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EX-32.1 - EXHIBIT 32.1 - LHC Group, Inclhc-20170331exx321.htm
EX-31.2 - EXHIBIT 31.2 - LHC Group, Inclhc-20170331exx312.htm
EX-31.1 - EXHIBIT 31.1 - LHC Group, Inclhc-20170331exx311.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, 2017
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,” “smaller reporting company,” and "emerging growth 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  
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 1, 2017: 18,280,040 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.

3


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, 
 2017
 
December 31, 
 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
16,781

 
$
3,264

Receivables:
 
 
 
Patient accounts receivable, less allowance for uncollectible accounts of $27,641 and $29,036, respectively
125,455

 
124,803

Other receivables
7,008

 
5,115

Amounts due from governmental entities
830

 
942

Total receivables, net
133,293

 
130,860

Prepaid expenses
10,769

 
9,821

Other current assets
6,289

 
5,796

Total current assets
167,132

 
149,741

Property, building and equipment, net of accumulated depreciation of $36,614 and $35,226, respectively
43,088

 
43,251

Goodwill
319,045

 
307,317

Intangible assets, net of accumulated amortization of $11,601 and $10,968, respectively
106,626

 
102,006

Other assets
6,834

 
11,756

Total assets
$
642,725

 
$
614,071

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
34,569

 
$
26,805

Salaries, wages, and benefits payable
45,056

 
34,265

Self-insurance reserve
11,776

 
10,691

Current portion of long-term debt
255

 
252

Amounts due to governmental entities
3,858

 
4,955

Income tax payable
3,663

 
3,499

Total current liabilities
99,177

 
80,467

Deferred income taxes
32,416

 
31,941

Revolving credit facility
78,000

 
87,000

Long-term debt, less current portion
476

 
544

Total liabilities
210,069

 
199,952

Noncontrolling interest — redeemable
12,893

 
12,567

Stockholders’ equity:
 
 
 
LHC Group, Inc. stockholders’ equity:
 
 
 
Common stock — $0.01 par value; 40,000,000 shares authorized; 22,604,974 and 22,429,041 shares issued in 2017 and 2016, respectively
226

 
224

Treasury stock — 4,881,623 and 4,828,679 shares at cost, respectively
(41,704
)
 
(39,135
)
Additional paid-in capital
121,137

 
119,748

Retained earnings
323,756

 
314,289

Total LHC Group, Inc. stockholders’ equity
403,415

 
395,126

Noncontrolling interest — non-redeemable
16,348

 
6,426

Total equity
419,763

 
401,552

Total liabilities and equity
$
642,725

 
$
614,071

See accompanying notes to condensed consolidated financial statements.

4


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,
 
2017
 
2016
Net service revenue
$
246,618

 
$
222,552

Cost of service revenue
154,370

 
135,601

Gross margin
92,248

 
86,951

Provision for bad debts
2,369

 
4,601

General and administrative expenses
72,011

 
66,240

Operating income
17,868

 
16,110

Interest expense
(780
)
 
(885
)
Income before income taxes and noncontrolling interest
17,088

 
15,225

Income tax expense
5,173

 
5,342

Net income
11,915

 
9,883

Less net income attributable to noncontrolling interests
2,448

 
2,197

Net income attributable to LHC Group, Inc.’s common stockholders
$
9,467

 
$
7,686

Earnings per share attributable to LHC Group, Inc.'s common stockholders:
 
 
 
Basic
$
0.54

 
$
0.44

Diluted
$
0.53

 
$
0.44

Weighted average shares outstanding:
 
 
 
Basic
17,643,463

 
17,485,766

Diluted
17,817,880

 
17,633,549

 




See accompanying notes to the condensed consolidated financial statements.


5


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, 2016
$
224

 
22,429,041

 
$
(39,135
)
 
(4,828,679
)
 
$
119,748

 
$
314,289

 
$
6,426

 
$
401,552

Net income

 

 

 

 

 
9,467

 
61

 
9,528

Acquired noncontrolling interest

 

 

 

 

 

 
9,398

 
9,398

Sale of noncontrolling interest

 

 

 

 
(446
)
 

 
877

 
431

Noncontrolling interest distributions

 

 

 

 

 

 
(414
)
 
(414
)
Nonvested stock compensation

 

 

 

 
1,581

 

 

 
1,581

Issuance of vested stock
2

 
170,042

 

 

 
(2
)
 

 

 

Treasury shares redeemed to pay income tax

 

 
(2,569
)
 
(52,944
)
 

 

 

 
(2,569
)
Issuance of common stock under Employee Stock Purchase Plan

 
5,891

 

 

 
256

 

 

 
256

Balance as of March 31, 2017
$
226

 
22,604,974

 
$
(41,704
)
 
(4,881,623
)
 
$
121,137

 
$
323,756

 
$
16,348

 
$
419,763

 
(1)
Net income excludes net income attributable to noncontrolling interest-redeemable of $2.4 million during the three months ending March 31, 2017. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 8 of the Notes to Condensed Consolidated Financial Statements.



See accompanying notes to condensed consolidated financial statements.

6


LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
11,915

 
$
9,883

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
3,190

 
2,948

Provision for bad debts
2,369

 
4,601

Stock-based compensation expense
1,581

 
982

Deferred income taxes
475

 
(124
)
Loss on disposal of assets
152

 
204

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(341
)
 
(12,446
)
Prepaid expenses and other assets
(2,413
)
 
(162
)
Prepaid income taxes

 
374

Accounts payable and accrued expenses
18,524

 
13,110

Income taxes payable
164

 

Net amounts due to/from governmental entities
(985
)
 
(2,209
)
Net cash provided by operating activities
34,631

 
17,161

Investing activities:
 
 
 
Purchases of property, building and equipment
(2,523
)
 
(2,622
)
Cash paid for acquisitions, primarily goodwill and intangible assets
(449
)
 
(10,577
)
Advanced payments on acquisitions
(4,487
)
 

Other

 
273

Net cash used in investing activities
(7,459
)
 
(12,926
)
Financing activities:
 
 
 
Proceeds from line of credit
5,000

 
4,000

Payments on line of credit
(14,000
)
 
(6,000
)
Proceeds from employee stock purchase plan
256

 
230

Payments on debt
(65
)
 
(56
)
Noncontrolling interest distributions
(2,391
)
 
(2,185
)
Sale of noncontrolling interest
114

 

Excess tax benefits from vesting of stock awards

 
651

Withholding taxes paid on stock-based compensation
(2,569
)
 
(1,421
)
Net cash used in financing activities
(13,655
)
 
(4,781
)
Change in cash
13,517

 
(546
)
Cash at beginning of period
3,264

 
6,139

Cash at end of period
$
16,781

 
$
5,593

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
721

 
$
749

Income taxes paid
$
4,580

 
$
4,466

See accompanying notes to condensed consolidated financial statements.


7


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. 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, 2017, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements, operated 403 service providers in 27 states within the continental United States.
Unaudited Interim Financial Information
The condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016, and the related condensed consolidated statements of income for the three months ended March 31, 2017 and 2016, condensed consolidated statement of changes in equity for the three months ended March 31, 2017, condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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, 2016 as filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2017, 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 through direct ownership of majority interest or controlling member ownership of such entities. 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:
 

8


 
 
Three Months Ended  
 March 31,
Ownership type
 
2017
 
2016
Wholly-owned subsidiaries
 
54.2
%
 
56.7
%
Equity joint ventures
 
44.1

 
41.6

Other
 
1.7

 
1.7

 
 
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 Company consolidates its equity joint ventures as the Company has voting control over the entities. The members of the Company’s equity joint ventures participate in profits and losses in proportion to their equity interests. The Company also consolidates entities which have license leasing arrangements as the Company owns 100% of the equity of these subsidiaries and consolidates them based on such ownership.
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, 2017 and 2016:
 
 
Three Months Ended  
 March 31,
Payor:
2017
 
2016
Medicare
72.1
%
 
74.4
%
Medicaid
1.6

 
1.7

Other
26.3

 
23.9

 
100.0
%
 
100.0
%
Medicare
Home Health
The Company’s home health 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 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 or transferred from another provider before completing the episode; (d) a payment adjustment based upon the level of therapy services required; (e) base payment adjustments for case-mix and geographic wage differences; or (f) 2% sequestration reduction for episodes beginning after March 31, 2013. Adjustments outlined above are automatically recognized in net service revenue when changes occur

9


during the period in which the services are provided to the patient. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
Hospice Services
Hospice services provided by the Company are 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 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.
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, Medicaid, 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 50% 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 amount of 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

10


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 of care for a particular patient, the Company submits a RAP for 50% instead of 60% of the estimated reimbursement.
The Company’s Medicare population is 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 are structured similar to either the Medicare or Medicaid payment methodologies. Because of its payor mix, 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,
 
2017
 
2016
Weighted average number of shares outstanding for basic per share calculation
17,643,463

 
17,485,766

Effect of dilutive potential shares:
 
 
 
Options

 
2,023

Nonvested stock
174,417

 
145,760

Adjusted weighted average shares for diluted per share calculation
17,817,880

 
17,633,549

Anti-dilutive shares
151,010

 
181,101

Recently Adopted Accounting Pronouncements
In March 2016, as part of its Simplification Initiative, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation ("ASU 2016-09"), which finalized 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 Company adopted the new standard on its effective date on January 1, 2017 and elected to apply this adoption prospectively.
All excess tax benefits and deficiencies in the current and future periods will be recognized as income tax expense in the Company's consolidated financial statements in the reporting period in which they occur. The Company recorded excess tax benefits of $0.8 million in income tax expense for the three months ended March 31, 2017. Additionally, the Company elected to continue to apply an estimated rate of forfeiture to its compensation expense for share-based awards.
Recently Issued Accounting Pronouncements
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-09") 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 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for reporting periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. As the Company progresses with evaluating the effect that

11


ASU 2014-09 will have on its consolidated financial statements and related disclosures, the Company does not expect a material impact on its consolidated financial statements upon implementation on January 1, 2018. The Company has not yet selected a transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases, ("ASU 2016-02") 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 2016-02 mandates a modified retrospective transition method for all entities. The Company anticipates that the adoption of ASU 2016-02 will result in a material increase in total assets and total liabilities. The Company continues to evaluate the effect that ASU 2016-02 will have on its related disclosures.     
3. Acquisitions and Disposals

On January 1, 2017, the Company formed a joint venture with LifePoint Health, Inc. ("LifePoint"). LifePoint contributed 12 home health agencies, seven hospice agencies, and one in-patient hospice unit to the joint venture. The Company acquired majority ownership of the membership interests of these agencies. These providers conduct home health operations in Arizona, Colorado, Louisiana, Tennessee, Texas, and Virginia; and hospice operations in North Carolina, Pennsylvania, Tennessee, and Virginia.
In a separate transaction, the Company acquired a pharmacy, which is reported in the facility-based services segment, during the three months ended March 31, 2017.
The total aggregate purchase price for these transactions was $11.9 million, of which $10.4 million was paid in December 2016 and the remainder was primarily paid in cash in the three months ended March 31, 2017. The purchase prices are determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows.
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):
Consideration
 
 
  Cash
 
$
10,880

Fair value of total consideration transferred
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
  Patient accounts receivable
 
4,399

  Trade name
 
2,200

  Certificates of needs/licenses
 
3,271

  Other identifiable intangible assets
 
6

  Other assets and (liabilities), net
 
(984
)
Total identifiable assets
 
8,892

Noncontrolling interest
 
9,398

Goodwill, including noncontrolling interest of $4,956
 
$
11,386


The Company conducted a preliminary assessment and has recognized provisional amounts in its initial accounting for the acquisition of the majority ownership in the LifePoint joint venture partnership for all identified assets in accordance with the requirements of ASC Topic 805. The Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identified adjustments to the assets purchased initially recognized, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized.


12


On April 1, 2017, LifePoint contributed seven home health agencies and five hospice agencies to the joint venture. The Company paid $4.5 million for this contribution on March 31, 2017, which is recorded in Other Assets on the consolidated balance sheet.

4. Goodwill and Intangibles
The changes in recorded goodwill by reporting unit for the three months ended March 31, 2017 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, 2016
$
210,839

 
$
64,234

 
$
18,820

 
$
13,424

 
$
307,317

Goodwill from acquisitions
3,092

 
2,966

 

 
372

 
6,430

Goodwill related to noncontrolling interests
2,529

 
2,427

 

 

 
4,956

Goodwill related to prior period net working capital adjustments............................................
(5
)
 

 

 
347

 
342

Balance as of March 31, 2017
$
216,455

 
$
69,627

 
$
18,820

 
$
14,143

 
$
319,045

Intangible assets consisted of the following as of March 31, 2017 and December 31, 2016 (amounts in thousands):
 
 
March 31, 2017
 
Remaining useful life
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Indefinite-lived assets:
 
 
 
 
 
 
 
Trade names
Indefinite
 
$
66,605

 
$

 
$
66,605

Certificates of need/licenses
Indefinite
 
36,598

 

 
36,598

Total
 
 
$
103,203

 
$

 
$
103,203

Definite-lived assets:
 
 
 
 
 
 
 
Trade names
5 months — 9 years
 
$
9,292

 
$
(6,395
)
 
$
2,897

Non-compete agreements
1 month — 3 years
 
5,732

 
(5,206
)
 
526

Total
 
 
$
15,024

 
$
(11,601
)
 
$
3,423

Balance as of March 31, 2017
 
 
$
118,227

 
$
(11,601
)
 
$
106,626

 
 
December 31, 2016
 
Remaining useful life
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Indefinite-lived assets:
 
 
 
 
 
 
 
Trade names
Indefinite
 
$
64,672

 
$

 
$
64,672

Certificates of need/licenses
Indefinite
 
33,327

 

 
33,327

Total
 
 
$
97,999

 
$

 
$
97,999

Definite-lived assets:
 
 
 
 
 
 
 
Trade names
8 months — 9 years
 
$
9,294

 
$
(5,991
)
 
$
3,303

Non-compete agreements
2 months — 3 years
 
5,681

 
(4,977
)
 
704

Total
 
 
$
14,975

 
$
(10,968
)
 
$
4,007

Balance as of December 31, 2016
 
 
$
112,974

 
$
(10,968
)
 
$
102,006


13


Intangible assets of $72.2 million, net of accumulated amortization, were related to the home health services segment, $25.9 million were related to the hospice services segment, $7.4 million were related to the community-based services segment, and $1.1 million were related to the facility-based services segment as of March 31, 2017. The Company recorded $0.6 million of amortization expense during the three months ended March 31, 2017 and 2016. 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, 2017 was 5.00% and the Eurodollar rate was 2.98%.
As of March 31, 2017 and December 31, 2016, respectively, the Company had $78.0 million and $87.0 million drawn and letters of credit totaling $11.0 million outstanding under its credit facilities with Capital One, National Association.
As of March 31, 2017, the Company had $136.0 million available for borrowing under the Credit Agreement with Capital One, National Association.

6. 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 379,063 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, 2017, the Company’s independent directors were granted 11,700 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, 2017, employees were granted 139,310 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, 2017 was $48.52.
The following table represents the nonvested stock activity for the three months ended March 31, 2017:

14


 
 
Number of
shares
 
Weighted
average grant
date fair value
Nonvested shares outstanding as of December 31, 2016
574,711

 
$
31.61

Granted
151,010

 
$
48.52

Vested
(170,042
)
 
$
28.46

Nonvested shares outstanding as of March 31, 2017
555,679

 
$
37.17

During the three months ended March 31, 2017, an independent director of the Company received a share based award, which will be settled in cash at March 1, 2018. The amount of such cash payment will equal the fair market value of 1,300 shares on the settlement date.
As of March 31, 2017, there was $17.9 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 value of shares of common stock vested during the three months ended March 31, 2017 was $4.8 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 $1.6 million and $1.0 million of compensation expense related to nonvested stock grants in the three months ended March 31, 2017 and 2016, respectively.
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 2017:
 
 
Number of
shares
 
Per share
price
Shares available as of December 31, 2016
189,611

 
 
Shares issued during three months ended March 31, 2017
5,891

 
$
43.42

Shares available as of March 31, 2017
183,720

 
 
Stock Options
There were no options issued or exercisable as of March 31, 2017. During the three months ended March 31, 2017, no options were exercised or forfeited and no options were granted. No compensation expense related to stock options was recorded during the three months ended March 31, 2017.
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, 2017, the Company redeemed 52,944 shares of common stock valued at $2.6 million, related to these tax obligations.
7. Commitments and Contingencies
Contingencies
The Company provides services in a highly regulated industry and is a party to various proceedings and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including audits by Zone Program Integrity Contractors ("ZPICs") and Recovery Audit Contractors ("RACs") and investigations resulting from the Company's

15


obligation to self-report suspected violations of law). Management cannot predict the ultimate outcome of any regulatory and other governmental and internal audits and investigations. The DOJ, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company's businesses in the future. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company's business and financial condition.
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.
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.
8. 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, 2017 (amounts in thousands):
 

16


Balance as of December 31, 2016
$
12,567

Net income attributable to noncontrolling interest-redeemable
2,387

Noncontrolling interest-redeemable distributions
(1,977
)
Sale of noncontrolling interest-redeemable
(84
)
Balance as of March 31, 2017
$
12,893

9. Allowance for Uncollectible Accounts
The following table summarizes the activity in the allowance for uncollectible accounts for the three months ended March 31, 2017 (amounts in thousands):
 
Balance as of December 31, 2016
$
29,036

Additions
2,369

Deductions
(3,764
)
Balance as of March 31, 2017
$
27,641


The allowance for uncollectible accounts decreased from 18.9% of patient accounts receivable to 18.1% over the three months ended March 31, 2017. This was due to a reduction in provision for bad debts due to improved cash collections due to the maturity of the Company's back office and field operations related to the use of the point-of-care platform and other technology advancements in reporting and analytics.
10. 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, 2017, the carrying value of the Company’s long-term debt approximates fair value as the interest rates approximate current rates.
11. 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, 2017 and 2016 (amounts in thousands):

17


 
Three Months Ended March 31, 2017
 
Home health services
 
Hospice services
 
Community-based services
 
Facility-based services
 
Total
Net service revenue
$
182,141

 
$
36,445

 
10,816

 
$
17,216

 
$
246,618

Cost of service revenue
112,086

 
23,273

 
7,948

 
11,063

 
154,370

Provision for bad debts
1,483

 
497

 
275

 
114

 
2,369

General and administrative expenses
53,922

 
10,406

 
2,311

 
5,372

 
72,011

Operating income
14,650

 
2,269

 
282

 
667

 
17,868

Interest expense
(585
)
 
(117
)
 
(39
)
 
(39
)
 
(780
)
Income before income taxes and noncontrolling interest
14,065

 
2,152

 
243

 
628

 
17,088

Income tax expense
4,253

 
659

 
83

 
178

 
5,173

Net income
9,812

 
1,493

 
160

 
450

 
11,915

Less net income attributable to noncontrolling interests
2,028

 
286

 
8

 
126

 
2,448

Net income attributable to LHC Group, Inc.’s common stockholders
$
7,784

 
$
1,207

 
$
152

 
$
324

 
$
9,467

Total assets
$
447,807

 
$
126,068

 
$
32,961

 
$
35,889

 
$
642,725

 
 
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

 


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, 2017;
our critical accounting policies;
our business strategies and our ability to grow our business;
our participation in the Medicare and Medicaid programs;
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 regulatory changes under the new presidential administration;
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;
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 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.

19


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, 2016 (the “2016 Form 10-K”), as updated by our subsequent filings with the SEC. This report should be read in conjunction with the 2016 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 high quality cost-effective post-acute health care services to our patients through our home nursing agencies, hospice agencies, community-based agencies, and long-term acute care hospitals ("LTACHs"). As of March 31, 2017, we have 403 service providers in 27 states. 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 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, 2017, we operated 305 home health services locations, of which 164 are wholly-owned, 126 are majority-owned through equity joint ventures, three are under license lease arrangements and the operations of the remaining twelve 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, 2017, we operated 73 hospice locations, of which 49 are wholly-owned, 22 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, 2017, 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, 2017, we operated six LTACHs with 8 locations, of which all but one are located within host hospitals. Of these facility-based service locations, three are wholly-owned and five are majority-owned through equity joint ventures. We also wholly-own and operate a family health center, two pharmacies, a family health clinic, and two physical therapy clinics.
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, 2017, the Joint Commission had accredited 289 of our 305 home health services locations and 47 of our 73 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.

20


The percentage of net service revenue contributed from each reporting segment for the three months ended March 31, 2017 and 2016 was as follows:
 
 
 
Three Months Ended  
 March 31,
Type of segment
 
2017
 
2016
Home health services
 
73.8
%
 
72.5
%
Hospice services
 
14.8

 
13.9

Community-based services
 
4.4

 
4.7

Facility-based services
 
7.0

 
8.9

 
 
100.0
%
 
100.0
%
Recent Developments
Home Health Services
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 31, 2016, CMS released a Final Rule (effective January 1, 2017) regarding payment rates for home health services provided during calendar year 2017. The national, standardized 60-day episode payment rate increased to $2,989.97 for 2017. The rural rate is $3,079.67. The Final Rule implements the final year of the four year phase-in of the rebasing adjustments to the national, standardized 60-day episode payment rate and the decrease of 0.97% to account for nominal case-mix growth between calendar year 2012 and calendar year 2014, which was not accounted for in the rebasing adjustments finalized in calendar year 2014. The Final Rule also contains minor adjustments to the Home Health Value-Based Purchasing ("HHVBP") program and to the home health quality reporting program. CMS estimates the overall economic impact of the proposed rule's policy changes and payment rate update is an estimated aggregate decrease of 0.7% in payments to home health agencies, which decrease will vary based on each agency's wage index and patient mix weight.
In addition, CMS finalized its proposal to implement a 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 29, 2016, CMS issued a Final Rule updating Medicare payment rates and the wage index for hospices for fiscal year 2017, which resulted in a 2.1% increase in payment rates. The 2.1% increase is based on 2.7% inpatient hospital market basket update, reduced by a 0.3% productivity adjustment, and a 0.3% adjustment set by the Patient Protection and Affordable Care Act ("PPACA"). The hospice cap amount for the 2017 hospice cap year will be $28,404.99. The following table shows the hospice Medicare payment rates for fiscal year 2017, which began on October 1, 2016 and will end September 30, 2017:
Description
Rate per patient day
Routine Home Care days 1-60
$
190.55

Routine Home Care days 60+
$
149.82

Continuous Home Care
$
964.63

Full Rate = 24 hours of care
 
$40.19 = hourly rate
 
Inpatient Respite Care
$
170.97

General Inpatient Care
$
734.94

On April 27, 2017, CMS issued a notice of proposed rulemaking to update Medicare payment rates and the wage index for hospices for Fiscal Year 2018, which will result in a 1.0% increase in payment rates due to the provisions of Section 411 (d) of the Medicare Access and CHIP Reauthorization Act of 2015 (Pub. L. 114-10) ("MACRA"). The hospice cap is also

21


increased by 1% and is proposed to be $28,689.04. CMS estimates that aggregate payments to hospices would increase by $180 million, or 1.0%, compared to payments in Fiscal Year 2017. The proposed rule also solicits comments regarding the source(s) of clinical information for certifying terminal illness and proposes changes to the Hospice Quality Reporting Program ("Hospice QRP"), including proposing new and future quality measures. The proposed rule also solicits comments on regulatory, subregulatory and policy changes to the healthcare delivery system to reduce complexity and burden on providers. Comments are due June 26, 2017 and we intend to submit comments in response to this notice.
Community-Based Services
Community-based services are in-home 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 75% 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.
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.
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.
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.

22


On August 2, 2016, CMS released the final 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 7.1% compared to fiscal year 2016 payments. 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 0.7% (including a market basket update of 2.8% reduced by a multi-factor productivity adjustment of 0.3%, minus an additional adjustment of 0.75 percentage point in accordance with the PPACA, for a net market basket of 1.75%). The LTACH PPS standard federal payment rate for fiscal year 2017 is $42,476.41 (increased from $41,762.85 in fiscal year 2016). Site-neutral discharges will have a 23% reduction in payments. 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%. The 25 Percent rule will apply to discharges occurring after October 1, 2016. CMS will have two separate outlier pools and thresholds for LTACH-appropriate patients and for site-neutral patients. For 2017, CMS finalized an increase of its fixed-loss threshold to $21,943 from 2016’s $16,423, to limit outlier spending at no more than 8% of total LTACH spending (2016 outlier payments may reach 9.0%). CMS is applying the proposed inpatient fixed-loss threshold of $23,570 for site neutral patients. CMS also finalized four new measures for the LTACH Quality Reporting Program to meet the requirements of the Improving Medicare Post-Acute Care Transformation (IMPACT) Act. For the fiscal year 2018 LTACH Quality Reporting Program, CMS added quality measures for Medicare spending per beneficiary, discharge to community and potentially-preventable 30-day post-discharge readmissions. For the fiscal year 2020 LTACH Quality Reporting Program, CMS adopted a new drug regimen review measure.
On December 7, 2016, Congress passed the 21st Century Cures Act ("Cures"), which boosts funding for medical research, eases the development and approval of experimental treatments and reforms federal policy on mental health care. Included in the bill was relief for LTACHs under a one year moratorium on the 25 Percent Rule, which would otherwise penalize LTACHs that admit more than 25% of their patients from a particular acute care hospital. As modified by Cures, implementation of the 25 Percent Rule will be suspended during federal fiscal year 2017 (October 1, 2016 through September 30, 2017).
On April 14, 2017, the CMS posted a display copy of its proposed annual update to Medicare payment rates and policies for the Fiscal Year 2018 inpatient hospitals prospective payment system and the LTACH PPS. CMS estimates the impact of the proposed rule will result in a 3.75% overall reduction in LTACH spending. The LTACH standard federal rate is reduced to $41,497.20 from $42,476.41. CMS is also proposing a 12 month administrative moratorium on application of the 25 Percent Rule beginning with the expiration of the statutory moratorium after September 30, 2017, and is proposing adjustments to high cost outlier and short stay outlier policies. CMS is proposing a new severe wound exception to be paid at standard Federal LTACH rates instead of site neutral payments for grandfathered LTACHs. CMS proposes to change the separateness and control restrictions for certain co-located IPPS-exempt hospitals. The Proposed Rule also adds three new quality measures and proposes to discontinue two quality measures. CMS is also proposing to implement collection of standardized patient assessment data under the IMPACT Act on functional status, cognitive function, cancer treatments, respiratory treatments, transfusions and other special services effective for admissions on/after April 1, 2018. The proposed rule also solicits comments on regulatory, subregulatory and policy changes to the healthcare delivery system to reduce complexity and burden on providers. Comments are due June 13, 2017 and will respond to comments in a final rule to be issued around August 1, 2017. We intend to submit comments in response to this notice.
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, 2017 compared to three months ended March 31, 2016
Consolidated financial statements
The following table summarizes our consolidated results of operations for the three months ended March 31, 2017 and 2016 (amounts in thousands, except percentages which are percentages of consolidated net service revenue, unless indicated otherwise):
 

23


 
2017
 
2016
 
Increase
(Decrease)
Net service revenue
$
246,618

 
 
 
$
222,552

 
 
 
$
24,066

Cost of service revenue
154,370

 
62.6
%
 
135,601

 
60.9
%
 
18,769

Provision for bad debts
2,369

 
1.0

 
4,601

 
2.1

 
(2,232
)
General and administrative expenses
72,011

 
29.2

 
66,240

 
29.8

 
5,771

Income tax expense
5,173

 
41.1

(1
)
5,342

 
41.0

(1)
(169
)
Noncontrolling interest
2,448

 


 
2,197

 
 
 
251

Total non-operating expense
(780
)
 


 
(885
)
 
 
 
105

Net income attributable to LHC Group, Inc.’s common stockholders
$
9,467

 
 
 
$
7,686

 
 
 
$
1,781

 
(1)
Effective tax rate as a percentage of income from continuing operations attributable to LHC Group, Inc.’s common stockholders, excluding the excess tax benefits realized in 2017 of $0.8 million. For a discussion on the excess tax benefits, see Note 2 of the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
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, 2017 and the related change from the same period in 2016 (amounts in thousands, except admissions, census, episode data, patient days and billable hours):
 
 
Same
Store(1)
 
De
Novo(2)
 
Organic(3)
 
Organic
Growth
(Loss) %
 
Acquired(4)
 
Total
 
Total
Growth
(Loss) %
Home health services
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
174,262

 
$

 
$
174,262

 
8.0
 %
 
$
7,879

 
$
182,141

 
12.9
 %
Revenue Medicare
$
127,902

 
$

 
$
127,902

 
4.7

 
$
4,811

 
$
132,713

 
8.7

New Admissions
43,696

 

 
43,696

 
11.7

 
3,679

 
47,375

 
21.1

New Medicare Admissions
28,094

 

 
28,094

 
7.5

 
1,863

 
29,957

 
14.6

Average Census
39,744

 

 
39,744

 
4.0

 
2,130

 
41,874

 
9.6

Average Medicare Census
27,936

 

 
27,936

 
(1.1
)
 
1,308

 
29,244

 
3.5

Home Health Episodes
49,196

 

 
49,196

 
1.5

 
2,642

 
51,838

 
6.9

Hospice services
 
 
 
 


 
 
 
 
 


 
 
Revenue
$
31,997

 
$
175

 
$
32,172

 
4.4

 
$
4,273

 
$
36,445

 
18.2

Revenue Medicare
$
29,984

 
$
165

 
$
30,149

 
5.2

 
$
4,025

 
$
34,174

 
19.3

New Admissions
2,591

 
24

 
2,615

 
6.2

 
497

 
3,112

 
26.3

New Medicare Admissions
2,205

 
23

 
2,228

 
3.5

 
429

 
2,657

 
23.4

Average Census
2,511

 
13

 
2,524

 
4.1

 
337

 
2,861

 
18.0

Average Medicare Census
2,319

 
12

 
2,331

 
3.7

 
319

 
2,650

 
17.9

Patient days
228,275

 
1,118

 
229,393

 
3.9

 
28,081

 
257,474

 
16.7

Community-based services
 
 
 
 


 
 
 
 
 


 
 
Revenue
$
10,414

 
$

 
$
10,414

 
(0.3
)
 
$
402

 
$
10,816

 
3.6

Billable hours
334,332

 

 
334,332

 
9.8

 
9,854

 
344,186

 
13.0

Facility-based services
 
 
 
 


 
 
 
 
 


 
 
LTACHs
 
 
 
 


 
 
 
 
 


 
 
Revenue
$
14,933

 
$

 
$
14,933

 
(20.6
)
 

 
$
14,933

 
(20.6
)
Patient days
13,732

 

 
13,732

 
(11.6
)
 

 
13,732

 
(11.6
)


24


(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 and hospice 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):
 
 
Three Months Ended
March 31,
 
2017
 
2016
Home health services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
101,772

 
55.8
%
 
$
87,412

 
54.2
%
Transportation
5,819

 
3.2

 
5,475

 
3.4

Supplies and services
4,495

 
2.5

 
3,825

 
2.4

Total
$
112,086

 
61.5
%
 
$
96,712

 
59.9
%
Hospice services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
16,088

 
44.1
%
 
$
14,013

 
45.5
%
Transportation
1,433

 
3.9

 
1,324

 
4.3

Supplies and services
5,752

 
15.8

 
4,290

 
13.9

Total
$
23,273

 
63.8
%
 
$
19,627

 
63.7
%
Community-based services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
7,833

 
72.5
%
 
$
7,589

 
72.7
%
Transportation
67

 
0.6

 
65

 
0.6

Supplies and services
48

 
0.4

 
73

 
0.7

Total
$
7,948

 
73.5
%
 
$
7,727

 
74.0
%
Facility-based services
 
 
 
 
 
 
 
Salaries, wages and benefits
$
7,618

 
44.3
%
 
$
7,594

 
38.2
%
Transportation
68

 
0.4

 
66

 
0.3

Supplies and services
3,377

 
19.6

 
3,875

 
19.5

Total
$
11,063

 
64.3
%
 
$
11,535

 
58.0
%
Consolidated cost of service revenue for the three months ended March 31, 2017 was $154.4 million, or 62.6% of net service revenue, compared to $135.6 million, or 60.9% of net service revenue, for the same period in 2016. Consolidated cost of service revenue variances were as follows:
Home Health Segment - Cost of service revenue increased as a percentage of net service revenue due in part to 2.0% Medicare reimbursement cuts recognized in 2017. Additionally, acquisitions accounted for $8.1 million of the $15.4 million increase, with the remaining difference caused by the growth in our same store agencies.
Hospice Segment - Acquisitions accounted for $3.1 million of the $3.6 million increase, with the remaining difference caused by the growth in our same store agencies.

25


Community-Based Segment - Cost of service revenue decreased as a percentage of net service revenue to the change in our patient mix.
Facility-Based Segment - Cost of service revenue increased as a percentage of net service revenue due to the reduction of LTACH licensed beds and lower revenue per patient day for the period caused by patient criteria changes that went into effect in June 2016 and September 2016.
Provision for bad debts
Consolidated provision for bad debts for the three months ended March 31, 2017 was $2.4 million, or 1.0% of net service revenue, compared to $4.6 million, or 2.1% of net service revenue, for the same period in 2016. The decrease in provision for bad debts was primarily due to continued process improvements implemented in our revenue cycle department. In addition, same store patient accounts receivable over 180 days decreased 10.0% during the first quarter of 2017 compared to the same period in 2016, which reduced our days sales outstanding by three days.  This was due to a concerted effort to review and collect on older accounts receivable that continued to be aged out and receipt of collections on some Medicare processing issues related to claims from 2015 and 2016.  The Company also noted more timely cash collections due to the continued maturity of our back office and field operations related to both our point-of-care platform and other technology advancements in reporting and analytics.
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):
 
 
Three Months Ended March 31,
 
2017
 
2016
Home health services
 
 
 
 
 
 
 
General and administrative
$
51,840

 
28.5
%
 
$
47,671

 
29.5
%
Depreciation and amortization
2,082

 
1.1

 
1,887

 
1.2

Total
$
53,922

 
29.6
%
 
$
49,558

 
30.7
%
Hospice services
 
 
 
 
 
 
 
General and administrative
$
9,786

 
26.9
%
 
$
8,472

 
27.5
%
Depreciation and amortization
620

 
1.7

 
518

 
1.7

Total
$
10,406

 
28.6
%
 
$
8,990

 
29.2
%
Community-based services
 
 
 
 
 
 
 
General and administrative
$
2,199

 
20.3
%
 
$
1,982

 
19.0
%
Depreciation and amortization
112

 
1.0

 
97

 
0.9

Total
2,311

 
21.3
%
 
$
2,079

 
19.9
%
Facility-based services
 
 
 
 
 
 
 
General and administrative
$
4,996

 
29.0
%
 
$
5,168

 
26.0
%
Depreciation and amortization
376

 
2.2

 
445

 
2.2

Total
$
5,372

 
31.2
%
 
$
5,613

 
28.2
%
Consolidated general and administrative expenses for the three months ended March 31, 2017 was $72.0 million, or 29.2% of net service revenue, compared to $66.2 million, or 29.8% of net service revenue, for the same period in 2016; however, as a percentage of net service revenue, it is a decrease of 0.6%. We continue to leverage efficiencies found in our back office that allows us to maintain general and administrative costs without increasing costs in proportion to the growth of our company.
The increase of $5.8 million in consolidated general and administrative expenses was due to acquisitions since March 31, 2016. General and administrative expenses for the home health services and hospice services segments increased $3.3 million and $1.5 million, respectively, due to such acquisitions.


26


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. As of March 31, 2017, we had $136.0 million available for borrowing under our credit facility.
The following table summarizes changes in cash (amounts in thousands): 
 
Three Months Ended March 31,
 
2017
 
2016
Net cash provided by (used in):
 
 
 
Operating activities
$
34,631

 
$
17,161

Investing activities
(7,459
)
 
(12,926
)
Financing activities
(13,655
)
 
(4,781
)
Cash provided by operating activities changed due to the increased collections in patient accounts receivable and accretion of agencies purchased in 2016.
The Company contributed $10.4 million to the joint venture partnership with LifePoint on December 30, 2016 and $4.5 million on March 31, 2017. The payment for these transactions caused the variance in cash used in investing activities.
Cash used in financing activities decreased due to the net repayment of our line of credit during the three months ended March 31, 2017.
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, 2017, our allowance for uncollectible accounts, as a percentage of patient accounts receivable, was approximately 18.1%, or $27.6 million, compared to 18.9% or $29.0 million at December 31, 2016. Days sales outstanding as of March 31, 2017 and December 31, 2016 was 46 and 49 days, respectively. The reason for the improvement in days sales outstanding was due to the strong cash collections for patients accounts receivable that were greater than 180 days old.
The following table sets forth as of March 31, 2017, the aging of accounts receivable (amounts in thousands):
 
Payor
0-90
 
91-180
 
181-365
 
Over 365
 
Total
Medicare
$
65,533

 
$
10,471

 
$
4,875

 
$
5,861

 
$
86,740

Medicaid
4,242

 
1,778

 
1,323

 
505

 
7,848

Other
36,379

 
8,542

 
6,730

 
6,857

 
58,508

Total
$
106,154

 
$
20,791

 
$
12,928

 
$
13,223

 
$
153,096

The following table sets forth as of December 31, 2016, the aging of accounts receivable (amounts in thousands):
 
Payor
0-90
 
91-180
 
181-365
 
Over 365
 
Total
Medicare
$
71,386

 
$
9,590

 
$
5,547

 
$
5,720

 
$
92,243

Medicaid
4,600

 
1,470

 
1,380

 
268

 
7,718

Other
33,084

 
5,943

 
7,179

 
7,672

 
53,878

Total
$
109,070

 
$
17,003

 
$
14,106

 
$
13,660

 
$
153,839


27


Indebtedness
As of March 31, 2017, we had $136.0 million available for borrowing under our credit facility with $78.0 million drawn under our credit facility and $11.0 million of letters of credit outstanding. At December 31, 2016, we had $87.0 million drawn and $11.0 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.
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, 2017, we were in compliance with all covenants contained in the Credit Agreement governing our credit facility.
Contingencies
For a discussion of contingencies, see Note 7 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

28


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 50% of our patient accounts receivable as of March 31, 2017 and December 31, 2016, 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 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, 2017 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 100 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 each of the three month periods ended March 31, 2017 and 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

29


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, 2017.
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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30


PART II — OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS.
For a discussion of legal proceedings, see Note 7 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 2016 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 4, 2017
 
/s/ Joshua L. Proffitt
 
 
Joshua L. Proffitt
 
 
Executive Vice President and Chief Financial Officer      
(Principal financial officer)


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