Greetings, welcome to the Amedisys Third Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

At this time, I’ll turn the conference over to Nick Muscato, Vice President of Strategic Finance. Nick, you may begin..

Thank you, operator and welcome to the Amedisys Investor Conference Call to discuss the results of our third quarter ended September 30th, 2019. A copy of our press release, supplemental slides and related Form 8-K filings with the SEC are available on the Investor Relations page of our website.

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

Before we get started with our calls, 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.

Company assumes no obligation to update information provided on this call to reflect subsequent events, other than is required under applicable securities laws. These forward-looking statements may involve a number of risks uncertainties, which may cause the company’s results or actual outcomes to differ materially from such statements.

These risks and uncertainties include factors detailed and 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 measures mentioned during our call today to the most comparable GAAP measures will also be available in our Form 8-K.

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

Thanks, Nick and welcome to the Amedisys 2019 third quarter earnings call. I’m very proud of our performance this quarter, as we have once again generated very strong financial results, while continuing to deliver on our four strategic pillars, as well as rigorously prepare for whatever the New World post-PDGM will be in 2020.

Again, our strategic pillars define us as a company. Our success over the last four years is largely due to our focus and progress in these four areas. As long as our patients, employees and referral sources continue to define success along these same lines, we’ll endeavor to make progress on our four pillars.

So, growth, our organic growth in Home Health was particularly strong as we hit 5% Medicare fee for service growth. This is our highest quarterly growth rate since Q3 2010.

On the inorganic front, we continue to work a full Hospice tuck-in pipeline, while streamlining our internal acquisition, integration and absorption process as we prepare for industry disruption in Home Health early next year. We also have continued our de novo success with seven de novos currently operating ahead of our initial projections.

And we have an additional four to six de novos targeted for the remainder of the year. We’re continuing to look to build and buy in Hospice, by opportunistically In Home Health, once we see what PDGM looks like, and build networks to expand our Personal Care coverage as well as innovate to allow more people to stay in their homes.

Now to people, we drove total voluntary turnover to approximately 16%, down from 17% in the second quarter, and for the month of September, we achieved a 14.9% turnover rate. This is our best ever. Let’s talk about operational efficiency.

We had 41% of our visits completed by LPNs and 43% of our visits completed by PTAs by the end of the third quarter, up from 39% and 42%, respectively during Q3 of last year. This will help continue to drive margin improvement.

And now to quality, we achieved a quality of patient care star score to QPC of 4.27 and we had over 13% of our care centers at 5 stars, while 90% of our care centers were over 4 stars. Our Hospice business once again outperformed the national average in all measurement categories and is at the top of the national players.

Our performance this quarter has allowed us to increase our EBITDA guidance range from $213 million to $216 million to $220 million to $223 million, the details of which Scott will cover in his remarks.

None of these results would be possible without our over 21,000 employees’ unwavering commitment to providing outstanding care to our patients in their homes. I want to thank every one of you for helping to deliver such strong clinical, operational and financial results.

Again, it all begins with our patients and our culture of caregiving which puts them first. As you all know, this is the last earnings call prior to PDGM being implemented. As such, let’s discuss the constantly evolving and challenging regulatory and legislative scene, our PDGM preparedness and our 2020 areas of focus.

Let’s start on the regulatory front. The 2020 Home Health final rule should be released by CMS any day now. And until we see and review the actual language in the final rule, it would not be useful or wise to speculate about possible strategies from the proposed rule.

On the legislative front, we continue to make great progress, signing up co-sponsors for our House and Senate bills. As you will recall, this legislation would prohibit CMS for making rate adjustments based on behavioral assumptions and allow only for adjustments based on observed evidence of a change in provider behavior.

As of this call, I am pleased to announce we have 31 bipartisan co-sponsors for the Senate bill representing a third of the total Senate and a third of the influential Senate Finance Committee members.

In the House, we have 135 partisan co-sponsors, representing almost a third of the House and over half of the prestigious Ways and Means Committee members.

As for next steps we fully expect to see continued and growing support for this legislation from Democrats and Republicans, while we continue to push for a Congressional Budget Office or CBO score on the bill. As you all know, policy making in Washington is an ever-changing landscape and we must remain aggressive, but flexible when seeking solutions.

We and our industry colleagues remain both. Internally as we have discussed with many of you, we have been practicing and drilling for PDGM since November of 2018, when CMS finalized the 2019 rule with the new payment model.

Since then, we’ve had a cross functional team of over 40 of our best working daily to prepare our business for these pending changes. As of November, 60 care centers will be in PDGM test mode, performing most of the functions required. Thus far, the results we’ve seen have exceeded our expectations.

We’ve dug into and dissected the behavioral assumptions, trained up our centralized coding function, implemented pay practice changes that will allow us to better optimize our LPN and PTA utilization and have begun to roll out Medalogix care, so that we will have better analytics around individualized patient-specific care plans, as well as optimizing utilization management.

It has been truly inspiring to see the entire organization rally around our strategies to address the impact of PDGM.

And I want to again emphasize our intense preparation, scale, financial resources and clinical and operational expertise position us to successfully transition to the new payment model, however, it manifests itself regardless of the regulatory or legislative outcome.

Not surprisingly, successfully navigating the waters of PDGM is our biggest initiative in 2020. That said, we have a few other operational and strategic initiatives that we will be working on through the remainder of the year and all of next year. CCH integration and optimization and the ClearCare build out and actualization.

Thus far, CCH integration has exceeded our internal modeling expectations, and we look to continue that trend of staying ahead of projections entering 2020.

As you will recall, when we acquired the asset, we laid out a margin improvement and growth plan that would require initial investment in the business and cause some initial disruption as we harvest synergies. Through thoughtful planning, we’ve been able to mitigate some of the anticipated negative impact.

2020 will be a year of continued focus on ramping the business development staff within that CCH care centers and further margin optimization, as we work to make the growth and margin profile of CCH mirror the Amedisys legacy Hospice business.

Finally, last quarter, we announced an innovative partnership with ClearCare, the Personal Care industry’s leading software platform, representing 4,000 Personal Care agencies [technical difficulty]..

Ladies and gentlemen, please stand by. We’re experiencing technical difficulties. Please stand by, ladies and gentlemen, we’re facing technical difficulties. Nick, your line is open. Ladies and gentlemen, please stand by. Nick, your line is live. Please go ahead. Finally – I’m just going to start at the top.

Finally in last quarter, we announced an innovative partnership with ClearCare, the Personal Care industry’s leading software platform, representing 4,000 Personal Care agencies across the US.

Our agreement with ClearCare creates an opportunity to establish a partnership between Amedisys and Personal Care agencies using the ClearCare platform in order to better coordinate patient care.

Long-term and part of our 2020 focus, we will be building a nationwide partnership of Personal Care agencies and the technology infrastructure needed to offer Medicare Advantage plans and others a true continuum of care by combining Home Health, Hospice and Personal Care services nationwide. It’s very early days and there is a lot of work to do.

But we’re very excited about the numerous opportunities this partnership presents us with. Thus far, early results have been extraordinary, with 880 Personal Care agencies, representing 90,000 caregivers in every state we operate in, having already signed up to participate in the partnership with Amedisys.

As you can see, we had another great quarter, and have continued our outstanding performance in 2019. Again, thank you to all the Amedisys’ employees for all you’ve done to drive this success. You continue to prove that no matter what the circumstances, 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?.

Thanks, Bob. I’m very happy to report on another impressive quarter of results, which once again was driven by excellent financial performance across all three of our segments.

For the third quarter of 2019 on a GAAP basis, we delivered net income of $1.03 per diluted share an increase of $0.07 on $495 million in revenue, an increase of $77 million or 19% compared to 2018. For the quarter, our GAAP results are impacted by income or expense items that we have characterized as non-core temporary or one-time in nature.

Slide 14 of our Supplemental Slides provides details regarding these items in the income statement line items each adjustment impacts. For the quarter on an adjusted basis, our results are as follows. Revenue grew $77 million or 19% of $495 million.

EBITDA increased $12 million or 25% to $57 million, EBITDA as a percentage of revenue increased 70 basis points, and EPS increased $0.20 or 21% to $1.15 per share. We’re very pleased with our Q3 performance, there were a couple of items that I’d like to highlight that positively impact our results.

Our health insurance expense for the quarter was flat sequentially, with typically experiences 10% to 12% increase in Q2 to Q3. As such, our health expense was approximately $2 million below our internal expectations. Additionally, reductions in workers’ compensation reserves benefit the quarter by approximately $2 million.

Turning to our third quarter adjusted segment performance. In Home Health, revenue was $312 million, up $17 million or 6% compared to prior year, driven by a 6% increase in same-store total volumes. On a same-store basis, Medicare admissions were up 5%, episodic admissions were up 8% and total admissions were up 9%.

Medicare revenue was up 2% impacted by our Medicare recertification rate of 37.2%, a 180 basis points lower than prior year and further impacted by an increase in price concessions. Medicare revenue per episode was up 2%. Visiting clinician cost per visit increased $0.90 compared to prior year driven mostly by planned salary increases.

Overall, cost per visit was up $0.81 compared to prior year on a 3% increase in total visits. Our gross margin improvement of a 110 basis points was driven by volume and rate increases across all payers as well as the 2.8% improvement in utilization.

Additionally, our planned shift and clinical mix resulted in a $600,000 reduction in cost of revenue for the quarter. Segment EBITDA was $47 million, up $3 million with an adjusted EBITDA margin of 15.1% representing a 10 basis point improvement.

Other items impacting the third quarter results were our Home Health segment include; non-Medicare revenue per visit increased 1.6% and G&A as a percentage of revenue was 24.3% for the quarter, which is up a 100 basis points compared to 2018. By shifting our staffing model and raises drove approximately 70 basis points of the increase.

Now turning to our Hospice segment results, which include our CCH and RoseRock acquisitions. For the third quarter, revenue is $162 million, up $59 million over prior year, an increase of 57%. Same-store average daily census was up 5% and same-store admissions were up 4%.

Segment EBITDA was $32 million, up $14 million over prior year, an increase of 47%. Net revenue per day was up $7.96 and cost of service per day was up $4.79 from prior year. Our segment EBITDA margin and operating metrics were impacted by the inclusion of the CCH acquisition in our third quarter 2019 results.

Excluding the impact of the CCH acquisition, our Hospice segment EBITDA margin was up from prior year. For the quarter, the CCH acquisition added $46 million in revenue and $7 million in EBITDA in our Hospice segment. The acquisition added $1.4 million in corporate costs, which resulted a net $5.7 million in consolidated EBITDA contribution.

Year-to-date, the CCH acquisition has added revenue of $123 million and $13.6 million in consolidated EBITDA. We’re very pleased with our performance to-date and are confident in our ability to grow top line and expand margin. Our Personal Care segment generated approximately $21 million in revenue in the third quarter and grew billable hours by 2%.

Hiring difficulties driven by the strong economy has limited our growth. Our results are comparable with the prior year as they are all inclusive acquisitions. We’re pleased with our continued progress as our EBITDA margin of the segment improved 410 basis points over prior year. Turning to our total general and administrative expenses.

On an adjusted basis, total G&A was $150 million or 30.3% of total revenue. Total G&A was up 70 basis points as a percentage of revenue compared to prior and sequentially.

Our total G&A expense for the quarter includes approximately $13 million related to the CCH acquisition, which is comprised of $1.4 million in corporate and $11.4 million in our Hospice segments. Finally, over half of the 70 basis point increase in total G&A expense is related to a change in our Home Health staffing model and raises.

As we detailed, we made purposeful D&A investments in 2019 to prepare the business for PDGM, including pay practice, redesign and staffing model changes, added sales and support employees for continued growth in all lines of business, add resources to pilot innovations and expanded our de novo process.

We generated $47 million in cash flow from operations for the quarter, which puts us at $127 million year-to-date. We’re on track to deliver in the range of $180 million for the full year 2019. DSO was 44.5 days, up approximately 4 days from prior year and 3.4 days sequentially. It was impacted by approximately 3.5 days by the CCH acquisition.

We anticipate increasing DSO upon the completion of the conversion of CCH care centers, the HomeCare HomeBase. Excluding the CCH acquisition, our DSO was 41 days which is flat from prior year. At the end of the third quarter, our leverage ratio was approximately one times and we’ve accessed over $470 million of liquidity.

On the de novo front, we are very pleased with our progress to-date and currently have 7 de novos care center operating we are targeting opening an additional 4 to 6 by the end of the year. Finally, as you can see on page 16 of our Supplemental Slide deck, we’re increasing our 2019 guidance ranges as follows.

Adjusted EBITDA of $220 million to $223 million and adjusted EPS of $4.32 to $4.39. As I mentioned, Q3 benefited from approximately $4 million as a result of lower health and workers’ compensation costs. However, we have not reduced our total health costs expectations for the year and expect to shift in the timing of costs.

The shift combined with our normal Q4 seasonality results in approximately a $6 million sequential increase in health costs in Q4. Our updated guidance ranges include this cost shift. Entering the fourth quarter, our areas of focus that we’ll ensure we continue our strong performance are as follows.

Continue Medicaid admission volume growth trends, Hospice ADC growth, minimizing CCH disruption and managing the impact performance related to our ongoing preparation for PDGM.

Related to PDGM and 2020 modeling, as we continue to update our analysis with 2019 episodic data, the Amedisys’ specific impact of PDGM, including the Market Basket Update is a negative 6.8%.

Of that 6.8%, our current view is that we can offset approximately 50% of the impact via behavioral changes, while mitigating the remainder via mix of costs levers including optimizing clinical mix and utilization. We’ll continue to refine our view throughout the remainder of the year and we’ll reassess the modeling on release of the final rule.

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

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question..

Hey, good morning guys..

Hey, Brian, sorry about that, just making a joke..

My first question as I think about your comments on organic growth you know, obviously admissions look really strong, 9% organic. But how is that translating into the Medicare revenue growth of 2%? We’ve got a lot of questions on that.

And I think investors would really want to see what the moving parts are in terms of your view on the delta between admissions and revenue growth..

Thanks, Brian. I’ll just got to take that and appreciate the question. Yeah and I think that’s a great question. And if you look at the numbers, certainly we’re excited about the top line admin growth on Medicare, we’re approximating 5% there. It’s our best since 2010, so very pleased with that. So that’s certainly helping our growth.

We also did see increase in revenue per episode of roughly 1.9%, that’s down slightly. We think that somewhat as we move through PDGM, we’re roughly running about 2.8% in prior quarters. So those are things that are helping us on the good side.

That was somewhat offset as I said in my comments, we did see you know an increase in price concessions year-over-year about $2 million, some of that’s timing related so that certainly has helped us, but the rest is really driven by a decline in recert rate, which we’ve experienced throughout the year, roughly down a 180 basis points year-over-year.

So you’re seeing that kind of pull down some of those volume numbers.

Chris, I don’t know if you want to add some more clarity there?.

Yeah. Hey, Brian, it’s Chris. So first, some raw numbers on the recert rates in the total volume. If we look at our total Medicare volume for the quarter, on admits, our admits were up 1,924 admits, but our recert decline as Scott mentioned, was down it was down 889, so we only had a net of 1035 new episodes in Q3 versus Q3 of last year.

That’s a roughly 1.4% year-over-year volume growth on the Medicare side. It’s strictly a recert issue.

What we noticed is, we had a real strong recert year last year, so 39% was our recert rate in Q3 of last year, 37.2% this year, we noticed this going into the year each of our three quarters so far this year have been lower year-over-year versus last year.

So we’re getting a little bit also of accumulation effect of recerts that were light in Q2 that carry into Q3 and the revenue is recognized in Q3 is catching up. The good news is that we know what it is, it’s internal, it’s nothing external, it’s driving it.

It’s more around you know, clinician capacity and focus that been going a lot at our agencies this year in terms of staffing model redesign, pay practice changes, PDGM preparation. We’re focused then on it, we’re chipping away. We think we’ll call back some more of that this quarter.

And we think we’ll get to where, you know, the revenue top side is reflective of the total volume as well..

And then just Brian, just from my perspective, I’ll take admission growth any day of the year. We can fix with the recert issue and I think the whole idea of are being able to produce results, which we haven’t been able to produce since 2010 on the top line is extraordinary.

I think the issue is often there’s a seesaw effect when you drive admissions and have very strong admissions of what it does from the utilization of resources is, it pushes your recerts down slightly. So I think as we balance this out, we’ll be able to push – have more modulated growth on both sides..

Now, thanks for that. And then I guess shifting to PDGM. Obviously, the rule is coming out soon. I guess Chris, if I may ask you know, what exactly are you doing in terms of prep work? And I don’t know you said in the prepared remarks that it’s hard to strategize, but I know you guys have already been doing pilot programs on the ground.

And then I guess, kind of related to that for Scott, how are you thinking about the starting rate, one of your competitors talked about their impact yesterday. So just wanted to hear your perspective and how we should be thinking about the rate based on the current rule as proposed? Thanks..

Yeah, I’ll start with the rate and let Chris dive more into our preparation work. So as I said my prepared comments, you know, we’re – our all-in rate, which is net of the good guide we’re getting on the Market Basket, which is for us is roughly 1.5% and inclusive of the behavioral assumptions that CMS has made, where our starting point is at 6.8%.

So that’s a negative 6.8% impact. You think about it on a $3,000 average revenue per episode, you’re roughly $200. So that’s kind of how we’re starting there.

You know and as I said in the comments as well, we think we can offset about half of that or about 3.4% through our behavioral changes, which is a combination of coding, comorbidity as well as loop. So that leaves us another 3.4% that overcome.

And we’re still feel very confident in the cost levers we have around visit per episode and then around LPN and RN and PTA conversions, you saw that in this quarter that we took half a visit out, we were really proud that we are able to focus on that and get those numbers moving. So I think that bodes well for our future development around that.

So I think it leaves us good opportunity. If you think about one visit just roughly and if you could kind of wait that down from kind of what’s true wherever you’re talking about $70 there. And then if you’re talking about each move, one move in LPN and RN and PTA that’s right, $20 each.

So if you think of the $200 on the top side and you know, we offset half of that with behavioral. And then you’ve got, you know, that’s a combination in a tune of another $110 coming out of the cost side, so I can give you kind of a view of where we would expect to get that coverage from..

And so I’ll add, from an operational perspective, again, we’ve been working on this since November of last year, we’ve had a group of about 40 professionals in the organization that are constantly meeting and working through this.

What we’ve done you know specifically is, we started off by tackling the coding side as well initially, you know looking at our episodes and then identifying you know episodes that have an opportunity for coding and we’ve been able to really kind of you know, reconfigure kind of our coding process, so that we’re fully done on that.

The comorbidity side we’re fully collecting the information there. So there’s really not much work to be done there as well. And then on the loop of management, you know, we’re working through that and we’ll have that, you know, kind of fully laid out by the end of this year.

And then last piece would be on the questionable encounters which you know those are basically episodes that in today’s environment don’t have a grouping home in tomorrow’ environment, we’ve been able to focus on that.

We initially start off with around 13% of our episodes and we’ve got that down to 0.3% of our 2019 episodes that now are still we’re looking for a home for. So we’ve done a lot there, we made a lot of progress there. And then the two cost levers.

Scott mentioned our visits per episode as you can see, we’re already down one half of visit year-over-year in Q3 and are moving our mix of our professionals LPNs and RNs and PTAs and PTs closer to a 50:50 mix. You know, specifically what’s happening to drive that is you know better scheduling on are far more focus there.

And we talked a lot about the pay practice change that we’re in the middle of today, that will be done at the end of this year that we think will unlock the rest of the runway for us to be able to get to that 50:50 mix..

And I think the other piece, Brian that’s important is about 20% of our – by the end of this year 20% of our care centers will be doing a lot of the PDGM, it will be like they’re living in the PDGM world. So we’ve – we're up to, I think about 50 care centers that are going to be up in doing this. So we feel good about how that’s working.

And we’ve learned a lot, we’ve been doing a fair amount of these since May. So we’ve learned a lot in the process, particularly on how to refine the coding.

But we’ve also looked – we’ve been able to drive our utilization down in this area, as well as a lot of work has been done on the hiring of LPNs and PTAs that have been beneficial from a cost perspective. So we feel you know, with 20% of our business already actually in the worst case PDGM world running effectively while we feel good where we’re at.

And we, again, I can’t thank our 40 people enough for getting us there so early and rigorously putting us through the paces so that we’ve been able to deliver as we’re going to these really good results, so we feel good about it..

And last question for me, Paul, as I think about CCH and the Hospice business, you know, Hospice is delivering good results, driving upside.

Is that mostly CCH? And how should we be thinking about your ability to continue delivering that kind of performance out of Hospice?.

I think, you know, I think CCH is on plan. So we feel good about. I mean, we’re still sticking to – we’re ahead of plan on the synergies.

I think if you saw, we basically delivered our results, we’re at, I think overall $13.8 million in on – at the end of the third quarter, so we beat already our projections for the year with CCH, so we feel good about it. We feel good about the synergy harvest that’s coming in. So the $34 million to $36 million of next year, we feel very good about.

So we just want more Hospice. So we’re – we’ve had to walk away from a couple of big deals, but we still have a really nice pipeline, the de novos are growing very well. So we continue to do that, we’re particularly seating de novos around, you know, where Chris used to play in Texas, we feel we like that space. So we feel very good about that.

And I think we feel good that – remember that $34 million to $36 million is basically just synergized. It’s not at our margin, it’s not at our growth rate. So when you add all that together, you’ve got a you know, you’ve got significant growth there in 2021..

Yeah, just real quick on Hospice performance. I would say that certainly we want to continue to you know – we have seen a little slow down, we guide it’s roughly 7% on admit growth. You see that’s a little slower. We knew were some tough comps there.

But our legacy segments still performing exceptionally well at the margin lines, you know, within our segment. I talked about you know, CCH delivering you know roughly $5.7 million, but at the segment level, it really delivers about $7.1 million, which on 46 – $46.5 million in revenue, they’re at about 15.6% of EBITDA contribution.

So you can see when you look at that from blend perspective, our legacy did great, it actually increased both EBITDA margin and gross margin. So we’re pleased with the – you know from a cost side, certainly working on the growth piece of it, but we’re happy with our performance..

Right. Thank you, guys..

Thanks, Brian. Appreciate it..

Thank you. The next question is from the line of Matthew Larew at William Blair. Please go ahead with your question..

Hey, Matt, how’re you doing?.

Hi, good morning. Chris, I wanted to follow-up a little bit on the Medicare admit stream. If you could just give us a sense for is there particular pockets of, you know, geographical regions you’re seeing strength or referral sources? You know what’s driving that, it looks like you know non-Medicare revenue was still up 16%.

So it didn’t appear to come at the expense of a growth in admit elsewhere.

Just wondering if you can go a bit more into that?.

Yeah, yeah. Thanks, Matt.

So you know we’ve obviously focused on our, you know, organic growth on the Medicare side for quite some time and we’ve been pretty clear about our strategy adding feet on the street, getting our reps out there trained, piling on the right accounts, at the right, you know, frequency and also as you know, working through any kind of operational issues that we have in some of our locations.

I’m real proud to say that, you know, the way we’re structured regionally, historically, we’ve had some, you know, over performers outshine or you know, overshadow some of our underperformers that could get us to some total growth. Today, we’re really seeing – we’re seeing growth across all of our regions in the organization.

So you know, I don’t think it’s anything particular other than us just really you know, being committed to our strategy, us selling on quality, us making sure that we have the best reps out there you know, selling a great product which is our service and I think it’s starting to gain some traction for so we have seven – we now are looking at you know, we’re looking at seven straight quarters of organic growth on the Medicare fee for service side.

So you know, we’re really excited about that and we want to continue to push for that..

Okay.

And then I just want to follow-up on the ClearCare partnership Paul you gave us some of the high level statistics in terms of signups, but could give us a sense for how you expect this to influence and contribute to the business and what kind of timeline we might see for you know, the signups the Personal Care agency is actually contributing to potentially top line for you?.

Yeah, I think I’m going to let – I’m going to – I’ll give you the top line on that. And then I’ll turn it over to Chris, because it’s reporting into him. I think the initial piece is what we hope for and what we’re testing out, we still have to roll out our test piece of this. So we’re still signing people up.

And I think our simple philosophy there is, the best way to be in these businesses is utilizing a network sort of approach and so that’s what we’re trying to migrate towards. The idea, of course, is that we actually – what we see every day is a desire to move back and forth between Personal Care and Home Health, and Personal Care and Hospice.

And we want to establish that ability to do that. So we can provide continuous care for our patients. And that was so initially we think we’ll start to see that in cross referrals. We’ve already seen where referrals on both sides. So we’re encouraged by it, very early days, very small amounts. But we’re encouraged by that.

The other thing we’ve been encouraged by is managed care, has come to the table and are very interested obviously in an ability for us to have the full care continuum, hopefully integrated, we haven’t built the integration tool for that.

So that’s what we’re working on now how to link in ClearCare with our HomeCare HomeBase data that we have, so that we can have one full view of this and build out continuous care plans. So that’s what we’re focused on.

I think once we do that, we’ll be in a very unique position to start to take risk and optimize caregiving and do it at the lowest cost with the best outcome. So managed care seems to be very interested in that. We’ve made a lot of calls thus far and have had some much more interested conversations.

I don’t know if Chris want anything to add?.

Right, and I think you laid it out well. I think the important thing is what you all should be seeing from us and hearing from us in the near-term is really kind of how we are connecting with these ClearCare agencies in our local markets to improve the patient outcome.

And it really comes down to you know, these Personal Care patients who has some sort of a skill need or end of life need. And they have a preferred relationship with us to where we can make that transition very smooth.

And vice versa, where we have patients and we’re discharging from our Home Health services or Hospice services, they still have some needs and functional limitations in the home. We already are seeing the cross referrals happen, again, we haven’t even really automated the system. It’s still on a manual process.

But you know, just by virtue of us being in the same markets and having the same kind of aligned goals, we’re seeing patients moving between us, from us to them and them to us which you know, that’s step one and now is we got to turn that into a better patient outcome and utilize the data as well and then that’s going to get us you know, the good traction in the audience with the with the plans on down the road.

Near-term, it’s really getting from a manual process to an automated process. We’re working on that right now. We haven’t done a formal rollout to all of our locations.

So what we’re getting today is actually just kind of organically happening based on the excitement, but we will have everybody trained up and rolled out by the end of this year that have signed up in markets where we overlap with them..

I think from a bigger strategic perspective, Matt, what’s interesting to us is, we want to be able to not just buy and own everything out there. But if we’re going to be really an ageing in place company, we’re going to need to partner, we’re going to need to be able to bring services that fundamentally and potentially we won’t own.

So we’re again trying to build in that infrastructure so that we can, again, as people want to age in place and as there is – as the world moves towards ageing in place and staying in the home, we’re going to need to bring in types of services that potentially will have to contract with and build networks around and not necessarily own..

Great, thank you..

Appreciate it..

Our next question comes from the line of Justin Bowers with Deutsche Bank. Please proceed with your questions..

Hey, Justin..

Hey, Paul and team. Good morning, everyone. I appreciate the pre-call music, I don’t need that second cup of coffee after that. So, thanks..

[indiscernible]..

So you guys had a tough comp on Medicare same-store revenue, I mean, you’re 10% at this time last year, and you know, admissions are at record levels.

So, is it fair to just in terms of trajectory of, you know, same-store growth in next couple of quarters with what seems like you know, recerts will maybe pick up a little bit? Is it fair to say maybe we’ve kind of hit the lows in terms of as comp season as kind of the volume pulls through? We’ve kind of maybe hit the trough in terms of Medicare same-store revenue? And then how should we be thinking about the recert rate over the next couple of quarters? And I do appreciate especially as PGM kicks in that you know, the admissions matter more, but the recert rate is picking up a little bit, and just wondering if you know, if we should – you know how we should be thinking about that?.

Yeah. hey, Justin it’s Chris. You know, thanks for the comments. Yeah, it was a tough comp.

But what we’re looking at is as we identify kind of a dip in our recerts in Q2, we’ve been focusing on that making sure that we have the capacity with our clinicians for you know, the admissions and the recertification as we saw a tick up as a percentage of completed episodes in Q3.

We anticipate an additional kind of pick up Q4, I think we’ll get back to kind of what will be normalized state you know of our total growth, total volume being in that – Medicare volume being in that 5% to 6% range and that should reflect – be reflective in revenue prior to any PDGM impact when I look at Q1, Q2 of next year.

We don’t anticipate PDGM to impact our recertification rates negatively or positively. So you know, I think your question is, should we see kind of Q3 as the trough and that was kind of coming back to where our top line revenue is reflective of our total volume growth I would say, yes..

Okay, got it and then just one quick follow-up. I appreciate the additional disclosure on the net effect that you guys are seeing which versus kind of my older data looks like 140 basis point improvement, Scott it sounded like in your prepared comments that that’s really just kind of looking at your current mix 2019.

Is that a fair – am I understanding that correctly?.

I think that’s fair. I mean, you know, when the first data first came out around the modeling, you know, they were using 2017 data. So you continually have new episodes coming through, you had other changes to reimbursement coming through with the 2018 final rule, the 2019 final rule. So that’s what we’re seeing there.

I think it’s, you know, this has been pretty close to our modeling and kind of from early in the year some small movements, but it’s been pretty stable for us..

Okay, thank you and great execution this quarter..

Thank you..

Thanks, Justin, appreciate it..

Thank you. The next question is from the line of Joanna Gajuk with Bank of America. Please proceed with your questions..

Good morning. Thank you. So just a couple –.

Hey, Joanna.

How’re you doing?.

Hi, how are you?.

Good..

So just a couple of follow-ups. So first I guess just the PDGM. So I appreciate did a commentary of how you envision offsetting the different pieces.

So how should we think about how quickly it’s going to go effective? You know, I guess when you start reporting this quarter under PDGM, and it sounds like you’re going to have everything in place essentially by the end of the year, so that once I guess, you know, 100% goes live, you know, or the 100% just as are live on PDGM.

So we kind of should just see how this plays out right away or you’re kind of anticipating more of a ramp up for Q1, you know, there’s still you know some things that you know, maybe not fully in place, and then you know by say mid-year, everything is in place, so any commentary on kind of the ramp up there?.

I think you’ve got to join. I’m going to let Chris go into the details, but I think the way you’re thinking of it is, I think the coding piece will largely be under control. Chris has been and our excellent coders have been really getting this under control.

But I think the migration from getting a full visit possibly, visit the half out and then getting the LPN, RN and PTA, PT ratios to an optimal place. So we’re able to pull those savings out all care centers will probably be the first two quarters..

I think you’re right. So I think if you’re looking at our all of our levers for PDGM, I’d break it again into two buckets.

One is the revenue lever, which are behavioral adjustments related to the same behavioral adjustments, the assumptions that CMS laid out, we will be done with any kind of material changes going into 1/1/20 with that, so that’s coding, that’s comorbidities and that is your kind of loop of management, if you will.

So that’s about half of our mitigation strategy. The other two will actually ramp throughout the year, which is the business per episode and I failed to mention earlier on is that part of is going to be around you know, what’s driving our management of that is our Medalogix care launch.

Paul mentioned 20% of our locations will be on Medalogix care rolling into January. We don’t have a full rollout plan until August. So it’s going to ramp throughout the year.

So when you look at a one visit per episode reduction in 2020, the best way to look at it is, you know, less than one in the first half of the year, getting to one in the middle of the year and exiting next year at probably close to one, one at one and a half and for through the whole year looks like and that one reduction.

Same goes for the other cost lever, which is our LPNs and – pay practices happening right now.

That is one of our biggest barriers moved to significant needle, that’ll be done by this year, we should clean you know January and July of next year in acceleration of us moving closer to that 50:50 ratio and when we exit next year, it should be even be more heavily weighted to PTAs and LPNs and it is to RNs and PTs.

So behavioral adjustments day one mid-year we get to our goal on cost levers, we exit next year, you know with well ahead of that, yeah..

Alright, and then I guess on that front, if CMS finalizes the payment reduction, how is that going to impact your cash flow in Q1?.

Hi, Joanna, this is Scott. We believe that’s roughly a 20-day impact. So you’re talking roughly on Medicare revenue, so we’re in a $60 million range that again will permanently adjust there. So that’s kind of where our view of it is as of right now..

And we haven’t heard anything that’s – that means the RAP is under debate. We felt very strong push back when we brought this up at CMS. So I would anticipate the phase out of the RAP will be part of PDGM..

Okay, and just to wrap it up, so I guess what comes with that along with all these changes with PDGM.

So how quickly should we see how, you know, the rest of the industry is firing under PDGM, because you mentioned you are going to wait and see how this plays out before you decide whether you want to buy or you know, acquire other assets in Home Health.

So how quickly you think you expect this to kind of, you know, show through?.

We expect two waves and I think initially with the RAP there as we’re looking at and we were trying to do some estimates to try to understand how much of the industry has actually access to financing and we think it’s very high portion of the industry does not have access to financing, when you look at the average size of some of these players.

So we think it’s going to probably go into two phases. And I’ll let Chris talk about it, because I think he’s been through this before, you know, 20 years ago..

Yeah, I think the early on was just going to be the smaller agencies that don’t have, you know, kind of cash reserves to be able to make payroll, a couple of payrolls into PDGM.

And, you know, if you think about rough math, you know, there’s an $18 billion industry, there’s roughly 12,000 agencies out there, the average agency size is a million and a half. You know, you’re going to have a lot that are going to fall into that bucket.

It’s going to be an acquisition process is going to be more of, they’re just going to – they’re going to unfortunately just go out of business and you know, it’s going to be, you know, where we exist, but there will be some opportunities for us to work through that.

And then I think that as the year goes on, you’ll probably see some of those that are able to actually navigate through PDGM, but really, they just don’t see kind of the long-term upside of just, you know, transforming the organization and we’ll likely start seeing some opportunities come up, you know, with smaller regional players out there that we can look at.

And I would also anticipate hospital-based systems, you know, that really have been working under a 20-year reimbursement program. We saw this in early 2000. Some of them may not just really kind of have the intestinal fortitude to work through a whole new, you know, transition as well.

So that could create maybe some buying opportunities for us down the road..

Thank you. [Operator Instructions] Our next question comes from the line of John Ransom with Raymond James. Please go ahead with your questions..

Hey, John..

Hey, good morning. So If I’m hearing you by the time, we get to 4Q ’20, you’re – if you take a $200 revenue that you know, as a starting point, and you get to your cost reduction, then and let’s say you offset half of that revenue that.

So am I hearing you right that – so revenue per episode would be down, say, $100, but your cost per visit could be down, you know, $180 to $200 by the time you get to 4Q? Is that fair? Or am I missing something?.

I think we’re looking at from a you know, from a cost per visit perspective, we’re looking potentially, let’s say, the shift is with one of each, maybe $40 kind of a movement there and the Redskins are going to come out, the visit reduction was going to impact my cost per visit metric.

Actually, you may see that because the fixed costs move a little bit slightly, but our total costs will go down, because I’m doing one less – on average one less visit within an episode..

And in the math that like once we get the staffing rate go through that math..

Yeah, so the staff adds what the $20, the differential was $20 for every shift you see..

Right..

Thank you. Our next question is from the line of Kevin Ellich with Craig Hallum. Please proceed with your question..

Hey, Paul thanks..

Hey, Kevin..

So you know just kind of a couple more questions on PDGM. I know you guys have talked a lot about it already.

But, you know, under PDGM more recertifications matter more since you’re shifting the 30-day episodes, just thinking about how that’s going to affect some of the moving pieces on the financial side, especially with you know, how they’re changing request for anticipated payment.

And Scott can you kind of go into some detail as to what that’s going to do to your receivables and DSO in 2020?.

Sure, so you know as we’ve talked about so we think that it’s roughly a 20-day impact to the DSO. So we think that’s probably $60 million hit there that kind of, you know, will disrupt our cash flow. So basically, if you think about where we’re running, we’re close to running a 50 – with a $59 million last quarter, $47.5 million in cash flow.

So you’re talking about a pretty much one quarter disruption of cash flow and that’ll, you know, moderate itself after the ones be kind of a permanent reset. But we’re confident in our plans will be ready for that working on our own build numbers to get those back down.

But, you know, it’ll be just from the Home Health side of the business, which is roughly $3 million is equivalent to a day..

Yeah, and we thought that the recerts are great..

Yeah. Hey, Kevin. So you know, I wouldn’t equate the 30-day billing periods to what’s going to change with the patients in terms of episodes, I mean, we’re still going to have 60-day episodes and just have 30-day billing periods.

And so the only thing that’s going to – should significantly or should change any recert rate would be a change in the type of patients that we’re admitting. We don’t really have any kind of plans around, you know, changing that materially.

So if we’re admitting the same types of patients next year that we’re admitting this year, then we should see you know, recertification rates kind of stays consistent as well as so these patient characteristics should be driving that you know, obviously not reimbursement..

Thank you. The next question – our next question is coming from the line of John Ransom with Raymond James..

Hey, sorry I just want to take one more..

Hey, you’re back..

So, yeah, yeah. Yeah so if you reduce two visits per episode, you know, that’s roughly $180 of cost that would come out. And then you get the LPN and PTA substitution, so –.

The other $20..

Yeah, if you do all that. So we’re talking $200 a visit that would – excuse me, an episode, that’s why I got trouble last time. But I think what I heard you say is that the $6.7 million gross revenue that is really going to be something like half of that. So maybe it’s $100 reduction in revenue per episode, but a $200 reduction in costs.

I mean, by the time all said and done, am I thinking – am I missing something there?.

Yeah, depending on that, if your math is right, so I think you’re dead on with the math. So just to recap that so on an episode basis, let’s because that’s easier to kind of think through this. So certainly the original that at $6.8 million is the $200.

If we’re to offset that cut that in half, so you’re right, so it’s within that episode hit of a roughly $100. So the net of that. And then if you think about taking costs in my previous example, I talked about $70 for one visit, plus, you know, on the shift another $20 for each that gets you to $110.

So yeah, anyway we were able to move up those visits coming out, then your math is right that that would certainly imply a higher reduction in that visit cost. I mean, the episode cost..

Thank you. The next –.

Go ahead..

I was just going to announce. Our next question is from Matthew Gillmor with Robert Baird..

Hey, thanks. I just had one quick clarification. So, you know, I appreciate all the commentary on PGDM.

And one of your peers called out the potential for some SWB de-levering and I just wanted to confirm when you’re talking about some of these initiatives, will that be enough to offset some of the natural growth in SWB or should we be thinking about that as a potential issue to be modeling next year?.

So we’re thinking about, you know, from a cost of revenue perspective, we still plan to, you know, do raise that 2% to 3%.

But and you back out think about staffing levels, you know, you know, this taking those kind of business out could basically we could grow this without having significant total cost increase or people increase which you certainly have fixed costs to that. So we have some abilities there, but what I would expect some mild inflation into that number.

Kind of thinking about modeling is kind of where you are today and then kind of adjust for what kind of shift on the cost side of it with LPN and RN..

Thank you. Our next question is coming from the line of Bill Sutherland with Benchmark Company. Please state your question..

Hey, Bill..

Hey, guys real quick one here on Hospice. Your ADC growth trending here at a nice mid single-digit pace.

Is that how we should think about, you know, your legacy business for the next however many quarters? And then what – I know you’re not – you’ve never said there’s going to be CCH growth, you know, within this two-year accretion model, but do you think – I mean how should we think about blended ADC growth next year, potentially from what you see now?.

Yeah, hey Bill this is Chris, I’ll take that one.

So on the legacy side, when I – when we bring up legacy and same-store, it’s really the same 81 locations that we had for several years, and I’ve mentioned this before, you know, we’ve gone pretty deep in those markets, we had an average ADC of about 45, about four years ago to we’re approaching average ADC of a 100.

So you know, getting to mid-single digits, 4%, 5%, 6%, we think it’s kind of really sustainable from here on out, that’s market expansion, and us taking a little bit of share. But obviously, the deeper the penetration, the harder is for us to continue to grow at a quick pace.

So you’re right, so we think is going to get us to that 7%-plus, you know, growth rate as a total as a division is going to be more around CCH and bringing their smaller care centers in line with kind of ours and also, you know, getting their growth rates in line with what we’ve historically seen, plus our de novo strategy, obviously, 7 de novos this year, four more coming online.

Those are going to be some new opportunities for us to you know, to drive the growth and going from 0 to you know, let’s say a 100 in those locations will be a big contributor.

But you know, mid-single digit is 5% But, you know, mid-single digit’s 5%, I think is the way you should be thinking about our legacy business, just because we’ve, you know we've had you know, several quarters of double-digit growth and this is becoming tougher and tougher to take market share on those, but we’re going to do what we can, and then we have new avenues for growth..

Our next question is from the line of Kevin Ellich with Craig Hallum. Please proceed with your questions..

Paul –.

Hey, Kevin..

Had to sneak one more in. So –.

Okay..

PDGM, you know, I guess what’s your preference? I mean, given you know, the potential changes we can see there from Medicare or legislatively, would you rather have the impact all at once in 2020? Or would you have it – would you rather have it spread out over, you know, a couple years kind of phased in, you know, what’s best for the company, and then what’s best for the industry and how – you know, how do we think about that?.

Yeah, I mean, that’s a great academic question. Appreciate it, but I think the final decision on PDGM is going to be made by others. So it’s going to be CMS and Congress. So I think, you know, as I said before, when you see a fork in the road, take it, and I think what we’re – either way for us is fine.

Our preference would be for the rest of the industry, we prefer a phase in, because we think it’s – we still think the RAP is going to be very damaging. But therefore, for the larger players, we do think it’ll provide some opportunity for M&A. But, you know, it’s really five hits you’re getting here.

You’re getting the 8%, you’re getting the real add-on elimination, you’re getting the RAP elimination, you’re getting double billing, you’re getting questionable encounters that you have to code it down to and fix that. So it’s really not a just a two Whammy deal. It’s a five Whammy deal.

And when you add all that together, it’s going to be devastating. And we just, you know, our belief is that we’re – we’ve prepped for this.

So we feel really good about it all in, if it’s the perfect storm, but we think for the rest of the industry and for the chaos that’ll sort of hurt people’s health, we think the phasing is going to be much better, because they still have to contend with all the other things that’s part of PDGM..

Thank you..

Appreciate it..

We have time for one additional question today which is coming from the line of John Ransom with Raymond James..

Hey, John..

I just want to know. This is a record for me getting back in the queue, so I think my star one buttons cannot be replaced.

So just to avoid kind of what happened today in this quarter, can you help us a little bit with segment EBITDA modeling for 4Q, I know you had some seasonal cost in Hospice, but how are you thinking about the segment EBITDA in 4Q versus 3Q?.

Thanks for joining us upon that, Scott..

Yeah, I think you got to think about still the normal – we haven’t done a lot of energy kind of from as we give guidance around breaking down the segment performance as you think about what the normal seasonality deal with.

I talked earlier about the $6 million that increase in health, you know, over 50% of that probably goes through the Home Health line. So you’ll see some pressures there that’s normal kind of other than the outset of $2 million that kind of shifted on it. So you’ll see that piece similar with workers’ comp.

So you see those kind of moves go along to the segment. We do generally see a little higher growth in Q4 will stabilize the recert rates, I think that will bode well for us.

You know, so I think that you would kind of see a similar – we kind of see it as a kind of a flattish type view going in from Q3 to Q4 just with typical other cost issues facing us and then we’ll get a full quarter raises, which is our plan, but that’ll hit as probably about $1.6-ish million additional in the Q4.

So kind of look like you know, our normal patterning. If you look at our charts in the back, we’re kind of dead on that normal progression..

Thank you. At this time, I’ll just now turn the call back over to Paul Kusserow for closing remarks..

Thanks, Rob. And I want to thank everybody who joined us on our technologically challenged call today. Thank you for that. I would also like to thank again, all of our people who delivered incredibly good results. So keep doing what you’re doing. Keep taking care of the people who need us the most.

We hope that everyone has a wonderful day and a Happy Halloween tomorrow. And we look forward to updating you on our ever evolving progress and purposeful work on the road during our next quarterly earnings call early next year. Thank you, everybody. Take care..

Thank you, everyone. This conclude today’s conference. You may disconnect your lines at this time and thank you for your participation..