as your highly complex wounds and some of the complex patients and we will continue to kind of fall in line with that. Obviously, there are some complex patients that a higher level of skill would be needed for. And we have certainly the full intention of making sure that we're using the right discipline there. So just based on my kind of 25-plus years of experience in this industry, kind of having LPNs working the revisits and the routine visits that are not highly complex is the right use of labor. RNs like to be challenged. They like to do the kind of the higher-skilled stuff. So I think that this will actually be a positive for us in terms of RN and LPN turnover rates and retention. And this is something that we just need to kind of get through.

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Christopher T. Gerard, Amedisys, Inc. - COO [47]

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Yes. And also, Patrick, I've been through this before, and my experience has shown that LPNs turn over less than RNs, and we expect that, that will occur here. RNs are harder to keep in general. Same with PTAs and PTs. But that's what we're going to be aiming for as we move to having more LPNs, figuring out what they need and want and making sure that we drive that turnover level down. Right now, they're a little below RNs.

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Operator [48]

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Our next question comes from the line of Dana Hambly with Stephens.

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Dana Rolfson Hambly, Stephens Inc., Research Division - Research Analyst [49]

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As the call started, the stock got weaker and it's now recovered a little bit and I certainly wouldn't ask you to comment on the stock price, but I was wondering if I kind of missed something in your comments where you were disappointed. I know you mentioned the star ratings, and you didn't raise guidance, but I feel like you had good explanation for that. So I was just wondering if there was anything else that you're saying that I missed. Anything that kind of fundamentally changed this quarter versus last time we talked last quarter.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [50]

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No. I mean, we're watching that as well. We're a little confused as well. So it's -- it wasn't a phenomenal quarter. It looks great. I think, as usual, we're being conservative, and we're talking about what's ahead and maybe we're bumming people out a little by doing that. But we're just trying to make sure that if you invest with us that you know what's out there. And some of the things that are out there, we're still talking about. But as you've seen in the last couple of years, we tend to overdeliver and that's what we hopefully will do here.

I think the idea as I've been saying is, I think the fact -- I think the reason why there is probably some issues with the stock is we didn't revise our guidance. And I think people -- we got a lot of questions on that, and we just aren't going to do that. So we're sorry, but we believe a first quarter doesn't make the year and to revise and to hype things up at this point isn't what we're going to do. We're going to -- we're asking folks who are investors and are analysts to say -- respect what we're going to do and in the second quarter, if things continue the way they're going, obviously, we're going to readdress the issue of guidance. And so -- but as we made our calls last night, that was the big issue. Why don't you guys push it up? Because you blow it away.

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Dana Rolfson Hambly, Stephens Inc., Research Division - Research Analyst [51]

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No. That makes sense. And I appreciate the comments, Paul. And then Paul, also you mentioned maybe a House bill by the end of this week. And after that, what are kind of the expectations of that actually making its way into legislation? And is there any reason for optimism that CMS might have something in the proposed rule that would address the behavioral assumptions?

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [52]

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I'm going to turn it over to Dave Kemmerly. He's here. He is our Legal Counsel, our GC and Head of our Government Affairs Group. But I feel very good about where we are, very, very good about where we are with CMS and particularly, legislatively, but I'll let Dave to fill you in on that.

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David L. Kemmerly, Amedisys, Inc. - Senior VP of Government Affairs & General Counsel [53]

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Yes. Dana, first thing I'll say off the top is we're very optimistic about our ability to perhaps pass the legislation to prohibit the use of behavioral assumptions. So specifically to the House bill, we expect it to be introduced next week. It's been pushed to next week only for the fact to allow more cosponsors to sign on. Key there is Republican and Democrat. The lead author there will be Terri Sewell from Alabama, a Democrat. And we expect a number of Republicans and Democrats to cosponsor that. Since we last talked, we now have Senator Collins' bill, of course, in the Senate you're familiar with. Her bill in the Senate was introduced in February. We now have 11 cosponsors on that, up from 7 previously. Again, we've got 6 Republicans, 5 Democrats as cosponsors with Senator Collins.

So the next steps are really, we'll continue to add cosponsors to the bills, and we've got a lot of those that we're working with we expect to sign on fairly soon on the House and the Senate side. We will then move to, and we'll continue to work with the staff, the key committee staff, on both sides on both the House and the Senate to understand this legislation. And what we expect to do in the latter half of the year to have the opportunity as different vehicles come along to try and insert this language from these bills. So there will be a number of those opportunities in the latter half of the year, we expect. And we will have built, which we've actually built not just this year, over last year and this year, we built a lot of understanding and a lot of support for this legislation. And key to that is, again, the bipartisan nature. So we feel really confident. The industry is aligned on this. We're aligned on the language. We're aligned on the bills. We're aligned in our advocacy efforts. So we feel good about it. It's an art. It's not a certain process, but we like where we are.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [54]

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So I'd say that -- I'd say, Dana, here's what I'd expect. We got 8 months to get this attached to something once the House bill drops. So that's a good amount of time. So hopefully Congress will start pushing some legislation through, and we can attach it. So we're looking to do that. So it's probably going to occur at some point in the latter half of this year. So that's what we're looking for. And remember, they're going to -- CMS is probably going to come out with the rule again, the proposed rule again. We don't expect any changes there in that. So the heavy lobbying will continue during this summer before November when the rule should drop. We hope to have a legislative cure for that before or we hope to get to CMS and tell them to and work with them to get rid of the -- or pare back the behavioral assumptions. We had some very good progress with CMS thus far though. So I'm optimistic even within the confines of CMS.

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David L. Kemmerly, Amedisys, Inc. - Senior VP of Government Affairs & General Counsel [55]

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Yes. Paul, thanks for mentioning that. On a parallel track, Dana, as Paul mentioned, we'll continue to spend a lot of time with CMS leadership, talking to them about specifically behavioral assumptions, our concerns there and a few other things with PDGM. But we're working on that track. As you know, they are mandated by the Bipartisan Budget Act to utilize behavioral assumptions to reach budget neutrality. However, they could soften those, and we're talking to them about that. So we don't expect to see a lot of movement necessarily in the -- when you see the proposed rule, but you'll see a lot of comments and lot of discussions with CMS from others -- us and others in the industry about the behavioral assumptions between the time of the proposed rule and the final rule coming out around early November. So 2 tracks, legislative and regulatory.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [56]

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Yes, and we feel good.

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Operator [57]

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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, LLC, Research Division - MD of Healthcare Services Equity Research [58]

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Just a follow-up to Dana's question about legislation there. Does the -- will the legislation specifically prohibit the use of behavioral offsets? I mean, because they are widely used in the industry. Or is it like what specifically will that legislation ask for?

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [59]

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General?

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David L. Kemmerly, Amedisys, Inc. - Senior VP of Government Affairs & General Counsel [60]

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Frank, a good question. Yes, it will prohibit the use of behavioral assumptions and -- on the front end, move to behavioral adjustments on the back end and it would smooth those to a maximum of 2%, if there is a downside, of 2% a year. So that's kind of the long and short of it. But yes, the prohibition to use behavioral assumptions on the front-end.

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

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So that's interesting. Because, obviously, that 6.42% on assumptions on future behavior, which don't get me into it, I can't believe this exists, this sort of thing exists, but if this goes through, it will be purely on proven behavior. So -- and then the other one is being limited to a 2% per year change of cut. So if anything that would be cut would be no more than 2%. And also, I think it's important that people know is when behavioral assumptions have been used in the past, it's generally been between 1% to 2%, and so that's -- so the 6.4% is way out of the norm. So that -- we're also making CMS aware of that too. It's way outside the norm.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [62]

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Got you. And then my real question is just really sort of a MA, Medicare Advantage related question, 2 parts there. Just I know some time ago, I think there was a proposal put out about some demo projects for doing a carve-in of hospice into the Medicare Advantage benefit. Just any color around that. And then, any updates you have about any type of risk-taking relationships or arrangements you are having with MA payers?

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

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Thanks, Frank. I think, yes, the risk relationships that we have, we've got a pretty robust, but small, to be very clear, but small risk relationships with 3 payers using 4 different types of risk relationships in 15 states. They are going well, and we're encouraged by them. They're largely revolving around our ability to reduce readmissions in hospitals, to keep our quality scores up and in a certain case, one specific case, to help with medication adherence. So those are going well. We're encouraged by that. Clearly, what we're using at that point is we're taking these results, and we're having bigger conversations with payers to say, okay, now that these are trending well, what should we be talking about from a risk relationship perspective. So we're encouraged about that. And again, we need to change the game and this industry needs to change the game with Medicare Advantage because their payments are so far below fee for service. We believe taking risk or pay for performance on some of these things is -- or gain-sharing is something that we need to be doing. I'll let Dave talk about the hospice proposal that CMMI has.

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David L. Kemmerly, Amedisys, Inc. - Senior VP of Government Affairs & General Counsel [64]

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Yes. In January, CMMI announced that beginning in 2021, MA plans participating in VBID will be permitted to offer the hospice benefit. VBID being the Value-Based Insurance Design program. Currently, this year, as of '19, there's about, I think -- there's 25 states in the VBID program, which represents about 13 plans or more, but in 2020, VBID will be available on all 50 states. So in 2021, any of the plans participating in the VBID program in all 50 states can voluntarily carve in the hospice benefits. So it's a ways out, but we're watching that closely.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [65]

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Yes. We're watching it. And the industry is getting itself trying to analyze what this actually would mean from an industry perspective. So the industry is still trying to figure out what this all means, Frank. So early days still.

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David L. Kemmerly, Amedisys, Inc. - Senior VP of Government Affairs & General Counsel [66]

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Yes. But the key thing to remember there is, it's voluntary for the plans. It's not mandatory.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [67]

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Yes.

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Operator [68]

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Ladies and gentlemen, we have reached the end of our question-and-answer session and I would like to turn the call back to President and CEO, Paul Kusserow, for closing remarks.

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Paul Berthold Kusserow, Amedisys, Inc. - President, CEO & Director [69]

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Thanks very much, Hector. I want to thank everyone who joined us on our call today, and also, again, like to thank all of the people who delivered these really superlative results. Keep doing what you're doing, taking care of the people who need us the most, that's what we do. We hope everyone has a wonderful day. We look forward to updating you on our ever-evolving process and purposeful work on the road or during our next quarterly earnings call in August. Take care, everybody. Have a great day, and thanks for listening.

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Operator [70]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.