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Edited Transcript of LHCG earnings conference call or presentation 9-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 LHC Group Inc Earnings Call

LAFAYETTE Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of LHC Group Inc earnings conference call or presentation Thursday, March 9, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Elliott

LHC Group, Inc. - SVP Finance

* Keith Myers

LHC Group, Inc. - Chairman, CEO

* Josh Proffitt

LHC Group, Inc. - EVP, CFO, Treasurer

* Don Stelly

LHC Group, Inc. - President, COO

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Conference Call Participants

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* Jason Plagman

Jefferies LLC - Analyst

* Frank Morgan

RBC Capital Markets - Analyst

* Bill Sutherland

The Benchmark Company - Analyst

* Ryan Halsted

Wells Fargo Securities, LLC - Analyst

* Dana Hambly

Stephens Inc. - Analyst

* Bill Bonello

Craig-Hallum Capital Group - Analyst

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Presentation

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Operator [1]

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Good day ladies and gentlemen, and welcome to the LHC Group fourth-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Eric Elliott, Senior Vice President of Finance. Sir, please go ahead.

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Eric Elliott, LHC Group, Inc. - SVP Finance [2]

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Thank you Liz, and welcome, everyone, to LHC Group's earnings conference call for the fourth quarter and year ended December 31, 2016. Hopefully, everyone has received a copy of our earnings release. If not, you may obtain a copy along with other key information about LHC Group and the industry on our website.

In a moment, we'll hear from Keith Myers, Chief Executive Officer, Don Stelly, President and Chief Operating Officer, and Josh Proffitt, Chief Financial Officer of LHC Group. Before that, I would like to remind everyone that statements included in this conference call and in our press release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include but are not limited to comments regarding our financial results for 2017 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties which are discussed in our annual and quarterly SEC filings. LSG Group shall have no obligation to update information provided on this call to reflect subsequent events.

Now I am pleased introduce the CEO of LHC Group, Keith Myers.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [3]

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Thank you, Eric, and good morning everyone. Thanks for being with us today.

LHC Group had a great fourth-quarter performance which complemented a strong year. We have entered 2017 with significant operating momentum which has only been strengthened by the January star ratings showing that we continue to lead our peer group in both quality care and patient satisfaction for the third quarter in a row. We expect 2017 to be a year of further profitable growth driven organically and through continued acquisition and joint venture growth.

Before I continue on those thoughts, I want to thank everyone on our LHC Group team for their performance in the fourth quarter and all of 2016. LHC Group's success is built on the high-quality care and customer service this team provides our patients and their families around the clock every day. The skill and the commitment that our team members embody is truly inspiring and enables them to constantly exceed the expectations of the people they serve so well. They are the wellspring of our growth, our reputation for quality and our prospects of the future. It is a privilege for me to work with them, and I recognize their unceasing efforts. So, thank you to all.

Turning to our fourth-quarter performance, we continued the favorable admission trends we've experienced throughout the year to produce the second consecutive quarter of double-digit growth in both total admissions and organic home health admissions. In fact, total admissions have now increased at a double-digit pace for four consecutive quarters, and organic growth in home health admissions has now accelerated for the past six quarters. We have continued to generate this organic home health growth in both our joint venture operations and in our freestanding locations. Our performance offers further validation of the growing recognition among hospitals and health systems, and increasingly among the MCOs that home health can be a tremendous asset to their operations through our proven ability to provide high-quality care and to reduce their costs for nonacute care. As a result, we continue to see an increase in our Medicare case mix and an expansion in our average Medicare reimbursement, which rose 4.7% for the quarter and 4.2% for the year.

In addition, as we mentioned in our news release, our organic growth rates are benefiting from our increased marketing efforts in our secondary markets. These are counties in which we are licensed to do business, but in which we do not have a location. Prior to the completion of our point of care system, we simply couldn't serve these markets effectively or efficiently, but now we can. Since our primary markets, which are the markets in which we have a location, constitute less than half the counties in which we are licensed, the new capabilities we gain with point of care have created a significant and continuing organic growth opportunity. Due to these combined factors, we enter 2017 with momentum for home health organic growth and we expect to generate further meaningful increases in organic admissions and organic revenue during 2017.

We are also well-positioned to drive growth through acquisitions for 2017 beginning with the LifePoint joint venture, which closed on January 1 of this year. We expect LifePoint to have a slightly positive impact on our results for 2017 and a much more meaningful positive impact in 2018 and beyond.

As Don will address more specifically, we expect to begin managing and consolidating the revenues to the current LifePoint portfolio of 29 home health and 12 hospice locations during 2017. In the current year, we expect these locations to generate revenues for LHC Group of approximately $50 million, or about 70% of the $72 million in revenues the locations currently produce on an annualized basis.

In addition, our shared goal with LifePoint over the next three to five years is to add home health and hospice locations to serve the communities in which each of their more than 70 hospitals are located. We believe this expansion will represent $200 million to $250 million in revenue opportunity. LifePoint continues to grow its base of hospitals, having added 12 over the last three years, and future additions represent a further opportunity for LHC Group.

In addition to the LifePoint transaction, we continue to evaluate a robust pipeline of potential joint venture and freestanding transactions. The LifePoint deal has been catalytic to many of these discussions and our continued leadership in the star ratings is another critical differentiating advantage. In addition to our growing number of conversations with new potential hospital and health system partners, we also have the deal experience, the integration capabilities, and the financial strength to continue to benefit from growing consolidation pressures among freestanding home health agencies and hospital providers. Our early and deep commitment to our hospital alignment strategy has also enabled LHC Group over two decades and developed the most extensive network of hospital and health system partnerships in the home health services industry.

Hospital and health systems are continuing to develop integrated care networks and engage in value-based reimbursement arrangements as fee-for-service healthcare becomes increasingly unsustainable. We expect to continue being a leading partner of choice for these networks based on our deep experience and great success in partnering with hospitals and health systems, our proven ability to provide high-quality care and patient satisfaction and to lower the cost of their patients' nonacute care, our scale and market density, and our data-driven tech capability and infrastructure.

As a final point, let me remind you that, historically, our geographic expansion has primarily focused on 19 (technical difficulty) new states that are favorable for freestanding agencies. In fact, about 80% of our home health locations are in (technical difficulty) these states. However, through our joint venture partnerships with hospitals and health systems, we can operate very effectively in any market, and as a result are focused on hospital and health systems joint venture expansion into all 50 states.

To summarize, we are confident that LHC Group is positioned to gain additional share in our highly fragmented and consolidated markets through both organic growth and acquisition growth. As always, we must continue to execute the proven strategies that have served our patients, partners, team members and shareholders so well. Through successful execution, we expect to achieve long-term growth and increased shareholder value.

Thanks for your time this morning, and now here's Josh to discuss our financial results in more detail. Josh?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [4]

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Thank you, Keith, and good morning everyone. Thank you all for joining our call.

Let me once again begin my prepared remarks by saying how much I appreciate all of our clinical professionals who continue to raise the bar and lead the industry with the high quality and exceptional service you deliver to the patients, families and communities we are so blessed to care for, and to all of the LHC Group family members who support them on a daily basis. Because of all of you, we are able to report another successful year for our shareholders and are truly poised for future success in 2017 and the coming years.

With regard to our financial results, net service revenue for the fourth quarter of 2016 was $235.4 million, an increase of 7.5% compared with net service revenue of $219 million in the same period of 2015. For the year ended December 31, 2016, net service revenue increased 12.1% from $816.4 million in 2015 to $914.8 million in 2016.

Consolidated same-store revenue grew 4.2% for the fourth quarter and 5.7% for the year ended December 31. This growth in same-store revenue is due to our growth in same-store admissions and an overall increase in patient acuity in the home health service line, which is offset by an estimated reduction in Medicare home health revenue of approximately 1.5% in 2016.

Net income attributable to LHC Group was $9.8 million, or $0.55 per diluted share, for the fourth quarter of 2016 compared with $7.7 million, or $0.44 per diluted share, for the fourth quarter of 2015. Adjusted net income attributable to LHC Group for the fourth quarter was $0.58 per diluted share compared with $0.53 per diluted share for the fourth quarter last year.

Adjusted net income for the fourth quarter of 2016 excludes $758,000 in acquisition expense. This expense includes $300,000 for the termination of the PHR CON application process and $458,000 for costs related to our joint venture partnership with LifePoint.

On a consolidated basis, our gross margin was 38.8% of revenue in the fourth quarter of 2016, as compared to 41.1% of revenue in the fourth quarter of 2015. Consolidated gross margin for the year ended December 31, 2016 was 39% of revenue compared to 41.1% of revenue in 2015. The decrease in gross margin year-over-year is due to multiple factors: one, the negative revenue impact from the 2016 home health reimbursement rule of an estimated 1.5% reduction to Medicare reimbursement; two, the negative impact on revenue from the LTACH patient criteria rule, which affected two of our LTACHs beginning June 1 last year, and the other six LTACHs beginning September 1; and also margin contribution from acquisitions that closed within the last 12 months that is lower than the gross margin for our more mature agencies. Excluding these recent acquisitions, our consolidated gross margin would be 39.5% for 2016.

Our general and administrative expense was 29.3% of revenue in the fourth quarter of 2016 as compared to 31.1% in the fourth quarter of 2015. Consolidated G&A expense for the year ended December 31 was 29.6% of revenue compared to 30.4% of revenue in 2015. The improvement in G&A expense as a percent of revenue is due to continuous cost control efforts while growing revenue and generating additional operating leverage.

Moving on to bad debt, our bad debt expense represented 1.3% of revenue in the fourth quarter and 1.6% for the year as compared to 2% and 2.4% respectively for the same periods of 2015. The decrease in bad debt expense year-over-year has positively affected my continued process improvements related to structural changes we implemented in our revenue cycle department, and continued strong cash collections. A big contributor in this decline was that we collected 96.2% of non-Medicare revenue for home health in 2016 versus 91.7% in 2015, and, for the fourth quarter, that was 104% of non-Medicare revenue for home health compared to 95.8% in the fourth quarter of 2015.

In furtherance of Keith's comments about our corporate development pipeline, I too could that be more excited about our robust pipeline of potential joint venture and freestanding opportunities. I would also note that we currently have $130 million available on our line of credit along with free cash flow of $42.1 million for the year, which leaves us well-positioned to fund future acquisitions and joint venture partnerships.

Turning now to our annual guidance for 2017, fiscal year 2017 net service revenue is expected to be in the range of $1 billion to $1.03 billion, and fully diluted earnings per share are expected to be in the range of $2.07 to $2.23. This guidance includes, one, the negative impact from the Medicare Home Health Prospective Payment System for 2017, which is expected to have an approximate 2% impact, or $10 million reduction, to Medicare home health revenue, which represents a $0.34 reduction in fully diluted earnings per share for the year; two, the negative impact from the Medicare long-term care hospital Prospective Payment System, which is expected to reduce Medicare LTACH revenue by approximately $6 million and result in an approximate $0.12 net reduction in fully diluted earnings per share for 2017 after implementation of further mitigation strategies; third, positive impact from the 2017 Medicare Hospice Wage Index and Payment Final rule effective October 1 of last year, which is expected to increase our Medicare hospice revenue for 2017 by 2.1%, or $2.7 million, and fully diluted earnings per share by $0.09. And last, our guidance does include the positive impact from our home health and hospice joint venture partnership with LifePoint, which was effective January 1 of this year and is anticipated to achieve approximately $50 million to $55 million in revenue and approximately $0.02 to $0.05 in EPS attributable to LHC in 2017. This guidance does not take into account the impact of further reimbursement changes, if any, future acquisitions, if made, de novo locations, if opened, or future legal expenses if necessary.

For the full year of 2017, we expect gross margins to be in the range of 38% to 39%, general and administrative expense as a percent of revenue to be in the range of 28.5% to 29.5%, bad debt as a percent of revenue to be in the range of 1.7% to 1.9%, and tax rate to be in the range of 40.5% to 41.5%.

Lastly, while we don't usually give quarterly guidance, because of all of the moving pieces in the first quarter of 2017, I will give a range to help you with your modeling. We are currently anticipating the first-quarter EPS to be in the range of $0.43 to $0.45. This estimate includes the traditional increase in the first-quarter payroll taxes of approximately $2.3 million over the fourth quarter of last year as well as costs associated with the integration and conversion of the Phase I LifePoint joint venture locations.

That concludes my prepared remarks, and I am happy to discuss anything you may want on the question-and-answer session. I'm pleased to turn the call over to Don.

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Don Stelly, LHC Group, Inc. - President, COO [5]

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Thank you, Josh, and good morning everyone listening. Like Keith and Josh, I too will begin my comments by congratulating every member of our LHC Group team. To see in printed headlines that our quality patient satisfaction and volumes are industry-leading is phenomenal, and it's due to you. To know the difference that is made in the value that it creates for patients, families and all stakeholders is that differentiation we've been talking about. Well done.

But as I stated last quarter and will do again, we still have opportunity to improve. While we do not underestimate the tremendous work that it is taking to get where we are, I challenge us all to keep the intense focus and improve where those paths to betterment lie before us.

Now, turning to details around our value proposition, for the January release, we produced a rating of 4.40 on that scale of 5 for the quality of care provided, this as compared to the national average of 3.25. This, as Keith alluded, is the third quarter that our ratings have been about 4. Now 90% of our agencies have a rating of 4 or higher, and this is compared to an industry average of approximately 30%.

On patient satisfaction, we have expanded our lead over the last two quarters. 79% of our agencies are rated 4 or better. The January release had us at 4.02 with the national average being 3.64.

Our star ratings do continue to meaningfully differentiate LHC Group in the market and is a key driver behind our industry-leading organic growth in admissions. For the fourth quarter of 2016, organic growth in total home health admissions was 10.8%, as compared to the fourth quarter of 2015, and 9.3% for the year, while organic growth in Medicare home health admissions was 8.5% for the fourth quarter of 2016 and 6.6% for the year.

Briefly adding context to the LifePoint JV, our plan to take ownership and begin managing the initial 29 locations in home health and 12 hospice operations is taking place in three stages, the first of which began immediately on the effective date of the transaction, January 1. On that day, we acquired 12 LifePoint home health agencies and seven hospices. We also began managing an additional 10 home health locations. Stage 2 will begin on April 1. And at that time, we will transition seven home health agencies and the remaining five hospice agencies. And then finally, Stage 3 will begin on to the first when we convert the 10 management agencies to the joint venture. We are very pleased with how the transition is going thus far and truly could not be happier of how Bill, David and the entire LifePoint team is working with us as a true partner.

As a side note regarding M&A, while the LifePoint integration does go through September for that third start of a phase, I would be remiss to not be very clear that, from an operations, home office support and integration team standpoint, we have capacity, and we are poised, ready and excited to acquire new assets from that robust pipeline that Keith talked about in his prepared remarks.

With that and in closing, let me again thank and congratulate all of my colleagues. I have never been more excited about our future and, honestly, more proud to speak on your behalf as I am today.

Liz, this will conclude our formal remarks, and we are ready now to go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Brian Tanquilut, Jefferies.

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Jason Plagman, Jefferies LLC - Analyst [2]

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Hey guys. It's Jason Plagman on for Brian. The first question was I think you've been discussing opportunities in the MA arena. Can you just talk about the talks you've had with some of those plans and how big the opportunity could be, both impact in 2017 and then farther out?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [3]

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Sure. This is Keith. I'll take that. We continue to have conversations with all of the plans, of course all the larger plans, but there are a lot of smaller plans and markets we are in that are equally important or more important to some of our local hospitals.

So I would like to -- I think I would say that we see a real movement and a positive trend. So for example, when we look at just revenue per admission, we are up -- I'm looking at Eric here, but I think about 4.5% in Q4 of 2016 over Q4 in 2015. And that's not spread evenly across the board, so that's just some payors that are moving quicker in the direction of recognizing that home health is not a commodity, but true home health agencies that manage patients as opposed to those that function almost like staffing agencies with managed-care companies where they don't make any attempt to control rehospitalization or any of those things. And when they separate us from those and look at our data, they see that we're not only reducing rehospitalization, but bringing down their global costs by moving patients downstream from higher cost settings like SNF, primarily from SNF. I think we all know that. But in order to do that, we have to be paid adequately to be able to do the things we do to take care of those higher acuity patients.

So, I hope I'm answering the question. I don't want to dive into specifics about conversations with individual payors for obvious reasons, but I can tell you that the positive movement is across the board. Mark-to-mark, let's say five years ago, it was quite frustrating. Almost every conversation we would have with a managed-care payor, they viewed home health like a commodity, all home health providers the same. And today, it's rare that any of the managed-care plans we're talking to think of it that way. They're differentiating quality providers from others, and that benefits those of us that provide high-quality care.

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Jason Plagman, Jefferies LLC - Analyst [4]

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Great. And then just my second question, I think, last quarter, you provided some data on different organic growths, difference between your JV locations and your standalones. Any update on there, that or what you saw in Q4 and what you expect between those two groups in 2017?

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Don Stelly, LHC Group, Inc. - President, COO [5]

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This is Don. It's a good question. Last quarter, when I noted that I don't member the exact numbers, but the JVs will pull the rope a little bit tighter than the freestanding. Here's the good news and, honestly, I think the better news. We have increased that throughput from our JVs and we are still seeing that today and home health, but we've really I think done a nice job of taking the freestanding to where, as we sit today, I would expect them to be pretty neck and neck for this first quarter. And while I don't have the exact numbers, I think that number is going to be close to 7% a leach. And I think that's a pretty good number going out into the year for both.

So, our efforts were to be proud and happy that that throughput for the JVs were doing so well, but to get our freestanding, and we've done that through our sales and I'm going to go back and obviously we are pounding that, it really has to do with our differentiation and quality. We are really starting to see, between the consolidation in the market and us being a difference maker, we are getting our better share.

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Jason Plagman, Jefferies LLC - Analyst [6]

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Good. Thanks guys.

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Operator [7]

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Frank Morgan, RBC Capital Markets.

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Frank Morgan, RBC Capital Markets - Analyst [8]

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Good morning. On the topic of LifePoint, the JV there and the details on that very thoughtful rollout, I'm curious. Would you say that this sort of minimizes any kind of integration risk? And will there be any, for example, any home care, home based conversions going on, say, at some of those LifePoint locations that are initially managed that will flip over later into the joint venture? Is that one of the reasons you structured it this way?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [9]

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Josh could get probably a little more specific on why we structured it that way, but really it's not. It had to do with some 36 (inaudible) issues, some management issues, some issues that LifePoint had to get I guess approval from their existing relationships. So, that really is the majority of the phases. It's not in regards to ingestion issues on conversion, and it's really not a P&L effect. So that's the first part of that.

Secondarily, when we say we are going to integrate it, whether it's in January, April or September, those trigger immediate conversions to home care, home base in a 60-day period, and that's regardless of the structure of Manco or ownership.

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Frank Morgan, RBC Capital Markets - Analyst [10]

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Got you. I think you also mentioned your capacity for acquisitions. And I'm just curious. What is your I guess appetite there from a leverage standpoint? What would you be willing to tolerate? Obviously, you've got some availability right now, and you've got good free cash flow, but what would be your tolerance if the right deal came along?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [11]

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That last part is the important part. When the right deals come along, we are -- we've said this, that we are quite comfortable in the 3 to 3.5 times leverage range, and so we're thinking that way. If something larger were to come along that would push us over that number and maybe into the 4s for some short period of time and you thought that it would bring it back down, none of that scares us away from a process or looking at any opportunity.

But to be quite honest, the deals that are the most accretive to us and have the best long-term potential are not the biggest deals where there are big processes and where you're looking at a $200 million or $300 million deal.

LifePoint, for example, was $70 million in existing revenue, and we are going to roll that out and, as we said, over the next few years, build out their current system. But they continue to grow, and we continue to grow with them. So we are looking at a $200 million to $250 million revenue stream. That's really the way we would like to grow. So, the robust pipeline that we are talking about now is a pipeline that has opportunities that look similar to that lifeline -- to that LifePoint opportunity. Different sizes. But what's changed for us is the hospitals and health systems used to come to us primarily one-offs in a pipeline, so one stand-alone hospital. And some of them were big, but it was just one. Now, we seem to have got to a level where we have a healthy mix of systems that are involved. So, in one transaction, you have multiple hospitals that you are bringing on.

And the last thing I'll talk about in capacity, I don't know how much -- this is probably not the time to get into a lot of detail about that, but LHC has grown since its inception in 1994 by doing higher, more highly accretive, smaller transactions. So we've always added multiple locations. And back in 2008, in that single year, we had added -- what was it, Eric?

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Eric Elliott, LHC Group, Inc. - SVP Finance [12]

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About 70.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [13]

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Yes, right at 70 locations in that year. So within our operating team, we have capacity of people, tiger team of people to go out and do these -- help do these transition periods whenever we have a smug of acquisitions that come through. So (multiple speakers)

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Don Stelly, LHC Group, Inc. - President, COO [14]

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(multiple speakers) steady, Keith. And that's what I was alluding to in the comments. We had got a few anecdotal questions about, look, is the LifePoint transaction an integration, because it's being stretched out, going to kind of streamline the capacity for you to do other things. The answer to that is absolutely not.

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Frank Morgan, RBC Capital Markets - Analyst [15]

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Got you. And then, just for clarification, on this deal backlog, are these just acquiring agencies from hospitals or are these potentially joint ventures that are also part of that $100 million plus revenue deal backlog?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [16]

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Yes, I mean they are almost all joint ventures. We might have -- we might have one or two freestanding deals. Most of this is joint ventures at this point.

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Frank Morgan, RBC Capital Markets - Analyst [17]

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Okay, so just the way you've been doing it. And then two, just sort of technical questions, just out of curiosity, when you talk about that secondary market development where you have a CON but you don't have an agency, how does that get treated when you open one in that market? Does that get thrown in with the same-store volume count, or how do you count that?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [18]

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Yes, it sure does. And that's what we call the de novo or the greenfield opportunities and it rolls into organic growth.

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Frank Morgan, RBC Capital Markets - Analyst [19]

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Got you. And then finally and -- last question, any guidance? Obviously, you have an EPS guidance for the first quarter. But any general guidelines about what that minority interest line would look like in the first quarter? Thanks.

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [20]

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I'll get that --

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Keith Myers, LHC Group, Inc. - Chairman, CEO [21]

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We are sitting here looking at each other. We don't have that in front of us. So we can follow up with you after the call with that.

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Frank Morgan, RBC Capital Markets - Analyst [22]

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Okay, that's fine. Thank you very much.

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Operator [23]

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Bill Sutherland, The Benchmark Company.

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Bill Sutherland, The Benchmark Company - Analyst [24]

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Thanks. Good afternoon. Good morning. I'm curious on the hospice business. Could you talk a little bit about the organic trend there? I don't think you break that out in your press release.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [25]

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Bill, are you speaking of growth, revenue, admissions?

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Bill Sutherland, The Benchmark Company - Analyst [26]

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Just simplifying that in revenue, that's fine.

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Don Stelly, LHC Group, Inc. - President, COO [27]

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I'll start off with the growth. We really believe, and although, honestly, and you will see it in the numbers, and I don't want to duck that, that the blip in the fourth quarter is not what we're going to see going forward. We had a pretty slow December in that, so I would go ahead, put your model in and look at a floor of 5% and a height of about 7.5% on the hospice growth. And I would take the margins from the third quarter and flow that out.

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Bill Sutherland, The Benchmark Company - Analyst [28]

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Okay. So seasonality or just something in particular because (multiple speakers)

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Don Stelly, LHC Group, Inc. - President, COO [29]

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Yes, it was part seasonality. But, honestly, we had a leadership blip on our East Coast and we took care of it in December and we are recovering from it now. So, going in from Q2 throughout, it's going to get back to our normal run rate.

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Bill Sutherland, The Benchmark Company - Analyst [30]

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Okay, good. On the guidance, Josh, I apologize. I got distracted when you were -- would you mind repeating the gross margin and G&A range?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [31]

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Absolutely, Bill. Gross margin for the year, we are expecting 38% to 39%, and G&A 28.5% to 29.5%. And just so you have all four of them in front of you, bad debt 1.7% to 1.9%, and taxes 40.5% to 41.5%.

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Don Stelly, LHC Group, Inc. - President, COO [32]

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This is Don. I want to go back and I want to talk about something that I think is very positive for us. First, we had a phenomenal year in hospice in 2016. But just a little more color to back up my assertion on growth -- of our 73 hospice locations, only 36 have a co-located hospice LHC Group location. And when you look, we discharge from those home healths in those co-located markets almost 2,700 patients to hospice from our home health, and we only captured about 34% of that. So our efforts to better care coordinate and collaborate are going to undertow what we think is a huge opportunity for growth as we go forward and build out this portfolio.

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Bill Sutherland, The Benchmark Company - Analyst [33]

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That's good color. Thanks. And the last question I had is I'd be interested in getting a little color on how you are managing the margins in the managed-care business, kind of what you're doing operationally or structurally there. Thanks.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [34]

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Don can maybe jump in. There's really not much you can do to manage the margin. When you accept the patients in our model, we are going to treat the patients, for the most part, payor-agnostic. So I mean, specifically, if we get a call in the middle of the night and we are going to pay overtime to send a clinician out to the home, and we're going to do that for a Medicare patient or a managed-care patient of course.

I made a comment earlier about staffing agencies. It's just the sad truth. We are seeing, in some markets, in some of the larger markets where there are agencies that are popping up to do strictly managed-care business, and they take the really low rates of managed-care payors and they put all of that business in one agency, and they actually do run a different model. So -- and part of it is you end up with a higher rehospitalization rate in those models. So there's not -- it's really on the rate side. That's where it has to come from us.

There are a lot of opportunities thought -- I'll just say this -- on the efficiency side in rev cycle. And there are two things that we are working with managed-care companies on. One is of course we have to have a rate (technical difficulty) rate that allows us to do what we need to do in the field, but there's also efficiencies that can be put in place on the rev cycle side.

Without getting into a lot of detail, let me just leave it at this. It costs considerably more to process claims for managed-care companies than it does for Medicare because you have -- there is so much back-and-forth that goes on between case managers giving permission and authorization to visit before a nurse can go out and make the visit. All that causes inefficiency. What we are trying to do is to negotiate arrangements where all of that risk shifts to us in some type of bundle arrangement where we can be held accountable on a true-up on a (technical difficulty) basis.

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Bill Sutherland, The Benchmark Company - Analyst [35]

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Great. That's kind of what I was thinking about is kind of what you're doing, not obviously with the level of care. I guess that can't be different, but just figuring you're looking for ways to make it a more efficient process in those cases. But that's good color. Thanks.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [36]

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A lot of it has to be driven by the managed-care company, and it starts with differentiation. There are a number -- quite a few high-quality home health providers that can be held accountable and can deliver high-quality service without having to be put on a strict visit-by-visit permission giving protocol by managed-care companies. So, they have to stop treating us as a commodity, and we are seeing big movement in that direction.

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Don Stelly, LHC Group, Inc. - President, COO [37]

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This is Don. In fact, and I'll offer, if you want to off-line get some real color on this, I'd be glad to do it. But this is a really important topic. And I want to just add a few key points to what Keith said. Managing managed-care should never be confused with manipulation of the managed-care care plan, or the actual treatment path. And we look at it now from the front door all the way to the back. The way we accept it, you have to understand that we have voluminous contracts with a multitude of different terms and conditions. We now have a much better process and associated technology to show our agencies what those are, and we also have a much better process of making sure that all of the documentation necessary for them facilitates that backoffice collection effort the Keith alluded to. So, we've really done a lot of work.

And then the last comment is, if you saw it in our stats, we have increased our managed-care ADC, but I would never want you to think that we are doing that in lieu of Medicare growth. Again, that is adjunctive to the industry-leading Medicare admit growth, not in lieu of it.

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Bill Sutherland, The Benchmark Company - Analyst [38]

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Great. I appreciate the color. Thank you.

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Operator [39]

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Ryan Halsted, Wells Fargo.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [40]

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Thank you. Good morning. Maybe just one last follow-up question on the gross margin topic. Is there other driving forces on the guidance related to acquisitions or any of the other -- to the LifePoint joint venture that would be impacting your gross margins?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [41]

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No, Ryan. This is Josh. It's really, for this year's guidance, as simple as the additional Medicare reimbursement cuts for this year. So -- and we were able to offset some of that. So when we look at -- we ended the year at 38.8% last year. And when you kind of normalize it for the acquisitions, that we are bringing that down to 39.5% for last year. And if you flow the Medicare cut into this year, we are coming in at the 38% to 39%. So, it's primarily driven off of reimbursement cuts and not anything else.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [42]

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Okay. That makes sense. And then moving to sort of the rest your guidance, on the revenue, if I take into consideration all of the reimbursement changes that you outline, it looks like the low end of your revenue growth range is consistent with mid-single-digit growth. How should I think about kind of the high end of your revenue range? What are some of the assumptions that you think could get you towards the high end?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [43]

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This is Josh again. You are spot on. The low end is in that kind of low to mid-single-digit growth. The high end would get you up in the more 8% to 9% home health and back up to the 10% or greater hospice growth. And that's really what's driving the bookends of the range.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [44]

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That's very helpful. And then just last, on the guidance, how should we be thinking about how that sort of organic growth could drop down to earnings? Are you assuming sort of other cost increases or any other reason why some of that organic growth might drop down at maybe a lower margin, or maybe sort of diluted -- diluting your earnings growth at the EPS guidance level?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [45]

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This is Josh. I'll start and then Don can jump in as well. But the short answer is no. But when you think about the revenue guidance, you do have about $50 million to $55 million of LifePoint that's in the revenue. That will have a lesser margin contribution than our same-store. So a $50 million to $55 million in net revenue has that effect of it. But for the remainder, I don't expect it at all to drop at lower margins for this year.

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Don Stelly, LHC Group, Inc. - President, COO [46]

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I don't either. In fact, going back to the commentary that I had about hospice, I actually am pretty bullish on what we will be able to do with those types of (inaudible) and of course that will be at a higher margin to where we were in the fourth quarter on hospice.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [47]

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Okay, that's great. Then switching gears back to the LifePoint joint venture, I'd be interested to hear how you're thinking about that $200 million to $250 million opportunity. I realize you don't want to get too far out ahead of yourself with sort of the near-term goals that you are executing on, but I'd be just curious. Are you starting to kind of identify specific hospitals in markets where you see good opportunity to bring home health and hospice? And is it -- is there a licensing requirement or what other sort of operational steps are you going to need to take before you can really start to drive that in?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [48]

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That's a good question. So, for us, it's a process just like the integration process of the existing assets. Simultaneously, while operations are in the process, Phase I of integrating the existing assets, our (inaudible) is identifying markets where LifePoint would have hospitals but does not have home health and hospice agencies. And then we are looking at each opportunity, whether we -- if it's in a state where we can open an agency, and we said look at that cost, compared to acquiring an existing small agency. Sometimes, it's actually less expensive to acquire a small agency and then rebrand that agency and attach it to that hospital. So, we are looking at that as a process, but it's not something we are waiting for. We are actually building that out now.

And in terms of the revenue, you know, we have a long history, as you know, of joint venturing in hospital health systems. So we can look at the volume of the facilities in the market and what are their plans for taking them. And we have a pretty good feel for what the revenue of home health and hospice will be in those markets.

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Don Stelly, LHC Group, Inc. - President, COO [49]

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Just to add a little bit more specificity, from an ops standpoint, we are looking at this as a three-pronged approach. One, the opportunity for better hospital to home health collaboration sits before us, clearly. Two, we have expertise in community volume acceleration that we are going to bring to those ventures, so that's the second. And Keith was really alluding to the third, and that's truly the market buildout. So we are not waiting to do those in order of that. We are actually doing them but in different phases, if you would. Obviously, it's going to be much easier and quicker to do the first two because of the sales and the quality and the differentiation than it is to go source and buy and close on those assets. We are working on that third process just as we are instituting the first two today.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [50]

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That's very helpful. Maybe one last question. I noticed it looks like you closed nine home health locations. Anything worth pointing out?

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Don Stelly, LHC Group, Inc. - President, COO [51]

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No, those were -- and I've often said this through the years. Instead of -- in fact, I can't remember since I've been here that we take one big look and close a bunch of stuff. We do our monthly operations reviews. And if there's anything on the bubble of drag, we look at it, we put it on a watchlist, and we close it. I want to be as clear as I can from any asset in LHC Group, we are not going to run them if they are dilutive. Period. And so that's just part of the course as we go through every month. And we look at them. If there's a very small market or there's something that is preclusive to success, then we will go ahead and close on. What I would say is that -- and Josh would have to correct me -- I don't know if any of those fell into provider and more so than a branch.

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [52]

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They did not.

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Don Stelly, LHC Group, Inc. - President, COO [53]

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So there was no goodwill or anything on the provider network. These are usually branches.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [54]

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Those wouldn't happen to be PCR states or any other reason to worry about that?

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Don Stelly, LHC Group, Inc. - President, COO [55]

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No, no. Look, PCR is a bidder of its own, but we are at a 98% success rate today. So no, that has nothing to do with it.

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Ryan Halsted, Wells Fargo Securities, LLC - Analyst [56]

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All right, great. Appreciate that. Thanks for taking my questions.

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Operator [57]

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Dana Hambly, Stephens.

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Dana Hambly, Stephens Inc. - Analyst [58]

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Thanks. Good morning. A couple of questions. One, on the second -- expanding into secondary markets, how much of your guidance, your revenue growth, depends on executing on that de novo strategy this year?

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Don Stelly, LHC Group, Inc. - President, COO [59]

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Very little. That's our upside that Josh was talking about on that growth of both 10% and above 7% on home health.

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Dana Hambly, Stephens Inc. - Analyst [60]

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Okay. That's helpful. And I think, last quarter, in the CBS business, you talked about staffing up in Tennessee, and that hit the margin. It looks like that came down. I just want to make sure we are all set there. And the second part of that is what makes some states structurally like the great state of Tennessee better than others where you can expand your service lines?

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Don Stelly, LHC Group, Inc. - President, COO [61]

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I'll take the first part on CBS. That had nothing to do with the inability to staff and everything to do with the weather in Tennessee that was in that period. It's such a substantive part of the CBS business, and I'm speaking of Elk Valley specifically, that that's what you saw in that. On the same specificity, it's all over the board, as you know, for CBS. Is the question regarding CBS or in the portfolio in general?

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Dana Hambly, Stephens Inc. - Analyst [62]

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I think it's where you can incorporate CBS with home health and hospice. I think we've heard from others that it's better in some states than -- and in others, it's just kind of futile to do something like that. I don't know if that's been your experience or not.

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Don Stelly, LHC Group, Inc. - President, COO [63]

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Absolutely.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [64]

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Absolutely. This is -- I don't think we answered this part of the hospice question exactly. But our strategy is, over the next four to five years, and it may take a little longer than that, but our clear strategy is to have hospice co-located in every market where we have home health. And by co-located, we mean same building, one suite for hospice, one suite for home health where the staff is not shared, thus they're separate. You may share some administrative staffers, you have a common working area, and all of that creates communication and operational synergies with employees and that ends up moving patients to the right -- helping patients move to the right setting. We've tried it different ways.

But I know your question wasn't about hospice, but if the reimbursement for CBS was there in every state, we would have all three of those services, because they are all that important. But unfortunately, it's not. It's a state reimbursement. So any time we go into a new state, we take a really deep dive not just looking at what the current reimbursement is, but what is the forecast for that state, the political climate, the underlying financial ability of the state and where do we think it's going. And we normally go to some -- one of the well-known outside firms. And I don't mind saying, I've said before, we use modeling now for that. There are other people do it as well. But if we're going to go into a new state with CBS, we are going to have over the course (inaudible), we are going to bring that into our boardroom. First I'll call a stand-up committee and we're going to dive into it and make sure we are comfortable there.

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [65]

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This is Josh. The only thing I would add is your recollection is very accurate. We talked about the contract labor spike in the third quarter of last year, and that it really took our SWB as a percent of revenue for the CBS service line higher than it had historically been, and we saw that come back down in the fourth quarter and where we are running so far this year. So there was a little bit of a contract labor pickup in the third quarter. That has now normalized back down.

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Dana Hambly, Stephens Inc. - Analyst [66]

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Okay, I appreciate that. Last one for you, Josh, your cash taxes were quite a bit lower in 2016 and 2015. I'm just kind of thinking. Were there any timing reasons for that, and then how should we think about cash taxes in 2017?

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Josh Proffitt, LHC Group, Inc. - EVP, CFO, Treasurer [67]

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Yes, no, you are exactly right. It was all timing-related. In light of the historic flood activity that we experienced here in Louisiana, the IRS actually gave us a reprieve and an extension on taxes. So, our Q3 and Q4 taxes ended up getting paid in January of this year instead of getting paid in the fourth quarter last year. So, it's nothing more than timing.

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Dana Hambly, Stephens Inc. - Analyst [68]

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Got you. Thanks very much.

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Operator [69]

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Bill Bonello, Craig-Hallum.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [70]

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Good morning guys. Just a couple of questions on the regulatory and legislative environment. Is there, first of all, is there anything in the American Health Care Act that's either a concern or an opportunity for you? And then, along with that, what have you seen so far, or what might you be expecting from the Trump administration in terms of rolling back regulations, whether it's PCR or mandatory bundles or other things that impact you?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [71]

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So, there's nothing I know of that has a positive impact on us in the new proposed reform legislation. I have Richard v nodding his head. He just came back Washington, D.C. yesterday from a partnership meeting. So as far as we know right now.

The other part I think is where I believe there are some positives. With this new administration, we have new leadership that will be over at Health and Human Services. Dr. Price has been -- he is a physician, which is great, and has been a strong supporter. I think it would be safe to say he's been a champion. It would be fair to say he's been a champion of the home health industry. So that's great to have a friendly there.

But also, this whole administration brings with it an environment where common sense, best business value practices, are what get attention, and politics plays less and less of a role. And I think that's really good for home health, because I've been doing this a long time. And home health for a long time has had an incredible value proposition, but we haven't had the big lobby dollars behind home health that some of the other providers we are competing with have. So, I think that's opening doors for us.

And at the same time, we are increasing our lobbying efforts in Washington, D.C. I think you are all familiar with the partnership. The partnerships continue to grow, and growing memberships represents for most parts the larger providers. And we have two large firms engaged representing the industry on a full-time basis in Washington, D.C. in concert with the counselor state associations and the National Association of Home Care. Everyone is working. We are just putting more dollars into that effort. And we are not just out there doing it with politics.

So, I'm sure you've heard that there's not a proposal, but just essentially a white paper that was put out for a remodeling of home health episodic payments, and it's a possibility. We don't know if it will have traction or not, but we are not sitting around waiting to see if it will have traction. The partnership has already engaged Dobson and DaVanzo to do a very deep dive into that paper so if it -- and that will be -- the final -- we'll have initial report in April, right, Richard? And a final report in June before the proposed rules come out, so we will be prepared to fight that vigorously if it does end up in the proposal. But of course, we also have a great working relationship with CMS. So our first -- what we are doing now is trying to persuade them to not move too quickly and make a mistake and let us advise them on maybe better ways to achieve their objectives. So, I feel really good about where we are positioned.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [72]

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Okay, that's helpful. Just as a follow-up to that last point, is that white paper -- I think that must be the groupers or whatever -- is that one of the biggest perceived risks that you have out there right now in terms of what could happen with reimbursement for home health?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [73]

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I don't know if I would call it a big risk, but I don't know of any other reimbursement-related home health risk that's out there. I am -- obviously, I'm feeling pretty good about things in Washington, and good is relative. It maybe just means it was really bad for a lot of years. But I think there's a real opportunity for us to get some relief from burdensome regulations that cost us a lot of money. And to home health providers, the elimination of some of these burdensome regulations that really add no value to the system and do harm to patients and costing the system by delaying patients moving downstream out of an inpatient setting to the home health setting, those would reduce our costs and increase our margins for home health operators without us having to get an increase. So that's what I'm optimistic about. I think that's worth more to us than an increase in reimbursement.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [74]

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Okay. Thank you. And then just one final question, just thinking out a year, are you able to project how you will perform under the value-based purchasing in the markets where that's been implemented? Do you have enough data to be able to sort of do a preliminary run and see what kind of bonus payment you think you would end up getting?

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Keith Myers, LHC Group, Inc. - Chairman, CEO [75]

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I don't think we can do anything that we would forecast with, because we don't have anything final in the regulation. So, obviously, what our quality scores are, whatever the withhold would be, we would get a distribution. As it's proposed, we would get a distribution that would be 100% of Medicare reimbursement plus something. So, we can certainly calculate that that would be positive, but we don't know how much. So, we haven't model it.

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Don Stelly, LHC Group, Inc. - President, COO [76]

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And all I'll add to that is Keith is absolutely right. Here's what we do know is where we are sitting with our quality and our internal data on TPS, we certainly wouldn't get a hit.

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Bill Bonello, Craig-Hallum Capital Group - Analyst [77]

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Great. Thank you very much.

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Keith Myers, LHC Group, Inc. - Chairman, CEO [78]

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Eric?

All right, Liz, Okay. Thank you, everyone, for dialing in. And as always, if you have any follow-up questions, we make ourselves available to you. Eric Elliott is available here in the office. If you need to speak with anyone else or would like to speak to anyone else on the management team, we will make time for you. So thank you for your support, and look forward to talking to you again next quarter.

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Operator [79]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.