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EX-31.2 - EXHIBIT 31.2 - LHC Group, Inclhc-20160331exx312.htm
EX-31.1 - EXHIBIT 31.1 - LHC Group, Inclhc-20160331exx311.htm
EX-32.1 - EXHIBIT 32.1 - LHC Group, Inclhc-20160331exx321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-33989
 
LHC GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
71-0918189
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
901 Hugh Wallis Road South
Lafayette, LA 70508
(Address of principal executive offices including zip code)
(337) 233-1307
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  
¨
 
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
  
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company  
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares of common stock, par value $0.01, outstanding as of May 2, 2016: 18,122,084 shares.



LHC GROUP, INC.
INDEX
 
 
 
Page
Part I. Financial Information
 
Item 1.
 
Item 2.
Item 3.
Item 4.
Part II. Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.

2


PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited)
 
March 31, 
 2016
 
December 31, 
 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
5,593

 
$
6,139

Receivables:
 
 
 
Patient accounts receivable, less allowance for uncollectible accounts of $28,617 and $26,712, respectively
117,761

 
110,350

Other receivables
2,507

 
2,093

Amounts due from governmental entities
964

 
1,081

Total receivables, net
121,232

 
113,524

Prepaid income taxes
1,575

 
1,949

Prepaid expenses
10,519

 
10,833

Other current assets
6,265

 
5,835

Receivable due from insurance carrier

 
550

Total current assets
145,184

 
138,830

Property, building and equipment, net of accumulated depreciation of $41,017 and $38,907, respectively
38,191

 
38,096

Goodwill
296,240

 
290,694

Intangible assets, net of accumulated amortization of $9,097 and $8,496, respectively
100,863

 
96,405

Other assets
2,375

 
2,029

Total assets
$
582,853

 
$
566,054

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
24,912

 
$
24,586

Salaries, wages, and benefits payable
39,506

 
28,098

Self-insurance reserve
11,109

 
9,636

Current portion of long-term debt
243

 
241

Amounts due to governmental entities
4,729

 
7,055

Legal settlement payable

 
550

Total current liabilities
80,499

 
70,166

Deferred income taxes
23,605

 
23,729

Income tax payable
3,415

 
3,415

Revolving credit facility
96,000

 
98,000

Long-term debt, less current portion
485

 
543

Total liabilities
204,004

 
195,853

Noncontrolling interest — redeemable
12,463

 
12,408

Stockholders’ equity:
 
 
 
LHC Group, Inc. stockholders’ equity:
 
 
 
Common stock — $0.01 par value; 40,000,000 shares authorized; 22,370,384 and 22,224,423 shares issued in 2016 and 2015, respectively
224

 
222

Treasury stock — 4,814,522 and 4,776,560 shares at cost, respectively
(38,560
)
 
(37,139
)
Additional paid-in capital
115,654

 
113,793

Retained earnings
285,392

 
277,706

Total LHC Group, Inc. stockholders’ equity
362,710

 
354,582

Noncontrolling interest — non-redeemable
3,676

 
3,211

Total equity
366,386

 
357,793

Total liabilities and equity
$
582,853

 
$
566,054

See accompanying notes to condensed consolidated financial statements.

3


LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended  
 March 31,
 
2016
 
2015
Net service revenue
$
222,552

 
$
193,079

Cost of service revenue
135,601

 
114,426

Gross margin
86,951

 
78,653

Provision for bad debts
4,601

 
5,259

General and administrative expenses
66,240

 
59,298

Operating income
16,110

 
14,096

Interest expense
(885
)
 
(545
)
Income before income taxes and noncontrolling interest
15,225

 
13,551

Income tax expense
5,342

 
4,729

Net income
9,883

 
8,822

Less net income attributable to noncontrolling interests
2,197

 
2,017

Net income attributable to LHC Group, Inc.’s common stockholders
$
7,686

 
$
6,805

Earnings per share — basic and diluted:
 
 
 
Net income attributable to LHC Group, Inc.’s common stockholders
$
0.44

 
$
0.39

Weighted average shares outstanding:
 
 
 
Basic
17,485,766

 
17,322,791

Diluted
17,633,549

 
17,489,483

 




See accompanying notes to the condensed consolidated financial statements.


4


LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Amounts in thousands, except share data)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2015
$
222

 
22,224,423

 
$
(37,139
)
 
(4,776,560
)
 
$
113,793

 
$
277,706

 
$
3,211

 
$
357,793

Net income

 

 

 

 

 
7,686

 
326

 
8,012

Acquired noncontrolling interest

 

 

 

 

 

 
372

 
372

Noncontrolling interest distributions

 

 

 

 

 

 
(369
)
 
(369
)
Other

 

 

 

 

 

 
136

 
136

Nonvested stock compensation

 

 

 

 
982

 

 

 
982

Issuance of vested stock

 
140,620

 

 

 

 

 

 

Treasury shares redeemed to pay income tax

 

 
(1,421
)
 
(37,962
)
 

 

 

 
(1,421
)
Excess tax benefits — vesting nonvested stock

 

 

 

 
651

 

 

 
651

Issuance of common stock under Employee Stock Purchase Plan
2

 
5,341

 

 

 
228

 

 

 
230

Balance as of March 31, 2016
$
224

 
22,370,384

 
$
(38,560
)
 
(4,814,522
)
 
$
115,654

 
$
285,392

 
$
3,676

 
$
366,386

 
(1)
Net income excludes net income attributable to noncontrolling interest-redeemable of $1.9 million during the three months ending March 31, 2016. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 9 of the Notes to Condensed Consolidated Financial Statements.



See accompanying notes to condensed consolidated financial statements.

5


LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
9,883

 
$
8,822

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
2,948

 
2,716

Provision for bad debts
4,601

 
5,259

Stock-based compensation expense
982

 
991

Deferred income taxes
(124
)
 
(183
)
Impairment of intangibles and other

 
79

Loss on disposal of assets
204

 
284

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(12,446
)
 
(7,026
)
Prepaid expenses and other assets
(162
)
 
(2,549
)
Prepaid income taxes
374

 
2,478

Accounts payable and accrued expenses
13,110

 
10,624

Net amounts due to/from governmental entities
(2,209
)
 
1,109

Net cash provided by operating activities
17,161

 
22,604

Investing activities:
 
 
 
Purchases of property, building and equipment
(2,622
)
 
(2,958
)
Cash paid for acquisitions, primarily goodwill and intangible assets
(10,577
)
 
(567
)
Other
273

 

Net cash used in investing activities
(12,926
)
 
(3,525
)
Financing activities:
 
 
 
Proceeds from line of credit
4,000

 

Payments on line of credit
(6,000
)
 
(13,000
)
Proceeds from employee stock purchase plan
230

 
210

Payments on debt
(56
)
 
(57
)
Noncontrolling interest distributions
(2,185
)
 
(2,242
)
Excess tax benefits from vesting of stock awards
651

 
642

Withholding taxes paid on stock-based compensation
(1,421
)
 
(1,122
)
Net cash used in financing activities
(4,781
)
 
(15,569
)
Change in cash
(546
)
 
3,510

Cash at beginning of period
6,139

 
531

Cash at end of period
$
5,593

 
$
4,041

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
749

 
$
447

Income taxes paid
$
4,466

 
$
1,787

See accompanying notes to condensed consolidated financial statements.


6


LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care primarily for Medicare beneficiaries. The Company provides home health services, hospice services, community-based services, and facility-based services, the latter primarily through long-term acute care hospitals (“LTACHs”). As of March 31, 2016, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures and controlled affiliates, operated 367 service providers in 25 states within the continental United States.
Unaudited Interim Financial Information
The condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, and the related condensed consolidated statements of income for the three months ended March 31, 2016 and 2015, condensed consolidated statement of changes in equity for the three months ended March 31, 2016, condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015 and related notes (collectively, these financial statements and the related notes are referred to herein as the “interim financial information”) have been prepared by the Company. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from the interim financial information presented. This report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2016, which includes information and disclosures not included herein.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s most critical accounting policies relate to the principles of consolidation, revenue recognition and accounts receivable and allowances for uncollectible accounts.
Principles of Consolidation
The interim financial information includes all subsidiaries and entities controlled by the Company. Control is defined by the Company as ownership of a majority of the voting interest of an entity. The interim financial information includes entities in which the Company receives a majority of the entities’ expected residual returns and absorbs a majority of the entities’ expected losses. Third party equity interests in the consolidated joint ventures are reflected as noncontrolling interests in the Company’s interim financial information.
The following table summarizes the percentage of net service revenue earned by type of ownership or relationship the Company had with the operating entity:
 

7


 
 
Three Months Ended  
 March 31,
Ownership type
 
2016
 
2015
Wholly-owned subsidiaries
 
56.7
%
 
54.6
%
Equity joint ventures
 
41.6

 
43.2

License leasing arrangements
 
0.9

 
1.3

Management services
 
0.8

 
0.9

 
 
100.0
%
 
100.0
%
All significant intercompany accounts and transactions have been eliminated in the Company’s accompanying interim financial information. Business combinations accounted for under the acquisition method have been included in the interim financial information from the respective dates of acquisition.
The following describes the Company’s consolidation policy with respect to its various ventures excluding wholly-owned subsidiaries:
Equity Joint Ventures
The members of the Company’s equity joint ventures participate in profits and losses in proportion to their equity interests. The Company consolidates these entities as the Company has voting control over the entities.
License Leasing Arrangements
The Company, through wholly-owned subsidiaries, leases home health licenses necessary to operate certain of its home nursing and hospice agencies. The Company owns 100% of the equity of these subsidiaries and consolidates them based on such ownership.
Management Services
The Company has various management services agreements under which the Company manages certain operations of agencies. The Company does not consolidate these agencies because the Company does not have an ownership interest in, and does not have an obligation to absorb losses of, the entities that own the agencies or the right to receive the benefits from those entities.
Revenue Recognition
The Company reports net service revenue at the estimated net realizable amount due from Medicare, Medicaid and others for services rendered. The Company assesses the patient's ability to pay for their healthcare services at the time of patient admission based on the Company's verification of the patient's insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance program. All such payors contribute to the net service revenue of the Company’s home health services, hospice services, community-based services, and facility-based services.
The following table sets forth the percentage of net service revenue earned by category of payor for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended  
 March 31,
Payor:
2016
 
2015
Medicare
74.4
%
 
74.7
%
Medicaid
1.7

 
1.4

Other
23.9

 
23.9

 
100.0
%
 
100.0
%
The following table sets forth the percentage of net service revenue contributed from each reporting segment for the three months ended March 31, 2016 and 2015:
 

8


 
Three Months Ended  
 March 31,
Reporting segment:
2016
 
2015
Home health services
72.5
%
 
75.9
%
Hospice services
13.9

 
8.7

Community-based services
4.7

 
5.1

Facility-based services
8.9

 
10.3

 
100.0
%
 
100.0
%
Medicare
Home Health
The Company’s home nursing Medicare patients are classified into one of 153 home health resource groups prior to receiving services. Based on the patient’s home health resource group, the Company is entitled to receive a standard prospective Medicare payment for delivering care over a 60-day period referred to as an episode. The Company recognizes revenue based on the number of days elapsed during an episode of care within the reporting period.
Final payments from Medicare may reflect one of four retroactive adjustments to ensure the adequacy and effectiveness of the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment if the number of visits was fewer than five; (c) a partial payment if the patient transferred to another provider before completing the episode; or (d) a payment adjustment based upon the level of therapy services required. In calculating net service revenue, management estimates the impact of these payment adjustments based on historical experience and records this estimate as the services are rendered using the expected level of services that will be provided.
Hospice Services
The Company is paid by Medicare under a per diem payment system. The Company receives one of four predetermined daily or hourly rates based upon the level of care the Company furnished. The Company records net service revenue from hospice services based on the daily or hourly rate and recognizes revenue as hospice services are provided.
Hospice payments are subject to an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of its total Medicare reimbursement from inpatient care services and the overall Medicare payment cap relates to individual providers receiving reimbursements in excess of a “cap amount,” calculated by multiplying the number of beneficiaries during the period by a statutory amount that is indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount. Beginning with the cap year October 1, 2014, CMS implemented a new process requiring hospice providers to self-report their cap liabilities and remit applicable payment by March 31 of the following year.
Facility-Based Services
The Company is reimbursed by Medicare for services provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare patient classified in that particular long-term care diagnosis-related group. For selected patients, the amount may be further adjusted based on length of stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. The Company calculates the adjustment based on a historical average of these types of adjustments for claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Revenue is recognized for the Company’s LTACHs as services are provided.
Medicaid, managed care and other payors
The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. The Company’s managed care and other payors reimburse the Company based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, the Company recognizes revenue from managed care and other payors in the same manner as the Company recognizes revenue from Medicare or Medicaid.

9


Accounts Receivable and Allowances for Uncollectible Accounts
The Company reports accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and consist of amounts due from Medicare, other third-party payors and patients. To provide for accounts receivable that could become uncollectible in the future, the Company establishes an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value. The credit risk for other concentrations of receivables is limited due to the significance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts, which have historically exceeded 55% of its patient accounts receivable, is limited due to (i) the historical collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The Company does not believe that there are any other concentrations of receivables from any particular payor that would subject it to any significant credit risk in the collection of accounts receivable.
The provision for bad debts is based upon the Company’s assessment of historical and expected net collections, business and economic conditions and trends in government reimbursement. Uncollectible accounts are written off when the Company has determined the account will not be collected.
A portion of the estimated Medicare prospective payment system reimbursement from each submitted home nursing episode is received in the form of a request for anticipated payment (“RAP”). The Company submits a RAP for 60% of the estimated reimbursement for the initial episode at the start of care. The full amount of the episode is billed after the episode has been completed. The RAP received for that particular episode is deducted from the final payment. If a final bill is not submitted within the greater of 120 days from the start of the episode, or 60 days from the date the RAP was paid, any RAP received for that episode will be recouped by Medicare from any other Medicare claims in process for that particular provider. The RAP and final claim must then be resubmitted. For subsequent episodes of care contiguous with the first episode for a particular patient, the Company submits a RAP for 50% instead of 60% of the estimated reimbursement.
The Company’s services to the Medicare population are paid at prospectively set amounts that can be determined at the time services are rendered. The Company’s Medicaid reimbursement is based on a predetermined fee schedule applied to each individual service it provides. The Company’s managed care contracts and contracts with other payors provide for payments based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. The Company is able to calculate its actual amount due at the patient level and adjust the gross charges down to the actual amount at the time of billing. This negates the need to record an estimated contractual allowance when reporting net service revenue for each reporting period.
Other Significant Accounting Policies
Earnings Per Share
Basic per share information is computed by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding during the period, under the treasury stock method. Diluted per share information is also computed using the treasury stock method, by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding plus potentially dilutive shares.
The following table sets forth shares used in the computation of basic and diluted per share information:
 
 
Three Months Ended  
 March 31,
 
2016
 
2015
Weighted average number of shares outstanding for basic per share calculation
17,485,766

 
17,322,791

Effect of dilutive potential shares:
 
 
 
Options
2,023

 
5,487

Nonvested stock
145,760

 
161,205

Adjusted weighted average shares for diluted per share calculation
17,633,549

 
17,489,483

Anti-dilutive shares
181,101

 
191,065

Recently Adopted Accounting Pronouncements

10


In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs, ("ASU 2015-3") which requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from that liability. The Company adopted this standard during the three months ended March 31, 2016. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest, which stated ASU No. 2015-3 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements; therefore, ASU No. 2015-3 will not have an effect on the Company's consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements
On May 28, 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers, ("ASU 2014-9") which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-9 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-9 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2016, the FASB issued ASU No. 2016-2, Leases, ("ASU 2016-2") which requires lessees to recognize qualifying leases on the statement of financial position. Qualifying leases will be classified as right-of-use assets and lease liabilities. The new standard is effective on January 1, 2019. Early adoption is permitted. ASU 2016-2 mandates a modified retrospective transition method for all entities. The Company is evaluating the effect that ASU 2016-2 will have on its consolidated financial statements and related disclosures.
In March 2016, as part of its Simplification Initiative, the FASB issued ASU No. 2016-9, Compensation - Stock Compensation (ASU 2016-09), which finalizes Proposed ASU No. 2015-270 of the same name, and seeks to reduce complexity in accounting standards. The areas for simplification in ASU 2016-09, involve several aspects of the accounting for share-based payment transaction, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. The new standard is effective on January 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
3. Acquisitions and Disposals

The Company acquired the majority-ownership of three home health agencies and six hospice agencies during the three months ended March 31, 2016. The total aggregate purchase prices for the Company’s acquisitions were $10.8 million, of which $10.5 million was paid in cash. The purchase prices are determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows.
The Company's home health services segment and hospice services segment recognized goodwill of $0.7 million and $5.1 million, respectively. Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting, and, accordingly, the accompanying interim financial information includes the results of operations of the acquired entities from the date of acquisition.    
The following table summarizes the aggregate consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired (amounts in thousands):


11


Consideration
 
 
  Cash
 
$
10,504

Fair value of total consideration transferred
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
  Trade name
 
2,623

  Certificates of needs/licenses
 
2,224

  Other identifiable intangible assets
 
141

  Other assets and (liabilities), net
 
69

Total identifiable assets
 
5,057

Noncontrolling interest
 
372

Goodwill, including noncontrolling interest of $308
 
$
5,819


Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certificates of needs are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a moratorium in place, the licenses are valued using the multi period excess earnings method. The other identifiable assets include non-compete agreements that are amortized over the life of the agreements, ranging from one to three years. Noncontrolling interest is valued at fair value by applying a discount to the value of the acquired entity for lack of control.
The Company conducted a preliminary assessment of deferred income tax accounting and the calculation of the final net working capital adjustment and has recognized provisional amounts in its initial accounting for the acquisition of Halcyon Healthcare, LLC ("Halcyon") for all identified liabilities in accordance with the requirements of ASC Topic 805. During the three months ended March 31, 2016, a net working capital adjustment of $0.3 million was recorded in goodwill and the provisional amounts initially recognized for Halcyon. The Company is continuing its review of these matters during the measurement period.

4. Goodwill and Intangibles
The changes in recorded goodwill by reporting unit for the three months ended March 31, 2016 were as follows (amounts in thousands):
 
 
Home health reporting unit
 
Hospice
reporting unit
 
Community -
based
reporting unit
 
Facility-based
reporting unit
 
Total
Balance as of December 31, 2015
$
202,995

 
$
58,136

 
$
17,972

 
$
11,591

 
$
290,694

Goodwill from acquisitions
721

 
4,790

 

 

 
5,511

Goodwill related to noncontrolling interests

 
308

 

 

 
308

Goodwill related to prior period net working capital adjustments............................................

 
(273
)
 

 

 
(273
)
Balance as of March 31, 2016
$
203,716

 
$
62,961

 
$
17,972

 
$
11,591

 
$
296,240

Intangible assets consisted of the following as of March 31, 2016 and December 31, 2015 (amounts in thousands):
 

12


 
March 31, 2016
 
Remaining useful life
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Indefinite-lived assets:
 
 
 
 
 
 
 
Trade names
Indefinite
 
$
63,242

 
$

 
$
63,242

Certificates of need/licenses
Indefinite
 
32,031

 

 
32,031

Total
 
 
$
95,273

 
$

 
$
95,273

Definite-lived assets:
 
 
 
 
 
 
 
Trade names
2 years — 5 years
 
$
9,127

 
$
(4,781
)
 
$
4,346

Non-compete agreements
1 month — 3 years
 
5,560

 
(4,316
)
 
1,244

Total
 
 
$
14,687

 
$
(9,097
)
 
$
5,590

Balance as of March 31, 2016
 
 
$
109,960

 
$
(9,097
)
 
$
100,863

 
 
December 31, 2015
 
Remaining useful life
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Indefinite-lived assets:
 
 
 
 
 
 
 
Trade names
Indefinite
 
$
60,762

 
$

 
$
60,762

Certificates of need/licenses
Indefinite
 
29,807

 

 
$
29,807

Total
 
 
$
90,569

 
$

 
$
90,569

Definite-lived assets:
 
 
 
 
 
 
 
Trade names
2 months — 5 years
 
$
8,985

 
$
(4,385
)
 
$
4,600

Non-compete agreements
3 months — 2 years
 
5,347

 
(4,111
)
 
1,236

Total
 
 
$
14,332

 
$
(8,496
)
 
$
5,836

Balance as of December 31, 2015
 
 
$
104,901

 
$
(8,496
)
 
$
96,405

Intangible assets of $68.6 million, net of accumulated amortization, were related to the home health services segment, $23.8 million were related to the hospice services segment, $7.6 million were related to the community-based services segment, and $0.9 million were related to the facility-based services segment as of March 31, 2016. The Company recorded $0.6 million of amortization expense during the three months ended March 31, 2016 and 2015. This was recorded in general and administrative expenses.
5. Debt
Credit Facility
On June 18, 2014, the Company entered into a Credit Agreement (the “Credit Agreement”) with Capital One, National Association, which provides a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $225.0 million and a letter of credit sub-limit equal to $15.0 million. The Credit Agreement replaced the Third Amended and Restated Credit Agreement with Capital One, National Association, dated August 31, 2012. The expiration date of the Credit Agreement is June 18, 2019. Revolving loans under the Credit Agreement bear interest at either a (1) Base Rate, which is defined as a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate in effect on such day plus 0.5% (b) the Prime Rate in effect on such day and (c) the Eurodollar Rate for a one month interest period on such day plus 1.0%, plus a margin ranging from 0.75% to 1.5% per annum or (2) Eurodollar rate plus a margin ranging from 1.75% to 2.5% per annum. Swing line loans bear interest at the Base Rate. The Company is limited to 15 Eurodollar borrowings outstanding at the same time. The Company is required to pay a commitment fee for the unused commitments at rates ranging from 0.225% to 0.375% per annum depending upon the Company’s consolidated Leverage Ratio, as defined in the Credit Agreement. The Base Rate at March 31, 2016 was 4.50% and the Eurodollar rate was 2.43%.
As of March 31, 2016 and December 31, 2015, respectively, the Company had $96.0 million and $98.0 million drawn and letters of credit totaling $9.8 million outstanding under its credit facilities with Capital One, National Association.

13


As of March 31, 2016, the Company had $119.2 million available for borrowing under the Credit Agreement with Capital One, National Association.

6. Income Taxes
As of March 31, 2016, an unrecognized tax benefit of $3.4 million was recorded in income tax payable, which, if recognized, would decrease the Company’s effective tax rate. All of the Company’s unrecognized tax benefit is due to the settlement with the United States of America, which was announced September 30, 2011. On July 30, 2014, the Internal Revenue Service (“IRS”) issued a notice of proposed adjustment asserting that a portion of the original tax deduction claimed by the Company associated with the settlement with the United States of America should be disallowed. The Company is currently appealing this proposed adjustment with IRS Appeals. The Company intends to vigorously defend its original position of the deductibility of the full settlement amount on its 2011 tax return.
7. Stockholder’s Equity
Equity Based Awards
The 2010 Long Term Incentive Plan (the “2010 Incentive Plan”) is administered by the Compensation Committee of the Company’s Board of Directors. A total of 1,500,000 shares of the Company’s common stock were reserved and 309,937 shares are currently available for issuance pursuant to awards granted under the 2010 Incentive Plan. A variety of discretionary awards for employees, officers, directors, and consultants are authorized under the 2010 Incentive Plan, including incentive or non-qualified statutory stock options and nonvested stock. All awards must be evidenced by a written award certificate which will include the provisions specified by the Compensation Committee of the Board of Directors. The Compensation Committee determines the exercise price for non-statutory stock options. The exercise price for any option cannot be less than the fair market value of the Company’s common stock as of the date of grant.
Share Based Compensation
Nonvested Stock
During the three months ended March 31, 2016, the Company’s independent directors were granted 15,300 nonvested shares of common stock under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan. The shares were drawn from the 1,500,000 shares of common stock reserved for issuance under the 2010 Incentive Plan. The shares vest 100% on the one year anniversary date. During the three months ended March 31, 2016, employees were granted 165,800 nonvested shares of common stock pursuant to the 2010 Incentive Plan. The shares vest over a five year period, conditioned on continued employment. The fair value of nonvested shares of common stock is determined based on the closing trading price of the Company’s common stock on the grant date. The weighted average grant date fair value of nonvested shares of common stock granted during the three months ended March 31, 2016 was $37.43.
The following table represents the nonvested stock activity for the three months ended March 31, 2016:
 
 
Number of
shares
 
Weighted
average grant
date fair value
Nonvested shares outstanding as of December 31, 2015
527,091

 
$
26.64

Granted
181,100

 
$
37.43

Vested
(140,620
)
 
$
25.86

Forfeited
(12,566
)
 
$
24.36

Nonvested shares outstanding as of March 31, 2016
555,005

 
$
30.41

During the three months ended March 31, 2016, an independent director of the Company received a share based award, which will be settled in cash at March 1, 2017. The amount of such cash payment will equal the fair market value of 1,700 shares on the settlement date.
As of March 31, 2016, there was $13.7 million of total unrecognized compensation cost related to nonvested shares of common stock granted. That cost is expected to be recognized over the weighted average period of 3.47 years. The total fair

14


value of shares of common stock vested during the three months ended March 31, 2016 was $3.6 million. The Company records compensation expense related to nonvested stock awards at the grant date for shares of common stock that are awarded fully vested, and over the vesting term on a straight line basis for shares of common stock that vest over time. The Company recorded $1.0 million of compensation expense related to nonvested stock grants in the three months ended March 31, 2016 and 2015.
Employee Stock Purchase Plan
In 2006, the Company adopted the Employee Stock Purchase Plan whereby eligible employees may purchase the Company’s common stock at 95% of the market price on the last day of the calendar quarter. There were 250,000 shares of common stock initially reserved for the plan. In 2013, the Company adopted the Amended and Restated Employee Stock Purchase Plan, which reserved an additional 250,000 shares of common stock to the plan.
The table below details the shares of common stock issued during 2016:
 
 
Number of
shares
 
Per share
price
Shares available as of December 31, 2015
213,760

 
 
Shares issued during three months ended March 31, 2016
5,341

 
$
43.03

Shares available as of March 31, 2016
208,419

 
 
Stock Options
As of March 31, 2016, 5,500 options were issued and exercisable. During the three months ended March 31, 2016, no options were exercised or forfeited and no options were granted.
Treasury Stock
In conjunction with the vesting of the nonvested shares of common stock, recipients incur personal income tax obligations. The Company allows the recipients to turn in shares of common stock to satisfy minimum tax obligations. During the three months ended March 31, 2016, the Company redeemed 37,962 shares of common stock valued at $1.4 million, related to these tax obligations.
8. Commitments and Contingencies
Contingencies
The Company is involved in various legal proceedings arising in the ordinary course of business. Although the results of litigation cannot be predicted with certainty, management believes the outcome of pending litigation will not have a material adverse effect, after considering the effect of the Company’s insurance coverage, on the Company’s interim financial information.
On October 18, 2013, a derivative complaint was filed by a purported Company shareholder against certain of the Company’s current and former executive officers, employees and members of its Board of Directors in the United States District Court for the Western District of Louisiana, styled Plummer v. Myers, et al., Case No. 6:13-cv-2899-JTT-CMH. The action was brought derivatively on behalf of the Company, which is also named as a nominal defendant. Plaintiff generally alleges that the individual defendants breached their fiduciary duties owed to the Company. The complaint also alleges claims for insider selling and unjust enrichment against the Company’s Chairman and Chief Executive Officer and the Company’s former President and Chief Operating Officer.
On December 30, 2013, a related derivative complaint was filed by a purported Company shareholder against certain of the Company’s current and former executive officers, employees and members of its Board of Directors in the United States District Court of the Western District of Louisiana, styled McCormack v. Myers, et al., Case No. 6:13-cv-3301-JTT-CMH. The action was brought derivatively on the Company’s behalf and the Company was also named as a nominal defendant. Plaintiff generally alleges that the individual defendants breached their fiduciary duties owed to the Company and wasted corporate assets. Plaintiff also alleges that the Company’s Chairman and Chief Executive Officer caused false and misleading statements to be issued in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and that the Company’s Directors are control persons under Section 20(a) of the Exchange Act. The complaint also alleges claims for insider selling,

15


misappropriation of information and unjust enrichment against the Company’s Chairman and Chief Executive Officer and the Company’s former President and Chief Operating Officer.
On March 25, 2014, the McCormack derivative action was consolidated with the Plummer derivative action described above and stayed. On October 7, 2015, the parties entered into a Stipulation of Settlement. On October 19, 2015, Plaintiffs filed an Unopposed Motion for Preliminary Approval of Proposed Derivative Settlement. On October 26, 2015, the District Court entered an Order Preliminarily Approving Settlement in the amount of $0.6 million. On January 11, 2016, the District Court entered its Order and Final Judgment approving the settlement and dismissing the consolidated action with prejudice. The Company's insurance carrier has funded the entire settlement amount, which was immediately releasable to Plaintiffs' counsel on January 11, 2016. The time for appeal has passed and no appeals were filed. This matter is now concluded. At December 31, 2015, the Company's balance sheet reflected the entire settlement in current assets as a receivable due from insurance carrier and correspondingly reflected the entire settlement in current liabilities as a legal settlement payable.
Joint Venture Buy/Sell Provisions
Most of the Company’s joint ventures include a buy/sell option that grants to the Company and its joint venture partners the right to require the other joint venture party to either purchase all of the exercising member’s membership interests or sell to the exercising member all of the non-exercising member’s membership interest, at the non-exercising member’s option, within 30 days of the receipt of notice of the exercise of the buy/sell option. In some instances, the purchase price is based on a multiple of the historical or future earnings before income taxes and depreciation and amortization of the equity joint venture at the time the buy/sell option is exercised. In other instances, the buy/sell purchase price will be negotiated by the partners and subject to a fair market valuation process. The Company has not received notice from any joint venture partners of their intent to exercise the terms of the buy/sell agreement nor has the Company notified any joint venture partners of its intent to exercise the terms of the buy/sell agreement.
Compliance
The laws and regulations governing the Company’s operations, along with the terms of participation in various government programs, regulate how the Company does business, the services offered and its interactions with patients and the public. These laws and regulations, and their interpretations, are subject to frequent change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations could materially and adversely affect the Company’s operations and financial condition.
The Company is subject to various routine and non-routine governmental reviews, audits and investigations. In recent years, federal and state civil and criminal enforcement agencies have heightened and coordinated their oversight efforts related to the health care industry, including referral practices, cost reporting, billing practices, joint ventures and other financial relationships among health care providers. Violation of the laws governing the Company’s operations, or changes in the interpretation of those laws, could result in the imposition of fines, civil or criminal penalties and/or termination of the Company’s rights to participate in federal and state-sponsored programs and suspension or revocation of the Company’s licenses. The Company believes that it is in material compliance with all applicable laws and regulations.
9. Noncontrolling interest
Noncontrolling Interest-Redeemable
A majority of the Company’s equity joint venture agreements include a provision that requires the Company to purchase the noncontrolling partner’s interest upon the occurrence of certain triggering events, such as death or bankruptcy of the partner or the partner’s exclusion from the Medicare or Medicaid programs. These triggering events and the related repurchase provisions are specific to each individual equity joint venture; if the repurchase provision is triggered in any one equity joint venture, the remaining equity joint ventures would not be impacted. Upon the occurrence of a triggering event, the Company would be required to purchase the noncontrolling partner’s interest at either the fair value or the book value at the time of purchase, as stated in the applicable joint venture agreement. The Company has never been required to purchase the noncontrolling interest of any of its equity joint venture partners, and the Company believes the likelihood of a triggering event occurring is remote. According to authoritative guidance, redeemable noncontrolling interests must be reported outside of permanent equity on the consolidated balance sheet in instances where there is a repurchase provision with a triggering event that is outside the control of the Company.
The following table summarizes the activity of noncontrolling interest-redeemable for the three months ended March 31, 2016 (amounts in thousands):

16


 
Balance as of December 31, 2015
$
12,408

Net income attributable to noncontrolling interest-redeemable
1,871

Noncontrolling interest-redeemable distributions
(1,816
)
Balance as of March 31, 2016
$
12,463

10. Allowance for Uncollectible Accounts
The following table summarizes the activity in the allowance for uncollectible accounts for the three months ended March 31, 2016 (amounts in thousands):
 
Balance as of December 31, 2015
$
26,712

Additions
4,601

Deductions
(2,696
)
Balance as of March 31, 2016
$
28,617

11. Fair Value of Financial Instruments
The carrying amounts of the Company’s cash, receivables, accounts payable and accrued liabilities approximate their fair values because of their short maturity. The estimated fair value of intangible assets acquired was calculated using level 3 inputs based on the present value of anticipated future benefits. For the three months ended March 31, 2016, the carrying value of the Company’s long-term debt approximates fair value as the interest rates approximate current rates.
12. Segment Information
The Company’s reportable segments consist of home health services, hospice services, community-based services, and facility-based services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, as described in Note 2 of the Notes to Condensed Consolidated Financial Statements.
The following tables summarize the Company’s segment information for the three months ended March 31, 2016 and 2015 (amounts in thousands):
 
Three Months Ended March 31, 2016
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
161,387

 
$
30,824

 
10,443

 
$
19,898

 
$
222,552

Cost of service revenue
96,712

 
19,627

 
7,727

 
11,535

 
135,601

Provision for bad debts
3,455

 
775

 
82

 
289

 
4,601

General and administrative expenses
49,558

 
8,990

 
2,079

 
5,613

 
66,240

Operating income
11,662

 
1,432

 
555

 
2,461

 
16,110

Interest expense
(678
)
 
(91
)
 
(41
)
 
(75
)
 
(885
)
Income before income taxes and noncontrolling interest
10,984

 
1,341

 
514

 
2,386

 
15,225

Income tax expense
3,850

 
420

 
228

 
844

 
5,342

Net income
7,134

 
921

 
286

 
1,542

 
9,883

Less net income attributable to noncontrolling interests
1,594

 
317

 
(43
)
 
329

 
2,197

Net income attributable to LHC Group, Inc.’s common stockholders
$
5,540

 
$
604

 
$
329

 
$
1,213

 
$
7,686

Total assets
$
400,924

 
$
111,308

 
$
33,133

 
$
37,488

 
$
582,853

 

17


 
Three Months Ended March 31, 2015
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
146,592

 
$
16,851

 
$
9,773

 
$
19,863

 
$
193,079

Cost of service revenue
85,546

 
10,099

 
6,900

 
11,881

 
114,426

Provision for bad debts
4,476

 
347

 
180

 
256

 
5,259

General and administrative expenses
46,454

 
4,888

 
2,217

 
5,739

 
59,298

Operating income
10,116

 
1,517

 
476

 
1,987

 
14,096

Interest expense
(430
)
 
(60
)
 
(6
)
 
(49
)
 
(545
)
Income before income taxes and noncontrolling interest
9,686

 
1,457

 
470

 
1,938

 
13,551

Income tax expense
3,657

 
620

 
45

 
407

 
4,729

Net income
6,029

 
837

 
425

 
1,531

 
8,822

Less net income attributable to noncontrolling interests
1,521

 
246

 
(20
)
 
270

 
2,017

Net income attributable to LHC Group, Inc.’s common stockholders
$
4,508

 
$
591

 
$
445

 
$
1,261

 
$
6,805

Total assets
$
385,653

 
$
34,019

 
$
32,971

 
$
38,321

 
$
490,964

 


18


ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain statements and information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to future plans and strategies, anticipated events or trends, future financial performance and expectations and beliefs concerning matters that are not historical facts or that necessarily depend upon future events. The words “may,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions are intended to identify forward-looking statements. Specifically, this report contains, among others, forward-looking statements about:
 
our expectations regarding financial condition or results of operations for periods after March 31, 2016;
our critical accounting policies;
our business strategies and our ability to grow our business;
our participation in the Medicare and Medicaid programs;
the impact of healthcare reform;
the reimbursement levels of Medicare and other third-party payors;
the prompt receipt of payments from Medicare and other third-party payors;
our future sources of and needs for liquidity and capital resources;
the effect of any changes in market rates on our operations and cash flows;
our ability to obtain financing;
our ability to make payments as they become due;
the outcomes of various routine and non-routine governmental reviews, audits and investigations;
our expansion strategy, the successful integration of recent acquisitions and, if necessary, the ability to relocate or restructure our current facilities;
the value of our proprietary technology;
the impact of legal proceedings;
our insurance coverage;
the costs of medical supplies;
our competitors and our competitive advantages;
our ability to attract and retain valuable employees;
the price of our stock;
our compliance with environmental, health and safety laws and regulations;
our compliance with health care laws and regulations;
our compliance with SEC laws and regulations and Sarbanes-Oxley requirements;
the impact of federal and state government regulation on our business; and
the impact of changes in our future interpretations of fraud, anti-kickback or other laws.
The forward-looking statements included in this report reflect our current views about future events and are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results

19


or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in the Part II, Item 1A. “Risk Factors,” included in this report and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), as updated by our subsequent filings with the SEC. This report should be read in conjunction with the 2015 Form 10-K, and all of our other filings, including quarterly reports on Form 10-Q and current reports on Form 8-K made with the SEC through the date of this report.
You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may differ materially from what we expect or anticipate.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is filed with the SEC. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refer to LHC Group, Inc. and its consolidated subsidiaries.
OVERVIEW
We provide quality cost-effective post-acute health care services to our patients. As of March 31, 2016, we have 367 service providers in 25 states: Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Kentucky, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin. Our services are classified into four segments: (1) home health services; (2) hospice services; (3) community-based services and (4) facility-based services offered through our long-term acute care hospitals (“LTACHs”).
Through our home health services segment, we offer a wide range of services, including skilled nursing, medically-oriented social services, and physical, occupational and speech therapy. As of March 31, 2016, we operated 284 home health services locations, of which 170 are wholly-owned, 108 are majority-owned through equity joint ventures, three are under license lease arrangements and the operations of the remaining three locations are only managed by us. We intend to increase the number of home nursing agencies that we operate through continued acquisitions and organic development.
Through our hospice services segment, we offer a wide range of services, including pain and symptom management, emotional and spiritual support, inpatient and respite care, homemaker services, and counseling. As of March 31, 2016, we operated 61 hospice locations, of which 46 are wholly-owned, 13 are majority-owned through equity joint ventures and two are under license lease arrangements. We intend to increase the number of hospice agencies that we operate through continued acquisitions and organic development.
Through our community-based services segment, our services are performed by skilled nursing and paraprofessional personnel, and include assistance with activities of daily living to the elderly, chronically ill, and disabled patients. As of March 31, 2016, we operated 11 community-based services locations, 10 are wholly-owned and one is majority-owned through equity joint ventures. We intend to increase the number of community-based agencies that we operate through continued acquisitions and organic development.
We provide facility-based services principally through our LTACHs. As of March 31, 2016, we operated six LTACHs with 8 locations, of which all but one are located within host hospitals. Of these facility-based services locations, three are wholly-owned and five are majority-owned through equity joint ventures. We also wholly-own and operate a family health center, a pharmacy, and a family health clinic.
The Joint Commission is a nationwide commission that establishes standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of health care organizations. Currently, Joint Commission accreditation of home nursing and hospice agencies is voluntary. However, some managed care organizations use Joint Commission accreditation as a credentialing standard for regional and state contracts. As of March 31, 2016, the Joint

20


Commission had accredited 264 of our 284 home health services locations and 34 of our 61 hospice agencies. Those not yet accredited are working towards achieving this accreditation. As we acquire companies, we apply for accreditation 12 to 18 months after completing the acquisition.
The percentage of net service revenue contributed from each reporting segment for the three months ended March 31, 2016 and 2015 was as follows:
 
 
 
Three Months Ended  
 March 31,
Type of segment
 
2016
 
2015
Home health services
 
72.5
%
 
75.9
%
Hospice services
 
13.9

 
8.7

Community-based services
 
4.7

 
5.1

Facility-based services
 
8.9

 
10.3

 
 
100.0
%
 
100.0
%
Recent Developments
Home Health Services
When the Patient Protection and Affordable Care Act (“PPACA”) was enacted in 2010, it changed a number of Medicare payment rates, including the reinstatement of the 3% home health rural add-on, which began on April 1, 2010 (expiring January 1, 2016). Other changes from PPACA that took effect on or after January 1, 2011 are:
 
reduced the market basket adjustment to be determined by CMS for each of 2011, 2012 and 2013 by 1%;
instituting a full productivity adjustment beginning in 2015; and
rebased the base payment rate for Medicare beginning in 2014 and phasing in over a four year period.
On April 14, 2015, legislation was passed, which limits any increase in home health payments to 1% for fiscal year 2018, and extended the 3% rural home health safeguard for two years through December 31, 2017.
On October 30, 2015, CMS released a Final Rule (effective January 1, 2016) regarding payment rates for home health services provided during calendar year 2016. The national, standardized 60-day episode payment rate increased to $2,965.12 in 2016. The rural rate will be $3,054.07. This is a net 0.01% increase in the national, standardized 60-day episode payment rate, due to application of (1) rebasing decrease of $80.95, (2) case-mix adjustment decrease of 0.97%, (3) net market basket increase of 1.9%, (4) case-mix recalibration budget neutrality adjustment increase of 1.87%, and (5) wage index budget neutrality adjustment increase of 0.11%. The home health market basket percentage increase for 2016 is 2.3% and the multifactor productivity adjustment is 0.4% for a net home health market basket of 1.9%. CMS reduced its estimate of nominal case-mix growth between 2012 and 2014 from 3.41% to 2.88% (0.53%) and spread the adjustment over three years at 0.97% each year to account for nominal case-mix growth. The finalized payment policies results in a 1.4% reduction in Medicare payments for all home health agencies.
In addition, CMS finalized its proposal to implement a Home Health Value-Based Purchasing ("HHVBP") program that is intended to incentivize the delivery of high-quality patient care. The HHVBP program would withhold 3% to 8% of Medicare payments, which would be redistributed to participating home health agencies depending on their performance relative to specified measures. The HHVBP would apply to all home health agencies in Arizona, Florida, Iowa, Massachusetts, Maryland, Nebraska, North Carolina, Tennessee, and Washington.
Hospice
On July 31, 2015, CMS released a Final Rule that updated the Medicare hospice payment rates and wage index for fiscal year 2016, which is estimated to be an increase in payment rates of 1.1%. Beginning January, 1, 2016, CMS finalized its proposal for two routine home care rates, in a budget-neutral manner, to provide separate payment rates for the first 60 days of

21


care and care beyond 60 days. In addition to the two routine home care rates, CMS is implementing a service intensity add-on payment that would help to promote and compensate for the provision of skilled visits at end of life. As finalized, fiscal year 2016 will be the seventh and final year of the Budget Neutrality Adjustment Factor for hospice. CMS updated the aggregate hospice cap to $27,820.75 for the 2016 cap year. CMS is also changing the hospice inpatient and aggregate cap year to coincide with the fiscal year (October 1 to September 30) beginning October 1, 2017. The following table shows the hospice Medicare payment rates for fiscal year 2016, which began on October 1, 2015 and will end September 30, 2016:
Description
Rate per patient day
Routine Home Care days 1-60 (effective January 1, 2016)
$
186.84

Routine Home Care days 60+ (effective January 1, 2016)
$
146.83

Continuous Home Care
$
944.79

Full Rate = 24 hours of care
 
$39.37 = hourly rate
 
Inpatient Respite Care
$
167.45

General Inpatient Care
$
720.11

On April 21, 2016, CMS issued a proposed rule updating Medicare payment rates and the wage index for hospices for fiscal year 2017, which is estimated to increase payment rates by 2%. The 2% payment rate increase is based on estimated 2.8% inpatient hospital market basket update, reduced by a 0.5% productivity adjustment, and by 0.3% adjustment set by the PPACA. The hospice cap amount for the 2017 hospice cap year will be $28,377.
Community-Based Services
Community-based services are care services, which are primarily performed by skilled nursing and paraprofessional personnel, and include assistance with activities of daily living to the elderly, chronically ill, and disabled patients. Revenue is generated on an hourly basis and our current primary payors are TennCare Managed Care Organization and Medicaid. Approximately 82% of our net service revenue in this segment was generated in Tennessee.
Facility-Based Services
On December 26, 2013, President Obama signed into law the Bipartisan Budget Act of 2013 (Public Law 113-67). This new law prevents a scheduled payment reduction for physicians and other practitioners who treat Medicare patients from taking effect on January 1, 2014. Included in the legislation are the following changes to LTACH reimbursement:
 
Medicare discharges from LTACHs will continue to be paid at full LTACH PPS rates if:
the patient spent at least three days in a short-term care hospital (“STCH”) intensive care unit (“ICU”) during a STCH stay that immediately preceded the LTACH stay, or
the patient was on a ventilator for more than 96 hours in the LTACH (based on the MS-LTACH DRG assigned) and had a STCH stay immediately preceding the LTACH stay.
Also, the LTACH discharge cannot have a principal diagnosis that is psychiatric or rehabilitation. 
All other Medicare discharges from LTACHs will be paid at a new “site neutral” rate, which is the lesser of:
the IPPS comparable per diem amount determined using the formula in the short-stay outlier regulation at 42 C.F.R. § 412.529(d)(4) plus applicable outlier payments, or
100% of the estimated cost of the services involved.
The above new payment policy will be effective for LTACH cost reporting periods beginning on or after October 1, 2015, and the site neutral payment rate will be phased-in over two years. Two of our LTACH providers have a cost report period beginning June 1, 2016 and four of our LTACH providers have a cost report period beginning September 1, 2016.
For cost reporting periods beginning on or after October 1, 2015, discharges paid at the site neutral payment rate or by a Medicare Advantage plan (Part C) will be excluded from the LTACH average length-of-stay (“ALOS”) calculation.

22


For cost reporting periods beginning in fiscal year 2016 and later, CMS will notify LTACHs of their “LTACH discharge payment percentage” (i.e., the number of discharges not paid at the site neutral payment rate divided by the total number of discharges).
For cost reporting periods beginning in fiscal year 2020 and later, LTACHs with less than 50% of their discharges paid at the full LTACH PPS rates will be switched to payment under the IPPS for all discharges in subsequent cost reporting periods. However, CMS will set up a process for LTACHs to seek reinstatement of LTACH PPS rates for applicable discharges.
MedPAC will study the impact of the above changes on quality of care, use of hospice and other post-acute care settings, different types of LTACHs and growth in Medicare spending on LTACHs. MedPAC is to submit a report to Congress with any recommendations by June 30, 2019. The report is to also include MedPAC’s assessment of whether the 25 Percent rule should continue to be applied.
25 Percent rule relief for freestanding LTACHs, HWHs and satellite facilities will be extended without interruption for cost reporting periods beginning on or after December 29, 2007 through December 28, 2016. Grandfathered HWHs will be permanently exempt from the 25 Percent rule. CMS must report to Congress by December 18, 2015 on whether the 25 Percent rule should continue to be applied.
The moratorium on new LTACH facilities and increases in LTACH beds will be renewed for the period from April 1, 2014 to September 30, 2017. Although the introductory language only refers to a moratorium extension for LTACH bed increases, the amendment to the Medicare, Medicaid, and SCHIP Extension Act (“MMSEA”) would extend both moratoriums. No exceptions will apply during this extension of the moratoriums. The original rule renewed the moratorium for the period beginning January 1, 2015; however, a provision within HR4302 accelerated the moratorium period beginning on April 1, 2014.
Not later than October 1, 2015, CMS will establish a new functional status quality measure for change in mobility of ventilator patients.
As part of the fiscal year 2015 or 2016 rulemaking, CMS is to study payment rates and regulations that apply to the special category of neoplastic disease LTACHs and may adjust such payment rates.
On August 4, 2014, CMS released its final rule for LTACH Medicare reimbursement for fiscal year 2015, which began on October 1, 2014 and ended on September 30, 2015. In the aggregate, payments for fiscal year 2015 increased by 1.1% over fiscal year 2014 rates. The 1.1% increase consisted of a 2.9% inflationary market basket update, offset by a 0.5% reduction for the productivity adjustment, and a 0.2% reduction to the market basket as defined by PPACA. LTACH payment rates were also reduced by approximately 1.3% for the "one-time" budget neutrality adjustment factor under the last year of a three-year phase-in and increased by 0.2% for wage index budget neutrality adjustment.
On July 31, 2015, CMS issued a Final Rule to update fiscal year 2016 payment policies and rates under the IPPS and LTACH PPS, which affects discharges occurring in cost reporting periods beginning on or after October 1, 2015. CMS projects that LTACH PPS rates would decrease by 6.9%. This estimated decrease is preliminary attributable to the statutory decrease in payment rates for site neutral LTACH PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years beginning on or after October 1, 2015. Cases that do qualify for higher LTACH PPS rates will see a payment rate increase of 1.7% (based on market basket update of 2.4% adjusted by a multi-factor productivity adjustment of -0.5 percentage point and an additional adjustment of -0.2 percentage point in accordance with the Affordable Care Act). CMS also finalized its proposal to implement a transitional blended payment rate (50% site neutral rate and 50% LTACH PPS rates) for site neutral discharges occurring in fiscal years 2016 and 2017.
On April 18, 2016, CMS released a Proposed Rule to update fiscal year 2017 LTACH reimbursement and policies under the LTACH PPS, which affects discharges occurring in cost reporting periods beginning on or after October 1, 2016. CMS projects that overall LTACH PPS spending would decrease by 6.9%. This estimated decrease is attributable to the statutory decrease in payment rates for site neutral LTACH PPS cases that do not meet the clinical criteria to qualify for higher LTACH rates in cost reporting years beginning on or after October 1, 2016. Cases that do qualify for higher LTACH PPS rates will see a payment rate increase of 0.3% (based on market basket update of 2.7% reduced by a multi-factor productivity adjustment of 0.5%, minus an additional adjustment of 0.75 percentage point in accordance with the PPACA, less 1.1% adjustment for high cost outlier spending in 2016, plus a 0.25% adjustment for short stay outliers in 2016). CMS also proposes to begin enforcement of the 25 percent rule which will cap the number of patients treated at an LTACH who have been referred from all locations of a hospital. Grandfathered LTACH facilities are exempt from the 25 percent rule, while rural LTACHs will have a threshold of 50% and MSA-dominant hospitals will have a threshold between 25% and 50%. CMS will have two separate outlier pools and thresholds for LTACH-appropriate patients and for site-neutral patients. For 2017, CMS proposes to increase

23


its fixed-loss threshold to $22,728 from 2016’s $16,432, to limit outlier spending at no more than 8% of total LTACH spending (2016 outlier payments may reach 9.1%). CMS is applying the proposed inpatient fixed-loss threshold of $23,681 for site neutral patients.
None of the above described estimated changes to Medicare payments for home health, hospice and LTACHs include the deficit reduction sequester cuts to Medicare that began on April 1, 2013, which reduced Medicare payments by 2% for patients whose service dates ended on or after April 1, 2013.
RESULTS OF OPERATIONS
Three months ended March 31, 2016 compared to three months ended March 31, 2015
Consolidated financial statements
The following table summarizes our consolidated results of operations for the three months ended March 31, 2016 and 2015 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):
 
 
2016
 
2015
 
Increase
(Decrease)
 
Percentage
Change
Net service revenue
$
222,552

 
 
 
$
193,079

 
 
 
$
29,473

 
15.3
 %
Cost of service revenue
135,601

 
60.9
%
 
114,426

 
59.3
%
 
21,175

 
18.5

Provision for bad debts
4,601

 
2.1

 
5,259

 
2.7

 
(658
)
 
(12.5
)
General and administrative expenses
66,240

 
29.8

 
59,298

 
30.7

 
6,942

 
11.7

Income tax expense
5,342

 
41.0

(1
)
4,729

 
41.0

(1)
613

 
13.0

Noncontrolling interest
2,197

 


 
2,017

 
 
 
180

 
 
Total non-operating expense
(885
)
 


 
(545
)
 
 
 
(340
)
 
 
Net income attributable to LHC Group, Inc.’s common stockholders
$
7,686

 
 
 
$
6,805

 
 
 
$
881

 
 
 
(1)
Effective tax rate as a percentage of income from continuing operations attributable to LHC Group, Inc.’s common stockholders.
Net service revenue
The following table sets forth each of our segment’s revenue growth or loss, admissions, census, episodes, patient days, and billable hours for the three months ended March 31, 2016 and the related change from the same period in 2015 (amounts in thousands, except admissions, census, episode data, patient days and billable hours):
 

24


 
Same
Store(1)
 
De
Novo(2)
 
Organic(3)
 
Organic
Growth
(Loss) %
 
Acquired(4)
 
Total
 
Total
Growth
(Loss) %
Home health services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
157,975

 
$
524

 
$
158,499

 
8.1
 %
 
$
2,888

 
$
161,387

 
10.1
 %
Revenue Medicare
$
119,334

 
$
373

 
$
119,707

 
5.3

 
$
2,419

 
$
122,126

 
7.4

New Admissions
38,423

 
125

 
38,548

 
7.2

 
576

 
39,124

 
8.8

New Medicare Admissions
25,610

 
79

 
25,689

 
3.3

 
447

 
26,136

 
5.1

Average Census
37,212

 
244

 
37,456

 
2.8

 
762

 
38,218

 
4.9

Average Medicare Census
27,458

 
171

 
27,629

 
1.4

 
617

 
28,246

 
3.7

Home Health Episodes
47,271

 
299

 
47,570

 
1.9

 
916

 
48,486

 
3.9

Hospice services
 
 
 
 


 
 
 
 
 


 
 
Revenue
$
19,700

 
$
866

 
$
20,566

 
22.0

 
$
10,258

 
$
30,824

 
82.9

Revenue Medicare
$
18,305

 
$
857

 
$
19,162

 
22.7

 
$
9,493

 
$
28,655

 
83.5

New Admissions
1,627

 
19

 
1,646

 
11.1

 
817

 
2,463

 
66.3

New Medicare Admissions
1,425

 
18

 
1,443

 
12.3

 
709

 
2,152

 
67.5

Average Census
1,582

 
68

 
1,650

 
21.5

 
775

 
2,425

 
78.6

Average Medicare Census
1,463

 
66

 
1,529

 
21.8

 
719

 
2,248

 
79.0

Patient days
143,991

 
6,164

 
150,155

 
22.9

 
70,539

 
220,694

 
80.6

Community-based services
 
 
 
 


 
 
 
 
 


 
 
Revenue
$
10,285

 
$

 
$
10,285

 
5.2

 
$
158

 
$
10,443

 
6.8

Billable hours
296,753

 

 
296,753

 
0.9

 
7,734

 
304,487

 
3.6

Facility-based services
 
 
 
 


 
 
 
 
 


 
 
LTACHs
 
 
 
 


 
 
 
 
 


 
 
Revenue
$
18,808

 
$

 
$
18,808

 
(2.0
)
 

 
$
18,808

 
(2.0
)
Patient days
15,537

 

 
15,537

 
(3.9
)
 

 
15,537

 
(3.9
)

(1)
Same store — location that has been in service with us for greater than 12 months.
(2)
De Novo — internally developed location that has been in service with us for 12 months or less.
(3)
Organic — combination of same store and de novo.
(4)
Acquired — purchased location that has been in service with us for 12 months or less.
Total organic revenue and patient metrics increased in our home health services segment, hospice services segment, and community-based services segment due to the successful execution of same store growth strategies.
Organic growth is primarily generated by population growth in areas covered by mature agencies, agencies five years old or older, and by increased market share in acquired and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first 24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage of growth, in the second full year of operation after the acquisition.
Cost of service revenue
The following table summarizes cost of service revenue (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue):
 

25


 
Three Months Ended
March 31,
 
2016
 
2015
Home health services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
87,412

 
54.2
%
 
$
77,653

 
53.0
%
Transportation
5,475

 
3.4

 
4,864

 
3.3

Supplies and services
3,825

 
2.4

 
3,029

 
2.1

Total
$
96,712

 
59.9
%
 
$
85,546

 
58.4
%
Hospice services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
14,013

 
45.5
%
 
$
7,092

 
42.1
%
Transportation
1,324

 
4.3

 
693

 
4.1

Supplies and services
4,290

 
13.9

 
2,314

 
13.7

Total
$
19,627

 
63.7
%
 
$
10,099

 
59.9
%
Community-based services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
7,589

 
72.7
%
 
$
6,786

 
69.4
%
Transportation
65

 
0.6

 
60

 
0.6

Supplies and services
73

 
0.7

 
54

 
0.6

Total
$
7,727

 
74.0
%
 
$
6,900

 
70.6
%
Facility-based services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
7,594

 
38.2
%
 
$
7,678

 
38.6
%
Transportation
66

 
0.3

 
56

 
0.3

Supplies and services
3,875

 
19.5

 
4,147

 
20.9

Total
$
11,535

 
58.0
%
 
$
11,881

 
59.8
%
Consolidated cost of service revenue for the three months ended March 31, 2016 was $135.6 million, or 60.9% of net service revenue, compared to $114.4 million, or 59.3% of net service revenue, for the same period in 2015. The increase in consolidated cost of service revenue was primarily due to an increase in patient admissions and census growth due to the successful execution of same store growth strategies. In addition, cost of service revenue increased in the home health services and hospice services segments by $2.1 million and $7.9 million, respectively, due to acquisitions.
Provision for bad debts
Consolidated provision for bad debts for the three months ended March 31, 2016 was $4.6 million, or 2.1% of net service revenue, compared to $5.3 million, or 2.7% of net service revenue, for the same period in 2015. In 2015, provision for bad debts in the home health segment included additional reserves for 2014 patient claims associated with two payors. Those adjustments were an isolated occurrence and increased bad debt reserves above normal levels.
General and administrative expenses
The following table summarizes general and administrative expenses (amounts in thousands, except percentages, which are percentages of the segment’s respective net service revenue):
 

26


 
Three Months Ended March 31,
 
2016
 
2015
Home health services
 
 
 
 
 
 
 
General and administrative
$
47,671

 
29.5
%
 
$
44,492

 
30.4
%
Depreciation and amortization
1,887

 
1.2

 
1,962

 
1.3

Total
$
49,558

 
30.7
%
 
$
46,454

 
31.7
%
Hospice services
 
 
 
 
 
 
 
General and administrative
$
8,472

 
27.5
%
 
$
4,567

 
27.1
%
Depreciation and amortization
518

 
1.7

 
321

 
1.9

Total
$
8,990

 
29.2
%
 
$
4,888

 
29.0
%
Community-based services
 
 
 
 
 
 
 
General and administrative
$
1,982

 
19.0
%
 
$
2,174

 
22.2
%
Depreciation and amortization
97

 
0.9

 
43

 
0.4

Total
2,079

 
19.9
%
 
$
2,217

 
22.6
%
Facility-based services
 
 
 
 
 
 
 
General and administrative
$
5,168

 
26.0
%
 
$
5,349

 
26.9
%
Depreciation and amortization
445

 
2.2

 
390

 
2.0

Total
$
5,613

 
28.2
%
 
$
5,739

 
28.9
%
Consolidated general and administrative expenses for the three months ended March 31, 2016 was $66.2 million, or 29.8% of net service revenue, compared to $59.3 million, or 30.7% of net service revenue, for the same period in 2015. The increase in consolidated general and administrative expenses was primarily due to an increase in the number of service providers resulting from acquisitions since March 31, 2015. General and administrative expenses for the home health services and hospice services segments increased $1.2 million and $3.6 million, respectively, due to such acquisitions.

LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our principal source of liquidity for operating activities is the collection of patient accounts receivable, most of which are collected from governmental and third party commercial payors. We also have the ability to obtain additional liquidity, if necessary, through our credit facility, which provides for aggregate borrowings, including outstanding letters of credit, up to $225 million.
Our reported cash flows from operating activities are affected by various external and internal factors, including the following:
 
Operating Results — Our net income has a significant effect on our operating cash flows. Any significant increase or decrease in our net income could have a material effect on our operating cash flows.
Timing of Acquisitions — We use our operating and/or financing cash flows for acquisitions. When the acquisitions occur at or near the end of a period, our cash outflows significantly increase.
Timing of Payroll — Our employees are paid bi-weekly on Fridays; therefore, operating cash flows decline in reporting periods that end on a Friday.
Self Insurance Plan Funding — We are self-funded for health insurance and workers compensation purposes. Any significant changes in the amount of insurance claims submitted could have a direct effect on our operating cash flows.
Medical Supplies — A significant expense associated with our business is the cost of medical supplies. Any increase in the cost of medical supplies, or in the use of medical supplies by our patients, could have a material effect on our operating cash flows:
The following table summarizes changes in cash (amounts in thousands):
 

27


 
Three Months Ended March 31,
 
2016
 
2015
Net cash provided by (used in):
 
 
 
Operating activities
$
17,161

 
$
22,604

Investing activities
(12,926
)
 
(3,525
)
Financing activities
(4,781
)
 
(15,569
)
Cash provided by operating activities changed due to net working capital associated with acquisitions.
Cash used in investing activities increased due to acquisition of Heartlite Hospice and two additional acquisitions which occurred during the three months ended March 31, 2016. There were no similar acquisitions during the same period in March 31, 2015.
Cash used in financing activities decreased due to the net repayment of our line of credit during the three months ended March 31, 2015.
Accounts Receivable and Allowance for Uncollectible Accounts
For home health services, hospice services, and community-based services, we calculate the allowance for uncollectible accounts as a percentage of total patient receivables. The percentage changes depending on the payor and increases as the patient receivables age. For facility-based services, we calculate the allowance for uncollectible accounts based on a claim by claim review.
As of March 31, 2016, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 19.6%, or $28.6 million, compared to 19.5% or $26.7 million at December 31, 2015. Days sales outstanding as of March 31, 2016 and December 31, 2015 was 48 and 46 days, respectively.
The following table sets forth as of March 31, 2016, the aging of accounts receivable (amounts in thousands):
 
Payor
0-90
 
91-180
 
181-365
 
Over 365
 
Total
Medicare
$
65,667

 
$
8,972

 
$
6,040

 
$
5,210

 
$
85,889

Medicaid
4,225

 
1,109

 
645

 
402

 
6,381

Other
32,924

 
6,769

 
7,622

 
6,793

 
54,108

Total
$
102,816

 
$
16,850

 
$
14,307

 
$
12,405

 
$
146,378

The following table sets forth as of December 31, 2015, the aging of accounts receivable (amounts in thousands):
 
Payor
0-90
 
91-180
 
181-365
 
Over 365
 
Total
Medicare
$
65,910

 
$
8,244

 
$
4,971

 
$
4,960

 
$
84,085

Medicaid
2,994

 
1,033

 
903

 
561

 
5,491

Other
26,794

 
7,248

 
7,699

 
5,745

 
47,486

Total
$
95,698

 
$
16,525

 
$
13,573

 
$
11,266

 
$
137,062

Indebtedness
As of March 31, 2016, we had $119.2 million available for borrowing under our credit facility with $96.0 million drawn under our credit facility and $9.8 million of letters of credit outstanding. At December 31, 2015, we had $98.0 million drawn and $9.8 million of letters of credit outstanding under our credit facility.
For a discussion on our Credit Agreement with Capital One National Association, see Note 5 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.

28


A letter of credit fee equal to the applicable Eurodollar rate multiplied-by the face amount of the letter of credit is charged upon the issuance and on each anniversary date while the letter of credit is outstanding. The agent’s standard up-front fee and other customary administrative charges will also be due upon issuance of the letter of credit along with a renewal fee on each anniversary date of such issuance while the letter of credit is outstanding. Borrowings accrue interest under the Credit Agreement at either the Base Rate or the Eurodollar rate are subject to the applicable margins set forth below:
 
Leverage Ratio
 
Eurodollar
Margin
 
Base
Rate
Margin
 
Commitment
Fee Rate
≤1.00:1.00
 
1.75
%
 
0.75
%
 
0.225
%
>1.00:1.00 ≤ 1.50:1.00
 
2.00
%
 
1.00
%
 
0.250
%
>1.50:1.00 ≤ 2.00:1.00
 
2.25
%
 
1.25
%
 
0.300
%
>2.00:1.00
 
2.50
%
 
1.50
%
 
0.375
%
Our Credit Agreement contains customary affirmative, negative and financial covenants. For example, without prior approval of our bank group, we are materially restricted in incurring additional debt, disposing of assets, making investments, allowing fundamental changes to our business or organization, and making certain payments in respect of stock or other ownership interests, such as dividends and stock repurchases, up to $50 million. Under our Credit Agreement, we are also required to meet certain financial covenants with respect to minimum fixed charge coverage and leverage ratios.
Our Credit Agreement also contains customary events of default. These include bankruptcy and other insolvency events, cross-defaults to other debt agreements, a change in control involving us or any subsidiary guarantor, and the failure to comply with certain covenants.
At March 31, 2016, we were in compliance with all covenants contained in the Credit Agreement governing our credit facility.
Contingencies
For a discussion of contingencies, see Note 8 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies
For a discussion of critical accounting policies, see Note 2 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
Accounts Receivable and Allowances for Uncollectible Accounts
We report accounts receivable net of estimated allowances for uncollectible accounts and adjustments. Accounts receivable are uncollateralized and primarily consist of amounts due from Medicare, other third-party payors, and patients. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for uncollectible accounts to reduce the carrying amount of such receivables to their estimated net realizable value.
The collection of outstanding receivables is our primary source of cash collections and is critical to our operating performance. Because Medicare is our primary payor, the credit risk associated with receivables from other payors is limited. We believe the credit risk associated with our Medicare accounts, which represent approximately 55% of our patient accounts receivable as of March 31, 2016 and December 31, 2015, respectively, is limited due to (i) the historical collections from Medicare and (ii) the fact that Medicare is a U.S. government payor. We do not believe that there are any other significant

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concentrations of receivables from any particular payor that would subject it to any significant credit risk in the collection of accounts receivable.
The amount of the provision for bad debts is based upon our assessment of historical and expected net collections, business and economic conditions and trends in government reimbursement. Quarterly, we perform a detailed review of historical writeoffs and recoveries as well as recent collection trends. Uncollectible accounts are written off when we have exhausted collection efforts and concluded the account will not be collected.
Although our estimated reserves for uncollectible accounts are based on historical experience and the most current collection trends, this process requires significant judgment and interpretation of the observed trends and the actual collections could differ from our estimates.
Insurance
We retain significant exposure for our employee health insurance, workers compensation, employment practices and professional liability insurance programs. Our insurance programs require us to estimate potential payments on filed claims and/or claims incurred but not reported. Our estimates are based on information provided by the third-party plan administrators, historical claim experience, expected costs of claims incurred but not paid and expected costs associated with settling claims. Each month we review the insurance-related recoveries and liabilities to determine if any adjustments are required.
Our employee health insurance program is self-funded, with stop-loss coverage on claims that exceed $0.2 million for any individually covered employee or employee family member. We are responsible for workers’ compensation claims up to $0.5 million per individual incident.
Malpractice, employment practices and general liability claims for incidents which may give rise to litigation have been asserted against us by various claimants. The claims are in various stages of processing and some may ultimately be brought to trial. We are aware of incidents that have occurred through March 31, 2016 that may result in the assertion of additional claims. We currently carry professional, general liability and employment practices insurance coverage (on a claims made basis) for this exposure. We also carry D&O coverage (also on a claims made basis) for potential claims against our directors and officers, including securities actions, with a deductible of $1.0 million per security claims and $0.5 million on other claims.
We estimate our liabilities related to these programs using the most current information available. As claims develop, we may need to change the recorded liabilities and change our estimates. These changes and adjustments could be material to our financial statements, results of operations and financial condition.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk relates to changes in interest rates for borrowings under our credit facility. Our letter of credit fees and interest accrued on our debt borrowings are subject to the applicable Eurodollar or Base Rate. A hypothetical basis point increase in interest rates on the average daily amounts outstanding under the credit facility would have increased interest expense by $0.2 million for the three months ended March 31, 2016.
ITEM 4.    CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) that are designed to ensure that information that we are required to disclose in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of March 31, 2016.

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Changes in Internal Controls Over Financial Reporting
There have not been any changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act, during the quarterly period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS.
For a discussion of legal proceedings, see Note 8 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 1A.    RISK FACTORS.
There have been no material changes from the information included in Part I, Item 1A. “Risk Factors” of the Company’s 2015 Form 10-K.
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.

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ITEM 6.    EXHIBITS.
 
3.1
Certificate of Incorporation of LHC Group, Inc. (previously filed as an Exhibit 3.1 to the Form S-1/A (File No. 333-120792) on February 14, 2005).
 
 
3.2
Bylaws of LHC Group, Inc. as amended on December 31, 2007 (previously filed as Exhibit 3.2 to the Form 10-Q on May 9, 2008).
 
 
4.1
Specimen Stock Certificate of LHC Group’s Common Stock, par value $0.01 per share (previously filed as Exhibit 4.1 to the Form S-1/ A (File No. 333-120792) on February 14, 2005).
 
 
10.1
Amendment to LHC Group, Inc. Second Amended and Restated 2005 Non-Employee Directors Compensation Plan, effective January 20, 2015.
 
 
31.1
Certification of Keith G. Myers, Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Joshua L. Proffitt, Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1*
Certification of Chief Executive Officer and Chief Financial Officer of LHC Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Schema Document
 
 
101.CAL
XBRL Calculation Linkbase Document
 
 
101.DEF
XBRL Definition Linkbase Document
 
 
101.LAB
XBRL Label Linkbase Document
 
 
101.PRE
XBRL Presentation Linkbase Document

*    This exhibit is furnished to the SEC as an accompanying document and is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
LHC GROUP, INC.
 
 
Date: May 5, 2016
 
/s/ Joshua L. Proffitt
 
 
Joshua L. Proffitt